Innovation Networks and
Alliance Management
Legal Aspects
of Alliances
Guest-lecture
16th October 2007
mr.drs.E.F. Clarkson, Law Teacher TM
1
Brief Overview of today's lecture

What are 'Alliances' (and what not)

Main Legal Aspects Of Alliances


Brief Discussion of the Main Legal
Domains
Application of Relevant Legal Domains
on Certain Types of Alliances

Licensing

R&D Agreements

Joint Ventures
Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances
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What are (strategic) Alliances?
Several definitions, e.g.
'Purposive strategic relationships between independent firms that
share compatible goals, strive for mutual benefits and
acknowledge a high level of mutual dependence'
(Mohr & Spekman, 1994)
'Long-term, cooperative relationships designed to leverage the
strategic and operational capabilities of individual participating
companies to achieve significant ongoing benefits to each
party' (Monczka, 1998)
'Collaborative agreement(s) of an enduring nature between firms,
which contribute resources to a common endeavor of
potentially important competitive consequences, while
maintaining their individuality'
(Gulati, 2000)
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Whatever the definition, alliances have
some distinctive characteristics (Pellicelli, 2003)

Two or more organizations make cooperation/
/collaboration agreement(s) to achieve objectives of
a common interest considered important, while
remaining independent

The partners share both the advantages and control
of the alliance for its entire duration

The partners contribute, using their own resources
and capabilities, to the development of one or more
areas of the alliance, important for them
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Alliances come in a variety of forms
(see INAM lecture 1, sheet 41)
Forms of cooperation
Market transaction
Outsourcing
(traditional)
Licensing
Joint Venture
Joint R&D,
production etc.
Outsourcing
Merger/
Acquisition
Minority
participation
(new)
A l l i a n c e s
Important elements are joint decision-making, joint revenues, joint risks, actual
collaboration between people taking place while partners remain independent
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Alliances are not…

Market transactions
(short term; no (explicit) cooperation/collaboration; influence/control only via
market, external competition mechanisms)

Outsourcing (traditional)
(agreements related to (auxiliary) activities not strategic for the partners)

Merger
(transaction whereby two (or more, about equally valued) firms become one,
both previously separate companies go out of existence)
C

Acquisition (subsidiary)
A
B
(take-over of a company that becomes a subsidiary; total control)
P
S
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Alliances are…

Licensing
(contractual method of developing and exploiting intellectual property
(specific technical/commercial know how) by transferring rights of use to
third parties without the transfer of ownership (this know how is often
legally protected by 'Intellectual Property Rights', like patents, copy rights,
trademark rights)

Contracts of collaboration in specific functions
(R&D, product development, production, distribution, marketing, etc.)

Joint Venture
(separate 'subsidiary' with two (or more) 'parent' companies; the partner
companies remain independent, the JV often is a separate legal entity)
A

Minority Participation
B
JV
(Stock participation of one or more of the partners by other partners, or
reciprocal participation)
A
B
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Main Legal Aspects of Alliances

Contract Law
Rights & obligations of the partners; restrictions to the principle of
'freedom of contract'

Intellectual Property Law (IPR)
Possibilities of (legal) protection and exploitation of ('embodied')
know how

Company Law
Rules regarding e.g. different legal forms for JV's

Competition Law
Rules with respect to opportunities/constraints regarding
cooperation/collaboration; restriction/distortion of competition
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Multiple Legal Aspects Applicable
Be aware that often all the mentioned 'legal
domains' are relevant for any form of alliances.
For instance, in case of an 'equity JV' one has to take
into consideration:
-
Contract law
(there is, at least, the JV-contract between the
partners)
-
IPR
(often the partners possess IPR-protected technologies, know
how etc. and the JV needs licenses to use these technologies)
-
Company Law
(e.g. voting control of the JV-partners,
appointment/discharge of the Board of the JV)
-
Competition Law
(JV can be a (prohibited) cartel or subject
to the regulation on the control of 'concentrations' of undertakings)
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Contract Law

Key-principle: 'Freedom of Contract'

but: for B2B-contracts important restrictions by
competition law (imperative antitrust regulations)!

Contracts are legally binding

Contracts are incomplete (room for opportunism; yet:
detailing can be a straitjacket or lead to distrust!)

Dispute resolution (national court? arbitration?
friendly settlement?)


Which national legislation is applicable to the
contract? (due to differences between national laws)
Negotiation phase (‘Letters of Intent’; break off
negotiations)
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Intellectual Property Rights (IPR)

'Embodiment' of technical/commercial know how






Specific legal protection




Inventions (products / processes)
Software / chips; IT-products; documentation
(Industrial) Designs & Models
Trademarks
Trade secrets, 'non-disclosed' know how
Patent legislation
Copyright legislation; 'Chips' Act
Legislation on industrial designs & models; trademarks
Some main points of IPR




exclusive rights
principle of 'territorialism'
period of protection
licensing
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Company Law

Variety of legal forms for JV's



Partnerships (contractual JV's)
Equity JV (Inc., Ltd; NV, BV; AG, GmbH; SA,
Sarl)
Legal form of JV is important for e.g.

(procedure of) establishment of the JV

(extent of) liability of the partners

ownership and control, management
structure
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Competition Law (Antitrust Regulation)
Alliances: contractual forms of
cooperation/collaboration

cooperation/collaboration: positive and negative
aspects

Principle of 'full competition'

Specific competition / antitrust regulation
(e.g. USA, EU, national legislation)
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Competition Law
(cont.)
Advantages of collaboration

furthering innovation and technology transfer

stimulating risk-bearing investments

strengthening competitiveness of SME's

developing new markets
Disadvantage / risk of collaboration

hampering competition!
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Competition Law
(cont.)
For example in EU competition law:
"all agreements between firms which have as their
effect the prevention, restriction or distortion of
competition (and which may effect trade between
Member States) shall be prohibited"
There are, however, under strict conditions,
exceptions to this rule of 'prohibition of cartels',
when the advantages of the agreement
(positive effects of the collaboration / cooperation)
outweigh the disadvantages (negative effects
on competition)
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Competition Law
(cont.)
The exception can be applicable in the case of
an agreement which:

contributes to improving the production or distribution
of goods or to promoting technical or economic
progress, while

allowing consumers a fair share of the resulting benefit,
and which does not:

impose on the firms concerned restrictions which are not
indispensable to the attainment of these objectives;

afford such firms the possibility of eliminating competition in
respect of a substantial part of the products in question
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Competition Law
(cont.)
Based on these 'exception conditions' there exist
some 'block exemption regulations' under which
certain types of agreements may be exempted
from the general 'cartel prohibition', e.g.

Technology Transfer Agreements (IPR-licensing)

Research & Development Agreements

Specialization Agreements (unilateral/reciprocal
specialization, joint production)

Supply and Distribution Agreements (vertical
relationships)
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Licensing Agreements
Possible motives for licensing

market expansion

fast market introduction

opening up of/access to new/foreign markets

technical development, technology exchange,
knowledge interchange

(lower production costs)

(generating royalties, extra revenues)

(prevent imitation & conflicts; settlement of legal
disputes)

(fiscal constructions, distribution of profits within groups
of companies)
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Licensing Agreements
(cont.)
Some important items of licensing contracts:

Clauses concerning the rights granted (e.g. (non-)exlusivity; right to
sub-license; geographical restrictions)

Field(s) of use

Royalties (what basis for royalty calculation; safeguard controlling rights)

Technical support

Know how transfer (accompanying know how)

Confidentiality of know how

‘Grant-back’ (regarding improvements) and ‘Non-attack’- clauses
(regarding the ability to challenge the validity of the IPR)

Restrictions on R&D

Warranties; juridical consequences of bad performance (breach)

(Warranty against) Infringement on/violation of others' IPR's

Duration; termination

Choice of (national) legal system / Forum choice (applicable law &
jurisdiction)
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Licensing Agreements
(cont.)
EU-Regulation on 'Technology Transfer Agreements'
(licensing agreements on patents, know how, software copyright)
Permitted clauses, e.g.

restrictions on sales into other party's exclusive territory or customer group

'exclusive territory'- licenses

'field of use'- restrictions
'Hardcore restrictions', e.g.

restrictions on self-determination of sales prices

limitation of output

restrictions on R&D activities

'exclusive grant back'- clauses, 'non-attack'- clauses

'customer restrictions' (with major exceptions!)
This Regulation is, in principle, only applicable to agreements between
firms that do not exceed certain market-share thresholds (20% in
case of competitors, 30% in case of non-competitors)
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Research & Development Agreements
EU Regulation on Agreements on joint R&D
and/or joint exploitation of results of that R&D
Permitted clauses, e.g.

restrictions on active sales policy in other parties exclusive territory

'(technical) field of use'- restrictions; 'grant back' clauses
'Hardcore restrictions', e.g.

restrictions on self-determination of sales prices

limiting output or sales

restrictions on R&D activities in other R&D-fields

'non-attack'- clauses

restrictions on passive sales in territories reserved for other parties
This Regulation is, in principle, only applicable to agreements
between firms that do not exceed the (combined) marketshare thresholds of 25% in case of competitors
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Joint Ventures
A
Joint Venture
Contract
B
JV
Possible motives

strengthen competitive position

need of capital; high risks

profit / cost-cutting

market access

technical and commercial know how
JV's in principle need to be reported to anti-trust
authorities!
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Joint Ventures
(cont.)
Equity JV





JV is a separate legal entity
JV itself is exposed to the (financial and
commercial) risks involved in the JV
Partners remain independent companies and act
as the JV’s shareholders
Extent of authority of each partner is in principle
proportionate to the partner’s equity ownership-%
Decision-making powers is in principle
distributed among the shareholders and the Board
of the JV
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Joint Ventures
(cont.)
Arranging control and company policy

Joint venture contract, e.g.

scope and purpose of the JV

financing

bring in know how

(line of) policy decision

mechanisms for dispute resolution


changes in ‘power relations’
(shareholding)
Joint venture 'Articles of Association'
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(Statutes)
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Joint Ventures
(cont.)
Distribution of authority

among shareholders (= partners) and Board



extent of the decision-making power of the Board
(pro-active executive role or merely be ‘the eyes & ears’
of the shareholders?)
Partner’s representation in the Board
among the JV partners

Equal distribution (50/50)


problem: JV is inherently liable to ‘deadlock’
Majority / Minority situation (e.g. 60/40)

problem: how to protect the minority shareholder
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Joint Ventures

Shareholders / Board




(cont.)
appointment/discharge of the Board
representation of the partners in the Board can
be arranged in the JV contract (shareholders’
agreement)
important decisions subject to shareholders’
approval
Protection of the ‘minority’ shareholder, e.g.
veto-right over ‘reserved matters’ (provided for in
the shareholders’ agreement)
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Joint Ventures
(cont.)
Dealing with ‘Deadlock’ and Mechanisms for
Dispute Resolution (Sayer, 1999)

Prevent deadlock through 49/49/2 distribution
(the 2% ‘outsider’ is holding the balance!)

Casting vote for one of the partners

Reference to the Boards of the partners

Binding Advice, Arbitration by an impartial
third party; take the matter to Court

Buy-Out

Termination of the JV
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