1 innovation networks and alliance management legal aspects of alliances guest-lecture 16th october...

1

Innovation Networks and Alliance Management

Legal Aspectsof Alliances

Guest-lecture16th October 2007

mr.drs.E.F. Clarkson, Law Teacher TM

2Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances

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


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)


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


Alliances come in a variety of forms(see INAM lecture 1, sheet 41)

Forms of cooperation

Market transaction

Outsourcing(traditional)

Licensing Joint Venture Merger/Acquisition

Minorityparticipation

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

Joint R&D,production etc.

Outsourcing(new)


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)

Acquisition (subsidiary)(take-over of a company that becomes a subsidiary; total control)

A B

C

S

P


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)

Minority Participation(Stock participation of one or more of the partners by other partners, or

reciprocal participation)

A B

JV

A B


Main Legal Aspects of Alliances

Contract LawRights & 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 LawRules regarding e.g. different legal forms for JV's

Competition LawRules with respect to opportunities/constraints regarding

cooperation/collaboration; restriction/distortion of competition


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)


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)


Intellectual Property Rights (IPR)

'Embodiment' of technical/commercial know how Inventions (products / processes) Software / chips; IT-products; documentation (Industrial) Designs & Models Trademarks Trade secrets, 'non-disclosed' know how

Specific legal protection 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


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


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)


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!



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)



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



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)


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)


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)


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)


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) market-share

thresholds of 25% in case of competitors


Joint Ventures

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!

A B

JV

Joint VentureContract


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



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' (Statutes)



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



Shareholders / Board 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)



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

1 innovation networks and alliance management legal aspects of alliances guest-lecture 16th october...

Documents

innovation networks

strategic alliances

intellectual property

rights of use

joint decisionmaking

joint revenues

joint risks

mutual benefits