Strategic AlliancesStrategic AlliancesHow to Structure, Negotiate, and Implement

Successful Alliances

June 5, 2003Debra J. Dorfman

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DisclaimerDisclaimer

The purpose of this presentation is to provide general information on certain legal agreements and common issues that may be relevant to you in forming and implementing strategic alliances. This presentation and the information contained in the following slides should not be considered legal advice. Every case has special circumstances requiring its own analysis by legal counsel.

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Why are Strategic Alliances Valuable in Today’s Market?

“Venture capitalists are placing more and more emphasis on a company’s ability to demonstrate customer ‘traction’ - either through early revenue or customer validation of the company’s product or product concept - before investing.”*

*From Hale and Dorr Venture Capital Report for 2003

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Strategic Alliances

H ireEm ployees

D irectSales

D o ItYourself

AK AM anufacturer

R epresentative

C om m issionedAgentsSolic itO rders

SalesR epresentative

Pay Som eoneB etter to

Sell B etter

D istributorSells B y

PrescribedM arket'g P lan

Franchise

H elpSom eone Sell

For You

Specia l C ases :O EM

Private Label

AK ASupply orM arketing

Agreem ent

D istributorR esells

ForProfit

D istributor

Let Som eoneSell For You

Specia l C ases:Team ing

Agreem ents

C an B e A:C orporation ,

Partnership , LLCor O ther

L icensee isJointly O w ned

B y You andAnother

JointVenture

Let Som eoneE lse M ake/Sell& O w n Part o fThat Som eone

Specia l C ases :K now -H owShow -H ow

M ore F lexib leC om pared to

Sale o fTechnology

Licensee M akes/Sells Product,

PaysR oyalty

L icenses

Let Som eoneE lse M ake/Sell

As responsibility decreases, up-side opportunity decreases and need for financing decreases.

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Well Crafted Agreements Can Provide a Blue Print to Success

> Flexibility

> Clear definition of responsibilities and scope

> Mutual ongoing incentives

> Good communication

> Dispute resolution

> Wind down / termination provisions

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Pre-Contract Issues

> Hart-Scott-Rodino Antitrust Rules

> EU Competition Laws

> Timing and disclosure

> Should a letter of intent be used?

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The Term Sheet

This includes the negotiated business expectations of your company and your partner

> Time frame and schedules

> Obligations and rights of each party

> Financing and pricing terms

> Intellectual property

> Publicity

> Non solicitation

> No shop clause

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The Non Disclosure Agreement

> Must be in place prior to commencement of due diligence

> Essential to maintain trade secret and competitive advantages

> Opportunity to assess the other party’s technology

> Review of technical and business compatibility

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Types of Agreements

What is the nature of the relationship to be established between the parties?

> License Agreement

> Research Agreement

> Development and License Agreement

> Co-Promotion Agreement

> Distribution Agreement

> Manufacturing and Supply Agreement

> Joint Venture Agreement

> Consortia

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Grant of Rights

What rights will be granted?> Defining technology to be licensed

Patents Know-how Improvements/“second generation” technology Technology of affiliates

> Scope of license Duration Exclusivity Field Territory Grant backs Retained rights Sublicensing

> Additional technology rights ROFNs/ROFOs/ROFRs

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Grant of Rights

Background technology

Limit to technology actually used for the proposed relationship

Limit to technology developed as of effective date

Limit to technology to which Licensor has right to grant licenses

Collaboration technology

Can be joint or sole inventions

Include inventions of larger company in the relevant Field or Market to ensure royalty is payable even when the smaller company is not the inventor or the joint inventor

Licensed Product Definition

Narrow definition is limited to products covered by valid patent claim

Broader definition includes products that embody each party’s technology or jointly developed technology

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Grant of Rights

> Territory

Worldwide

License limited to specified countries or regions

> Affiliates

Know who they are

Avoid inclusion of technology of “affiliates”

> Field/ Market

> Grant back of rights

> Retained rights

> Sublicensing

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Grant of Rights

> Structuring methods of obtaining additional IP and/or additional markets

Right of First Negotiation

Right of First Offer

Right of First Refusal

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Financial Terms

> Milestone Payments

> Royalties

> Profit-Sharing

> License fees

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Financial Terms

Sublicensee Sales and Example

> Net Sales• $1,000,000: Sublicensee net sales• 5% royalty• $50,000 payment

> Sublicense Income• $1,000,000: Sublicensee net sales• 15% royalty to Licensee ($150,000)• 50% sublicense income sharing• $75,000 payment

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Financial Terms

> Equity investments What type of security?

— Common stock

— Special class of preferred stock

— Warrants Other rights and restrictions?

— Board representation or observer rights

— Standstill provision

— Voting rights and veto power of collaborator

> Debt/loan facility

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Exclusivity/Non-Compete Provisions

Exclusivity: Either party agrees that it will not perform services, commence a research or commercialization program (other than as contemplated by the collaboration), either alone or in collaboration with any third party, in competition with the Alliance in the relevant Field/ Territory/ Market

Exceptions: Grandfathered Relationships/ Existing collaborations Academic/research institutions Affiliate activities Carve-out for acquisitions of or mergers with entities

with competing programs

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Product Development

Generally, who does what?

Plan

Budget

Diligence

How are decisions made?

Management Committee

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Manufacturing

> Who makes the Licensed Product?

> Key Manufacturing Issues Forecasting Price Quantity Second manufacturing source Warranty Product liability indemnity Insurance

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Commercialization

Who markets and sells the Licensed Product?

Co-Promotion/ Co Branding

Each party markets product under shared label Control issues:

— Sales call assignments

— Advertising and collateral materials

— Training and related materials

— Samples use

— Pricing

— Regulatory approval

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Managing the Alliance

How to make the deal work once the contracts are signed

> Expectations and objectives

> Control vs. collaboration

> Communications

> Commitment

> Issue resolution

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Dispute Resolution

What happens when parties disagree?

> Steering Committee

Structures

— Usually equal representation

— Raises concerns about disrupting progress of collaboration

Possibilities

— Kickup issues to senior officers

— Provide one party with veto power over all issues or specified issues

— Resort to mediation or arbitration

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Dispute Resolution Mechanisms

> Typical dispute resolution mechanisms

• Mediation/arbitration

– binding vs. non-binding

– designation of arbitrators

– governing rules (e.g., AAA, UNCITRAL, etc.)

– location

– specify rules for the proceedings (e.g., timetables, limits on discovery, etc.)

– special types of arbitration - e.g., “baseball”-style

• Litigation

• jury trials

• contingency fees

• extensive discovery

• large class actions

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Termination

Expect the Best, Anticipate the Worst

> A significant percentage of strategic alliances are terminated prior to the introduction of the targeted products/technologies.

> While strategic alliance agreements typically cover product development, commercialization and financial terms in great detail, dispute resolution and termination clauses are often an after-thought.

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What rights should I try to get back if my partner terminates the collaboration?

> All data and information

> Inventory at cost

> Manufacturing contracts and data

> Supply commitment

> Customer information

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Common Triggers for Termination Of Strategic Alliances

1. Breach

2. Change of control

3. Unilateral termination right/ Termination for convenience

4. Failure to achieve milestones

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Bankruptcy Considerations

> Licensor in bankruptcy

• Licensor may assume or reject agreement post-filing

• If licensor assumes, licensee at risk of agreement assigned to third party, which may be a competitor

• If licensor rejects, 365(n) applies and licensee becomes unsecured creditor for damages

• 365(n): continued access to licensed “intellectual property” after rejection (services and other obligations terminate)

> Licensee in bankruptcy

• Licensee may assume or reject agreement post-filing

• Licensee may assume agreement and assign to third party, which may be a competitor

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Miscellaneous Issues> Indemnification

product liability intellectual property infringement

> Insurance self-insurance? dollar amount? primary or secondary coverage? term of coverage?

> Export control

> Publicity

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Any Questions?

Please feel free to contact

Debra J. Dorfman609-750-7644

debra.dorfman@haledorr.com

with any questions you may have.