1. “Crafting an alliance often brings lawyers and executives into a big struggle”

2. Executives - tend to be more concerned with building successful businesses. They are more focused on growth and often argue for broad-based alliances with running room for scope expansion. Executives - tend to be more concerned with building successful businesses. They are more focused on growth and often argue for broad-based alliances with running room for scope expansion. Lawyers - want to limit risks and create future options for the corporate parent. They tend to favor alliances that are narrow in scope and long on contractual detail. Lawyers - want to limit risks and create future options for the corporate parent. They tend to favor alliances that are narrow in scope and long on contractual detail. For example, lawyers often shun 50-50 joint ventures because of the risk of deadlocks in decision making, executive often see them as ideal for encouraging trust and independence.

3. The best firm should combine legal and business best practice when structuring alliances. The best firm should combine legal and business best practice when structuring alliances. We will be focusing on five essential deal terms in order to see how combination between lawyers and executives will work: ownership, scope, structure, valuation, and exit. We will be focusing on five essential deal terms in order to see how combination between lawyers and executives will work: ownership, scope, structure, valuation, and exit.

4. Companies entering alliances are often concerned about their share of economic ownership in a venture due to maximize of financial rewards and also influence over critical venture decisions. For example, McKinsey study shown that 50-50 alliances have a substantially higher success rate than those with uneven ownership which is 60 percent of the time.

5. Lawyers typically advise against 50-50 joint ventures, recommending that the client take a majority position and management control while also protecting the parent’s interests (our interest). Lawyers typically advise against 50-50 joint ventures, recommending that the client take a majority position and management control while also protecting the parent’s interests (our interest). But companies do not always heed the lawyer’s counsel against 50-50 joint venture because neither partner is willing to turn over control to the other side. When ownership is split 50-50, lawyers will attempt to protect parent interests by drafting a detailed joint venture contract specifying that both partners will have equal seats on a governance board.

7. Some executives approach is just like the lawyers that try for the majority ownership, but others look beyond the matter of economic ownership and focus on decision-making control, for instance, by executives will identifying a few key issues before the agreement is signed. Some executives approach is just like the lawyers that try for the majority ownership, but others look beyond the matter of economic ownership and focus on decision-making control, for instance, by executives will identifying a few key issues before the agreement is signed. Consider a U.S. firm and a Latin American firm that was negotiating a joint venture to manufacture and sell the U.S. firm’s product in Latin America. Consider a U.S. firm and a Latin American firm that was negotiating a joint venture to manufacture and sell the U.S. firm’s product in Latin America.

8. Decision making lies at the heart of successful alliances, the ideal approach contemplates using five mechanisms. Decision making lies at the heart of successful alliances, the ideal approach contemplates using five mechanisms. 1. Separate Economic Control from Decision- Making Control 2. Seek the Casting Vote or Veto Power on Certain Decisions 3. Agree in Advance on Ten to Fifteen Key Decisions 4. Develop a Decision-Making Map 5. Create Conflict Resolution Mechanisms

9. For example, a joint venture in the office equipment business was 50-50 in economic control, but one partner operated the alliance and controlled all major decisions. For example, a joint venture in the office equipment business was 50-50 in economic control, but one partner operated the alliance and controlled all major decisions.

10. Example, one leading international oil company signed a 50-50 joint venture in the Indian market after concluding that a casting vote on capital expenditures was enough to protect its interests.

11. For example, firms may want to agree in advance on transfer pricing, venture staffing, and dividend policies. In deciding on certain decisions, partners will uncover potential areas of conflict and speed decision making once the alliance is operational.

12.  The alliance should has a clear understanding of roles in different decisions. The partners should consider developing a decision- making protocol, a road map of the most important decisions that the alliance will face.

13. For example, the JV agreement might allow one partner to fund investments while diluting the other’s ownership stake. To avoid conflict in the future, the alliance might be allowed to buy crucial inputs or sell its output on the open market if the parents fail to reach the agreement. For example, the JV agreement might allow one partner to fund investments while diluting the other’s ownership stake. To avoid conflict in the future, the alliance might be allowed to buy crucial inputs or sell its output on the open market if the parents fail to reach the agreement.

14. What sort of legal structure will hold them together ? What sort of legal structure will hold them together ? - between joint venture and non-equity (contractual) alliance. - between joint venture and non-equity (contractual) alliance. Structure for joint venture: Corporation, General Partnership, Limited partnership, Limited Liability.

15. 1) Liability Not primary: For example, if partners choose general partnership they can establish new subsidiary corporate subsidiaries that will be the partners in the venture. 1) Liability Not primary: For example, if partners choose general partnership they can establish new subsidiary corporate subsidiaries that will be the partners in the venture. 2) Neither Is governance: If the partner of 50-50 contractual alliance wants four member board of director so each partner can bring two representative for the committee. 2) Neither Is governance: If the partner of 50-50 contractual alliance wants four member board of director so each partner can bring two representative for the committee.

16. 3) Taxation and Accounting Treatment 3) Taxation and Accounting Treatment Will the firm be taxed as corporation or partnership? Will the firm be taxed as corporation or partnership? Corporation – Taxed TWICE !! Corporation – Taxed TWICE !! Payment from venture to venture parent will also be different depending on structure. Payment from venture to venture parent will also be different depending on structure. 4) Regulation Non equity alliance or joint venture which is under general partnership, limited partnership or limited liability. 4) Regulation Non equity alliance or joint venture which is under general partnership, limited partnership or limited liability. ‘DOESN’T NEED A REPORTABLE TRANSACTION ‘DOESN’T NEED A REPORTABLE TRANSACTION corporate joint venture NEEDS REPORTABLE TRANSACTION’(if they reach certain size) corporate joint venture NEEDS REPORTABLE TRANSACTION’(if they reach certain size)

17. Executive should focus on business issues that will affect the choice of structure. Executive should focus on business issues that will affect the choice of structure. Key questions: Key questions: Do partners plan to make additional capital investments? Do partners plan to make additional capital investments? If successful, will the alliance last for three or more years? If successful, will the alliance last for three or more years? Is one partner likely to sell its interest to the other partner or a third party, or will the venture be spun off to public investors? Is one partner likely to sell its interest to the other partner or a third party, or will the venture be spun off to public investors? “ The answers will help decide whether to establish venture or contractual alliance” “ The answers will help decide whether to establish venture or contractual alliance”

18. Steps to focus on: 1)What concern about the structure that should be address? 1)What concern about the structure that should be address? 2) Lawyer should be asked to identify and look of the benefit of Governance, tax regulatory and liability concerns. 2) Lawyer should be asked to identify and look of the benefit of Governance, tax regulatory and liability concerns. 3) Work together to generate answer. 3) Work together to generate answer.

19. Defining scope requires the partners to establish boundaries of geography, product categories, customer segments, brands, technologies, and fixed assets between the alliance and the parents. Defining scope requires the partners to establish boundaries of geography, product categories, customer segments, brands, technologies, and fixed assets between the alliance and the parents.

20. Lawyer’s Perspective Define the scope of an alliance narrowly and reserve rights for the parent to expand into related area in the future with or without partner. Reasons: To REDUCE risk. A more narrow scope approach would be limiting the scope to a specific country, signing a nonexclusive agreement, building in minimum performance requirements would have been a better strategy.

21. Lawyer’s Perspective Drawbacks of Narrow Scope: Can interfere with ongoing venture development, especially if technology licenses from the parents are too restrictive. Can interfere with ongoing venture development, especially if technology licenses from the parents are too restrictive. Narrow scope means that the alliance will depend on the parents for resources, which might leads to potential conflict. Narrow scope means that the alliance will depend on the parents for resources, which might leads to potential conflict. Narrow scope limits the alliance’s ability to respond to change to adapt to new market condition. Narrow scope limits the alliance’s ability to respond to change to adapt to new market condition.

22. Executive’s Perspective Often want to have a broad venture that allows room for growth. Often want to have a broad venture that allows room for growth. Statistic shown from 150 multinational companies surveyed, 65% experienced major conflict in the first year of their alliance. Where as the successful alliance studied were substantially expanded in scope. Statistic shown from 150 multinational companies surveyed, 65% experienced major conflict in the first year of their alliance. Where as the successful alliance studied were substantially expanded in scope. A solution would be to narrow the scope at the initial stage and then allow expansion in the appropriate time. A solution would be to narrow the scope at the initial stage and then allow expansion in the appropriate time.

23. The Best of Both World Create Room for Growth. Create Room for Growth. Select Partners that are Not Competitors: This will reduce disputes over the activities and ensure commitment of the alliance. Select Partners that are Not Competitors: This will reduce disputes over the activities and ensure commitment of the alliance. Establish Exclusive Arrangement Only When Necessary. Establish Exclusive Arrangement Only When Necessary.

24. The Best of Both World Anticipate and Negotiate Changes in Scope in Advance: Anticipate and Negotiate Changes in Scope in Advance: E.g. European vehicle company alliance with a Korean company aiming to distribute through out Asia. Its initial geographical scope is to distribute its product a single country; however, plan to expand to other country after Korean sales were established. Defines how Parents will use Technology Created by the Alliance: Defines how Parents will use Technology Created by the Alliance: E.g. two chemical manufacturers might collaborate to develop a new type of plastic, with one of the firm having the right to sell to automotive segments, and another have the right for all other customers.

25. How much each partner’s contribution worth? How much each partner’s contribution worth? What economic interest in the venture the partners will receive in the return for these contributions? What economic interest in the venture the partners will receive in the return for these contributions? How the partners will value the output of the alliance? How the partners will value the output of the alliance?

26. The Lawyer’s Perspective Approach to valuation is from the perspective of their client Approach to valuation is from the perspective of their client Tend to negotiate aggressively to minimize clients resources devoted to the alliance and maximize its share of the future profit or other outputs Tend to negotiate aggressively to minimize clients resources devoted to the alliance and maximize its share of the future profit or other outputs Result: it often time ends up as a win lose situation, may then interfere with the creation of a strong business Result: it often time ends up as a win lose situation, may then interfere with the creation of a strong business

27. The Executive’s Perspective More likely to advocate valuation that creates a strong alliance More likely to advocate valuation that creates a strong alliance E.g. executives maybe willing to value assets on favorable terms for the alliance to improve the chance of future success. A strong alliance will make sense only if the result is meeting the goals of the company (e.g. maximize shareholder value). A strong alliance will make sense only if the result is meeting the goals of the company (e.g. maximize shareholder value).

28. The Best of Both World By establishing three deal terms: A group of executives and lawyers assigned to protect parent interests and analyze the alliance from parent’s perspective. A third team would consist of executives from both sides. Its role is to protect the interests of the alliance. The purpose is to develop a business plan and determine how the alliance can maximize synergies and resources.

29. An alliance is rarely a permanent management. An alliance is rarely a permanent management. McKinsey’s analysis shows that the average life span of joint venture is about seven years, with more than 75 percent of terminated joint ventures acquired by one of the partners. With the above statistics, it is very important to consider the exit provisions in an alliance to protect their interests McKinsey’s analysis shows that the average life span of joint venture is about seven years, with more than 75 percent of terminated joint ventures acquired by one of the partners. With the above statistics, it is very important to consider the exit provisions in an alliance to protect their interests

30. Lawyers recognize the need to negotiate exist clauses and will almost always insist that these clauses be included in the alliance agreement. Lawyers recognize the need to negotiate exist clauses and will almost always insist that these clauses be included in the alliance agreement. Lawyers must ask their clients to identify the events that will trigger a right to exit. For example: Lawyers must ask their clients to identify the events that will trigger a right to exit. For example: 1. Change in control of one of the parents. 2. The inability to agree on a key issue 3. The failure to achieve an important business milestone 4. The breach of contract 5. A sunset date after which either partner can terminate the alliance upon notice to the other.

31. Lawyers must also asked their clients to discuss how the exit should be made once an exit right is triggered. For example, in joint venture, it is common to propose “put” provisions, under which one partner has the right to require the other to purchase its interest. Lawyers must also asked their clients to discuss how the exit should be made once an exit right is triggered. For example, in joint venture, it is common to propose “put” provisions, under which one partner has the right to require the other to purchase its interest. Lawyers may also suggest that partners be given the right to sell their interests to third parties once exit rights are triggered. Lawyers may also suggest that partners be given the right to sell their interests to third parties once exit rights are triggered. Lawyers may recommend that this transfer right be subject to a right of first refusal, under which the non-selling partner would have an option to acquire the interests of the selling partner before the selling partner may transfer its interest to a third party Lawyers may recommend that this transfer right be subject to a right of first refusal, under which the non-selling partner would have an option to acquire the interests of the selling partner before the selling partner may transfer its interest to a third party

32. Lawyers may suggest that the exit be affected by selling the alliance in its entirety or conducting an initial public offering. Lawyers may suggest that the exit be affected by selling the alliance in its entirety or conducting an initial public offering. Finally, good lawyers will ask their clients to focus on termination-related valuation issues. Finally, good lawyers will ask their clients to focus on termination-related valuation issues. For example, if the partner is going to sell its interest to the alliance or other partners, what price should be paid? Lawyers may suggest the use of an outside appraisal like investment banks or advisers to set a “fair price”

33. Executives tend to approach exit provisions differently. Many want to defer detailed discussion on the grounds that such discussions can reduce trust. Executives tend to approach exit provisions differently. Many want to defer detailed discussion on the grounds that such discussions can reduce trust. The vary act of suggesting exit provisions can seem like a proof of bad faith. The vary act of suggesting exit provisions can seem like a proof of bad faith. Executives may want to avoid discussion of exit provision for a second reason: it forces an uncomfortably blunt assessment of whether the parent is the natural buyer or seller of the assets. If the partner is the natural seller- say, because the business really does not fit the company portfolio but cannot be sold for an attractive price today-this can be embarrassing for the managers running the business. Executives may want to avoid discussion of exit provision for a second reason: it forces an uncomfortably blunt assessment of whether the parent is the natural buyer or seller of the assets. If the partner is the natural seller- say, because the business really does not fit the company portfolio but cannot be sold for an attractive price today-this can be embarrassing for the managers running the business.

34. As with most other elements of alliance negotiations, both lawyers and executives have perspectives that should be combined in the integrated negotiation plan. As with most other elements of alliance negotiations, both lawyers and executives have perspectives that should be combined in the integrated negotiation plan. 1. Address Exit Up Front. This is very important in terms of determining the terminal value of the alliance, the partners should consider them in detail in the negotiations

35. 2. Be Careful with “Buy-Sell” Provisions. This is most common device to set alliance value upon termination but it is appropriate only when each partner is just as likely to be the buyer or the seller. 3. Assess Who Is Likely to Be Buyer or Seller. It is often possible to anticipate which partner will be the acquirer by looking at how closely the alliance’s business is connected to each partner’s core activity and at the ability of each partner to invest.

36. Both lawyers and executives have much to offer in crafting alliance agreement. Best business practices suggest that some of the typical lawyers’ concerns- the desire to define scope precisely and the reaction against 50-50 joint ventures- are overblown. Both lawyers and executives have much to offer in crafting alliance agreement. Best business practices suggest that some of the typical lawyers’ concerns- the desire to define scope precisely and the reaction against 50-50 joint ventures- are overblown. Similarly, the lawyers’ views on such issues as exit mechanisms and structure can provide significant help to the executives. A good working relationship between the two parts of the negotiating team should increase the likelihood that the resulting alliance will be well designed and successful. Similarly, the lawyers’ views on such issues as exit mechanisms and structure can provide significant help to the executives. A good working relationship between the two parts of the negotiating team should increase the likelihood that the resulting alliance will be well designed and successful.