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					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   2
  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)


 Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   3
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

Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   4
        Alliances come in a variety of forms
                                      (see INAM lecture 1, sheet 41)




                                        Forms of cooperation


 Market transaction                   Licensing                         Joint Venture             Merger/
                                                                                                 Acquisition
                   Outsourcing                      Joint R&D,
                      (traditional)               production etc.                        Minority
                                                   Outsourcing                         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


 Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances                       5
    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
Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances           6
     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                 B
     Minority Participation                                                JV
        (Stock participation of one or more of the partners by other partners, or
           reciprocal participation)
                                                                      A                B
    Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   7
 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



Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   8
     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)

    Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances       9
  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)

Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   10
    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

Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   11
 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


Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   12
 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)




Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   13
 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!



Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   14
 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)
Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   15
 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


Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   16
    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)

Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   17
 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)

Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   18
 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)

Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   19
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)


Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   20
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
Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   21
 Joint Ventures
                                              Joint Venture
                            A                   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!
Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances       22
 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

Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   23
 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'                                             (Statutes)

Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances            24
 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

Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   25
 Joint Ventures                              (cont.)


     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)


Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   26
 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

Innovation in Networks & Alliance Management (0ZM05/0EE10) – Legal Aspects of Alliances   27

				
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