Legal Due Diligence Checklist Venture Capital - PDF

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					   CORPORATE STRATEGY BOARD                                                                                         NOVEMBER 2002
                                                                                                         www.corporatestrategyboard.com

                                                                                                                                  ISSUE BRIEF
                                                                                                         Joint Venture Toolkit


                                         JOINT VENTURES--OVERVIEW
 This report analyzes steps              Over the past two decades there has been a significant increase in the formation of domestic
         in the joint venture            and international joint ventures. For many firms, joint ventures are no longer a peripheral
                                                                                         1
                                         activity but a mainstay of competitive strategy. A driving force behind this trend is the
 preparation process and                 realization by many firms that joint ventures provide opportunities to enter new markets, obtain
  presents a checklist with              new skills, and share risks and resources.
           steps to consider             Nevertheless, many joint ventures do not achieve their potential and failure rates remain high,
       (Appendix A), a due               frustrating the efforts of many firms to capitalize on alliance strategies. The following are
                                         examples of recent unsuccessful partnerships, all of which were announced with a great deal of
         diligence checklist             promise:
                                                   2

  (Appendix B), a sample                 •     Apple Computer and IBM invested hundreds of millions of dollars in two software joint ventures
           memorandum of                       (Taligent and Kaleida) designed to challenge Microsoft's supremacy. Both ventures were dissolved a
                                               few years later with both Apple and IBM having little to show for their cooperative efforts.
     understanding (MoU)                 •     US West and Time Warner formed an alliance designed to exploit the convergence between
   (Appendix C) and joint                      telecommunications and entertainment. Several years later, the partners found themselves involved
                                               in a lawsuit in which US West tried to block Time Warner's purchase of Turner Broadcasting.
    venture scorecards to
      assess alliance value              Contractual agreements between joint venture partners are often executed under conditions of
                                         high uncertainty, and it is unlikely that all future contingencies can be identified during the
            (Appendix D, E).             formation process. Early planning, however, can eliminate many of the problems that plague
                                         joint ventures and careful preparation may reveal whether a joint venture is indeed the most
                                         appropriate strategic option. Often, firms become focused on getting their joint venture deal
                                                                                                                    3
                                         done quickly and lose sight of the larger strategic and financial picture.
                                         This report examines a series of planning issues that should be taken into account when a
                                         company identifies collaboration through a joint venture as a viable option for growth.

                                                                    THE JOINT VENTURE PREPARATION PROCESS
 A joint venture is formed when two
 or more distinct firms (the parents)                             The first step in developing a joint venture is to formulate a strategy that
                                                Strategy
                                                                  aligns with organizational goals and vision. In developing a JV strategy,
           combine a portion of their         Formulation         companies must identify their core competencies, current capabilities
 resources to form a separate jointly            Page 2
                                                                  and gaps as well as determine their level of risk tolerance.
         owned organization. Unlike
  transaction-based negotiations, as
                                                                  Partner identification is a critical component of a joint venture.
    in the buying or selling of firms,
                                                Partner           Successful companies have a proactive screening approach to partner
          where the conclusion of the                             selection. High quality due diligence is critical to partner selection. Due
negotiation is the end of the discrete       Identification
                                                 Page 2           diligence should uncover and analyze all issues that are likely to impact
interaction, successful joint venture                             the JV and most importantly assess cultural fit of the partners.
negotiations represent only the first
 step in a multiple-step relationship.                            Establishing a governance structure that maintains appropriate decision-
                                                 Formal           making powers while protecting the interests of the joint venture parents
                                                                  is essential to joint venture success.
                                              Governance
                                               Structures         Companies should formalize the joint capabilities and future direction of
                                                 Page 4           the venture in a Memorandum of Understanding to reduce ambiguity
                                                                  connected with strategic intent.

                                                                  To accurately measure the performance of joint ventures, partner
                                             Accountability       companies should establish a scorecard against which to measure the
                                             & Performance        performance of the joint venture against key goals and targets.
                                             Measurement
                                                 Page 5



                                                      2002 Corporate Executive Board
     CORPORATE STRATEGY BOARD                                                                                                          PAGE 2
    JOINT VENTURE TOOLKIT                                                                                                            ISSUE BRIEF


                                               STRATEGY FORMULATION

                                               Joint Venture Strategy Development— Without first understanding and articulating the
      The joint venture process begins
                                               alliance strategy issues internally, decisions about who to partner with are uninformed. The first
             first with making strategy        step in developing joint ventures is to assess current capabilities and gaps. A useful starting
            decisions and second with          point for developing joint venture goals is also a review of past and current alliance projects,
         screening potential partners.                                                                 4
                                               corporate strategy documents and vision statements.
              Having information and
                 knowledge about your          Identification of Core Strengths and Value Activities—Firms should begin selecting deal
      organization’s objectives and its        rationales by taking stock of their existing strengths. Clarifying core competencies helps
     capability resources and gaps are         identify deal rationales in two ways. Firstly, it allows the company to identify competencies that
         critical before beginning the         make it valuable to a prospective partner. A company can promote these areas when sourcing
                                               and structuring deals, as competencies will attract partners and provide negotiating leverage.
            partner screening process.         Secondly, clarifying existing core competencies will uncover areas of weakness that need to be
                                               shored up with new partnerships. A good deal can be the quickest way to close capability
                                                     5
                                               gaps.

                                               Determination of Risk Tolerance—The sources of risks should be identified and tolerance to
                                               the risk determined as early as possible. Some of the risks to be considered include investment
                                               in relation-specific assets, competitive risks associated with loss of technology and markets,
                                               and the firm’s reputation and image.

                                               The outcome of setting the joint venture strategy is the formulation of a business plan that
                                               includes partner selection criteria, due diligence, a cultural self-assessment and a negotiating
                                               strategy.

                                               PARTNER IDENTIFICATION

                                               Successful companies have a proactive screening process as opposed to an ad-hoc or reactive
                                               approach to partner selection. Ideal partners have compatible objectives, complementary
   “Partner selection is so important.         resources and skills, organizational fit in terms of culture and processes and willingness to ally
 There is such a thing as a partner of         with each other.
choice, and the number one player in
                                               To facilitate proactive partnering, decision makers must have information and knowledge of all
a particular business isn’t always it.”
                                               potential partner’s objectives, financials, resources and skills, processes and culture. Legal
                                —Dan Trott,    knowledge is also needed to determine the ramifications of entering a JV with a particular
                                                          6
Vice President, Pepsi Lipton Tea Partnership   company.

                                               Firms should ideally have substantial knowledge about their potential partners including why
                                               the other firms might want a joint venture, the firm’s strengths, weaknesses, reputation and
                                               experience with joint ventures. Becoming a “partner of choice” come from three principal
                                                       7
                                               sources:

  Successful joint ventures cannot be              •    Corporate assets—Powerful alliance brands are built on unique corporate assets
one-sided. Mutual value creation and               •    Alliance track record—Potential partners seek companies with a history of multiple,
      a common destiny should be the                    successful alliances
objective of all joint venture partners.           •    Strong alliance management skills—Partners of choice demonstrate excellent
                                                        management of their alliance portfolios




                                                          2002 Corporate Executive Board
 CORPORATE STRATEGY BOARD                                                                                                      PAGE 3
JOINT VENTURE TOOLKIT                                                                                                        ISSUE BRIEF


                                        PARTNER IDENTIFICATION (CONTINUED)

                                        Due-Diligence—The objective of performing due diligence is to uncover and analyze all issues
                                        that are likely to impact the success and cost of the joint venture. These issues may vary from
                                        highly objective, such as whether the accounting statements of the potential partner corporation
                                        are accurate, to highly subjective, such as whether the organizational cultures of the two
                                        companies are compatible. Due diligence reviews encompass a range of wide issues which
                                        can be categorized into four broad areas:

                                        !   Strategic due diligence—Performed to understand the position of the partner in the market
                                            place and its likely position in the future
                                        !   Financial due diligence—Conducted to obtain a realistic insight into the revenue growth
                                            potential of the partner company
                                        !   Legal due diligence—Performed to verify disclosures made by potential partner and to
                                            ensure that no major liabilities are incurred.
                                        !   Operational due diligence—Verification of all issues pertaining to operations, including,
                                            management team structure, culture and morale.

                                        Cultural Fit Assessment--After identifying potential partners, and in conducting due diligence,
   Even when companies pay close        the key step is to assess the cultural fit between partners (though it is often considered as
      attention to cultural issues in   partner selection is conducted). Differences in corporate culture seldom stops deals from being
alliance diagnosis and structuring,     completed. But cultural differences can significantly shape the optimal approach to integrating
cultural differences never go away.     the organizations. Differences in partners’ corporate cultures must be assumed as given and
   Dealing with them is essential to    companies in a JV agreement must capitalize on the synergies that arise from successful use
                                                                8
              alliance management.      of cultural differences.

                                        During a cultural assessment, the company must examine the potential partner’s corporate
                                        values and expectations, organizational structure, reward systems and incentives, leadership
                                        styles, decision-making processes, pattern of human interaction, work practices, history of
                                                                                      9
                                        partnerships and human resource practices. For example, Eli Lilly sends a due diligence team
                                        to the potential partner to evaluate the partner’s resources and capabilities and to assess its
                                        culture. This evaluation is used as both a screening mechanism and a tool to assist Lilly in
                                                                                        10,11
                                        organizing staffing and governing the alliance.
                                                                                              12
                                        Key areas of insight to determine cultural fit include:
                                        !   Interviewing target employees and managers
                                        !   Reviewing personnel practices to identify similarities and differences
                                        !   Comparing corporate mission and vision statements that reflect corporate direction and
                                            values
                                        !   Evaluating compensation and benefit plans
                                        !   Evaluating decision-making processes and approaches to identify potential conflicts
                                        !   Studying corporate focus and orientation: does the company focus on profitability,
                                            customers, performance appraisal systems to evaluate leadership and performance
                                            management systems
                                        !   Examining succession planning and incentive systems to understand the behaviors the
                                            organization encourages.




                                                   2002 Corporate Executive Board
    CORPORATE STRATEGY BOARD                                                                                                        PAGE 4
   JOINT VENTURE TOOLKIT                                                                                                          ISSUE BRIEF


                                           BUILDING THE JOINT VENTURE GOVERNANCE STRUCTURE13

                                           Establishing a Governance Structure—Research shows that many companies with alliances
     The optimal governance structure
                                           have no formal bodies to govern those alliances and that eight out of the ten most common
will depend on the alliance objectives,    causes of alliance failure are related to governance.
                                                                                                14
 the level of investment, technological
           conditions, and partner time    Establishing a governance structure which gives the executive management of the joint venture
horizons. Ultimately what determines       appropriate decision-making powers but which also protects the interests of the joint venture
joint governance structure is the level    parents requires careful thought and balancing of interests. The governance structure must be
                                                                                                      15
         of trust between the partners.    tailored to the requirements of the individual transaction.
Governance costs under conditions of
            mistrust will be greater and   There are a variety of governance issues that must be resolved before a joint venture begins
   procedures will be more formal and      operations including the following:
                           cumbersome.
                                           !   Top management positions
                                           !   Board composition
                                           !   Reporting expectations
                                           !   Partner monitoring

                                           To ensure that companies can cope with the complexities and demands of joint ventures, the
                                           scope of such governance structures should broaden to include both the traditional governance
                                                                                                                           16
                                           responsibilities as well as the six new areas of responsibility outlined below:

                                           !   Ensuring fiscal prosperity and integrity to meet the primary fiduciary obligations to
                                               maximize shareholder value and minimize risk
                                           !   Allocating scarce capital to make the best choices along the “build, buy, borrow” continuum
                                           !   Valuing complex assets including both tangible and intangible assets
                                           !   Redirecting resource flows to reflect changing conditions
                                           !   Expediting working relationships to speed decision making both internally and with external
                                               partners
                                           !   Establishing durable links across national and corporate boundaries to link shared
                                               aspirations, operating principles and values across all operations

                                                                                                           17
                                           Developing the Memorandum of Understanding (MoU) —Finalizing the joint capabilities
                                           and future direction in a documented business plan reduces the initial ambiguity connected with
                                           strategic intents. This can be attained by developing a memorandum of understanding (MoU).
                                           While failure to develop a statement of joint intent will not necessarily lead to failure, doing so
                                                                                 18
                                           reduces the risk of early dissolution.

                                           An MoU, which will often start off a joint venture, helps to:

                                           !   Confirm the fundamental intentions of the parties
                                           !   Enable the senior negotiators to concentrate on establishing the fundamental principles of
                                               these often complex deals
                                           !   Provide a basis for any public announcements or approaches to initiate regulatory
                                               clearances
                                           !   Ensure smooth transition and management of the joint venture




                                                      2002 Corporate Executive Board
  CORPORATE STRATEGY BOARD                                                                                                         PAGE 5
 JOINT VENTURE TOOLKIT                                                                                                           ISSUE BRIEF


                                          BUILDING THE JOINT VENTURE GOVERNANCE STRUCTURE (CONTINUED)

                                          An MoU should normally address—at least in outline—the following principal issues (see
                                          appendix B for a sample MoU):

                                              •    Likely joint venture structure
                                              •    Equity interests of the parties
                                              •    Initial capital and any commitments to future financing
                                              •    Board, management and voting structures
                                              •    Decisions requiring consent of the parents
                                              •    Commitments to provide technology
                                              •    Non-compete undertakings
                                              •    Broad scope of any warranties/indemnities
                                              •    Basic exit provisions
                                              •    Conditions precedent
                                              •    Target timescales.

                                          FACILITATING ACCOUNTABILITY AND MANAGING PERFORMANCE OF JOINT VENTURES 19
                                          To measure the performance of joint ventures accurately, a company must start by recognizing
                                          the potential obstacles to the agreement and determine a common approach to performance
   To get the maximum value out of        measurement, as each partner has its own reporting processes and systems. This can be
   all joint ventures and to maintain     achieved by implementing a feedback mechanism and instituting a scorecard approach to
         the ability to intervene when    measuring performance of the joint venture.
         performance veers off track,
 managers should learn to measure         Feedback Mechanism—Companies must ensure accountability of the joint venture on three
         the joint venture’s fitness on   levels, each focusing on different aspects of the problem and prompting distinct managerial
  several levels—a process that can       responses. At the first level, every joint venture should be assessed to establish how it is
                                          performing and whether the parents need to intervene. The assessment creates the foundation
reveal fundamental weakness in the        for the next level, which is to search periodically for performance patterns across the portfolio—
           way companies create joint     a process that often leads to adjustments in the types of deals a company pursues and
  ventures as well as assess whether      sometimes to additional investments in building alliance-related skills. Once a company better
 the joint venture contributes to the     understands how its portfolio is performing, it can conduct a top-down review of overall strategy
                    corporate strategy.   in order to ensure not only that its alliance portfolio is configured in the best possible way and
                                          contributes sufficiently to its performance but also that it has ranked new opportunities in a clear
                                          order of priority.
                                          Scorecard—Developing, up front, a detailed view of the economics of a joint venture is
     It is essential for both the joint   indispensable to measuring its performance. The process should go beyond the usual cash
   venture and the parents to take a      flow metrics to include transfer-pricing benefits, benefits outside the scope of the deal (for
 balanced view of performance. To         instance, sales of related products), the value of options created by the alliance, and start-up
  achieve this balance, it is useful to   and ongoing management costs
include the following dimensions of
                                          Once a company has a clear view of the economics, the next step is to develop, within 30 days
     performance fitness: financial,
                                          of the launch, a scorecard to track the venture’s performance. Partners must decide whether to
            strategic, operational and    share a single alliance scorecard, to have separate scorecards, or to develop some
                          relationship.   combination of the two.

                                          For a joint venture with its own P&L, a single scorecard is often possible; for most other
                                          alliances, the combination approach works best. Each partner can supplement a shared
                                          scorecard with additional metrics tracking the progress of an alliance against goals (such as
                                          learning or strategic positioning) that aren’t shared by the other partners. This approach also
                                          enables each partner to devise internal metrics that allow it to compare the performance of an
                                          alliance with the performance of wholly controlled activities and of other, similar alliances (see
                                          appendix for sample scorecards).




                                                     2002 Corporate Executive Board
 CORPORATE STRATEGY BOARD                                                                                                                   PAGE 5
JOINT VENTURE TOOLKIT                                                                                                                       APPENDIX


        Appendix A—Preparing for the joint venture: Checklist
        The following issues to be considered at the outset of discussions regarding a proposed joint venture:

        1. Initial steps
        Basic initial steps or questions to consider include the following:
        Has a feasibility study or business plan been prepared?
        Will confidential information be disclosed during negotiations? Has a confidentiality agreement or information exchange
        agreement been put in place?
        Is each party still free, pending signature of the definitive agreements, to negotiate with third parties an alternative or
        competitive deal?
        Should there be exclusivity obligations, preventing such negotiations, for a specified period?
        Is a letter of intent or memorandum of understanding appropriate to establish points of principle?
        Are any of the parties a publicly-quoted company with public announcement obligations or stock exchange requirements
        for shareholder approval relating to the venture?
        What material authorizations, consents, licenses or other conditions precedent will be required for the joint venture to
        commence?
        If an international joint venture, considering the effect of local laws of the country in which the venture is to be established,
        what governing law should apply?



        2. Structure of the joint venture
        Consider the appropriate structure (note tax considerations) for the joint venture:
        Corporate or unincorporated venture?
        Limited or unlimited liability company?
        Contractual collaboration or alliance?
        Partnership? Limited partnership?
        Limited liability partnership (LLP)?
        Profit pooling or revenue sharing arrangement?
        Location of joint venture entity?
        Series of joint venture vehicles in different jurisdictions?
        Existing entity – or new entity to be formed?



        3. Contribution of existing assets
        Due diligence investigation to be undertaken by either party into assets/business to be contributed by the other?
        Tax/transfer duty considerations affecting method and timing of contributions?
        Method of valuation of contributed assets? Accounting policies to be applied?
        Any equalization payment required as between the parties? Method of calculation and payment?
        Any minimum net worth obligation on either party in respect of assets to be contributed?
        Any subsequent completion account adjustment as between the parties?
        Warranties and/or indemnities to be given by either party to the joint venture/other party regarding business or assets
        contributed? Limits as to time and/or amount?
        Any material contracts/assets/properties which require third party approval prior to vesting in the joint venture?
        Need to provide for partial, delayed or conditional completion of asset contributions?
        Need for separate contribution agreement under relevant local laws?




                                                     2002 Corporate Executive Board
 CORPORATE STRATEGY BOARD                                                                                                                  PAGE 6
JOINT VENTURE TOOLKIT                                                                                                                      APPENDIX


        4.   Intellectual Property
        Will material technology be provided by the parties to the joint venture? Is it protected by intellectual property rights (IPR)?
        Is technology predominantly in the field of the joint venture – or is it used (mainly/partly) in the separate operations of the
        parties?
        Is it preferable to vest ownership in the joint venture – or to license?
        Will parties need ongoing access to IPR generated by the joint venture?
        Will antitrust regulations apply to the terms relating to IPR?
        Will trade marks of the parents be licensed to the joint venture for its use –including in its name/logo?
        What should be the position of rights to IPR in the event of termination?



        5. Property and related services
        Will property be transferred/leased to the joint venture?
        Will ‘site-splitting’ be necessary?
        Will transitional arrangements be necessary to support the joint venture in respect of services, property-related facilities,
        IT/communication systems, accounting and other professional support?
        Need for environmental audits? Allocation/indemnities regarding potential environmental liabilities attributable to pre-
        completion circumstances?




                                                    2002 Corporate Executive Board
 CORPORATE STRATEGY BOARD                                                                                                  PAGE 7
JOINT VENTURE TOOLKIT                                                                                                      APPENDIX


        Appendix B—Joint Venture Due Diligence Checklist
        Note: The following list is not intended to be exhaustive, but rather to provide examples of the types of
        inquiries that a prospective joint venture partner would typically make. In any given situation some of these
        inquiries will be unnecessary or inappropriate and other inquiries will be necessary.

                                             "   Do barriers to entry exist?
                                             "   Can market accept new product?
                                             "   What are the assumption underlying market estimates?
                                             "   Do they have any strategic alliances?
                                             "   Are they a likely acquisition target for competitors
        Strategic Due Diligence
                                             "   Who are the market leaders?
                                             "   What are the features and benefits of competitors products?
                                             "   Are the any potential product substitutes that can radically change the
                                                 industry in the short-term
                                             "   What is the nature of the personal relationships between key employees
                                                 and customers?

                                             "   What is the revenue potential of the joint venture?
                                             "   What are the short- and long-term forecasts, including driver-based cash
                                                 flow and valuation model?
        Financial Due Diligence              "   What is the quality of receivables?
                                             "   Are there any shareholder loans?
                                             "   Are there any unrecorded liabilities?
                                             "   What are some of tax contingencies to consider?

                                             "   Review articles of incorporation, corporate minutes, and corporate
                                                 bylaws
                                             "   Are there any anti-trust laws that should be considered?
                                             "   What are the existing labor agreements ?(Examine any collective
        Legal Due Diligence                      bargaining agreements, employee handbooks, employment agreements,
                                                 restrictive covenants, confidentiality agreements and partners general
                                                 employment practices)
                                             "   Review all pending litigation, including copies of complaints, answers,
                                                 motions and discovery
                                             "   Determine partners compliance with tax laws

                                             "   Are operations managed by formal schedule with clear objectives?
                                             "   Effectiveness of communication channels?
                                             "   What is the structure of the reporting relationships?
                                             "   What is the current culture/morale?
        Operational Due Diligence
                                             "   Is the sales group motivated?
                                             "   Is there measurable superior technology that enables sustained product
                                                 development?
                                             "   Does a process exist to ensure cost/quality standards?
                                             "   Is management of raw materials and inventory optimal?




                                              2002 Corporate Executive Board
 CORPORATE STRATEGY BOARD                                                                                                                PAGE 8
JOINT VENTURE TOOLKIT                                                                                                                    APPENDIX


        Appendix C—Sample Memorandum of Understanding for Joint Ventures
        [Date]


        [COMPANY NAME] (X) and [COMPANY NAME] (Y) are proposing to form a new company (Joint Venture) for the
        purposes of a [DESCRIBE JOINT VENTURE] This memorandum of understanding sets out the proposed terms of the
        Joint Venture and timetable for implementation. It is not intended to be legally binding except as specifically set out below.
        This memorandum of understanding is confidential to the parties and their advisers and is subject to the confidentiality
        agreement already entered into between X and Y which continues in full force and effect.
        1.   BUSINESS OF THE JOINT VENTURE
        The parties wish to enter into the Joint Venture to [STATE REASONS FOR JOINT VENTURE AND INTENDED SCOPE
        (PRODUCTS AND TERRITORY)].
        2.   STRUCTURE
        It is proposed that the Joint Venture will be conducted through a [DESCRIBE NATURE OF COMPANY] incorporated in
        [COUNTRY] and to be formed by the parties on or before closing (the joint venture). [But the parties may agree on a
        different structure if it becomes necessary or desirable for commercial or other reasons].
        The name of the joint venture will be [NAME] or such other name as the parties may agree.
        The headquarters of the joint venture will be based in [LOCATION OF HEADQUARTERS].
        Each party will own half of the share capital of the joint venture and will have equal shareholder voting rights.
        3.   CONTRIBUTIONS TO THE JOINT VENTURE AND FINANCE
        In consideration for the issue of shares in the joint venture to X at closing, X will transfer to the joint venture the
        [DESCRIBE BUSINESS TO BE CONTRIBUTED BY X] (the X Business) and make any required cash payment.
        In consideration for the issue of shares in the joint venture to Y at closing, Y will transfer to the joint venture the
        [DESCRIBE BUSINESS TO BE CONTRIBUTED BY Y] (the Y Business) and make any cash payment required
        Upon signing of this memorandum of understanding, the parties intend to appoint [NAME OF VALUER] (the Valuer) to
        conduct an independent valuation of the X Business and the Y Business on the basis of agreed instructions, a copy of
        which is annexed to this memorandum of understanding.
        If different values are attributed by the Valuer to the X Business and the Y Business, the party that contributes the lesser
        valued business will make a cash payment equal to the difference in value in part consideration for the issue of shares by
        the joint venture at closing [or the parties will agree an alternative arrangement for bridging any difference to maintain the
        50/50 equity relationship within the Joint Venture].
        The definitive agreements will provide that if either party gives inaccurate or misleading information to the Valuer in
        connection with the initial valuation or withholds information that could have a material impact on the valuation, it will
        compensate the other party on an indemnity basis for any difference between the original valuation and a revised
        valuation as determined by the Valuer (as if made at the same time as the original valuation based on correct
        information).
        Each party will conduct investigations into the business to be contributed by the other to the Joint Venture that will include
        [LIST SPECIFIC REPORTS AND INVESTIGATIONS REQUIRED].
        Each party will allow the other and its advisers and the Valuer full access to such records, key employees, advisers and
        operations of the X Business and the Y Business as are reasonably required for the purposes of the valuation and each
        party’s investigations.
        At signing, the parties and the joint venture will execute acquisition agreements relating to the sale of the X Business and
        the Y Business to the joint venture which will incorporate warranties and indemnities and other terms negotiated between
        the parties. [There will be appropriate provisions for compensation of the other party and the joint venture in the event of
        breach of any of the warranties and indemnities given in the agreements].
        The parties envisage that the Joint Venture will be self-financing. They do not envisage having to provide any further
        finance to the Joint Venture but, if further finance is required, intend to contribute equally.




                                                    2002 Corporate Executive Board
 CORPORATE STRATEGY BOARD                                                                                                                  PAGE 9
JOINT VENTURE TOOLKIT                                                                                                                      APPENDIX


        4.   CONDITIONS AND APPROVALS
        The proposed Joint Venture is conditional on:
        Both parties accepting the valuation referred to in paragraph 3 and otherwise being satisfied with the results of their
        investigations into the business to be contributed by the other party to the joint venture.
        Any third party, regulatory or tax consents required for the Joint Venture being received in terms satisfactory to both
        parties.
        There being no material adverse change in the business, operations, assets, position (financial, trading or otherwise),
        profits or prospects of the X Business or the Y Business between the signing of this memorandum of understanding and
        closing.
        No legislation or regulation being proposed or passed that would prohibit or materially restrict the implementation of the
        definitive agreements or the participation in the Joint Venture of either party.
        Each party producing a legal opinion, in a form satisfactory to the other, confirming that it has the capacity to enter into the
        Joint Venture.
        5.   ACCOUNTS
        The financial year end of the joint venture will be [STATE YEAR END].
        The accounts of the joint venture will be prepared in accordance with [STATE RELEVANT ACCOUNTING STANDARDS]
        and the first auditors of the joint venture will be [NAME OF INTENDED AUDITORS].
        The management of the joint venture will prepare an annual business plan for approval by the parties as shareholders and
        monthly management accounts which will be sent to the parties as shareholders (together with such other financial and
        operational information as they may reasonably require from time to time). The first business plan will be prepared by the
        parties and adopted by the joint venture at closing.
        6.   MANAGEMENT AND EMPLOYEES
        Each party will appoint an equal number of directors to the board of the joint venture who will have equal voting rights. No
        board resolution will be passed without at least one director appointed by each party voting in favor.
        The post of chairman will be held, taking it in turn in alternate years, by an appointee of each party. The chairman will not
        have a casting vote.
        The following board appointments will be made upon formation of the joint venture:
        !    [NAME] will be Chairman,
        !    [NAME] will be Chief Executive Officer,
        !    [NAME] will be Chief Financial Officer,
        !    [NAME] will be [OTHER KEY POSITION OR DIRECTOR],
        !    [NAME] will be [OTHER KEY POSITION OR DIRECTOR], and
        !    [NAME] will be [OTHER KEY POSITION OR DIRECTOR].
        The board of directors will be responsible for the day to day management of the joint venture but the following issues will
        be reserved for agreement between the parties as shareholders:
             !    permitting the registration of any person as a member of the joint venture other than X and Y in relation to their
                  initial investment and any of their permitted transferees
             !    altering the name of the joint venture
             !    altering any constitutional documents of the joint venture
             !    adopting the Business Plan for each financial year
             !    [OTHER RESERVED MATTERS].
        [DETAILS OF EMPLOYEES TO BE TRANSFERRED TO THE JOINT VENTURE AND HOW IT IS INTENDED THAT
        REDUNDANCY COSTS (IF ANY) WILL BE BORNE BY THE PARTIES].




                                                   2002 Corporate Executive Board
 CORPORATE STRATEGY BOARD                                                                                                                      PAGE 10
JOINT VENTURE TOOLKIT                                                                                                                           APPENDIX


        7.   DIVIDEND POLICY
        The parties intend that the joint venture will distribute by way of dividend at least [ ] % of profits available for distribution in
        each financial year unless they agree otherwise.
        8.   RESTRICTIONS ON PARTIES
        The parties will give undertakings not to compete with the business of the joint venture and not to solicit its customers or
        employees.
        9.   DEADLOCK
        If there is a disagreement between the directors or the parties as shareholders that cannot be resolved at board or
        shareholder level, the matter will be referred to the Chairmen of the parties and, failing agreement, a termination process
        will ensue.
        10. TRANSFER OF SHARES
        Neither party will be able to transfer shares to a third party without first offering to sell them to the other party at the price
        of the proposed sale to the third party. But pre-emption will not apply to intra group transfers of the whole of a party’s
        shareholding.
        11. TERMINATION AND LIQUIDATION
        If either party becomes insolvent or is subject to a change of control, the other party will be entitled to purchase its shares
        in the joint venture at an agreed price or, failing agreement, at a price determined by an independent expert.
        If the joint venture is wound-up, the parties will endeavor to ensure that assets contributed by each party will, so far as
        possible, be transferred back to that party.
        12. LANGUAGE
        The negotiations will be conducted in [LANGUAGE] and all legal agreements relating to the Joint Venture will be prepared
        in [LANGUAGE].
        13. EXCLUSIVITY
        This paragraph is legally binding.
        Each party undertakes that for a period of [NUMBER OF WEEKS/MONTHS] from the date of signing this memorandum of
        understanding it will not
        a)   commence or continue negotiations for the sale of all or a significant part of the X Business or the Y Business (as the
             case may be) to a third party
        b)   commence or continue negotiations about a potential joint venture with a third party, the business of which may
             overlap with the proposed business of the Joint Venture,
        c)   disclose any information (including, without limitation, information about the X Business or the Y Business) to a third
             party for the purpose of negotiations relating to a sale or joint venture described in (a) or (b) above, or
        d)   seek, encourage or respond to any approach that might lead to negotiations relating to a sale or joint venture
             described in (a) or (b) above.
        Each party shall ensure that its employees, agents and advisers comply with the undertakings in this paragraph as if they
        were the relevant party.
        Each party acknowledges that the other will incur significant costs, fees and expenses by relying on this paragraph and
        that if it breaches the paragraph it must (without prejudice to any other remedies the other party may have) indemnify the
        other party for all costs, fees and expenses incurred in connection with the initial valuation and investigations, negotiations
        and preparation of documents relating to the proposed Joint Venture.




                                                     2002 Corporate Executive Board
 CORPORATE STRATEGY BOARD                                                                                                               PAGE 11
JOINT VENTURE TOOLKIT                                                                                                                    APPENDIX



        14. COSTS
        This paragraph is legally binding and is subject to paragraph 13 (exclusivity).
        The fees of the Valuer appointed shall be borne equally by the parties.
        The fees of [STATE ADVISERS] relating to the preparation of [STATE DOCUMENTS] shall be borne equally by the
        parties.
        Each party shall be responsible for its own costs (including, without limitation, costs relating to the investigations of the
        business to be contributed by the other party to the Joint Venture)
        Each party may end negotiations in relation to the proposed Joint Venture, without having to give any reason for doing so
        or incurring any liability to the other party.
        15. GOVERNING LAW AND JURISDICTION
        This paragraph is legally binding.
        This memorandum of understanding is (and all negotiations and any legal agreements prepared in connection with the
        Joint Venture will be) governed by and construed in accordance with the law of [RELEVANT JURISDICTION].
        The parties irrevocably agree that the courts of [RELEVANT JURISDICTION] have exclusive jurisdiction to settle any
        dispute or claim that arises out of or in connection with this memorandum of understanding and negotiations relating to
        the proposed Joint Venture.


        Signed by [DIRECTOR OR OFFICER]
        for and on behalf of [PARTY X]                      ………………………


        Signed by [DIRECTOR OR OFFICER]
        for and on behalf of [PARTY Y]                                 ………………………




                                                               SCHEDULE
                                                           PROPOSED TIMETABLE


        Action                                                           Responsibility          Timing/ deadline
        Instruct valuer
        Start due diligence
        Prepare first draft of shareholders’ agreement and by-laws
        of the joint venture
        Prepare first draft of [OTHER DOCUMENTS]
        Establish third party consents and approvals
        Valuation complete
        Agree Business Plan
        Signing
        Closing




                                                   2002 Corporate Executive Board
 CORPORATE STRATEGY BOARD                                                                                                                        PAGE 12
JOINT VENTURE TOOLKIT                                                                                                                             APPENDIX


        Appendix D—Measuring Performance of a Joint Venture—The Use of Scorecards


                                     ALLIANCE PERFORMANCE SCORECARD FOR XYZ COMPANY
                                                                                                                 Missed      Met      Exceeded
        Goal                             Metric                                Results
        Financial Fitness
        Increase alliance
                                         Product sales growth                  15%                                           X
        revenues
        Reduce overlapping costs         Reduction in overhead costs           18%                                           X
        Increased parent                 Transfer prices, fees                 $89 million                                   X
        revenues                         Related product sales                 $10 million                       X
                                                                               50% chance of building
        Increase/create growth
                                         Embedded option value                 $500 million business in 3                    X
        options for parents
                                                                               years
        Strategic Fitness
                                                                               Met first milestone; on
        Develop new technology           Technology milestones                                                               X
                                                                               target for next hurdle
                                                                               Fair (fewer staff rotations
        Increase learning of             Number of parent staffers on
                                                                               in marketing than                 X
        parent                           development teams
                                                                               suspected)
        Increase share of target
                                         Market share                          20%                                           X
        customers
        Increase brand equity of         Recognition/satisfaction              40% recognition among                                  X
        alliance products                surveys                               key customers
        Operational Fitness
                                                                               Eight of ten top ten
        Hit key operating goals          Operational milestone                 operational milestones                        X
                                                                               exceeded
        Reduce manufacturing
                                         Cost of goods sold                    $98 per unit                      X
        costs
        Optimize alliance                                                      45 person-days at
                                         Time spent by management                                                                     X
        management and                                                         appropriate management
                                         and staff
        coordination time                                                      level
        Relationship Fitness*
        Make fast and effective                                                6; slow to agree on pricing
                                         Decision-making rating                                                  X
        decisions                                                              strategy
                                                                               8; generally high across                               X
        Build and maintain trust         Trust rating
                                                                               teams
                                                                               7; acceptable, but need
        Communicate effectively          Communications rating                 more informal                                 X
                                                                               communication
        Ensure senior                    Senior management attention           9; good attention, no                                  X
        management involvement           rating                                intervention needed
        Define partner roles
                                                                               7; marketing support of
        clearly and leverage             Role-clarity rating                                                                 X
                                                                               parent A not yet defined
        unique skills
        *Based on a ten point scale where 10=truly outstanding, 6=sub par, scored derived from annual partner survey of key staff in both
        companies.

                                                                                                    Source: James Bramford and David
                                                                                                    Ernst, “Managing an Alliance Portfolio,”
                                                                                                    The McKinsey Quarterly (2002).




                                                       2002 Corporate Executive Board
 CORPORATE STRATEGY BOARD                                                                                                                              PAGE 13
JOINT VENTURE TOOLKIT                                                                                                                                   APPENDIX


          Appendix E—Sample Joint Venture Scorecards: Siebel Systems


                                                   Siebel Systems Alliance Scorecard
                             Financial Fitness                                                         Strategic Fitness
      Revenues                                                                  Customer Satisfaction
                                                    Goal     Performance
                                                                                Customer Loyalty Index                          9.5 out of 10
      Overall Alliance Revenue Index                100            110
                                                                                Performance Dimensions:                         Responses
      •    Partner led revenues                     40             45
                                                                                •     Satisfaction with product                 94%
      •    Siebel-led Revenues                      50             50                 performance

      •    Joint Revenues                           10             15           •     Satisfaction with integration of          93%
                                                                                      third party systems
      •    Revenues from new business               20             18
                                                                                •     Satisfaction with implementation          97%
                                                                                      effectiveness
      Note: Revenue goals vary across partner                                   Note: Based on biannual ~100 question
      categories                                                                customer survey that contains ~ 5 alliance
                                                                                questions

                           Operational Fitness                                                       Relationship Fitness
      Management by Objectives                                                  Partner Selection
                                                    Goal     Performance        Partner allegiance index                        8.5 out of 10
      •    Marketing Investment (percent            50 %          65%           •     Overall partner satisfaction              High
           of annual goal)                                                      •     Change partner investment                 Dramatic increase
                                                                                •     Likelihood to continue                    High
      •    Number of partner’s staff                42             55
           trained                                                              Performance Dimensions                          Score (0-10)*
      •    Number of joint sales calls              25             21
                                                                                •     Alliance Management                                8.1
      •    Number of marketing events to            10             12           •     Sales engagement                                   8.6
           generate demand                                                      •     Alliance marketing                                 6.7
                                                    5               7
                                                                                •     Product marketing                                  9.0
      •    Number of weekly pipeline calls                                      •     Integration, validations                           9.7
                                                                                •     Training                                           7.4
                                                                                •     Global Services                                    9.6
      Note: based on quarterly plan developed
      jointly by Siebel and Partner; includes                                   Note: based on quarterly >80 question
      financial objectives, such as key revenue                                 partner-satisfaction survey
      metrics shown above in financial fitness.

          *Siebel uses this information to calculate gap score (importance of dimension to partner—Siebel performance=gap score); gaps of 2.0 or
          higher require action plan by alliance manager; performance in applying this plan is monitored by Seibel and senior executive of partner’s
          company.

                                                                                                       Source: James Bramford and David
                                                                                                       Ernst, “Managing an Alliance Portfolio,”
                                                                                                       The McKinsey Quarterly (2002).




                                                           2002 Corporate Executive Board
 CORPORATE STRATEGY BOARD                                                                                       PAGE 14
JOINT VENTURE TOOLKIT                                                                                           END NOTES




        1
          Andrew Inkpen and Kou-Qing Li, “Joint Venture Formation: Planning and Knowledge Gathering for
        Success—Part 1,” Organizational Dynamics (Spring 1999).
        2
          Ibid.
        3
          Ibid.
        4
          Salvatore Parise and Lisa Sasson, “Leveraging Knowledge Management Across Strategic Alliances,”
        Ivey Business Journal (March 2002).
        5
          George T Geis and George S. Geis, “Partnering and Deal Making in the Digital Age,” Ivey Business
        Journal (March 2002).
        6
          Salvatore Parise and Lisa Sasson, “Leveraging Knowledge Management Across Strategic Alliances.”
        7
          William Gordon et al., “Becoming an Alliance Partner of Choice,” Accenture Outlook (2001)
        8
          Anton Gueth, “Entering into an Alliance With Big Pharma,” Pharmaceutical Technology (October 2001).
        9
          ibid.
        10
           Jeffrey H Dyer et al., “How To Make Strategic Alliances Work,” MIT Sloan Management Review
         (1 July 2001).
        11
           Pippa Walker, “After the Alliance: Managing Cultural Differences,” Outlook (2001).
        12
           Christopher Bogan and Keith Symmers, “Marriages Made in Heaven” Pharmaceutical Executive
        (January 2001).
        13
           Andrew Inkpen and Kou-Qing Li, “Joint Venture Formation: Planning and Knowledge Gathering for
        Success—Part 2,” Organizational Dynamics (Spring 1999).
        14
           Ibid.
        15
           “Joint Ventures and Alliances” Freshfields Bruckhaus Deringer, November 2001.
        16
           Charles Rousell, “Leading Beyond Walls,” Decision Making Beyond the Boundaries,
        New York: Jossey Bass Publishers (1999).
        17
           “Joint ventures and alliances” Freshfields Bruckhaus Deringer.
        18
           Betina Buchel, “Joint Venture Development—Driving Forces towards Equilibrium.”
        19
           James Bramford and David Ernst, “Managing An Alliance Portfolio,” The McKinsey Quarterly
        (Summer 2002).




                                            2002 Corporate Executive Board

				
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