A Contractual Alliance or a Joint Venture?

Alliance experts A contractual alliance or a joint venture?Alfred GriffioenIntroductionA collaboration between two or more parties willeventually be laid down in an agreement. Animportant choice to make when fleshing out analliance is whether it will take the form of acontractual agreement, or of a shares transaction(which includes a joint venture). This articlepresents some guidelines.OptionsBoth a contractual arrangement as a shares transaction come in several varieties.The most important ones are displayed in Figure 1, in the continuum between atraditional contract and the dissolution of a company.For a contract between parties, withoutforming a new legal entity, we can Traditional contract • Transactional customer /supplier relationsdistinguish between: Contractual Unilateral • Licensing, franchising agreements agreement • Long term outsourcing • a unilateral agreement with a clearly defined use of the other Bilateral • Joint R&D, marketing, partys resources, such as a Partnerships agreement distribution licensing agreement, an R&D Minority • One sided agreement or distribution share • Exchange of shares agreement; and Share Joint • 50% - 50% • a bilateral agreement, in which transactions Venture • Other proportions both partners contribute resources Dissolve • Merger to the collaboration, such as a a company • Takeover marketing alliance, production alliance or an optimised Figure 1, Different legal forms of collaboration customer-supplier relationship.For a shares transaction we can distinguish between: • a minority stake taken by one the partners in the collaborative partner, or a share swap in which the parties exchange shares; • a separate new legal person in which the collaborating partners are shareholder, commonly known as a joint venture.The term Joint Venture is frequently used to describe a collaborative business.However, the term does not have a legal status in all countries. It can be a regularcompany with shareholders and limited liability, where the shares are distributedamong the partners. This is the way it is used in this book. In other countries it canbe an entity without the possibility to hold assets, where the partners are both liablefor losses incurred by the alliance. The structure then resembles a contractualarrangement.Alfred Griffioen - A Contractual Alliance or a Joint Venture? 1

Alliance experts Material and knowledge-based resourcesIn all four cases (unilateral and bilateral contract, minority stake and joint venture),the point is for the companies to find a way to gain access to the partners valuableresources without losing control over its own.The scholars Das and Teng contend that the preference for the type of collaborationdepends on the type of resources contributed by the two parties1. Are these: • material resources that cannot be copied, such as money, production means, personnel, distribution channels and patented knowledge; or • knowledge-based resources that can be copied, such as work methods, market information and databases?The most likely preference depends on the combination of resources contributed byparties A and B, as represented in Figure 2.If both parties contribute their Company Bresources to a joint venture, then Material resources Knowledge basedthats where knowledge exchange resourcesoccurs immediately. After all, the Preference by A and B for Preference by A for a jointparties involved share one primary Material unilateral agreement, in venture: here knowledge resources which use of resources isgoal: to make sure the joint venture compensated is shared most quickly Compnay Ais successful. This is to theadvantage of the partner that Preference by A for a Preference by A and B for Knowledge bilateral agreement:contributes the least amount of based minority share in B to detailed arrangements retain control over ownknowledge-based resources, in this resources knowledge can be made about knowledge sharingcase company A. Figure 2, Most likely preferences regarding typeSince 2008, the British beverage of alliance, from company As point of viewcompany Diageo is the exclusivemarket supplier of the vodka brand Ketel One, especially in the United States. Forthis it paid 900 million dollars to the Nolet family, who remain owner of the brandname Ketel One. Diageo and the Nolet family transfer the sales rights into a jointventure in which both parties hold a 50% stake.The agreement is set up based on the interest of Ketel One: this company ownsmost material resources, namely the sales rights, which give exclusive access to theunderlying production company. Diageo owns most knowledge-based resources:namely, relevant market knowledge. The sum paid by Diageo should mainly be seenas compensation for 50% of the sales rights, meaning 50% of the profit.If, on the other hand, company A contributes the most amount of knowledge-basedresources and partner B more material resources, then A will have a preference for aminority share in the collaboration partner. This is the best assurance that thepartner will not misuse the knowledge acquired in the course of the collaboration.Should this nevertheless occur to any substantial degree, then the share will anywaybe worth more.In 2010, General Electric Oil & Gas obtained a minority share in Shenyang, China’sleading compressor manufacturer. For General Electric this gave further access tothe Chinese market, a hard-toobtain resource that Shenyang could provide. ForShenyang the technology of General Electric was important, which is less easy toAlfred Griffioen - A Contractual Alliance or a Joint Venture? 2

Alliance experts protect in a collaboration. Through its minority share General Electric receives atleast part of the extra value that the collaboration generates.If both parties contribute mainly knowledge-based resources, then the effect of thealliance will decrease following a first learning period. Both parties will want toarrange the best possible protection for their own knowledge, and that they can usenewly developed knowledge. A bilateral agreement is the most obvious option here.CMS law firm has concluded an agreement with The Levant Lawyers, the largestlawyers office in Lebanon. "There are important opportunities for the furtherdevelopment of our activities in the Middle East", says CMSs Bob Palmer, partner forEnergy and projects. Emile Kanaan, chairman of The Levant Lawyers, comments onthe initiative: "We are very pleased with the collaboration with CMS. Thanks to this,we can offer our clients access to some 2500 lawyers and the most extensivenetwork of law firms in Europe".CMS and The Levant Lawyers each offer the other access to clients in their ownregion. The parties can also acquire knowledge about doing business between theregions. All relevant aspects can be arranged in a bilateral agreement, in which thetwo parties have an equal position.If both parties mainly contribute material resources, then unilateral agreementsseem most appropriate. Such agreements will arrange, for example, the use ofdistribution channels, patents or other scarce resources in return for money orservices.At the end of 2010, 3M Drug Delivery Systems signed an exclusive licensingagreement with Spirig Pharma AG, a Swiss manufacturer of dermatological anddermocosmetic products. Spirig Pharma AG will utilise one of 3M’s immuneresponse modifier (IRM) molecules to further its development of treatment for sundamaged skin. In this case just a unilateral licensing agreement is sufficient.ConclusionsThe choice of organisation form has a direct influence on the behaviour of bothparties. If it is both parties objective to develop a large amount of new sharedknowledge, for example, then a joint venture would be the obvious choice, despitethe fact that a joint venture implies greater overhead costs (notary, accountant, andso on) and will demand more time in terms of reporting and governance.On the other hand, if a collaboration has a limited turnover and profitability, asimple standard contract could be the optimum choice. Though each alliance isunique, the underlying contractual provisions are often much less so. Here lies asubsequent challenge towards the standardisation of processes, which would makethe use of alliances as a competitive instrument even more accessible.For more articles of Alfred Griffioen search on Slideshare or go to www.allianceexperts.comReferences 1 T.K. Das, Bing-Sheng Teng, A resource based theory of Strategic Alliances, 2000Alfred Griffioen - A Contractual Alliance or a Joint Venture? 3

A Contractual Alliance or a Joint Venture?

by Alfred Griffioen on Jul 21, 2011

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A Contractual Alliance or a Joint Venture? — Document Transcript