The Anatomy of Partnering with Big
   Pharma - an A-Z Approach
       Ellen Leznik, Founding Partner, Virtual Law Partners...
Preparation
Defining Goals
       Funding

       Access to:

        -    technology
        -    expertise
        -    manufactur...
Understanding and Managing
    Timeframes

       Allocate time to do preliminary investigation
        and due diligence...
Assembling the Team and Assigning
    Roles

       The team:
        -  knowledge of the industry and your
        compa...
Assembling the Team and Assigning
    Roles (cont’d)

       Team roles:

        -  Decision-makers
        -  Negotiato...
Due Diligence
       Know the other side and know yourself.

       Understand your potential partner: What are you gett...
Due Diligence (cont’d)
       Understand yourself: What can you commit to and what will you
        need to explain.
    ...
Due Diligence in China

    Why Due Diligence Is Important in China?

       Fact verification

       Risk evaluation

...
Due Diligence in China (cont’d)

     Due diligence can be very difficult in China:

        Incomplete record-keeping

 ...
Due Diligence in China (cont’d)
        In addition to checking relevant documents, special
         attention should be ...
Negotiation
Psychology of Negotiation: Cultural
     Cosiderations

     Tips for negotiating in China:
        Don't say or do anyth...
Psychology of Negotiation: Cultural
     Cosiderations

     Tips for negotiating in the U.S.:
        Be direct – indire...
Psychology of Negotiation:
     Negotiation Styles

     Negotiation styles: China

        Chinese negotiating style is ...
Psychology of Negotiation:
     Negotiation Styles

     Negotiation styles: U.S.A.
        There is a variety of negotia...
Preparation for a Negotiation Meeting

        Know how to justify and explain reasons for your
         positions
     ...
Term Sheet
        The main purpose of the term sheet is to document the parties understandings about a
         proposed...
Term sheet (cont’d)
        Binding or Non-binding?

         –   “Binding” – means the parties have committed to the ter...
Term sheet (cont’d)
        Typical important terms in a term sheet:
          –  Key financial terms – upfront payments,...
Agreement: Basic Structure

        Definitions
        Collaboration Scope and Governance
        Development of Produ...
Agreement: Basic Structure (cont’d)

        Fees and Payments
        Future Generation Products
        Ownership; In...
Agreement: Select Provisions
        Definitions
         -      Importance of Definitions:
                Whether or no...
Agreement: Select Provisions (cont’d)

     Examples of key definitions:
        “Net Sales” means the amount billed by a ...
Agreement: Select Provisions (cont’d)

     Examples of key definitions (cont’d):
       “Fully Burdened Cost” shall mean ...
Agreement: Select Provisions (cont’d)

     Examples of key definitions (cont’d):
       “Collaboration Know-How” shall me...
Agreement: Select Provisions (cont’d)

     Examples of key definitions (cont’d):

       “Biotech Patents” shall mean, to...
Agreement: Select Provisions (cont’d)

        Fees and Payments
         -   Initial Research Payment
         -   Resea...
Agreement: Select Provisions (cont’d)

     Diligence
        Common to have diligence obligations; the key is to make
  ...
Agreement: Select Provisions (cont’d)

     Diligence (cont’d)
        Remedies for failing to meet diligence
         ob...
Agreement: Select Provisions (cont’d)

        Infringement
         - Infringement of Patents by Third Parties
         ...
Agreement: Select Provisions (cont’d)

        Termination
         -   Term (some possible alternatives):
             -...
Agreement: Select Provisions (cont’d)

        Termination (cont’d)
         - Termination for breach
           May incl...
Agreement: Select Provisions (cont’d)

     Dispute Resolution in China

        Most foreign companies still favor arbit...
Agreement: Select Provisions (cont’d)

     Dispute Resolution in China (cont’d)
        Popular venues for arbitration:
...
Strategic Investment
   Considerations
Evaluating Investment Capital
     Opportunities

        Strategic investment capital provided by a major
         pharm...
Governance Matters


              Board Seats
            Board Observers
          Approval/Veto Rights



             ...
Governance Matters (cont’d)
      Board Seats:
      •   Some strategics want and will take board seats – others will not ...
Governance Matters (cont’d)
      Board Observers:
      •   Similarly, most strategic investors want board observer right...
Governance Matters (cont’d)
      Stockholder Approval/Veto Rights:
      •   VCs (including strategic investors/VCs) freq...
Exit Participation Rights

     Many strategic investors will request rights to participate as a
     potential acquiror i...
Exit Participation Rights (cont’d)
        Right of First Refusal (ROFR)
          •   Most problematic as it permits the...
Information Rights
        All/most investors generally get basic information rights, such as:
          •   Monthly, qua...
Information Rights (cont’d)

        Strategies for protecting information:

         •   Limit scope of information righ...
Evaluating Investment Capital
     Opportunities: Take-aways

        Proactively negotiate and address governance
      ...
Acquisition of Equity in
 Chinese Companies
Things to Consider When Acquiring
     Equity in a Chinese Company

        Check the foreign investment guidelines.
    ...
Things to Consider When Acquiring
     Equity in a Chinese Company (cont’d)

        Acquisition of partial equity as an ...
Execution and Implementation
Execution: the Final Hours

        Be prepared for set-backs
        The deal is not final until the ink is dry on the
...
Post-Execution Issues

        Handling requests from your partner that are
         not covered or anticipated by the
  ...
IP-related Issues in China

        Major Forms of IP Protection Are Available
         –   Patents, trademarks, copyrigh...
IP-related Issues in China (cont’d)

        Strategies for IP Protection in China
         –   Internal controls
       ...
SPEAKER BIOS
        Ellen Leznik, JD, is a Founding Partner of VLP and the Chair of the firm’s Life Sciences Group.
    ...
SPEAKER BIOS
        John Rigsbee, PhD, JD, is a Partner at VLP. John's practice focuses on representing life sciences
  ...
SPEAKER BIOS
        Geoff Willard, JD, is a Partner of VLP and chairs the firm’s Corporate, Securities, and Mergers and ...
SPEAKER BIOS
        Tao Xiong, JD, is a Partner at the Shanghai office of Broad & Bright. Tao’s practice
         focuse...
SPEAKER BIOS
        Changchun Yuan, JD is a partner at the Beijing Office of Broad & Bright. His major
         practice...
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The Anatomy Of The Deal Presentation ChinaBio June 2009

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A partnering agreement with a pharmaceutical company may be one of the most complex transactions a biotech company will enter into as part of its business operations. Understanding the negotiation process, the structure of the agreement and the significance and potential pitfalls of certain critical terms can play a big role in forming a successful collaboration. This presentation discusses the steps involved in entering into a partnering deal, from preparation to negotiation to execution and implementation, including certain details specific to doing deals in China.

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The Anatomy Of The Deal Presentation ChinaBio June 2009

  1. 1. The Anatomy of Partnering with Big Pharma - an A-Z Approach Ellen Leznik, Founding Partner, Virtual Law Partners LLP eleznik@virtuallawpartners.com John Rigsbee, Partner, Virtual Law Partners LLP jrigsbee@virtuallawpartners.com Geoff Willard, Partner, Virtual Law Partners LLP gwillard@virtuallawpartners.com Tao Xiong, Partner, Broad & Bright tao_xiong@broadbright.com Changchun Yuan, Partner, Broad & Bright changchun_yuan@broadbright.com
  2. 2. Preparation
  3. 3. Defining Goals  Funding  Access to: - technology - expertise - manufacturing - distribution - sales force  Ownership  Alternative positions Virtual Law Partners LLP 3 June 23, 2009 Broad & Bright
  4. 4. Understanding and Managing Timeframes  Allocate time to do preliminary investigation and due diligence  List all activities and associated timelines  Be realistic about timeframes  Manage expectations Virtual Law Partners LLP 4 June 23, 2009 Broad & Bright
  5. 5. Assembling the Team and Assigning Roles  The team: - knowledge of the industry and your company’s business - legal knowledge - communication skills - language skills - cultural understanding/sensitivity - prior experience Virtual Law Partners LLP 5 June 23, 2009 Broad & Bright
  6. 6. Assembling the Team and Assigning Roles (cont’d)  Team roles: - Decision-makers - Negotiators (lead, “bad cop”, counselor, peacemaker, senior statesman, etc.) - Observer - Drafters - Team support Virtual Law Partners LLP 6 June 23, 2009 Broad & Bright
  7. 7. Due Diligence  Know the other side and know yourself.  Understand your potential partner: What are you getting? – Understand their business: Why are they getting into the deal and can they carry through? – Are they developing competitive products and this would be a backup if their own products don’t work? – Is this complimentary to a current product or project? – Do they have the financial and personnel resources to carry through? – Understand their IP and other contributions -- What is the manner of IP protection? Patents, trade secrets, etc. -- What do the patents cover? Do they actually cover the compound or method of interest? -- What other special expertise do they bring? Virtual Law Partners LLP 7 June 23, 2009 Broad & Bright
  8. 8. Due Diligence (cont’d)  Understand yourself: What can you commit to and what will you need to explain. – Understand your own objectives and resources -- What are your primary goals in entering into the deal? -- What resources can you commit to this goal, and has the level of commitment been approved? -- What are the limits on commitments? When would you need to turn the deal down? – Understand your own IP and other contributions -- What is the manner of your IP protection? Patents, trade secrets, etc.? -- What do the patents cover? Do they actually cover the compound or method of interest? -- What is your own view of the strength of your IP portfolio? -- Are there any issues with your IP that may come up? -- What other special expertise or resources do you have to offer? Virtual Law Partners LLP 8 June 23, 2009 Broad & Bright
  9. 9. Due Diligence in China Why Due Diligence Is Important in China?  Fact verification  Risk evaluation  Deal structuring  Documentation Virtual Law Partners LLP 9 June 23, 2009 Broad & Bright
  10. 10. Due Diligence in China (cont’d) Due diligence can be very difficult in China:  Incomplete record-keeping  Lack of publicly available information  Resistance by Chinese companies  Fast-changing legal and business environment Virtual Law Partners LLP 10 June 23, 2009 Broad & Bright
  11. 11. Due Diligence in China (cont’d)  In addition to checking relevant documents, special attention should be given to (as applicable to the partnering transaction): – manufacture license – GMP – IP (Good in China? Other countries? Possibility of infringing on others’ rights?) – Key technical person and relevant Employment Agreement, Non-Disclosure Agreement, Non-Competition Agreement – Distribution network – Product category (restricted or prohibited) – Certificates from other countries (e.g., U.S. FDA) Virtual Law Partners LLP 11 June 23, 2009 Broad & Bright
  12. 12. Negotiation
  13. 13. Psychology of Negotiation: Cultural Cosiderations Tips for negotiating in China:  Don't say or do anything to embarrass your counterpart and cause them to lose "face."  Don't point your finger or any sharp object such as a pen or pencil at anyone.  Don't lose your temper and raise your voice. Be nice, and leave yourself room for coming back.  Government support is highly evaluated. Win support from the government in China and your home country is important.  Decision making is difficult process (responsibility and liability) – allow them time and be patient.  People in China tend not to use lawyers in the beginning, (if that is the case, lawyer can be used as an interpreter, an advisor)  People in China are price sensitive; business negotiation is often a negotiation about price.  People in China like working with big companies. If you are not big, you have to show your specialty.  Sending the right team to China: Pay attention to the status of your team members.  Identifying real Chinese negotiators and try to convince him. Virtual Law Partners LLP 13 June 23, 2009 Broad & Bright
  14. 14. Psychology of Negotiation: Cultural Cosiderations Tips for negotiating in the U.S.:  Be direct – indirect statements may be misunderstood or misinterpreted.  Don't be discouraged by a very adversarial and/or aggressive negotiation style – remain assertive and don’t lose control of negotiation.  Find out early in the process who has decision-making authority and insist that decision-makers are present or available when negotiating key terms.  Be prepared for lawyers being involved in the negotiations early on. Don’t be put at a disadvantage by not having legal representation yourself.  Don’t focus exclusively on price terms – a lot of value can be added by careful drafting of definitions (such as Net Sales), IP and other terms.  Understand the other team members’ roles and observe their interaction.  Allow some time for socializing and getting to know each other, but stay away from such sensitive topics as politics and personal finances. Virtual Law Partners LLP 14 June 23, 2009 Broad & Bright
  15. 15. Psychology of Negotiation: Negotiation Styles Negotiation styles: China  Chinese negotiating style is generally people-oriented and permeated with such Confucian notions of guanxi, renqing, li, face, family, age, hierarchy, and harmony etc.  Taking a people-oriented approach: never expecting one-off legal agreements to bring about the planned outcome.  Relax and create a relaxed environment. Relax will make the negotiation easier.  If your Chinese is not good enough, don’t count on it.  Find a good interpreter (not just can interpret the voice, but the meaning, not the words but the substance) -- need an expert with both language and professional skills and cross culture understanding and business savvy.  If you are not sure about the real meaning, confirm by asking questions.  Invite the Chinese to negotiate abroad (use “home advantage”) Virtual Law Partners LLP 15 June 23, 2009 Broad & Bright
  16. 16. Psychology of Negotiation: Negotiation Styles Negotiation styles: U.S.A.  There is a variety of negotiating style in the U.S., from collegial to highly adversarial. Try to address and eliminate an overly aggressive approach at the very beginning of the negotiation process by letting the decision-makers know that such style is offensive and not acceptable to you.  U.S. legal documents tend to be very detailed and structured. Get legal advice if you are not familiar with some legal terms or provisions.  Make sure that all terms in the agreement correctly reflect what has been negotiated in a meeting.  Americans tend to be more informal – adopt such style if you are comfortable with it, especially when negotiating in the U.S.  If your English is not that good, don’t count on it and get a good interpreter/translator who has experience with Life Sciences-specific terms.  If you are not sure about the meaning of anything that is being said, don’t hesitate to ask for clarification.  Invite the U.S. team to negotiate on your “home turf” and use it to your advantage. Virtual Law Partners LLP 16 June 23, 2009 Broad & Bright
  17. 17. Preparation for a Negotiation Meeting  Know how to justify and explain reasons for your positions  Know and understand your documents 100%  Prepare a meeting agenda  Develop and discuss negotiation strategy with your team  Make sure that your lawyer understands your business concerns  Don’t negotiate against yourself Virtual Law Partners LLP 17 June 23, 2009 Broad & Bright
  18. 18. Term Sheet  The main purpose of the term sheet is to document the parties understandings about a proposed deal, especially with respect to key terms.  Alternative documents: Letter of Intent (LOI), Memorandum of Agreement (MOU), or Heads of Agreement.  Advantages:  Written understanding of key terms  May include some binding commitments  Disadvantages:  Time and resources expended in negotiation  “Two bites at the apple” – either side can try to renegotiate agreed terms at the agreement stage  Recommendation: • Generally a good idea. • For a straightforward deal, get down the key business terms, but don’t over- negotiate • For a complex deal, more important, take some time Virtual Law Partners LLP 18 June 23, 2009 Broad & Bright
  19. 19. Term sheet (cont’d)  Binding or Non-binding? – “Binding” – means the parties have committed to the terms; this is a contract in and of itself, and obligations exist. – “Non-binding” means the document sets out the terms expected to be in the final agreement, but no obligations exist until the final agreement is signed.  Recommendation: - Generally avoid binding term sheets. They are basically contracts without the detail and legal protections normally present in a contract. - However, it is possible to have binding terms in a generally non-binding term sheet, and there may be some advantages to that. Virtual Law Partners LLP 19 June 23, 2009 Broad & Bright
  20. 20. Term sheet (cont’d)  Typical important terms in a term sheet: – Key financial terms – upfront payments, milestones, royalties, equity component, expenses. These should be spelled out clearly and reasonably completely. – Scope of license rights included – What is covered? Exclusive? Territory or Field Restrictions – General allocation of responsibilities. – Any major contingencies or conditions precedent – obtaining third party license, obtaining funding, etc. – “Unusual” conditions – deal terms that are outside the norm  Optional “binding” terms: – Confidentiality – especially important if you don’t have an adequate confidentiality agreement in place. – Exclusive period of time to negotiate. – Deadlines to execute final agreement. – “Break up” fees.  Don’t overnegotiate the term sheet – Get the key terms discussed above down, but leave the remainder for the agreement itself. Virtual Law Partners LLP 20 June 23, 2009 Broad & Bright
  21. 21. Agreement: Basic Structure  Definitions  Collaboration Scope and Governance  Development of Products  Supply of Bulk Compound or Products  License Grants and Grants to Intellectual Property - Research and Development Licenses - Commercialization Licenses - Diligence Obligations Virtual Law Partners LLP 21 June 23, 2009 Broad & Bright
  22. 22. Agreement: Basic Structure (cont’d)  Fees and Payments  Future Generation Products  Ownership; Intellectual Property  Confidentiality  Representations and Warranties  Indemnification  Term and Termination of Agreement  Governing Law; Dispute Resolution  General Provisions  Exhibits Virtual Law Partners LLP 22 June 23, 2009 Broad & Bright
  23. 23. Agreement: Select Provisions  Definitions - Importance of Definitions: Whether or not you are able to define the key terms is often a sign of whether the deal has been sufficiently well understood and defined. - Think carefully about the more important definitions, such as:  Exclusivity  Field Restrictions  Net Sales  Licensed Product - “Nesting” or “hierarchical” definitions vs. circular definitions. Virtual Law Partners LLP 23 June 23, 2009 Broad & Bright
  24. 24. Agreement: Select Provisions (cont’d) Examples of key definitions: “Net Sales” means the amount billed by a Party or an Affiliate for sales of Products to an unrelated Third Party less: (i) discounts, including cash discounts (including quantity discounts), charge-back payments and rebates granted to managed health care organizations or to federal, state and local governments, their agencies, and purchasers and reimbursers or to trade customers, including but not limited to, wholesalers and chain and pharmacy buying groups (with any such discounts or reductions which are based on sales to the customer of multiple products being allocated to Product on the basis of a methodology approved by JSC), (ii) credits or allowances actually granted upon claims of damaged goods, rejections or returns of Products, including recalls, (iii) freight, postage, shipping and insurance charges actually allowed or paid for delivery of Product, to the extent billed, (iv) commissions paid to Third Parties, and taxes, duties or other governmental charges levied on, absorbed or otherwise imposed on sale of Products, including without limitation value-added taxes, or other governmental charges otherwise measured by the billing amount, when included in billing, as adjusted for rebates and refunds. Virtual Law Partners LLP 24 June 23, 2009 Broad & Bright
  25. 25. Agreement: Select Provisions (cont’d) Examples of key definitions (cont’d): “Fully Burdened Cost” shall mean the aggregate cost to Biotech and its Affiliates of conducting clinical trials of Product, which shall include without limitation the following: amounts paid to clinical research organizations, clinical investigators, Third Party clinical research associates for services related to such clinical trials, together with related travel expenses; incidental costs (including but not limited to the cost of providing drug labeling, measuring serum drug levels and detecting angiogenesis markers, and the cost of other materials required under the clinical trial protocols); and other direct costs of materials (including those related to manufacturing Products and performing analytical and stability studies) and labor. Virtual Law Partners LLP 25 June 23, 2009 Broad & Bright
  26. 26. Agreement: Select Provisions (cont’d) Examples of key definitions (cont’d): “Collaboration Know-How” shall mean any and all tangible or intangible know-how, trade secrets, inventions (whether or not patentable), data, preclinical and clinical results, physical, chemical or biological material, and other information that is both (a) useful in the Field and/or that relates to Products or Candidate Compounds, and (b) in any way derived from or developed pursuant to activities undertaken by either party in the conduct of the Collaboration. “Collaboration Patents” shall mean all foreign and domestic patents (including extensions, reissues, re-examinations and inventors certificates relating thereto) that issue from patent applications (including substitutions, provisionals, divisionals, continuations and continuations-in-part of such applications) that claim inventions in the Collaboration Know-How and that are filed by or on behalf of one or both of the parties hereto. “Collaboration Technology” shall mean the Collaboration Patents and the Collaboration Know-How. Virtual Law Partners LLP 26 June 23, 2009 Broad & Bright
  27. 27. Agreement: Select Provisions (cont’d) Examples of key definitions (cont’d): “Biotech Patents” shall mean, to the extent useful in the Field, all foreign and domestic: (a) patents issued and existing as of the Effective Date; and (b) patents issuing from patent applications that are pending as of the Effective Date (including substitutions, provisionals, divisionals, continuations and continuations-in-part of such applications); and (c) extensions, reissues, re-examinations and inventors certificates relating to the foregoing patents, which, in each case, Biotech owns or controls or to which Biotech has a license (with the right to sublicense or subcontract). Biotech Patents existing as of the Effective Date include the patents and applications listed in Exhibit B attached hereto. Virtual Law Partners LLP 27 June 23, 2009 Broad & Bright
  28. 28. Agreement: Select Provisions (cont’d)  Fees and Payments - Initial Research Payment - Research and Development Funding - Milestone Payments to Biotech - Royalty - Reports - Currency - Records and Audit - Withholding of Taxes Virtual Law Partners LLP 28 June 23, 2009 Broad & Bright
  29. 29. Agreement: Select Provisions (cont’d) Diligence  Common to have diligence obligations; the key is to make them make sense – Goal is to ensure that the project progresses reasonably and each party makes reasonable efforts to move it forward. – Make sure the events are within your control. Ex: make the milestone “Filing a NDA” as opposed to “Receive FDA approval”. – Detail may have to vary based on stage of development; if very early stage drug candidate, hard to forecast specific commercialization dates. – If the deal is less collaboration and more a license, consider “payments in lieu” and similar options. – Diligence obligations are particularly important if the other party has competitive products in its pipeline; you don’t want them to de-emphasize development of your product in favor of their own. Virtual Law Partners LLP 29 June 23, 2009 Broad & Bright
  30. 30. Agreement: Select Provisions (cont’d) Diligence (cont’d)  Remedies for failing to meet diligence obligations – Remedies can take a number of forms, but need not be punitive. – Consider loss of license, loss of exclusivity, or “make up” financial arrangements. – Ultimate remedy is reversion of rights and termination; consider provisions to include transfer of materials, IP and regulatory filings. Virtual Law Partners LLP 30 June 23, 2009 Broad & Bright
  31. 31. Agreement: Select Provisions (cont’d)  Infringement - Infringement of Patents by Third Parties Notice Cooperation Enforcement Action - Infringement of Third Party Patent Rights Joint Strategy Defense Virtual Law Partners LLP 31 June 23, 2009 Broad & Bright
  32. 32. Agreement: Select Provisions (cont’d)  Termination - Term (some possible alternatives): - [XX] anniversary of the first commercial launch of a Product; or - [XX] anniversary of the Effective Date; or - expiration of last to expire Biotech Patent covering the manufacture, use or sale of Product Virtual Law Partners LLP 32 June 23, 2009 Broad & Bright
  33. 33. Agreement: Select Provisions (cont’d)  Termination (cont’d) - Termination for breach May include termination for failure to meet diligence criteria - Effect of termination - Accrued Rights; Surviving Obligations Virtual Law Partners LLP 33 June 23, 2009 Broad & Bright
  34. 34. Agreement: Select Provisions (cont’d) Dispute Resolution in China  Most foreign companies still favor arbitration: – Litigation can be expensive and slow – Concerns of local courts’ bias – No finality – appeals – Enforceability – New York Convention – Confidentiality Virtual Law Partners LLP 34 June 23, 2009 Broad & Bright
  35. 35. Agreement: Select Provisions (cont’d) Dispute Resolution in China (cont’d)  Popular venues for arbitration: – Hong Kong International Arbitration Center  Proximity to China  Good facilities; Chinese language backup  Reliable supporting legal system – Singapore International Arbitration Center  Facilities and legal system also excellent  Greater distance from China – China International Economic and Trade Arbitration Commission  Rules increasingly resemble rules of international arbitration institutions  Questions remain about impartiality, fairness and competence of tribunals Virtual Law Partners LLP 35 June 23, 2009 Broad & Bright
  36. 36. Strategic Investment Considerations
  37. 37. Evaluating Investment Capital Opportunities  Strategic investment capital provided by a major pharmaceutical company partner can be extremely valuable and attractive to a biotech start-up, but comes with risks and presents traps for the unwary.  When presented with the opportunity to take a strategic investment, biotech start-ups need to evaluate not only financial considerations, but also issues relating to: • Governance Matters; and • Exit Participation and Information Rights. Virtual Law Partners LLP 37 June 23, 2009 Broad & Bright
  38. 38. Governance Matters Board Seats Board Observers Approval/Veto Rights Virtual Law Partners LLP 38 June 23, 2009 Broad & Bright
  39. 39. Governance Matters (cont’d) Board Seats: • Some strategics want and will take board seats – others will not or cannot. • Having a director designated by a strategic investor on your board can give rise to conflicts, concerns about misappropriation of corporate opportunities, information leakage, etc. – even if the director ostensibly is required to act as a fiduciary. • Generally, it is advisable not to have strategics represented on your board of directors if you can avoid it. • If you do have strategics represented on your board, consider steps (preferably implemented in advance of or upon their investment – not as a surprise later) to mitigate the risk of conflicts. • One option is to address certain matters at the committee level and ensure that the strategic designees is not on the applicable committee(s). • Another option is to adopt conflicts of interest and related policies at the board level to require board members to recuse themselves from certain meeting discussions or topics. Virtual Law Partners LLP 39 June 23, 2009 Broad & Bright
  40. 40. Governance Matters (cont’d) Board Observers: • Similarly, most strategic investors want board observer rights. Observers are entitled to attend board (and often board committee) meetings, but have no voting rights. • Having an observer designated by a strategic investor gives rise to many of the same conflicts and other issues and concerns implicated by strategic designated directors. • You should negotiate and obtain separate agreements and covenants restricting strategic-designated observers from access to highly sensitive information and data, discussions and information that might be legally privileged, or other information and materials that the company otherwise views as inappropriate for the observer to receive or be privy to – including information about the company’s relationship with the strategic investor designating the observer, projects that might involve collaboration with entities that the strategic competes with, etc. Virtual Law Partners LLP 40 June 23, 2009 Broad & Bright
  41. 41. Governance Matters (cont’d) Stockholder Approval/Veto Rights: • VCs (including strategic investors/VCs) frequently get veto/approval rights – including over future financings, a sale/merger of the company, incurrence of indebtedness, and so on. • You really don’t want a strategic to control veto rights – even if they are well-intentioned, this can have catastrophic results and provide the strategic with significant leverage in future negotiations. • This generally can be addressed by ensuring that strategics own less than a majority (or less than the a veto percentage) of any securities with approval/veto rights. • If you can’t entirely avoid a strategic getting veto rights over certain events, negotiate provisions to blunt their impact, for example:  No veto over a sale/merger generating a 3x or greater return  No veto over a financing at 1.5x or greater valuation;  No veto over debt financings from institutional lenders or not secured by certain IP rights in which the strategic has an interest. Virtual Law Partners LLP 41 June 23, 2009 Broad & Bright
  42. 42. Exit Participation Rights Many strategic investors will request rights to participate as a potential acquiror in a sale/merger or other exit event involving the company. These rights take many flavors:  Right of First Refusal  Right of First Offer  Right of Negotiation  Right of Notification Ideally, you won’t have to give an investor any of these exit participation rights – but that’s easier said than done. Virtual Law Partners LLP 42 June 23, 2009 Broad & Bright
  43. 43. Exit Participation Rights (cont’d)  Right of First Refusal (ROFR) • Most problematic as it permits the ROFR holder to swoop in and take over a negotiated deal. • ROFRs can discourage other bidders/participants, making a target unattractive and minimizing the potential to create an auction atmosphere.  Right of First Offer (ROFO) • A ROFO basically is a strategic investor’s opportunity to make a compelling offer and preempt a competitive process.  Right of First Negotiation (ROFN) • If a bid comes in from another party, the strategic gets a seat at the table, with the chance to negotiate with the target in parallel. Strategic often entitled to know principal terms of other bid(s). • This can have a chilling effect and a ROFN can really stretch management of the target, which effectively is put in the position of negotiating two deals (or more) at one.  Right of Notification (RON) • Least onerous participation right – target just needs to notify strategic that it has an offer and is not affirmatively required to negotiate with them. May or may not require disclosure of key terms. • Strategic can decide if it wants to jump in with a proposal or not. Virtual Law Partners LLP 43 June 23, 2009 Broad & Bright
  44. 44. Information Rights  All/most investors generally get basic information rights, such as: • Monthly, quarterly and/or annual financial statements; and • Budgets/forecasts.  Biotechs may not want strategics to get certain of these rights or certain additional rights, including: • Inspection rights, which could be a back-door means to obtain additional information; or • Strategic planning information; or • So-called “management rights.”  These additional rights could represent back-door opportunities for strategics to gain competitive or sensitive information, get visibility on performance metrics that might cause them to back off other commitments, etc. Virtual Law Partners LLP 44 June 23, 2009 Broad & Bright
  45. 45. Information Rights (cont’d)  Strategies for protecting information: • Limit scope of information rights to the greatest extent possible. • Require that information be disclosed only to investment team/members or within a particular business unit or segment. • Require non-use obligations (difficult to obtain). Virtual Law Partners LLP 45 June 23, 2009 Broad & Bright
  46. 46. Evaluating Investment Capital Opportunities: Take-aways  Proactively negotiate and address governance issues upfront. Properly managed, you can avoid many issues and misunderstandings later.  Expect to have to give up some exit participation and information rights, but be prepared to push back on these to obtain the best deal (that is, least onerous restrictions and fewest/most limited information right obligations). Virtual Law Partners LLP 46 June 23, 2009 Broad & Bright
  47. 47. Acquisition of Equity in Chinese Companies
  48. 48. Things to Consider When Acquiring Equity in a Chinese Company  Check the foreign investment guidelines.  If it is OK to invest, decide whether to acquire full or partial equity.  Acquisition of partial equity as a foreign direct investor: (1) through reorganization, take 50%+, to gain control; (2) through capital increase (if no increase on the Chinese side, foreign share increases); (3) if a public Chinese company, through holding more B or H shares of the company. Virtual Law Partners LLP 48 June 23, 2009 Broad & Bright
  49. 49. Things to Consider When Acquiring Equity in a Chinese Company (cont’d)  Acquisition of partial equity as an established Chinese entity (FIE): (1) through agreement between shareholders; (2) through transfer of shares to an affiliate or third party; (3) through adjusting investment proportion among shareholders (to increase shares): (4) through a pledge, where the pledgee of the beneficiary acquires equity.  If the equity held by foreign shareholders equals to or is more than 25% - will still be treated as FIE.  Be aware of restricted and prohibited activities (e.g., processing of herb medicine, manufacture based on secret prescription). Virtual Law Partners LLP 49 June 23, 2009 Broad & Bright
  50. 50. Execution and Implementation
  51. 51. Execution: the Final Hours  Be prepared for set-backs  The deal is not final until the ink is dry on the execution page  Don’t just cave in to last-minute ambush tactics – know your alternatives  Don’t show desperation or anger when presented with unexpected demands – use your leverage and drafting skills Virtual Law Partners LLP 51 June 23, 2009 Broad & Bright
  52. 52. Post-Execution Issues  Handling requests from your partner that are not covered or anticipated by the collaboration agreement  Preserving the knowledge of the deal details  Amendments to the collaboration agreement Virtual Law Partners LLP 52 June 23, 2009 Broad & Bright
  53. 53. IP-related Issues in China  Major Forms of IP Protection Are Available – Patents, trademarks, copyrights, trade secrets, domain names, plant variety rights, integrated circuit layout design  Fast-changing landscape of IP Protection – Stronger government resolve for a better IP system – IP laws are being revised and updated  2008 National Intellectual Property Strategy  3rd amendment to the Patent Law to become effective on October 1, 2009  Increasing number of judicial interpretations of IP laws – Both IP filings and IP litigation cases are on the rise Virtual Law Partners LLP 53 June 23, 2009 Broad & Bright
  54. 54. IP-related Issues in China (cont’d)  Strategies for IP Protection in China – Internal controls – Government relationship – Litigation as the last resort Virtual Law Partners LLP 54 June 23, 2009 Broad & Bright
  55. 55. SPEAKER BIOS  Ellen Leznik, JD, is a Founding Partner of VLP and the Chair of the firm’s Life Sciences Group. Ellen's practice focuses primarily on representing Life Sciences companies in intellectual property licensing and commercial transactions. Ellen has extensive experience counseling clients in a variety of industries, including biotechnology, pharmaceutical, solar energy, semiconductor, software and consumer products. She advises both private and public companies on issues related to domestic and international transactions, including research, licensing, manufacturing, collaborations, distribution and clinical trials matters. Ellen’s particular expertise is in the clinical trials area. She counsels her clients on a variety of clinical trials matters for trials conducted both in the U.S. and internationally.  Prior to joining VLP, Ellen spent eight years in private practice providing legal services to Life Sciences and other technology companies, with special emphasis on international licensing transactions, collaborations, manufacturing and clinical trials. Prior to starting her private practice, Ellen served as In- House Counsel and Assistant Secretary at SUGEN, Inc., a public biotech company with its core technology in the oncology area. While at SUGEN, Ellen was responsible for the company's all legal matters (other than patents), including licensing and corporate partnering transactions, securities, clinical trials matters, employment issues, real estate and litigation matters.  Ellen served as a Board member of the Association of Corporate Counsel San Francisco Bay Area Chapter, where she also chaired the Life Sciences and Membership Committees. Ellen graduated from Stanford Law School in 1995. She received her B.B.A. in Management Information Systems (magna cum laude) and M.B.A. degrees from the University of Houston. Ellen is a member of the State Bar of California.  Ellen can be reached at ELeznik@VirtualLawPartners.com or 650.321.1393. 55 June 23, 2009 Virtual Law Partners LLP Broad & Bright
  56. 56. SPEAKER BIOS  John Rigsbee, PhD, JD, is a Partner at VLP. John's practice focuses on representing life sciences and technology companies in commercial transactions, intellectual property counseling, licensing, and general business and corporate matters. He has over 12 years experience counseling clients in a variety of industries, including biotechnology, pharmaceuticals, medical devices, semiconductor, networking, telecommunications, software and the Internet.  Prior to joining VLP, John was General Counsel for Entelos, Inc., a world leader in building computer models of diseases and conducting predictive bio-simulation for the life sciences industry. At Entelos, John was responsible for all the Company’s legal affairs, including general corporate matters, commercial transactions, mergers and acquisitions, and intellectual property matters. John negotiated and closed deals with many of the world's premier pharmaceutical companies, including companies such as Pfizer, Novartis, Johnson & Johnson and Unilever. John also managed a patent portfolio consisting of 35 issued patents and over 120 pending applications worldwide. Before joining Entelos, John was corporate counsel at Jazz Pharmaceuticals, Inc, and corporate counsel at Tularik Inc. until its acquisition by Amgen, Inc  John began his legal career as an attorney with Townsend and Townsend and Crew, where he focused on commercial and patent litigation. John subsequently joined Venture Law Group, where he advised life science and technology companies on commercial transactions, intellectual property matters, licensing, and other general business and corporate matters. John earned a J.D. from University of Southern California, a Ph.D. in Chemistry from University of California, Berkeley, and a B.A. in Chemistry from Carleton College. John is licensed in California and registered to practice before the U.S. P.T.O..  John can be reached at JRigsbee@VirtualLawPartners.com or 415.963.4148. Virtual Law Partners LLP 56 June 23, 2009 Broad & Bright
  57. 57. SPEAKER BIOS  Geoff Willard, JD, is a Partner of VLP and chairs the firm’s Corporate, Securities, and Mergers and Acquisitions Group. Geoff is based in Reston, Virginia, where he represents emerging growth companies, their investors, and managers in a wide- range of corporate and commercial transactional matters. Geoff's practice focuses on mergers and acquisitions, equity and debt financings (including venture capital, strategic, seed, and angel financings), joint ventures and strategic alliances, and other corporate matters. He also advises clients on the formation and structuring of new business entities, licensing and commercial contracting matters, general employment and equity compensation matters, and corporate governance issues. His clients include both established and early-stage companies in the telecommunications, software, Internet, new media, retail, government services, healthcare, life sciences, cleantech/alternative energy, and manufacturing fields, among others. Geoff also represents venture capital, corporate, and strategic investors, as well as founders, managers and boards of start-ups, and principals of venture capital funds. Many of his clients are active in international markets and Geoff has advised on a variety of transactions involving parties or assets based or operating in China (including Hong Kong and Taiwan), Japan, India, Singapore, Australia, New Zealand, Mexico, Canada, the UK, Spain, Germany, France, and the Czech Republic, among other countries.  Prior to joining VLP, Geoff was a partner with DLA Piper, a major global law firm, and an associate with Cooley Godward, one of the country's premier technology and venture capital law firms, where he engaged in a similar practice. Geoff began his legal career with the international law firm Jones Day, where his practice focused on domestic and international mergers and acquisitions, public company financings, and joint ventures and strategic alliances. During law school, Geoff spent a summer as a law clerk in the Hong Kong office of Heller Ehrman.  In July 2008, Geoff was named a Mergers and Acquisitions "Rising Star" by Virginia Super Lawyers. He has been active in a variety of organizations serving the technology community, including the Mid-Atlantic Venture Association and the Northern Virginia Technology Council, and has published articles on a variety of topics.  Geoff received his J.D., summa cum laude, from American University, where he was a member of the Law Review, and his B.A., cum laude, from New York University, majoring in East Asian Studies and International Politics. Geoff reads, writes, and speaks Mandarin Chinese at a basic/elementary level. He is a member of the Virginia and District of Columbia Bars.  Geoff can be reached at GWillard@VirtualLawPartners.com or 703.722.0620. Virtual Law Partners LLP 57 June 23, 2009 Broad & Bright
  58. 58. SPEAKER BIOS  Tao Xiong, JD, is a Partner at the Shanghai office of Broad & Bright. Tao’s practice focuses primarily on representing multinational companies in cross-border mergers and acquisitions, joint ventures, private equity and venture capital investment and general corporate matters. Tao has extensive experience counseling clients in a variety of industries, including biotechnology, pharmaceutical, information technology and consumer products.  Prior to joining Broad & Bright, Tao was an associate at O’Melveny & Myers LLP and K&L Gates LLP, both major international law firms, where her practice focused on mergers and acquisitions, private equity, securities and general corporate counseling. Tao began her legal career in 1998 as a Lecturer in Law with Renmin University of China School of Law, a top law school in China, where she taught courses on international business law.  Tao received her J.D. and L.L.M. from New York University School of Law. She also received L.L.M. and L.L.B. degrees from Renmin University of China School of Law. Tao is admitted to the National Bar of China, the State Bar of New York and the State Bar of Pennsylvania. Virtual Law Partners LLP 58 June 23, 2009 Broad & Bright
  59. 59. SPEAKER BIOS  Changchun Yuan, JD is a partner at the Beijing Office of Broad & Bright. His major practice areas are foreign investment, M&A, general corporate, healthcare and insurance. He has over 14 years experience in advising multinational clients in various industries including a number of multinational pharmaceutical and medical device companies. He advised them on corporate governance, business negotiation, license and distribution, regulatory compliance and government affairs.  Before joining Broad & Bright, Changchun was a legal consultant at Coopers & Lybrand. He then became a senior associate at an international law firm and a partner at a leading Chinese law firm in Beijing. Changchun also served as in-house counsel for the Asia Pacific Region of a multinational insurance company.  Changchun began his legal career in 1985 as an assistant professor in the Chinese Academy of Social Sciences in Beijing. He holds his L.L.M. from the Chinese Academy of Social Sciences and his J.S.D. from Stanford Law School. Changchun is admitted to the National Bar of China and the State Bar of New York. Virtual Law Partners LLP 59 June 23, 2009 Broad & Bright

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