Contractual Considerations: Structuring CommercialRelationships and Associated Agreements to Suit your Needs Kylie van Heerden
CONTRACTUAL CONSIDERATIONSKey things to consider in any Product Development / Research Agreement • The Project • Obligations of the Provider • Fees and Payment • Intellectual Property • Confidentiality • Insurance and Indemnity • Termination • Dispute Resolution
The Project1. Scope: • What are you wanting to achieve / what are you asking of the Provider?2. Term: • How long is the Project likely to take? • Is there a fixed or required timeframe? • Are there milestones to be met?3. Supervision: • Who has general responsibility for the Project? • What level of involvement do you want / how frequently do you want to be kept up to date?
Key Obligations of the Provider• Standard of care / compliance with applicable laws and regulations.• Recording of results.• Reporting requirements.• Responsibility for outgoings.
Fees and Payment• Fixed fees / staged fees based on milestones / success fees?• Who is responsible for expenses such as travel and other incidentals?• Is any external funding being provided (e.g. MBIE funding)?
Intellectual Property• Ownership of Background IP (e.g. each party retains ownership)• Licence to use Background IP? If so, on what terms?• Who owns Project IP?• Licence to use Project IP? If so, on what terms?• Are there any rights of publication granted to the Provider (e.g. if project forms part of a Thesis)?
Confidentiality• Each party to observe obligations of confidentiality.• No unauthorised disclosure.• No competition.• Exceptions (e.g. where information is in the public domain).
Insurance and Indemnity• Public liability insurance / minimum requirements?• Indemnity for loss resulting from breach?• Unlimited or limited liability?
Termination• Grounds for termination?• Consequences of termination?• Reconciliation of fees paid?
STRUCTURAL OPTIONSOften a company will get to a point where they nolonger want to, or are able to, take their vision tothe next step alone.There are various structural options, and the rightstructure will depend on a number of factors,including capital requirements, tax considerations,number of interested parties, Government fundingrequirements etc….
For the purpose of this presentation we will look atthree of the more popular structures:• Incorporated Joint Venture• Unincorporated Joint Venture• Limited Partnership
Key Advantages of Incorporated JV• Recognised business entity in New Zealand.• Limited liability at the joint venture level.• Flexibility of ownership and funding structure.• Distributions can be made of both capital and profit (subject to the solvency test) under the Companies Act.• Governance and management structure.• General administration and accounting is usually more efficient.
Key Disadvantages of Incorporated JV• Inability to pass losses through to the shareholders.• Compliance with continuity of ownership requirements before a company can carry forward losses and imputation credits (this makes a company vulnerable to ownership changes).• Capital gains cannot be distributed to resident shareholders without a further tax impost, other than on the winding up of the company/through a company share buy-back.
Key Advantages of Unincorporated JV• Typically, each party is only liable for its proportionate share of the joint venture’s liabilities.• Tax losses incurred are received by the parties, and depreciation and interest costs can be claimed directly by the parties.• Imputation credits are generated in the correct entity.• Capital gains are received by the parties without any tax on dividends.
• The joint venture has no separate legal personality and therefore is not required to file a tax return.• Each party is effectively obliged to return its proportionate share of joint venture income and is assessed on an individual basis.
Key Disadvantages of Unincorporated JV• No limited liability• Some uncertainty as to whether the Partnership Act 1908 applies.• The marketability of the joint venture interest is often less compared to shares in a company.
• The ability to finance the joint venture itself or a joint venture interest through lending institutions is often more difficult.• Capital gains cannot be distributed to resident shareholders without a further tax impost, other than on the winding up of the company/through a company share buy-back.
Key Advantages of a Limited Partnership• Losses can be offset against Limited Partner’s income.• Capital gains can be distributed.• Management is centralised.• Like a company, the entity has limited liability.• Attractive vehicle for overseas investors.• The identity of Limited Partners is confidential.
Key Disadvantages of a Limited Partnership• Structure is slightly more complex than a company.• Limited Partners can not participate in the management of the entity (although they can by wearing a different hat).
Key considerations when deciding what structure works best for you• Capital / Finance Requirements?• Likelihood of tax losses?• Residency of participants?• How many parties should be involved?• Who brings what to the table?
• The value of each party’s contribution (be it financial or otherwise)?• Is the venture a one off project or an on-going business relationship?• What sort of management structure is favoured (i.e. a formal board or an informal management committee)?
FURTHER ASSISTANCEFor further advice on the legal aspects associatedwith taking your product / business to the nextlevel, please contact:Kylie van HeerdenPartnerSharp TudhopeDDI: (07) 928 0777Email: firstname.lastname@example.org