Joint Venture and Strategic Alliance: Protect Your Business Rights

An equity joint venture creates a separate legal entity, typically a corporation or LLC, owned by the parties in proportion to their capital contributions, and the separate legal entity has its own contractual rights and obligations and its own liability exposure distinct from the parties. A non-equity strategic alliance is purely contractual, which means that each party retains full ownership of its own assets and the relationship is governed entirely by the alliance agreement.

LLC formation and operating agreements counsel can advise on the specific equity and non-equity structure options and develop the separate legal entity formation strategy.

In an equity joint venture organized as a corporation or LLC, the parties owe each other fiduciary duties that include the duty of loyalty and the duty of care. Under the Delaware General Corporation Law and equivalent state statutes, directors of a joint venture corporation owe these duties to the joint venture entity rather than to their appointing party, which creates tension when a party's director must act in the best interest of the venture in a manner that conflicts with the appointing party's interests.

Strategic alliances and MOUs and consortium agreement counsel can advise on the specific alliance structure and develop the joint venture and strategic alliance legal framework strategy.

Corporate governance and breach of fiduciary duty counsel can advise on the specific governance rights and fiduciary duty obligations and develop the corporate venture governance and fiduciary compliance strategy.

A joint venture agreement must address the initial capital contributions of each party, the governance structure including the composition of the board and the voting thresholds required for major decisions, the allocation of profits and losses, and the restrictions on transfer of interests. Supermajority voting requirements for major decisions, such as approval of an annual budget or a material change in the business plan, protect minority parties from being outvoted.

Joint venture agreement and shareholder agreements counsel can advise on the specific formation, governance, and decision-making provisions and develop the joint venture agreement and governance documentation strategy.

Intellectual property contributed to a joint venture is typically licensed to the joint venture entity rather than transferred outright, and the license agreement should specify the scope of the license, the territory, the field of use, whether sublicensing is permitted, and what happens to the license if the joint venture terminates. Joint venture agreements must also address ownership of IP developed during the venture, because without a clear contractual provision, the default IP ownership rules may allocate ownership in a manner that neither party intended.

Technology licensing and IP transactions and business contract advisory counsel can advise on the specific IP ownership and licensing issues and develop the IP contribution and licensing clause strategy.

A deadlock in a joint venture occurs when the parties hold equal voting power and cannot reach agreement on a matter requiring their consent, and a deadlock can paralyze the venture and destroy the value of the parties' investment. Deadlock-breaking mechanisms include escalation to senior management, mandatory mediation, a casting vote on specified categories of decisions, and buy-sell provisions that require one party to buy the other out.

Corporate disputes and shareholder disputes counsel can advise on the specific deadlock, fiduciary breach, and governance failure issues and develop the deadlock-breaking and corporate dispute resolution strategy.

Joint ventures and strategic alliances between competitors are subject to antitrust scrutiny under the Sherman Act, and the critical question is whether the collaboration is likely to reduce competition by fixing prices, allocating customers, or creating market power. The antitrust analysis depends on the nature of the collaboration, the market shares of the parties, and whether any ancillary restraints, such as non-compete provisions, are reasonably necessary to achieve the legitimate purposes of the collaboration.

Business dispute and partnership dispute resolution counsel can advise on the specific antitrust compliance and regulatory exposure issues and develop the alliance antitrust compliance strategy.

A buy-sell agreement embedded in the joint venture governance documents protects each party's ability to exit the venture at a fair price, and the most common buy-sell mechanisms include the right of first refusal and the shotgun provision, which allows either party to name a price at which it will either buy the other party's interest or sell its own. The exit provisions should address the valuation methodology, the timeframe, and any non-compete obligations that take effect upon exit.

Teaming agreement and corporate governance advisory counsel can advise on the specific exit rights and buy-sell mechanism provisions and develop the exit rights and partner buyout strategy.

Dissolution of a joint venture organized as a corporation requires compliance with the applicable state corporation statute, which typically requires a board resolution or shareholder vote, the filing of a certificate of dissolution, the satisfaction of all outstanding liabilities, and the distribution of remaining assets to the members. Post-dissolution obligations frequently include the survival of confidentiality and IP protection provisions.

Corporate dissolution and liquidation and injunction proceedings counsel can advise on the specific dissolution, wind-down, and post-alliance obligation issues and develop the dissolution and post-alliance compliance strategy.