Using a Joint Venture to Fund Development of New Company’s Technology

Joint ventures are an important transactional tool for companies looking to develop strategic alliances.   If, after the exchange of information and preliminary due diligence information, the parties are still interested in pursuing the joint venture, the next step usually is the negotiation of a letter of intent or memorandum of understanding. Although there is no legal or other requirement for such a letter or memorandum, and the parties may wish to make it clear in the document itself that the agreement is not intended to be binding, it serves to memorialize the fundamental understandings and intentions of the parties. It also can be used to obtain any necessary legal or regulatory authority necessary for further negotiation of the joint venture, and it clearly is the first step toward a definitive set of joint venture agreements and documents. Finally, a letter of intent or memorandum of understanding is generally taken as an assurance that both parties are serious and, in fact, the document will often include a covenant from both parties that they will not attempt to locate an alternative joint venture partner for some period of time while they attempt to complete their own negotiations.

While there is no standard form to be followed in drafting the letter of intent or memorandum of understanding, it should be detailed enough to provide a skeleton of the proposed joint venture.   The letter of intent should also describe in some detail certain obligations that are unique to the activities of the proposed joint venture. For example, a letter of intent for a joint venture between a large party and a smaller party to support development of the smaller party’s innovative technologies might include terms relating to funding of the development work by the large party and the ability of the large party to terminate the joint venture and acquire ownership of the technology by issuing shares of its stock to the smaller party.  This type of arrangement provides the smaller party with the capital required to continue developing its technologies; however, as opposed to seeking a return on its investment through sales of products based on the technologies it will look to appreciation in the value of the shares it will be receiving from the larger party.  For its part, the larger party will typically demand control of the board of directors of the joint venture and a larger ownership percentage of the joint venture and will insist that the smaller party provide a detailed business plan that will be used to measure progress toward the desired technological development.

For detailed discussion of joint ventures, and examples of the forms of documents referred to above, see Business Transactions Solution on Westlaw Next. 

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