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Toolkit for Negotiating and Documenting Joint Ventures

The chapter on Joint Ventures in my Westlaw Next product Business Transactions Solution (§§ 103:1 et seq.) provides detailed coverage of the formation, management and termination of joint ventures.  For attorneys that need to move quickly in counseling their clients about joint ventures, we have created a practice toolkit that includes a library of checklists beginning with a transaction checklist that can be used in negotiating and drafting the documentation for use in a corporate joint venture arrangement. See Specialty Form at § 103:22.  Additional checklists may be useful for certain aspects of forming and organizing a joint venture including a checklist that covers various legal issues as well as key provisions in the joint venture documentation. See Specialty Form at § 103:22.10.  It is also useful to have a checklist of the key matters to consider when drafting a shareholders’ or partnership agreement to be sure that nothing is missed during the process of negotiating and finalizing that important document.  See Specialty Form at § 103:22.20.  Counsel may also want to prepare a checklist for closing procedures. See Specialty Form at § 103:22.30. In addition, when considering what type of legal entity to choose for a joint venture a checklist that covers each of the key factors, and differences among the potential entity choices (i.e., partnerships, corporations and limited liability companies), can be a useful tool to refer to when talking to clients. See Specialty Form at § 103:22.40.  Checklists are also helpful in drafting management and operational provisions (see Specialty Form at § 103:22.50) and for planning on how to terminate the joint venture (see Specialty Form at § 103:22.60).


Forming a Strategic Alliance

A strategic business relationship, or strategic alliance, can be formed for a number of reasons and the potential activities of the parties to such a relationship are almost limitless; however, there is a basis continuum of steps that is typically followed in the formation process.  The first step usually will be the development of an overall strategy, including specific goals and objectives, for a proposed alliance.  At this point the company may not even have a particular partner under serious consideration although the actual partner selection will obviously have a big impact on strategy decisions.  Issues to be considered include evaluating the feasibility of the proposed alliance, identifying and defining the purposes and objectives of the alliance, determining whether there are sufficient resources (i.e., technology, personnel, capital, raw materials, manufacturing assets etc.) available for the alliance to be feasible and, finally, making sure that the alliance as contemplated would be closely aligned with the rest of the company’s business.


The second step should be identifying potential partners for the alliance and conducting a thorough evaluation and assessment of the strengths and weakness of each candidate to ensure that there is a reasonably high chance that the parties will be compatible and able to work together to achieve the mutual goals and objectives of the alliance.  Creating a list of potential partners begins with a focus on parties that are likely to possess the key core competencies and resources that the company lacks and which are essential to achieving a specific goal—development of new products or technologies, high volume manufacturing, or distribution and sale of products into new markets.  The company should then go through its own list of partner selection criteria and assess the goals and objectives of the party and how the management and operational practices of the other party will fit with those of the company.


Once a partner has been selected attention turns to contract negotiations and creation of a formal understanding regarding the business activities of the alliance and the mutually determined goals and objectives of those activities. When drafting the terms and conditions of a proposed strategic alliance it is absolutely essential for each of the parties to carefully consider, in advance, their own goals and motives for entering into the arrangement. Obviously the hope is that the alliance will be “successful,” but the key questions are just what specific business opportunities are being pursued and why is it that it makes more sense to pursue those opportunities with that particular partner as opposed to with another partner or alone.  Each of the parties should assign a team of managers and relevant specialists (e.g., engineers with particular expertise in any technology that is to be developed and/or used in the alliance) to create a complete “business case” for the alliance that demonstrates how the arrangement, including the proposed terms and conditions, fit with the strategy of the parties.  The business case should also include a definition of the short- and long-term goals of the alliance and each of the key assumptions that must be true in order for attainment of those goals to be reasonably foreseeable.  The actual contract negotiations for the alliance should be handled by experienced managers and professional advisors from each side and each step of the process should be used as an opportunity to confirm that the parties have a realistic view of the goals and objectives of the alliance and the contributions that each party is expected to make to the alliance activities.


The final step in the formation process occurs after the formal documentation has been completed and before the parties begin to actually commit their resources and attention to the proposed activities of the alliance.  Typically the negotiation process is quite intense and demanding the participants from both sides can get sidetracked over differences regarding relatively minor issues that must be resolved in order for the documentation to be completed.  It is important to step back one last time and review the conditions for a successful alliance to see whether the parties are on the right track.  Among other things, the parties should convene one or more pre-alliance meetings so that the managers and key employees who will be involved in the day-to-day activities of the alliance can get to know one another and learn more about each other’s management styles and company cultures.  These meetings should be used as an opportunity to create an overall business plan for the alliance and then break the activities of the alliance down into manageable pieces that can be easily measured.  The parties need to go behind the contract language to reach a clear and comfortable mutual understanding about how they will work together—governance structures, planning and control procedures, information exchanges, creation and dissemination of progress reports, and formation and management of project teams that include representatives from both parties.  Over the next few weeks I'll post some additional thoughts on ideas for increasing the chances of success for a strategic alliance.


Non-Solicitation and Non-Competition Agreements

Restrictions on the use and disclosure of trade secrets and other confidential information are basic elements of any trade secret protection program and companies need to understand when and how to include such restriction into non-solicitation and non-competition agreements they ask their managers and employees to sign in order to restrict their ability to solicit business from the customers for the benefit of their future employers or to otherwise actively or passively engage in activities that compete with the company’s business.  Non-solicitation agreements are appropriate for employees, such as sales representatives, whose job activities involve extensive interaction with the customers of the employer. A non-competition agreement may be useful for senior management and other key employees who may logically be inclined to compete with the employer following termination of his or her employment, either directly or as an employee of another company.  Care must be taken, however, not to run afoul of applicable state laws that dictate the scope of enforceability of specific attempts to limit competitive activities.  Westlaw Next subscribers can learn more about, and obtain examples of, non-solicitation and non-competition agreements, by reviewing the chapter on Employee Noncompetition and Nonsolicitation Agreements in Business Transactions Solution (§§ 168:1 et seq.).


Duties of Marketing Managers

Many companies are launched by a founding group that includes at least one member with a strong marketing background and he or she will generally become the foundation of the company’s marketing function as the organization grow.  In any event, the marketing function for any company, regardless of its size, must have a senior manager and personnel carrying out necessary activities in several key areas:

  • Collection and analysis of market information, which refers to marketing personnel that are engaged in marketing research activities;
  • Product and segment management, which refers to marketing personnel with specific responsibility for coordinating marketing activities relating to particular products and/or customer markets (e.g., product managers);
  • Marketing communications, which refers to marketing personnel responsible for developing and executing tactics designed to disseminate the marketing messages of the company (i.e., advertising, public relations, direct response, packaging etc.); and
  • Marketing fulfillment, which refers to marketing personnel responsible for fulfilling promises made during the course of marketing campaigns such as distributing coupons, gifts and prizes.

Ideally the marketing function will have one or more experienced persons who can deal with each of the areas described above and larger companies may have entire units that focus only on market research.  As the marketing function grows it will develop its own complex hierarchy including a senior marketing executive, or “chief marketing officer,” one or more marketing directors; and managers and supervisors.  Outside parties, such as a public relations firm and often a separate advertising agency, will also become ad hoc members of the marketing organization.


Someone in the position of marketing director would be given substantial responsibility for conceiving and implementing the company’s marketing and public relations strategies including some or all of the following duties:

  • Developing and implementing multi-media marketing campaigns using a variety of tactics and strategies including direct mail, print, radio, television and/or the Internet;
  • Actively managing ongoing marketing programs to meet changing marketing conditions and implementing strategies for addressing competitive threats;
  • Working with senior management and other key personnel in the marketing and sales functions to develop a sales and marketing business plan for use in budgeting, strategic planning and achievement of customer growth and revenue goals;
  • Managing multiple advertising agency and public relations firm relationships to support the successful execution of the sales and marketing plan;
  • Managing marketing expenses and forecasts to ensure realization of growth goals and financial targets; and
  • Developing and implementing programs and events in communities where the company has a presence to position the company as a strong local neighbor and asset for these communities.

Marketing directors will generally be supported by one or more managers who will provide assistance to their directors; support the sales department; manage relationships with channel partners to grow existing accounts; conduct training and development activities for junior members of the marketing team; participate in bid/quote negotiation of marketing materials; participate in the creation and production of collateral materials; assist in the execution of advertising campaigns; work with public relations firms and directly with members of the media; and supervise the marketing team.  Marketing managers typically must have a diverse background in areas such as research, graphic design, technical writing, planning, preparation of reports, and photography.


Is Your Business a Franchise?

Franchising is extremely popular and franchised businesses have been a significant sector of the United States economy for some time. The franchise system is based upon long-term contracts for the transfer of products, know-how, and goodwill by franchisors in exchange for a share of the revenues of businesses operated by franchisees.  Franchising is subject to government regulation on both the federal and state level, and franchise laws generally reflect a concern for the purchasers of franchises by regulating franchise sales and requiring disclosures and/or registration in connection with such sales.

The key regulatory elements in the franchising area are the Federal Trade Commission's Rule on Franchising (“FTC Rule”) and the 2008 Franchise Registration and Disclosure Guidelines (the “Uniform Franchise Disclosure Document Guidelines” or “UFDD Guidelines”) promulgated by the North American Securities Administrators Association (“NASAA”). In adopting the UFDD Guidelines NASAA has embraced the disclosure requirements set forth in the FTC Rule with minimal additional requirements.

When beginning the planning for a new business venture, the entrepreneur should take the time to evaluate whether or not the proposed business does, in fact, fall within the scope of the franchising laws.  One method that can be used is to meet with an experienced lawyer to go over the elements of the new business and see how they stack up against the key factors of the definition of a "franchise" and the most common exemptions and exclusions.  Westlaw Next subscribers can access a detailed questionnaire to walk clients through the analysis at §45:176 of Business Transactions Solution. 


Evaluating Strategic and Operational Compatibility of Alliance Partners

In order for a strategic business relationship, or “SBR,” to be successful the parties must be able to work together effectively at both the strategic and operational levels.  Certainly the parties must establish the overall strategic goals and objectives for the arrangement and these should be clearly translated into objective measures of performance, budgets and milestones.  However, it is equally important for the parties to invest the time and resources necessary to ensure completion of the day-to-day operational activities that will lead to attainment of the strategic goals and objectives. 


The documentation for a comprehensive SBR generally provides for the establishment and maintenance of formal oversight procedures, such as a joint steering or management committee, to ensure that the SBR remains on track with respect to the pursuit and achievement of the major economic and technical objectives.  While this can be an important tool in making sure that collaboration issues among the representatives of each party are identified and resolved the parties should consider taking additional steps to make sure that day-to-day activities and interactions between managers and employees involved in the SBR proceed smoothly. 


It is now commonplace for companies to provide managers who will be involved in alliances with additional training on relationship building and discussing and resolving disputes.  However, it is also recommended that the parties explicitly create, disseminate and enforce guidelines, or “behavioral protocols,” that everyone involved in the SBR–executives, managers and employees—should follow when engaging in alliance-related activities and interacting with colleagues from their partner.  Examples of rules that might be formulated include the following:

  1. Information regarding internal changes relating to business plans and organizational structure will be shared on a timely basis so that the parties can jointly consider the impact, if any, of those changes on the SBR.
  2. Meetings and other discussions regarding problems and challenges that have arisen relating to the SBR will focus on generating solutions rather than simply raising problems and exchanging complaints and assertions of blame.
  3. When representatives of the parties at lower levels are unable to resolve an issue on their own they will escalate the matter jointly within their organizations and collaborate on the preparation of background information to executives from both partners so that each side is fully informed and recognizes that resolving the issue is in the best interests of everyone.
  4. Each party should undertake to pass on information regarding any complaints that they may hear from within their organization regarding the SBR so that the managers involved in the SBR can discuss the best way for both parties to work together to formulate a response to a complaint if such a response is warranted to ensure that the partners continue to enjoy the support of their internal constituencies.
  5. Individual and group relationships between representatives of each party will be continuously nurtured through scheduled exchanges of information and opinions including regular weekly conference calls to keep in touch even when there are no specific important issues that need to be discussed or resolved.

These guidelines are rarely part of the formal documentation for the SBR; however, they should be set out in a written record and managers from each of the parties should be assigned responsibility for making sure that they are being followed.  If all proceeds well the guidelines will become the basis for a specific “alliance culture” that is built on collaboration and communication.  Once this unique culture is in place both parties should work hard to ensure that new personnel joining the activities of the SBR are properly indoctrinated.  Inevitably the composition of the teams from both sides will change over the course of the SBR as new projects are identified or additional opportunities present themselves.  When new persons join the team it is important to take the time to explain to them the overall purpose of the SBR, the progress that has been made, how their skills are expected to fit into the operational activities, and how the parties have elected to interact with one another.


Warrants in Bridge Debt Financing Transactions

Clients may be interested in issuing warrants or options to purchase additional company securities as part of their debt financing transactions.  The terms of the warrant are described in a separate document, including the type of security issuable upon exercise of the warrant, the number of units of the covered security issuable upon full exercise of the warrant, the exercise price, the term of the warrant, rules for adjusting the number of units covered by the warrant and the exercise price, and procedures for exercising the warrant and issuing the new securities to the investor.

A common use of a warrant is in connection with a bridge financing arrangement in anticipation of the closing of another round of equity funding. In this situation, investors providing a bridge loan will be issued warrants to purchase additional shares of the securities issued in the equity transaction.  While a bridge financing may, and often does, involve a single investor/lender, companies may obtain funding from two or more investors, all of which would receive identical promissory notes and warrants even though the loans may be made at different times over a mutually agreed window of time (e.g., one to three months).  While preferences among the bridge lenders are uncommon and unwieldy to create, management may reward an investor willing to make the first loan with a warrant to purchase a fixed number of common shares at the then-current fair market value of the common shares that they investor can exercise over a relatively short period of time.  If such a warrant is issued the company must disclose the terms to other investors and be prepared to field requests for equal treatment; however, the company can reasonably argue that the warrant were issued in recognition of special risks undertaken by the initial investor in providing funds when it may not have been clear that the company would be able to raise additional financing.

A full discussion of warrants and options, including other examples of form documents, is provided in Chapter 154 of Business Transactions Solution on Westlaw Next (Corporate Equity Financing).



Emerging Companies Need a Strong Marketing Group

New companies obviously have no brand recognition.  While this is a liability in the short-term, it should be embraced as an opportunity for the company to build its own brand identify from the very beginning and style a message that it wants to convey to each of its stakeholder groups including specific customer segments.  Since a start-up typically has limited resources to invest in traditional marketing tactics such as advertising and promotion the best way to get started with branding is to make sure that the company’s products meet real and important requirements of customers and that the sales group accurately conveys a credible message to customer regarding the features, benefits and performance of the products.  In other words, customers must be trained to trust what the company says about its products so that they company is eventually perceived as a reliable vendor that can deliver on its promises and representations.


The marketing and sales groups are the key players in developing and communication messages about the company’s products to potential customers.  It is essential that marketing and sales each understand the roles that they play and how their activities interrelate with each other.  If an analogy can be made to a military campaign, the marketing group is akin to the air force in that it is responsible for creating messages about the company’s products that can be disseminated throughout the target market to soften up potential customers so that they are ripe for capture when they are eventually engaged by the company’s army of sales personnel.  For established companies with more financial resources the “air campaign” of the marketing group can take the form of advertising campaigns that notify and educate customers in advance about the features of the company’s new products.  However, since start-up companies rarely are able to finance this type of promotional push the marketing group has to think and act more strategically and provides its value by becoming experts in customer requirements and making sure that customer needs are meant during product development and the sales group has the tools necessary to demonstrate to customers how their needs can and will be satisfied by the company’s products.   


In order to build credibility with customers and create strong brand recognition there must be a high level of coordination and communication between the people working in the marketing and sales areas.  The best way to achieve these objectives for a new company is to have one senior executive responsible for both marketing and sales and to make sure that each group is fully versed as to their specific roles and the types of communication that needs to occur across functional boundaries.  As for the marketing side, it should take the lead in studying the market and building links with customers in order to truly understand what customers are looking for in the business area in which the company is operating.  At the highest strategic levels the marketing group provides significant input into which market segments the company should target initially and should create a blueprint for product design and promotion that can be vetted and endorsed by the entire executive team and then dispatched to each of the functional departments for execution.  


While the sales group will certainly have its own views on product features and pricing, there is tendency for sales to argue based on what was heard at the last customer visit in order to close the next deal.  It is the responsibility of the marketing group to take a long-term view and impose the discipline necessary to begin building a permanent company message and brand reputation.  However, marketing certainly cannot ignore sales and, in fact, should treat the sales group as a key internal customer and provide it with the tools and information necessary for them to be successful when engaging with prospects.


Growing companies should establish procedures to monitor how well the marketing and sales groups are collaborating and how effective each of them are being in fulfilling their specific roles in relation to identifying and satisfying the needs of customers.  One way to evaluate the work of the marketing group is to look at whether or not it is perceived by the sales group as contributing value to the customer relationship process.  One thing to look at is whether the marketing group invited to sales group meetings that include brainstorming about how to approach new customers.  If marketing is included in these sessions that is a sign that the sale group values the information that marketing has collected about customer requirements and the knowledge that marketing has regarding specific product features and the way in which sales can differentiate them in the minds of customers.  Another measure of the value of the marketing team is what percentage of its time is spent communicating with customers as opposed to dealing with internal issues.  If marketing personnel are not in touch with the market they have little or nothing to contribute to the sales process and the sales team will ultimately come up with its own ideas for describing what the company is and why the company’s products are different.  Finally, the value of members on both teams can be assessed by how often they are consulted by their counterparts on the other team regarding customer needs and how well the company’s products are satisfying those needs.  For example, a salesperson who is continuously contacted by the marketing group for input on marketing decisions is likely well attuned to customer requirements and thus serves a valuable role in both areas.