& LawyersManagers Worakit A Minn S Phenjan R Nutthasith V

1.Ownership 2.Structure 3.Scope 4.Valuation 5.Exit 5 TermsOwnershipStructureScopeValuationExit Powerful Model for Forming Alliances

Companies entering an alliance are often concerned about  Their share of economic ownership to maximize financial rewards  Ownership determines power of controlling critical decision 5 TermsOwnershipStructureScopeValuationExit

 According to the McKinsey study, many ventures fail because of unclear decision-making rights  alliances have a substantially higher success rate and longer life span than those with uneven ownership 5 TermsOwnershipStructureScopeValuationExit

5 TermsOwnershipStructureScopeValuationExit

 Lawyers typically advise against joint ventures, recommending that the client take a majority position and management control to ensure clear decision power while protecting the partners’ interests  Sometimes, these solutions are acceptable to both partners, but sometimes is not when neither partner is willing to turn over control to other side 5 TermsOwnershipStructureScopeValuationExit

 When ownership is spilt 50-50, lawyers will attempt to protect parent interests by drafting a detailed joint venture contract specifying that both partners will have equal seats on a governance board who will have veto power over a list of key decisions like acquisition and divestiture, the annual budget, or capital expenditures etc 5 TermsOwnershipStructureScopeValuationExit

 Some executives agree with the lawyer’s perspective that try for majority ownership and controlling vote on the board  Some looks beyond that and focus on decision- making control, for instance, by identifying a few key issues and agreeing on how each will be resolved before the agreement is signed 5 TermsOwnershipStructureScopeValuationExit

 For example, a U.S. firm and a Latin American firm were negotiating a joint venture to manufacture and sell U.S. firm’s product in Latin American. U.S. firm was afraid that its local partner would not fund the construction of a second regional plant, so they made several alterations to the alliance agreement  Crafting agreement creatively can prevent the joint venture to fail as a result of conflicts and decision gridlock 5 TermsOwnershipStructureScopeValuationExit

5 TermsOwnershipStructureScopeValuationExit

5 TermsOwnershipStructureScopeValuationExit 1. Separate Economic Control from Decision - Making Control In the energy industry, one consolidation joint venture had a split in terms of economic ownership but operated as a partnership on all decisions. 2. Seek the Casting Vote or Veto Power on Certain Decisions One leading international oil company signed a joint venture in the Indian market after concluding that a casting vote on capital expenditures was enough to protect its interests. 3. Agree in Advance on Ten to Fifteen Key Decisions Firms may want to agree in advance on transfer pricing, venture staffing, and dividend policies. In deciding on certain decisions, partners will uncover potential areas of conflict and speed decision making once the alliance is operational.

5 TermsOwnershipStructureScopeValuationExit 4. Develop a Decision-Making Map The alliance should has a clear understanding of roles in different decisions. The partners should consider developing a decision-making protocol, a road map of the most important decisions that the alliance will face. 5. Create Conflict Resolutions Mechanism The joint venture agreement might allow one partner to fund investments while diluting the other’s ownership stake. To avoid conflict in the future, the alliance might be allowed to buy crucial inputs or sell its output on the open market if the parents fail to reach the agreement.

Potential Partners must determine the sort of legal structure. The most basic level of doing that is to choose an alliance between a “Newco Joint venture” and “Non-equity alliance” Whereas, Newco Joint Venture is favored when partner seek to make deep combinations of tangible assets such as technology and equipment Non-Equity alliance is favored when planned integration is less deep of the intangible assets, such as ideas 5 TermsOwnershipStructureScopeValuationExit

Four joint venture structures 1. corporation 2. general partnership 3. limited partnership 4. limited liability 5 TermsOwnershipStructureScopeValuationExit

 Choosing an Alliance, lawyers tend to focus on the four dimensions, which are liability, governance, tax, and regulation. Traditionally, liability is the main concern of the lawyers, but lawyers now tend to focus more on tax and regulation follow the new guidelines. 5 TermsOwnershipStructureScopeValuationExit

 Liability concern are not primary:  Neither is Governance:  Tax and accounting treatment Maybe:  Regulation 5 TermsOwnershipStructureScopeValuationExit

 The executives tend to focus on business issues that will affect the choice of structure. For example, do they want an alliance that is an autonomous business? Or does the success of alliance depend on integrating parent assets?  The answers will help partner decide whether to establish a joint venture or contractual alliance 5 TermsOwnershipStructureScopeValuationExit

 Encourage the executive to clear what concerns the structure should address  Lawyers should be asked to identify the governance, tax, regulatory, and liability concern  Work together to generate the answer to form a structure. 5 TermsOwnershipStructureScopeValuationExit

What the venture and the partners can and cannot do 5 TermsOwnershipStructureScopeValuationExit

 Lawyers define the scope of an alliance narrowly and reserve the right for the parent to expand into related areas in the future with or without partner. This can be very helpful in reducing risk.  it can interfere with ongoing venture development (technology)  Alliance will depend on the parents for resources, and the transfer pricing will lead to conflict  limit the alliance ability to respond to change 5 TermsOwnershipStructureScopeValuationExit

 Executive understand that defining alliance scope narrowly may reduce risk and prevent a big giveaway to alliance or other partner, but executive also recognize that a scope may reduce the likelihood that the alliance and hence the parents will succeed in the long run. 5 TermsOwnershipStructureScopeValuationExit

5 approaches 5 TermsOwnershipStructureScopeValuationExit 1. Create room for growth 2. Select partner that are not competitors 3. Establish exclusive arrangement only when necessary 4. Anticipate and negotiate change in scope in advance 5. Define how parents will use technology created by the alliance

 Economic interest  Input from both partners. In terms of capital, effort and time  Output for both partners -What they will receive from the alliance -In terms of profit, market share etc. 5 TermsOwnershipStructureScopeValuationExit

 Aggressive  Win-Lose situation  Weak business  Not focusing on actual alliance objective 5 TermsOwnershipStructureScopeValuationExit

 Less aggressive Win-Win situation  Create trust  Focus on alliance objective  Strong relationship 5 TermsOwnershipStructureScopeValuationExit

Three deal teams LawyerExecutive Executive 5 TermsOwnershipStructureScopeValuationExit

 Create terms that will trigger the termination of the alliance  Decided to protect both partners 5 TermsOwnershipStructureScopeValuationExit

 Exit clauses in the contract  'Buy-Sell' 5 TermsOwnershipStructureScopeValuationExit

 Can reduce trust and confidence  Embarrassment 5 TermsOwnershipStructureScopeValuationExit

 Address exit up front -Emphasis the importance of exit -Assign separate team  'Buy-Sell' -Use only when it's clear who will be buyer and seller  Assess, who are buyer and seller. -Core activity. -Patent or technology control. -Seller should consider 'Floor price’ 5 TermsOwnershipStructureScopeValuationExit