24. JV vs. Strategic Alliance Companies remain independent Companies A and B combine to form a new company C Joint Venture Strategic Alliance A B C A B A B
Most common structure is a LLC. The LLC is taxed as a partnership and pays no federal income taxes. Profits and losses are passed through to members. Can also be a corporation. Both arrangements shelter parties from direct liabilities. Mutual indemnities between parties is critical. Same as 2 on previous page. Who and how will operations be managed? What activities can parties carry out exclusively vs. through the JV? What can they carry out independently? What must they first offer to the JV? What is the general scope of the JV? How can the JV decide to increase scope? What is the impact on scope of activities on existing, proposed or potential activities of parties? Who will own the intellectual properties? Can parties license for use? Terms must be defined. Will party’s intellectual property be sold or licensed to the JV? What are terms of each sale/license? Can parties use IP assigned to or created by the JV for non-JV purposes? Under what terms and conditions? Determine what applies and the impact on the JV. Sometimes, a “constitution” or local articles must be drawn up in accordance with local laws to avoid disputes. Provisions should be made for parties to exit honorably and amicably with consequences fully spelled out and limits on what can or cannot be transferred to an outside party.
Who will have custody of account books, prepare periodic financial statements, what statements will be prepared, what accounting standards will apply? Provisions must be made for obtaining external loans and to which party is to source for such loans. Who can obligate the JV? Who will be signatories? How will profits and dividends be distributed, and in what shares. What % of net earnings will be retained as reserves and plowed back into the business. How to split of the proportion of responsibility in event of loss? Can differ from how profits are split. Who an withdraw? How much? Under what conditions? Impact on ownership interests.
JVs usually have a predetermined end. The parties come to a mutual end at a specific time. The agreement should detail what would happened if the union ends sooner than expected. The agreement should spell out what specific situations, actions, activities and the like that, if occurs, will be cause for separation. Sold, dissolved, adopted…what? S.E.
