This section discusses key legal, financial, tax, marketing or technology element which must be carefully structured in order to maximize a new venture's likelihood of success.

1. Objective of Joint Venture
2. Choice of Structure - Business Environment Factors
3. Choice of Structure - Unincorporated vs. Incorporated JV Vehicles
4. Choice of Structure - Unincorporated JV - Partnership vs. Pure JV
5. Tax consequences of Different Structures
6. Pro Forma Contents of JV Agreement
7. Major Errors in License Agreements
8. Issues in Accessing Technology Information
9. Issues in Use of Technology Information

• Form an alliance to leverage each other's Unique Strengths, not to correct each other's weakness.
  
  
• Form an alliance around a Market Opportunity, not around narrow products.
  
  
• Form an alliance around Unique Skills, Capabilities, Technology, and Know-How.
  
  
• License proprietary technology out liberally to grow your Business Ecosystem but maintain Control over Key Kernels.

1. government policy at the situs of joint venture concerning:
   
   
   1. intellectual property rights and protection;
      
      
   2. licensing restrictions and compulsory licensing requirments;
      
      
   3. foreign investment restrictions and incentives;
      
      
   4. indigenization and local content requirments; and
      
      
   5. currency and exchange controls.
   
   
2. tariff structures.
   
   
3. tax structures.
   
   
4. position of supplier in market for product of the technology and use of product.
   
   
5. position of supplier in market for product of the technology with respect to market territories.
   
   
6. stage of development of technology.
   
   
7. anticipated changes in market structure and the position of supplier in market.
   
   
8. distribution requirments including shipping costs and sales structures.
   
   
9. compatibility of available protection of proprietary interests with program of protection required by supplier of interests.
   
   
10. product liability laws.
    
    
11. product design standards such as units, labelling, design, safety, and environmental requirments.
    
    
12. capital requirments and available capital markets.
    
    
13. startup time requirments.
    
    
14. availability of raw materials and suppliers of intermediate goods.
    
    
15. availability of acceptable co-venturer, either as recipient of the technology or as contributer of other essential ingredients to joint venture such as distribution channels, strength to ddevelop technology, capital, etc.
    
    
16. labor markets and trade union organizations.
    
    
17. social structure of the community and cultural appropriateness of the technology and product at the situs of the joint venture and anticipated market for the product.

	Unincorporated Joint Venture (Partnership)	Incorporated Joint Venture
1.	Each participient has joint liability to the full extent of its own assets for liabilities of the Joint Venture (consider insurance).	Participants liability is limited to its investment as a shareholder in the Joint Venture (but guarantees mat be required from the participants third parties).
2.	One participant's notice to dissolve can result in dissolution.	Perpetual existence not affected by action of one participant (subject to statutory remedies for just and equitable winding-up, opression and derivative actions).
3.	Relatively easy to wind up.	More complex to wind up.
4.	Each participant can bind the Joint Venture (through agency).	One participant cannot subject the Joint Venture to obligations (subject to actions of individual directors).
5.	Few rules for governing imposed on Joint Venture.	Corporation law establishes sophisticated procedural rules.
6.	Each participant is subject to an absolute duty of good faith to the other participants (fiduciary relationship).	A participant can act solely in its own interest as a shareholder.
7.	New participants require dissolution of existing partnership and formation of new one unless agreement specifically provides for changes.	Relatively easy to add new participants.
8.	Participant cannot contract with or sue the Joint Venture (only with the other participants).	Participants can contract with or sue the Joint Venture.
9.	One participant can force a return of its capital (by dissolution and liquidation and sharing of assets).	One participant cannot force a buyout or a return of its capital contribution (except through a shareholder's agreement or court action under provisions for dissent, winding-up, derivative actions or oppression).
10.	Few statutory pre-conditions imposed to formation.	Various statory conditions imposed for incorporation (e.g. citizenship requirment for directors).
11.	Taxation provisions can affect participants directly.	Two levels of taxation.
12.	The legal relationship between the participants may be varied by express agreement (but not vis-a-vis third parties).	A shareholders agreement is able to vary only part, but not all, of the legal relationship between the participants.

	Characterizing Relationship as Partnership	Characterizing Relationship as Pure Joint Venture
1.	Joint Venture usually operates as a continuing business over unspecified time period.	Joint Venture is usually limited to a narrow single venture, of limited scope and duration, which terminates on its completion.
2.	Joint contribution of capital which is "pooled."	No community of capital (funds are separately retained).
3.	Common ownership and undivided interest in contributed or acquired assets.	Separation of the participants' interests and ownership in assets and resources utilized by each participant for the Joint Venture.
4.	Delegation of ultimate management authority to Joint Venture (including control over its assets).	Retention by each participant of ultimate authority over actions of Joint Venture (e.g. power of veto).
5.	Participants' activities usually restricted to those of the Joint Venture.	Right of participants to carry on other business.
6.	Joint Venture receives a total revenue, and after deducting aggregate expenses distributes only net profit to the participants in a stated proportion.	Each participant receives gross revenues attributed and investment, usually directly, or from the other parties by a settlement process.
7.	Each participant shares (in a states proportion) in the expenses borne by the other members through the Joint Venture, and shares any losses resulting after deducting aggregate expenses from revenue.	If revenue received by a participant is inade- quate to cover its joint venture expenses, then the deficiency is borne by the party itself (expenses are allocated directly to the participants).
8.	Profit and loss of each participant determined an basis of net amounts received from the Joint Venture.	Profit and loss of each participant is determined by a combination of its Joint Venture revenues/expenses with the revenues/expenses of its other operations.
9.	Joint Venture pays, as an expense, taxes and assessments applicable to facilities used.	Each participant pays taxes and assessments with respect to facilities it uses for the Joint Venture.
10.	Joint Venture pays the salaries of the personel seconded to it by the participants out of its "pool" of funds.	Each participant pays salaries of its personel assigned to the Joint Venture (deducting them as an expense).
11.	Participants may on termination only liquidate the assets and share in the proceeds.	Right of each participant to a return of its contributed resources upon termination of the Joint Venture.
12.	Joint and several liability of each participant to third parties for debates of the Joint Venture and for wrongful acts and omissions of the other participants and the Joint Venture.	Liability on a contractual basis (e.g. permits a participant disavowing liability to third parties based on other participants acts).
13.	Fiduciary duty of each participant to disclose material matters affecting the Joint Venture.	Duty to disclose material facts on a contractual basis only.
14.	Participants must act in best interests of the Joint Venture.	Allows right to act in own interest, unless trustee relationship exists for particular property (e.g. accounting for secret profit).
15.	Power of participant as agent of other participants ant the Joint Venture, to bind them to action taken in the usual business of the Joint Venture.	Participant's power to bind the other participants and the joint venture can be limited or be non-existent by express agreement, unless agency relationship is represented to third parties.
16.	Disposal of Joint Venture partnership interest is a capital reciept.	Disposal of interest in such a Joint Venture is generally ordinary income.
17.	Joint Venture engaged in trading, mining or manufacturing must register usually (to permit enforcement of their contracts).	No registration requirement (unless different name used by the participants as a business style to reflect the Joint Venture activities).

Types of Organization:

1. branch operation
   1. corporate division
   2. joint venture
   3. partnership.
2. new subsidiary corporation
   1. intercompany pricing issues
      National Revenue Guidelines
   2. considerations in structuring ownership of assets.

Financing of Operation and Investment:

1. debt financing
2. capital financing.

Taxation of Foreign Investors:

1. taxation of business operations
   1. branch
   2. new corporation.
2. taxation of national/international sources of investment income
   1. branch
   2. new corporation.

Taxation of Foreign Investors:

1. small business incentives.
2. venture capital corporations.
3. special economic zones.

(Both incorporated and unincorporated)

Scope:

1. Description of the parameters of the venture as a whole, and limitation of members' activities to such scope (e.g. rights, territories, restrictions).
2. Allocation of functional responsibilities, roles and activities between the parties.
3. Outline of the design and specifications for the venture and a list of all other documents required as an integral part of joint venture (e.g. technology transfer agreement, license agreement, assignment, technical assistance agreement).

Structure:

1. Unincorporated structure; assumed in this discussion to be a partnership. In such case, project team assumes great importance. The elements to consider are:
   
   
   1. Assets and property, title to which is acquired by the partnership (Disposition or Rollover per ______ Income Tax Act?).
   2. Assets and property, leased/loaned to the partnership (title remaining with participants).
   3. Valuation of goodwill for future dissolution purposes.
   4. Non-competition provisions and dissolution.
   5. Proportion of sharing in profits.
   6. Proportion of sharing in losses.
   7. Right to earn Interest on capital prior to profit occurring.
   8. Day to day management and administration allocation.
   9. Voting power based on equality, capital contributed, seniority, etc.
   10. Basis for new partner admission and for expulsion.
   11. Rights on insolvency of a partner.
   12. Restrictions on rights of one partner to dissolve partnership.
   13. Right to draw against earnings.
   14. Buy-out, valuation and terms of payment.
   15. Amendment procedure.
   
   
2. Incorporated structure; dealt with in articles, by-laws and unanimous shareholders agreements. The elements to consider are:
   
   
   1. Jurisdiction of incorporation.
   2. Registered office location.
   3. Limitation on business objects, if any.
   4. Capital structure and attributes of each class of shares.
   5. Share allocation (proportional to value of contributions or otherwise).
   6. Share transfer and mortgage restrictions (e.g. right of first refusal to purchase, on basis of express valuation method or otherwise).
   7. Articles of incorporation, by-laws and other constitutional documents.
   8. Size of and representation on board of directors and limitations on their powers.
   9. Dividend/royalty policy.
   10. Choice of officers.
   11. Extent of shareholder's consent for corporate action.
   12. Shareholder's guarantees.

Implementation:

1. Schedule.
2. Cut-off date for finalization of joint venture agreement.
3. Conditions precedent e.g. approvals and financing.
4. Term of joint venture.
5. Delay in either party implementing joint venture, which results in certain consequential rights of the other party, e.g. damages, right to terminate.
6. Responsibility for obtaining all government approvals (e.g. foreign exchange control approval where applicable to foreign co-venturer) and burden of cost.
7. Ensure compliance with all foreign laws that apply to the parties' activities respecting the joint venture (retain local counsel).

Project Team:

1. Composition of Project Team/Steering Committee.
2. Scope of responsibilities.
3. Authority and powers.
4. Decision process.
5. Define technical assessment procedures and requirements.
6. Appointment of Project Coordinators.
7. Dispute resolution process.

Financing:

1. Source of funding and responsibility for same.
2. Joint applications for outside funding, liability for guarantees and portion in which shared.
3. Allocation of funding received jointly.

Confidential Information:

1. Scope of technology transfer.
2. Scope of business information exchange.
3. Non-disclosure agreements addressing rights protected by statute and for information not subject to statutory protection.

Improvements:

1. Rights to acquire interest in improvements and developed information resulting from disclosed technology (e.g. right of first refusal); right to apply for patent and other protection.
2. Rights of either party to use improvements and developed information.
3. Rights to new technology developed by joint venture.

Conflicting Interest:

1. Non-competition between the joint venture and the participants in certain areas; e.g. within scope of technology and products covered in the agreement, and with respect to all confidential information.
2. Warranty that there is no existing agreement and that no action shall be taken by a joint venturer to enter into an agreement, which conflicts or in any manner restricts the operation and achievement of the objectives of the joint venture agreement.

Deadlock Provisions:

1. Deadlock provisions used to protect the interests of the joint venturers, consisting of universal consent/veto provisions respecting:
   
   
   1. Deadlocked Project Management team or board of directors.
   2. Vote equality for participants.
   3. Signing authority for all documents requiring all participants endorsement.
   4. Consent of all participants to certain enumerated acts.
   5. Restrictions on transfer of interest in the joint venture.
   
   
2. Remedies for breach of deadlock provisions:
   
   
   1. Statutory (for incorporated joint venture).
   2. Express remedies (e.g. change in voting rights, forced purchase of interest).

Disclosure Obligations:

1. Extent of duty to disclose any material facts which will affect the joint venture, including opportunity for an individual party to profit to detriment of the venture.
2. Rendering accounts and provide access to that portion of the participant's books and records reflecting the joint venture.

Contributed Assets (including Technology):

1. Contribution of existing assets and new assets; complete description of cash / non-cash / technology / - capital assets contributed.
2. Allocating value of contributed assets.
3. Ownership of assets:
   
   
   1. by the joint venture organization,
   2. by the participants individually or jointly (security interest question) with the joint venture acquiring
      
      
      1. a license / assessment / lease or
      2. right to the benefit of, or the products of, the assets with no actual "hands-on" use.
   
   
4. Right to and apportionment of capital cost allowance.
5. Payment or credit for expenditures made on asset procurement prior to joint venture agreement.
6. Control over future research, design and construction.
7. Ability to use assets for other purposes.
8. Limitation on right to sell or transfer assets allocated to the joint venture without consent of all participants.
9. Obligation to furnish and use latest technology as part of the contributed assets and future upgrading.

Material (production process):

1. Quality, type and amount of materials to be provided by each party.
2. Material utilization procedures.
3. Remedies on failure to comply with the above requirements (e.g. reduction in benefits- see M below).

Benefits:

1. Right to profits and allocation (e.·. by asset contributions, equity participation, etc.).
2. Right to a share of the products in kind and allocation (e.g. by type, by percentage of all or several types).
3. If take share in kind, do parties obtain products by buying form joint venture, or as of right.
4. Right to deal with products on terms as parties see fit (e.g. markets and price).

Operating Costs / Financial Provisions:

1. Payments for operating costs to be made by each party:
   
   
   1. out of a common fund according to a formula, or
   2. directly with respect to allocated areas, subject to adjustment formula on some basis.
   
   
2. Basis of allocation of costs.
3. Pricing of products of technology produced by the joint venture.
4. Taxes.
5. Currency provisions.

Existing Plant:

1. Right of a participant to deal with all assets not assigned to joint venture without limitation except to the extent that such dealings would adversely affect the joint venture.
2. The effects of the joint venture on the operation of the parties' other (non-joint venture) assets and plant.

Personnel:

1. Source of personnel assigned to the joint venture.
2. Reporting lines and responsibilities of personnel.
3. Source and extent of compensation for personnel (salaries, bonuses, profit sharing, stock options).
4. Restriction on solicitation and hiring of personnel after termination of joint venture.
5. Labor relations policy.
6. Eliminating conflicting obligations of personnel (to joint venture vis-a-vis participant).

Policies and Procedures:

1. Sales and marketing policies.
2. Engineering practice.
3. Production / QA Methods.
4. R & D expenditures.

Modification of Scope:

1. Provision for modifying scope of joint venture if circumstances change.
2. Allocating excess joint venture resources and / or capacity.

Independence and Severability:

1. Extent acting independently vis-a-vis third parties (not a partnership or agency relationship).
2. Structuring the agreement to indicate independence of interests (e.g. sole decision making power in certain areas).

Liability:

1. Extent of joint liability.
2. Participant's liability for wrongful acts or omissions of other participants.
3. Liability for prior debts and expenses.
4. Fiduciary duties between the parties.
5. Liability for disclosure of unreliable information between the participants.
6. Cross indemnities between the parties for liability incurred based on enumerated prohibited acts.
7. Cross indemnities for liabilities incurred due to third party claims re: quality of technology, product, personal injury, property damage, patent indemnity.

Disputes:

1. Arbitration stipulated courts or mutually acceptable agreement.
2. Governing law (based on either the supplier's / recipient's country, the more advanced country or the country where likely to be enforced).
3. Interpretation provisions.
4. Location of resolution process.

Force Majeure:

Termination:

1. Right to terminate participation;
   
   
   1. discretionary, at various stages (e.g. letter of intern, assessment, prototype, etc.) and / or
   2. on certain events (e.g. default), and
   3. according to certain procedure;
      
      
      1. first right of refusal (otherwise sale to third party permitted)
      2. "shotgun" Buy-Sell (price set at which other participant may buy of sell),
      3. "piggyback" (interests of all the participants must be disposed on same basis to third party),
      4. closed bid auction.
   
   
2. Rights on terminations or expiration of agreement.
   
   
   1. to interest in the joint venture,
   2. final account settlement,
   3. allocation of technology and improvements on dissolution, and
   4. Right of "bought-out" party to have special customer status (e.g. to have material processed, and receive output on advantageous terms).

Assignment:

Assignment of property or interest in the agreement should be prohibited, whether directly or indirectly through change of ownership of the parties, which would have effect of altering the agreement objectives between parties.

1. Failure to Define and Provide For All Necessary Rights to Use the Technology
   
   

   1. Technical Information
      
      
      1. Right to Use
         • How
         • Qualifications / Restrictions
         
         
      2. Right to Disclose
         • Sublicense
         • Agents / Subcontractors / Suppliers
         • Customers
         
         
      3. Right to Reproduce
         • Purpose
         • Limitations
         
         
      4. Right to Retransfer
         • Sublicense
         • Sale
         • Assignment of license
         
         
      5. Right to Modify / Improve
      
      
   2. Proprietary Product
      
      
      1. Right to Use
         • How
         • Qualifications
         • Restrictions
         
         
      2. Right to Produce, Copy or Manufacture
         • Limitations
         
         
      3. Right to Distribute
         • Sale
         • Lease
         • Import
         • Sublicense its use
         • Right to Modify / Improve
      
      
   3. Proprietary Process / System
      
      
      1. Right to Use
         • How
         • Qualifications
         • Restrictions
         
         
      2. Right to Disclose
         • Sublicense
         • Agents / Subcontractors / Suppliers
         • Customers
         
         
      3. Right to Retransfer
         • Sublicense
         • Sale
         • Assignment of license
         
         
      4. Right to Modify / Improve
      
      
   4. Proprietary Apparatus
      
      
      1. Right to Use
         • How
         • Qualifications
         • Restrictions
         
         
      2. Right to Disclose
         • Sublicense
         • Agents / Subcontractors / Suppliers
         • Customers
         
         
      3. Right to Reproduce
         • Purpose
         • Limitations
         
         
      4. Right to Retransfer
         • Sublicense
         • Agents / Subcontractors / Suppliers
         • Customers

2. Failure to Qualify or Limit Each Right
   
   

   • Ability to unbundle rights
     
     
   • Deal with each right individually
   
   
   1. Territory
      • E.g. by including previously exclusively licensed areas
      
      
   2. Time
      • License term vs. agreement term
      • By date, event or statutory period
      • By exclusivity
      
      
   3. Exclusivity
      • Exclusive rights
      • Non-exclusive rights (and covenant not to exercise)
      • Sole License
      
      
   4. Field of Use / Channel of Distribution
      
      
   5. Controlling Products Use After Sale
      • Overcoming doctrine of exhaustion
      • Retention of control over use of proprietary products by contract limitations even after sale

3. Failure to Provide for Protection of Licensed Rights
   
   

   1. Right to Ensure Statutory Protection of Licensed Rights
      • Licensor's obligation to apply and prosecute
      • Notice of licensor's election not to apply or prosecute
      • Licensee to obtain right to prosecute (assistance of licensor)
      
      
   2. Right to Protect License Interest
      • Licensor to register license in appropriate registry
      • Fee responsibility
      • License right to register (assistance of licensor)
      
      
   3. Right to Ensure Statutory Protection Does Not Lapse
      • Notice of renewal or non-payment of maintenance fees
      • On non-renewal, licensee's right to keep current
      
      
   4. Right to Acquire Statutory Grant of Licensor's Rights
      • Option to buy on certain events (e.g. failure of licensor to prosecute or to maintain)
      • Right of first refusal if licensor disposing of technology
      
      
   5. Right to Institute Legal Action Against Infringers
      • Commencement by licensor Initially
      • Commencement by licensee on default of licensor
      • Responsibility for costs
      • Extent of cooperation
      
      
   6. Right to Infringement Indemnity

4. Failure to License Improvements
   
   

   1. Ownership of Improvements
      • Joint or individual
      • Grant backs
      
      
   2. Basis of Licensing Improvements
      • Same as base technology (i.e. technology definition encompasses improvements)
      • Different basis
      
      
   3. Compensation
      • Included Improvements
      • Additional costs

5. Representations and Warranties
   
   

   1. Title
      • Ownership or exclusive license with right to sublicense licensee
      
      
   2. No Existing Claims for Infringement of Proprietary Rights
      
      
   3. Exercise of Rights Granted Will Not Infringe Proprietary Rights of Third Parties
      • Qualification "to best of licensor's knowledge"
      
      
   4. No Prior Grant of Rights
      
      
   5. No Lawsuits With Respect to Technology
      • No notice of claims
      • No knowledge of circumstances that could give rise to claims

Technology May be Acquired by a Company Using its Own Resources

1. Internally (e.g. development) or
2. Publicly available

Technology also acquired from Third Parties - Know How

Know-How Definition

• Technical and business knowledge and experience
• Requires show- how as a corollary
• Key is the blend, compilation, configuration of information (not individual information)

Types


1. Commonly Available Information
   • Acquired and refined into different format
   • Unprotected (e.g. copies of patients) or trade secret
   
   
2. Information Not Generally Available
   • Invented or developed
   • Not available to general public
   • Trade secrets
     • not patentable
     • patentable but not applied for
     • subject to patent application

Trade Secret Definition

• Any formula, pattern, device or compilation of information used in business, which gives an opportunity to obtain an advantage over competitors who do not know or use it

Major Errors in Accessing Technology

1. Failure to Define and Provide for All Necessary Rights of Access and Acquisition of Technology
   
   
   1. Right to access technology information
      • Definition important
      • At certain level or stage of development: basic research, design, development, engineering, manufacturing, construction, management, maintenance, improvements, enhancements, marketing, as related to process, apparatus or product
      
      
   2. Right to access or acquire technology embodiments
      • Prototypes, models, product samples
      
      
   3. Right to acquire tooling and equipment
      • Special, custom, standard
      
      
   4. Right to acquire parts and materials
      
      
   5. Right to acquire products
      
      
   6. Right to acquire related business information
      • Customer lists, supplier lists, parts and materials, marketing information
   
   
2. Failure to Consider Improvements
   
   
   1. Definition
      • Contrast with new developments
      
      
   2. Obligations to develop improvements
      • By each party
      • By objective or by funding
      
      
   3. Right to access improvements
      • Notice and delivery
      • Type of improvements
   
   
3. Failure to Define Format and Contents
   
   
   1. Documentation
      • Number of copies
      • Size
      • Paper type
      
      
   2. Non-documentary forms
      • Photos, blueprints
      • Number of originals
      • Size
      • Type of material
      
      
   3. System of measurement
      
      
   4. List of drawings
      
      
   5. List of materials
      
      
   6. List of specifications
      
      
   7. Manufacturing procedures
      • Manufacturing drawings
      • Quality assurance procedures
      • Inspection plans
      
      
   8. Manufacturing facilities
      
      
   9. Tooling list
      
      
   10. Production planning
   
   
4. Representation and Warranties
   
   
   1. Possession by licensor of technology
      • To extent required to transfer technology
      
      
   2. Technology not in possession of licensor
      • To be developed or acquired in accordance with schedule
      
      
   3. Technology to be without defect and complete to allow stated objectives
      • Provided:
        1. Licensee complies with licensor's instructions
        2. Licensee's tools and equipment meet licensor's standards
        3. Parts and materials used by licensee meet licensor's standards
        4. Resources and skills of licensee equivalent to those of industry or licensor's standard

Show How

• Not a legal category
• Instruction, training, education services

Requires


1. Possession of know- how
2. Instructional capability

Problem: Non-Proprietary nature requires contractual relationship

Major Errors

1. Failure to Define Show-How
   
   
   1. Training
      • Scope
      • Location
      • Length
      • Number of people
      • Cost
      • Facilities
      • Aids
      
      
   2. Formal education
      • Scope
      • Location
      • Length
      • Number of people
      • Cost
      • Facilities
      • Aids
      
      
   3. Staff exchanges
      • Location
      • Length
      • Number of people
      • Cost
      
      
   4. Consulting
      • Scope
      • Location
      • Length
      • Number of people
      • Cost
      
      
   5. Maintenance
      • Ongoing support
      • Scope