Six Points to Keep in Mind to Avoid Losses When Forming a 'Business Alliance' Correctly

In recent years, we have seen numerous cases of venture companies with limited resources such as capital and personnel achieving rapid growth within a few years. Many of these companies have successfully enhanced their competitiveness in a short period of time by skillfully utilizing funds from venture capital firms, mergers and acquisitions (M&A), and business alliances.

In this article, we will discuss ‘business alliances’, a management strategy that allows companies to maintain their management rights while expecting to strengthen their business in a short period of time. We will explain the advantages and disadvantages of business alliances, as well as key points to check in the contract.

What is a Business Alliance?

A business alliance is a type of partnership that does not involve capital movement. Companies provide each other with resources such as funds, technology, sales resources, and personnel to enhance their competitiveness.

The main types of business alliances are technology-related alliances, production-related alliances, and sales-related alliances. The contracts for each of these vary depending on the content of the alliance.

Technology-Related Alliances

This type of alliance involves utilizing the technological resources of another company for your own business. Typical examples include “license agreements” that use the intellectual property and know-how of other companies, and “joint research and development agreements” that provide technological resources to each other and jointly develop new technologies or services.

License Agreements

A license agreement is a contract that permits the use of intellectual property rights such as copyrights, utility model rights, patent rights, and know-how. There are two types: exclusive and non-exclusive.

Important items in the contract include the product (field, item) that permits the use of intellectual property, the range (country/region), sales channels, duration, and license fees.

For more details on the points of license agreements, please refer to the following article.

Joint Research and Development Agreements

A joint research and development agreement is a contract that defines the roles and obligations of each party, the handling of results, etc., necessary for smooth joint work. Important items include role sharing, cost sharing, confidentiality obligations, and the handling of intellectual property arising from joint development.

Production-Related Alliances

This type of alliance involves using the production line of another company to increase production capacity without making equipment investments. For the other company, it can generate income by utilizing a production line with a low operating rate, so if the conditions are right, it can be a beneficial alliance for both parties.

Production alliances are one of the necessary alliances for venture companies with limited funds. Typical examples include “manufacturing consignment contracts” that consign the production or part of the manufacturing process of their own products, and “OEM contracts” that manufacture brand products of the selling company on a consignment basis.

Manufacturing Consignment Contracts

A manufacturing consignment contract is a contract that stipulates the necessary items for manufacturing consignment, such as product specifications, quality control, delivery and acceptance, and consideration. Important items include delay in delivery, defective products, risk assumption and warranty liability, and damages.

OEM Contracts

There are two types of OEM contracts: ① the case where the contractor manufactures the product according to the instructions of the consignor, and ② the case where the contractor attaches the logo mark or trademark of the consignor to the existing product of the contractor. The structure of the contract is basically the same as the manufacturing consignment contract, but items related to the management of logo marks, trademarks, drawings, product specifications, etc. provided by the consignor are added to the important items.

Sales-Related Alliances

This type of business alliance aims to expand sales and share, or to enter overseas markets, by utilizing the sales resources such as sales channels of other companies. It is an important alliance for venture companies that are focused on technology development and cannot allocate resources to sales and marketing.

Typical examples include “dealer contracts” where the selling company purchases products from the product manufacturer and resells them under its own name, “agency contracts” where the product is resold as an agent of the product manufacturer, and “franchise contracts” that grant sales rights to franchisees.

Dealer Contracts

A dealer contract is a contract that stipulates the rules necessary from the time the company (dealer) that conducts sales purchases the product to the time of resale. Important items include the distinction between exclusive and non-exclusive, sales area, sales channels, delivery and acceptance, product warranty, use of trademarks, intellectual property rights, and product liability.

Agency Contracts

There are two types of agency contracts: the intermediary type, where the agent intermediates the sale between the product manufacturer and the customer, and the sales type, where the agent sells directly to the customer like a dealer. The structure of the contract differs, so care is needed.

For more details on the points of agency contracts, please refer to the following article.

Franchise Contracts

A franchise contract is a contract that stipulates the rules from the time the franchise headquarters provides the franchisee with the rights and management know-how necessary for operation in a package along with the sales rights, to the time the franchisee receives compensation and royalties.

While there are many advantages for franchisees, the contract also includes various obligations and burdens, so careful consideration of the contract content is necessary.

For more details on the check points of franchise contracts, please refer to the following article.

Difference from Capital Alliances

A capital alliance involves three patterns: ① investing in the other company, ② receiving investment from the other company, and ③ mutually investing in each other. Compared to a dry business alliance in terms of business, the relationship becomes stronger and synergy effects can be expected in terms of management and finance.

The pattern of investing in (or receiving investment from) the other company is often seen when large companies use the technology or services of small and medium-sized enterprises for their own business. However, for small and medium-sized enterprises, while they can raise funds and calculate sales, there is a possibility that they may not be able to freely develop their business. Therefore, careful consideration is necessary, including the investment ratio.

In addition to this, there are also strategic alliances such as ‘capital and business alliances’ that involve investment, and ‘joint ventures’ that involve joint investment to create an independent organization.

Benefits of Business Alliances

Shortens the time needed for business development and controls costs

By utilizing the management resources such as technology, know-how, sales power, and sales channels that other companies already have, it is possible to build a new business structure in a short period of time at a lower cost compared to proceeding independently.

Maintains the independence of the company

In the pattern of capital tie-ups where you receive investment from the other company, your detailed management information will be understood by the other company, and depending on the investment ratio, there is a possibility that they may be involved in management.

In this respect, a major advantage of business alliances is that they allow for independent management decisions without being influenced by the other company.

Easy to dissolve if ineffective

Business alliances do not involve shareholding, and build cooperative relationships with other companies through contracts. Therefore, if the initially expected effects are not achieved, it is possible to dissolve the alliance in a business-like manner.

This is particularly important in the IT-related field, where new business models are constantly being created. It is conceivable to respond to changes in the business environment and consider changing or withdrawing from alliances, making this an important benefit.

Disadvantages of Business Alliances

High Risk of Technology and Know-how Leakage

In business alliances, often referred to as a “Leaning Race,” there is a risk that your company’s technology, know-how, and information may be learned by the partner company. However, this can also be an advantage from the opposite perspective, so a comprehensive judgment is necessary.

Risk of Termination of the Alliance

In business alliances established through contracts, there is always a risk of termination for reasons such as changes in management policy or strategy, successful absorption of the partner company’s technology and know-how, or failure to achieve the desired effects from the alliance. However, this can also be an advantage from the opposite perspective.

Key Points to Check in a Business Collaboration Agreement

There are various patterns of business collaborations, and the form of the contract varies accordingly. Here, we will explain the important points to check that are common to any collaboration, using a standard “Business Collaboration Agreement” as a model.

1. Purpose of the Business Collaboration

Article ◯ (Purpose)
Party A and Party B will collaborate in business for the purpose (hereinafter referred to as “this Purpose”) of developing and commercializing a new ◯◯ in the ◯◯ field, using the management resources each possesses, for their mutual development.

The key point of the purpose clause is to clarify the common goal that both parties are aiming for in the business collaboration.

Each party must recognize the role they should play and create a clause so that there is no doubt about the business area, the products, technologies, services, and operations they aim for.

2. Scope and Division of Duties

Article ◯ (Division of Duties)
The scope of the business to be collaborated on under this contract is various tasks necessary for developing and commercializing ◯◯, and will be divided between Party A and Party B.
2 The duties to be performed by Party A are ◯◯◯◯◯◯
3 The duties to be performed by Party B are ◯◯◯◯◯◯

As multiple companies cooperate to perform tasks, it is important to make the scope of work and division of roles as clear as possible.

3. Agreement on Cost Burden

Article ◯ (Cost Burden)
Party A and Party B will bear the costs of performing their respective duties as defined in Article ◯ of this contract and will not claim from the other party. However, if it is found that the cost significantly exceeds the initial estimate, the party will promptly report to the other party, and the handling of the excess will be decided in good faith between Party A and Party B.

By stipulating the burden of costs incurred in performing the work, and the handling in cases where the amount significantly exceeds the estimate, unnecessary trouble can be avoided.

In the sample clause, both parties bear the cost, but if one company is to make a significant profit, it is also an option to increase the burden on that company.

In the case of a business collaboration that includes business operations, it is also necessary to separately stipulate the “method of distributing profits”.

4. Confidentiality Clause

The four items that are particularly important in the confidentiality clause are the scope of confidential information, the scope of the confidentiality obligation, the prohibition of disclosure to third parties, and the confidentiality period.

For more details on the confidentiality clause, please refer to the following article.

5. Ownership of Intellectual Property Rights of the Deliverables

Article ◯ (Intellectual Property Rights)
1. The patent rights and other intellectual property rights and rights related to know-how, etc. (hereinafter collectively referred to as “Patent Rights, etc.”) related to inventions and other intellectual property rights or know-how, etc. (hereinafter collectively referred to as “Inventions, etc.”) that arise in the course of the business under this contract shall belong to the party to which the person who made the invention, etc. belongs. However, if the intellectual property includes the other party’s confidential information, it will be shared by Party A and Party B.
2. Patent Rights, etc. arising from Inventions, etc. jointly made by persons belonging to Party A and Party B shall be shared by Party A and Party B.
3. Party A and Party B may implement the Patent Rights, etc. related to the shared without the consent of and payment to the other party.
4. When Party A and Party B license a third party to normally implement the Patent Rights, etc. related to the shared, they shall discuss and decide in advance with the other party on whether to permit the license and the conditions, etc. if they decide to permit it.

Regarding the ownership of intellectual property rights, it is possible to consider an arrangement to transfer them to the company that will be the business entity, but it is important to make a decision after consulting with the management department as it will affect future business.

Also, if “copyright” is included in the intellectual property rights, there are rights unique to copyright such as moral rights of authors, translation rights, and adaptation rights, so it is necessary to separate the clauses and stipulate them.

⒍ Prohibition of Transfer of Rights and Obligations Clause

Article ◯ (Prohibition of Transfer of Rights and Obligations)
Party A and Party B shall not transfer, pledge, or allow to be inherited the rights and obligations arising from this contract to a third party without the prior written consent of the other party.

Even with a confidentiality obligation clause and this clause, there is a possibility that the other company may be acquired by a competing company. As a countermeasure, there is also a method of separately stipulating that this contract can be terminated if the control rights are changed.

Summary

We have explained the basic knowledge required for business alliances, their advantages and disadvantages, and the key points to check in business alliance contracts.

For venture companies, business alliances can be a business opportunity, but depending on the content of the contract, they may also carry significant risks.

To succeed in business alliances, which come in various forms, we recommend consulting with a law firm that has specialized legal knowledge and extensive experience, and seeking their advice.

Introduction to Contract Creation and Review Services by Our Firm

At Monolith Law Office, as a law firm with strengths in IT, Internet, and business, we offer services such as the creation and review of various contracts, not limited to business alliance contracts, to our advisory and client companies. If you are interested, please see the details below.