Case study - joint venture negotiation
A recent matter in which Chilli Law acted for a corporate client highlights the need to take steps to clearly and carefully consider and identify the terms and scope of a joint venture arrangement (or any other major ongoing project based contract) before instructing a lawyer to solidify the terms in legal documentation.
The client sought to enter into a joint venture under which it would transfer a portion of its shareholding in exchange for the opportunity to commercialise a piece of proprietary software provided by the other party.
The key learnings that arise from the experience of our client in this case were:
- Be more precise with regard to defining the deal between the parties.
- Undertake a robust due diligence with respect to any promises or claims of the third party.
Poor initial negotiations - letter of intent
We were initially provided with a fairly loose letter of intent drawn up by one of the parties and signed by them.
Upon review of the the arrangement and some background checks of the proposed joint venture partner, we identified a number of issues that related to the use by that JV partner of the same intellectual property in a similar and competing businesses that should have been considered as key matters in the discussions between the parties.
While we were ultimately able to resolve these issues during the course of further negotiations, these matters could have been a deal breaker – particularly as each of the parties was already satisfied that, from their perspective, the deal had already been done. The parties' solicitors do not need to necessarily be directly involved in negotiations of the commercial terms, but it is worthwhile making contact at an early stage of such negotiations so that that your solicitor can give you input on the kinds of key issues that should be addressed in discussions so that by the time your solicitor receives the letter or intent (also known as a letter of offer, heads of agreement or memorandum of understanding) discussions can be limited to the details, not major issues.
A well drafted letter of intent that properly scopes the arrangements between, and obligations of, the parties will not only increase the chance that the deal proceeds and does not get bogged down in secondary negotiations, but will have the happy effect of reducing your legal fees for preparation of the documents. Win/win!
Lack of due diligence
Following the completion of negotiations and signing of the joint venture documents, the parties almost immediately experienced issues between them. Most importantly, it soon became apparent to our client that the intellectual property that they had been promised was still in development. What's more, the other joint venture partner began to request funding for completion of that intellectual property. Given that the client was already participating in high level meetings and discussions which involved promises relating to the delivery of services under the software, this was highly embarassing.
Our client had failed to undertake proper due diligence on the specific item of intellectual property that had been promised. However, due to the fact that:
- the client had relied on and was induced to enter into the agreement by other party’s representations regarding the status of the intellectual property; and
- we had included certain warranties relating to the status of the intellectual property in the associated licence agreement, breach of which gave rise to certain rights of termination for the client,
we were able to terminate the joint venture without further cost to our client.
However, not all situations will be as easily unwound as this one, particularly where the parties have already commenced significant work together. Such situations are likely to lead to court proceedings and expensive and protracted litigation. The key is not to rush negotiations and to make sure you are aware of who you are dealing with and whether they have the ability to meet their promises.