Forming a Strategic Alliance - Key Issues

There are some key issues to look out for when drafting a Strategic Alliance Agreement. The most important provision to include, in my opinion, is a "No Partnership" provision. A strategic alliance is different in purpose and form than a partnership, and the agreement should expressly reflect the intentions of the parties not to form a partnership. The legal status of a "partnership" involves a whole series of rights and obligations that neither party to a strategic alliance would like to assume. Therefore, a "No Partnership" provision must be included and must clearly stress that the parties do not intend to create a partnership in this agreement.

A second key area to deal with is a provision addressing confidential information. Parties to a strategic alliance will inevitably share proprietary and confidential information to realize the purpose and goals of the arrangement. Thus, the agreement must include a "Mutual Nondisclosure" provision that defines "Confidential Information" and expressly states the respective parties' rights and obligations in respect to this confidential information. Most likely, each party will want a promise from the other that they will not disclose confidential or proprietary information to third parties.

In addition, the agreement should address the contributions of each party. In other words: What will each party be bringing to the agreement? Capital contributions of cash, intellectual property (patents, trademarks, copyrights), technology transfers or licenses, distribution network, market access, personnel and other transfers of resources are key components of the alliance agreement.

The alliance agreement should also provide a mechanism for dealing internally with disputes between the parties. This provision may set-up a board, composed of members from both parties, responsible for hearing and resolving disputes. Due to concerns of both time pressure and wanting to maintain internal harmony, partners to an alliance will likely not want to send matters of internal dispute to an outside arbiter. Thus, the agreement should provide a mechanism for dealing with problems or disputes internally.

The sharing of risks and rewards is central to a strategic alliance. This issue is generally the most fiercely negotiated item in any alliance agreement. Profit sharing in proportion to each party's ownership interest in the alliance is often used. This does align the interests of all parties because each seeks to maximize profit. Losses can be shared in the same manner or limited to the extent of capital contribution. Great care must be taken in defining how net profits will be calculated.

In conclusion, when negotiating strategic alliance agreements, a "no partnership" provision must be prominently included, and the issues of confidentiality of information, party contributions, and allocation of risks and rewards generally require substantial negotiation. If the parties approach that negotiation creatively and work cooperatively to consider a variety of options, provisions can be negotiated that provide acceptable protection to all parties and support a common strategy.