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“It must be remembered that there is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than the creation of a new system. For the initiator has the enmity of all who would profit by the preservation of the old institutions and merely lukewarm defenders in those who would gain by the new ones.” [FOOTNOTE 1] In 1958, Jack Kilby, an engineer from South Bend, Kan., invented the semiconductor chip and thus were planted the seeds of a multibillion dollar web of industries and endeavors that now spans the globe. Just as the industrial revolution dramatically changed the way we work, communicate, travel, educate our children and spend our leisure time, the emergence of information processing technology and networked communications as a pervasive and ubiquitous fact of life is having at least an equal, if not greater effect. One which, in hindsight, may be viewed as even more revolutionary. As commercial use of the Internet and World Wide Web evolved into multibillion dollar global businesses, corporate securities lawyers migrated to a more investment- and venture capital-oriented style, if not substance, of legal practice. Creative mergers, acquisitions, spin-offs and initial public offerings become an increasing staple of an increasing number of lawyers. “Seed money,” “angel investing,” “mezzanine financing” and “second” or “late stage investing” populated the front pages of newspapers and magazines, as “growth investing” replaced the more traditional “value investing” as a direct consequence of “dot-com” investing. But as the new millennium arrived, the “sizzle” has given way to the more traditional “steak” of the investment and corporate securities community. The bandwagon had stopped and the band no longer played on. STRATEGIC ALLIANCE CONCEPT Into this world comes the potential for investments and “M&A” work focused around the concept of a strategic alliance. The term “alliance” really represents a continuum of relationships, but for convenience let’s assume an “alliance” means the result of two or more entities joining resources, assets or activities to pursue common opportunities. Similarly, let’s agree that a “strategic” alliance is one in which at least one party believes the alliance is fundamental to the fulfillment of its strategic objectives. In reality, the meaning of “strategic” is as diverse and variable as the senior executives who define them. A strategic alliance is evolutionary — no static definition sufficient, no dynamic meaning capturing its essence at any point in time. The longer each party is committed to the relationship, the broader the scope of obligations, the more significant the joint business activities, the greater the amount of resources involved, the more expensive the investment and the greater the potential for revenue, the more likely the parties will regard the relationship as strategic. Alliances, strategic or otherwise, range from knowledge exchanges and training to sales lead sharing and cross referrals; from research and joint development to cross-licensing and technology transfer; from product development to product marketing; from minority ownership or investments to joint ventures and acquisitions. Alliances may also include government and academic institutions as well. The creature known as the Internet began as a government-sponsored project in self-preservation, evolved to include defense-related commercial enterprises and academic research institutions and only recently (mid-1990s) did “.com” outnumber “.mil”, “.gov” and “.edu.” It is also noteworthy that strategic alliances have disregarded borders for quite some time. For example, in 1991 Fujitsu acquired an 80 percent stake in ICL. Indeed, its own 60 percent interest in Spain’s Secoinsa was formed in 1935 as a spin-off of Fuji Electric, a joint venture between the Furekawa cartel and the German electrical giant Siemans. But while the character of strategic relationships has always been international, today they are global — primarily because customers are now empowered with a global informational resource and consumers have needs and preferences that are not based on borders. At the point of sale the consumer does not care who owns or builds the factories or whose money is behind the marketing program or even whose equity funds the operations. In fact, the “nationality” of products or services is often not only irrelevant, but also indeterminate. Consider that when goods, services, money, people, business and information cross national boundaries relatively freely, the concept of national competitiveness becomes meaningless and “balance of trade” statistics become excuses for intervention in currency markets or protectionism. French people do not really compete with Brazilians or Koreans. Fujitsu competes with Siemans, Pfizer competes with Merck, and Citibank competes with J.P. Morgan Chase. For global companies that have become “insiders” in local markets they serve, trade is no longer a macroeconomic phenomenon — many European and American companies have gotten so good at matching revenues and costs in major currencies and hedging exposure through currency trade, that local tax and accounting rules may be virtually irrelevant to their operations. Access to information about goods and services through increased technology has empowered consumers with choice and created marketplace demand. This has not created more choices, but it has allowed greater numbers of people to have freer access to those choices. In this information age, knowledge is truly power. Products and services previously unknown to consumers in protected markets are being seen and demanded. The individual consumer likes what she or he likes, not some mathematical average of global tastes and preferences, and greater access to competitive markets has substantially increased the potential value of alliances that are global in scope. In his book, “The Borderless World,” Kenichi Ohmae, managing director of McKinsey & Company in Japan, notes that “Before everything else is the need to clearly see your customers. The pressure for globalization has not so much been driven by diversification or competition, as by the needs and preferences of customers.” In a truly interlinked, global economy, the key success factors shift from resources to the marketplace in which companies must participate to prosper. As markets liberalize, wage rates go up, the consuming habit caves in and the economy rapidly shifts to the service sector. Remember, to a consumer the act of production adds little value. In our global village, tied together with computer networks that make time and distance irrelevant, companies cannot remain mere traders of assets, they must be long-term builders of value and quality. The right company strategy is to create sustaining and superior value for customers, and to do so may well depend on the ability to leverage skills developed elsewhere, the ability to exploit synergies and economies of scale with other parts of business operations, and the ability to develop strategic and complementary alliances with others. HOW TO SUCCEED There are a variety of reasons companies seek to form alliances: access to capital, expense and risk sharing, product or service fit, distribution, production or marketing capability, among others. While all the potential permutations could hardly be described here or even predicted, some common themes can be gleaned from the successes and failures of the past. In structuring alliances, especially strategic alliances, there are significant legal issues and considerations that must be taken into account before, during and after the consummation of an agreement. Every experience-based study of strategic alliances arrives at one indisputable conclusion: most don’t work! Sooner or later partners wind up disillusioned with the performance of the alliance or the activities appear so unproductive and unsatisfying that the alliance is dissolved, intentionally or through neglect. So how can lawyers improve the odds of success? A good start is counseling anyone embarking on a strategic alliance that there will be only a small chance of success and that to increase those chances, everyone — including the lawyers — must adopt attitudes and behaviors designed to succeed. In short, alliances require very hard work and without a strong commitment to work very, very, very hard, the alliance will fail. Structuring the alliance properly is also critical, but is only one step along a difficult path. Evaluate and select partners wisely. Few strategic alliances succeed because of control or contracts. Most make it because of trust, communication, motivation, creativity, customer relationships, persistence and sheer attention by dedicated, senior people. Strategic alliances only succeed when people from each organization listen and learn and compromise. Regardless of what we lawyers may think, negotiations and contracts surface concerns, crystallize issues and define the rights and obligations of each party, but documents don’t create good relationships. However, a well-crafted and well-drafted contract can serve as an invaluable benchmark for those who were not at the table when the letter and spirit of the alliance were first forged. Alliances require teams. Because no single discipline possesses sufficient knowledge or skill to structure, negotiate, implement and manage an alliance, entities that are committed to a strong and effective alliance have no choice but to build cross-functional teams to form, establish and operate the alliance. It is absolutely critical to involve key players from marketing, human resources, accounting, audit, tax and finance, technology and operations, as well as legal. Creating effective teams early in the life cycle of an alliance not only invests people with ownership of the alliance but also allows each discipline to be proactive and creative. Far too often, failures to spot key issues or missed expectations that were left on the table at the inception of the alliance are ones that ultimately lead to its demise. As the process of forming the alliance moves forward, more specific legal and contractual issues must be addressed. For example, what will the legal structure of the alliance be? Will it be a separate corporation or partnership or a purely contractual arrangement? Will ownership, now or in the future, consist of debt? Equity? Both? The parties will also need to determine the nature and extent of their commitment and the resources that will be required. How will the alliance initially be capitalized? What provisions need be made for future capital contributions? Must they be cash or can they be goods, intellectual property or services? In addition, management and control of the alliance must be agreed upon, both in terms of contributions of personnel and in terms of rights to govern the activities and operations of the alliance. Teams and committees generally produce outstanding long-term results, but day-to-day operations and decision-making cannot be effectively performed by committees. Coupled with the management and financial structuring considerations are issues related to liability and allocation of risk. While it goes without saying that a party that feels it has a greater risk, also seeks a greater reward if the outcome is successful, these parameters are extremely difficult to articulate, quantify and accurately describe at the commencement of a complex strategic relationship which is inherently unpredictable and is, by definition, outside the control of any one individual party. FURTHER ISSUES TO CONSIDER There are, of course, regulatory issues to consider. The Federal Trade Commission and the Antitrust Division of the Department of Justice share responsibility for reviewing business combinations for potential antitrust problems. As with any combination of resources, assets and business operations, alliances, whether strategic, tactical, operational or otherwise, will fall within the scope of antitrust scrutiny in any jurisdiction in which the parties or the alliance operate. The parties must carefully define how performance and success will be measured. How will the parties recognize when the objectives for which the alliance was created have been achieved? Most alliances are created based on heady plans for synergy and dramatic results. In reality, the first months (and often years) are a tremendous drain on resources and energy with numerous distractions, as the parties struggle to make the alliance fully operative. Accept this and significantly discount at least the first year’s planned performance. Some alliance proponents recommend that only the highest performers join and be rewarded accordingly. They believe that new ventures among diverse partners are too high risk and too demanding to start out with anything less than the strongest team available. If the alliance is international, there is yet more complexity in structuring the relationship and there are unique legal issues involved. Transborder data flow and privacy; the protection of intellectual property; government approvals to cross a border or operate a business; all are different in many jurisdictions. There are currency restrictions and exchange rates to consider, and the treatment of income and complex tax questions must be resolved. On the positive side, international ventures can often take advantage of unique entity legal structures not available in the United States (e.g., Gesellschaft mit beschrankter Haftung (GmbH) and Societe Anonyme (S.A.) have attributes of both corporate and partnership forms). Certain technology is subject to export controls; there are often regulations concerning investments and acquisitions by foreign persons; intellectual property protections may vary; and employment and labor laws differ. Lawyers crafting alliance agreements must also be concerned as to how, where, in what language, and under whose law disputes will be resolved. International alliances should have the benefit of local counsel to ensure the agreement and the relationship is actually permissible and enforceable. Clients must also be sensitive to the cultural and social variables of business relationships. Lack of understanding or respect for local practices and customs can doom a relationship and efforts to effectively market to customers. One of the most visible symbols of courtesy in any relationship — one which is deeply appreciated — is simply taking the time to learn the culture and practices of another. Participants in international business must learn the styles and attitudes of others in developing business relationships. How do I greet you — a handshake or a bow? Are titles or punctuality critical? Can I bring you a gift or buy you a drink? We learn quickly that it is rude to be late in Japan, that you don’t package things in fours in China, that you don’t shake your head from side to side in Bulgaria to say “no,” and you don’t make the traditional U.S. “OK” gesture in Brazil. WHY ALLIANCES FAIL Strategic alliances fail for two major reasons. What seemed like a really good idea, wasn’t; or, it was a good idea, but it wasn’t executed properly. First, don’t let clients be seduced by potential. Get the facts about such things as market potential, the partner’s real capability, and the competitive, legal and regulatory environment. Be honest and objective about your own clients’ capabilities and culture. Advance planning and thoughtful consideration, coupled with due diligence and some hard work up front, is one of the best methods for preventing problems which result from picking the wrong product or service, the wrong market or simply picking the wrong partner. Failures in execution occur for similarly preventable reasons: faulty processes; lack of attention; too many changes in policy, direction and tactics; too much dependence on key people who leave; and sometimes, cultural differences that are just too strong. Conceptual and executional failures can be anticipated and overcome. Careful planning, honest and open negotiations and compromises and well-drafted agreements describing the relationship and respective responsibilities of the parties can anticipate, if not prevent, most problems. CONSIDER THESE RULES Last, but not least, consider the following. The agreement describing a strategic alliance is not a road map to the consequences of dispute and litigation, even though these issues cannot be ignored. The agreement should stem from a presumption that strategic relationships are built on quality, integrity, trust and teamwork, operated to continuously build value for everyone involved. More importantly, the agreement should be a statement of principles defining expectations. Consider the following rules of engagement for strategic relationships: 1. Be open and honest in needs and expectations. Listen to each other. 2. Never feel obligated to do all things, at all times, with only each other. Paths diverge — it doesn’t mean the alliance should. 3. Strive for the highest quality, most cost-effective products and services, always trying to meet or exceed the expectations of the other. 4. Disagreements and misunderstandings will occur. Promise to resolve them amicably and cooperatively, seeking solutions and prevention of future problems, not blame. 5. Promise not to violate each other’s rights or the rights of anyone else. 6. Respect and honor the trust placed in you and when given access to proprietary or confidential information of the other, act that way. 7. Try not to cause each other damage, but if damages occur, make it right. 8. Measure the strength and success of the relationship by asking employees, customers, shareholders and investors what they think. Then listen to them. 9. When sharing a common goal, share both risks and rewards fairly. 10. Teamwork and trust are key differentiators of the relationship. They allow the alliance to achieve together, what could not be achieved as effectively or successfully alone. Imagine these principles set forth as the basis of a strategic alliance. How many senior executives would be willing to do business on this basis? How many lawyers would approve their clients signing such a document and using it as the basis for a commercial relationship? Perhaps that is why so many strategic relationships fail. Joseph I. Rosenbaum, the senior corporate and securities partner in the New York office of Reed Smith LLP, also heads the New York-based e-commerce group. He chairs the Information Technology & Global Networks Committee of the American Bar Association’s Section of Science and Technology and is an Adjunct Professor of Law at New York Law School, where he teaches The Law of Electronic Commerce and Information Technology. ::::FOOTNOTES:::: FN1“The Prince”, Machiavelli, 1513.

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