Strategic Business Alliances FAQS

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  • What is a strategic alliance ?

  • Are there legal reasons for forming a strategic alliance?

  • What are some of the drawbacks of a strategic alliance?

  • What are some examples of a strategic alliance?

  • What are some of the practical considerations that need to be considered on a strategic alliance?

  • What kind of legal planning should go into a strategic alliance?

  • Why should I be concerned about how a strategic alliance is structured ?

  • Is there any particular approval process required to form a strategic alliance?

  • What legal approvals are of concern in a strategic alliance?

  • Are there any concerns about a strategic alliance being illegal ?

    Q: What is a strategic alliance?

    A: A strategic alliance can be defined generally as an arrangement between two or more companies to pursue a common business objective. A strategic alliance is perhaps most commonly described as a partnership or a joint venture (which is really nothing more than a partnership for a specific purpose). But the term could cover a broad spectrum of business relationships that may include anything from simple cost-sharing arrangements to a fully﷓integrated merger of two companies.

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    Q: Are there legal reasons for forming a strategic alliance?

    A: The reasons for forming a strategic alliance are as varied as the imagination. From a legal standpoint, though, the principal reason to form a strategic alliance is to try to create an organization that is better able to compete in the market place. Sometimes, a strategic alliance can represent an effort to roll up a number of separate business entities into a single legal entity that has integrated management, economies of scale and other characteristics that translate into more economic clout.

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    Q: What are some of the drawbacks of a strategic alliance?

    A: As with any business venture, any strategic alliance is risky. It may even be fair to say that most of them fail. But many alliances have been hugely successful, and the adage holds true that "nothing ventured, nothing gained." Before undertaking any strategic alliance, there should be sound planning and legal advice involved in the process.

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    Q: What are some examples of a strategic alliance?

    A: Marketing Contracts . This type of alliance exists where businesses remain independent but agree to market their products together. Typically, there would be no pooling of capital or a sharing of risk. A marketing network, for example, is something that might be characterized as a strategic alliance. There can also be huge tax benefits to combining and integrating two or more business entities.

    Partnership or Joint Venture. Going a step further, a strategic alliance to form a new product or service may be in the form of a partnership. A partnership for a specific purpose would be called a "joint venture."

    Asset Purchases. A business can purchase the desired assets of another business. If this is done as an "asset purchase," the purchaser is not actually buying the business entity, and any liability problems remain with the seller. In many respects, an asset purchase is much like going to the seller's store and buying all the merchandise without actually buying the store itself.

    Stock Purchases. A stock purchase requires nothing more than all of the shareholders endorsing and handing their stock certificates over to the buyer at the same time the buyer gives them a check for the purchase price. In contrast to an asset purchase, the buyer is actually taking over the store and not just purchasing the merchandise. In essence, the buyer steps into the shoes of the selling shareholders.

    Mergers. The ultimate alliance would be a merger, which is much like a marriage of two businesses where they blend together to become one entity. In the usual case, there is a "surviving" corporation that will issue new stock to shareholders of a "disappearing" corporation in exchange for their stock in the disappearing corporation. Much like an asset purchase, the surviving corporation will then take title to all of the assets of the disappearing corporation, and the disappearing corporation will cease to exist.

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    Q: What are some of the practical considerations that need to be considered with a strategic alliance?

    A: There are numerous factors to consider before entering into a strategic alliance, including:
    • Costs of operating
    • Ownership and control
    • Profits and losses
    • Labor and employment laws
    • Potential liability exposure
    • Insurance coverage
    • Tax consequences
    • Regulatory hurdles
    • Administrative issues
    • Marketing angles

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    Q: What kind of legal planning should go into a strategic alliance?

    A: The level of planning for a strategic alliance is necessarily going to depend on the nature of the alliance being contemplated. You'll want to develop a clear understanding of what you're trying to do and then reduce it to writing in the form of a proposal. You shouldn't sign anything until the plan has evolved to the point that you have a fairly detailed outline. The outline should at least cover the following points:
    • Parties
    • Purpose
    • Economic terms
    • Nature of relationship
    • Term and termination of the relationship
    • Insurance and indemnification
    • Contact information
    • Individuals responsible for managing the alliance relationship

    It's easy to put together a proposal, but the nuts and bolts of a deal get complicated. So it's always a good idea to seek the advice of professionals such as your lawyer and accountant before finalizing a strategic alliance.

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    Q: Why should I be concerned about how a strategic alliance is structured?

    A: One particular concern arises when parties unwittingly call themselves partners when this is not what they really mean. Being in a partnership is like being married, with attendant duties that go beyond a mere contractual relationship. Partners, for example, owe a fiduciary duty to each other, such that you may be required to do such things as disclose financial information or make business opportunities available to the alliance that were never contemplated as being part of the deal.

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    Q: Is there any particular approval process required to form a strategic alliance?

    A: If you're operating as a sole proprietorship, the approval process on your end is a simple one. With respect to any business entity, though, the parties must be careful to make sure that appropriate authorizations and approvals are obtained before finalizing the alliance. If a corporation is involved, for example, a contract to form an alliance must be executed by a duly authorized officer of the company. This authorization is usually secured by resolution of the board of directors. If the alliance rises to the level of a joint venture, acquisition or even a merger, it will probably be necessary to get the approval of the shareholders.

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    Q: What legal approvals are of concern in a strategic alliance?

    A: It may also be necessary to secure approval from one or more governmental agencies. If a new business is being formed, for example, you may need a business license. If a new entity is being formed, it may also be necessary to secure approvals from shareholders. If a conglomerate is being formed based on a merger, approval might even be necessary from federal agencies like the Securities Exchange Commission, the Federal Trade Commission, or the U.S. Department of Justice.

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    Q: Are there any concerns about a strategic alliance being illegal?

    A: Absolutely. One particular concern would be the antitrust laws. In very broad terms, these laws prohibit agreements among competitors to unreasonably restrain trade. In certain instances such as price fixing and boycotting, a strategic alliance agreement among competitors could be deemed to be "per se" illegal.

    If an alliance results in a monopoly or an attempt to monopolize competition, it could also be held to be illegal. The antitrust laws provide for severe penalties that may include tripling the amount of damages. In extreme situations, criminal prosecution is also possible.There are other potential legal pitfalls as well.

    It's absolutely essential to secure legal advice before entering into a strategic alliance, particularly if you're thinking about forming one with a competing company. With sound legal advice, you can oftentimes structure an alliance even among competitors with a minimum risk of it being illegal. Without such advice, though, participants of a strategic alliance can literally walk into a legal minefield without knowing it.

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