Successful Strategic Alliances: Avoiding legal and accounting pitfalls

Alliances can be great for business, but putting safeguards in place to ensure intellectual property, valuable human resources and other proprietary considerations are secured in the event the relationship goes sour is of paramount importance.


Establishing a strong foundation for your strategic alliance means choosing the right alliance partnerimplementing an appropriate structure, defining appropriate measures of success and identifying potential points of failure. However, in the midst of the enthusiasm and optimism that comes with rolling out of an alliance, important legal and accounting issues are often overlooked. In this installment of the Successful Strategic Alliances series, we identify the most common of these issues and how to address them before they threaten your alliance.

Defining unique sharing agreements. Alliances are built on the premise of sharing resources such as data, intellectual property, competitive intelligence, and access to employees and customers. Sharing such resources creates a unique set of legal and business requirements that need to be included in an alliance agreement. Begin by taking an inventory of the resources that you plan to share so that they may be included. According to Violet French, a lawyer from Toronto-based law firm Torkin Manes, who helps clients optimize alliances, “all alliance participants should clearly define what they are comfortable sharing with one another prior to rolling out the alliance. Doing so helps to solidify for participants the value each member contributes to the business relationship and reduces the potential of mismatched expectations”.

Partnering with competitors. Defining the rules around sharing in an alliance agreement is particularly important when forming an alliance with a competitor. For example, competitive partners in the airline industry establish rules around sharing routes, and competitive partners in the auto manufacturing industry develop detailed rules about sharing vehicle components. In fact, hyper-competitive partners often develop a “co-opetition” framework that recognizes two partners may effectively leverage an alliance for some product offerings or targeting some market segments while remaining fierce competitors in others. Ms. French says that “by articulating the parameters around what resources can be shared, how they can be shared, and assigning responsibility for managing these resources, companies dramatically reduce their exposure if, or when, the alliance runs its course”.

While partnering with competitors can prove to be a worthwhile strategy for quickly penetrating new markets, it can also be risky. To minimize that risk, you should clearly understand your potential partner’s short- and long-term strategies. A critical consideration is whether they are using your reputation, intellectual property and distribution channels in ways that could eventually erode your business. To understand potential partner’s motivations, review their history of establishing alliances as well as the processes, policies and legal documentation that they developed to establish and support previous partnerships. Another way to glean how they see the alliance evolving is to conduct “worst case scenario” planning during early stage discussions or due diligence.

Finally, when you strike up an alliance with a competitor you need t0 follow the rules set out in the Competition Act. Ms. French notes: “Provisions in this Act have to be considered even when alliances are established between potential competitors”.

Protecting intellectual property. It is important to ensure that any alliance agreement safeguards the intellectual property of each participant. Doing so helps to reduce the risk of unnecessarily exposing what makes your company special. Simon Brightman, co-founder of The Product Accelerators, says, “this is particularly important when alliances are established to build a product. Since creating new products is often a fast, dynamic, and iterative process, participants can easily lose track of the innovations that transform an idea into a truly unique product”. That can have considerable implications on the ownership of licenses and future royalties.

Protecting employee expertise and client information. Resources commonly shared during an alliance include human resources and customer data. As a result, there can be concerns that employees may work for the current or former alliance partner. To safeguard against this risk, include in an alliance agreement an employee non-solicitation clause where partners agree not to offer employment to the other partner’s employees during the term of the agreement or for a defined period after the conclusion of the alliance. A similar non-solicitation clause can be added so that partners cannot solicit each other’s clients.

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Protecting confidential information. To protect confidential information, you can limit its access to those who require it to carry out the obligations defined in the alliance agreement. Another safeguard is to agree upon and monitor specific standards for sharing, managing and guarding confidential information.

Managing expenses and revenues. Establishing, maintaining and measuring effective alliances has associated costs. Robert Gold, managing partner at Bennett Gold Chartered Accountants, says: “Alliance partners should jointly agree upon rules and responsibilities for managing these new expenses. Furthermore, these should be clearly spelled out in an alliance agreement and allow for the degree of transparency required for applicable financial reporting or audits”. The same precaution applies to revenues generated and assets purchased.

Defining post-alliance obligations. Whether an alliance is established for a specific, one- time event or it is intended to span several years, participants need to identify the conditions that would cause the partnership to end — either on friendly terms or not (e.g. because of non-performance). The more involved the alliance, the more important it is to consider post-alliance obligations to minimize any potential business disruption or damage to complex relationships (with customers, suppliers, manufacturers and/or distributors).

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