Joint ventures and partnership as coopetition

Joint ventures and partnership as coopetition

Author: Henry Clarke

In the recent article “The strategic utility of joint ventures and partnerships in difficult and uncertain times”, I advocated the merits of joint ventures and partnerships as relatively resource-light means to achieve growth and retain market share. This article considers the assessment of such opportunities with competitors in “co-opetition” or “coopetition”.

Coopetition saves costs and removes the duplication of effort. It shares risk. It pools skills for mutual benefit. Coopetition is worth considering and the competition law impact can be assessed for the viability of coopetition (if the parties have such market share significance as to make competition law a worry). Coopetition opportunities missed may be business growth and profit foregone. Your alternative options may be poorer ones. Your counterparty may still find a competitor for coopetition.

Considering all the options for you and the options you think that your competitor has is important in deciding if you enter a coopetition project. Coopetition opportunities should involve your senior managers in thorough discussion. Is there inequality of bargaining power between the parties to make the opportunity a non-starter? Despite the inequality of bargaining power, can you shape the project in a way to ensure a win-win for you and the counterparty?

There may be many dimensions to relations between parties in coopetition. A manufacturer might consider supplying component parts to a competitor, but it may also consider the impact of this on the sales of its final product range. The buyer of parts may also consider the impact of its reliance on a competitor for parts. If the parts provider has a really good component and the product assembler has a strong brand with loyal customers, this combination may work.

It may be that together the parties can create a new product. Alternatively, and more commonly, competitors cooperate to define standards and interoperability. This expands the product market for each manufacturer if its gadgets are compatible with other gadgets within an operating system.
Each party may have valuable proprietary technology to preserve. On other occasions the combined effect of each parties’ proprietary technology or skills may be market changing. The latter situation enables the parties to refine the market and leap ahead of the competition.

Coopetition may work where there is inequality of bargaining power. For the larger party it builds reliance of the smaller party on it. For the smaller party it gains the benefit of access to the ecosystem and channels to market of the bigger party. Where the bigger party has a risk of being dominant in a market, careful consideration of competition law will be needed for such a venture.

Coopetition is risky where the counterparty wishes you to share your proprietary technology or skills. Their larger size might lead them to demand this. It may be a legal or an expected requirement of foreign direct investment. In this situation it may be prudent to forego the opportunity despite the size of the market offered to you

If you proceed with coopetition, the documentation for the joint venture or partnership is important. It is the skeleton upon which the flesh and blood of the project will grow. Having previously kept your legal advisers informed of the project idea as it develops in order to receive their general guidance, when initial commercial terms are reached the legal advisers can review the idea for competition issues to highlight any such issues in good time to ensure the joint venture or partnership is designed to address those points.

The legal advisers will be most visible in the drafting of the legal documentation for the joint venture or partnership. Control of the joint venture is a key consideration that legal advisers will analyze as well as how the project may be unwound or exited by the parties should it not go so well. If a party has majority control as a shareholder, the other party may wish to have performance guarantees and penalties written into the joint venture documentation for its reassurance. This will incentivize the majority owner to progress the project to the satisfaction of the junior partners, albeit with the project being conducted in a manner the majority partner is comfortable with. The legal advisers are likely to carefully consider the inclusion in the documentation of the costs liability basis to avoid future disputes and ensure the parties understand the nature of the coopetition.

The parties need the right mindset for coopetition: ensure it is not a breach of competition law, it is a win-win for the partners and the consumers benefit. The redefinition of market boundaries with Brexit brings a change in the flows of the navigational channels of international trade for British business. Change in these flows may be exacerbated by changes in statutory and regulatory standards. This is an era of challenge and also opportunity for British business. In meeting these challenges and opportunities, businesses should consider the possibilities of joint ventures and partnerships – even as coopetition. My colleagues and I at Acuity Law have experience of joint ventures and partnerships and would be delighted to assists your business on such a journey.

Contact Henry Clarke to discuss your business ideas for a joint venture.

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