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Joint Venture Strategy Session: Technological Transformation and Joint Ventures

December 8, 2016

Greenberg Traurig, LLP | gtlaw.com

Speakers

Alphonse Valbrune, Genpack Managing Senior Counsel As Managing Senior Counsel for Genpact, Mr. Valbrune leads an international group of attorneys responsible for the commercial transactions of Genpact’s Banking, Financial Services and Insurance, Capital Markets and IT, and Analytics groups, representing over $1 billion in revenue. He has represented Genpact in the formation of Markit Genpact KYC Services Limited (www.kyc.com), an innovative joint venture formed to offer “know-your-client” data services to the financial services industry. Mr. Valbrune previously served as the General Counsel & Corporate Secretary of Headstrong Corporation, a global IT services company acquired by Genpact in 2011 for $550 million. He holds an AB Degree from Harvard College and a Juris Doctor Degree from Columbia University School of Law.

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Speakers (cont.)

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Jonathan Beckham, Greenberg Traurig Shareholder Jonathan Beckham counsels clients on technology and commercial transactions, mergers and acquisitions, corporate finance transactions, joint ventures, and corporate reorganizations. He currently acts as lead counsel on numerous technology transactions, including cloud enterprise software license transactions, cloud infrastructure procurement matters (e.g. data center and colocation leases, dark fiber and capacity wavelength leases and purchases, equipment leases, consortium and private subsea cable system leases), IT outsourcing, business process management services and professional services agreements, and transition services and development agreements. Mr. Beckham previously worked as in-house counsel to Tata Communications International. He earned his undergraduate degree from the Wharton School of the University of Pennsylvania, JD from Stanford Law School and an LL.M in taxation from the Georgetown Law Center.


Speakers (cont.)

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Genae Richardson, Capital One Assistant General Counsel

Genae Richardson is an Assistant General Counsel in the Corporate Advisory, Securities and Transactions (CAST) group at Capital One. In her role, Ms. Richardson provides legal support and counsel on a broad range of corporate transactions, including mergers & acquisitions, complex procurement and outsourcing contracts, strategic financial projects and venture capital investments. Ms. Richardson previously worked as in-house counsel at Verizon Communications and in private practice at Skadden, Arps, Slate, Meagher & Flom LLP. She holds an AB Degree from Dartmouth College, a MBA from Boston University and a JD from the University of Texas School of Law.


What is a Joint Venture?

> Definition

– a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance – Wikipedia

– A commercial collaboration in which two or more unrelated parties pool, exchange or integrate some of their resources with a view to mutual gain, while at the same time remaining independent –ABA Model Joint Venture checklist

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What is a Joint Venture (cont.)?

> No precise definition at law (e.g. tax code, state law)

> Spectrum for joint ventures

From outsourcing relationship, joint activities (e.g. marketing) to formal partnership

Strategic alliances

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Why Focus on Financial Services?

> Scale of operations

> Current market conditions

– Fintech – technological transformation

– Regulatory environment

– Focus on operations, processes

> Regulatory impact on JVs

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Joint Ventures in Action

> Capital One Growth Ventures

– FinTech strategic partner, advisor, investor

– Investment approach. Portfolio:

Data & Infrastucture

Payments and commerce

Security and authentication

– Regulatory limits

> Genpact

– joint venture with Markit for standardization and centralization of Know Your Customer (KYC) data and documents

– Services opportunity

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Emergence of FinTech

> World Economic Forum Report, The Future of Financial Services, June 2015

– Addresses potential for technological disruption in financial services

– Emphasizes role of non-traditional firms

> Scope of recent blockchain technology activity:

– 2,500 DLT-related patent applications filed

– 80% of banks predicted to initiate DLT projects by 2017

– Over US $1.4 billion invested in DLT over past 3 years

– 90+ central banks worldwide discussing DLT

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Disruption in Payment Processing

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Other Joint Ventures

> JPMC – Ariba

– foray into order-to-pay services

> Other industries

– Telecommunications

convergence solution for GSM-CDMA cellular networks

– Automotive

– Airlines – over 30 years of international JVs

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Benefits of Joint Venture

> Permits focus on core business

> Flexible / expedited entry to market

> Access to new technologies

> Pre-investment / acquisition experience

> Cost / risk sharing

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Downsides of Joint Venturing

> Core vs. non-core function – potential for miss (e.g. unwanted sharing of opportunity)

> 3rd party risks

– Partnering risk – marriage

– Introduction to business, trade secrets

– Access to data, confidential information

– Change of control – new unwanted partner

> Difficult exit / uncertain termination rights

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Preparation for a Joint Venture

> Alternative prior relationships - Commercial agreement, equity investment

> Due Diligence

– Mutual process

– Parties to JV

DD scope based upon prior relationships, interest in JV

DD on ability to perform - financial, technical and operational capabilities

– Existing business – integration planning, compliance risks, liabilities

– Valuations – contributed or existing assets, services (associated liabilities)

– Assets / Intellectual Property – ownership, title, contractual restrictions

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Preparation for a Joint Venture (cont.)

> Term Sheet or Letter of Intent

– Key provisions

Mirrors definitive agreement –

• scope, contributions, allocations of cost / revenue, termination rights

Confidentiality

Binding provisions- good faith, confidentiality, exclusivity

– Reliance, Potential for litigation

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Joint Venture Structure

> Considerations

– Tax, limited liability, regulatory, benefits, IP ownership, exit strategies,etc.

> Forms:

– Jointly-owned corporation / LLC

– Partnership

– Contractual (non-equity)

Strategic alliances, outsourcing

Ensure no partnership

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Joint Venture Negotiations and Agreement Terms

> Form of agreement

> Key Terms (resembles Term Sheet)

Scope and Purpose

Economics

• Capital Contributions

• Allocations and Distributions

Management and control

Exit

• Termination rights

• Transferability

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Scope and Purpose of the Joint Venture

> Must be carefully defined

> Parameters of JV –

– purpose, business lines, markets, geography, duration

– Corporate opportunities

> Exclusivity, Non-compete provisions

– Must weigh value, consideration for restrictive covenants

> Responsibilities of parties

Services as contribution to JV

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Capital Contributions

> Form of consideration

– Cash, property, intellectual property, personnel, services

– Requires adequate description of initial and future contributions

> Drives valuation and tax considerations

> Subsequent contributions, 3rd party financing

– May involve condition precedent, milestones

> Related transactions

– Equity investments, incentive options, affiliate transactions

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Capital Contributions (cont)

> Future contributions

– Limits / caps

– Reimbursement of JV costs may be mandatory

– Mechanisms, procedures for capital calls

– Opt-outs – dilutive contributions

> Failed contributions, capital calls

– Consequences to be detailed (e.g. loan, dilution, default)

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Contributions and Development of IP

> Pre-existing / background IP rights

> License vs. contribution

> Joint development of IP

– Joint ownerships

– Patent rights – 35 USC 116, Ethicon (Fed Cir 1998)

– Commingling of sole assets with joint

> 3rd party IP rights

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Operation of the Joint Venture

> Joint venture decisions

Business plan, annual budget

Capital contributions, 3rd party financing / liens

M&A, asset dispositions

Affiliate transactions

3rd party transactions – licenses, investments, etc.

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Management and Governance

> Structure

– Direct decisions (managing members) vs board of managers / management committee

– Specify Major decisions vs operational / day-to-day

– Voting rights

Impacted by dilution, reduction in board seat if threshold ownership required

– Parties may specify specific title, roles and responsibilities to be filled

> Approval rights for minority partner(s)

> Deadlocked decisions

– Risks of 50/50 ventures, In re Bermor, Inc. (Del Ch 2015) 25


Dispute Resolution > Remedies for deadlock

– Buy-sell provision

– Dissolution / termination

– Arbitration / mediation

> Which decisions are subject to which remedy?

– Fundamental or Specific decisions, board decisions

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Exiting the Joint Venture

> Necessary to contemplate consequences of termination up front. Goal is retention of value.

> Common reasons for termination

– Change of control

– Default by a party, failure to contribute or bear responsibility

– Changed strategy or vision, changing market

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Exiting the Joint Venture (cont.)

> Avoid easy abandonment of JV

– Who can trigger termination and when?

– Avoid unnecessary deadlock – Fisk Ventures v Segal (Del Ch 2009)

– Limit applicable change of control circumstances, specify alternative remedies for default

> Remedies, actions upon termination

– Distribution of property, deallocation of IP rights

– Buy-sell

– Termination / dissolution 28


Exiting the Joint Venture (cont.)

> Additional key exit planning issues:

– Continuation of IP license rights for customers, partners

– Key personnel, knowledge transfers

– Transition services

– Customers requiring exit, termination assistance / payments

– Continuation of non-competition clauses

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Transferability

> Permitted transfers without consent

– Affiliate transfers

> May facilitate liquidity

> Change of control context

> Buy-sell rights - ROFO, ROFR, tag-along, drag along

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Questions?

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