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2011 aia presentation the good bad and the ugly of strategic relationships (2)

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2011 aia presentation the good bad and the ugly of strategic relationships (2)

  1. 1. Forming Strategic Alliances – The Good, the Bad, and the Ugly   Austin AIA Annual Summer Conference Presented by Brenda Barrett Healey August 25, 2011 DALLAS · FT. WORTH · HOUSTON · AUSTIN · SAN ANTONIO
  2. 2. What is a strategic alliance? <ul><li>A formal relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations </li></ul>
  3. 3. The Good
  4. 4. Why look for strategic partners? <ul><li>Cost sharing </li></ul><ul><li>Risk Sharing </li></ul><ul><li>Collaboration on ideas </li></ul>
  5. 5. <ul><li>Enhance Strengths </li></ul><ul><li>Compensate for Weaknesses </li></ul><ul><li>Economies of Scale </li></ul><ul><li>The whole is better than the sum of its parts </li></ul>
  6. 6. Forms of Strategic Alliances <ul><li>Contractual Relationships </li></ul><ul><li>Joint Ventures/Partnerships </li></ul><ul><li>Creating a new entity </li></ul><ul><ul><li>Limited liability company/professional limited liability company </li></ul></ul><ul><ul><li>Professional Corporation </li></ul></ul><ul><ul><li>Limited Liability Partnership </li></ul></ul><ul><ul><li>Limited Partnership </li></ul></ul><ul><ul><li>Corporation </li></ul></ul>
  7. 7. Contractual Relationship Joint Venture/Partnership Formation of an Entity/Business Description <ul><li>Examples of Types of relationships: </li></ul><ul><li>Office sharing agreement/Sublease </li></ul><ul><li>Agreement to provide services (independent contractor) </li></ul><ul><li>Subcontract for services </li></ul>A general partnership may be formed without any governmental filing by oral or written agreement. Partners are taxed instead of partnership. Partners of general partnerships share liability for debt obligations <ul><li>Select appropriate form of entity to use: </li></ul><ul><li>Corporation </li></ul><ul><li>Limited Liability Company </li></ul><ul><li>Limited Partnership </li></ul><ul><li>Limited Liability Partnership </li></ul><ul><li>Professional Corporation </li></ul><ul><li>Professional Association </li></ul><ul><li>Professional Limited Liability Company </li></ul>Start Up Costs Legal Fees to draft agreement that outlines the relationship (service agreement? Independent contractor agreement?) Fees to draft Joint Venture/Partnership Agreement Typically greater than to draft service contract for contractual relationship because of multiple issues that need to be addressed in Joint Venture/Partnership Agreement Advise on appropriate form of entity to use (includes tax planning) Fees to draft organizational documents (see “Organizational Documents” below for list) Fees to draft any other initial documents not related to the formation (service contracts; employment agreements; etc.)
  8. 8. Contractual Relationship Joint Venture/Partnership Formation of an Entity/Business Initial Capital Minimal to zero; Each side pays their share of start up expenses independently Depends on terms of agreement Enough to pay for initial start up expenses and to pay for expenses anticipated until entity is generating enough revenue to pay for expenses out of revenue Should fund with enough initial capital so that owners do not have make additional capital contributions or loans to the business Individual Liability Only liability is what is agreed to in the contract or under law No liability for liabilities of counter party’s business If construed to be a partnership, each partner has full liability for the liabilities of the partnership Assuming corporate formalities are maintained, generally not liable for debts and obligations of entity Participation in Management No participation in management of counter party’s business General partners have the exclusive right to manage the business of venture Provided by statute and governing documents of entity Transferability of Interest Interest in contract may be assigned unless prohibited by contract Generally, a partner may assign right to distributions, but the assignee can only become a partner if other partners consent Securities law restrictions on transfer and restrictions may also be imposed in the operating agreement
  9. 9. Contractual Relationship Joint Venture/Partnership Formation of an Entity/Business Organizational Documents Contract Joint Venture/Partnership Agreement Certificate of Formation Bylaws , Company Agreement or Limited Partnership Agreement (or appropriate variation) Organizational meeting minutes or consent SS-4 If corporation, may have S Election form If corporation – Stock certificates If Corporation – Shareholder Agreement Accounting No need to establish separate books for the relationship; but each party has to appropriately account for the costs paid and revenue received from the relationship Partnership should keep separate books and records Must keep separate books and records Fiduciary Duties None Fiduciary duties to partners Governing body owes fiduciary duties to owners
  10. 10. Contractual Relationship Joint Venture/Partnership Formation of an Entity/Business Ownership of Work Created during relationship As specified in the contract Partnership generally Entity owns Termination of Relationship Defined term Must set a defined term when the relationship ends; can always be extended if things go well Can have a defined term but not required Is possible to have a defined term but typically do not Removal or Withdrawal of a counterparty Would likely be breach of contract and subject to damages Removal or withdrawal of a partner Removal or withdrawal of an owner Matters to attend to at termination Contract dictates what happens on termination and when termination occurs. Typically no assets of the venture so nothing to transfer Agreement and law provide procedure and requirements for dissolution and distribution of assets. May require final tax return Sell (or transfer in exchange for some value) all remaining assets and distribute to all owners in accordance with formation documents File appropriate legal paperwork to dissolve File final tax returns upon dissolution
  11. 11. The Bad and the Ugly
  12. 12. Improperly formed alliances an create unwanted exposure <ul><li>Unexpected liability to third parties </li></ul><ul><li>Obligations to your “partner” </li></ul><ul><li>Ownership of property </li></ul><ul><li>Regulatory violations </li></ul>
  13. 13. How? Joint Venture as a Partnership <ul><li>A joint venture that satisfies definition of a “partnership” is a Partnership </li></ul><ul><li>Texas Business Organizations Code definitions: </li></ul><ul><ul><li>Partnership : “An association of two or more persons to carry on a business for profit as owners creates a partnership, regardless of whether: </li></ul></ul><ul><ul><ul><li>The persons intended to create a partnership; or </li></ul></ul></ul><ul><ul><ul><li>The association is called a ‘partnership’, ‘joint venture’, or other name.” </li></ul></ul></ul>
  14. 14. <ul><ul><li>Factors used in determining if “partnership” exists (Tex. Bus. Org. Code §152.052) </li></ul></ul><ul><ul><ul><li>Receipt of right to share in profits </li></ul></ul></ul><ul><ul><ul><li>Expression of intent to create </li></ul></ul></ul><ul><ul><ul><li>Participation or right to participate in control </li></ul></ul></ul><ul><ul><ul><li>Agreement to share or sharing of losses or liability </li></ul></ul></ul><ul><ul><ul><li>Agreement to contribute money or property </li></ul></ul></ul><ul><ul><li>Safe harbors which do not create a partnership </li></ul></ul>
  15. 15. Do you have a Partnership? <ul><li>Ingram v. Deere (Tex. 2009) </li></ul><ul><ul><li>Psychologist and Psychiatrist disagree if partnership formed to run pain clinic </li></ul></ul><ul><ul><li>Psychiatrist claims had oral agreement for partnership and to split profits </li></ul></ul><ul><ul><li>Trial court initially determined was a partnership and awarded share of profits before and after trial totaling over $5,000,000 </li></ul></ul><ul><ul><li>Reversed – No partnership </li></ul></ul>
  16. 16. <ul><li>Analysis: </li></ul><ul><ul><li>Courts must consider all five factors but no single factor is either necessary or sufficient as proof </li></ul></ul><ul><ul><ul><li>Agreement to share profits not required. Profits as compensation does not create a partnership. </li></ul></ul></ul><ul><ul><ul><li>Absence to share in losses not dispositive, but factor. </li></ul></ul></ul><ul><ul><li>“ Totality of circumstances” </li></ul></ul><ul><ul><li>Direct proof of parties intent to form not required but language and how described relationship to others is important </li></ul></ul><ul><ul><li>Control </li></ul></ul>
  17. 17. <ul><li>Swanson v. Schlumberger Tech. Corp. (Tex. App. Texarkana 1997) </li></ul><ul><ul><li>Swanson and Schlumberger (successor to original party, Sedco, Inc.) in sea diamond mining business together </li></ul></ul><ul><ul><li>Schlumberger exits sea-diamond mining business and buys out Swanson in order to sell full interest to DeBeers and British Petroleum </li></ul></ul><ul><ul><li>Swanson sues for breach of fiduciary duty among other claims, and wins $14 million in damages, and $35 million in exemplary damages </li></ul></ul>
  18. 18. <ul><ul><li>General evidence of community of interest </li></ul></ul><ul><ul><ul><li>Held selves out as partners; letter agreements; original lease awarded to predecessor and Swanson as partnership </li></ul></ul></ul><ul><ul><li>Evidence of agreement to share profits </li></ul></ul><ul><ul><li>Evidence both agreed to be responsible for some expenses which constituted some agreement to share losses </li></ul></ul><ul><ul><li>Evidence to demonstrate mutual control of project </li></ul></ul>
  19. 19. Types of Exposure
  20. 20. Liability to Third Parties <ul><li>Each partner is agent of the partnership (Tex. Bus Org. Code § 152.301) </li></ul><ul><li>All partners are liable jointly and severally for a debt or obligation of the partnership (Tex. Bus Org. Code § 152.304) </li></ul><ul><ul><li>Torts (personal injury, negligence, defamation, fraud) </li></ul></ul><ul><ul><li>Contractual obligations </li></ul></ul>
  21. 21. <ul><li>Ked-Wick Corporation v. Levinton , (Tex. App.—Houston (14 th ), 1984 ) </li></ul><ul><ul><li>Joint venture between construction contractor and agent that sold house </li></ul></ul><ul><ul><li>Each party to joint adventure is legally responsible for the act of the other performed within the scope of the enterprise and resulting in injury to a third person </li></ul></ul>
  22. 22. Obligations to Partners <ul><ul><ul><li>Partner owes partnership and partners duty of loyalty and duty of care and must discharge those duties in good faith and in manner reasonably believes to be in best interest of partnership (Tex. Bus Org. Code §152.204) </li></ul></ul></ul><ul><ul><ul><li>Swanson v. Slumberger— Found fiduciary duty owed to Swanson </li></ul></ul></ul>
  23. 23. Ownership of Property <ul><li>Partnership property is not the property of the partners (Tex. Bus Org. Code §152.101) </li></ul><ul><li>Property does not have to be acquired in name of partnership to be partnership property if transfer document indicates partnership or partner identity (Tex. Bus Org. Code § 152.102) </li></ul>
  24. 24. <ul><li>Presumed to be partnership property if acquired with partnership property (Tex. Bus Org. Code § 152.102) </li></ul><ul><li>As dissolution, partnership property pays back debts then distributed in accordance with rights to distribution (Tex. Bus Org. Code § 152.706) </li></ul>
  25. 25. <ul><li>Taormina v. Culicchia (Tex. Civ. App.—El Paso, 1962) </li></ul><ul><ul><li>Partner of defunct partnership had rights to receive its share of goodwill of defunct partnership </li></ul></ul><ul><ul><li>Newly created partnership created by previous partners attempted to use goodwill </li></ul></ul><ul><ul><li>Goodwill: same location, same name, same customers, same supplier </li></ul></ul><ul><ul><li>Goodwill is asset of partnership belonging to all </li></ul></ul>
  26. 26. Regulatory Matters <ul><li>Tex. Occ. Code § 1051.306 - Registration </li></ul><ul><ul><ul><li>Permits Board of Architectural Examiners to adopt rule to require a firm, partnership, corporation, or association that engages in the practice of architecture, landscape architecture, or interior design to register with the Board </li></ul></ul></ul><ul><li>Rule 1.124 </li></ul><ul><ul><li>Architectural firm or other business entity offering architectural services have registration requirements </li></ul></ul><ul><ul><li>Registration required within 30 days after creation </li></ul></ul><ul><ul><li>Annual registration; Notice when dissolved (30 days) </li></ul></ul>
  27. 27. <ul><ul><ul><li>Rule 1.122 – Associations </li></ul></ul></ul><ul><ul><li>When forming business association with “Non-registrant” that is not employee, client, or subcontractor or consultant of architect or client, requires written agreement for architect or its firm to be responsible for Construction Documents </li></ul></ul><ul><ul><ul><li>Requires particular provisions of the contract </li></ul></ul></ul><ul><ul><ul><li>Also requires architect to exercise “Supervision and Control” over the preparation of all “Construction Documents”, with limited exceptions </li></ul></ul></ul><ul><ul><li>Rule 1.124 requires registration of the association too </li></ul></ul>
  28. 28. Practical Considerations in forming Strategic Ventures
  29. 29. Key Terms of Strategic Relationships <ul><li>Contribution of Capital </li></ul><ul><li>Allocation of responsibility </li></ul><ul><li>Decision making authority </li></ul><ul><ul><li>Day to day decisions v. strategic decisions </li></ul></ul><ul><ul><li>Material changes to structure </li></ul></ul><ul><ul><ul><li>New “partners”; Change in ownership percentages </li></ul></ul></ul><ul><ul><ul><li>Merger/Dissolution </li></ul></ul></ul><ul><ul><li>Avoid 50/50 decision making models </li></ul></ul>
  30. 30. <ul><li>Distributions </li></ul><ul><li>Allocation revenue between distributions and retained funds </li></ul><ul><li>Termination of relationship and distribution of assets </li></ul><ul><ul><li>Physical assets </li></ul></ul><ul><ul><li>Intellectual Property </li></ul></ul>
  31. 31. Identifying your Strategic “Partner”
  32. 32. What does a good strategic partner look like? <ul><li>Proven ability to deliver </li></ul><ul><li>History or solid relationships with other business partners and employers </li></ul><ul><li>Equal or greater level of sophistication in business management matters </li></ul>
  33. 33. <ul><li>Complements your strengths; Resources to address your weaknesses </li></ul><ul><li>Similar level of risk tolerance </li></ul><ul><li>Similar values </li></ul><ul><li>Interested in the process of working through the initial start up documents and talking about issues to be addressed in documents </li></ul>
  34. 34. <ul><li>Has financial ability to shoulder up to two years of little to no income from the venture </li></ul><ul><li>Would you want to have a cup of coffee with them every day? </li></ul>
  35. 35. What does a bad strategic partner look like? <ul><li>Multiple previous banking relationships </li></ul><ul><li>Multiple failed attempts at partnerships/ </li></ul><ul><li>ventures/entities (lots of prior partners) </li></ul>
  36. 36. <ul><li>History of unexplained involvement in litigation </li></ul><ul><li>Bankruptcy filings </li></ul><ul><li>Lack of interest in process to draft start up documents and agreements </li></ul>
  37. 37. <ul><li>Excessive sense of urgency </li></ul><ul><li>Lack of sophistication in business and management (unless you will be handling this) </li></ul><ul><li>Has your same strengths and same weakness </li></ul>
  38. 38. <ul><li>Is much more risk averse or risk tolerant than you </li></ul><ul><li>Primarily talks about how successful this is going to be and how much money you are going to make </li></ul>
  39. 39. <ul><li>Little to no personal cash reserves to support self during tough times </li></ul><ul><li>Values not aligned </li></ul>
  40. 40. Questions?
  41. 41. 816 Congress, Ste. 800 Austin, Texas 78701 512-708-1804 www.hensleeschwartz.com Presented by: Brenda Barrett Healey [email_address] 512-708-1804 512-206-6469 DALLAS · FT. WORTH · HOUSTON · AUSTIN · SAN ANTONIO