Dilanchian Lawyers & Consultants
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Reducing obstacles for collaboration formation

Going solo in business is easier in some ways than doing business in a collaboration. Collaboration requires alignment of the ambitions, agendas and styles of two or more individuals, companies or organisations. This can be more work than it's worth.

However, doing business in collaboration is generally easier, and a whole lot more profitable, than battling solo.

Our focus here is on practical advice for collaboration formation. Do that well and you will reduce subsequent obstacles to develop, grow or exit from a collaboration.

A collaboration is a business structure

"Collaboration formation" is not a technical term. It is not also a generic process in law, though there is a mountain of law to consider in forming a collaboration.

The level of collaboration formation is increasing. Contributing to this is escalation in globalisation and outsourcing.

The broader context for collaboration formation is business structuring. The convention among lawyers and accountants is to group collaboration formation within the common concept of business structuring. Though it is often not the case, accountants normally handle tax and operational issues, lawyers do the documents. Business structuring is a very broad subject covering formation of one person company structures, public companies, associations under association incorporation acts, limited partnerships, trusts, as well as various types of collaborative arrangements between two or more parties.

The first column of the following table lists types of common business structures in Australia, and several other common law jurisdictions. The second column lists common types of foundational documents usually used to form each type of business structure in a legally effective way.

  Business Structure
Foundational Document
  Sole Trader No document needed
  Proprietary Company Constitution and Shareholders Agreement
  Partnership Partnership Agreement
  Trust Unit Trust Deed or Discretionary Trust Deed
  Collaboration Joint Venture Agreement, Strategic Alliance Agreement, Franchise Agreement, Distribution Agreement, Agency Agreement etc.

As can be seen from the last row of the table, there are many types of collaborations. This variety of collaborative arrangements adds to the complexity of practical and legal issues which should be resolved to prepare a good foundational document.

There are substantive differences between the usual types of foundational documents used for collaborations. Customising an agreement, and preparing related paperwork to suit a particular collaboration, is what's needed. That involves business and legal knowledge, skill and experience as well as an eye on potential future issues.

Many factors can tear apart joint ventures, alliances and other types of collaborations. Clear legal and operating structures set up at the outset helps reduce the chance of ruin. From a lawyer's perspective this involves putting in place at least one supporting foundational document. This is the case even if the collaborators or team members are close friends and relatives.

voc_amsterdamSo why is having a good foundational document so vital? If a collaboration hits rough waters, with a good foundational document in place each party can at least quickly identify its areas of exposure. It may be that fear, uncertainty and doubt can be removed due to wording in the document. Ignorance will then not drive members into a panic shouting "Abandon ship!".

With a good foundational document in place exposure areas can be treated more quickly and efficiently, whether what is feared is a collision (eg legal action by third parties) or a leak inside the ship (eg a member leaving to compete with the venture).

Preparation of a foundational document is an opportunity to chart the course for the venture ship, the collaborative business structure. Use it to test the journey ahead before sailing into uncharted waters. The lack of such charts and testing, by clients or their advisers, in our experience are very common cause of woe in collaborative arrangements.

Form a collaboration in four stages

Here's the nitty gritty. To form a collaboration the parties need to participate in planning sessions and feasibility assessment meetings. Only then should advisers put on legal hats and select and draft the appropriate foundational document(s), eg research agreement, distribution agreement, or commission agreement between collaborators. We recommend management of collaboration formation work in four stages:

Stage 1: Planning - outcome is a project plan
Stage 2: Analysis of options - outcome is choice of a preferred option for the type of colloboration
Stage 3: Negotiation and deal memo preparation - outcome is a deal memo, recording what's agreed
Stage 4: Contracting and documentation - outcome is legally binding foundational document

Recently we advised a client who wished to form a collaboration for a digital media venture in the tourism sector. Our client sought advice on how she could create a business structure which served the needs of herself, the other specialists she needed to work over a few years in the venture, and the established company for whom the project was designed to serve. The company was to remunerate the team with a combination of cash and shares.

In helping our client move forward, we prepared a questionnaire which included the following questions designed to draw out the information to select the preferred option for a foundational document.

We supplied our client with the following operational or practical questions. Answer them when you next seek to chart the course of a collaboration. Give your answers to a lawyer to advise on what type of business structure and foundational documents are right for your proposed venture.

  • WHO are the team members? Also indicate how they know each other and how long business relationships have existed.
  • WHAT will be the role of each team member? State specific duties.
  • HOW will the team work together? Provide a statement setting out in very concrete terms the step by step process by which you and the team will work and build towards the vision of being co-owners of the assets to be created.
  • WHAT is to be the legal arrangement between the "team"? This question is about the legal relationship(s) between team members. This affects the types of management controls to be put in place to help achieve the collective vision, mission and goals. For the legal arrangement or legal organisation between team members there are many options. Here are three options.
    • If the team is to have a loose or unstructured arrangement between team members, it would still be best to still reflect that in a document which can have legal force. Certainly, an unstructured team has the benefits of managerial and

      collaboration_defined

      legal flexibility, but without documentation an unstructured team's legal status remains dangerously uncertain. Uncertainty infects questions such as who owns the project, who controls the project, and who is responsible and legally liable for non-compliance with requirements?
    • If the team is to be a legal partnership then the structure would arise from partnership law and any partnership agreement between them. It is best for this to be reflected in a Partnership Deed.
    • Alternatively each team member can be a contractor to a team company. In that arrangement the company would typically own and control the contributions of each contractor. Each contractor may also wear the additional two hats of being a shareholder and director of the company.

Apply these questions before you select a foundational document. This recommendation follows the principle of "form follows function". This means you should first determine the functional needs of the business or collaboration and only then select the form of foundational document to suit those needs. Failure to take that approach, and to answer questions such as those above, will start your collaboration on the wrong foot.

 


Credits: The painting is Rembrandt van Rijn's The Syndics of the Clothmakers’ Guild. It is signed and dated ‘Rembrandt f. 1662’ and kept at Amsterdam's Rijksmuseum. The photo is of a replica of the Amsterdam, a vessel owned by the Dutch East Indies company and now berthed at a museum in Amsterdam. This city is prominent in the early history of capitalism and recognition that collaboration helps build wealth. Rembrandt's painting is of cloth merchants working in Amsterdam. Wildly successful at the time in the city was the Dutch East Indies Company. With its shares traded in the Amsterdam Stock Exchange from 1602, it was one of the world's first joint-stock companies. Like the British East Indies Company, it was among the first transnational corporations with shareholders jointly financing merchant trading vessels in return for dividends.


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