Here we interview London corporate partner, Victoria Birch, about the use of joint venture structures in the context of the development and launch of projects and products in the technology sector.
Victoria is part of the Norton Rose Fulbright Technology and Innovation team, whose recent projects have included advising:
- The Trade Information Network Limited (a consortium of international banks building and developing a global trade finance platform).
- VAKT Global Limited (a consortium of leading energy companies and banks that has developed a commodities trading platform using distributed ledger technology).
- A joint venture between two global banks on the development and procurement of a regulatory compliance technology platform called Sentinel in respect of MiFID II requirements.
- A commodities joint venture developing an innovative blockchain platform which will provide a first-of-its-kind digital register to ensure traceability and accountability across the entire value chain.
Victoria is co-head of the Norton Rose Fulbright London payments practice and is a member of our global FinTech group. She is a regular speaker on artificial intelligence, distributed ledgers (including blockchain technology), smart contracts, the internet of things and technology more broadly.
1. What are the typical tech use cases you advise on and why do these drive a joint venture transaction?
We advise on a wide range of technology use cases, from artificial intelligence, smart contracts, internet of things and distributed ledger technology to quantum computing. In many ways, the development of a technology platform is well suited to a joint venture structure, particularly as it enables members to share in the risks and costs of development, which can be beneficial when the technology is in a nascent form. Similarly, many platforms are looking to achieve scalability, and a consortium or joint venture model can help to procure early engagement for a broad user and stakeholder base at an early stage.
The technology joint ventures that we advise on cover a wide spectrum. At one end, it can be two or more parties looking to enter into a form of partnership to develop a platform. Each may have different skills or assets to bring to the project, and a joint venture arrangement can help to recognise and regulate those differences.
For example, one may have the technology capability and rights to develop the platform, and the other, a strong customer base and the regulatory licences and approvals required to operate the platform in a particular market. In that scenario, a joint venture arrangement enables each to access the skills and assets of the other parties in an agreed governance framework in order to promote the platform’s success. You can see this with financial institutions partnering with technology providers to provide digital services to the financial institutions’ customer base.
In some cases it may be that a technology provider or certain market participants are looking to create an industry-wide platform. In the case of a trade finance platform, for example, the project’s success will be dependent on it being accessed and used by participants across the global market. A joint venture arrangement (or consortium in some cases) enables the project to attract investment and engagement by the key stakeholders and participants in that market in order to ensure market acceptance and scalability is achieved more readily. In such a scenario, it is also not uncommon for the joint venture to expand further once it reaches a launch or commercialisation stage – the aim being to expand its participant base to include a wider user community and to create a governance model that is more independent of its founders and that instead works for the industry/community as a whole.
2. Often a corporate structure would be the vehicle of choice for a joint venture but in the tech context the picture may be more complex – what kind of structures are common and what are the factors that dictate the selection of a preferred structure?
The structure of a technology joint venture can be driven by a number of factors, including:
- The objectives of the founder members - are they looking to create an independent community/industry platform, or to procure control for founder members with a potential return on investment/monetisation?
- The timelines to launch - some structures will require regulatory/antitrust clearances that can be time consuming and can have long lead times.
- Any third party contractual concerns - for example, what will be the contractual nexus between members and any third party technology provider?
- Regulatory or tax considerations - including in respect of the individual status of the founder members.
Corporate vehicles, such as English law private limited companies or companies limited by guarantee, are popular and continue to be vehicles of choice for many technology joint ventures, particularly where the joint venture is being used as an investment vehicle.
The many benefits of having an incorporated joint venture remain true in the technology space, whether it is the:
- Relative ease of contracting with third parties (such as technology developers).
- Separation from the joint venture’s “owners” (in terms of legal liability and operations).
- Ability to provide a return to the founders/investors for the investment, costs and risks they have incurred in the development stage.
However, other forms of entity are being used and explored, such as limited liability partnerships, partnerships, registered societies and societas europaeas. There can also be jurisdictional variations, with some jurisdictions offering alternative structures that have particularly appealed to technology companies, such as foundation or co-operative models.
For example, many crypto-asset companies are formed as Swiss foundations to benefit from the community governance model it allows. A foundation or co-operative model can also make the process of admitting new members, varying rights (for example, according to usage levels), and allowing or compelling existing members to exit, much easier. As such, this model has proven to be particularly attractive to technology platforms that aim for an expansive user/member base and where “independence” from the founder members is deemed a particularly marketable quality.
For some projects, a more contractual framework may be preferred. For example, a contractual joint venture with either joint ownership of assets, or a single member owning the technology and IP with licensing/contractual arrangements back to the other members. Other structures include debt financing structures and IP/asset pooling arrangements, again often with a lead member who is then financed by the other members with suitable governance, indemnification, licensing and contractual rights.
3. Once a structure has been selected, is this typically a static choice or does the structure sometimes evolve?
It is not uncommon for an interim solution or a phased approach to structure to be adopted. Technology joint venture structures are as prone to evolution and change as other businesses, and may adapt according to their growth and the nature of their operations once launched.
However, in some cases, a changing structure is even more relevant for technology companies. The technology may be in a nascent form, or the platform itself may be at the proof-of-concept stage, and so the structure will need to be adapted once its potential has been realised and the form and nature of its operations have been developed.
For some joint venture projects it may be that a corporate vehicle cannot be established in the initial phases of development due to anti-trust or regulatory concerns. The founder members’ own internal governance constraints may also be more onerous for an equity investment (as opposed to entering into a contractual arrangement), and this could impact on timelines.
In such circumstances, some form of contractual arrangement may be used in advance of the establishment or incorporation of a joint venture vehicle. A contractual arrangement can also make an exit from a project easier to manage in the initial stages, which can be attractive to potential investors, particularly as the benefits of the new technology may not yet have been realised in full.
In some cases, there may be a phased approach to structuring:
- The founder members may wish to have greater control over the initial stages of development (and potentially a return on investment for the risks and investment costs they have incurred); and
- Once the platform has launched, there may be a desire to open up the governance and membership to a broader user base.
Even when a corporate vehicle has been established, the governance model can be constantly evolving. For example, changes may be required as operations are launched, so the contractual and governance framework for different users/participants and members fits the ecosystem that has grown up around the platform.
As with any business, technology joint ventures can also evolve in line with their operations and global reach. Corporate group structures may be developed to include technology and IP licensing and servicing subsidiaries alongside operational subsidiaries in new markets or jurisdictions. This can have a number of benefits, whether from a tax structuring perspective or, for example, by enabling management incentives to be situated at a different corporate level from that of the interests of the founder members.
4. What are the common “gating” issues or issues that need to be dealt with or factored into the timeline at an early stage?
One of the biggest concerns from a timing perspective is whether the joint venture is subject to merger control laws. Merger filing processes can be burdensome and costly, and may cause delay to implementation.
Over 140 jurisdictions have competition regimes with jurisdiction being triggered by a number of factors – for example, the members’ revenue streams in those jurisdictions and the respective control structure and governance rights in respect of the joint venture entity. With this in mind, we advise clients to undertake the merger control review as early as possible in the process in order to ensure that any impact on timelines can be factored in.
Similarly, the global trend for the introduction of national security controls on investments may be particularly relevant to technology joint ventures. For example, the UK’s proposed National Security and Investment Bill, introduced into the House of Commons in late 2020, would empower the UK government to investigate and potentially block transactions in sensitive areas, such as communications, data infrastructure and computer hardware. Similar regimes are being adopted by other jurisdictions which, similarly to the merger control process, can lead to a global analysis being required where a platform operates in a number of jurisdictions.
Other regulatory processes and applications can also be time consuming and, in some cases, such as the US Bank Holding Company Act, will need to be considered and reviewed at the structuring stage. As the value of a technology joint venture may be partly dependent on IP rights, the timing of patent applications (and similar IP requirements) should also be factored in.
Aside from regulatory processes, larger corporations often have long lead times on internal governance approvals for equity investments which will need to be considered when setting timelines for implementation.
5. From a practical perspective, what advice would you give where a large number of parties are collaborating?
Seeking antitrust advice at the earliest stage of the project is key because a collaboration between competitors can raise potentially serious competition law concerns which can significantly impact on the success of the project. Appropriate safeguards should therefore be put in place, both during the initial negotiations and development of the project and also in respect of the operation of the platform in due course.
Project management is also key to ensuring that timelines are met and negotiations and interactions with third parties are managed efficiently. A unified voice when interfacing with third parties, particularly during contractual negotiations, is likely to produce a better result and ensure a conclusion is reached more readily.
It is also useful to have a single point of contact when instructing third party service providers, such as financial advisers and lawyers, in order to ensure that instructions are co-ordinated and streamlined (to help reduce costs and timelines). It may be that the project has a natural or lead sponsor who will take the lead on project management. Alternatively this may be delegated to a committee from among the participants.
6. What are the sorts of issues that can be challenging for the parties to resolve and document, and why is this the case?
The key issues that parties will face will depend on the nature of the platform and also the respective rights and objectives that the parties are looking to achieve. In some cases, this may depend on the nature of the parties joining the joint venture arrangement.
For example, the parties may include large corporations that have specific risk profiles and investment committee requirements which will need to be addressed. Alternatively, one party may bring specific skills or assets to the project which they will look to protect.
Some issues will also depend on how the platform will operate in the future. Is the platform intended to operate independently from its founder members – will there be an autonomous management team or will they defer to the joint venture parties for consensus on key identified issues (through board membership, reserved matters or veto rights)? In some cases, a balancing act will need to be maintained to ensure that the joint venture company has the flexibility to operate efficiently and quickly in its start-up phase, while recognising that shareholder rights will also need to be respected and protected.
Intellectual property rights can also be a challenge, particularly where one party is contributing more to the project than others:
- What rights will those members have to IP and technology that they have independently developed and contributed to the joint venture?
- Will there be licensing back arrangements to members and on what terms?
- What will happen to those rights on an exit?
- Does the future success of the platform depend on a licence of retained software or other IP rights and will they continue to be available to the project after the relevant member has exited and, if so, on what terms?
- Will a distinction be drawn between those rights and assets developed and contributed to the project by a member, and those subsequently developed and/or enhanced by the joint venture itself?
As the project develops, the aim is typically for self-sufficiency, particularly following commercialisation. However, there may be a need for further member funding or for the joint venture to seek further funds through an agreed waterfall of financing options, which may end with a shareholder recourse option.
The circumstances in which such a funding obligation can be triggered can be a key negotiation point, and the process will need to be properly crafted to balance the need for efficiency (as one of the main triggers is likely to be an emergency funding scenario where speed will be of the essence) with the need for ensuring that the members are protected against unwanted further cash injections.
It is also important to have a strategy for the end destination – whether the aim is to ultimately broaden the member base or to ensure monetisation:
- Is there an agreed approach between members?
- What is the timescale and the milestones that will need to be met, and how will performance against these milestones be reviewed and judged?
Some members may wish to exit the project early and the rules surrounding this will need to be negotiated and agreed. For example, will there be a lock-in period to give the project security in its initial stages, or will there be freedom of transfer or exit?
The rights of members upon an exit (whether to the technology and IP developed during their tenure or the potential return or realisation of contributions made by that member during their membership) will need to be agreed.
7. Do you have a feel for whether joint ventures in the tech sector may become more or less common over the next few years?
Joint ventures are likely to remain a feature of the technology sector over the next few years. There is a natural harmony in the joining of technology companies with existing participants in a particular market to innovate and change processes and services that will continue to resonate.
Joint ventures provide a structure that can aid the particular challenges that many new technologies face, particularly in terms of sharing risks and costs in the development stage. Larger joint ventures can also help a technology to gain market acceptance and scalability more quickly as a wider base of participants are engaged and invested in its success from an early stage. As such, they are likely to continue to be a popular structure for the foreseeable future.