Financing the Commercialization: Corporate Partnerships
Development costs, requirement of the approval of the regulatory bodies and other activities required for the commercialization of the technology require substantial amounts of capital. Such requirements would result in the necessity of corporate partnerships that are beneficial to both partners.
Research and development partnerships are generally formed for commercializing new technologies. Under the Turkish Law, such partnerships may take in a form of a contractual relationships that forms a joint venture as stipulated under Turkish Code of Obligations numbered 6098 and dated 11.01.2011 as ordinary partnerships that lack limited liability protection or they may enter into an equity partnership stipulated under the Turkish Commercial Code numbered 6012 and dated 14.02.2011 (“TCC”) that offer limited liability protection for shareholders. For the purpose of this Article, only equity partnerships would be reviewed.
Corporate partnering generally involves a single or multi arrangements with a general large firm who has the financial capabilities and/or other functional capabilities such as product development, manufacturing or distribution and a small start-up or an entrepreneurial technology firms generally lacking capital and other functional skill such as production and marketing skills. For the purposes of this article, the former would be mentioned as the Senior Partner and the latter would be mentioned as the Junior Partner.
- Senior partner makes an equity investment through a share transfer or a share capital increase in accordance with the TCC. Arrangements can be made through articles of association such as managerial privileges and voting privileges in general assembly. Senior partner depending on the investment and its role in commercializing the technology may ask for the majority of the seats in the board of directors.
- A separate contract may be signed between the partners for the purpose of financing the research and development of a specific technology. Since making all the investment through a share capital increase or share premiums would constitute legal difficulties such as the dilution of the Junior Partner’s shares and other legal requirements imposed by the TCC.
- Senior Partner may agree to act as an original equipment manufacturer or value-added reseller depending on the developed technology. In such case, Junior Partner, depending on the agreement, would be entitled to collect royalty from the sale revenues. Junior Partner, in this specific case, licensed the developed technology to the Senior Partner.
- Senior Partner may also provide funding for the development of new technology using the base technology owned by the Junior Partner. With that regard, Senior Partner would agree to buy the developed technology through a non-exclusive license while the Junior Partner retains its right to sell the developed technology as well. Junior Partner depending on the agreed terms may have to pay royalties to the Senior Partners in line with the sales of the developed technology by the Junior Partner.
- Senior Partner may obtain all intellectual property rights from the Junior Partner and Junior Partner would receive royalty based on the specified use.
- Senior partner may purchase the Junior Partner depending on the arrangement that gives a call option to the Senior Partner and other shareholders (entrepreneurs) in the Junior Partner have to sell their shares to the Senior Partner.
In addition to possible arrangements between the Senior Partner and Junior Partner, Parties may enter into supplementary agreements such as:
- Senior Partner’s may be granted right of first refusal with regards to a possible share transfer of the other shareholders in Junior Partner. This would ensure the protection of the ownership structure of the Senior Partner unless desired by the Senior Partner. Such provision is generally stipulated through a Shareholders Agreement with the entrepreneur and the Senior Partner.
- Senior Partner may be given the option to purchase the shares of the entrepreneurs in the Junior Partner upon the occurrence of certain events. Such events may include: the death of the lead developers and personal bankruptcy.
- Senior Partner may be granted “Tag-Along” rights. In such case, if the entrepreneurs intend to sell their shares to a third-party, the Senior Partner may participate in this sale as well. In accordance with such rights, if the potential buyer refuses to buy the shares of the Senior Partner, the sale process shall not commence.
- Non-competition and confidentiality agreements would also be required if the Senior Partner becomes the sole owner of the Junior Partner. Such agreements are generally stipulated as a provision of a share transfer agreement.
As complex as it may be, arrangements between the Junior Partner and Senior Partner should be carefully stipulated. The royalty rates, depending on the arrangement and the success of the commercialization, may constitute substantial amounts. Both parties should carefully consider the current circumstances and the future prospects of the technology in development.
Author: Batuhan Ecin