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Most companies are looking into ways of using technology to stay ahead of the competition and build resilience within the business. But if your core business has nothing to do with tech then you may need some help. That might mean outsourcing the technology to another company or forming a joint venture. While there are huge benefits to partnerships, joint ventures and mergers and acquisitions within the tech space, there are also some risks - and not just to the business.
Governments are increasingly concerned that joint venture partners could pass important technology to a foreign power.
Take one pretty high-tech example - where a US company invented a robotic exoskeleton that helps humans strengthen mobility. The company wanted to develop their technology for medical use - to help patients’ rehabilitation from stroke and spinal cord injuries - so they made a deal with some biotech facilities and partners in China. That was until the Committee on Foreign Investment in the United States - known as SIFIUS- told them to terminate their joint venture. SIFIUS cited national security concerns - as a foreign adversary of the United States, there were concerns the Chinese could have used this technology to make a robot soldier suit. Think Iron Man. So, how can you grow quickly and acquire new tech safely? And what should you watch out for when you’re entering into joint ventures with another firm?
We spoke to Olaf Gaertner and Byron Phillips to get advice on what companies need to be thinking about as they approach a joint venture. Both are partners in Hogan Lovells’ Litigation, Arbitration and Employment practice.
Q: What are some of the risks companies may face when outsourcing key business processes to a technology company?
Byron: With any kind of innovation, there is risk. Often we see mismatched expectations between parties, or ill preparation for the JV or for the partnership, or whatever the tie-up might be. There may also be a failure to really plan for how you enter into it and then how you come out of it at the other end. So there are many areas for potential risk. But that doesn't mean that they're not a good idea. They're a fantastic idea. They’re actually how we are going to make progress and how we utilise and develop technology properly for better business and for a better world. There are lots of tools that are at our disposal to help mitigate risk. And when those risks do actually come to the forefront, to be able to deal with them in a sensible and meaningful way.
Olaf: That’s also what we’re seeing here in CE. It’s a great idea to join forces and to cooperate. But you really have to pay attention. In our experience, it’s important that cultures fit. If those in a joint venture have too many different ways of thinking about the world, it can end in real trouble. And that can go on for years. So you really want to be sure at the beginning whether this is a fit or not.
Byron: That's an absolutely pivotal point. Often we focus on the tech in a JV, but actually it's people. And most of the time the tech is developed by and controlled by people. It is the people that you have to fit together to make a JV work.
Q: According to the Litigation Landscape report, over 60% of businesses said that development and/or deployment of technology is a core part of their growth strategy. Why do you think that is and how does a joint venture fill the gap? Is a JV always the answer?
Olaf: Certainly not always. And why is that? Because technology is developing so quickly and many large companies have the fear of being left behind, of not developing quickly enough. So you have to team up with very agile, small companies, find a good match and have options. Otherwise, you may risk being left behind. I think that that's one of the main reasons why we have seen so many JVs over the last five years in the technology sector.
Byron: And a lot of the time that is a very sophisticated, sensible company - whether it's on the tech side or on the non-tech side, realising that a particular area is not their area of expertise. They're not going to be able to develop either the tech or the non-tech side themselves. So it makes a huge amount of sense to bring the two together and to exploit those opportunities as a team.
Q: The report also shows that the appetite for tech joint ventures is growing quite rapidly. Almost half of respondents said they're looking to execute a tech JV in the next two years vs. just 39% percent in the past two years. So do you think that vulnerabilities and risks are going to have to be weighted into these decisions?
Byron: Yes, is the very short answer. A slightly longer answer is that we are obviously going to see a proliferation of these joint ventures. I think that everybody understands that and it's the right thing to do for most businesses who are working in these various spaces. The fact is that each business is going to have to understand where the risks are and how to mitigate those risks and how to ensure that the joint venture or the partnership does two things: continues on the path that is intended, but also evolves where it needs to evolve.
Q: Byron, do you have any specific examples that you can share with us of when technology goes wrong?
Byron: Yes. although I cannot name the parties, because it’s a dispute I’ve worked on. It involved a major IT infrastructure contract whereby the supplier provided software to a large organisation. This was a multi-year contract. Issues arose immediately because the organisation and a number of sub-organizations within its structure all wanted the software to be bespoke to their particular wants and needs, and for it ultimately to do different things for each of them. Immediately the service, or the product, bore no resemblance to what was described in the contract and caused huge issues to both parties. This is a fairly extreme example but this is where you can see how issues arise. Without proper planning and dialogue with all stakeholders at the outset, and throughout the project management phase, or an understanding of what the tech is supposed to do and an ability to identify where it can go wrong and what to do if that happens, there can be very very severe consequences. And the potential for lengthy and costly litigation or arbitration flowing from that is obvious.
Olaf: So why is it that in tech JVs, there is a higher potential for disputes? It is because the product is developing, because the product is new, its leading edge. People at the beginning have high hopes and they really want to do something together. But in software code, for example, it is very difficult to find issues. It's not like you’re taking apart a car, where you take a look at what you have in your hands. With software, you can’t touch all these intangibles. All this is part of technology and it creates additional risks that are very, very difficult to verify and to find out.
Q: Can you discuss some of the ways companies can look to mitigate risk?
Byron: There are a number of areas that we focused on in the Litigation Landscape report. One is - what is the end destination and how do you actually wind down a joint venture partnership at the end of its life? A lot of forward planning needs to be done. Unfortunately, quite often it isn't done, and that causes a number of problems for all parties because you need to identify what happens to directors who are on the board of the joint venture at the end of its life. What happens with the various assets and liabilities, IP rights that are developed during the lifetime of the joint venture? All of these things need to be dealt with at the front end in the deal documentation to make sure that they're clear enough and each party understands exactly what's going to happen at the end of its life. If there are likely to be changes to that, there needs to be are express variations to the deal documentation to make sure that nothing is left ambiguous at the end.
Olaf: We have a very fitting example about what Byron is discussing. Right now, we have a huge joint venture dispute in the tech area that's happening. There are about 50, 60, 70 court cases going on in parallel, and all covering one joint venture. And they do have a very clear mechanism that they have for redemption rights, which is the right to to recall the shares back to the founders if a specific financing round is not met. That means some money at a specific date or you can call the shares back. Yet we are still fighting because the other side accepts that they didn’t provide the funding, but they argue ‘but you didn’t need the money at this time. The project was not developing sufficiently, so there was no need for the money.’ So people get creative. You need to try to clarify all this at the outset to make it as simple as possible because lawyers and all people involved will get creative and will try to wriggle out.
Byron: On that point, you must have a sensible dispute resolution mechanism in the agreement to actually help the parties make their way through whatever issues they face towards the end, because that's going to help with avoiding very creative lawyers causing trouble when it comes to trying to resolve a dispute.
Q: Let's talk about the future of tech. When we talk about technology such as the metaverse or AI, what are some of the risks and pitfalls?
Byron: There are lots of really interesting things happening as we move into an increasingly digital future. The Metaverse, for example, brings phenomenal opportunities for commerce and an extraordinary platform for social interaction. The general consensus seems to be that it will grow organically as we see more and more businesses coming into play and different products and services and capabilities combine. If we assume multi-millions of users, it will require almost inconceivably huge databases to deal with the inevitable data, which itself of course brings potential risk including data-breaches and cyber-fraud. So businesses and governments will really have to navigate the legal ramifications and certain legal tools will probably have to adapt and evolve. Where we’re operating in that intersection between business and government, it becomes ever more important for the legal issues to be considered very carefully.
Similarly, AI systems and their increasing autonomy present fascinating legal conundrums from a regulatory perspective but also from the perspective of how existing legal doctrines, such as negligence and product liability will need to adapt. Some jurisdictions are currently responding more quickly than others to the legal issues arising from emerging technologies. That’s absolutely certain. China, for example, appears to be acting very swiftly to build a regulatory framework, which is fantastic.
Q: So what is your overall advice on how companies can mitigate risk?
Olaf: My answer may be surprising coming from a lawyer. But I’d say, don't pay too much attention to the law. It is extremely important that the JV fits, but you need to listen to your gut feeling. Make sure there’s a cultural fit because that is what, in the end, will bring you to the ups and downs. And the legal text is a help, it’s a support, but it will not make sure that the joint venture is a success in the end.
Byron: Also, listen to the people who know how the tech is supposed to work. When you are entering into these agreements, you need to make sure that you've got the tech side of the business and legal working together to make sure that the deal documentation and any further documentation that's created accurately reflects what the parties anticipate is going to happen over the period of the joint venture. It needs to ensure everyone’s interests and intentions are covered and that the tech can actually do what it needs to do and what the deal documentation says it can do. Because as soon as you've got a mismatch between those, then it's almost doomed from the start because you're going to be playing catch up to try to make sure that the tech fits with what the contract says.
Authored by Olaf Gaertner and Byron Phillips.
