During the recent Movement Control Order (“MCO”) period, we saw many business owners going digital to stay afloat, and / or entering into strategic business alliances to leverage on the skills and resources of other businesses. These are trying times for all businesses, but it could also be a time to seek opportunities to explore alliances / collaborations with other businesses in creative ways.
Just to get the legal jargon out of the way, business owners should be careful in using the term ‘partnership’ in common business parlance, as this may inadvertently attract the legal implications of ‘joint and several liability’ under partnership law if the contractual terms are not clear. Business owners could instead enter into a ‘collaboration arrangement’ or ‘strategic alliance’ with other businesses by setting up a new legal entity as a joint venture vehicle (for an incorporated joint venture) OR more easily through an ‘unincorporated joint venture’.
Unincorporated joint ventures are essentially contract based relationships which do not involve the creation of a separate legal entity. An unincorporated joint venture can usually be created by way of an agreement either through a non-legally binding Memorandum of Understanding (“MOU”), also known as Heads of Agreement / Letter of Intent / Term Sheet, or a fuller definitive Collaboration Agreement which will fully bind the parties. Which of these instruments should be appropriately used will depend largely on the intentions of the parties and how specific or detailed their business relationship will be.
Difference between MOU and Collaboration Agreement – Which one to choose?
An MOU is a written document which sets out the fundamental objectives and understandings of parties. It is often used at the early stages of discussions and negotiations between parties who intend to set out a framework of working together quickly and possibly even loosely, with a view to enter into a more elaborate business relationship in the longer term.
Some of the key terms in an MOU typically include:
- details of parties;
- parties’ roles and responsibilities;
- duration of the MOU; and
- termination of the MOU.
Though an MOU usually sets out the intent for parties to collaborate and will include the mutually agreed terms of the collaboration arrangement, the main downside to an MOU (perhaps intentionally so) is that it generally lacks the degree of detail and specificity for a party to rely on it as a legally binding contract.
While an MOU can be drafted to be selectively and specifically legally binding on certain terms only, a full collaboration agreement may be more appropriate if the nature of the collaboration involves:
- significant commercial value,
- detailed responsibilities on the parties,
- obligations to bear or incur significant costs or liabilities,
- expectations of payment or monetary involvement,
- expectations of confidentiality or certain restraints,
- a considerable length of time or continuity (rather than a one-off project), or
- clear demarcation of property ownership (tangible or intangible).
Here is an example of a scenario where a definitive collaboration arrangement may be more suitable than an MOU:
A trading company intends to digitalise its business by taking its offline business online via various e-commerce channels. The trading company decides to collaborate with a software / mobile app developer to develop a fully functional e-commerce website and mobile app for its trading business. Instead of paying fees outright for the developer’s technical services, the trading company offers a share of its sales revenue generated from the e-commerce site or app built by the developer. The developer, seeing the potential for a stream of continuous income and scalability of the business arising from such a collaboration, is eager to get its team working on the project immediately. Both parties excitedly pen down in great detail the concept of the app, the scope of work, the marketing strategy for user acquisition, the potential use-cases etc. The parties even agree to ‘formalize’ such a collaboration in writing via a ‘simple non-binding MOU’, leaving the bothersome details to be ironed out along the way based on ‘mutual trust and good faith’.
Based on the above example, it would be pertinent for both parties to first ask themselves, and each other, the following ‘difficult or awkward’ questions:
- Are there any specific expectations of time, costs or resources to be borne by either party?
- Are there any specific expectations of delivery times or clear milestones expected from a party?
- Are there specific issues where one party must have the final say in decision making?
- Are the parties willing to disclose sensitive confidential information, customer data, trade secrets to the other party for the purposes of the collaboration?
- Are there specific expectations of remuneration, payment, revenue or profit share by each party?
- Are there clear thresholds of time, performance or success milestones where failure to achieve them will justify termination or non-renewal?
- What exactly happens after the collaboration is terminated?
- Are there specific types of property (e.g, source codes, precedent codes, vendor / customer data, domain name, password access, user-interface, marketing materials etc) that can only be owned or used exclusively by one party and not both?
- Are there specific problems or liabilities that one party is not in control of and does not want to take on?
As with all other forms of agreement, regardless of its title, the extent of detail and substance of the relationship will largely depend on the parties’ own specific circumstances, time-frame, objectives, priorities and expectations.
Speedy negotiations, broad intentions and good feelings of trust and co-operation between parties before entering into a collaboration are indeed important, but taking the time to work on a definitive collaboration agreement could be the critical foundation for long-term success and can certainly assist in minimising risks in any collaboration.
It may be a challenging time for business owners, but if business owners are resilient and flexible enough to collaborate and work together within properly established boundaries and expectations, such businesses that can adapt, leverage and synergize will certainly flourish in this new environment.
This article was written by Shawn Ho and Natalie Ng. Shawn leads the corporate practice group of Donovan & Ho, which has been recognised as a recommended firm for Corporate, Mergers & Acquisitions by the Legal 500 Asia Pacific 2018. IFLR1000 has also ranked us a Notable Firm 2019.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.