Monthly Archives: June 2010

How to Protect Long-Term Investments in Operational Contracts (Technology Law Letter #10)

How to Protect Long-Term Investments in Operational Contracts

Consider one of the most difficult issues you’ll ever encounter when negotiating a contract: one party must make a large, long-term investment for the deal to work, but won’t sign the contract unless its investment (and its return on the investment, or ROI) is adequately protected.

I’ve posted an article on my blog that explains three key approaches to protect that investment and get your deal done.

The article covers long-term investments made as part of an agreement concerning a company’s operations, such as an independent contractor agreement, technology development agreement, distribution agreement, or purchase and sale of products or services.

Those operational agreements are different from investment contracts, such as stock purchase agreements or loans to a corporation, partnership or limited liability company (LLC). Investment contracts raise additional questions under corporate/partnership, tax and securities laws. For example, long-term cash investments can be protected using preferred stock in a corporation or special provisions for capital accounts in partnerships and LLC’s. Loans may be protected by taking an interest in collateral, such as real estate (e.g., a mortgage on a commercial building). By contrast, my article focuses on provisions of non-financial contracts used in operations.

The article explains three approaches:

1. Match the contract duration to the investment horizon. If necessary, lay out an early exit path that works, considering termination for convenience with a kill fee, a liquidated damages clause, mediation, a management escalation process and a transition process after termination.

2. Focus the relationship by wisely choosing whether to use exclusivity, semi-exclusivity, a Most Favored Nation (MFN) clause, minimum required purchase or recoupment.

3. Finally, look at other contracts between the parties to see if the parties’ relationship should be strengthened by cross-collateralization or cross-default provisions.

Of course, the article defines and explains all of the “shorthand” words above, such as “semi-exclusivity.” By considering and applying the 3 approaches that I describe, you’ll be far ahead of many other deal makers.

You can read the full article at: www.boadweelaw.com/how-to-protect-long-term-investments-in-operational-contracts-full-article/