DEALMAKER TOOL JV Negotiations Positioning Sheet The Term Sheet s Forgotten Twin NO ONE QUESTIONS THE VALUE of a Term Sheet in structuring a venture transaction. But in the fever and fog of negotiations, deal teams often forget to develop or maintain a critical parallel tool: The JV Negotiations Positioning Sheet (Exhibit 1). In its simplest form, a Positioning Sheet is a table or spreadsheet developed by the deal team that defines, for each major transaction term, the Company s preferred position, lead fallback position, alternative ways to structure that transaction term, and walkaway positions. As a living document to be updated across the negotiation of a Term Sheet and subsequent deal documents, such as a Heads of Agreement (HOA) or Memorandum of Understanding (MOU), the Positioning Sheet is a powerful and easy way to keep a structured inventory of potential deal terms, and to maintain internal alignment on the Company s preferred and fallback positions. Consider it the Term Sheet s forgotten twin. The purpose of this note to explain what a Positioning Sheet is, and how and when to create it. This note also makes the case that, if done well, a Positioning Sheet can also potentially serve as corporate-level guidance on major clauses in future negotiations of similar ventures. BUILDING A JV POSITIONING SHEET How to structure. A Positioning Sheet can be designed in a number of ways, but invariably is structured as a table with key terms running as rows down the side, and categories of positions running as columns across the top (Exhibit 2). The number of rows will depend on the stage and complexity of the transaction, but typically ranges from 15 to 35 line items. These The JV Deal Exchange January 2014 1
Exhibit 1: JV Negotiation Tools terms relate to topics such as scope, exclusivity and non-competes; legal form; ownership; financing; financial and capital structure; governance and control; management; parent-provided services; commercial terms; and exit and termination. Along the top, the Positioning Sheet is organized around five columns: (i) term heading, (ii) current preferred position, (iii) lead fallback position, (iv) other alternative positions, and (v) walkaway positions/no-go zones. Depending on the situation, the deal team might include an additional column for the counterparty s position, with extra space for comments and open questions. How to develop. To create a Positioning Sheet, the deal team should first identify all the major negotiating term headings including any terms where the counterparty and Company might have differing opinions, or where internal Company sponsors, deal team members, or legal or business development counsel might hold different ideas. Next, for each term heading, the deal team will usually write down its current preferred position, if such a position exists (this preferred position will go into a draft Term Sheet, if the Company is drafting that document). The deal team will then generate a list of other alternatives (i.e., alternative structures to that term). Typically, 2 to 5 alternatives are identified for each key term. For example, in a 50:50 Asiabased semiconductor JV that would manufacture advanced semiconductor wafers to be supplied to its parent companies for resale, exclusivity was a critical deal term. Prior to entering negotiations, the deal team for the U.S. partner identified five ways to structure the exclusivity provision. These ranged from no restrictions on what either partner could do with the manufactured product, to full restrictions that granted each party the right to sell its offtake only into pre-defined, narrow, and different market segments. Alternative positions like this can be developed by looking at comparable JV Agreements, consulting experienced lawyers and business developers, or relying on one s own experience. Subscribers to Exhibit 2: Basic Structure of a Positioning Sheet The JV Deal Exchange January 2014 2
Exhibit 3: Sample Positioning Sheet Entries Alternative positions can be developed by looking at comparable JV Agreements, consulting experienced lawyers and business developers, or relying on one s own experience Joint Venture Advisory Group can contact us for additional ideas and sample language. Indeed, once negotiations with the counterparty begin in earnest, additional ideas will be generated through the negotiations. This full set of alternatives should be placed initially in the fourth column of the Positioning Sheet, as other alternative positions. The deal team should then have an integrated discussion about which of these alternatives is the lead fallback position, and whether any positions represent walkaway positions/no-go zones and indeed, whether the initial view on the Company s preferred position is still the preferred position, given the broader set of alternatives now on the table. Based on that discussion, the initial list of alternatives is distributed into different columns. For the semiconductor JV, the initial draft of the Positioning Sheet was populated for all key terms (Exhibit 3). In most cases, the deal team developed for each term a preferred and lead fallback position, along with other alternative positions, and walkaway positions/no-go zones. When to create. A full Positioning Sheet is generally best created after developing a set of deal options and agreeing on the preferred construct, but before drafting the Term Sheet or other interim deal document, such as an HOA or MOU (Exhibit 4). During the deal options generation and selection process, the deal team is not ready to work 30-plus terms in parallel. Rather, it should be focused on generating 3 to 5 high-level deal constructs, which tend to be differentiated by a small handful of critical terms, such as product or market scope (e.g., single asset, country, or product collaboration vs. The JV Deal Exchange January 2014 3
Exhibit 4: Key Documents in the JV Deal Process broader growth play), corporate form (e.g., joint venture vs. licensing agreement), ownership, and what activities are performed inside the venture versus performed by the parent companies. 1 Once the Company and counterparty have aligned on the high-level construct, it is time for the deal team to create the Positioning Sheet. The Positioning Sheet then becomes the basis for developing a Term Sheet that can be shared with the counterparty. The Positioning Sheet can easily be converted into a tool to support future negotiations and leverage prior thinking We were recently reminded of the costs of creating a Positioning Sheet too soon. Working on a 50:50 Chemicals joint venture, we developed a Positioning Sheet prior to our client fully aligning with the counterparty on the high-level deal construct. Our client had a strong preference to be the Operator of the JV, which was to operate on the site of one of its existing chemical complexes. Once the counterparty was fully engaged in the discussions, however, it became clear that it would only proceed with the negotiations if a separate joint venture organization was created, albeit one that would be principally staffed by secondees. This change in the operating model caused a fundamental reworking of the Positioning Sheet, since the construct and terms for a single-partner operated venture are quite different from establishing a JV organization. Why and how to update. Initially, a Positioning Sheet is created to help with the drafting of the Term Sheet. But its greatest value comes in serving as the active ledger of the negotiations that is, a place where new ideas and existing terms get recorded, refined, and shifted from one column to another as the negotiation unfolds. As the designated owner of the Positioning Sheet, the deal team project manager is responsible for updating the document following each round of counterparty negotiations or other input, including from internal working sessions, and advice from legal, tax, finance, and other advisors. In direct negotiating sessions, it can be useful for the Positioning Sheet owner to have a copy in his or her paperwork, and use it as a structured place to write down ideas as they arise during the discussions. When the time is right whether during or between negotiating sessions, the Positioning Sheet is an organized repository to look for ways to unstick negotiations by offering alternatives, including making concessions to the counterparty in one area in exchange for concessions to the Company in another area. 1 For a detailed discussion of JV deal options, see Developing JV Deal Options (Practitioner Guide). The JV Deal Exchange January 2014 4
CORPORATE TOOL AND GUIDANCE When companies enter into a string of similar agreements, the Positioning Sheet can serve a broader corporate purpose Today, many companies have joint venture strategies a plan to use a particular type of joint venture to pursue a certain set of opportunities. For example, Telecom, Consumer, and Retail companies like Vodafone, Unilever, and Walmart use joint ventures as a means to access new emerging markets, such as China, India, and Mexico. Chemical companies like BASF, Bayer, and American Cyanamid regularly enter into single-site manufacturing joint ventures, often operated by one partner, as a way to generate scale and secure supply of low-cost offtake. Similarly, Alternative Energies and Pharmaceutical & Biotech companies regularly enter into JVs with technology companies to develop and commercialize new technologies. And upstream Oil & Gas companies routinely form single-partner unincorporated JVs to explore for and develop new reserves. When companies enter into a string of similar agreements, the Positioning Sheet can serve a broader corporate purpose. Initially a device to support an individual transaction, the Positioning Sheet can be easily converted into a tool to support future negotiations and leverage prior thinking. The simplest way to do this is to merely reassemble the Positioning Sheet into a base form. To do this, simply place each potential position or term into the fourth column ( alternative positions ), and make sure other deal teams know this resource exists. This will allow the next deal team to start with a robust set of options and a clean sheet, which it can work through in its own negotiation by placing the term that it believes to be the preferred, lead fallback, and other positions into the appropriate columns, and then revising Exhibit 5: Structured Corporate Guidance The JV Deal Exchange January 2014 5
from there. When that team has completed its negotiations, a member of the corporate business development or legal staff can update the tool by adding to the list of alternative structures, or adding commentary related to the rationale and key considerations for each structure. A similar but more prescriptive approach is to use the same format but, rather than placing all the terms in the fourth column, pre-populate certain positions into the preferred, lead fallback, or walkaway columns. This way, deal teams will at least understand the Company s starter position on certain terms, and understand where it is going outside the bounds of corporate guidance. Our client work shows two other ways to convert the individual Positioning Sheet into a corporate tool both of which weave even more corporate guidance into the tool s fabric. One approach is for the Company to define its preferred negotiating posture and areas of negotiating flexibility with regard to each major clause or section of a JV Agreement (Exhibit 5). This approach may also include commentary with regard to the internal owner and related resources, such as corporate policies and guidelines, and other tools that might be helpful to dealmakers in structuring these provisions. Another approach is to embed corporate commentary inside a model form or actual JV Agreement Another approach is to embed corporate commentary inside a model form or actual JV Agreement. A European Power company, for example, took its most recent offshore wind JV Agreement and embedded alternative structuring options, sample contract language, and commentary directly into the agreement. The head of corporate development has instructed his business development teams and lawyers to start with this template when structuring JV Agreements. In Oil & Gas, one major oil company has placed alternative terms and corporate commentary into the industry s model form agreement an industry-accepted standard JV Agreement. ~ ~ ~ In the fog of joint venture negotiations, it is easy to lose one s way or at least lose track of different, potentially acceptable deal terms and ideas. A JV Negotiations Positioning Sheet takes time and attention to develop and maintain, and it will not, on its own, deliver the deal team to a good JV Agreement. But it does provide a map when unexpected weather invariably starts to roll in. c For questions on this issue, please contact: James Bamford Managing Director james.bamford@waterstreetpartners.net The JV Deal Exchange January 2014 6
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