Avoiding pitfalls in forging strategic alliances in India

By Bhumika Batra and Sachita Shetty, Crawford Bayley & Co

Many companies in developing countries find it difficult to adapt due to increasing competition and the integration of markets. Mergers and acquisitions is one strategic option, but it may end up being a complex, risky and costly affair.

An alliance is an organic response that can help companies survive. Strategic alliances give access to additional resources while maintaining competitive advantage and increasing market presence.

Bhumika Batra
Associate partner
Crawford Bayley & Co

In strategic alliances, the parties agree to remain independent contractors working towards a common goal as opposed to being stakeholders of a legal entity. Through an alliance, the partners share their surplus or complementary capabilities. Efficiently managed strategic alliances help companies expand their offerings substantially, without additional investment.

There are several benefits to pooling resources, but there are also a number of challenges. Performance failure and incompatibility issues are common and could lead to break-ups or failure of alliances.

In India, however, there is also a regulatory challenge. For instance, though foreign entities were allowed to have a stake in the multi-brand retail sector, the 30% local sourcing requirement proved to be a stumbling block for some. Major international brands found it difficult to comply, which forced many to exit India, sometimes leading to bitter fights.

Since alliances are structured on contractual or quasi-contractual bases, parties have had to revisit their agreements to enforce the termination and dispute resolution clauses. Hence, legislating for and negotiating of the termination, indemnification and governing law clauses is of paramount importance.

Sachita Shetty
Senior associate
Crawford Bayley & Co

The grounds for termination could set out that a material breach of the agreement shall entitle the technology licensor or franchisor to compel the licensee or franchisee to de-brand and wrap up the business. The foreign party can ensure that the defaulting licensee ceases the use of its brand immediately and that it does not compete in a similar or derivative business. Additionally, agreements can also provide clauses to waive a licensee’s or franchisee’s right to legal action against the licensor or franchisor when the contract is terminated.

In a franchise agreement, the relationship between the franchisor and franchisee is on a principal-to-principal basis. A clear provision to this end in the franchise agreement will protect the franchisor against any interpretation of implied agency, which would otherwise expose the franchisor as a principal for the acts of the franchisee.

Since cross-border franchising transactions involve protection of intellectual property of the owner, such agreements may provide for: (a) overseas or neutral governing laws; and (b) international dispute resolution. The parties may agree on a neutral venue and juridical seat for the arbitration proceedings and choose to submit exclusively or non-exclusively to a foreign court, which has inherent jurisdiction over the dispute.

When there is a dispute regarding termination, sometimes the Indian partner continues to carry on the business using the franchisor’s trademark, logo, and know-how without necessarily paying for their use. The foreign partner can then initiate a lawsuit with an interlocutory application for an injunction to protect its intellectual property.

Litigation can take a long time, and even if the franchisor ends up with a favourable judgment, the expenses involved and the damage to the brand in pursuing litigation can be significant. The Supreme Court has held that the grant of an interim injunction is a matter of discretion of the courts and the following tests are to be applied: (a) whether the plaintiff has a prima facie case; (b) whether balance of convenience is in favour of the plaintiff; and (c) whether the plaintiff would suffer irreparable injury if the defendant is not restrained.

Courts in India are known to adopt a proactive stance insofar as reputed trademarks are concerned and grant injunctions. Usually, lawsuits in respect of intellectual property draw a close upon completion of the interlocutory proceedings, if an injunction is granted restraining the defendant from using the trademark pending a final decision.

Licensors and franchisors now prefer subscribing to golden shares, whether or not they are acquiring equity or debt. Golden shares have differential voting rights, which gives the owner of the intellectual property the right to control the use of the brand. It ensures that they have enough voting rights in the licensee entity to enforce debranding immediately and efficiently.

Bhumika Batra is an associate partner and Sachita Shetty is a senior associate at Crawford Bayley & Co.

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