Misappropriation of Corporate Opportunity: MobileActive Media, LLC under Delaware Law
February 28, 2013 by Bierce & Kenerson, P.C.
New ventures in Big Data, cloud-based computing, outsourced business process management (BPM), Internet-based SaaS services, IT-enabled marketing and mobile telephony face keen competition in the marketplace. However, when competition comes from a co-owner of the new venture, the results can be ugly, litigious and expensive for all parties. The MobileActive Media, LLC joint venture for mobile media advertising was formed in 2007 in Delaware and lasted only till 2010 before litigation about breach of contract, breach of fiduciary duty and dissolution. The MobileActive Media case offers insights into the importance of scope of business operations, joint control, relationship governance, vetoes, and personalities in achieving value and overcoming typical risks of joint ventures.
A January 25, 2013 decision of the Delaware Chancery Court decided that a 50% owner of a Delaware LLC was responsible for misappropriation (or “usurpation”) of corporate opportunities of the LLC by entering into business operations that competed with the LLC’s core purpose of business. The court awarded $3.08 million in damages from usurpation.
For new venture startups, friends and family investors, angel investors, venture capital investors as well as mid-sized businesses seeking growth, it is critical from the start to ensure that the new venture is designed well and implemented by all parties. The lessons apply to pre-nuptial agreements for strategic business relationships ranging from co-investment to supply chain and value chain relationships.
The New Venture. In 2006, a U.S. former senior executive of a national cable telecom company (the “Entrepreneur”) and a U.K. technology company (the “Platform Company”) formed a 50-50 Delaware LLC to exploit “interactive video and advertising” activities in North America. The Entrepreneur agreed to, and did, provide access to his broad industry contacts. The Platform Company, a United Kingdom business that owned proprietary mobile marketing technologies, would provide technical resources, and its 50% ownership would be held by a subsidiary.
Exclusivity of LLC’s Business Purpose. The Delaware LLC’s operating agreement contained an exclusive-dealing clause that stated that interactive video and advertising activities in North America by either joint venturer or their affiliates would take place exclusively through the joint venture. It excluded the UK company’s (and its subsidiaries‘) “North American non-video based mobile and on-line marketing businesses.” It expressly permitted the members and their subsidiaries to “engage in any business activities except those whose primary purpose involve the enabling and enhancing of interactive video programming and advertising content across multiple digital platforms.” In re: MobileActive Media, LLC, a Delaware LLC, Del. Chancery No. 5725-VCP (Jan.25, 2013), slip op. [Citations omitted]
Prospects for Success. The joint venture had bright prospects due to introductions provided by the Entrepreneur to executives in the telecommunications and advertising industries. These led to two business deals, but further growth was stunted due to a conflict of interest and lack of support from the UK Platform Company.
Struggles between the Members. Shortly after the operating agreement was signed, the UK Platform Company offered to buy out the Entrepreneur’s 50% interest. They realized it was a bad deal early, but did not resolve their differences. They ignored the disagreement without terminating the joint venture and made several acquisitions in related technologies. Over a period that started a few months after the signing of the LLC operating agreement for MobileActive, the UK Platform Company (and its subsidiaries) closed on acquisitions of companies that owned:
(1) an off-the-shelf SMS gateway and reporting package;
(2) a micropayments business that allowed users to send and receive a text message to authorize the purchase of virtual goods;
(3) a Toronto based advertising and marketing boutique that provided traditional types of marketing services;
(4) a Canadian analytics business that provided database solutions and predictive analytics; and
(5) a Canadian analytic search technologies company with technologies that allowed non-technical users ―to query very, very large databases and create customized reports in a very rapid fashion; and
(6) a Delaware corporation that had a sizeable SMS network of 17 million consumers and the technology to deliver advertising to the network.
The UK company never offered any opportunity to the Delaware LLC or the Entrepreneur to invest in such target companies.
Eventually, the subsidiary of the UK Platform Company that was the 50% member went through a restructuring and transferred all of its assets to a newly formed Canadian company for less than fair value. The Entrepreneur successfully disputed the value of the consideration the company paid in this transaction, claiming it violated the Delaware Uniform Fraudulent Transfer Act. The new Canadian company was then sold in 2011 for approximately $100 million. The Entrepreneur did not receive a cent from these transactions and chose to sue, claiming breach of fiduciary duty. The Court awarded him 3.08 million dollars and impressed a trust on the assets.
Elements of a Claim for Breach of Fiduciary Duty by Misappropriation of Corporate Opportunity. As a general reminder to all considering a new business venture, under Delaware corporate law (as recounted by Vice Chancellor Parsons):
“A claim for breach of fiduciary duty requires proof of two elements: (1) that a fiduciary duty existed and (2) that the defendant breached that duty. ―At the core of the fiduciary duty is the notion of loyalty—the equitable requirement that, with respect to the property subject to the duty, a fiduciary always must act in a good faith effort to advance the interests of his beneficiary. ―It forbids one joint adventurer from acquiring solely for himself any profit or secret advantage in connection with the common enterprise. ―The doctrine of corporate opportunity represents but one species of the broad fiduciary duties. The elements of misappropriation of corporate opportunity are: (1) the opportunity is within the corporation‘s line of business; (2) the corporation has an interest or expectancy in the opportunity; (3) the corporation is financially able to exploit the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary is placed in a position inimical to his duties to the corporation.” Id.
Lessons for New Ventures (especially Tech Ventures and IT-Enabled Business Process Management Ventures). This case highlights classic truths of business law.
- Clear Definition of Corporate Purpose. Every equity owner of a company should agree on the shared scope of business. The definition should serve as a clear guide for future conduct to avoid possible breaches of the fiduciary duty of loyalty.</li>
- Get All Parties to Approve. The senior management of all equity owners should exercise their business judgment and commit to the new venture’s scope. What the Delaware court failed to mention was that the board of directors and officers of the UK Platform Company are liable to the shareholders under UK fiduciary duty principles because they knew, or should have known, of the conflicts with the US Entrepreneur and sought to circumvent his rights anyway.
- Relationship Management. The US Entrepreneur was partially at fault for not getting all of the UK Platform Company’s management “on board” and fully committed. He also failed to manage the relationship through a specific management procedure under the Operating Agreement to ensure full disclosure and early resolution of conflicts.
- Valuation. The litigation occurred because the parties disagreed on the value of what was created and what was eventually to be divided among the owners. The $3.08 million damage award shows that disloyal conduct can be expensive. Both parties should consider use of appraisals or other methods for valuation when a dispute becomes irreconcilable.
- Dispute Resolution Process and Exit Plan. A well-drafted Operating Agreement will identify the method for resolving disputes. Under Delaware LLC law, liquidation and dissolution is the only solution permitted, unless the parties have agreed otherwise. Investors and other passive owners should be particularly concerned about the risk of dissolution, so they may wish to provide for some form of “work out” involving ongoing operations to be managed by an interim manager while a buyer is sought to buy the entire business.
- Legal Fees. Legal fees for enforcement of contract rights under an LLC’s Operating Agreement are not recoverable as damages, unless the contract requires it or unless statutes allow such recovery. The weaker party should consider the impact of such a clause.
- Fiduciary Duty. Some LLC’s may be managed by members (or managers) who have no fiduciary duty to the members. Depending on the applicable law, such exculpatory provisions could have a serious impact on the future of the enterprise and enable one member to take unfair advantage of the others. The equity owners who are not managers should consider the impact of such an exculpatory clause.
Joint Venture between IBM and French Bank BNP Paribas
October 16, 2009 by Bierce & Kenerson, P.C.
On December 19, 2003, IBM and the French bank BNP Paribas announced the creation of a joint venture to manage BNP Paribas’s IT operations. The deal represents the evolution of a “partnership” model between service provider and its customer within the framework of the European Union’s protective labor laws.
Scope.
The joint venture was structured so that it would provide, initially, information technology services to manage and operate BNP Paribas’s operations. BNP Paribas is reportedly the number one bank in the Euro zone and a major international bank with operations in more than 85 countries. Its operations include commercial banking, investment banking, international private banking and asset management. The deal covers computing power for 26 billion operations per second (26,000 MIPS), online storage capacity of 400,000 billion characters (400 Teraflops) and 7,000 Unix or NT servers.
Motivation.
In its announcement, the bank indicated that, while benchmarking studies (“etudes de benchmarking”) conducted by the bank had revealed its technological excellence, the bank shared certain motivations of other major financial groups that decided to outsource their information technology services.
- Technology Changes.
The bank stated that its alliance with IBM, “world leader in information technologies and services,” could anticipate the future evolution of technologies through “a continuous retention of its staff at the best level,” improving the flexibility of the services rendered and assuring the ongoing continuity of excellence in information technologies. - Cost Management.
At the same time, the bank noted that this joint venture would promote the “mastering of information technology costs, which responds to the exigencies of the banking profession that is evolving in a highly competitive environment. “[translation.]” - Labor Relations.
BNP Paribas’s IT Director, Herve Gouezel, announcing the deal, stated that the partnership “guarantees that the BNP Paribas employees would retain their legal status as well as their mastery of their technical framework.” [Our translation.] - IT Services on Demand.
BNP Paribas’s IT Director expressed confidence in the “Information Technology on Demand” model that the joint venture offered, allowing the bank to obtain an assured provider of services that could be expected to evolve and develop to absorb organic growth and adapt to evolutionary changes in the banking sector. - Prior Business Relationship.
IBM’s success appears to have been generated by its prior relationship with the bank. In the 1999-March 2000 timeframe, United European Bank, Banque Nationale de Paris (BNP) and Banque des Paris et des Pays-Bas (Paribas) merged. IBM provided the integration services to facilitate rapid implementation of the merger on a technical basis. As part of the integration of the banks, IBM migrated their technology platforms from OS/390 systems to OS/390 Sysplex systems. The banks were already operating a management system of DB2 databases, IBM’s IMS transactions management system and IBM’s MQSeries solution allowing exchanges of data between heterogeneous platforms that BNP had installed in 1995 instead of undertaking its own internal updates of historical systems and a project for an inter-application exchange project. BNP Paribas and IBM had previously claimed that IBM’s merger-integration services had begun saving the bank €250 million per year in IT costs beginning in 2002.
Ownership.
The joint venture will be owned 50-50 equally by IBM and BNP Paribas. While not announced, each party would probably establish a separate subsidiary to own its share.
Employees.
By reason of the joint venture structure, BNP Paribas retains control and responsibility of its workforce. The 50-50 ownership allocation, however, suggests that the operational control will be exercised at least equally by IBM. Approximately 450 persons will be working for the joint venture to maintain the BNP Paribas infrastructure and IT operations.
The announcement was silent on the degree of integration of BNP Paribas’ shared IT services group, BNP Paribas Services, based in Geneva, Switzerland with approximately 400 employees, which reportedly provides IT solutions to the private banking arms of its parent group, BNP Paribas, after the merger of the three constituent banks of BNP Paribas in 1999-2000. Given the size of the staff and the fact that Switzerland is outside the European Union, it is possible that the bank might have retained such operations external to the IBM-bank joint venture.
Sales.
The joint venture is anticipated to have “sales” of approximately € 1.0 billion within five years after inception. The target customers, other than BNP Paribas, are not immediately clear. There appears no mention of any restraint in IBM’s ability to compete with the joint venture. We are waiting for such a disclosure on IBM’s next joint venture.
Lessons.
Selection of a joint venture structure in the European Union appears to offer some unique advantages that are local in nature. This legal structure overcomes a number of barriers to outsourcing under French and European Union labor laws. The management of a 50-50 joint venture requires an allocation of roles and responsibilities that can be virtually the same as a classic “independent contractor” agreement. The operating structure, scope definition, budgeting process, termination provisions and consequences, intellectual property rights and other essential elements undoubtedly resemble those in a well-drafted “independent contractor” agreement. If this is truly a joint venture, special considerations of fiduciary duty under the law governing each party and the joint venture merit attention.
Hewlett Packard and NEC, 2002 Joint Ventures in Outsourcing
October 9, 2009 by Bierce & Kenerson, P.C.
Overview.
On December 12, 2002, Hewlett Packard and NEC announced a joint venture (“JV” or “alliance” for our discussion) with NEC to deliver managed information technology outsourcing services in Asia, the United States and Europe. The legal structure of the joint venture was not fully disclosed, but some guesses may be made. This case study explores business and legal issues frequently arising in joint ventures. We trace some of the prior relationship and the resulting economic, cultural and operational fit of the venturers.
Joint Venture as a Business Model in a Depressed Global Economy.
The joint venture starts with the realization that the resources of each joint venturer are insufficient to meet a particular market need. ( In a sense, a shared services center is a joint venture of the department or lines of business of a large enterprise.) This particular JV targets a need to serve global companies engaging in mergers and acquisitions. This view of the world suggests that increasingly, for the foreseeable future, consolidation and concentration of multinational enterprises will continue. In essence, the HP-NEC joint venture targets this wave of global consolidations across industries.
Prediction for Future Restructuring of the Joint Venture.
Business analysis suggests that, after NEC completes a spin-off of its semiconductor business, the new joint venture will be a candidate for merger into HP, provided that the joint venture achieves satisfactory performance goals. NEC’s Chairman and CEO, Koji Nishigaki, observed at the December 2002 news conference that “we have laid the foundations [for a merger], so the potential is there. Part of the companies could be merged. We will see many dynamic changes.”
Ultimately, like any joint venture, the potential for any merger and the success of the joint venture will depend on the joint performance of the JV partners, raising the issue of what commitments each is making to compete successfully in an increasingly competitive, increasingly concentrated market for outsourced international services in information technology management.
The joint venture presents a number of legal issues that are common to any international joint venture in information technology, hardware, software and managed services.
Geographical Scope.
The alliance will market to multinational companies that have offices in one or more territories. Initially, these territories are limited to China, Japan and the United States. As of 2004, the joint venture will expand the territory to South East Asia and Europe. The phased introduction of jointly-provided services into targeted territories should enable the parties to manage the inevitable transitional kinks in their relationship before taking the relationship to distant markets.
Service Scope.
The JV includes marketing, systems integration and customer support services.
Target Customers.
The JV partners intend to create a new market for IT outsourcing for customers that are not dependent on mainframes. They admit that IBM dominates the mainframe computer market. Rather, the JV will be targeting large global customers in the “post-mainframe-era market,” particularly the integration of computer systems after mergers of large global corporations that have disparate IT infrastructures. In Japan, the two have already worked on an integrated system for Sumitomo Mitsui Banking, which is the product of a recent merger of two banks. That deal not only inspired the joint venture, but probably will also serve as the “sweet spot,” template and benchmark for future joint venture service offerings.
Legal Structure.
The two alliance partners indicated that they will establish one or more joint ventures to provide a range of information technology services. The HP-NEC announcement did not elaborate on the terms or structure of the JV, so we will speculate.
Under a joint venture, there are basically two methods of developing a “joint venture”
- Contractual Joint Venture:
In a “contractual” joint venture, the two partners establish a business operation that is based solely on a contract. No new legal entity is formed. Such joint ventures were popular in East-West trade during the Soviet era. At that time, contractual joint ventures had several ideological and legal advantages for the Soviets. No one had to establish a legal entity that would have an existence independent of the joint venturers. The Soviets did not have to implement a capitalist tool of an entity owned by someone other than the State (the Fatherland). Accounting could be defined in the contract, leaving everything to negotiation and nothing to the application of capitalist legal systems. (Did you hear of Hollywood Accounting? It spawned many lawsuits. The Soviets had their own style of contractual accounting, too!). And termination could be achieved by contract termination, without transfer of any assets from an entity. We doubt that the HP-NEC deal was inspired by a contractual JV structure. - Entity Joint Venture:
In an “entity” joint venture, the joint venturers agree to form a new entity (the “JVCo”), which then serves as the focal point for the business operations. In an outsourcing JV, the joint venturers typically contribute cash to the JV Co. to conduct certain defined operations (such as its officers and key employees in administration and marketing). But, the JV partners rarely transfer ownership of intellectual property, operating employees, real estate or technology systems to JVCo. Instead, the JVCo takes licenses and leases from its JV partners, who also agree to provide defined services to the JVCo so that JVCo can, in turn, deliver the outsourcing package to the JVCo customers. A JVCo need not have much capital: any transitioning of customer employees and other resources under management could be made to either, or both, of the JV partners instead of to the JVCo. In fact, JVCo might have no assets at all, assuming that the JV partners each make available, on a “secondment” basis, its own employees performing functions in the name of the JVCo. Maybe the Soviets had a smarter idea, since at least the third parties dealing with the JV under a contractual JV could make a claim against some deep pockets!
Structure of Services to Target Customers.
Under the JV, the partners agree to establish a “joint sales force,” which might be under a JVCo. When a customer signs a contract with JVCo, the customer’s transitioned employees would probably be hired by a separate jointly owned entity (“JVServiceCo”), with services being provided separately and jointly by HP and NEC. The exact nature of the legal relationships between the service providers, as a team, the customer-specific JVServiceCo and the customer would reflect a number of legal and business considerations. The authors of this case study offer to provide details of such considerations, and related strategies, to their clients on request.
Scope of the JVCo’s Operations.
Under corporate law, the JV partners must carefully define the scope of the JV’s operations. Like lines in the sand, the scope defines the realm of business opportunities that each JV partner must bring to the JV, rather than perform on its own. Anything outside the defined scope does not involve any fiduciary duty of a JV partner to bring the corporate opportunity to the JV and to avoid competing with the JVCo for the opportunity.
Scope of Contributions in Kind.
In the HP-NEC deal, the announcement failed to mention anticipated financial contributions. This suggests that the two parties will minimize invested capital by allocating functions in a complementary, non-competitive, fashion. Such an allocation justifies a joint venture since the two companies might not have been able to offer or compete in the marketplace alone. See Antitrust in Joint Ventures in Outsourcing.
In the press conference, HP’s President, Carly Fiorina, said that HP “focuses on capability, invention and innovation,” while NEC “brings important capabilities in open mission-critical systems.” This suggests that NEC would be providing managed services for data centers operating legacy systems under Unix (or variants), and HP would be providing customer solutions design, project management and custom services in software development, product design, technology improvement plans and strategic consulting.
HP’s Contribution.
HP is already a leading outsourcing company in North America and Europe. In September 2002, Canadian Imperial Bank of Commerce awarded HP with a seven-year, $1.5 billion contract for the provision of IT services.NEC’s Contribution.
Customer Base.
NEC has an installed customer base in Japan’s financial and business markets, especially in telecom. NEC also has extensive business relationships with technology companies in China, which should help open the Chinese market for HP’s computers and, in combination, NEC’s and HP’s technology services. But, in the JV, new markets will be targeted, so the Japanese market will be only an incidental target market. Accordingly, the JV will allow NEC to enter new geographical markets using HP as a sales agent and distribution channel.
Technology Solutions.
NEC’s Solutions group offers custom consulting and systems integration services that could be used to provide back-office support in Japan. NEC Solutions offers highly reliable computing solutions to enterprise, government, and individual customers by providing software, hardware, and services necessary to design, integrate, and operate these elements. NEC Solutions focuses on customized solutions packages for new technology deployments for customers.In addition, NEC’s Systems Integration services group, which has approximately 13,000 systems engineers, provides end-to-end systems design, development, deployment, and systems operation solutions. System integration is provided directly and through NEC Soft, Ltd. and other subsidiaries. SI services consist of (a) systems design, development, and deployment services, (b) operational support services, including system problem diagnosis and correction, and (c) consulting services on systems architecture design and technology planning, including the evaluation and selection of technologies and platforms.
In software, NEC develops and provides software products primarily for use in its computers. Software products include operating systems, middleware for managing large-scale distributed data processing systems, and application software. NEC continues to further develop its capabilities in middleware to enable the more rapid, cost-effective integration of different systems, protocols, and software.
Rationale for a Joint Venture in Outsourcing.
Several key factors brought this joint venture into being:
Prior Collaborative Relationship over Many Years.
Since at least 1995, HP and NEC have been collaborating on technology other than services. They share mutual competitors, including Microsoft and IBM. Prior to the merger of Compaq into HP, HP had already established a series of joint activities in research and development, design, manufacture and distribution of computers and their components. The past relationship focused on combining mainframe technology expertise of NEC and, in at least one case, Hitachi, Ltd., with HP’s operating systems and computers.
In 1995, the two companies partnered in the Unix server arena, allowing NEC to purchase large-scale servers and related technology from HP on an OEM basis for resale in Japan. As a result, the NEC NX7000 product line is based on HP technology.
In 1997, HP became an OEM supplier to NEC and Hitachi, Ltd. of entry-level models in the HP 9000 D-class Enterprise Server family. Also, HP signed a multi-year software development agreement with NEC and Hitachi to integrate Japanese mainframe expertise into HP-UX operating system for grater modularity, scalability, performance, reliability and management by self-healing enhancements to detect and repair unexpected software problems in the HP-UX kernel. Incidentally, in 1989, HP and Hitachi signed a broad alliance including the joint development of HP’s Precision Architecture RISK CPU chips and the design and construction of HP’s PA-RISC systems. The two companies established a technical support center in Japan (the “HP-NEC Enterprise Solution Integration Center,” or “HP-NEC ESIC”).
In 1998, HP and NEC signed a development agreement to optimize HP’s HP-UX operating system to run on systems using the upcoming Merced 64-bit processor. As of 2002, the Merced processor has not generated widespread market demand.
In 1999, HP and NEC agreed to collaborate on what they called was the next generation of Japan’s Internet Protocol (IP) network. Under the 1999 agreement, NEC distributed IP servers using HP-UX (HP’s Unix-like operating system) and HP OpenCall (HP’s middleware) together with NEC’s application software and IP network equipment. On the R&D level, the two companies agreed to combine their computer and telecom technologies to provide real-time high performance for telecom carriers.
In May 2002, HP and NEC announced a strategic collaboration to deliver large-scale, open mission-critical solutions for targeted industries. They noted that, together, they had already jointly delivered several complex mission-critical solutions in the financial and telecommunications industries. This collaboration expressed an intention to target a number of U.S. financial services companies and a range of global Japanese companies. They intended to explore broader market opportunities worldwide, common systems integration and solutions, to leverage each other’s enabling technologies such as NEC’s OpenDiosa middleware for high-availability applications on non-mainframe servers and HP’s Utility Data Center and Integrated Service Management. The allocated roles for HP to provide IT infrastructure services and outsourcing capabilities and NEC’s systems integration and support technologies.
Common Technology Architectural Orientation.
While each of the JV partners has developed thousands of patents, every patent is subject to challenge and invalidation.
Concentration and Vertical Integration in the International Markets for Information Technology Outsourcing.
In 1997, Computer Associates reportedly offered to acquire Computer Sciences Corporation so to support distribution of CA’s software products. CSC successfully rebuffed the offer. But the dialogue raised the question of the viability of a future IT outsourcing business where the Service Delivery group was merely the distribution channel for proprietary software of Computer Associates and its favored channel partners.
Restructuring of NEC.
NEC has been hard hit by a combination of a decline in global demand for computers (and the computer components that NEC manufactures), falling prices for IT hardware, excess capacity in broadband telecommunications (and consequential decline in optical networking), and a general economic decline in Japan during the 1990’s and early 2000’s. As a result, NEC has restructured for cost-cutting, redirection of capital investment and supply-chain management to improve manufacturing efficiency. The restructuring includes closing of aging factories, layoffs, transfer of semiconductor business (including system LSIs, integrated circuits and discrete devices and compound semiconductor devices but not DRAM’s) to a new subsidiary that NEC intends to spin off in a public offering. Since 2000, NEC has also separated its plasma display panel division and merged several similar units at group companies.
In short, NEC has decided to slim down from its “giant” size into a series of separate companies, each with its own business plan. Development of an outsourcing business suggests a new business plan. In announcing the JV, NEC’s President and CEO Koji Nishigaki admitted that NEC had no experience in the full-scope type of outsourcing business, and hoped to learn from HP’s business model.
Restructuring of HP.
HP is the fish that swallowed the second fish that swallowed the third fish. HP merged with Compaq Corporation, a computer manufacturer and outsourcing services provider, after Compaq had acquired Digital Equipment Corporation, a computer manufacturer and outsourcing services provider especially for distributed networks of computers. As part of the post-merger integration, HP has shed thousands of workers and sought economies of scale and new channels for leveraging core competencies — including outsourcing — into new geographical markets.
Coopetition: Competition and Collaboration amongst Outsourcers.
“Coopetition” refers to the anomaly of companies that compete in one sector cooperating closely in another sector.
IBM.
In this case, HP, NEC and Hitachi, who have all worked closely to compete with IBM and other computer manufacturers, have joined IBM in the promotion of “open source” computing, to be supported by a non-profit Open Source Development Lab in Portland, Oregon, to test enterprise-class Linux.
Microsoft.
Microsoft licenses eHome technology to NEC and HP.
HP and NEC.
Each of HP and NEC sell computers, personal digital assistants / Windows CE devices and other technologies that perform similar functions.
Securities Law Disclosures for Joint Ventures.
Joint ventures involve significant risk to the business and reputation of each party. Formation and operation of a joint venture could require disclosure under securities laws, since a significant venture could have a material impact on the financial performance of either party. Each of HP and NEC has annual revenue in the neighborhood of about $35 billion to $40 billion. A venture that does put at risk 1% or 2% of that revenue stream (consisting of $350 million to $700 million) probably is not “material.”
On the other hand, such information might be disclosed generally in the issuer’s “management discussion and analysis.” This disclosure is much more general in nature.
As NEC said in such discussion in its Form 20-K filed in August 2002:
WE RELY ON OUR STRATEGIC PARTNERS, AND OUR BUSINESS COULD SUFFER IF OUR STRATEGIC PARTNERS HAVE PROBLEMS OR OUR RELATIONSHIPS WITH THEM CHANGE
As part of our strategy, we have entered into a number of long-term strategic alliances with leading industry participants, both to develop new technologies and products and to manufacture existing and new products. If our strategic partners encounter financial or other business difficulties, if their strategic objectives change or if they perceive us no longer to be an attractive alliance partner, they may no longer desire or be able to participate in our alliances. Our business could be hurt if we were unable to continue one or more of our alliances.
Under the Sarbanes-Oxley Act of 2002, joint venturers such as NEC and HP will probably need to disclose more information relating to joint venture operations. While that law generally does not change the definition of materiality, it does require disclosure of information the previously was ignored under former financial accounting principles. The act does require closer attention to disclosure of “off-balance-sheet” transactions. The SEC has issued a proposed rule on such disclosures.
Outsourcing Law & Business Journal™: January 2009
January 1, 2009 by Bierce & Kenerson, P.C.
OUTSOURCING LAW & BUSINESS JOURNAL (™) : Strategies and rules for adding value and improving legal and regulation compliance through business process management techniques in strategic alliances, joint ventures, shared services and cost-effective, durable and flexible sourcing of services. www.outsourcing-law.com. Visit our blog at http://blog.outsourcing-law.com for commentary on current events.
Insights by Bierce & Kenerson, P.C., Editors. www.biercekenerson.com
Vol. 9, No. 1 (January, 2009)
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1. Identity Theft in 2009: Compliance by Business Owners and Government Agencies under Draft Federal Data Breach Notification Act.
2. Codes of Conduct in the Outsourcing Environment: Practical Scenarios after Wipro Debarment and Raju / Satyam Fraud.
3. Humor.
4. Conferences.
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1. Identity Theft in 2009: Compliance by Business Owners and Government Agencies under Draft Federal Data Breach Notification Act. Personally identifiable information is the core to the global economy. All businesses, large and small, rely upon information technology, outsourced to external service providers, to process such information for a wide range of uses, including HR payroll and administration, purchase orders, accounting, finance, credit card payments, debt collection, tax compliance, records management, procurement, engineering, market analytics, business intelligence, e-discovery, legal services, and logistics. All businesses must comply with data breach notification laws. In the U.S.,these laws will likely be extended and federalized in 2009. For more information on pending federal legislation as of January 2009, click here for the full article, and, for a copy of the draft 2009 federal Data Breach Notification Act, click here.
2. Codes of Conduct in the Outsourcing Environment: Practical Scenarios after Wipro Debarment and Raju / Satyam Fraud. Implementing lessons learned from Enron and the Sarbanes-Oxley Act, “codes of conduct” have become an integral ongoing concern in supply chain management applicable to employees, suppliers, contractors, consultants, captive affiliates, outsourcers and joint venture partners. When a trusted supplier breaches that code of trust, the enterprise customer needs to identify available remedies and make informed choices about enforcing legal rights and effectively mitigating the risks. This article makes recommendations for best practices in risk management, business continuity planning, disaster recovery, and legal rights and remedies in case of adverse events associated with a breach of a code of conduct or code of ethics due to senior management fraud or innocent “improprieties” that were fully disclosed but not permitted. It takes inspiration from the Raju /Satyam fraud in early 2009 and the debarment of Satyam Computer Servers Ltd., Wipro Technologies and Megasoft Consultants from the World Bank list of eligible contractors for corrupt practices. For the full article, click here.
3. Humor.
Change Control, (n). (1) a majority of voters on election day; (2) lobbyist’s draft legislation to block competitors from changing the rules of the marketplace; (3) Darwinian Evolution of Species, applied to business process transformation; (4) periodic brain dump.
4. Conferences
February 9-10, 2009, 9th Annual e-Services Philippines Conference and Exhibition and Next Wave Cities for Global Sourcing Council’s Multi-National Teleconference in Manila, Philippines and Hoboken, New Jersey. The Global Sourcing Council will join with a session at the 9th Annual eServices Global Sourcing Conference and Exhibition taking place in Manila, The Philippines, to focus on “Next Wave Cities”. In the U.S., this event will take place at the Stevens Institute in Hoboken, New Jersey, beginning at 7PM; refreshments will be served, followed by an international video conference at 8PM. A keynote speaker and panel will be present in each location. The Stevens Institute site will focus on key factors that client companies seek in their sourcing locations. In a bid to be the next e-Services hub, invited cities present their development plans and competitive advantages. Vendors and buyers/influencers will exchange perspectives on current demand and supply requirements; presentations from new eligible locations in the Philippines, Asia and Europe will be given and this conference will provide business matching and lead development opportunities. To register, click here. For more info on the 9th Annual e-Services Philippines Conference and Exhibition, visit their website.
February 10-11, 2009, American Conference Institute (ACI) Reducing Legal Costs, New York, New York. Corporate legal departments are under the gun to reduce costs, and the pressure on them to do so will only mount as the economy struggles. American Conference Institute’s 2nd Annual Corporate Counsel Forum on Reducing Legal Costs has been tailored to provide in-house counsel with the knowledge they need to successfully employ cost-reducing procedures both internally and externally. Don’t miss this unique cross-industry benchmarking forum on keeping legal department costs in check, led by a spectrum of leading companies. For more info, click here.
February 11-13, 2009 NASSCOM Leadership Forum 2009, Mumbai, India. The NASSCOM India Leadership Forum 2009, a milestone event that will mark NASSCOM’s 20th year, will bring under one roof industry leaders, thought gurus, analysts, Government decision makers, academia and IT users from across the world. For the very first time, the global conclave will journey through three key themes-one for each day-to completely transform the experience for delegates. For more info, click here.
February 16-18, 2009 IAOP 2009 Outsourcing World Summit, Carlsbad, California. In its 12th year educating the world’s outsourcing professionals, IAOP™’s 2009 Outsourcing World Summit is a one-of-a-kind opportunity. Come to learn the very latest in how to create competitive advantages for your company through outsourcing. For more info, visit their website.
February 23-24, 2009, American Conference Institute LPO Summit, New York, New York. ACI’s Legal Process Outsourcing Summit is designed for both in-house counsel and law firms who are still evaluating the viability of offshore outsourcing, plus those who already have outsourcing operations in place but who want to stay ahead of the latest industry developments to optimize their business practices. For more info, click here.
February 23-25, 2009, IQPC 6th Annual Procure-to-Pay Summit, Miami, Florida. SSON and IQPC’s Procure-to-Pay series returns with the 6th installment this February! Following the tremendous success of the last events and traction from leaders in the space, the 2-track agenda promises to deliver tools to help bridge purchasing with payables and enable process excellence throughout each and every segment of the P2P cycle, including improving the bottom line, optimizing available resources and managing process change. For more info, click here.
February 26, 2009, Global Services Conference, New York, New York. This year’s theme is “Revisiting Global Sourcing in a Challenging Economy”. The financial crisis and the economic meltdown have put pressure on organizations of all types. In a more globalized world, the dimensions of global engagement have increased and so has the impact. In challenging economic conditions, global sourcing of services throws up new opportunities. The 2009 Global Services Conference will have expert discussions around how customers of business and technology services can revisit their global sourcing strategies to tap into these opportunities. In a jam-packed day filled with thought-leaders, peer discussions, workshops and real-world case studies, the 2009 Global Services Conference breaks new ground in providing content to help executives determine how to establish business value in outsourcing engagements. Global Services will also present the findings of its annual Global Services 100 research study at an awards and cocktail reception. Click here for more info.
March 22-26, 2009, IQPC’s 13th Annual Shared Services Week, Orlando, Florida. SSON’s Shared Services Week™ is the community event for all levels of Shared Services professionals around the globe. With over 900+ past attendees from 22+ countries each year, it is the “Can’t Miss” event for everyone involved with shared services. In it’s 13th year, the event is bigger than ever! We have added additional tracks, more expert speakers, a larger exhibit hall and new content. Experience the most renowned Shared Services conference ever and take away key insights you will learn no where else. Network with experts in the industry and create contacts for life. Receive a 30% discount when you register by using code IUS_OSL_#3. Call 1-800-882-8684 or visit us online.
April 27-29, 2009, IQPC’s 7th Annual e-Discovery Conference, San Francisco, California. Join this year’s conference to learn more about managing the process of electronic discovery files and to explore options that are available for this task. Proactive e-discovery solutions are more critical to legal departments yet the solutions for costs, implementation, and management are still widely unknown. This conference will provide strategies for e-discovery success including proactive strategies for record management; global privacy issues, data security laws, regulations; specific cost control options; judicial perspective; and cutting edge software solutions. For more info, click here.
May 5-6, 2009, 7th Annual HRO World TM Conference & Expo at NY HR Week ™ , New York, New York. Hear from the HR outsourcing industry’s most respected practitioners, analysts and vendors. Register by April 10 with Source code HROL and save $100. Register here online or call 1-800-727-1227.
May 18-20, 2009, 6th Annual HR Shared Services & Outsourcing Summit, Denver, Colorado. The 6th Annual HR Shared Services Summit is the most important event of the year for HR leaders seeking to re-align their services with the strategic requirements of the business. This successful event brings together senior HR leaders in an exciting interactive forum, delivering best practice case studies aimed at optimizing every stage within the HR transformation process. Given historic economic conditions, it’s more important than ever that HR leaders exploit the dramatic economies of scale that are available to them through shared service structures. And for more mature companies – those that have already made the transition to an HR shared service model – there is an urgent need to re-align the kinds of services they offer with increasingly tough business challenges. Click here for more info.
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