LexisNexis

Partnerships in the healthcare and life science market in times of a pandemic - dos and don’ts

Wednesday 26 May 2021

Christoph von Burgsdorff

Luther Rechtsanwaltsgesellschaft, Hamburg

christoph.von.burgsdorff@luther-lawfirm.com

Robert Burkert

Luther Rechtsanwaltsgesellschaft, Hamburg

robert.burkert@luther-lawfirm.com

The globalisation of the market, the growing number of players and high innovation pressure have significantly increased what is demanded of companies in the healthcare and life science market. To cope with these demands, numerous companies are turning to partnerships, especially during the current pandemic, in order to combine their strengths, know-how and resources with a partner.

Roche and Regeneron, BioNTech and Pfizer, and CureVac and Bayer are prominent examples of partnerships that were engaged during the pandemic. A partnership is an ideal way for small, as well as large, companies to pursue their interests and create synergies. Companies that aspire to enter the healthcare and life science market can benefit from the reputation and know-how of established companies. Established companies, in turn, use the innovative power of smaller and younger companies to stay competitive or extend their market share.

How to cooperate successfully?

The choice of the appropriate legal structure is crucial for the success of the partnership. Two forms frequently used in practice are the partnership agreement and equity joint venture ('joint venture'). Depending on the partners’ interests, either kind of partnership can be better suited to their needs. Hence, it is mandatory to know the advantages and disadvantages, as well as the prerequisites, of the alternatives in order to make the right choice.

The partnership agreement

By concluding a partnership agreement, the participating companies form the contractual grounds on which they commit themselves to cooperate; however, what each partner brings to the table must be precisely defined, which means each partner’s contribution to the partnership. The partners remain independent of each other in their legal capacity and decision-making, and remain separate legal entities. This has the advantage that the establishment of the partnership is less costly and time-consuming. Aside from the formation of the contract, no further steps are needed; in particular, the incorporation of a new company is not necessary. Additionally, because the partners are not intertwined by a joint corporation, the partnership agreement can, in general, be terminated at relatively short notice. For the same reasons, there is usually no joint market presence.

However, partnership agreements may contain substantial liability risks, which must be taken into account when drawing up the contractual agreement. For example, in the worst case, the partners may be held jointly liable on a personal level because, under certain circumstances, their partnership may be considered a non-limited commercial company under German law. In this case, the liability of the respective partners would not be limited, and they would be jointly liable, even though it was their intention to avoid joint responsibility. The reason behind this liability risk is the fact that, under German law, to establish a cooperation, only a common purpose is needed (eg, a joint market presence, joint research and development or joint distribution efforts). If such a joint purpose is established, the partners are associated as corporations under German statutory law; especially since written articles of association are not required. If the partners then enter or act in the market, joint liability will be established.

Furthermore, if the partners unintentionally form a corporation, German statutory law applies. This means that the partners have to manage the corporation jointly, as decisions have to be unanimous, if not otherwise expressly agreed upon. Additionally, the applicability of corporate statutory law can conflict with the agreed upon distribution of the proceeds from the partnership. All these aspects further the parties’ entanglement, despite them choosing the partnership agreement in order to avoid this. Hence, it is mandatory that these issues are considered before entering into a partnership, and that they are addressed within the partnership agreement.

The equity joint venture

If the partners were to choose to form a joint venture, the partnership would be established by founding a new corporation jointly with each partner as a shareholder of the new corporation. Which form of legal entity the partners choose to form the new joint venture depends on various factors. Each form comes with its own advantages and disadvantages, both in legal and tax terms. For example, the partners may limit the liability of the new corporation, thus avoiding unintended liability risks. The joint venture has the advantage that the partners can have a joint presence on the market under a joint name and position themselves on the market. In addition, the new company has its own organs, which take care of the operations and day-to-day business of the joint venture. Further, these organs may mediate in the case of differences of opinion between the partners.

Due to the partners’ close relationship and tight entanglement, however, it is more complex, and thus more costly, to terminate a joint venture. A partner cannot simply walk away from the joint venture because it is a shareholder. If left to the statutory rules, the only solution will often be the liquidation of the entire joint venture, which can take an unreasonable amount of time. Even if the partners want to avoid this process of liquidation, the departing partner will rarely be willing to transfer its shares free of charge. Due to this conundrum, and in order to speed up the process of leaving on the one hand and keeping the joint venture running with the remaining partner(s) on the other hand, an exit process has to be provided for in the articles of association.

The practice has developed different solutions for the exit of a partner. The easiest way for the partners is to set out a fixed price or fix calculation of the share price within the articles of association. Such a price can also be contingent on the terms of the exit, which means that if the leaving partner fulfilled its obligations to the fullest ('good leaver') the share price will be higher than if the leaving partner was negligent in its duties ('bad leaver').

Aside from this simple solution, other more refined exit terms can be found in practice. For example, the partners may set out that the leaving partner shall offer its shares to the remaining partner for a certain price set by the leaving partner. The remaining partner(s) may either accept the offer and buy the shares for the asked price or decline the offer. However, if the remaining partner decides to decline to buy the shares for the set price, it in turn has to offer its shares to the departing partner for exactly the same price, and the departing partner is obligated to accept, thus effectively switching roles. This procedure ensures that the partner wanting to leave does not try to pressure its partner for an unreasonable share price that it would not be willing to pay itself. The downside of this straightforward process is the uncertainty of the outcome and the potential leverage it can create. In particular, if the partners are not on equal financial terms, one partner might force the other to make certain decisions by threatening it to engage the exit process, where the financially stronger partner potentially can dictate the rules.

Another crucial aspect is the procedure if the parties hold equal shares but cannot reach a consensus. This may lead to a deadlock between the partners, rendering the joint venture unable to operate properly. In such a situation, the managing director of the joint venture may act as a mediator. Alternatively, a third party, for example, a professional mediator or arbitrator, may be called upon. Ultimately, the partners may also stipulate in the articles of association that the exit procedure shall be engaged if a deadlock cannot be resolved.

The healthcare and life science market

During the ongoing pandemic, numerous small and large pharmaceutical companies opted to enter into some form of partnership. Producing results quickly and grasping new opportunities was difficult for companies on their own. However, by combining their know-how, resources and distribution networks, they were able to effectively produce needed supplies, develop new solutions and distribute these successfully.

However, the healthcare and life sciences sector is highly regulated. Pharmaceutical products and medical devices are examples for strictly regulated products. If the partners want to be active in the healthcare market, these regulations must be considered before the partnership is formed: Who shall acquire the necessary permits and approvals? Which partner shall finance the approval and surveillance process? What happens if approvals are denied? Which partner shall hold the approval if the partnership is terminated? This needs to be taken into consideration when setting up a partnership.

Résumé

Regardless of the specific sector, corporations need to be aware of the possibilities and risks a partnership may hold before entering into one. A partnership can only be facilitated to its fullest if the contractual basis is drafted diligently and with foresight.

This becomes even more true if the partners take part in the healthcare and life sciences market. The strict regulations and high risks if permits or approvals are not granted can be a severe burden on the partnership. The partners should avoid these legal hurdles beforehand, and should agree on exit strategies in the case that push comes to shove.