Strategic Alliances: Legal Consideration in Financial Services Transactions

Strategic Alliances  are contractual agreements between business entities, or in some cases individuals  to share business assets, including but not limited to intellectual property, licensing, etc.  contribute funds and to some extent share technology and employees  to achieve a mutual financial goal.    These arrangements are well-known in the real estate industry as joint ventures and more recently banks have used the term “collaborative partnerships” to offer customers new products through technology.

One example of a strategic alliance, is  an agreement between a federally-regulated financial institution and a state licensed real estate broker, who may be brokering residential mortgage loans through a technology, or marketplace lending platform.  These relationships must be carefully documented with respect to many issues, including, but not limited to the compensation arrangements among the participants, the integration of the technology platform to comply with federal and state law, allocation of risk through indemnification clauses and financial responsibilities of the parties.  Based on new case law, it is important to identify and confirm the underwriting structure.  Additionally, if there are third-party entities used in the underwriting process, such as title insurance companies, escrow, sharing of brokerage fees or intellectual property rights, these issues must be resolved prior to closing.  These alliances or collaborative partnerships can be documented to achieve one goals, and, or subsequently can end in a merger of the entities.    Legal considerations, such as compensation, including warrants and options, as applicable, ability to unwind if certain benchmarks are not met, which entity takes the lead if the relationship must be terminated, and most importantly, the regulatory requirements of each entity must be properly addressed.

Another issue that arises when parties are working together and coming from different  “business cultures” is the issue of trust.   As counsel I advise dealing  with the trust issue throughout the  negotiations.  In the case of the strategic alliance  relationship example given above, one set of participants is interested in technology innovation and bringing credit to marketplace participants in a user-friendly manner.  The other set of participants comes from a “highly-regulated” environment and makes  deliberate decisions  looking at all the issues prior to closing.  Sometimes, without experiences counsel involved, the cultures may clash and the transaction may not close.  Although we cannot quantify the trust issue, we can draft representations and warranties,  covenants, hold-back funds in a post-closing escrows, etc. to work through these issues.

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