Gain- and Risk Allocation in Research and Development Joint Venture Collaborations

Abstract

Since early 2020, a fast-track development of a COVID-19 vaccine has become crucial for world society. The development process of a new vaccine is complicated, time-consuming and the risk of not finding a solution is high. Under these critical conditions, many pharmaceutical and biotech companies have decided to join forces in the attempt to develop the vaccine as fast as possible and minimize costs and the risk of failure. For this purpose, forming a contract-based joint venture collaboration can lay the foundation on which the contributing parties may combine their complementary resources. As joint ventures are not subject to lex specialis under Danish law, the principle of “freedom of contract” is the prevailing consideration and legal foundation for joint venture agreements. This thesis argues that these gap-filling rules do not provide sufficient and optimal protection against opportunistic behavior between the parties. By applying the theoretical framework of strategic contracting on the contractual obligations of two parties in a research and development joint venture that differs in several parameters, this thesis argues that by altering some of the base assumptions of an entirely symmetrical collaboration, improvements can be made by taking the parties asymmetrical features into consideration, thereby facilitating the creation of relational rents. This thesis studies how the inclusion of gain and risk allocation provisions focusing, in particular, the parties’ difference in risk tolerance, whereby the joint venture parties can increase both their individual and combined utility yield. Hence, several models of allocating gains and risks are examined, whereby it is concluded, that even though some of these models show an improvement over the conventional symmetrical approach to the allocation of gains and risks, further improvements of the utility yield are possible by combining elements of the previously examined models. It is concluded that these improvements of the parties’ utility will further enhance their commitment to the joint venture collaboration and reduce their proclivity towards performing opportunistic behavior. Further, it is examined whether supplementary application of gain and hardship provisions may facilitate improvement on the positive effects on the gain and risk allocation model, by inserting an obligation to take part in a renegotiation process in the case of an unexpected equilibrium changing event occurring. It is concluded that this renegotiation will improve the joint venture’s dynamic efficiency, and thereby ensuring its henceforth existence.