Ever entered a relationship with the secret escape route already mapped out? It sounds a bit cynical, doesn’t it? Yet, in the high-stakes world of strategic business alliances, the fine print often includes clauses detailing exactly how and why the partnership can come to an end. Why would companies forging collaborations focused on innovation and growth already be thinking about breaking up?

Strategic alliances are meant to be win-win collaborations, allowing companies to access new resources, share risks, and tap into each other’s expertise. However, these relationships, particularly in dynamic sectors like the biopharmaceutical industry, aren’t always smooth sailing. The contracts that underpin these alliances often contain what are known as termination provisions, which act as crucial governance mechanisms. These clauses provide the flexibility to exit a partnership that isn’t performing as expected or when unforeseen circumstances arise. Think of them as the business equivalent of a pre-nuptial agreement – uncomfortable to discuss but potentially vital for protecting everyone’s interests.

The inclusion of termination provisions isn’t just about having a way out; it’s a strategic balancing act. On the one hand, these provisions offer safeguards against opportunistic behavior and provide the flexibility to adapt to changing market conditions or technological advancements. On the other hand, they can also breed distrust, create instability and weaken commitment. In the worst case, termination provisions can be exploited to extract better terms, and fear of sudden termination can discourage alliance-specific investments. Still, without termination rights, partners risk losses if obligations aren’t met or key assets, such as patents, are threatened. So, how do alliance partners evaluate this tradeoff—ensuring both security and sustained commitment?

An empirical study by FEB researcher Marvin Hanisch finds that in alliances with high technological uncertainty, companies are more likely to include termination rights “for convenience,” which allow them to part ways without further justification when the technology doesn’t pan out as hoped. In addition, the likelihood of including these clauses is influenced by factors like the scope of the alliance, the size of upfront payments, and even the prior relationship between the companies. Alliances with a broader scope or large initial investments often see more termination rights included, likely to mitigate the increased risks involved. Conversely, companies with strong existing relationships might be less inclined to include such clauses, viewing their absence as a sign of commitment.

So, why the need for the escape plan in the first place? The uncomfortable truth is that even the most promising partnerships can falter due to a multitude of reasons, from disagreements over strategy to the emergence of better opportunities elsewhere. Termination provisions offer a structured way to address these issues without resorting to lengthy and costly legal battles. They acknowledge the inherent uncertainties and potential risks in collaborative ventures.

The takeaway is that termination provisions in strategic alliances are not necessarily a sign of pessimism but rather a demonstration of strategic foresight. They are tools that allow companies to manage risk, incentivize performance, and maintain the agility to pursue better options if a partnership isn’t working. For anyone involved in forming or managing business alliances, understanding the different types of termination rights – conditional (triggered by specific events) and unconditional (exercisable for any reason) – and their implications is crucial. Carefully considering when and how to include these provisions can ultimately contribute to more robust and adaptable partnerships.

Author: Marvin Hanish - m.hanish@rug.nl

Reference:

Hanisch, M. (2025). Strategic Alliance Governance Through Termination Provisions: Safeguard and Incentive, Flexibility and Commitment. Journal of Management. Advance online publication. https://doi.org/10.1177/01492063241247495