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BUYING THE BRAINS - COMMON STRUCTURAL ISSUES IN SECTOR SPECIFIC M&A TRANSACTIONS
AIJA TALLINN – 19 APRIL 2013AIJA TALLINN – 19 APRIL 2013
JEROME VERMEYLENJEROME VERMEYLEN
Overview
Structural issues specific to M&A transactions in IP/IT intensive sectors
Five issues:Due diligenceShare deal vs asset dealKeeping the brainsFinancing / debt push downData protection
Case study
Acquisition of a fence producer
Due diligence IP is not limited to registered IP Key questions are
Which IP is critical to the business: trademarks, patents, copyrights (including on software), domain names, knowhow, trade secrets etc.
Who has rights regarding the IP: clients, employees, self employed contractors, joint venture partners, any other third parties who may dispute the rights / use by the target
Due diligence (2)Which rights: ownership, right of use /
licensing right, economic / moral rights (copyright only) etc.
Which scope: exclusivity, duration, territory etc.
Who are the target’s brains and which are their contractual arrangements: employees, directors, self-employed contractors, shareholders
Due diligence (3)
If target uses cloud computing, which (contractual) protections are granted by cloud computing/IT supplier: SLA, data recovery measures, IP protection (e.g. software developed by target), confidentiality of data/information, limitations of liability etc.
Due diligence (4)
Based on the result of the (IP/IT) due diligence:
Structure the transaction
Determine reps & warranties and specific indemnities
Remedy problems (conditions precedent or post-closing)
Share deal - Asset deal
Share deal: all assets and liabilities of the target remain with the targetNo need to organise the transfer of IP
rights / agreementsNo need to request new permits /
authorisationsCheck IP agreements for change of
control clauses
Share deal - Asset deal (2) Asset deal:
Transfer of non registered IP (except copyrights): solo consensu
Transfer of registered IP and copyright: writing required
Transfer of registered IP: formalities for the enforceability of transfer towards third parties
Transfer of agreements requires approval of co-contracting party
Share deal - Asset deal (3)
Change of “data controller” Registration with / notification to / authorisation from local data protection authorities
Notification to data subject
Keeping the brains Registered IP: no big issue
Tangible and easily identified Well-protected and reps & warranties
Non-registered IP: often key issue in IP/IT intensive sector Existence and value rests with people Knowhow and skills Often no tangible evidence (except for
copyrights but also evidence issues)
Keeping the brains (2)
Keep the brains by using the carrot and the stick:Keep directors and key employees
incentivized through: (Minority) shareholding
Stock options
Good leaver – bad leaver provisions
Keeping the brains (3)
Keep the sellers incentivized through: (Minority) shareholding
EarnoutNon-compete clause for shareholders,
directors and key employees With penalties / lump sum damages
Keeping the brains (4)
Protect the target’s IPContractual provisions with all relevant
employees and self-employed for the transfer of IP to the fullest extent Condition precedent to transaction
Non-disclosure clause for shareholders, directors and key employees With penalties / lump sum damages
Keeping the brains (5)
Protect the unregistered IP: Protect computers and databases
Protect clients lists (e.g. “mystery records” and “intentional typos”)
Restrict access to IP sensitive locations
Log network access, data transfer, printing, e-mailing etc.
Introduce good practice guidelines in the working rules for employees
Financing / debt push down
Can IP be used as collateral for financing?Floating charge on the business,
including IP: no problemPledge on IP rights? Requirement of
“dispossession” of the pledged assets
Possible for IP rights?
Current view: yes (at least for registered IP)
Data protection “Adequate protection” required if
personal data transferred or accessible from outside the EUAuthorisation of data subjectStandard clauses of the EU Commission
to be signed between data exporter and data importer
US safe harbour list of companiesCountries with adequate protectionNo difference if asset or share deal
QUESTIONS?
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