Technology is intangible, in particular for M&A lawyers making technology deals from their desks, far away from the asset. Intangible assets are generally hard to grasp and may raise certain issues during a transaction. This article highlights some of the typical issues in M&A technology transactions and suggests solutions to tackle/avoid them.
What is "Technology"?
From an M&A lawyer's perspective, "technology" is difficult to grasp: it is a mix of different intellectual property rights (IPRs), including patents, utility models, copyrights, semiconductor chip designs, as well as know-how and business secrets. Technology as such is thus not tangible, and that raises certain issues in and brings complexity to a transaction. This article highlights some typical examples of such issues and suggests solutions to tackle/avoid them.
Seller's Issues: How to protect the technology?
A Seller must be aware that any deal can "die" and in the current M&A environment, the chances that a deal dies are – quite frankly and unfortunately – not low. Working on the sell-side of a transaction, one must therefore avoid that if a deal dies (for whatever reason), the bidder walks away and starts up the business of the target company with the information it gleaned during the due diligence / contract negotiations. The first (and least) thing a Seller can and should do is to introduce a water-proof confidentiality regime, consisting of (i) a non-disclosure / confidentiality agreement (NDA), (ii) a non-solicitation obligation (to protect the target company's employees; usually, this is part of an NDA), and (iii) a proper data room regime (green / red / black data room rules), before any confidential information is disclosed. In addition, a Seller may want to seek (factual) protection by thoroughly considering if and when it discloses a certain (not-registered) technology to a Bidder...
The text below discusses two selected issues concerning NDAs:
Definition of "Confidential Information"
A major issue in NDAs is how "confidential information" is defined. Should orally submitted information be part of the confidential information? Do documents necessarily need to reflect the confidentiality nature (eg by bearing the words "CONFIDENTIAL" or similar)? Sellers want to have a broad definition, Bidders want to narrow it down. In any case, Sellers should consider listing specific examples to clarify the scope of the definition (thus avoiding any discussion whether eg sketches or drafts of prototypes or developments disclosed at site visits are included).
Under Austrian law, the breach of an NDA entitles the beneficiary to claim damages from the violating party. There are numerous questions connected with this (actually simple) principle. For instance, what is the damage if the Bidder discloses the target company's key technology? Is the Bidder liable for breaches of its advisors? Does the Seller need to prove negligence on the part of the Bidder? A Seller may want to clarify these issues rather than relying on statutory law. Also, the Seller may want to consider introducing a contractual penalty for breaches (or possibly only for the disclosure of certain technologies?), a pill that is usually hard to swallow for a Bidder.
Bidder's Issues: How to identify and verify the technology?
At the beginning of a legal due diligence, it is crucial to discuss and clearly determine the scope of the legal due diligence review. In particular, the parties should discuss (i) which technology of the target business is important for the client going forward, and (ii) (ideally) what are the post-closing plans with the technology (eg does the client want to exploit a technology in certain (new) jurisdictions?). The legal advisor must then assess how to determine and analyse the technology, eg via information in the data room (eg lists or owned/licensed IPRs) or the Q&A process. A good legal advisor should nevertheless inform its client about what cannot be verified at all in a legal due diligence, eg matters not reflected in a register excerpt, events since the date of the register excerpt provided in the data room, or non-compliances that are not disclosed (eg does the target really use a specific software only on five workstations, as provided for in the license agreement?). For such "gaps" and any other issues identified during a legal due diligence, the Bidder must rely on the representations and warranties agreed in a transaction document.
Representations and Warranties
In the transaction documentation, the representations and warranties (RW's) may then focus on circumstances concerning the technology-relevant IPR's, which may include inter alia:
- Rights (ownership, license) to IPR as currently used (and as actually intended to use?)
- No limitations or restrictions to use or exploit IPR
- Validity and enforceability of IPR
- No disputes (including threatened ones?) relating to IPR
- No infringement of IPR of the target companies and by the target companies (of third-party IPR)
- Proper protection and documentation of trade secrets / know-how
- No change of control clauses in license agreements?
- No harmful software codes (virus, trojan horses, etc)
- Hardware in good working order, fit for use
- No system failures in recent periods
Sellers may want to oppose these RW's by (i) narrowing the scope of the RW's to registered IPR (which in Austria would eg not cover copyrights), (ii) excluding IPR that is available on the market (eg off-the-shelf software products), (iii) excluding warranties on infringement of third-party IPR generally or at least narrowing the RW down to (a) known infringements or (b) allegations in writing, and (iv) generally, introducing materiality, "best knowledge" and disclosure qualifiers. For both parties, a detailed RW-by-RW assessment, involving competent IP lawyers, is essential to properly reflect the parties' interests and to protect them from risks.
Quote: Due to the legal nature of technology, a technology-focused M&A transaction requires thorough considerations on both the Seller's and the Bidder's end, in particular when it comes to (i) the protection of technology during the transaction and for broken deals, (ii) the identification and verification of technology during the due diligence and (iii) the protection of technology and the protection of the parties' interests when executing the transaction.
This article was originally published in the schoenherr roadmap`14 - if you would like to receive a complimentary copy of this publication, please visit: pr.schoenherr.eu/roadmap.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.