Mergers and acquisitions – 3 things a tech company needs to consider
Looking for a competitive edge? A merger or acquisition can provide financial, strategic and operating advantages for tech companies operating in an increasingly competitive and fast-paced environment.
Before the completion of a merger or acquisition there will be substantial negotiation between the parties’ legal advisers. Based on our recent deal experiences, we’ve set out below the hot issues and things to be aware of:
1. Representations and warranties
In the tech world, representations and warranties concerning the key business areas of information technology (IT) and intellectual property (IP) are often of significant importance in a merger or acquisition.
For example, in an acquisition scenario, the buyer will need certainty that the target it is acquiring solely and exclusively owns all of its IP, or, in the event that this isn’t the case, the buyer will require evidence and a clear understanding of the target’s entitlement to use any IP necessary to operate its associated business.
The above can be achieved by ensuring that the seller provides a comprehensive suite of warranties and representations in the acquisition agreement.
Common IP warranties include statements confirming that the target company is the official registrant of its domain name(s) and that all material IP rights have been duly registered.
Such statements serve a dual purpose of providing contractual assurance to the buyer whilst helping to elicit from the seller material information that the buyer may not be aware of.
The success of certain tech companies can at times be dependent upon the knowledge, skill and expertise of a handful of key employees.
In this scenario, the buyer may want to consider granting share options to the key employees to incentivise and retain them, and/or have such employees enter into new employment agreements at completion to ensure the successful continuity of the target post-completion.
The latter can be particularly difficult agreements to negotiate given that the employees in question may not be directly benefiting from the sale.
Additionally, there may be confidentiality issues surrounding the transaction itself which might prevent full disclosure of the transaction details to the key employees.
3. Allocation of risk
Each party to a tech merger or acquisition will seek to achieve what they consider to be a fair allocation of risk. Below are some examples of issues that can arise in tech acquisitions which require the parties to negotiate and apportion risk fairly:
- A target using freelancers to create IP: are the freelancers correctly classed as self-employed or is there an employment status risk? If so, which party should bear this risk of a future employment claim and any associated costs?
- Infringement of a third party’s IP? If so, what is the risk of a future claim against the target? Who should bear the risk in respect of such possible claims?
- If a key commercial contract of the target, where there is a change of control, requires third party consent to be assigned to the buyer, who should bear the risk of such approval not being obtained?
In these situations, indemnities and warranties are often relied upon to apportion risk between the parties.
Further, caveats such as “knowledge,” “material adverse affect” and “materiality”, are used to shift risk to the buyer who will then only be entitled to recover any losses in the event that it can prove that the seller had awareness of the matter in question or if the issue exceeds the agreed materiality thresholds.
For more information, please contact Laura Wilson at firstname.lastname@example.org or on 01892 506 047.
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