This article was published by The M&A Journal and Practical Law Company on its PL C Intellectual Property & Technology web services
This Note highlights key intellectual property (IP) considerations in stock purchase and merger transactions.
It discusses legal due diligence of the target company's IP and drafting and negotiating IP aspects of stock purchase and merger agreements (including representations and warranties) and ancillary agreements. It also addresses certain information technology (IT) considerations.
In most stock purchase and merger transactions, legal issues involving intellectual property (IP) are handled by IP counsel separately, but concurrently, with the negotiation of other transaction issues.
This Note discusses:
Due diligence of the target company's IP assets, including issues commonly identified during the buyer's due diligence review. Key aspects of drafting and negotiating the IP aspects of stock purchase and merger agreements, including representations and warranties, covenants and ancillary agreements. It also addresses certain information technology (IT) aspects, including the target company's proprietary and licensed software, and its software and IT agreements with other parties.
In any stock purchase or merger transaction, the buyer primarily wants to ensure that it acquires or has access to all IP assets required to conduct the business after the closing date of the transaction. IP issues should not be overlooked in any transaction, but their analysis in a specific transaction depends on many factors, including whether the target company:
Is in the business of exploiting IP or otherwise heavily relies on IP in its business. Is a mature business or a start-up. Has a diversified IP portfolio or holds a single key IP asset. Is a stand-alone company or a subsidiary of a larger entity (see Carve-out Transactions). IP counsel involved in a stock purchase or merger generally have five primary areas of responsibility:
Understanding the transaction structure and its implications for the target company's IP assets and liabilities (see Types of Transactions). Conducting IP due diligence, including identifying relevant IP assets and liabilities, and preparing an analysis of the results (see IP Due Diligence). Drafting and negotiating the IP aspects of the purchase or merger agreement, including representations and warranties, and covenants (see Purchase or Merger Agreement). Drafting and negotiating any ancillary IP or IT agreements, including licenses and transition services agreements (see Ancillary IP and IT Agreements). Coordinating any required post-closing IP matters, such as IP prosecution and maintenance (see Post-closing Issues). For the purposes of this Note, references to the target company include any target company subsidiaries.
This Note focuses primarily on IP and IT issues under US law. If the target company's foreign IP assets are material to the transaction, the buyer should consider retaining local IP counsel in the relevant foreign jurisdiction.
TYPES OF TRANSACTIONS
Understanding the transaction structure is necessary for evaluating the transaction's potential impact on the target company's IP assets, particularly the target company's IP licenses and other IP-related agreements. IP due diligence and the negotiation of IP issues must take into account whether:
The transaction is a stock purchase or merger and, if it is a merger, the type of merger structure (see Stock Purchases and Mergers). The target company, or the seller, is a publicly- traded or privately-held entity (see Public versus Private Transactions). The transaction involves the sale of a subsidiary, division or other smaller part of a larger business (see Carve-out Transactions). Stock Purchases and Mergers
In a stock acquisition, the buyer typically acquires a controlling ownership interest in the target company. By operation of law, control over the target company's assets, rights and liabilities (including unknown or undisclosed liabilities) transfers to the buyer as of the closing. For further information, see Practice Note: Stock Acquisitions: Overview (http://us.practicallaw.com/4-380-7696).
A merger is a legal combination of two companies where the surviving entity succeeds to both companies' assets, rights and liabilities (including unknown or undisclosed liabilities). In a forward merger and forward triangular merger, the target company ceases to exist by merging into the buyer and the buyer's subsidiary, respectively. In a reverse triangular merger, the target company survives the merger as the buyer's subsidiary. For more information, see Practice Note, Public Mergers: Overview: Merger Structures (http://us.practicallaw.com/4-382-2164).
In both stock purchases and mergers, the buyer directly or indirectly assumes control over all IP rights owned by the target company and the benefit of all licenses under which the target company uses third-party IP. However, to ensure that the target company will continue to have all IP rights necessary to operate its business, the buyer must consider:
Any potential loss or impairment of the target company's IP rights caused by the transaction itself (see IP and IT Agreements). In a carve-out transaction, the target company's right to continue using IP retained by the seller or its other affiliates (see Carve-out Transactions). The negotiation of a stock acquisition or merger, therefore, differs from an asset acquisition, in which the buyer only acquires the assets and liabilities it identifies and agrees to acquire and assume, subject to any liabilities imposed on the buyer as a matter of law.
Public Versus Private Transactions
In public company transactions, the buyer often relies on Securities and Exchange Commission reports and other public filings for material information about the target company. Because the seller in a public company transaction usually does not indemnify the buyer, the buyer cannot rely on the representations and warranties in the purchase or merger agreement to protect it from post-closing IP-related claims and liabilities. Therefore, in a public company transaction:
The IP representations and warranties tend to be more streamlined and are often not heavily negotiated. The buyer must rely on IP due diligence to identify potential post-closing risks not disclosed in public filings. For further information about public mergers, see Practice Note, Public Mergers: Overview (http://us.practicallaw.com/4-382-2164).
Because public filings are not available for private company transactions, the buyer must rely more heavily on the due diligence analysis and thorough representations and warranties to:
Gather information about the target company's IP assets and liabilities. Reduce the risk of unexpected post-closing claims and liabilities. In private company transactions the IP representations and warranties typically survive closing, leaving the seller (or a fund set aside by the target company) with ongoing indemnification obligations if any of those representations or warranties turn out to be false.
For more information about private mergers and stock acquisitions, see Practice Note, Private Mergers: Overview (http:// us.practicallaw.com/0- 380-9145) and Practice Note, Stock Acquisitions: Overview (http://us.practicallaw.com/4-380-7696).
A carve-out transaction is the sale of a subsidiary, division or other smaller part of a larger business. The carved-out business often shares certain IP assets and services, including IT services, with its parent and other affiliates. In this case, due diligence becomes critical to identify the assets transferring to the target company and those remaining with the seller. The parties must also determine whether the seller must license IP assets or provide IP or IT services to the target company for a transitional period or on a long-term basis after closing (see License Agreements and Transition Services Agreement).
For more information on carve-out transactions, see Practice Note, Carve-out Transactions (http://us.practicallaw.com/7-504-1544).
IP DUE DILIGENCE