Before buying or selling a tech business, there are a few things you don't want to miss. At the outset, give serious consideration to exactly which assets, rights and obligations you intend to acquire/sell or assign. This may seem simple, but it is actually a tedious task, especially if the seller continues to operate a business following the sale. A particularly difficult area for this relates to IP. This is a short article meant to identify a few critical and practical issues to keep top of mind, but it is certainly not an exhaustive list.
Ownership of IP
Develop an inventory of the IP involved in the target business and confirm which entities hold the IP being sold. It isn't unusual for IP to be owned by a separate entity within a seller group. With individual or start up entity sellers, always confirm that ownership of material IP has been assigned to a selling entity by obtaining assignment agreements from key employees and consultants. If there is registered IP—in the US and globally—make sure that public assignment records accurately reflect current ownership and any existing encumbrances. Failing to do so can result in unexpected surprises at closing.
It is important to determine the scope of the rights granted to seller and to be passed to buyer, the financial and other obligations and any infringement liability or indemnity issues. As these agreements are often not assignable without consent, consider whether and when to seek consent. If a license agreement is assigned to buyer, consider whether seller will need to have the benefits of the IP license agreement for a transition period and whether that is permitted under the agreement. Are there services provided by employees of the selling business who are not transferring? As the seller, be sure to consider the appropriate scope of representations as they apply to third-party IP and make sure to figure out whether you will need a license back to any of the transferred IP to operate the rest of your business after the sale.
Confirm that there are no known valid infringement claims made or threatened. Once a monetization event occurs or is in process, the likelihood of a claim may increase due to the publicity and perception of improved chances for a recovery by a claimant. Be sure to understand any infringement indemnity obligations and any applicable limitations on liability for infringement claims.
Don't forget to maintain confidential and proprietary information during a diligence review. It is critical to consider when certain sensitive information should be made available for a buyer to review. This is particularly true in the context of competitors for both commercial and legal reasons.
Approvals and notices
The seller's governing body should approve the proposed sale and, depending on the significance of the transaction, the approval of the equity owners may also be necessary. Next, consider whether the assets are collateral for any indebtedness that will need to be released or assumed so that a lender is involved. If real property leases are being transferred, landlord approval may be necessary. Also, consider whether any government agencies will need to be notified. For example, whether the Hart Scott Rodino Antitrust Improvements Act (HSR) or other non-US jurisdictions' merger control rules apply along with the necessary filings and applicable waiting periods. For tech businesses involved in certain critical technologies, infrastructure or involving sensitive personal data, it is also critical to consider whether approval is needed from the Council on Foreign Investment in the United States (CFIUS).
In most organizations, human capital is one of the most valuable assets, so it is best to give thought about whether all employees will be moved over to buyer and all of the logistics of onboarding employees. Some of the most important considerations relate to their benefits and whether buyer will continue to provide similar offerings from both a financial and an actual standpoint. For employees outside of the US, there will be a host of additional issues that need to be considered with appropriate time allotted pre-closing to vet these issues.
Tax efficiency, approvals and minimizing liability will be the likely drivers for the transaction structure. Understanding the objectives of the parties' in these areas, as well as the particular facts involved, will help to guide advisors as to the best transaction structure to achieve the parties' goals.
Hopefully, this list will serve as a short cheat sheet for you to keep top of mind as you plan your next deal.