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Structuring and legal considerations
Key laws and regulations
What are the key laws and regulations implicated in technology M&A transactions that may not be relevant to other types of M&A transactions? Are there particular government approvals required, and how are those addressed in the definitive documentation?
As value in technology companies and transactions concerning them mainly reside in and are centred around the intellectual property rights of the target, the Law on Intellectual and Artistic Works, the Law on Industrial Property and secondary legislation thereof are the key laws and regulations implicated in such transactions. While some IP rights, such as trademarks, are still heavily relevant for other types of M&A transactions, since the value in technology companies and their business models are strictly related to their intellectual property rather than their tangible assets, the above laws are of an even greater importance when it comes to technology M&A transactions. Incidentally, it must be stressed that business models are not protected as IP rights under Turkish law. Depending on the field of activity of the technology company concerned, additional government approvals may be sought, as some of the technology industries, such as fintech, cryptocurrency and e-communications are heavily regulated under Turkish law.
Are there government march-in or step-in rights with respect to certain categories of technologies?
In certain industries, an approval, prior consent or post-transaction notice from or to a regulatory body (other than the Competition Board) may be needed to finalise share transfers. This is the case for heavily regulated industries, such as energy production, finance and trading, capital markets, media and communications.
When the target’s businesses are related to such regulated industries, governmental organisations must intervene. However, such approvals are not related to ‘categories of technologies’, but rather related to the regulatory powers admitted to such governmental organisations in the relevant industry at which the technology company concerned is active. Moreover, there are some regulatory indirect measures, such as requirement of a local entity or data localisation rules that, in effect, work as government march-ins.
Further, regarding the privatisation of once public companies, the government may keep ‘preferred shares’ if the High Council of Privatisation deems it is strategically necessary for public policy. Thus, the government may continue to directly interfere or have negative control over important actions of the company.
How is legal title to each type of technology and intellectual property asset conveyed in your jurisdiction? What types of formalities are required to effect transfer?
Title to trademarks, designs, patents and utility models (registrable IP rights) shall be transferred by means of a written agreement certified by the notary public. There are no other formalities to effect such transfers. However, such assignments need to be submitted to the relevant registry to be binding upon third parties (perfection). On the other hand, whereas intellectual property in software is protected by copyrights under the Law on Artistic Works and Intellectual Property, referred to as ‘computer programs’, title to copyrights is transferred by means of a written agreement that explicitly states which rights and powers related to the copyright material shall be transferred to the acquirer. There are no further formalities to effect such transfer. As for the domain names that uses ‘.tr’ extension, an online form needs to be submitted to the registrar entity from which the domain name holder procures services to effect a domain name transfer.
What are the typical areas of due diligence undertaken in your jurisdiction with respect to technology and intellectual property assets in technology M&A transactions? How is due diligence different for mergers or share acquisitions as compared to carveouts or asset purchases?
When due diligence is carried out for M&A transactions and share purchases, the main focus is on the business model of the target and regulatory compliance of such, rather than the ownership of the IP rights, chain of titles and registrability thereof. This is because, for M&A transactions and share purchases, the acquirer may also require certain representations and warranties to offset ownership-related risks and secure its investment; whereas, when an asset purchase or carveout is concerned, the whole purpose of the transaction is to benefit from the relevant IP rights or business. Therefore, an indemnity may not be adequate to offset investment risks.
What types of public searches are customarily performed when conducting technology M&A due diligence? What other types of publicly available information can be collected or reviewed in the conduct of technology M&A due diligence?
Trademarks, patents, utility models and domain names are registerable IP rights under Turkish law. Therefore, a due diligence as to the ownership of target’s trademarks, patents, utility models and domain names can be conducted via public searches. Moreover, the shareholders of an incorporated business are publicly available via the trade registry gazette and, regardless of whether there are IP rights registered under the name of the target’s shareholders, they may also be checked. Unfortunately, other IP rights, such as copyrights, are not registered; therefore, ownership is not publicly available and the acquirer has to trust the documents provided by the target to confirm the chain of titles. In such a case, the due diligence process may focus on the demonstrability of the ownership.
Registrable intellectual property
What types of intellectual property are registrable, what types of intellectual property are not, and what due diligence is typically undertaken with respect to each?
Trademarks, designs, patents, utility models and domain names (with ‘.tr’ extension) are registerable IP rights under Turkish law, whereas copyrights are not. When registered IP rights are concerned, the registrability and demonstrability of the ownership is not part of the due diligence process, as the registered owners are deemed the truthful owners; however, when the target holds a non-registrable IP right, registrability and demonstrability of the ownership are the main focus of a due diligence process. For due diligence processes concerning the registered IP rights, the main difference in each is the relevant protection periods for trademarks, designs and utility models.
Can liens or security interests be granted on intellectual property or technology assets, and if so, how do acquirers conduct due diligence on them?
IP rights can be subject to liens, which are granted by means of a written agreement, and no further action has to be taken to effect a lien. For registered IP rights, liens may also be registered for the purposes of perfection. This act of registering can be concluded by submitting of simple petition accompanied with the necessary documentation to the relevant registrar.
For non-registered intellectual property, such as copyrights, perfection is also an option under the Law on Liens on Intangible Assets in Business Transactions. For the purposes of perfection, the lien agreement must be notarised and submitted to the Intangible Liens Registry. However, a non-registered lien agreement concerning a copyright is still enforceable under Turkish law, provided that the agreement is in writing.
To ensure there are no binding lien agreements concerning the IP rights, while drafting the asset transfer agreement, the acquirer usually requires a representation from the target that the copyright is free of any encumbrances and further undertakings to transfer the copyright to any third parties. Accordingly, during the due diligence process, the liens may also be checked from the registry for the registered IP rights, whereas, for non-registrable IP rights, the acquirer again must trust the documents that are presented by the target.
It is also common practice to require the target to put the IP rights, especially the source codes when software purchases are concerned, on escrow for the period between signing and closing of the deal. Whereas the IP rights essentially do not have a physical form and can be transferred via a written assignment, a contractual duty to hold the IP rights on trust would practically only give rights to compensation if the owner of the IP rights (the target) breaches such obligation, but would not grant any rights to claim the title before the third person who has acquired the said IP rights in goodwill unless the lien is registered (as applicable).
Employee IP due diligence
What due diligence is typically undertaken with respect to employee-created and contractor-created intellectual property and technology?
The ownership of the copyright belongs to the creator upon creation (either the employee or the contractor in this case) and can only be transferred via a written assignment agreement. However, the employer shall automatically have the power to use the financial rights related to the copyright. Therefore, for employee creations, the due diligence process is limited to assess whether the copyrighted work was created within the course of employment and in close relation to employee’s duties (based on the experience he or she gained at the workplace and work carried out at the office). When contractor-created intellectual property is concerned, extra documentation for written assignment shall be sought.
For patentable employee inventions, the Law on Industrial Property and the Regulation on Employee Inventions provide a specific procedure where the employee owns the invention created during the course of employment; however, he or she needs to notify the employer regarding the invention in writing without undue delay. If the employer requests full rights to the invention within four months following the notification, the title to the invention is transferred to the employer as soon as such request is received by the employee. Therefore, the scope of the due diligence shall be to determine if the explained procedure is followed and the title to the invention is dully transferred. The provisions of this regulation are mandatory and may not be altered to the detriment of the employee in the employment contract. This is why the employment contract is reviewed.
Unless otherwise provided under the employee’s employment contract, for employee-created registrable designs, the title to the design that the employee has created during the course of employment, as part of his or her duties and in close relation with the know-how he or she acquired at the workplace, belongs to the employer. This is also why the employee’s employment contract is reviewed. The question of whether the design was created during the course of his or her employment is assessed as part of the due diligence process.
For contractor-created IP rights, the contracts of work shall be reviewed. An explicit assignment of the IP rights to the target shall be sought. It must be stressed that, under Turkish law, while an undertaking to assign a not yet created copyright is permissible, a future assignment is invalid. In other words, such agreements are not directly enforceable to claim rights to the future works; however, they grant the transferee a compensation claim on the grounds of breach of contract. This is why an assignment after the creation of the work has to be sought during the due diligence process.
In any case, for the registered IP rights, if the target is registered as the owner of the IP rights, the due diligence process is then lighter and may be limited to a possible dispute of ownership between the employee and the employer, or the target and the contractor. For example, regarding both patentable creations and designs, the employer is obliged to make a payment if the employee so requests. Documentation as to such payment may be sought from the target if the relevant IP right is of critical importance for the acquirer.
Transferring licensed intellectual property
Are there any requirements to enable the transfer or assignment of licensed intellectual property and technology? Are exclusive and non-exclusive licences treated differently?
Regardless of any licence agreements associated with the IP rights concerned the conditions specified under question 3 shall be fulfilled. As a licence agreement only gives the licensee a contractual right, when the underlying IP rights is transferred, the licensee may not have any claims against the acquirer unless the licence agreement was registered at the relevant registry for the IP rights concerned (as applicable). However, even then there are not any further actions to be taken to affect the transfer.
Software due diligence
What types of software due diligence is typically undertaken in your jurisdiction? Do targets customarily provide code scans for third-party or open source code?
The due diligence process is closely associated with the nature of the proposed transaction. For asset transfers, code scans are customarily provided and technical assistance may be needed during the legal due diligence process once access is granted to code scans to decide the fitness for purpose of the asset, such as the degree of improvement needed for further development and associated costs. When share purchases are concerned, code scans or access to source codes are not generally required, as the copyright shall stay within the target company anyway. However, there may be deal-specific cases where the valuation of the target heavily depends on its software products or services. In this case, access to source code or provision of code scans may still be required as part of the due diligence process.
Further, the scope of the deal is also a concern because requiring access to such delicate material as conducting a due diligence may lead to more transaction costs, as additional non-disclosure agreements may be sought by the target, or additional technical support may be sought by the acquirer to correctly assess the value of software and its fitness for the acquirer.
Other due diligence
What are the additional areas of due diligence undertaken or unique legal considerations in your jurisdiction with respect to special or emerging technologies?
As with other legislations, big data and, therefore, data protection rules, are hot topics in Turkey. That is why, as part of the business model assessment and compliance thereof, they should be considered if the target collects or processes any data (usually customer data) and, accordingly, it should be determined whether the consent of the data subjects are duly obtained or the data is processed in compliance with the legislation. For businesses that deal with artificial intelligence and the internet of things, data processing is of a great importance; when the target’s business model includes such technologies, compliance with data protection rules is specifically assessed.
While there are no specific regulations for emerging technologies such as autonomous driving, an overall compliance assessment with the fundamental laws and regulations is still conducted during the due diligence process. For other industries such as banking and finance, where regulatory measures are already in place, the business model of the target is specially studied to decide if the target’s products or services are subject to any licensing requirements as per the applicable law. Regarding fintech companies that already have licence to provide services, the scope of the due diligence process often evolves into examining possible infringement of the licence by the target and determination of regulatory requirements to be fulfilled to effect the proposed transaction. For example, subject to thresholds, share transfers of fintech companies shall be notified to or approved by the Banking Regulatory and Supervisory Authority.
Representations and warranties
In technology M&A transactions, is it customary to include representations and warranties for intellectual property, technology, cybersecurity or data privacy?
Yes, representations and warranties for intellectual property, technology, cybersecurity and data privacy are commonly used in technology M&A transactions.
Representations and warranties concerning the related intellectual property generally focus on two main subjects: ownership and licensing agreements. These representations and warranties typically include that the target: holds legal title to the IP rights concerned or uses such rights under a duly executed licensing agreement; has only licensed its own IP rights (or sometimes the acquirer seeks rather for a representation that the IP rights has not yet been licensed to any third parties) in keeping with the market conditions and the nature of business life; and has not infringed any third-party IP rights and been party to any such infringement disputes. If the related IP rights are registered, it is also common to include representations that the registration was duly made and remains unchallenged.
Together with these generic representations and warranties, some specific cases are also worth mentioning. For example, when the target is a start-up company, given their appetite for entering into partnerships with industry giants and the asymmetric negotiation power such giants have in these deals, start-up companies have a tendency to accept any terms and conditions imposed on them, even unnecessary undertakings of exclusive licensing or future transfer of IP rights. In these cases, the acquirer usually requires the target to represent and warrant that it does not have any binding undertakings to transfer the title to or issue an exclusive licence to other third parties in whatsoever form. When start-up deals are concerned, another important issue is to make sure that all relevant IP rights belong to the target but not the founders or their employees. Therefore, it is very common to include a representation that the founder or employee, as a rightful IP owner, has duly transferred the title to the IP rights to the target. Another example could concern deals where the business model of the target base on tailoring IP rights (such as software as a service models) for each individual customer. When the target’s business is as described, a specific representation indicating each customer product is separately created, does not infringe any IP rights that were previously created (or transferred or exclusively licensed to the customers) and duly documented by the target.
When data privacy issues are concerned, a representation that the target is compliant with the data protection rules is almost always found in any technology M&A dealm as data processing is almost inescapable. What is more delicate here is when the target’s business is heavily dependent on data processing activities (such as artificial intelligence and internet-of-things technology, as mentioned under question 11). In these circumstances, more specific requirements that may go beyond the regulatory requirements may be sought, such as a representations that consent to collecting all data to establish the current database is duly obtained and documented, or representations concerning data safety.
Representations and warranties regarding cybersecurity are typically limited to the existence of software, hardware and staff to ensure cybersecurity and that the relevant measures to sustain such are in place.
Customary ancillary agreements
What types of ancillary agreements are customary in a carveout or asset sale?
When carveout sales are concerned, the IP rights that belong to the carved-out business to be transferred to the acquirer automatically transfers to the acquirer upon execution of the purchase agreements. In effect, there is no transition period in between. For asset sales, the same principle applies. The title to the IP rights transfers immediately at signing without further need of any specific execution necessities. For the avoidance of doubt, it must be stressed that the transfer of registered IP rights, such as trademarks and patents, needs to be registered with the relevant registry to be binding upon third parties. However, the title to the IP rights immediately transfers at signing so that, for the acquirer to start rightfully using the IP rights, no further execution necessities are required. Thus, it is not customary to include such ancillary agreements for these kinds of asset sales. Still, non-transferable and non-exclusive cross-licences may be used as ancillary agreements to asset sales if the acquirer would like to hold the title to the IP rights and allow further developments on the IP rights by the target.
Conditions and covenants
What kinds of intellectual property or tech-related pre- or post-closing conditions or covenants do acquirers typically require?
To decide whether the below conditions are pre- or post-closing items depend on numerous variables, such as the extent and scope of control that may be gained following the transaction (when the acquirer will have the majority of the shares of the target following the transaction, there is no need to be as specific or strict on post-closing items); risk associated with non-satisfaction of these items (there may be such heavy results upon non-satisfaction of these items that they make become deal-breakers); and the time frame needed to complete such items as requested. Acquirors typically require the items listed below as pre- or post-closing conditions or covenants, depending on the severity of such when the nature of the deal is taken into account:
- transfer of IP rights to the target (almost always a pre-closing item);
- government approval (if applicable, always a pre-closing item);
- competition clearance (if applicable, always a pre-closing item);
- full compliance to a regulation, such as the Data Protection Law, to be attained, including any amendments to merchant or customer contracts, alterations to websites and commercial electronic texts (may either be a pre- or post-closing item depending on the risk associated with non-compliance and the time needed to become fully complaint);
- amendments to employment contracts to reflect employee inventions or creations regulations (almost always a pre-closing item);
- amendments to major deals to clarify a crucial point, such as an undertaking to transfer title to the target’s IP rights (may either be a pre- or post-closing item depending on the risk associated with non-compliance and the time needed to negotiate an amendment with the party to the agreement); and
- change-of-control notices or consent to be sent or received, as applicable (usually post-closing items for notices, whereas consent is typically sought before closing takes place).
This list is not conclusive and is brief compared to a technology deal, which may be quite complex; it is prepared only to give the reader an idea of pre- and post-closing items that have become almost market practice in Turkey.
Are intellectual property representations and warranties typically subject to longer survival periods than other representations and warranties?
Survival periods of representations and warranties concerning intellectual property may be drafted longer than other representations and warranties, but it is not the general practice. That is to say, there must be a specific risk detected during the due diligence process as to the ownership or lawful use of the relevant IP rights for longer periods of indemnification to be sought. For example, when the ownership to the IP rights is disputed, has been previously challenged or is deemed to be subject to ambiguous terms and conditions, then the acquirer may seek longer survival periods for the IP representations and warranties to better offset investment risks. Although the acquirers tend to pursue indefinite terms or a statutory lapse of time periods, in general, survival periods typically last from one to three years.
Breach of representations and warranties
Are liabilities for breach of intellectual property representations and warranties typically subject to a cap that is higher than the liability cap for breach of other representations and warranties?
See question 15. Liabilities for breach of IP representations and warranties are not typically subject to a cap higher than the liability cap for breach of other representations and warranties, provided that there is not any specific risk defined regarding the ownership or lawful use of the relevant IP rights. In general, caps over the liability is defined in relation to the investment amount or the purchase price (an amount between 50 per cent to 150 per cent is typical).
Are liabilities for breach of intellectual property representations subject to, or carved out from, de minimis thresholds, baskets, or deductibles or other limitations on recovery?
See questions 15 and 16. It is not typical to carve out or deduct liabilities for breach of IP representations from de minimis thresholds or basket clauses, unless there is a specific risk is detected for the breach of IP representations during the due diligence process. If the acquirer has not reflected this risk on the purchase price or the investment amount, then he or she may seek for unlimited liability clauses for IP rights related breaches as well as specific indemnification clauses.
Does the definitive agreement customarily include specific indemnities related to intellectual property, data security or privacy matters?
Specific indemnities related to intellectual property, data security or privacy matters cannot exactly be deemed as the market practice in Turkey. In general, the definitive agreements include an overall indemnity clause to cover all breaches of representations and warranties. Still, for specific cases, this may be sought by the acquirer. For cases where the target is under the risk of facing an IP or data breach that may cause significant damages or result in regulatory sanctions imposed on the target, the acquirers may require a specific indemnification clause. The common mechanism used to achieve this is essentially a security term. This is more applicable to venture capital investments where the investor is willing to take on such risks to obtain greater yields but would still like to have a safety net so as to not lose higher than the amount of investment. In these cases, the party to provide the security as specific indemnification is usually a start-up company (who, by definition, is not in place to offer a letter of credit or cash collateral). Usually, in such cases, the start-up companies agree to put some portion of their shares on escrow to be released if the risk is realised and the founders cannot indemnify the investors as per the general indemnification rule defined under the investment agreement.
As a closing condition, are intellectual property representations and warranties required to be true in all respects, in all material respects, or except as would not cause a material adverse effect?
As a general closing condition, the acquirer requires that the representations and warranties are still applicable as of the closing date and that no materially adverse effect is caused during the time passed between the signing and closing date. The materially adverse effect is typically drafted broadly enough to cover any effects over the target’s business, financial standing, profits, prospective income and assets; that is to say, it does cover the IP representations and warranties but is not specific. Therefore, the acquirer shall have a walk-away right if a material adverse effect is caused by any acts, omissions, events, circumstances or changes over the related-IP representations and warranties in a manner to degrade the applicability thereof.