Purchase agreementRepresentations and warranties
In technology M&A transactions, is it customary to include representations and warranties for intellectual property, technology, cybersecurity or data privacy?
The warranties for intellectual property, technology and data privacy form part of a standard set of warranties that is, to some extent, included in most M&A transactions. In general, the set of warranties for intellectual property, technology or data privacy is heavier in technology M&A transactions than in M&A transactions involving manufacturing or similar targets.
Furthermore, due to increasing regulation of Environmental, Social and Governance (ESG), buyers are showing increased interest in warranties regarding ESG.
The relevant warranties customarily comprise the following.
With respect to intellectual property:
- the ownership of material intellectual property necessary for the target’s conduct of business;
- no notices on infringement of the target’s intellectual property by a third party and vice versa;
- disclosure of all material licences to use third-party intellectual property necessary for the target’s conduct of business; and
- assignment of employee-created intellectual property.
With respect to technology:
- the materially good working order and regular maintenance of IT systems and no material functionality failure (eg, in specific sectors, meaning a continuous interruption of operation of certain material systems of at least 24 hours) thereof;
- validity and no notice of breach of material IT contracts;
- possession of source codes to all software necessary for the target’s conduct of business; and
- with respect to data privacy, compliance with material data protection legislation.
The inclusion of cybersecurity warranties is not widespread in the Czech Republic M&A transactions.
In technology M&A transactions involving targets active in the telecommunications industry, the set of warranties includes, in particular, the warranties on due possession of the relevant regulatory licences and radio frequency allocation decisions.Customary ancillary agreements
What types of ancillary agreements are customary in a carveout or asset sale?
The customary ancillary agreements in technology M&A transactions include transitional services agreement (TSAs) and brand licensing agreement (BLAs).
The TSAs typically govern the post-completion provision of services that, before the completion of the transaction, were provided to the targets at the seller’s group level and vice versa. A provision stipulating that either party can request the provision of an omitted service (ie, a service that has been provided prior to carve-out, but is omitted from the TSA) is generally included in the TSAs. The targets benefiting from the transitional services of the seller’s group are required to draw up a migration plan setting out the detailed steps of becoming self-sufficient in terms of services provided under the TSAs.
BLAs provide for licences to trademarks and domain names owned at a group level that are bespoke to the target’s business. These agreements also contain provisions regarding rebranding and the discontinuation of use of the licensed intellectual property.Conditions and covenants
What kinds of intellectual property or tech-related pre- or post-closing conditions or covenants do acquirers typically require?
The condition precedents are typically limited to the purchaser’s obligation to obtain the necessary competition and regulatory approvals for the transaction. Depending on their materiality, tech-related issues arising out of due diligence are customarily dealt with by way of the seller’s pre-completion obligations.
Such pre-completion obligations usually depend on the particular issues identified in the course of due diligence and include, for instance:
- renewal of domain name registrations;
- assignment of employee-created IP rights;
- obtaining ownership to intellectual property where only a right of use in respect thereof has been granted to the target; or
- obtaining change of control consents from licensors under the licence agreements relating to third-party intellectual property used by the target.
Are intellectual property representations and warranties typically subject to longer survival periods than other representations and warranties?
The scope of fundamental warranties that are subject to a longer survival period is typically limited to the warranties relating to the seller’s authority to enter into the agreement and title to the shares or assets being transferred, thus IP warranties are not typically included. Therefore, IP warranties are subject to the same survival periods as other operational warranties. The survival periods for such operational warranties vary considerably depending on the type of M&A transaction, and can range from a period of 12 months up to five years. However, this depends on the nature of the transferred business and, under certain circumstances, IP warranties may be included within the fundamental warranties, in particular where IP is a core part of the transferred business.
However, in certain technology M&A transactions, parties set the survival period at double of the survival period for operational warranties (36 months).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?
Similar to survival periods, no specific liability cap for a breach of IP warranties is generally included in the transaction documentation. The liability cap for operational warranties vary considerably depending on the type of M&A transaction and can range from a single-digit percentage of the purchase price up to 50 per cent of the purchase price. However, in certain technology M&A transactions, parties set the liability cap for breach of IP warranties at 70 per cent of the purchase price.
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?
In terms of IP warranties, it is not standard to carve these out from the de minimis thresholds, baskets or deductibles, or other limitations on recovery. The warranties provided for under the transaction documentation are customarily subject to the same limitations on liability, regardless of the subject matter to which they relate (except for maximum liability cap, which is typically higher for fundamental warranties).Indemnities
Does the definitive agreement customarily include specific indemnities related to intellectual property, data security or privacy matters?
The specific indemnities provided for in a definitive agreement are customarily limited to coverage for the specific risks identified in the course of due diligence. Such specific indemnities can include:
- indemnification for claims of infringement of a third-party’s intellectual property confirmed by a binding court decision;
- employee claims in respect of the development of intellectual property outside of the scope of their employment duties; and
- the lack of legal title for the processing of personal data.
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?
In general, the inclusion of a ‘walk right’ of the acquirer for breach of IP warranties between signing and closing is rather rare (as is the ‘bringing down’ of all warranties at closing; in some cases, the ‘bringing down’ of warranties is limited to specific warranties, such as fundamental warranties). If the warranties are ‘brought down’, usually a similar standard is required at closing as at signing.
However, in certain technology M&A transactions, parties may agree that a breach resulting in the warranties being materially untrue, and such breach resulting in a loss in excess of 50 per cent of the initial purchase price (excluding the earn-out amount, if any), entitles the purchaser to terminate the transaction.