We have been working on a number of private company mergers and acquisitions transactions this year where the technology and the intellectual property of the target company (the “Target”) are the key value drivers for the transaction. It is always surprising when the Target has not used “good housekeeping” with regard to its intellectual property and when the Target has transacted business without regard to what might happen in the event of an acquisition. This is especially a surprise since the exit strategy for many (if not most) private companies is an acquisition.
In a current transaction, our client is buying a private software company based in Europe. The software, technology and intellectual property are the key value drivers in the deal. The following are some of the issues in the transaction. These are key issues for acquirers in M&A transactions and are issues that private companies can easily avoid.
- IP Developed by Employees. The agreements between the Target and its employees do not include a present assignment of intellectual property from the employees to the Target. Consider the Stanford v. Rochedecision.
- P Developed by Contractors. Similarly, the agreements between the Target and its contractors do not include a present assignment of intellectual property from the contractors to the Target.
- IP Developed by Engineers’ Personal Management Companies. In this transaction, some of the key engineers (who are also significant shareholders) were not employees of the Target, but instead contracted with the Target under separate “personal management companies.” These personal management companies are common in the particular European jurisdiction for tax reasons. So the key engineers are the sole employees of a personal management company, which in turn provides services to the Target and may, in some cases, provide services to other companies. In some cases the personal management company has an agreement with the Target, while in other cases there is no agreement with the Target. If there is an agreement with the Target, the agreement does not include an assignment of intellectual property to the Target. To make matters more complicated, the engineer has no agreement with the management company. As a result, it is not clear who owns the intellectual property – the engineer, the management company or the Target. In one case, the personal management company was liquidated.
- Patents. The Target received an assignment of a patent from a European University, but the patent assignment was incomplete and did not fully assign the patent to the Target. Other patent assignments were sloppy and incorrectly identified the Target as the assignee.
- Inbound Licenses. As a result of the Target’s relationship with the European University, the Target used “academic” as opposed to “commercial” licenses to certain third party software.
- Tax Subsidies from Local Government. The Target received tax subsidies for product development efforts and the subsidies included restrictions on the “transfer” of the result of the development work. However, the term “transfer” is not defined.
If you are a private software or technology company and your “exit plan” is an acquisition, follow good housekeeping when it comes to your ownership of your intellectual property and your transaction will go much more smoothly. If you are an acquirer, do not overlook the diligence around these “fundamental” issues.