Purchase agreement

Representations and warranties

In technology M&A transactions, is it customary to include representations and warranties for intellectual property, technology, cybersecurity or data privacy?

Buyers of technology companies may require extensive IP representations and warranties, including:

  • scheduling of all IP registrations and pending applications, and all material IP and IT contracts (typically included as part of the ‘material contracts’ representation);
  • sole ownership of intellectual property purported to be owned by the target and ownership or the valid right to use all other intellectual property used in the target’s business, in each case, free and clear of all encumbrances (other than permitted encumbrances);
  • no infringement, misappropriation or other violation of third-party IP rights by the target (this representation may be qualified by knowledge) and of the target’s IP rights by any third party (this representation is typically qualified by knowledge);
  • validity, enforceability and subsistence of the target’s intellectual property;
  • no claims or actions asserted by or against the target alleging any infringement, misappropriation or other violation of IP rights, or challenging the ownership, use, validity or enforceability of the target’s intellectual property;
  • reasonable efforts to protect trade secrets and other confidential information;
  • due execution of invention assignment and confidentiality agreements;
  • sufficiency of IP assets;
  • no adverse effect on IP rights arising from the consummation of the proposed transaction;
  • no outstanding governmental orders affecting the target’s intellectual property;
  • no contribution of resources, facilities, funding or other matters by any governmental entity, university or similar public institution; and
  • no unauthorised access to or disclosure of source code, compliance with all open source and other third-party code licences, and no problematic use of copyleft or viral code.


Standard IT, data security, and data privacy representations include:

  • ownership and right to use all material IT assets;
  • implementation of commercially reasonable information security programmes and reasonable efforts to protect the confidentiality, integrity and availability security of IT systems owned, leased or otherwise used by the company, and to protect the confidentiality, integrity and availability of the data (including personal information) on those systems;
  • compliance with privacy, data security and data protection laws (including the California Consumer Privacy Act (CCPA), California Consumer Privacy Rights Act (CPRA), Colorado Privacy Act, Virginia Consumer Data Protection Act, HIPAA, New York SHIELD Act and the General Data Protection Regulation (GDPR)), contractual obligations (such as the Payment Card Industry Data Security Standard (PCI-DSS)), and company policies;
  • adequate third-party vendor privacy and data security protections, to include the flow-down of any compliance requirements (for example, use restrictions, security measures and data breach notification requirements);
  • continued ability to use personal data upon closing;
  • sufficiency, good working order and good working condition of IT systems;
  • no disabling codes, drop-dead devices, time bombs, Trojan horses, worms, trap doors, back doors or other contaminants in the target’s products or IT systems;
  • implementation of reasonable disaster recovery and business continuity plans;
  • no failure, security breach, material interruption or disruption, loss or unauthorised access to or use of any IT systems or any business-sensitive information or personal data; and
  • no data breach notifications required or provided, and no data breach claims or inquiries made against the target.
Customary ancillary agreements

What types of ancillary agreements are customary in a carveout or asset sale?

Ancillary agreements that are customary in a technology or IP-focused carveout or asset sale in the United States include IP assignments, transitional licences and transition services agreements. An asset sale is typically affected by means of a bill of sale and assignment and assumption agreement for the purchased assets, which generally transfers ownership in technology, products, equipment, other personal property, real property and agreements.

To the extent that assignments of any IP registrations or applications may be affected, short-form IP assignments are typically executed for purposes of recording such assignments.

Transitional trademark licences are typically executed if the seller will retain certain marks used by or in connection with the transferred business or assets and the buyer needs a period of time post-closing to wind down use of the seller’s marks and transition to other marks.

Transition (or reverse transition) services agreements are commonly entered into where the parties need time to transition functions (such as IT systems and back-office functions) from seller to buyer (or buyer to seller).

Other post-closing licence agreements may be executed if one party acquires or retains intellectual property in which the other party will continue to have rights to use post-closing. The licence may take multiple forms, depending on how the transfer of intellectual property is structured. For example, instead of acquiring intellectual property outright, the buyer may take an exclusive licence from the seller (sometimes limited to a specific field of use). Where the buyer acquires the intellectual property outright, the seller may request a licence back from the buyer (for use other than in connection with the business being sold). In addition, if the purchased IP assets are transferred based on a ‘used’ or ‘primarily used’ standard, there may be post-closing cross-licences of intellectual property between the seller and buyer.

Conditions and covenants

What kinds of intellectual property or tech-related pre- or post-closing conditions or covenants do acquirers typically require?

Pre-closing conditions or covenants of the seller may include:

  • interim operating covenants, such as:
    • prohibitions on granting any licences, covenants not to assert or other rights in intellectual property to a third party, and on abandoning any IP rights or allowing IP rights to lapse (with negotiated carveouts); and
    • prohibitions on entering into, modifying or terminating any IP- or IT-related agreement (with negotiated carveouts);
  • requirements that the target obtain and provide:
    • third-party consents to change of control or assignment under material IP- or IT-related agreements with third parties;
    • amendments to material IP or IT contracts as may be required to successfully integrate the target into the buyer’s business;
    • settlements or releases of outstanding adverse IP claims or actions; and
    • termination of certain IP contracts as may be requested by the buyer (in merger and stock purchase transactions);
  • open-source remediation (updating or replacing software to ensure compliance with open-source licences and to eliminate potential inadvertent grants of open-source licences to third parties); and
  • obtaining invention and IP assignments and confidentiality agreements from former and current employees and contractors (if such assignments were not previously obtained, if existing assignments were deficient or to correct chain-of-title issues).


Post-closing conditions or covenants of the seller may include:

  • assisting the buyer with effecting and recording short-form IP assignments with the USPTO, US Copyright Office, relevant domain name registrars and any state IP offices;
  • agreeing to ‘wrong pockets’ obligations (eg, whereby each party agrees to promptly and without any further consideration transfer to the other party any assets that were inadvertently improperly allocated to such party);
  • granting post-closing transitional trademark licence agreements for any retained trademarks and licence (or cross-licence) agreements for any shared intellectual property; and
  • providing transition services to help transition the business (including to the buyer’s IT systems).


Survival period

Are intellectual property representations and warranties typically subject to longer survival periods than other representations and warranties?

Acquirers of tech businesses may request the ability to sue for breach of IP representations for a period following closing (eg, three to six years). While there is no statute of limitations for filing a patent infringement suit in the United States, a six-year survival period would correspond to the time period for recovering monetary damages for patent infringement. Copyright infringement suits must typically be filed within three years after the infringement claim accrues. Federal trademark law does not specify a statute of limitations for filing trademark infringement suits so the time limit varies by state. The Defend Trade Secrets Act includes a three-year statute of limitations, but state laws vary. Ultimately, the survival period for IP representations depends on negotiations between the parties.

To provide some context, for general or non-fundamental representations (eg, financial statements or litigation), the survival period may be much shorter (eg, one or two years). For tax matters, the survival period may expire 30 to 90 days following the expiration of applicable statutes of limitations. For fundamental representations (eg, title to assets in an asset deal, title to shares in a share sale or due authorisation), buyers will generally request that the survival period last indefinitely, or 30 to 90 days following the expiration of the maximum period available under applicable law.

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?

In a technology M&A transaction, buyers may request a liability cap for the breach of IP representations that exceeds the liability cap for non-fundamental representations (in a non-technology M&A transaction, this is less common). However, this may be the subject of heavy negotiations between the parties. Note that there is a growing trend in M&A transactions (including those in the technology sector) to rely on representation and warranty insurance (R&WI) for protection against liabilities instead of relying on the traditional indemnity structure. The terms and conditions of the R&WI (including any express exclusions from coverage) and whether it will be the sole mode of recourse for the buyer against liabilities may be the subject of heavy negotiations between the parties.  

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?

This is also typically the subject of heavy negotiation. In some cases, the cap on liabilities for breach of IP representations may be subject to the same de minimis thresholds, baskets, deductibles or other limitations on recovery applicable to non-fundamental representations, but this point will be considered together with the other negotiated points described above.


Does the definitive agreement customarily include specific indemnities related to intellectual property, data security or privacy matters?

The parties may include specific indemnities for matters that were disclosed or discovered in due diligence (eg, potential claims by third parties related to patent infringement or trade secret misappropriation), including in transactions where all other liabilities are otherwise covered by the R&WI. Specific indemnities are typically not subject to de minimis thresholds, baskets or deductibles, but may be subject to a negotiated liability cap (eg, the purchase price or some other agreed amount).   

In an asset purchase agreement, liability for retained liabilities is typically not subject to limitations on recovery. The same is true for liabilities related to matters arising prior to closing with respect to the transferred liabilities.

Walk rights

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?

Buyers and sellers will negotiate the extent to which IP representations are brought down subject to materiality qualifiers at closing.

In the most buyer-friendly formulation, a buyer may require that IP representations be true and correct in all respects as of the closing (without materiality qualifiers). Sellers may view this as reducing the certainty of closing, in particular where there are more than a few days between signing and closing and so a de minimis exception is sometimes provided.

An alternative formulation is for a limited subset of the IP representations and warranties (such as sufficiency of IP assets or non-infringement) to be brought down subject to a materiality qualifier, while the other IP representations are brought down subject to a no material adverse effect qualifier.

In the most seller-friendly formulation, all of the IP representations may be brought down at closing subject to a ‘no material adverse effect’ qualifier. ‘Material adverse effect’ (MAE) is typically a heavily negotiated term in an acquisition agreement, particularly the events that would not constitute an MAE. It is an exceedingly difficult threshold to meet and effectively requires the buyer to close even if material breaches are discovered between signing and closing (as they do not meet the MAE threshold).

In 2018, in a first-of-its-kind decision, the Delaware Chancery Court ruled in Akorn Inc v Fresenius KABI AG that Fresenius, as the acquirer, was released from its obligation to close the underlying acquisition due to an MAE suffered by Akorn, the target company. All prior Delaware court decisions had required the acquirer to close due to failure to establish a MAE, with courts typically finding that the acquirer was simply suffering from ‘buyer’s remorse’. In its decision in Akorn Inc v Fresenius KABI AG, the Delaware Chancery Court provided useful guidance on the significant burden that acquirers must meet when attempting to terminate an acquisition on the basis of an MAE (eg, an acquirer must establish that the applicable MAE event substantially threatens the overall earnings potential of the target in a durationally significant manner). At the same time, in reviewing and discussing specific financial metrics, the Delaware Chancery Court emphasised that it was not establishing any bright-line quantitative test for determining whether a MAE had occurred. While there have been no other findings of an MAE event by a Delaware court since the Akorn decision, the Akorn decision remains a useful resource for acquirers, target companies and practitioners going forward when drafting and negotiating MAE clauses in acquisition agreements.