Given the increased focus on M&A transactions in CEE involving a strong IP component, it is essential to identify, at an early stage, any potential IP red flags. These should later be reflected in the deal structure – including valuation – as well as in post-closing matters, in order to ensure that sufficient IP is transferred to secure business continuity.
No two M&A deals are alike, and each transaction has its own veiled legal traps. Our long-term experience in the CEE region has taught us that special attention must be paid to intellectual property (IP) rights. Likely due to the brief history of IP regulation in the region, companies generally do not pay sufficient attention to their IP portfolios. Thus, IP often raises significant hurdles in M&A transactions in CEE that have a strong IP component.
Through our experience we have also discovered that, unfortunately, due diligence processes themselves are sometimes lacking a more insightful analysis of the IP component. This must change. The client, together with its legal counsel, should carefully weigh the impact of IP on the transaction. Subsequent due diligence must determine the type of IP that is targeted, whether the IP is sufficiently secured, and the means of transfer. The findings must be reflected cleverly by the valuation, deal structure and M&A agreement.
So, what should you pay the most attention to when it comes to IP rights? While it is not possible to provide an all-inclusive list, we outline below particular issues that we have determined to be the most relevant for the CEE region in the context of single-jurisdiction or cross-border M&A transactions.
1. The relevant IP rights. This is the first and most crucial step. Potential difficulties are usually raised by identifying the relevant know-how and trade secrets as well as other type of unregistered IP rights (e.g. unregistered trademarks, copyrights, databases). This is because local firms sometimes neglect to secure protection for their IP rights. Additionally, IP rights granted to third parties (e.g. licenses) should also be carefully evaluated, given that in our region such agreements are sometimes rather unclear. Last but not least, issues involving shared IP should also be prudently assessed (e.g. shared rights over software).
2. The target’s industry and its B2B or B2C focus. The creation and protection of IP rights are heavily influenced by the target’s industry sector and market. To best serve our clients, we have developed a sector-based approach, which allows us to provide tailored advice based on a genuine understanding of the relevant industry. For example, we have found that IT companies – especially those in the CEE region, which are usually at an earlier development stage – do not pay sufficient attention to IP rights. This negatively impacts their market value and transaction outcome.
3. The key employees who create IP. These individuals should be identified at an early stage and, if desired and possible, retained. The purchaser is usually primarily interested in securing the assignment of these IP rights to the target. It so happens that targets in the CEE region do not usually have clear agreements with their employees who create IP. If the key employees are not retained, temporarily preventing them from recreating the IP in question is often sought through non-competition agreements. In order to be enforceable, local laws often require such non-competition agreements to provide compensation to the employee.
4. The data protection audit. This is essential for securing and transferring databases and is especially important for companies that handle large amounts of personal data (e.g. customer identification data, customer behaviour data). Given the increased reliance on ‘big data’, this is becoming more and more frequent. Additionally, given the high sanctions that may be applied in this respect (up to 4 per cent of worldwide turnover under new EU regulations from 2018) – the data protection audit is essential to safeguard the purchaser’s interests (and pockets).
5. Carve-out transactions. In these cases, the intra-group agreement should be analysed in depth in order to ensure continuity of the target’s business activity. Transitional use of IP should be covered in the M&A agreement, and the subsequent exit from dependence on intra-group agreements should be carefully planned.