Due diligence for tech M&A in Netherlands

Due diligence

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?

In the Netherlands, due diligence in technology transactions typically focuses on:

• title to shares (if a share deal);
• IP rights owned by the company (trade names, design or model rights, copyrights, neighbouring rights, trademarks, patents, databases, plant breeders’ right, chip rights, often including domain names, know-how or trade secrets; although these last three do not officially qualify as such);
• agreements involving the company’s use of third-party IP rights, know-how, or use of IP rights or company know-how (eg, licence agreements and transfer deeds);
• possible infringements of third-party intellectual property and vice versa;
• historic and pending litigation involving IP rights or know-how;
• security interests and encumbrances established on or prejudgment or executory seizure of IP rights or company know-how;
• agreements related to the website maintained by the company;
• agreements involving compliance with, or documents evidencing compliance with, statutory privacy provisions;
• privacy statements or policies; and
• documentation relating to (adequate) procedures to prevent unauthorised access and the introduction of viruses, worms, Trojan horses, spyware or other disruptive elements into the information technology.

In a share deal, merger or demerger, all company assets and liabilities are automatically transferred, following the execution of the notarial deed of transfer of shares or execution of the notarial deed of merger or demerger. Therefore, in a share deal, there will be particular emphasis on title to share as well as the review of key agreements in order to confirm the extent to which change of control clauses are triggered.

By contrast, in an asset deal or carveout (assuming pre-closing restructuring is involved), all assets and liabilities must be separately transferred, taking into account all applicable transfer requirements. As a result, the due diligence investigations conducted in a share deal differ from the investigations conducted in an asset deal in the sense that there is an increased focus on the individual assets concerned. Moreover, depending on the type of assets being transferred and the identity of the buyer, conducting a ‘Transfer of Undertakings’ (Protection of Employment) Regulations 2006 analysis is paramount. Due diligence must establish whether a transfer of undertaking has taken place, by which certain employees are automatically transferred from the seller to the buyer irrespective of the ‘scope’ of the assets and liabilities that are transferred by virtue of the asset purchase agreement.

Finally, in recent years, an increasingly popular phenomenon in technology transactions has been the ‘acqui-hire’, by which companies acquire the company’s assets or shares for the sole purposes of hiring its key software engineers. Once the new people are onboard, the acquired business is liquidated. In an acqui-hire, part of the due-diligence research should be a thorough assessment of the engineers and their terms of employment, as well as their values, work habits and priorities.

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?

Generally, a buyer and its (legal) advisers will review the information included in the trade register of the Dutch Chamber of Commerce. This register contains information on the target’s registered name and address, its directors, annual accounts and other filings, such as past mergers or demergers. Moreover, before the wire transfer of the purchase price to the seller upon completion of the transaction, the central insolvency register is checked to confirm that neither the target company nor its subsidiaries have been declared bankrupt.

In a technology M&A due diligence, it is customary to consult additional registers to confirm, among other things, that all IP rights are owned by the target and to establish what, if any, registered licences are issued. Trademarks and design or model rights - depending on their scope - are registered with the Benelux Office for Intellectual Property, the European Union Intellectual Property Office or the World Intellectual Property Organization, respectively. Each organisation maintains its own register. Patents - depending on their scope - are registered in the Dutch Patent Register or European Patent Register. Finally, domain names - which do not technically qualify as IP rights, but may qualify as trade names - are registered with the Foundation for Internet Domain Registration. Copyrights are created by operation of law and are, therefore, not registered in the Netherlands. Therefore, we require an overview of all IP rights and copies of all relevant licence agreements, to verify whether all relevant intellectual property is owned or validly licensed by the target.

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?

In the Netherlands the following types of intellectual property are registrable: trademarks, design or model rights, patents, plant breeder’s right and domain names. Due diligence typically consists of a review of the registers. See question 5.

Other IP rights, such as copyrights, database rights, trade names and trade secrets are not registrable under Dutch law. These rights arise by operation of law or first usage. For due diligence purposes, it is important to review all relevant agreements and other documentation held by the target related to these rights. See question 5.

Can liens or security interests be granted on intellectual property or technology assets, and if so, how do acquirers conduct due diligence on them?

Under Dutch law, there is no single legal equivalent to a lien. A lien can refer to an array of Dutch security interests. In practice, the most common security interest vested in respect of IP rights or technology assets is a pledge. Under Dutch law, IP rights can be encumbered by a pledge, provided that the relevant intellectual property law states that the IP right is transferable. This is the case for copyrights, trademarks, design or model rights, patents and plant breeders’ rights. The requirements for the creation of a pledge differ per IP right; however, in most cases, a pledge is established through an authentic or private deed. To the extent that the IP rights are registered, the pledge is recorded in the applicable register.

Moreover, most technology assets - such as hardware - can be encumbered by a right of pledge, provided that these assets qualify as movable assets. A pledge is created by an authentic or registered private deed. In these instances, due diligence typically consists of reviewing the relevant deeds and underlying contracts containing the obligation to create a pledge. Depending on the nature and motives for the transaction, seller, buyer and creditor can decide to settle all outstanding debts prior to closing or, alternatively, agree that the acquirer will take over (part of) the existing debt after closing. In the first case, the pledge will terminate by operation of law prior to closing. In the second case, the creditor will enter into new (finance) agreements with the acquirer upon closing, waive its existing pledge prior to closing and establish a new pledge post-closing. If a pledgor (debtor) fails to comply with its obligations under the finance agreement, the pledgee (creditor) can dispose of the IP rights as if he or she were the owner.

What due diligence is typically undertaken with respect to employee-created and contractor-created intellectual property and technology?

Establishing ownership of IP rights, created by employees or independent contractors, is particularly relevant when copyright protected works are involved - as these are not formally registered or recorded. According to the Dutch Copyright Act, copyrights vest in the creator by operation of law. However, if the creator is an employee, the Dutch Copyright Act dictates that all copyrights created by an employee vest in the employer, provided that these activities fall within the employee’s job description. To avoid confusion and prevent copyrights from automatically vesting with the employee, an IP clause is often included in employment agreements. The same rules do not apply if the person creating the intellectual property qualifies as a contractor rather than an employee. All copyrights created by a contractor automatically vest in contractor as creator. To avoid having to seek the permission of the contractor each time the copyright protected works are used, companies will typically include an IP clause in their agreements. This clause compels contractors to transfer all copyrights created throughout the course of the assignment to the company.

Unfortunately, the distinction between employees and independent contractors is not always clean-cut. Even if an agreement is not formally labelled as an employment agreement, it can qualify as an employment agreement if it satisfies the statutory requirements and vice versa. Earlier this year, a Dutch lower court ruled that the relationship between food-delivery company Deliveroo and its deliverers qualifies as an employment agreement. The decision was controversial as it followed an earlier decision, in which the Dutch lower court ruled that the relationship between Deliveroo and its deliverers should qualify as an assignment agreement rather than an employment agreement. In another case against the cleaning service platform Helpling, the court decided that the relationship should not be seen as an employment agreement nor as an agency work employment contract with Helpling, but should be perceived as employment intermediation. Therefore, it appears that the jury is still out on how the contractual relationship between workers and online platforms with similar hiring constructions should be qualified.

In light of these rules and case law, due diligence related to employee- and contractor-created intellectual property typically focuses on standard and personalised employment agreements; freelance agreements and (standard) management agreements; agreements involving hiring out and hiring in employees; and proceedings, pending proceedings or other employment-related disputes. If relevant, due diligence should also focus on employees who contributed to patentable inventions, as they may hold certain rights or be entitled to compensation. Finally, if trade secrets are considered valuable company assets, due diligence should also focus on confidentiality and secrecy undertakings with employees and contractors. Under the new Trade Secret Act, if a company does not have adequate non-disclosure agreements in place, this may prevent know-how from qualifying as a trade secret. If due diligence investigations reveal that the agreements with employees or contractors do not sufficiently protect intellectual property, IP rights must be transferred to the target prior to completion by means of a separate deed of transfer.

Are there any requirements to enable the transfer or assignment of licensed intellectual property and technology? Are exclusive and non-exclusive licences treated differently?

A licence can be granted for all IP rights. A licence is, in essence, an agreement between the owner of the IP rights (licensor) and a third party (licensee), by which the licensor authorises the licensee to use its IP rights. A licence can be limited in, among others, time, scope, territory, type of IP right, exclusivity, sublicences, transferability, royalties, types of goods or services, and duration. Apart from the requirement that consent must be reached between licensor and licensee, no formal requirements exist for the establishment of a licence under Dutch law (except for an exclusive copyright licence that should be done by deed). However, a patent, design or model right or trademark licence does not bind third parties until the licence is registered in the relevant register. In practice, a licence is usually embedded in a written agreement in order to avoid discussions at a later stage. Generally speaking, licence agreements can be transferred. Parties can include a provision in the licence agreement, dictating that the licence cannot be transferred (ie, exclude the right to transfer). Considering that the legal implications of a clause of this nature can be particularly burdensome, this should always be verified during due diligence.

Debate exists on whether the new owner of the IP rights is bound by a pre-existing licence after transfer. The prevailing opinion is that the new owner must respect the licence, provided that the new owner knows or should be aware that a licence agreement exists (eg, by consulting the appropriate register). As not all IP rights are registered in the Netherlands, an essential part of the due diligence investigation is to find out whether the company has entered into licence agreements with third parties.

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?

In the Netherlands, due diligence typically focuses on the review of:

• agreements relating to the sale, purchase, licensing or licence granting of software;
• agreements relating to IT services;
• agreements relating to technology in escrow and technology escrow for hardware and software;
• reseller, distribution and strategic alliance agreements with other IT suppliers;
• letters of intent with suppliers and customers related to IT;
• general terms and conditions governing the sale or purchase of IT (hardware, software or IT-related services); and
• assignment agreements related to rights on hardware or software offered or delivered to customers (ie, IP transfer deeds).

See question 8 for the due diligence typically conducted if employees or independent contractors are involved in the development of software.

As part of this due diligence, the target company usually provides information on whether the software used is licensed through third parties or open source. However, since lawyers (in general) are not qualified to comment on the quality of software, we explicitly exclude this from the scope of our due diligence. If the nature of the transaction requires in-depth software due diligence we advise clients to involve third-party experts.

What are the additional areas of due diligence undertaken or unique legal considerations in your jurisdiction with respect to special or emerging technologies?

In general, most of the aforementioned considerations apply equally to special or emerging technologies, with privacy compliance being a major focus point. Further, depending on the nature of the transaction, specific regulatory requirements may apply, which will constitute part of the due diligence investigation.