Technology and IP-driven deals accounted for over 30 percent of M&A deal volume in Europe in 2014.1 This trend is bound to continue, with many deals involving strategic or financial investors from outside of Europe, particularly the United States and Asia.

The European legal landscape remains fragmented in important areas and presents unique pitfalls of which foreign investors should be aware. The following are some of the important IP issues that commonly arise in European technology deals:

  1. Lack of Uniform IP Rights

While IP protection across Europe meets minimum standards of protection under the TRIPS Agreement and specific EU directives, many important areas are not harmonized and remain governed by national laws that vary significantly from country to country in key respects, including questions on:

  • whether ownership of IP rights vests in the employee or the employer;
  • whether licensees are protected in the event of a licensor’s bankruptcy;
  • whether licenses must be recorded to be enforceable against an assignee of the licensed IP;
  • what formalities are required to effect the assignment of IP rights;
  • whether licenses are – by default – assignable or sublicensable;
  • whether sublicenses survive the termination of the main license; and
  • whether co-owners require consent for the use, licensing, or enforcement of co-owned IP and whether they are subject to revenue sharing or accounting requirements.

These variations will remain even under the “Unitary Patent” regime that is expected to go live in 2017.

Diligence, deal documentation, and implementation (including the recordation of assignments and licenses where required) need to be highly tailored in light of these differences.

  1. IP Ownership

Foreign investors who rely on an automatic transfer of ownership of employee-developed IP may be in for a surprise. In many European countries, there is no “work made for hire” doctrine (as known, e.g., in the United States) and ownership of copyright will originally vest in the employee who authored the work. In some countries, such as Germany, the copyright as such is considered inalienable and the assignment of an employee’s copyright to the employer – a standard provision in U.S.-style employee IP agreements – is not possible. While German law does allow the transfer of the author’s rights to use and exploit the work, that transfer requires an explicit agreement.

There are exceptions for software created by an employee pursuant to the European Software Directive.2 However, implementation in national laws varies, with some countries providing for original ownership by the employer of employee-created software works, while other countries only provide for a statutory license to the employer.

Diligence and deal documentation must reflect those differences. In some cases, insufficient or absent “transfers” of employee rights need to be remedied pre-signing or pre-closing.

  1. Inventor Remuneration

With respect to employee inventions, the laws across Europe are also often different from the laws of certain key non-European jurisdictions. In sharp contrast to the situation with respect to copyrightable works, the right to employee inventions often vests in the employer by operation of law in many European countries. Some countries impose formal and procedural requirements,3 and there may be time limits with respect to an employer’s opt-in or opt-out rights.

Most importantly, some countries, such as Germany, have mandatory statutory inventor remuneration laws, requiring the employer to pay adequate remuneration for the use of the employee’s inventions in addition to his or her regular salary. The details are complex and often require specific discussions about past and future compensation of employees, depending on whether the employee and/or that employee’s inventions and related patents are transferred to the buyer or retained by the seller.

Focused diligence and specific representations and warranties with respect to the seller’s past compliance with remuneration laws may also be required.

  1. Insolvency Issues

In the event of a licensor’s bankruptcy, European national laws do not necessarily provide protection for the licensee as this may be the case in other jurisdictions. Germany, for example, currently provides no statutory protection for licensees in a licensor bankruptcy proceeding.

In M&A transactions, this risk must be considered both by purchasers obtaining licenses under seller-retained IP and by sellers obtaining licenses back under IP transferred to the buyer. It is also a risk factor if the acquired business relies on key in-licenses from third parties. Statutory law varies from country to country in Europe.

Evolving case-law in some countries, notably in Germany, suggests that there are ways to structure transactions in a way that could mitigate this risk,5 but any such structure requires careful analysis on a case-by-case basis.

  1. Privilege

U.S.-style discovery is generally not available in civil-law countries. As a result, there is also no direct counterpart to the U.S attorney-client privilege doctrine and European companies are often not aware of the risk of privilege waiver through disclosure of privileged information. Investors that may be subject to U.S.-style discovery, including non-U.S. companies with a strong presence in the United States, should consider and address this risk in deal discussions and diligence involving European counterparties. Otherwise, potentially harmful documents and attorney-client correspondence disclosed by the unwary European counterparty could become discoverable in subsequent U.S. litigation to the detriment of the new business owner or the European target or both.


M&A Leaders Survey Predicts Strong Tech M&A Activity

Western Europe and the UK in the Top 5 of the “Hottest Regions/Countries”

A majority of respondents representing multiple sectors of the technology M&A community forecast acquisition activity in 2015 tracking to its strongest year since the Internet bubble burst in 2000, according to the latest M&A Leaders Survey.

The survey, conducted jointly by Morrison & Foerster and tech market intelligence firm 451 Research, reveals that over 6 in 10 respondents expect to see an increase in the number of tech M&A transactions this year, with over 15 percent of those expecting an increase predicting a “significant” increase over 2014 levels. In addition to an anticipated rise in tech M&A activity, a majority of respondents also expect private company valuations to either rise or stay the same as 2014. The number of IPOs is also expected to either remain at or increase over 2014 levels, the survey found.

When asked to pick the three “hottest” countries or regions for establishing or expanding a presence through acquisition or partnership, the United States was the runaway favorite (identified by 75 percent of respondents), followed by Western Europe (47 percent), China (33 percent), the United Kingdom (25 percent), and India (19 percent).

Click here to view image.

More information about the M&A Leaders Survey can be found here.