Structuring and legal considerations

Key laws and regulations

What are the key laws and regulations implicated in technology M&A transactions that may not be relevant to other types of M&A transactions? Are there particular government approvals required, and how are those addressed in the definitive documentation?

Key laws and regulations relevant for technology M&A transactions (including, among others, data protection and privacy rules, intermediary rules and fintech regulations) are:

  • the Information Technology Act;
  • the Copyright Act;
  • the Trade Marks Act;
  • the Patents Act;
  • the Designs Act; and
  • the Payment and Settlement Systems Act.

Additionally, several draft laws and regulations, such as the draft guidelines for online pharmacies, the new draft data protection and privacy law, the draft e-commerce policy (which may impact companies engaged in e-commerce) and the new proposed ‘over the top’ regulations, will become relevant once they are passed into law and must be considered from a risk assessment perspective in anticipation of this.

Government rights

Are there government march-in or step-in rights with respect to certain categories of technologies?

Yes, the government has the right to acquire inventions or patents for a public purpose. Consideration must be paid to the owner of the invention as may be mutually agreed and failing such mutual agreement as may be determined by the High Court.

Legal assets

How is legal title to each type of technology and intellectual property asset conveyed in your jurisdiction? What types of formalities are required to effect transfer?

Legal title is transferred by an instrument in writing, which must be duly stamped with the appropriate amount of stamp duty. Further, in the case of patents and trademarks, the acquirer must register his or her title by submitting a written application to the authorities. In the case of copyrights and designs, though not mandatory, it is advisable that the assignment is recorded by the acquirer by filing a prescribed form with the authorities.

Additionally, with regard to assignment of copyrights, care must be taken that the term, territory and certain other aspects are recorded in writing, failing which the term is deemed to be only five years, the territory is deemed to be only India and, if the rights assigned are not exercised within one year of the date of assignment, the rights stand lapsed unless the contract provides to the contrary.

Due diligence

Typical areas

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?

The typical areas with respect to technology and IP assets are:

  • determining ownership of the asset to start with (eg, whether the entity that is being acquired, or from which the asset is being acquired, legally created the asset or acquired the asset; or whether assignment agreements with proper clauses have been executed and the stamp duty has been paid);
  • determining if there are any third-party components or open source codes forming part of the assets that may impact its complete ownership or use or royalty obligations, etc;
  • ascertaining whether there are any infringement claims from third parties with regard to such assets; and
  • whether the technology or asset is protected by the grant of a patent and, if not, whether it is likely to infringe any patents.

There is no difference in due diligence as far as technology and IP assets are concerned. However, general due diligence in the case of mergers or share acquisitions involve various other aspects, such as title to the shares and authority for the merger or sale.

Customary searches

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?

Patent and design searches may be conducted for technology assets. In addition, court databases may be searched for verifying if the party or person from whom the technology asset is being acquired is party to any litigation.

A public notice may also be issued out of abundant caution.

Registrable intellectual property

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?

Copyrights, patents, trademarks and designs are all registrable. Trade secrets are not registrable but can be protected through non--disclosure agreements. The typical due diligence undertaken is to ascertain:

  • if the intellectual property is registered in the name of the seller or if any application for registration has been made by conducting online searches;
  • if the intellectual property has been acquired from a third party;
  • whether there is an instrument of assignment, with proper assignment clauses and stamp duty paid; and
  • whether there are any ongoing disputes with regard to the intellectual property for which searches are conducted in the publicly available databases and court records.

Further, relevant teams and inventors are interviewed to ascertain if they were or remain aware of issues such as open source code, third-party components and prior art searches.

Liens

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

Yes, these can be created. However, there is no specified procedure for creation of a security interest under the intellectual property laws, except for patents and designs. Under the Patents and the Designs Act a specific section is prescribed for recognition of rights of a mortgagee, and that provides that an application must be filed in form 16 and form 12, respectively, with the controller to record rights obtained as a mortgagee. Due diligence to ascertain if any such interests have been created would entail a review of all contracts and agreements, interviews with the bankers and management, and inspection of the register of charges maintained by the registrar of companies, etc.

Employee IP due diligence

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

For contractor-created intellectual property and technology, as stated above, it is critical to ascertain whether there is an instrument of assignment, with proper assignment clauses and consideration, and stamp duty paid. As far as employees are concerned, the contract of employment must be verified to ascertain:

  • if stamp duty has been paid;
  • whether it is truly an employment contract or an independent contractor contract;
  • if consideration has been paid; and
  • most importantly, whether the contract provides that employee or employer shall be the first owner of the work, etc.
Transferring licensed intellectual property

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

These would depend on the licence available with the licensee and any restrictions thereupon. Exclusive and non-exclusive licences are treated very differently in India, as the name suggests. Non-exclusive licences would not entitle the licensee to any sole rights to use or exploit the technology, whereas exclusive licences would.

Software due diligence

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?

Typically, the due diligence undertaken involves interviewing the coders, perusing contracts with the coders and getting third-party specialist teams to ascertain if any third-party or open source code has been used. Target providing code scans is based on mutual agreement and on a case-to-case basis.

Other due diligence

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

These are all new and emerging areas of laws in India, and thus the laws are not yet developed. However, the government is examining these new and emerging areas of law. For example, in the case of drones, the Ministry of Civil Aviation has finalised a national drone policy and permitted civil use of drones from 1 December 2018. Similarly, for artificial intelligence the Ministry of Industry and Commerce set up a task force that issued a report in March 2018.

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?

Yes, it is customary to include such representations and warranties. For example, the target would be asked to represent and warrant that it is the sole and absolute owner of the intellectual property that is being sold and that such intellectual property does not infringe any third-party rights. Similarly, with regard to data protection, the target would be asked to represent that it is in compliance with all applicable data protection and privacy rules, including those notified under the Information Technology Act of India.

Customary ancillary agreements

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

These depend on the facts and circumstances of each matter. However, transitional trademark, cross-licensing and transition services agreements are used.

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 relating to intellectual property are typically that there is no material adverse change in the business or finances of the target owing to any intellectual property disputes or third-party claims, and there is no material challenge to any IP rights owned or used by the target by any third party, including any action for revocation of any patent, etc. As far as post-closing covenants are concerned, these would typically provide for liquidated damages for breach, such as any misrepresentations, indemnity for any costs incurred and losses suffered.

Survival period

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

Yes, the periods typically extend at least to the life of the exclusive rights granted by law, which are generally for over a decade in most cases, as compared to the standard representations and warranties, which are generally limited to much shorter periods.

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?

This depends on the facts and circumstances of each case. However, generally, the caps are higher. The caps could be a significant percentage of the purchase price or even the full purchase price if the target has no other significant assets other than the intellectual property.

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 depends on the facts and circumstances of each case. Generally, liability for breach of IP representations are not taken lightly.

Indemnities

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

Yes. The indemnities would require the seller to indemnify and hold harmless the acquirer from all costs charges including reasonable fees of attorneys, expenses and losses that arise as a direct or indirect result of the breach of any of the terms and conditions of the acquisition agreement, including any misrepresentations by the seller.

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?

The IP representations and warranties are generally required to be true in all respects. However, the walk right, depending on the bargaining position of the parties and their risk appetite, would be negotiated to the misrepresentation having caused or likely to cause a material adverse effect on the target as may be determined by the purchaser..

Updates and trends

Key developments of the past year

What were the key cases, decisions, judgments and policy and legislative developments of the past year?

Key developments of the past year20 What were the key cases, decisions, judgments and policy and legislative developments of the past year?

Some of the key developments of the past year are as follows.

The government has permitted up to 26 per cent foreign investment into Indian companies engaged in the business of uploading/ streaming news and current affairs through digital media. However, such investment will require the prior approval of the government.

The government has permitted entities with foreign investment engaged in the single brand retail trading sector to undertake e-commerce activities or online sales even prior to opening of brick and mortar stores in India. However, within two years of launching online sales, the physical stores would need to be opened. Earlier, such sales could be undertaken only if the entity had first opened brick and mortar stores in India.

To encourage and protect founders of start-ups, the law has been amended to allow a company to issue shares with disproportionate voting and other rights up to 74 per cent of the total paid-up share capital, as compared to the earlier cap of 26 per cent.

A tax known as the ‘angel tax’ was levied on start-ups, on any premium received by them that was above the fair market value of their shares. This will no longer apply, provided the start-up is registered with the Department for Promotion of Industry and Internal Trade.

Content on social media applications is being monitored closely for any anti-India narrative, obscene content, etc. Also, those social media applications that have claimed an ‘intermediary’ status under the Information Technology Act, thereby claiming that they are not liable for content on their platforms, are being questioned on any exclusive content agreements they may have with content creators. Recently, a popular app was temporarily banned pursuant to an interim court order on allegations of having anti-India content and obscene video clips. This ban was later lifted.

A comprehensive data protection and privacy law, the Personal Data Protection Bill 2018, is likely to come into effect soon. This law is modelled on the lines of the General Data Protection Regulation of the European Union.

The government has announced its intention of focusing on India’s digital economy, including areas such as internet of things, artificial intelligence, software development, electronics manufacturing, etc.