As the deal flow shows, there is clearly a technology transaction boom going on! The boom is accelerated further by the pandemic and the fast paced digitalisation and innovation spurred by it. The global technology M&A deal volumes have been record high since a small dip in the beginning of the pandemic, and predictions are that the boom will continue.
Every industry is facing technology disruption in some form, and as a result, the importance of technology, data and other intangible assets continues to grow across industries, not only those traditionally seen as technology or intellectual property (IP) driven. Even when the target companies are not technology companies in the traditional meaning, their operations will run on technology. Thus, we like to say that all M&A transactions are technology transactions. Hence, involving expertise of technology lawyers in all stages of an M&A deal will be crucial for its success.
Does the target really hold the IP rights it allegedly owns?
A proper legal due diligence investigation covering all intangible assets is an important part of every technology transaction. “Kicking the tires” of the target company, or actually digging much deeper than that, shapes and sometimes even breaks the deal. Lawyers reading thousands of pages of documentation in connection with the legal due diligence (LDD) phase just for the sake of doing it? Definitely not! While artificial intelligence tools will take more important role in narrowing down the information gap between the seller and the buyer, LDD is a mechanism to gather information and build the big picture about the legal status of the target’s IP and data assets. The goal is to verify the rights and obligations pertaining to the intangible assets and identify related risks in order to be able to address them in a proper manner in connection with the contemplated transaction. Non-deal breaker findings can be addressed in the transaction agreements, and certain identified risks can be mitigated either before or after completion of the deal. In addition to an IP due diligence of the tech assets, the technology deals we see today often require carrying out in-depth data and open source software licensing due diligence investigations.
Data in the Spotlight
The technology field is data centric and valuations are often driven by opportunities to leverage the target’s business or industrial data. This, together with the entry into force of the General Data Protection Regulation (GDPR), has put data in the spotlight of M&A transactions. Identifying the risks related to data often requires not only extensive work, but even better understanding of the data assets than the target itself may possess. To put it simply, as with money flows, one must understand where the data comes from, where it is stored, how it is used and where it is transferred, perhaps internationally.
The GDPR provides supervisory authorities with extensive powers and the fact that the sanctions under the GDPR are severe, amounting to the greater of 4% of the global turnover or EUR 20 million, evidently means that no buyer can take the risk of being in material breach of the GDPR right as of day 1 upon closing. Therefore, the legal due diligence must cover GDPR compliance. By identifying the rights and responsibilities connected to data, the buyer can ensure that the data can also be used and capitalised as planned post-transaction.
Interesting IP (database) and data protection issues also come up in connection with negotiating ancillary agreements relating to, for example, the licensing of data assets in situations where they will be used post-closing by both the seller and the buyer. Who is responsible, and to what extent, for GDPR compliance and what is the scope of warranties and/or indemnities as well as related limitations of liability as to the data at hand? Market standards are still developing in this regard, and it may be bittersweet for the seller to accept the regulation based exposure.