Successful lawyering in the technology transaction boom

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.

The use of open source software is market standard, but certain compliance issues are involved.

Open source software

While the use of open source software (OSS) is seen as a market standard in software development these days and it is somewhat old fashioned to talk about OSS related “risks”, certain compliance aspects must be tackled as in the case of any software related IP licensing. Yet, the risks may still be apparent to all those who use OSS as part of their solutions and services. Namely, the OSS licenses pose a wide range of requirements when the license is triggered, ranging from inclusion of copyright notices to disclosure of source code. Many companies only use OSS internally and such cases pose very few risks as the requirements set in the OSS licenses are, in general, triggered by distribution.

The OSS due diligence focuses on understanding the use of OSS in the target and its products or services and the compliance with the OSS license terms. Typical situations of concern are OSS license breaches, which constitute copyright (or even patent) infringement, and the use of so-called copyleft licenses, which may infect proprietary technology. The use of a copyleft license in a proprietary product means, in a most challenging scenario, that the target’s proprietary software becomes subject to the OSS license, and perhaps even the requirement to disclose the also proprietary source to recipients of the program.

“The LDD team cannot work in a vacuum.”

It goes without saying  – the LDD team cannot work in a vacuum when investigating these matters and  close cooperation with the technical due diligence team and the client from the outset is of utmost importance.

“Transaction agreements are a tool for mitigating and shifting the risks.”

Translating the findings into the transaction agreements

The focus on technology and data related terms in the transaction agreements is increasing. First of all, the transaction agreements must cover the proper transfer of all intangible assets. Depending on the deal structure, this can be very straightforward or require extensive paperwork. Further, certain identified risks may be mitigated already before the consummation of the transaction as conditions precedent whereas other risks require agreeing on the risk allocation through specific indemnity provisions. For example, the consent of a third party for the transfer of a license, or source code remediation by the target to ensure compliance with OSS licenses, could be included as conditions precedent to the transaction. On the other hand, liability for an alleged IP infringement risk could be shifted to the seller through a specific indemnity provision. Unknown risks should be properly reflected in the representations and warranties given by the seller, and should cover, for example, the ownership and non-infringement of IPs in the intangible assets as well as compliance with the GDPR.

“Post-closing transitional services or long-term co-operation agreements are often IP and data heavy.”

The closing of the deal might not mean the end of co-operation between the parties and in many cases the target is even after the closing dependent in some way of the services provided by the seller. In such case a fixed term transitional service agreement (TSA) comes into place. Sometimes, a license or cross-license is a vital part of the deal as a whole, and the long-term license agreement negotiated as part of the deal is at least as important for the parties as the transaction agreement itself.

It becomes apparent above – successful lawyering in the technology transaction boom requires seamless co-operation between transactional and technology lawyers, not to forget seamless co-operation between the lawyers and the client and other experts involved in the dealmaking. Teamwork makes the dream work.

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