M&A in the IT sector: Avoiding the pitfalls
In the technology sector, mergers and acquisitions come with specific challenges. For tech companies, their ultimate purpose is to absorb the technology of the target company and to utilize it for the development of its own technology. Therefore the challenge is to overcome inherent hurdles in melding staff and technologies for a successful corporate transaction and fruitful product development.
Steven De Schrijver is the head of the corporate & M&A and the IT & New Media Departments of Lorenz in Brussels. He has been involved in numerous mergers and acquisitions and advised multiple companies in the technology sector on their corporate transactions. As winner of the M&A and the Information Technology Law Firm of the Year awards for Belgium, Lorenz is perfectly placed to advice tech companies on their corporate transactions in Belgium.
Tech companies wishing to acquire a company should be aware of the encumbrances in transactions in the technology sector and specific pitfalls that will require special attention. The two key issues with respect to corporate deals in the technology sector relate to IP/IT and employment:
1. IP and IT due diligence
Since the target’s technology and its intellectual property are the most valuable assets to an acquiring tech company, a thorough and comprehensive due diligence is essential to obtain a correct assessment of the assets involved. This due diligence should not only focus on the value of the intellectual property rights, but also – and most of all – on the transferability of these rights.
For intellectual property that is not owned, but only licensed by the target, it is crucial to investigate whether the licenses contain a change of control clause, prohibiting the target transfers of the licenses to the acquirer. Another possible pitfall in transferring IP could be exclusive rights granted to local distributors in a specific region, which could be incompatible with the existing distribution network of the acquirer.
Moreover, it should be verified whether the intellectual property with respect to the technology software that was developed by the target’s employees has been validly transferred to the target company. Under Belgian law, if an employee develops new software in the execution of his duties or following the instructions given by his employer, the employer exclusively shall be entitled to exercise all economic rights in the program so created, unless otherwise provided by contract. Thus, the target company’s employment contracts should be checked to determine if clauses on the non-assignment of the intellectual property rights to the employer are present. Also if software is developed by free-lance consultants, it should be verified who holds the intellectual property rights under the contract.
Another aspect that is often overlooked is the presence of Open Source code in the developed software, which implies that these source codes are available to everyone. Cisco experienced the consequences of the presence of Open Source codes in the target’s software when it acquired Linksys in March 2003 for 500 million dollar. After the deal was closed Cisco was contacted by the Free Software Foundation that determined that the Linksys software contained Open Source code. Since it would be very cost prohibitive to reengineer the software, Cisco had to release the source code, which then became available to anyone at no cost.
2. Employment issues
Companies in the technology sector often work with independent contractors, or, so called freelancers. Often these contractors only work for one company from which they receive instructions. In effect, they often work almost as employees. The acquiring company should therefore well examine the working situation of these freelancers and obtain appropriate warranties from the target company in case the independent contractors would be re-qualified as employees by tax – and social security authorities and consequently additional taxes and social security contributions would be imposed on the company. Possibly also their working situation post-closing needs to be reviewed.
Finally, it is common practice in the technology sector to outsource employees to other companies to carry out an assignment. Nevertheless, companies should be careful when doing this, since the Belgian law of July 24, 1987 on the Secondment of Employees for the Benefit of Users, prohibits placing employers at the disposal of users. Employers breaching this law can be held criminally and civilly responsible. Consequently, this liability risk needs to be well assessed and covered by adequate warranties from the target company’s side.
Steven De Schrijver
Head of Corporate & M&A and IT & New Media Departments
Lorenz
Regentlaan 37-40 Boulevard du Régent
1000 Brussels
Telephone: +32.2.239 2000
E-mail [email protected]