Welcome to MJ Hudson’s monthly On Target, where you’ll find useful tips and insights to ease you through your M&A transactions.
This month we focus on the tech sector, and provide some tips as to how you might approach the acquisition of a tech (software) heavy business.
For once, lawyers won’t necessarily be your first port of call… Make sure you assemble an expert technical due diligence team, and put the target company’s valuable tech through its paces. Meet the developers if you can, as well as any members of the business’ management or operations team who oversee the software’s use and maintenance. Dig into the software’s history and its development process, but also understand how the business or its customers currently use the software, and how it might be enhanced in the future.
All too often ownership of software is – often inadvertently – shared with third parties. At English law, intellectual property (including rights in respect of software) developed by an employee in the course of their employment would, by default, be owned by the employer. Of course, it’s still wise to check if the development was part of the employee’s duties or occurred outside those duties. It’s also important to bear in mind that the rules for copyright and patent ownership are different. However that won’t necessarily be the case in other jurisdictions, nor in the UK if the software is developed by a consultant or freelancer. If a third party has been hired to develop the software, a full and unqualified assignment of all IP is needed in order to transfer ownership rights to the target company. Given the possibility for dealbreakers to lurk here, establishing ownership of intellectual property should be an early priority for both technical and legal due diligence.
Many recently-developed software platforms are – at least in part – based on open-source architecture, or rely on open-source modules. This is partly because open-source software is often, but incorrectly, regarded as “free”. Open-source software can, in fact, be subject to restrictive licensing terms like any other third party software product. In particular, watch out for products developed using open-source material where the licensing terms require the disclosure or re-distribution of any modifications or enhancements developed by the target company, or place some other restriction on use.
If the target business monetises its software by licensing it, make sure you understand the terms of that licensing. Do the licence terms adequately reserve all intellectual property rights to the target company? What about any modifications or enhancements made by the licensee – are these allowed? Who owns them?
Make sure the target company has a strategy and process for protecting its key intellectual property. Data breaches and hacking may be hot topics in the media (and deservedly so), but are key assets also protected against competitors who might be developing similar tech? Consider what rights could, and should, be registered, how and where. Also realise that a lot of valuable IP can exist in employees’ heads – is the target business correctly identifying, recording and protecting that information?
Prepare for the worst, too – what happens if a key individual leaves the target business, are the termination provisions (e.g. obligations to return confidential information, and any post-termination confidentiality obligations) and restrictive covenants sufficiently robust and enforceable to protect the target business?
A related point to check is what personal data the target business holds about customers, other trading partners and its employees. How and where is the data processed, is any of this data used for or stored in the business’ software assets, and is any of it disclosed or transmitted externally or into another jurisdiction? A data protection lawyer will be able to assist with this assessment.
Finally, step back from the technical analysis and assess the team. Frequently the real growth value of a tech business – the energy, ideas, drive and technical expertise – resides in the individuals. How do they work together, who leads, who experiments, who anticipates issues, who problem-solves? Group dynamic can often be as critical as individual talent, so make sure your due diligence encompasses an assessment of these ‘soft’ factors too.
With special thanks to Vicki Salmon and Sam Jinks at IP Asset who provided expert intellectual property law input for this article. IP Asset is a specialist intellectual property legal practice.
Is this brief too brief? Want to know more about acquiring a tech business? (of course you do) Expert legal advice is on hand from MJ Hudson’s M&A team. Just contact any of the On Target team (details below) or your usual MJ Hudson M&A contact, and we’ll gladly help.
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