Splendid September for everybody also here from Attorneys-at-Law TRUST.! It is time for our next posting in our M&A negotiation series. Below, you can find a timeline illustrating how an M&A negotiation process might proceed in real life. In addition to examining these dynamics, I also want to raise some, perhaps neglected, points from the patent and privacy point of view for those readers who are more familiar with “an ordinary” deal structure.
As in any commercial transaction, it all starts from a contact with the potential acquirer, an action which can be taken by the seller or the target directly—or it could be an investment bank having an assignment from the seller to find a potential buyer.
The first thing to bear in mind is the non-disclosure agreement. Now, there are two different non-disclosure agreement (NDA) models that one might use depending on whether there is a direct contact between the buyer and the seller or investment bank (submitting first teasers and then later information memoranda).
Do you know what the differences are between an ordinary mutual NDA and NDA made by a venture capital firm or for the purposes of an investment bank submitting information memoranda? Well, we are not going to tell you everything—perhaps at some later point. Let us just assume at this point that an NDA serves two purposes. First, controlling the exchange of information; and second, the use of this very information in the future.
Before any detailed information is exchanged, an NDA should be in place. Furthermore, before the parties proceed to due diligence, which means an investigation of the target typically from financial, legal and technical perspectives, the seller or its representative may have asked for indicative bids from one or more buyers, possibly this way trying to limit the number of companies performing detailed investigations of the firm. This is not always the case and it might be that first the parties negotiate a “term sheet” and after that there is due diligence. As a third option, there might be the signing of the entire share purchase agreement after which the due diligence process is carried out before the deal is closed.
In the due diligence process, one has to bear in mind that information is one of the most valuable assets of any company. It is not very unorthodox that potential competitors bid just to catch a glimpse of the assets or even confidential patent applications! Furthermore, if there are competitors in the process, one very important thing often forgotten by even the largest of law firms not familiar with patent-intensive business sectors is that in a due diligence process one may enable patent exposure if competitors are permitted to perform technical due diligence. Your competitor might, e.g., find something that is covered by their own patents and try to assert these patents against you or a third party acquirer with an intension to block business.
Slightly carried away from the original theme, consider a possibility for including a patent mining or non-assert clause in this situation IN ADDITION to limiting the access to relevant documentation in practice. A non-assert clause is like a covenant not to sue. I assume that this is a more familiar clause for most of you. However, a patent mining clause might be more unfamiliar. Here is an example of its idea:
“I promise to you that if I receive information I do not use this information to file patent applications, perform infringement analysis or for other similar purposes. If there are any issues to the contrary and I, e.g., file an infringement claim against you, I promise to prove that I have acted as stated in this clause”.
If you have not prepared a term sheet before due diligence, then it could be prepared simultaneously. As it appears, most commercial issues are clarified in the term sheet likewise the deal structure. However, in many cases it may be too early to fix the deal structure at this stage as relevant information might arise in the due diligence process that influences the decision, whether it is a share deal or asset deal altogether.
An example might be that originally it would have been agreed that the transaction is done as a share deal because that the seller typically is better off as they might get a tax neutral deal. In due diligence, it is, however, established that certain IP assets and third-party technology licenses are within the company and those would be very important to the other affiliates and business units of the seller. Of course, these assets might be transferred or assigned to the seller or its affiliates as a condition precedent to the closing to the seller (which takes time that you may not have). Alternatively, it might be worth considering whether the buyer would agree to execute a business purchase agreement and limit the transaction to “transferred assets” while they would perhaps get a license to the retained assets. This way the buyer might even pay a bit more of the assets, as they may be able to make deductions in their taxation. All these depend on the particular circumstances surrounding the deal. So, after the completion of the term sheet, heavy negotiations usually take place ending with the SPA. The deal structure is something that we need to deal with separately and it is not covered in this current blog posting.
Some post-closing issues typically arise already before the SPA is signed, and one thing involves transfer of data necessary to continue business without interruptions.
If you are transferring personal data, one should keep in mind the perhaps slightly neglected issue that even in this case the theoretical starting point is the “consent” of the person whose information one is about to disclose. There is one statement from the Finnish Data Ombudsman 14.9.2009 (1467/44/2009) in which it is stated:
“Ennen yritysjärjestelyn toteuttamista voidaan myös harkita työelämän tietosuojalain 3 §:n mukaisesti työsuhteen oikeuksien, velvollisuuksien, etujen tai työtehtävien erityisluonteen kannalta välittömästi tarpeellisten tietojen luovuttamista esim. henkilötietolain 8 § 2 mom. mukaisena tavanomaisena luovutuksena. Tällöin edellytyksenä on, että työntekijöiden ei-arkaluontoisia henkilötietoja voidaan luovuttaa tarkoitukseen, joka on yhteensopiva rekisterille määritellyn käyttötarkoituksen, kuten palvelussuhteen hoidon kannalta, jos työntekijöiden voidaan olettaa tietävän henkilötietojen tällaisesta luovuttamisesta. Henkilötietojen luovuttaminen on myös mahdollista tarpeellisuusvaatimuksen täyttyessä työntekijän suostumuksella.
Tietosuojavaltuutetun käsityksen mukaan on tarkoituksenmukaista, ettei kaikkien työntekijöiden nimiluetteloa yksityiskohtaisine palkkatietoineen sekä työsuoritusarviointitietoineen luovuteta uudelle mahdolliselle työnantajayritykselle ennen yritysjärjestelyn toteutumista.
- Henkilötietolaki (523/1999) 3 §, 5 §, 6 §, 7 §, 8 § 1 mom. 1 kohta, 5 kohta, 6 kohta, 8 kohta, 8 § 2 mom., 9 §, 10 §, 24 §, 32 § ja 33 §, 34 §.
- Laki yksityisyyden suojasta työelämässä (työelämän tietosuojalaki, 759/2004) 2 §, 3 §, 4 §, 4 §:n 3 mom., 5 §.
- Työsopimuslaki (55/2001) 1 luku 10 §
- Laki yhteistoiminnasta yrityksissä (334/2007) 4 luku 15 §, 6 luku 32 §”
So, in summary before closing, the rule of thumb is that disclosure of personal data should be limited. As the relevance of this area of law is increasing (and significant sanctions have been imposed), it is worth investigating this unchartered territory further. Perhaps, we next address the realm of NDAs even though I promised not to do so. This should give to you a vivid picture how the process “flows” forward in a timely manner.
Until next time and we want to cite one of my favorite academics, Karl Popper, who said: “If we are uncritical we shall always find what we want: we shall look for, and find, confirmations, and we shall look away from, and not see, whatever might be dangerous to our pet theories.”. There are no objective truths in an M&A process, and we invite you to disagree with us, comment and contribute your insight and we all learn more!