Six Recent Representations and Warranty Trends in Tech-Heavy and Disruptive Technology Transactions
Market evolution, geopolitical change and continued efforts towards the best practice amongst M&A practitioners have each lead to a number of recent changes to the representations and warranties that are now more typically given by sellers in international technology M&A transactions. Taylor Wessing’s transatlantic corporate technology team has highlighted below six shifts in market practice they have increasingly seen being negotiated, and ultimately agreed, in recent international transactions.
1. Stronger Intellectual Property Warranties
EU sellers have recently stepped up to a more US, and arguably more buyer friendly, style of IP warranties. Where agreed, this trend towards protection for buyers is usually provided by carving out and scheduling key IP protections from the general business warranties and treating them differently. This also typically means they are then neither included in general basket (indemnification threshold) provisions nor time limited in the same way.
2. GDPR Compliance
No technology company can hope to have escaped the furor surrounding the Global Data Protection Regulation coming into force on 25 May 2018. While we expect it will take some time for market practice to settle down, in the post GDPR world we are already seeing increased emphasis on demonstrating data protection compliance as part of M&A transactions. Sellers are being expected to provide warranties as to GDPR compliance, which includes providing details of adequately documented and implemented measures together (in some cases) with terms for data migration at completion.
3. Open Source (or Anti-Open Source) Warranties
These are now relatively commonplace. A seller may often be proposing to sell technology that incorporates an element of open-source software. Using warranty protections to identify the relevant software and accompanying licenses-in, if any, that govern these third party intellectual property rights and including appropriate protection is key. This is not least because some third party OSS licenses restrict the use of the technology by the buyer following the purchase by requiring the distribution of any technology containing that OSS.
4. ICO/Token issuance Warranties
The trend to include warranties that a company has not created, allotted, listed, offered etc. any form of digital token, blockchain-based asset, cryptocurrency or similar has become increasingly common. Whilst there are not many European companies that have yet gone so far as to launch an initial coin offering, there are those that are working on blockchain protocols, building new forms of computer network and services related to tokens and token sales. Buyers want to be aware of this upfront given the disruptive and volatile nature of these business models as well as the uncertain regulatory framework within which they are operating.
5. Locked Box
Whilst this seller friendly accounting method is still not common in US buy side deals, a “Locked Box” approach is being more frequently proposed by an EU seller and accepted by a US buyer as a plausible alternative where deal dynamics permit. Accompanying warranties and indemnities protect the buyer in respect of the conduct of business and leakage from the “Locked Box date” to completion.
With tightening immigration controls at the center of political decision-making in the US and many parts of Europe, we have seen buyers increasingly nervous about the risk and cost of failure to comply with immigration and right to work checks for employees. It is worth noting that where there is a risk that employees may not be able to work for the company post transaction, if those employees are key to the business the risk may not be sufficiently addressed by warranties. In that case, an early discussion on the potential impact on price as well as checking there are sufficient employment related and IP protections would be well advised.