European Union: European M+A News, Winter 2015

Last Updated: February 2 2015
Article by Alistair Maughan, Kristina Ehle and Chung-Hun Daniel Kim


By Alistair Maughan and Kristina Ehle

The market in Europe for resale of software and other digital media is growing, and this represents an opportunity and a threat for companies involved in M&A activities.

The resale market for used software and other forms of media is increasingly attractive for small and mid-sized enterprises to acquire the digital assets upon which their business operations rely. From software downloads to e-books, online platforms have been created to facilitate the second-hand trade in different forms of digital media. While there may be obvious short-term benefits of such resales–not least in cost terms– the existence of resold digital media may cause issues in planned M&A transactions in Europe.

The growth of digital media resale as an issue in European M&A projects could be said to have started with a European Court of Justice (CJEU) decision in 2012, known as the UsedSoft case, that allowed the resale of "used" software downloads in some circumstances. But courts across Europe are still grappling with the consequences of that decision. Until either the EU enacts further legislation or the CJEU issues a clarifying decision, the pattern of which digital media resales are clearly allowed in which country will continue to resemble a patchwork quilt.

In the UsedSoft case, the CJEU ruled that, under European law, a software owner cannot prevent a lawful acquirer of software downloaded from the Internet from selling unwanted licenses to use that program to third parties. It does not matter if the software was originally downloaded with terms specifying that the right to use the software is both non-transferable and limited to the licensee's internal business purposes.

Under the EU Software Directive (2009/24/EC), the first sale in the EU of a copy of a computer program, by or with the consent of the copyright holder, is said to "exhaust" the right of distribution of that copy. The CJEU held that the right to distribute a copy of a computer program lawfully downloaded from the Internet is exhausted if the right holder grants the acquirer the right to use the copy for an unlimited period of time. That meant that the copyright holder cannot object to the resale of a copy of a computer program for which its distribution right is exhausted.

It is important to understand that the UsedSoft decision did not give free rein to any licensees of software to copy and sell that software to third parties under all circumstances, and that the decision was limited to software downloaded from the Internet under a perpetual license. But the UsedSoft decision seemed like a green light to a number of companies keen to establish trading platforms to allow resale of other forms of digital media in Europe, and those companies were not going to be put off by some of the limitations of the UsedSoft decision. The result has brought about material growth in the digital media resale market across Europe.

As the market has grown for different types of digital media, so have attempts by product owners to close down some of the platforms established to facilitate the trade but with varying success. So far, a Dutch court has refused to close down Tom Kabinet, a platform allowing the resale of e-books. Conversely, a court in Berlin has refused to allow the continued operation of a business reselling keys for computer games. One of the main issues has been whether the principle of exhaustion of rights in the EU Software Directive also extends to digital media covered by the EU Copyright Directive (2001/29/EC).

The variability in the European court decisions shows the level of uncertainty that exists in different countries in Europe and across different media as to the scope of application of the UsedSoft decision.

For businesses assessing M&A targets in Europe, this uncertainty has some practical effects:

  • One aspect of valuing a target in the business of creating and licensing software or other digital media will be the exposure to a secondhand resale market. Extra diligence will be required to assess the proportion of a target's revenues that come from licensing under the EU Software Directive via the perpetual license model in respect of which resale was endorsed by the CJEU. Acquirers will need to understand what prospects exist for targeting and closing down second-hand resale models that undermine direct future license revenue.
  • Where the acquisition target is a user of resold digital media, an acquirer must address the extent to which reliance is placed on such media, and whether in-bound licensing occurs made via a resale platform that conforms to the type and nature of resales typically permitted by the courts.
  • Just as with open source software, forewarned is forearmed. Acquirers need to undertake adequate diligence about the original source of software and digital media acquisitions to enable an adequate risk assessment. Too often diligence checklists do not include adequate questions about the source and content of targets' software and digital media estates.
  • An assessment of the risks presented by resold software and digital media ought to form a greater part of the planning of any M&A project where the target is a European company relying on software or other digital media.


By Chung-Hun Daniel Kim

This has the European Commission enacted the Market Abuse Regulation (No. 596/2014 – MAR) which aims to update and strengthen the existing framework governing market conduct in the EU. Until its entry into force in July 2016, the European Securities and Markets Authority (ESMA) and the European Commission will be called upon to implement technical standards and develop guidelines. MAR is complemented by the Market Abuse Directive (2014/57/EU – MAD) which requires all Member States to provide for harmonized criminal sanctions in the field of market abuse.

Key changes under MAR are:

  • A broadened scope of dealings covering financial instruments admitted to trading on EU regulated markets, and, in addition, financial instruments traded on multilateral trading facilities or organized trading facilities, e.g. on the Open Market in Germany, credit default swaps, contracts for difference and spot commodity contracts. Making a decision to cancel or amend existing orders for financial instruments on the basis of inside information will now count as insider dealing. MAR also introduces a number of exclusions and exceptions from its scope (so called safe harbor provisions), e.g. if a company has established a sufficient compliance-system.
  • A broadened definition of inside information covering both non-public information that would be likely to have a significant effect on the price of the financial instrument, and information that a reasonable investor would be likely to use as part of his/her investment decision. In case of protracted processes, even intermediate steps may now be seen as inside information (adaption of the decision of the European Court of Justice in Geltl/Daimler).
  • Market soundings are enabled under certain conditions, i.e. the disclosure of inside information relevant to potential investors in takeover or merger situations. The disclosing party has to obtain the consent of the person receiving the inside information, inform the person that he/ she is prohibited from using this information and obligated to keep the information confidential.
  • Increased administrative effort regarding the public disclosure of inside information, such as, maintaining inside information, once disclosed, on the website for at least five years and the possibility of delaying disclosure if this would prejudice legitimate interests of the company and not mislead the public, provided that the company can ensure the confidentiality of the information.
  • New market abuse offences such as attempted market manipulation and algorithmic or high frequency trading which is solely undertaken to disrupt or delay the trading system as market manipulation.
  • Significantly higher administrative sanctions for non-compliance that are dependent on the annual turnover (up to 15%), and the publication of cases of non-compliance by the competent national authority, e.g. the German BaFin, which is supposed to have a great deterrent effect (so called naming and shaming). Furthermore, the Member States need to implement the criminal sanctions for market abuse under MAD.

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Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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Alistair Maughan
Kristina Ehle
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