When acquiring a company issues regarding IT will inevitably arise and as IT becomes an increasingly important factor for business IT issues will be given increasingly higher priority. In this short article issues typically regarded as issues of "IT-law" shall be presented in a merger and acquisition context.
The legal issues regarding IT when acquiring a company will for obvious reasons often be secondary to major legal issues such as - when acquiring the shares of a company - required offer procedures or anti-trust and competition regulations. However, it can be costly not to give the legal IT issues required attention. The more IT dependent the target company is, the higher attention "IT law" deserves. The pitfalls of law and IT are ample.
The issues of law and IT to be taken into regard when acquiring a company can be divided into categories such as; IT contracts, copyright, protection of confidential information, telecommunications regulations, evidence and data protection. The categories are as their labels reveal somewhat arbitrary but the categorisation provides an overview of the connection between law and IT and the categories can be used to breakdown the issue of IT and law into topics easier to handle.
Before going further into any one of the different categories of issues a question that deserves some attention is at what point IT related legal issues should be brought up on the agenda when acquiring a company. A general answer to this complex issue is that issues might have to be brought up in all phases of an acquisition. They might have to be brought up in connection with business considerations concerning the acquisition, i.e. in the initial phase of target identification, during any "due diligence" examination of the target and finally also in the later stages of an acquisition, this as necessary third party consents should be obtained before closing of the acquisition.
It can already in the initial phase of a M&A be desirable to bring up the legal issues on the agenda as early as possible. Knowledge of issues such as the possibilities to acquire customer databases, based on knowledge of dataprotection regulation, or to what extent it is permissible to abroad carry out activities such as bookkeeping or retention of electronic records might seem small issues when acquiring a company but can later become issues of some importance, due to costs arising from the need to adopt less advantageous solutions than anticipated. More significant is perhaps to what extent it is possible and wise to transfer IT contracts such as software licences and leases of hardware. A more thorough analysis of the issues so far mentioned has to be undertaken in a "due diligence" procedure. If such a procedure is carried out when acquiring a company most of the "IT law" issues in the acquisition will, for obvious reasons, have to be dealt with in this phase. Whether "IT law" issues are found on a due diligence checklist under such a heading or if they can be found under different headings, headings such as "intellectual property rights" and "Government/Regulatory", is perhaps a minor question, the major question being that the issues are taken into due regard. It is this that requires special knowledge about IT and IT related legal issues. Finally such issues may arise also in the later stages of an acquisition, for example when there is a need to obtain a government permission to handle personal data this requires special measures legal as well as non-legal.
IT contracts often have a distinctive character. Knowledge of factors such as long term dependency, rapid development of technology, importance of user requirement specifications etc. are necessary to evaluate the contract also from a legal point of view. Long term maintenance agreements are one type of agreements that deserve such legal attention. It is issues such as terms of the maintenance agreement with regard to risk of unreasonable remuneration claims upon termination and requirements for documentation of undertaken activities that deserve attention.
When the agreement to purchase or lease hardware is more substantial then an agreement concerning a handful of microcomputers, say a lease of a for the company critical system, there should be a detailed contract covering all the aspects of the hardware's life span. The delivery of such a computer system is mostly only the beginning of the relationship, not its culmination. Thus, such contracts often deserve special attention when acquiring a company.
Assignment is of course one issue that has to be taken into regard, especially in cases where assets instead of shares are acquired. Generally, a contract with a third party can only be assigned in accordance with the terms of the contract. This will normally imply that the third party must give his consent to the assignment. Knowledge to what extent this is feasible with regard to IT contracts is therefore necessary.
Intellectual property rights such as copyright are assets not to be neglected when acquiring a company. Software is generally protected by copyright. Most companies have today brought computers into use and will thus have acquired software, software is thus a necessity for most businesses.
If a company, for whatever reason, has developed software of its own, details of employment agreements or sub-contractor agreements dealing with the rights in the software will be crucial for the evaluation of such an asset.
If the company has acquired software, terms of license agreements relating to use and protection deserve special attention. Knowledge about the degree of care taken in the target company concerning handling of other person's copyright works is important to identify potential liability risks.
As regards duties to undertake special protection measures liability will be founded on the license agreement. To mention one example, the existence of terms requiring the use of serialisation codes gives rise to a question of to what extent compliance has been met within the target company, non compliance will probably give rise to potential liability.
A target company will often have entered into a number of software license agreements as licensee. Intellectual property rights can be disposed of by assignment. When assigning the rights as licensee this will normally require the consent of the licensor. A for this matter important, and in relation to acquisitions highly relevant, statutory rule in the Swedish Copyright Act states that, in the absence of an agreement to the contrary, when the copyright forms part of a business, it may be transferred together with the business or of part thereof. However, according to this rule the transferor still remains liable for the fulfilment of the agreement.
The examples discussed in this article under the categories IT contracts and Copyright reveal that IT related legal issues will arise even in cases where the target company is not a software house or some other typical IT related business. Further examples of that can be given under these categories, or other. Further examples as well as examples under the other categories mentioned above, protection of confidential information, telecommunications regulations, evidence and data protection will, however, have to be dealt with in an other article.
The content of this article is intended to provide general information on the subject matter. It is therefore not a substitute for specialist advice.