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Getting What You Bargain For in a Merger or Acquisition
BNH interviewed Timothy Largay, partner in the Corporate Department of Murtha, Cullina, Richter & Pinney LLP, a law firm with offices in New Haven and Hartford.
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Business New Haven
2/8/1999
By: BNH
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What common problems arise in mergers and acquisitions involving technology companies?
The title to intellectual property is sometimes a problem because, in many cases, the sellers are small or start-up companies that have been dedicating their energies to developing a product and may not have been so attentive to issues of trademark compliance. For example, if a company doesn't file a statement of use in the fifth year of a trademark registration, the trademark office automatically terminates that registration. So if a buyer fails to do due diligence on a seller, it may end up purchasing the seller's intellectual property - the trademark, patent or copyright that's the real heart of the business - and later find out that it's worthless.
What other types of problems should buyers be aware of?
One issue is unresolved litigation, where it's often difficult to assess the seller's potential liability. In these cases, the buyer may want to discount the purchase price or else carve the litigation out of the agreement and leave it entirely with the seller. Problems may also occur when the seller has licensed a product that was developed by an employee or an independent contractor and neglected
to draw up the proper contractual
agreements. Though the seller may believe that it owns the product, the buyer may later find out that the seller never really had title to it.
What can be done if these problems surface after the closing?
The acquisition agreement will contain a so-called “indemnification provision” which requires the seller to indemnify the buyer against any losses sustained as a result of misrepresentation, including the cost of litigation. But recouping those losses can be a time-consuming and painful process, so the buyer is much better off having found out about problems beforehand. Besides, once the merger takes place, the last thing you want is to be in a position where you're suing your own employees. That can be very disincenting.
What can sellers do to protect
themselves in M&As?
First, they should do their own due diligence to make sure that the representations and warranties they make are, in fact, accurate; sellers can now obtain insurance to protect themselves in these situations. Second, it's always helpful to get paid upfront or, if there is a deferred payment agreement, to negotiate an escrow arrangement - where an independent third party holds the money - in case the creditworthiness of the buyer becomes an issue. Finally, it's in the seller's interest to negotiate an agreement where the buyer purchases the stock of the company rather than its assets. Why? Because when a buyer purchases a company's stock, by operation of law it assumes all the company's liabilities as well. The ideal outcome for the seller, of course, is to walk away from the transaction with money in hand and no liabilities.
How should companies select a
law firm to handle a merger or acquisition?
Buying or selling a technology company is a complicated process. There may be significant financial, accounting and tax considerations, as well as labor, intellectual property or real-estate issues that must be resolved. So I'd suggest a broad-based law firm that has access to experts in all those areas. Whether you're buying or selling, it's important to have knowledgeable help to guide you through the due-diligence process and the actual acquisition. And, as in everything else, there's no substitute for experience. BNH
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