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Promises That Matter: IP Covenants in M&A Transactions
Practical Law Legal Update 8-618-0473 (Approx. 4 pages)
Promises That Matter: IP Covenants in M&A Transactions
by Practical Law Intellectual Property & Technology
| Published on 06 Oct 2015 • USA (National/Federal) |
A discussion of some of the key intellectual property (IP) and information technology issues to address in covenants in a merger or acquisition transaction. This Legal Update contains links to Standard Clauses and other Practical Law resources providing more detailed information concerning the drafting and negotiation of IP and IT-related covenants.
In any merger or acquisition where a target's intellectual property (IP) is material to the transaction, the buyer typically seeks covenants from the seller or target company to take or refrain from taking certain actions concerning the target business's IP. These covenants may control how extensively the parties negotiate the typically heavily negotiated merger or purchase agreement representations and warranties. While the parties' IP representations and warranties reflect their allocation of IP-related risks before the agreement's signing, buyer's counsel should also consider what additional, promissory protections may be needed:
- Between signing and closing (see Pre-closing Covenants).
- For a limited period after closing (see Post-closing Covenants).
Pre-closing Covenants
If there is a time gap between signing and closing, the seller typically covenants that it must conduct its, or where the seller itself is not the target company, the target company's, business as usual until closing. Known as the interim operating covenant, this covenant assures the buyer that the target business is operated in the ordinary course of business and is in the same condition and of the same value at closing as when the buyer conducted its due diligence and appraisal of the target business. The interim operating covenant may include a list of specific actions before closing that the seller must take, not take or not take without the buyer's consent. This list depends on the industry of the target company and deal-specific factors.
Common interim operating covenants relating to IP include:
- Not licensing, encumbering, assigning or otherwise disposing of any IP assets of the target business.
- Making necessary filings and payments to maintain the status of the target business's registered IP.
Other common IP-related pre-closing covenants include:
- Making necessary filings to record the release of security interests or update the chain-of-title of registered IP.
- Executing and delivering IP assignment documents, including assignments suitable for recording with the applicable government authorities.
- Authorizing the transfer of domain names with the applicable registrars.
For more information on these and other IP-related pre-closing covenants, see Practice Notes, Intellectual Property: Asset Purchases: Pre-closing Covenants and Other Asset Purchase Agreement Provisions and Intellectual Property: Stock Purchases and Mergers: Pre-closing Covenants and Other Purchase and Merger Agreement Provisions.
Post-closing Covenants
The parties may also include post-closing covenants in the purchase agreement to cover the license or transfer of specific IP or IT rights or performance of specified services after the closing. In a carve-out transaction, these covenants may address:
- License to retained or shared IP. The buyer may seek a license or covenant not to sue from the seller relating to the buyer's use of IP used in the target business that the seller intends to retain after closing. This catch-all license may be necessary where:
- in an asset purchase transaction, the buyer is acquiring ownership of less than all IP used in the target business (for example, where the buyer is acquiring only IP that is exclusively or primarily used in the target business); or
- in a stock purchase transaction that is a carve-out, the target company uses IP owned by the seller (or affiliates of the seller that are not included in the divestiture) that was used both in the target company's business and the seller's other businesses before closing (for example, where the seller is the target company's corporate parent).
- Know-how transfer. Where certain key employees with knowledge of IP or IT matters are not being transferred with the acquired business, the buyer may require the seller to make the retained employees available for consultation or training for a limited time after the closing to ensure that all know-how associated with the purchased assets is actually transferred to the buyer.
- Separation or replacement of shared IT contracts. In addition to any transitional assistance that the seller may provide or cause to be provided to the buyer under a separate transition services agreement, the buyer may seek to include a post-closing covenant in the purchase agreement requiring the seller to provide assistance in negotiating replacement licenses or support agreements for enterprise systems and other software or IT services that are retained by the target company for continued use in its business and may not be covered under the transition services agreement.
For model covenants addressing these and other IP and IT issues, see Standard Clauses, IP Covenants: Asset Purchase (Pro-buyer) and IP Covenants: Stock Purchase (Pro-buyer).