Although federal and state corporation, securities, antitrust, and tax laws governing mergers and acquisitions (M&A) are complex and nuanced, and the structure of a given transaction is usually driven by tax and securities considerations that aren’t within intellectual property counsel’s control, it’s useful for intellectual property lawyers to know the basic structures of these deals and the impact on the intellectual property provisions in the agreement. Here’s a crash course on basic types of M&A agreements.
Companies can merge or be acquired through three basic mechanisms:
- Stock Purchases. In a stock purchase, the acquiring corporation pays cash to the owners of the target company’s stock, the buyer becomes the parent, and the target entity continues intact as a subsidiary of the buyer. Acquiring companies can also issue their own stock to the shareholders of a target company in exchange for a controlling interest in the target, in a transaction known as a “stock-for-stock exchange.” From an intellectual property perspective, stock purchases have some important benefits over other forms of mergers or acquisitions, most importantly, that the target’s corporate identity remains intact as a subsidiary of the buyer. As a result, any liabilities of the target entity remain with that entity and are not transferred to the buyer. Because buyers often have deeper pockets, it can be beneficial to keep the target’s liabilities isolated in the subsidiary, especially if there is pending or threatened litigation or patent infringement claims against the target.
- Statutory Mergers. In a statutory merger, the acquired corporation is merged directly into the acquiring corporation, the shareholders of the target company become shareholders of the surviving corporation, and all of the disappearing corporation’s business, assets, contracts, and liabilities are assigned or transferred to the surviving corporation by operation of law. The three primary structures for statutory mergers are “straight-in mergers,” “forward triangular mergers,” and “reverse triangular mergers.” Each of the three structures impacts key intellectual property issues differently, so it is important for intellectual property counsel to be familiar with each structure and to learn early in planning for a given transaction which of the three structures will be involved.
- Asset Purchases. By purchasing all or substantially all of the target company’s assets, the acquiring company may avoid acquiring some or all of the target’s liabilities. Asset purchase agreements present several unique challenges for intellectual property counsel. First, it’s important to identify and schedule all of the key assets being acquired. Second, it’s important for the asset purchase agreement to identify any liabilities of the seller that will be assumed by the buyer and any excluded liabilities that will remain with the seller. Finally, in an asset purchase, unlike a statutory merger, the seller’s intellectual property assets will not be transferred to the buyer by operation of law, so it’s important to obtain an express assignment from the seller of all intellectual property rights. Counsel should require separate forms of assignment for patents, copyrights, and trademarks to document and record the transfer with the appropriate governmental agency.
As explained in my earlier blog post, Get Intellectual Property Counsel in on Your M&A Deal, intellectual property counsel should be thoroughly familiar with, and actively engaged in, the drafting and negotiation of M&A agreements. To do this effectively, they need to educate themselves first.
These three mechanisms are explained comprehensively in CEB’s Intellectual Property in Business Transactions, chap 7, which covers intellectual property issues in M&A agreements.
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