Lexpert Magazine

64 LEXPERT MAGAZINE | OCTOBER 2017 TECHNOLOGY | COLUMNS | George Takach is a senior partner at McCarthy Tétrault LLP and the author of Computer Law. a first version has not yet been completed). Whatever the pricing formula will be for the acquisition, I suggest agreeing to it ear- ly on. en, later, no matter what you may find during the due diligence phase, the actual price derived from the formula will fluctuate with the actual data unearthed, but the pre-agreed metric will drive the final price regardless. is can avoid the otherwise awkward process of re-trading on price part way through the diligence exercise, which is not pleasant for either you or the Target; and remember, you have to live with the staff of the Target aer the acquisition, so they need to be treated well and with respect. AN IMPORTANT MILESTONE: SIGNING THE LETTER OF INTENT Once you have agreed with the Target on price (or, more specifically, the formula by which price will ultimately be deter- mined), you are ready to sign a letter of in- tent (generally known as the "LOI"). e LOI is a short document, written in plain English rather than in legalese, which sets out the major terms of the deal such as what you are buying, who is joining you from the Target, and what you're planning on paying. e LOI is generally non-binding, ex- cept for one very important provision: a clause in your favour that says that the Tar- get and its shareholders, and its staff, can- not solicit any other bidders for the Target for a period of time, usually in the 45- to 90-day range. In other words, during this exclusivity period they may only talk to you about doing a deal. UNCOVERING TRUTH THROUGH DUE DILIGENCE Once the LOI is signed, what ensues is an intensive period of kicking the tires of the Target. In small tuck-in deals a few items are researched very thoroughly by the pro- spective buyer, and none more so than the Target's key people. Frankly, you can al- most think of a tuck-in deal as a recruiting exercise for a number of soware engin- eers, data scientists, and a range of other "techies" and analysts, but in a group set- ting (which presumably will allow them to work better together once they join you). Especially if the Target has been around for only a matter of months (rather than years), one of the issues you will want to research carefully is where each of their key staff came from before they joined the Tar- get. You'll want to make sure that they are not subject to a problematic non-compete provision of a prior employer that is com- petitive with your organization. Equally, you'll want to be sure that whatever in- tellectual property they worked on at the Target was not first "invented" for a prior employer, which might give that earlier employer ownership of it. OWNING THE ALL-IMPORTANT IP is brings us to the critical issue of deter- mining if the Target indeed owns the intel- lectual property it says it does (including, for example, the key AI soware that you plan to use for your new CRM platform). It would be devastating if, a few months aer closing the deal to acquire the Target, another company approached you to indi- cate that they own the Target's important soware code — what an expensive mess that would precipitate! e challenge in determining owner- ship of soware code (or any other copy- rightable material, such as documentation) is that there really isn't an effective cen- tral registry of ownership for these sorts of assets; there is a voluntary register for copyrights, but practically its use is limited. erefore, as the purchaser of intellectual property you must do a "title search" by tracking actual authorship of the soware code, because the first human creator of it (or that person's employer, if the person was an employee who developed the ma- terial in the course of their employment) is the first owner of the copyright under black-letter copyright law. As you do your due diligence (your rigor- ous review of the Target's materials, people and soware code), you should therefore be on the lookout if the Target used any third- party consultants to prepare any portion of the soware code or other materials. Ideally, in such circumstances the consult- ant has assigned their intellectual property rights to the Target by means of a written assignment. In the absence of such a signed document, you (and the Target) may have a material issue regarding ownership. Another area for due diligence review involves privacy law. For example, in build- ing their AI capabilities, did the Target collect and use data sets that included personal information of any type? And, ideally, if they have such data, did the Tar- get anonymize the data in a manner such that the material is no longer identifiable back to specific human beings? at would be good. Otherwise, you might make it a con- dition of closing the deal that such an anonymization process is carried out on the data. Again, you don't want to inherit any problems created by the Target, even if you will receive an indemnity from the sellers in the purchase agreement. And that is our segue into the purchase agree- ment, which we will discuss next month. THE CHALLENGE in determining ownership of software code (or any other copyrightable material) is that there really isn't an effective central registry of ownership for these sorts of assets; there is a voluntary register for copyrights, but practically its use is limited

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