Lexpert Magazine

LEXPERT MAGAZINE | NOVEMBER/DECEMBER 2017 83 BY GEORGE TAKACH TECHNOLOGY Here's how to craft a tech deal purchase agreement to align expectations all around Tech Tuck-Ins (Part 2) IN MY LAST column I imagined that you were a large financial institution in the process of buying a small tech company (the "Target") that was in the artificial in- telligence (AI) space. We call this a "tech tuck-in." You are particularly keen to have the Target's top-flight team of AI engineers and data scientists join your organization, but the Target also had developed some soware that would advance your own CRM efforts significantly. You've agreed in a non-binding Letter of Intent on a price (or at least a formula on how to subsequently determine a price once your due diligence review of the Tar- get is complete), settled a Non-Disclosure Agreement (under which you have mutu- ally exchanged non-public information), and you have completed your due diligence. Now you're ready to negotiate a sensible and even-handed purchase agreement (PA). PAs are fairly complex documents that take time and care to dra, negotiate and settle. What follows are highlights of what needs to be considered early on in the pro- cess. While the legal aspects of tech com- pany M&A — both for tuck-ins and more complex tech acquisition deals — can be quite involved, some of the basics can be reduced and considered in fairly business- oriented terms, as follows. A WIN-WIN STRUCTURE An important issue to work out collabora- tively with the selling shareholders of the Target (referred to here as the "sellers") is whether you will be buying their shares of the Target, or whether you will purchase the assets of the Target, and the Target will then distribute to the sellers the proceeds of the sale, either by dividend or some other means. is will typically involve a fairly involved negotiation before the resolution can be reflected in the PA. As a general rule, the sellers will want to sell their shares of the Target, particularly if the Target qualifies as a Canadian Con- trolled Private Corporation, in which case each seller may be able to claim a capital- gain tax exemption on the first roughly $800,000 of proceeds received by each of them if they have held the shares of the Target for more than two years and haven't already claimed this exemption in the past. On the other hand, you may well prefer to be buying assets, particularly in respect of the Target`s soware products, because under Canadian tax law you may have an accelerated write-off of the purchase price paid for that asset. In essence, you, the sellers and tax advi- sors will negotiate an optimum structure for the deal. Sometimes the compromise will involve a hybrid deal in which the buyer acquires the soware asset first, and directly aerward acquires the shares from the sellers. e objective is to cra an ap- proach in the PA that works well for both parties in a mutually tax-effective manner. PROMISES, PROMISES Whatever the final structure for the acqui- sition, what will not vary is that the sellers will be required to make a long series of rep- resentations and warranties (collectively, "Reps") in the PA about their Target com- pany, including the fact that it owns its pro- prietary soware. e Reps are essentially a series of promises that the sellers make about various aspects of the Target, which will result, if any one or more of them proves to be inaccurate, in you getting back some of the purchase price you paid for the business. For example, particularly if you're buying the shares of the Target, you will want the sellers to confirm in the PA that the only liabilities of the Target are those that are listed in a schedule to the PA. In my last column I discussed how in the due diligence process you confirmed, as best you could, that the Target owned its proprietary soware. Now, you get a con- tractual confirmation to the same effect in the Reps. In another section of the PA, the sellers give you an indemnity confirming that if one or more of the Reps proves to be untrue, they will reimburse you for the re- sulting damages on a dollar-for-dollar basis. PHOTO: SHUTTERSTOCK | COLUMNS |

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