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Impact of Intellectual Property on M&A Transactions in Bulgaria and Beyond

How intellectual property can affect an M&A deal with Georgi Kanev from Kinstellar
Image credit: Georgi Kanev, co-head of Kinstellar’s firm-wide IP & IT service line; Canva

Georgi Kanev is a Managing Associate in Kinstellar's Sofia office and the co-head of the firm-wide IP&T service line. He focuses on the technology, media and telecommunications (TMT) sectors as well as on corporate and commercial law. He specializes and is extensively involved in IP&T and data protection matters. He has more than 10 years of expertise in various IP law fields, including EU and national trademarks, the fight against counterfeits, IP enforcement and infringement matters, copyrights creation, maintenance and licensing, and trade secrets. He has also assisted with IT law-related matters such as software development, end-use license agreements, and crypto-assets.

Georgi Kanev is the co-head of Kinstellar’s firm-wide IP & IT service line, based in Sofia. Kinstellar is Emerging Europe and Central Asia’s leading independent law firm. With offices in 11 jurisdictions and over 350 local and international lawyers, it handles some of the most significant M&A and corporate deals in the technology, finance, energy, and real estate industries by delivering consistent, joined-up legal advice and assistance across diverse regional markets. Kinstellar’s specialty is complex cross-border transactions. Georgi shares some insights on intellectual property issues that may arise during M&A deals involving companies in Bulgaria.

Unlocking the value of intellectual property (IP)

Hardly anyone could argue against the constantly increasing importance of IP to companies. IP not only affects the business models of companies but also brings additional value to the table (e.g., in addition to its client list and personnel, a target offers proprietary software solutions facilitating and supplementing the company’s normal business activities). This is true not only for the “usual suspects” such as technology companies, FinTech startups, gaming studios, and pharmaceutical companies, but also for companies previously not so heavily dependent on IP assets, such as financial institutions, insurance companies, and retailers. 

Because of the above, in recent years we have seen an increasing number of transactions driven mainly by the IP assets of targets. In some cases, a company’s IP might be the actual target of the buyer. IP assets might be not only the main value drivers of the transaction, but also the ones to determine the structure of the deal – an asset deal (e.g., if the buyer is mainly interested in (part of) the target’s trademarks or industrial design portfolio) or a share deal (e.g., when company’s personnel and proprietary software solutions are the drivers of the transaction, certain limitations on copyright transferability should be considered).

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How IP can adversely affect the different stages of an M&A transaction

As a result, we have often witnessed how issues with IP assets, whether owned or used by a target, identified in the due diligence process can adversely affect the transaction. The findings could have a negative impact on any of the following aspects of a transaction:

  • the price – uncertainties around ownership of a target’s core IP assets could decrease the overall value of the business (e.g., the IP chain related to the development of the target’s key product(s) is not clear);
  • the negotiations of transactional documents – restrictions in agreements for the target’s right to use material IP assets could cause delays or result in heavier indemnities to be undertaken by sellers. A target’s right to use a third-party software solution that is material for its business could be terminated as a result of the contemplated transaction. If a third-party software solution is not easily replaceable, a comprehensive transitional services agreement might need to be negotiated as well;
  • the closing process – deficiencies in employment agreements could require a number of additional documents to be executed as a condition precedent to the completion of the transaction and the transfer of the purchase price. Such deficiencies may relate to employment agreements of relevant functions that contain no IP-related contractual clauses or that contain IP clauses that do not provide sufficient protection of a target’s ownership or use of IP works created by its employees within its employment;
  • the post-closing process – the lack of certain documents and processes could require time- and cost-consuming efforts to be undertaken by buyers immediately after the closing to improve the IP strategy and protection of the business. This includes the absence of trademark protection for a target’s main brands, product names, and logos in all relevant markets, despite the territorial character of such intellectual property rights.
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In IP-driven transactions, such findings could easily widen the gap between sellers’ and buyers’ expectations, both in terms of the structure (including post-closing integration) and the value of the deal. This is often the case when founders sell their first project to multinational IP-rich or tech-heavy groups. Usually, the latter has adopted strict and detailed compliance- and IP-protection-related policies and procedures across their jurisdictions, which are to be implemented and followed by their new structure as well. In some cases, such implementation could even require changes in the business structure and processes of the target. Further, in cross-border transactions, this gap could be widened by the differences in the legal rules on IP rights available in buyers’ and sellers’ jurisdictions (especially valid when a US or a UK company/fund acquires a company in Bulgaria).

Frequent IP deficiencies identified in the due diligence process

Most of the IP-related issues that we see in our practice come from a combination of sellers’ failure to identify their core intellectual property assets and the lack of knowledge of the particular legal requirements for the protection of the different types of intellectual property and quasi-IP assets (e.g., patentable inventions, utility models, trademarks, industrial designs, hardware/graphic design, software solutions, databases, trade secrets and know-how, audio-visual works, music, websites). This may lead to a failure to adopt an initial IP strategy or to the adoption of a strategy that does not use the right legal instrument(s) that best protect their title, rights, and interests in the particular IP asset. Some of the most frequent IP deficiencies on the market include:

  • even though IP-related development is primarily undertaken in-house by a company’s employees, companies use template employment agreements that contain no IP clauses or contain standard IP clauses that do not provide sufficient protection to the company and are not tailored to their business needs;
  • when companies use the services of external contractors/freelancers for the development of IP-related works, they often use service agreements that do not include sufficiently detailed provisions on IP rights allocation – for instance, they do not consider the practice of Bulgarian courts in such cases;
  • companies have no internal policy, process, and/or procedure for the identification, maintenance, and protection of trade secrets (including know-how). In certain cases, this could adversely affect the company’s ownership or use of valuable information/data that could not be protected otherwise, e.g., as a copyrighted work, patent, or trademark;
  • companies do not keep up-to-date the details of their IP-related registrations (e.g., trademarks, domain names) – although generally, this is not a material intellectual property issue, it could still delay a transaction.
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It could even turn out that some of the above-mentioned IP deficiencies might adversely affect the company’s capability to (fully) comply with some of its contractual obligations towards its clients – for instance, when providing outsourcing services to third parties.

Striking a balance

Each company should increase its efforts to understand and evaluate its core IP assets from the outset, including its dependence on the material IP assets of third parties, and focus on unlocking their true value. A proper and effective IP strategy could help a company find the right business partners, investors or buyers, or at least will facilitate a potential transactional workstream.

At the same time, when evaluating a potential investment opportunity, buyers should pay attention to the IP aspects of both the target’s business and the transaction. If certain IP deficiencies are identified in the due diligence process, respective remedies should be taken to limit the buyer’s exposure to related risks.

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