Business Legal Checklist for Purchasing A Digital Media Company Using Videogame Developers & Publishers As Case Studies Due Diligence Issues/Checklist What kind of company is being sold or bought? • Developer of Videogame Software • Publisher of Videogame Software • One or the other or both? Recent Interactive Entertainment &A Deals Buy-Side – Represented Ubisoft Entertainment SA in its purchase of Driver from Reflections/Atari Buy-Side – Represented D3P in its purchase of Vicious Cycle Currently working on… • Purchase of an MMO Publisher • Purchase of an Online Background Music Provider Sell-Side – Represented Centerscore in its sale to Vivendi • Online Advertising Roll-up • Online Music Company IPO IP Due Diligence Checklist – What is the asset or asset base that is being sold or acquired? • Type of Videogame Software Product • Third Party Licensed Tools & Code • Internally Developed Tools & Code Base • External Development • Console/PC/Internet/Wireless • Open Source/Public Domain Software • Software Development Processes • Asset Buckets: – Trade Secret – Copyright – Patent – Trademark Development Legal Documentation • Inbound Technology or Content Licenses – Change of control provisions • Consents needed or not – Is Developer/Licensee in compliance with terms of inbound licenses? – Open Source or Public Domain Software • i.e., has Developer created a situation where it has to share its work product intentionally or inadvertently, because it has used open source or public domain software? – Are there any major brand or content licenses? Developer Legal Documentation (continued) • Internal Development – Have all employees and consultants signed confidentiality/invention assignment/work for hire agreements (i.e., do they own their website)? – How has source code and technology processes been treated from a legal perspective? • Trade Secret? • Patent? • Copyright? – Are there any patent or copyright filings for the code or other technology? Developer Legal Documentation (continued) • External Development – How are these relationships documented? • What kind of development agreements exist? • Who owns what? • Work for Hire? • License? • Work for Hire & License? • Milestone Schedules? • Payment of Milestones who will pay for what pre/post acquisition? Publisher ~ Licensor Considerations • How is the software product monetized? – Direct to Consumer – Sales of Single User License Software • Retail • Web • Via Third Parties – B to B • Direct to Business – Enterprise Licensing Issues & Considerations • Value Added Resellers & Distributors – Other • OEM/Bundling • Shareware • Open Source/Service Model • Services Only Documentation of Distribution & Customer Relationships – How are these distribution/customer relationships documented? • Distribution Agreements such as with Web Portals, Brick & Mortar retailers such as Walmart, Telecom Carriers, Software Aggregators or Bundlers • E-Commerce stores • Internet Advertising Agreements • VAR Agreements • Software License Agreements • End User License Agreements • Service Agreements – What will be the impact of a change of control on these legal relationships? Personnel • What is a software developer - Collection of talented programmers, designers, engineers, and managers • What is a publisher of software – collection of developers,and then sales, business development, marketing, accounting, finance, service, ops management, and administrative people – Who are they? Who are the key people? Whom do you want to retain? – How are people tied into the company? – How are the relationships papered? • Employment Agreements • Restricted Stock Agreements • Stock Option Agreements Personnel (continued) – Whom do you want to keep? – Whom to you want to get rid of or who wants to leave? – What will happen with a change in control? • Business • Legally Personnel (continued) • What are the objectives of the Buyer & Seller with respect to the deal and after the closing? – What are the deal terms with respect to: • Purchase price? • Holdback? • Earn Out? – What will the key people that you want to retain get in their new employment agreements as far as compensation? – What is the equity compensation component? • Stock Options ISOs vs. Nonquals • Restricted Stock – What is the non-compete and what is the law of the jurisdiction in question with respect to non-competition and non-solicitation? • California – non-competes are enforceable with respect to a shareholder the sale of a business but not otherwise? Tax Issues • What are the tax implications of the deal structure? • Are there losses that can be used? • How will the deal structure affect the acquirer's balance sheet and be tax advantaged for the seller (who doesn’t want capital gains)? • What will the software transfer pricing scheme post acquisition? – i.e., where does the acquirer want to put the asset so that it can use the software in a legitimate way vis a vis the acquirer's present transfer pricing scheme • What will be the amortization scheme for the intellectual property acquired and which entity in the acquirer’s group will hold the intellectual property? Deal Structure, Timing, & Typical Process • Asset Purchase • Stock Purchase • Merger • Stock, Cash Consideration, or Assumption of Debt or some combination thereof? • Financing? • What is the timing? • What are the alternatives for the buyer and seller? • LOI, Due Diligence, Definitive Agreement, Pre-Close Obligations (Consents & Employment Agreements), Close, Post Close Obligations