The legal aspects of technology company transactions

The ultimate goal is often to acquire the technological expertise of other companies through corporate transactions, such as share deals (purchase of company shares) or asset deals (purchase of individual technological assets). In a share deal, the buyer acquires the shares of the target company. The company itself remains intact, and all its assets — including its technological expertise, patents and licences — are transferred to the buyer. In an asset deal, however, the assets are transferred individually.

Technology transactions are complex processes which, in addition to financial and strategic considerations, raise specific legal issues.

Apart from the fundamental choice between a share or asset deal, key questions arise regarding how to handle the target's existing technological assets, such as inventions, patents, trade secrets, software programmes, and any existing licences and R&D agreements with third parties.

Inventions made at the target company can be critical. The rights to such inventions initially belong to the respective inventors, not the target. If the inventors are employees of the target company, this is generally not a problem, as the rights are transferred to the employer by law unless the employer expressly waives the invention.

However, this is different for freelance inventors, or if the inventor is the managing director or a shareholder of the target — a common occurrence in start-ups. In these cases, the invention must be explicitly transferred to the target by the inventor.

Therefore, it is essential that due diligence confirms these transfers have taken place before the transaction is finalised. Otherwise, the rights remain with the inventor, which could pose a significant problem if the invention represents the technological core of the transaction on which the buyer depends to continue running the company.

Another crucial point in this context is to 'take along' the key employees and essential know-how carriers from the target's R&D department. These employees should be involved in the transaction process from the outset to avoid churn tendencies related to the transaction and prevent attempts to poach them from the market. Intensive labour law support during the transaction process is essential.

 

A technical invention can be legally protected by registering it as a patent. Patents offer the owner exclusive protection against imitation and form the backbone of many technology-oriented companies. When selling a company, it is crucial that all relevant patents are transferred to the buyer in full.

The due diligence process should examine whether all patents have been properly registered and extended, and whether the remaining term (a maximum of 20 years in total), as well as the geographical and substantive scope, are sufficient for the buyer.

It must also be clarified whether the target is the owner of the relevant IP and authorised to transfer it. In the case of university spin-offs, for example, the rights to inventions, patents and software are often still held by the university due to state aid and budgetary laws. It may therefore be necessary to transfer the required IP prior to the transaction, possibly with financial participation from the buyer.

Particular caution is required if the target has granted licences for relevant patents or software to third parties. Such licences may be limited to specific areas or fields of application, which could prohibit the buyer from using them in the future, either partially or entirely. Transferring the licensed rights as part of the transaction does not change this initially. This means that, prior to closing, the buyer must ensure that it has fully and effectively acquired all rights to use the relevant technologies.

Trade secrets are a frequently underestimated component of company value. Unlike patents, they are not recorded in a register and are only legally protected if the target company actively ensures confidentiality through suitable measures.

For the seller, this means being able to demonstrate that sufficient technical and organisational measures are in place to protect the target's trade secrets. Examples include the establishment of access controls, encryption, confidentiality guidelines and targeted employee training. As part of the due diligence process, the buyer should check this very carefully. Without these measures, not only is there a lack of actual protection against the loss of secrets, but... In fact, the relevant know-how is not subject to legal protection and is therefore essentially worthless to the buyer as an asset.

Special care is also required because losses of trade secrets are irreversible and cannot be protected by guarantees in the company purchase agreement.

For the purposes of the corporate transaction itself, the target company's secret know-how must also be secured by appropriate protective measures, particularly strict confidentiality obligations. Forming a clean team, which is given sole access to the relevant information and whose members are restricted to individuals not involved in operational business (such as lawyers), should also be considered.

This can prevent antitrust risks arising from the exchange of transaction-related information if the buyer and target company are competitors.

 

Research and development (R&D) plays a central role for technology companies, whether it is development carried out solely with their own resources or R&D cooperation with third parties. In many cases, the R&D potential of the target company is the actual reason for the purchase.

The transfer of ongoing R&D collaborations with third parties to the buyer does not initially require the consent of the collaboration partner as part of a share deal. However, it is important to ensure that the cooperation agreement does not allow the partner to terminate the agreement in the event of a transaction (a so-called 'change of control' clause). Nevertheless, it is advisable to ascertain before finalising the transaction whether the partner is willing to continue the joint project in the new configuration. In the case of an asset deal, the co-operation partner's consent to the transfer to the buyer is legally required anyway.

At the same time, it must be ensured that the R&D collaborations entered into by the target, as well as all technology transfer agreements (e.g. patent and software licences), comply with antitrust law, and that these limits are not exceeded following the transaction. This could happen as a result of an increase in joint market shares related to the transaction, or if the buyer is a competitor of the cooperation partner, unlike the target. Antitrust violations always represent a considerable risk because they can lead to the entire cooperation being declared legally invalid and substantial fines being issued.

The purchase and sale of technology companies requires careful legal preparation and structuring of the transaction, an in-depth due diligence review, and drafting of the purchase agreement, particularly with regard to technical expertise, intellectual property, and the target's research and development activities.

It is particularly important for the buyer to ensure that all relevant IP rights, trade secrets, technology transfer agreements and R&D cooperation agreements are legally viable and sufficient in terms of content, and that they are transferred effectively and in accordance with the purchase agreement.

The seller should identify and eliminate any legal issues that could potentially jeopardise the deal, particularly with regard to the protection of trade secrets, ownership of inventions, patents and other IP rights, or insufficient licences. Ideally, this should be done before the transaction process begins.

In general, companies considering a share or asset deal should involve experts early on to take into account the specific legal aspects of a technology transaction. This is the only way to ensure the long-term success of the transaction.