Business Legal Checklist for Purchasing

A Digital Media Company

Using Videogame Developers & Publishers

As Case Studies

Due Diligence Issues/ChecklistWhat 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

Sell-Side – Represented Centerscore in its sale to Vivendi

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

• 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