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Tech & Sourcing @ Morgan Lewis

TECHNOLOGY, OUTSOURCING, AND COMMERCIAL TRANSACTIONS
NEWS FOR LAWYERS AND SOURCING PROFESSIONALS
Contract Corner

Picking up where we left off on April 6, below are some additional key issues to consider and address when negotiating an application purchase agreement.

Transfer of Employees

Once the terms of intellectual property and infrastructure transfer have been agreed, the buyer should investigate the human resources required to maintain and support the application. Typically, a number of key personnel would transfer to the buyer to continue performing the same functions. Sometimes sellers insist that the buyer offers employment to all members of the team involved in development and operations of the application, irrespective of the value of their contribution, in order to avoid the need to deal with employment termination issues, such as redundancy obligations.

The seller is usually reluctant to assume an obligation to ensure the transfer of an entire team to the buyer. Sometimes this can be addressed through the offer of hiring bonuses that the buyer pays to the team at the expense of the seller.

If the buyer decides that a transfer of employees is not required, the buyer should, at least, consider entering into a transitional services agreement with the seller to cover the functions of employees that were responsible for the product. This is particularly important for products where the pre-deal IT audit revealed a lack of detailed architecture documentation, as it may be difficult for the buyer to continue developing the product without the knowhow of the former team members. Note that sometimes transfers of personnel are dictated by law and so may apply irrespective of the parties’ intentions.

Transfer of Users

As users form the essential part of the application’s value, the buyer and the seller should discuss and agree in advance on the best strategy to ensure a smooth transfer of the user base. Prior to transfer, the users have contracts with the seller, so the challenge here is to transfer all these contracts to the buyer. Typically, the buyer and the seller would agree that on the date of the transfer, the application’s terms of use and privacy policy will be updated to mention the buyer as the service provider. The parties should review current terms of use and local rules to ensure that such update is allowed and whether any notices to users are required.

Note that depending on the jurisdiction of the users, the buyer may need to secure separate users’ consent or notices to process user data, including historical account data. While it may be cumbersome to review the rules for each and every jurisdiction, the buyer should, at least, try to take into account the rules of all jurisdictions where a significant number of users are located.

Maintaining users’ brand loyalty may also be a challenge. The parties would typically agree on robust non-solicitation and confidentiality provisions that would prevent the seller and its affiliates from approaching the users with alternative products. Sometimes a deferred payment or variable payment based on the rate of successful transfer may be appropriate.

Transfer of Contracts with Suppliers

Most mobile applications require a number of revenue-generating, content-providing, and supply contracts to support their operations. The buyer should determine how best to address the transfer of such contracts. If the existing terms are acceptable, the buyer may require the seller to procure the assignment of contracts to the buyer as is. However, if significant issues were identified during the due diligence, then termination of existing arrangements and entering into new contracts may be more appropriate.

Transfer and Payment Mechanics

Once the parties have identified all transferring elements and have agreed on their individual transfer mechanics, they should determine when the actual application “transfer” will be deemed completed. It may be prudent to establish several milestones, especially if the transfer contemplates assignment or license of registerable IP rights.

The payment would be typically split with the first payment due at signing (or completion of the first milestone) and the final payment made after all elements of the application have been duly transferred. If the seller requires the final payment to be secured, whether by a letter of credit, a bank guarantee, or an escrow arrangement, it is key for the parties to agree what documents would be provided to the bank or the escrow agent to confirm that the transfer has duly occurred.

Contractual Protections

The buyer should not leave common contractual protections aside. Seller’s representations, warranties, and indemnities, especially with respect to noninfringement of any third-party intellectual property rights, sufficiency of assets and compliance with applicable laws, are essential for the application purchase transaction. Noncompete and non-solicitation covenants from the seller are also important to preserve the commercial value of the purchased application. However, these should be carefully checked for enforceability in each relevant jurisdiction.