Saturday, 20 August 2016

SPA Series Part 11: Negotiating M&A Deals in Finland - On Disclosures and Disclosure Letters

As promised now we talk about disclosure letters, documents that are very critical in many respects. First, we must understand the relationship between disclosures and warranties. As we discussed in part 5 of this blog series in connection with the disclosure material, if an issue is described in the disclosure materials, then the purchaser cannot claim that there be a breach of warranty unless the parties have agreed on specific indemnity to cover a known risk. Although this document is critical, the parties often invest much more time and effort in the wording of the warranties than the disclosure letter. These kinds of “formal disclosure letters” are typically more common in the cross-border context, while, in domestic deals, the same end-result may be achieved by disclosure material definition and adjustments to the specific sections of the agreement (and this way avoiding the need to have a specific annex titled “disclosure schedule”).

Disclosure letters are typically drafted by the sellers and in UK models divided into three parts: general disclosures, specific disclosures and disclosed documents.

General disclosures refer to matters, e.g., in public registers and so forth, which are not necessarily included in the due diligence material otherwise BUT are still publicly available information. One has to bear in mind that even in cross-border deals there is no strict one-size fits all approach. In fact, for example, it might be conceivable to argue that general disclosures are actually not very typical in US deals while they are so in UK deals. Also, by way of comparison according to some study, in US deals there is more often a requirement that a disclosure must be cross-referenced to warranties (as opposed to automatically qualifying all warranties). 

Specific disclosures, on the other hand, refer to actual warranties and may be deemed to complement disclosures (if a risk is not for example otherwise sufficiently disclosed in the due diligence material). Or, alternatively, there are typically warranties that require additional information to be given and listed in the disclosure letter. 

Moreover, as a third element, this disclosure letter document contains a reference to or copies of the documentation bundle being disclosed. The answer to the question often asked from us, whether something should be included in the letter or not, is that if you are a seller and you wonder whether a risk, fact or matter is worth disclosing, just disclose it. Even if you consider that something is already disclosed, just verify it by disclosing it again.

There are, however, two schools, and some do not like the idea that one has to make specific disclosures in the first place but rather they want to ensure that disclosure material included in the data room generally is sufficiently clear. Of course, even in this case there might be listings of facts or matters (such as in connection with a specific warranty, “Except for the facts, matters and circumstances outlined in Annex X, the Sellers represent and warrant that there are no additional…”). From the enforcement perspective, one could argue that, say, if a risk is not disclosed in the disclosure schedule expressly as a specific disclosure but only in the disclosure material, in one of the many Board’s minutes in the data room, such risk is not “fairly disclosed” to the buyer (see also Part 5 of this blog series). So in other words when evaluating the seller’s liability in case of a breach of a warranty, this means that it could be easier for the buyer to establish that this disclosure was insufficient to qualify the seller’s warranties and therefore the seller should be held liable for the breach and therefore there is resistance against using disclosure letter in general. 

Another argument for resisting disclosure letters is that disclosures can act as a double-edged sword if the buyer opens price negotiations or walks away as mentioned above and therefore, sellers may attempt to solve this dilemma by making information available without expressly drawing the buyer’s attention to it, like, in one of the many Board minutes included in the data room material. This way they could still argue that the buyer was aware of the risk prior to the execution of the deal and therefore the seller should be exempted from the breach of warranty.

There are so many questions still to consider: what constitutes "fair disclosure"? What is the connection of materiality and specific disclosure? What warranties can be given regarding disclosures? When to disclose? And so forth. Some standard questions are also answered in the disclosure letter's introductory text which might say something like this:


This is the Disclosure Schedule referred to in Article X of the Share Purchase Agreement (the Agreement).

All capitalised terms used and not defined in this Disclosure Schedule shall have the meanings given to them in the Agreement, unless the contrary intention appears.

This Disclosure Schedule shall have the effect set out in the Agreement. Accordingly, we shall not be deemed to be in breach of the warranties or other terms of the Agreement: i) if such facts or circumstances are specifically disclosed herein; or ii) if the disclosure is made in the disclosure material if such facts or circumstances should have been apparent based on such investigation or otherwise to a person reasonably knowledgeable having experience in business similar to the Business. 

Specific disclosures set out in this Disclosure Schedule mark out the section or subsection to which they apply for the ease of reading only but also qualify other sections or subsections in Section of the Agreement. All representations and warranties are further qualified by information available from public sources including, without limitation, press releases, publications and trade registers.

Where any representation or warranty contained in the Agreement is limited or is qualified by the materiality of the matters to which the warranty relates, the inclusion of any matter in this Disclosure Schedule does not constitute a determination by the Seller that such matters are material. 

The inclusion of any matter in this Disclosure Schedule does not constitute a determination by the Seller that such matters need to be disclosed in order for the Seller to avoid liability under the Agreement.

Opinions expressed by independent advisors and consultants are to be read as containing their professional opinion with any assumptions and limitations pertaining thereto...."

So to conclude, these are the main principles to help you get started but we have tried to point out that there are many more open issues if you wish to go deeper into this topic. We will continue from here next time and in the meantime, let’s enjoy the last summer days of our beautiful country!

Friday, 12 August 2016

August Greetings, Security Interests over Patents and M&A Blog News

Splendid August to everyone!

I’m back at the office and full of energy after a relaxing summer break. As my one of the first things on the agenda, I thought it would be a good time to continue our M&A blog. We have had several interesting projects after our last posting, so these blogs have been slightly on hold and, as some of you might have heard, we, for example, represented management and investors in the acquisition of Suomivalimo from Componenta, as well as represented Patria Plc in the acquisition of a stake in Silverskin (Press release can be read from here). Also in the IT sector things are moving forward, and in addition to transactional work we are currently involved in a facility management outsourcing project for a banking sector client and another outsourcing for one of the leading Finnish companies in its field is also in the process—so a magnificent autumn is ahead of us!

Anyways, new M&A Blog is coming next week and this time we talk about disclosure letters. These documents and disclosure strategies are very critical in many respects. We start by focusing on basics and the relationship between disclosures and warranties. As we discussed in part 5 of the blog series in connection with the disclosure material, if an issue is described in the disclosure materials, then the purchaser cannot claim that there be a breach of warranty unless the parties have agreed on specific indemnity to cover a known risk. Then we go deeper into the exact interplay between different provisions, different disclosure types and discuss questions what, how and when to disclose as the seller.

Another matter is that as the European Commission has recently asked organizations to submit comments to the Commission consultation on an effective insolvency framework within the EU (“Consultation”) and as the issue is also discussed in the forthcoming AIPPI conference to be held in Milan in September, we wrote a few words on the security interests over patents under Finnish law and some modest proposals for improvement.For all of you who are interested in this topic, please read Kluwer Patent Law Blog from here!

We will continue from here next time and, in the meantime, let’s enjoy the last summer days of our beautiful country!

Monday, 9 May 2016

From Elvish and Klingon to C++: languages should or should not be subject to copyright protection Part 2?

So our story continues. The Software directive has since been replaced by Council Directive 2009/24/EC but without relevant alterations in substance in this regard, and therefore the principles expressed here are still valid:

Article 1: “Protection in accordance with this Directive shall apply to the expression in any form of a computer program. Ideas and principles which underlie any element of a computer program, including those which underlie its interfaces, are not protected by copyright under this Directive” and “A computer program shall be protected if it is original in the sense that it is the author’s own intellectual creation. No other criteria shall be applied to determine its eligibility for protection”

The same idea of protecting merely the expression is found also in the TRIPS agreement and the WIPO agreement, which were also both referred to in the case. The CJEU referred to Article 5(3) of the Software Directive, stipulating that a person who has obtained a copy of a computer program under a licence is entitled, without the authorisation of the owner of the copyright, to observe, study or test the functioning of that program so as to determine the ideas and principles which underlie any element of it, provided that those acts did not infringe the copyright in the program. Authorisation for such acts, to the extent that these included loading and running the program, is not required if they are necessary for the use of the program by the lawful acquirer in accordance with its intended purpose, including for error correction. The CJEU expressly confirmed that licensing agreements cannot be used to try to protect the ideas and principles underlying any element of the program: Thus, any agreement terms seeking to prevent the studying, observing and testing of licensed software are unenforceable.

CJEU held that neither the SAS Language nor the functionality of the SAS System were protected by copyright under the Software Directive, and no infringement could take place. However, the Court also found that “the finding (referred to here) cannot affect the possibility that the SAS language and the format of SAS Institute’s data files might be protected, as works, by copyright under Directive 2001/29 if they are their author’s own intellectual creation”. Thus, while the court confirmed that these elements were not protected, it did leave the window open as to that they COULD be protected; This leads to the conclusion that while emulating the functionality of software is allowed, reproducing a copyright work consisting of a programming language or data file format could not be.

To further clarify the matter, quite a clear statement in this regard can be found in another CJEU’s ruling given quite at the same time as the SAS ruling (and in fact, the SAS ruling refers to this as well), namely its ruling in case Bezpecnostni softwarova asociace, where it stated that: “the object of protection under Directive 91/250 includes the forms of expression of a computer program and the preparatory design work capable of leading, respectively, to the reproduction or the subsequent creation of such a program.”

Conclusions to follow in the final part, but in the meanwhile have a pleasant working day!



Friday, 6 May 2016

From Elvish and Klingon to C++: languages should or should not be subject to copyright protection Part 1?

While being involved in interesting licensing arrangements in TMT sector recently, I must admit that this  case truly caught my eye in the latest in Hollywood Reporter:

"When Paramount and CBS closed out 2015 with a lawsuit over a crowdfunded Star Trek fan film titled Axanar, the two studios probably had no idea that they were about to get mired in an esoteric legal debate about the protectability of the Klingon language. But that's exactly what's happened, and with the language of digital coding hanging in the background, a California federal judge's forthcoming decision could hold significance — so large, in fact, that this otherwise run-of-the-mill copyright action has now drawn an amicus brief from a language society that quotes a Klingon proverb translated as "we succeed together in a greater whole."

To review, after the Star Trek rights holders filed their complaint, the defendant production company demanded particulars of the franchise's copyrighted elements. In response, Paramount and CBS listed many, but what drew most attention was claimed entitlement to the Klingon language. The defendant then reached back to a 19th century Supreme Court opinion for the proposition that Klingon is not copyrightable as a useful system."

The conclusion of the brief states the following:

We had an interesting discussion in ITechLaw's London conference on the copyright protection of programming languages and there seems to be an interesting connections between these two cases and therefore I wanted to write about this topic. So main questions, can one infringe a copyright in J.R.R Tolkien’s Elf language by writing a book with that language? Or more interesting is C++ different to Klingon language discussed above?

As a start I think it is needed to cite SAS v. World Programming Ltd (WPL) - case briefly although the case itself is most likely quite known by my learned colleagues (English High Court (Arnold Judge), ruling in July 2010; ECJ case 406/10 (ruling on 2 May 2012), English Court of Appeal (21 November 2013). 

So, the case involved the so called SAS System, a software program enabling its users to perform certain data processing and analysis tasks. As background, the SAS System was and is quite a profitable one, based on roughly 35 years of experience and development.  WPL saw a market for alternative software, which would be able to execute application programs written in the SAS Language. For this purpose WPL had licensed the Learning Edition of the SAS System, which it carefully studied and tested. On the basis of its observations, it developed the so called WPS system that was competing with the SAS System. WPL openly admitted that this was in fact also its purpose, and did not even try to excuse itself in respect of its purposes.  What turned out to be rather crucial to the case was that WPL had developed its system without access to the SAS source code or object code, and furthermore, its system was written in a different programming language. Probably the most important merit of this competing system, and definitely one of the reasons why SAS had such a major interest to dispute the case in different instances, was that it enabled users of the SAS System to change their system significantly more easily than before, as the WPS system was able to read the SAS programming language. This saved the customers from the trouble of rewriting their existing applications in a different language in order to change their systems, and thus significantly reduced to costs (and, naturally, the threshold) of such change. The courts focused most on the evaluation of whether the claimed components of the SAS System were protected by copyright in the first place, and thus SAS’s claims were largely examined in this respect.

Next time we further elaborate this so stay tuned!



Thursday, 3 March 2016

TRUSTin alkuvuoden transaktiokuulumisia!!!

TRUSTin vuosi 2016 on lähtenyt liukkaasti kuin suksi ja ajattelin lyhyesti kirjoittaa kuulumisia toimistostamme. Kävimme ensinnäkin vierailulla International Bar Associationin konfrenssissa Pariisissa, jossa aiheena oli yrityskaupat ja ajankohtaiset trendit. Tätä edelsi itse asiassa Lontoo, jossa kävimme tapaamassa tuttuja ja pokkaamassa  vuoden 2016 International Law Officen (ILO) Client Choice Awards -palkinnon kategoriassa Yrityskaupat (Suomi). Diilirintamalla näyttää myös vilkkaalta ja keväällä on varmasti tulossa lisää uusia referenssicaseja aina rahoitusjärjestelyistä isompiin yrityskauppoihin ja IT-projekteihin. Ajattelimme koota näkemyksiämme, ajatuksiamme ja kokemuksiamme näistä "yksiin kansiin" ja julkaista perinteisen M&A and Corporate Finance Updaten tässä lähiviikkojen aikana. Fokusoimme myös muutamiin havaintoihin tech M&A -projekteista, jotka tuntuvat olevan nousussa ja sehän sopii meille, kun olemme olleet tässä sektorissa etulinjassa mukana.

ILOn palkinto oli miellyttävä yllätys ja tämä näyttääkin olevan osoitus siitä, että kustannustehokkaalle ja transaktioihin erikoistuneelle asianajotoimistolle on  tilausta kotimaan asianajomarkkinoilla perinteisten isojen toimijoiden rinnalla. Selittävinä tekijöinä on varmasti hinnoittelumme (yrityskaupoissa erityisesti alle 20MEUR diilit ovat ydinalueellamme), sitoumuksemme johtaa projekteja tiivisti osakastasolla ja hoitaa projektit pienellä dynaamisella tiimillä aina due diligencestä neuvotteluprosessin loppuun ja post–integraatioasioihin. 

ILO:n valintaperusteet palkinnolle olivat seuraavat:

”ILO Client Choice awards recognize both individual partners and firms that are superior across the full spectrum of client service. This year’s winners were chosen from more than 2,500 individual client assessments.  Clients are asked to rate individual lawyers and law firms on the following client service criteria: quality of legal advice, value for money, commercial awareness, effective communication, billing transparency, tailored fee structures, response time, sharing of expertise and use of technology.”

Pääasia kuitenkin on, että uskon meillä kaikilla olevan yhdistävänä piirteenä se, että kaikilla on hinku päästä töihin ja oppia lisää, joka näkyy aina kaikessa päivittäisessä tekemisissämme. Mukavasti olemme päässeet tarjouskilpailuihin mukaan, mutta vielä mahtuu lisääkin!

Tivian kanssa olimme järjestämässä "Onnistunut IT-ulkoistus"-seminaarin, jossa Hannes Snellmanin, Liaisonin ja 2NS:n kanssa käsittelimme ulkoistuksia eri näkökulmista. Omassa puheenvuorossamme kävimme läpi mm. kilpailutusprosessien käytäntöjä juristin  näkökulmasta, mitä  vaikutuksia  erilaisilla  kilpailutuksilla   ja  nykyisillä  trendeillä  (mm.   pilvipalvelut,  bimodaliteetti, cloud brokerage)  on  palvelu-­ulkoistuksen  sopimusehtoihin  ja   sopimusrakenteisiin, kuinka  huomioida  muuttuvat  regulatory compliance -­asiat ja   tietosuojakysymykset, ja lopuksi, miten  sopimuksessa  ylipäänsä varmistetaan  ulkoistusprosessin  tavoitteiden   saavuttaminen. Kiinnostuneille koulutuksen aineisto on saatavilla täältä. Meiltä on myös pyydetty keskeisimpiä kohtia konsernitasoisten CRM, ERP tai vastaavien liiketoimintakriittisten IT-projektien hankinnoista ja mitkä ovat sellaisia tekijöitä, joilla on suurimmat kaupalliset merkitykset ja joita harvemmin osataan ottaa huomioon. Totta kai vastaamme huutoon ja laadimme ns. top #3 listan muutamasta mielestämme keskeisimmästä tekijästä, joihin olemme itse törmänneet ja näistä lisää siis tulossa tälläkin blogilla jatkossa.

Näin lopuksi haluan kuitenkin vielä TRUSTin tiimin puolesta kiittää vielä ILOn äänestykseen osallistuneita ja toki myös kaikkia muitakin asiakkaitamme, jotka ovat tehneet tämän mahdolliseksi. Tästä tunnustuksesta kiitollisina lupaamme pyrkiä työskentelemään entistä ahkerammin!