Wednesday, 31 May 2017

How cloud and digitalisation change outsourcing and IT contracting - part 1?


Intro...

As you may remember, I earlier promised to write about the practical issues surrounding IT agreements in the digital era, and cover certain misunderstood concepts and principles in the IT world that are, in principle, "simple" but nowadays too often subject to lengthy negotiations. Cloud is definitely the mainstream solution today, even in heavily regulated sectors such as banking and insurance as outlined, e.g., in Temenos & Capgemini 2015, according to which 89% of banks globally use at least one cloud application, while the figure was 57% in 2009.

Standard IT procurement templates won't work

According to our recent experience, most of the standard contractual templates used by many large corporate customers in their procurements, as well as most IT agreement models currently generally available, fail to address the latest delivery and operational models applied by cloud capacity providers. Even though the principles remain the same—and yes, from a legal point of view, there are still services, licenses, hardware, etc.—cloud capacity for example requires a different approach to these due to the various characteristics that separate it from traditional IT deliveries. This implies that one must also go deeper into the world of cloud and understand how cloud brokerage and service integrators work to create a reasonable balance between the interests of the different parties involved, and to truly gain business benefits from the new service models (as opposed to relying on standard "one-size-fits-all" -type of ICT procurement frame agreements). In addition, there are certain new elements that need to be added to the above legal framework, such as the above mentioned capacity, which is still a relatively unknown concept for many lawyers even if they might otherwise be very experienced in IT contracting. 

Modern outsourcing requires less transactional elements

It is probably already a decade since the Amazon Web Service (or AWS) started offering these services, and still we seem to be missing the core understanding of what this is actually all about. Essentially it is about using resources over a network which may include just space, software (SaaS), computational power (IaaS) or hosting platforms, for example, as a service (PaaS). Under the SaaS heading, we have plenty of alternatives from traditional systems like HR, accounting/financials (Workday), CRM (Salesforce), e-mail and office (Office 365) to data storage providers (Dropbox), or photos (Flick) or social network applications (Facebook) which are most well-known for everyone. New digital services differ from (and affect) traditional outsourcing in many ways. Perhaps most importantly, they may remove the need to outsource in the traditional sense completely, i.e. “Less infra, personnel & software, less to outsource".

Digitalization requires a more subtle liability allocation

Furthermore, modern digital services often are not offered by one vendor alone but, instead, there is often a network of different players involved with varying roles, which means that also liability allocation is subtler than it was in the past. In this new environment, different deliveries, personal data and related liabilities alike move from vendor to vendor, vendor to customer or vice versa, unlike in traditional IT contracts of the time when it was still possible to reduce the whole delivery model to a simple "projects and on-going services” format. In my view, this should not be seen as an increased risk but rather as an inherent characteristic of the new way of providing services. Consequently, the liabilities and their allocation should also be different, as in this example that outlines a simplified contractual network of a company engaged into a digital marketing campaign.

Technology lawyers need to create new core competences

As I see it, if one should use the time to really understand how this world works, it would give strategic advantages or costs savings, depending on the strategy. In other words, "too many cooks do not spoil the broth". Instead, they enable a more agile IT environment for you if you select the right partners and know how to use them! Also lawyers need to understand in detail how these different systems communicate at technical and legal level, how personal data is transferred around the environment and I must say, it is not a simple task and it is made even more difficult due to the fact that one often operates in cross-border environment of internet where compliance requirements are still many times based on local legislation. Here I promise to raise 5 top issues how contracting practices are changing at the practical level that I wish someone would have told me before I started drafting my first cloud-era IT agreement or spider-webs like one above, and then I hope to hear your views on this issue as well! 

Regards,


Jan

Friday, 24 March 2017

SPA Series Part 13: Corporate and Share matters, Capitalisation

Now we focus on corporate and stock matters which cover several issues such as corporate organizations, capitalisation, title to shares and required corporate decisions. 

Some of these are easy like the one stating that the seller is a corporation duly organised and existing and having necessary corporate power and authority. In case of shares, capitalisation is similarly one of the key issues. This concept covers issues like number of shares, the requirement that these are validly issued, outstanding and fully paid. Similarly, these warranties contain statements that in the closing good and valid title to the shares is transferred without any liens or encumbrances and that there are no convertible loans, options or other special rights entitling to shares. All these serve one purpose only, to ensure that the buyer ends up having full hundred percent ownership in the company. Sometimes there might be warranties saying, for example that "...liens or encumbrances except for lien of the bank released upon closing...". This warranty requires that the seller has received from his or her bank a statement to this effect.

One issue to keep in mind is that options may require a separate treatment. These might be converted into shares as a condition precedent to the closing or these could be purchased directly upon closing in which case the purchase price would be lowered respectively. Both methods are being used and even if the conversion route is selected it might be advisable to have double security to ensure that if there remains any unconverted option rights at the closing which can be redeemed by the buyer (by waiving condition precedent if applicable), then the purchase price will be adjusted respectively. There some tax aspects or differences between these models that need to be taken into account in the tax sections of the agreement.

Also if the seller fails to disclose option rights the buyer will have an indemnification claim against the seller, but effectively the option holder may have the right to claim conversion of the option rights (if possible under the terms) and there might be a minority that might be annoying, but gladly the redemption process under the Chapter 18 of the Companies Act will normally help. If there are additional concerns in this respect that there might be more undisclosed option rights (and Chapter 18 could not necessarily help), then structuring the deal as a merger might be one solution worth investigating further. In asset deals these kind of share matters and capitalisations are not truly relevant, but some kind of statement might be good to have any ways if not for other purpose at least to ensure that the persons with whom one has been dealing with have significant ownership in the company.

In cross-border context one issue that often raises is qualification to do business. This is do to the fact that in many cases such decision is delayed until it is mandatory. This is a kind of business decision, which may lead to a potential tax liability (and if massive, of course annoying to the purchaser). Another risk that might raise and that the purchases wishes to avoid is that a material agreement is rendered unenforceable. There are solutions to these warranties that are on the "middle-ground" like one stating that "the company is qualified in all jurisdictions were it owns or leases property or has personnel". This gives some kind of "materiality" element to the representation. Another option might be to say that the company may qualify in all jurisdiction if needed without significant loss or expense. Material agreements can also be discussed separately from this qualification perspective and it could be stated for example that failure to qualify does not affect enforceability which would cover the other aspect mentioned concerning these qualifications.

Corporate decisions are the final issue to be mentioned in this posting and naturally there should be a statement that all necessary corporate approvals have been give. Normally these kind of "...subject to the approval of the Board of Directors..." qualifications should not be accepted as these give the other party an option to walk-away.

Next time we will focus on my favourite representation regarding financial statements so stay tuned and have a pleasant weekend in the meanwhile!

Regards,

Limppu

Monday, 23 January 2017

TRUST'S Greetings & SPA Series Part 12: Buyer's Reps & Warranties

Sunny January & 2017 for everyone, 

Once again a magnificient year has passed and I must say as we had such an energetic ending for 2016, I thought that I should start this year's postings with a small recap of what happened.

First of all, at AIPPI Milan, we presented our national group's report on security interests over intellectual property (which is also going to be published as an article later this spring). Further, we provided advice in many interesting transactions, such as, Affecto in their acquisition of the big data analytics company Bigdatapump (press release here). For those of you who do not know them already, Affecto is a listed Finnish company that creates business value for our customers by combining information with insight, leveraging the full data set surrounding organizations, and proving services ranging from information technologies to advanced digital business solutions. Those of you who know me personally can definitely believe that it was just that kind of tech M&A deal I love to do with a focus on technology, intellectual assets and big data. In this area TRUST. truly has unique industry expertise and rock-solid track-record from earlier tech deals, from outsourcings to cyber-sector and what I like to say "the best M&A team in Finland" – and I truly mean that! We also continued our transactional work in the wellness and sports sector, advising the tech company Healfactory / TNT trainers, for example, in the ownership arrangements and financing round, e-commerce and data protection matters – a deal that continues our flow of transactions in this sector after the SportsTracker acquisition by Suunto and Amer Sports. Of course there were several others (see more from here) so lots of interesting assignments completed and much more is still to come in 2017.

Personally I celebrated my fourth year at the TRUST. and at the same time I also wish to thank you all for the greetings I received via LinkedIn and otherwise. To start this fourth year with style, we also moved to the new premises in the distinguished Fennia building. At the company level, things are moving forward with an ever-increasing pace and focus on recruitments during this 2017 – we try to arrange house-warming parties but first we have to wait to get all the things in right places (and get furniture such as chairs which are, unfortunately, still missing)!


Before we go to our actual topic, one final issue and benefit for the readers of this blog; if you are interested in ICT and outsourcings, I hope you could attend to Tivia's seminar this spring (Time 6.4.2016 (klo 8.00–12.00) | Place Technopolis Otaniemi, Espoo), which contains magnificent program with several top-notch speakers like VP Markus Kinni from Liaison, Kai Erlund from Dittmar & Indrenius, Riitta Lehikoinen from Winway and Juho Ranta from 2nd Nature Security. Hope to see you there and I have one free participation available so please let me know if you wish to take this opportunity! 

Our real topic for today relates to the buyer's representations and warranties. Here we look at the question from both the seller's and the buyer's representations and approaches in mind that could be taken in the documentation and argumentation used during the negotiations. We have already earlier covered the reasoning and ideas behind representation and warranties in general and their connection to disclosures (see more from earlier posting from here) so we go directly to the topic.

Purchaser's approach

First of all, the buyer represents and warrants to the sellers that the representations and warranties set out in this section X.X are true, accurate, and not misleading on the completion date (except those of the representations and warranties that address matters only as of a particular date or only with respect to a specific period of time, which need only be true, accurate, and not misleading as of such date or with respect to such date or period). What are the "bare minimum" warranties that the buyer should be able to give? 

At least the following should be included: 

"Organisation and Existence of the Buyer"

Meaning that the buyer is, say, a legal entity duly organised and validly existing under the laws of Finland. Naturally, one has too take into account whether the buyer is a private company or an entity.

"Power and Authorisation of Buyer"

Under this representation, the purchaser represents that it has the full legal and corporate power (reference including any necessary decisions, permits, approvals, consents and authorizations) to enter into the agreement and to consummate the contemplated transaction.

"Enforceable Agreement"

This rep states that the agreement constitutes a valid and binding obligation of the purchaser enforceable against it in accordance with its terms. There might be additions that the execution of the agreement, the consummation of the transaction will not result in a breach of any judgment or order of any court, governmental or other body, any applicable law or regulation, any agreement or commitment binding on the purchaser, or the articles of association of the buyer.

Seller's approach

Those were the standard ones the purchaser should be able to give, but there are typically additional requirements coming from the seller and these include the following:

"The Purchaser is not insolvent"

Under this one, the purchaser represents that no decision has been taken, or request made, or other initiatives taken, by the purchaser for the purchaser’s bankruptcy, winding up or liquidation. It might continue that "to the buyer’s knowledge, no decision has been taken, or request made, or other initiatives taken by any court or other authority, or any third party for the purchaser’s bankruptcy, winding up or liquidation". Very handy in distressed situations, but otherwise not perhaps the most important element of the deal.

"Absence of Litigation and Claims"

This pretty much states the issue mentioned in the heading that there are "no claim, action, proceeding or investigation is pending or threatened against the purchaser which would delay or prevent the consummation of the transactions contemplated by this agreement". 

One issue from the seller's side which relates to this theme is a representation and warranty in which the buyer gives a representation and warranty that it is not aware of any breach of any covenant or any of the representations and warranties of the seller or any other provision of the agreement which gives comfort that there is not going to be a claim immediately after the closing for example. On the other hand, if the buyer is aware of the breach prior to the closing, under the contract law principle one cannot raise a claim anyway as you were aware of the issue at the time of purchase. However, in order to avoid liability, the sellers should be able to prove that the breach was disclosed sufficiently so you see the reason for having this kind of representation in place?

"Sufficiency of Financing"

The higher the purchase price or the more complex the transaction finance is, the more relevant this next rep is so here it is stated that "the buyer has arranged for binding and sufficient financing for the consummation of the transactions contemplated by this agreement, including but not limited to the payment of the purchase price and any transfer taxes in full, and such financing is not subject to or conditional upon any conditions or circumstances beyond the control of the buyer". In smaller deals this can typically be ignored if the parties are in good financial standing.

"Authority Approvals"

Finally, this states that "no approval, authorization, clearance, consent or permit of a competent national or supranational authority, including any relevant competition authority, is required for the lawful and valid consummation of the transactions contemplated by this agreement by the purchaser". Typically this refers to merger control, but there are also other cases where this is relevant. For example, I was involved in a transaction in which the target was a Finnish radio station and there it was an issue regarding the approval to transfer the radio licence to the purchaser, which is why this representation was also relevant.

Hopefully you find this helpful. Next, we will look at the seller's representations and warranties! I think that we might go in more detail to those but we'll see – now, a splendid start for your week.

Best wishes,

Limppu