December 5, 2021

Volume XI, Number 339

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December 03, 2021

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December 02, 2021

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GovTech M&A: A Selection of Evolving Trends in Mergers and Aquisitions

Buyers are aggressively targeting companies with differentiated technology and strategically-positioned intellectual property. 

An ever-growing demand for cyber and data security, coupled with a drive for analytics and intelligence, is pushing buyers to rapidly seek innovative GovTech companies for purchase. 

GovTech companies who have taken necessary measures to protect their intellectual property assets, and who can demonstrate an ability to monetize such assets, are receiving considerable attention from prospective buyers.

For growing GovTech companies looking for a potential exit, understanding the risks associated with intellectual property is becoming increasingly crucial at an earlier stage.  Notably, a prospective purchaser will want a GovTech company to establish that it has taken a careful approach to protecting its intellectual property, which should include implementing appropriate licensing arrangements with customers and partners, understanding the scope of government retained rights, using robust proprietary rights assignment agreements with its employees and contractors, and ensuring that its source code does not include open-source materials that would give any third party a right to use such code. 

Sellers are reimbursing due diligence and other fees in exchange for a lack of exclusivity. 

It’s sometimes referred to as a “break fee.” The seller says to the buyer, “I’m not going to commit to you yet and I’m going to stay on the market and continue speaking with other potential buyers. But, if I don’t choose you to buy me, I’ll reimburse your due diligence and other pursuit costs.” 

This is a trend happening with seller auctions in other markets, and slowly starting to appear in the GovTech space. While buyers of course prefer exclusivity as soon as possible, this arrangement is one way to bridge the gap for a buyer to more comfortably stay in the process if the seller is not ready to commit.

Sellers are not encouraged to make this a standard practice; many buyers will demand exclusivity and companies therefore need strong leverage (strategically-positioned intellectual property, perhaps?) to play this card.

More deals are being done with an insurance policy as the only source of funds to cover indemnification for inaccurate reps and warranties. 

In a sale, the reps and warranties are “promises made” about the condition of the target company, for example, the company is not in breach of its contracts or the company is not a party in any material litigation. Indemnification is the enforcement mechanism, a payment due to the buyer, if the reps and warranties turn out to be inaccurate after closing, and the buyer suffers damages. 

Typically, the source of funds for indemnification is held in escrow by a third party. The buyer may also sometimes hold back a percentage of the purchase price for a period of time as the source of funds (more favorable to the buyer), or the seller may avoid such a holdback or an escrow forcing the buyer to recover directly from the seller post-closing (more favorable to the seller). 

An increasingly growing option is the use of a reps and warranties insurance policy, which can provide a buyer with a source of recovery for a seller’s breach of its reps and warranties. Use of a “reps policy” is becoming more common when a seller is running an auction process or when the parties cannot agree to terms for post-closing risk allocation. Third party escrow is still the most typical approach in GovTech deals, but the more widespread use of reps and warranties insurance is a welcome addition. 

Private sellers are positioning themselves in auctions with aggressive documents which, in some cases, are similar to public company deals. 

Consider it a “public company risk allocation” trend for some private sellers running auctions where they are in the driver’s seat. In a very competitive auction for the sale of a company, a private, middle-market GovTech company might be able to have the buyer agree to extremely limited or no post-closing indemnification provisions in the sale agreement. 

This is a risky move for buyers and typically only available to sellers with considerable leverage.  Buyers in these types of auctions may want to strongly consider a reps and warranties insurance policy. 

What’s to come?

Pay attention to the distributed ledger technology (i.e. blockchain) as it continues to develop - particularly its implementation into various commercial applications - and the usage of digital currency and its regulatory environment.

Copyright © 2021 Womble Bond Dickinson (US) LLP All Rights Reserved.National Law Review, Volume VII, Number 275
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About this Author

Rajan Singh, Corporate attorney, Mergers, Private Equity Transactions, Tysons Corner, Virginia, Womble Carlyle Law Firm
Associate

Rajan Singh is an attorney in the Corporate and Securities Section of Womble Carlyle Sandridge & Rice.  Mr. Singh has a diverse transactional practice that focuses on the representation of public and private companies in strategic mergers and acquisitions, private equity transactions, business restructurings, and general corporate matters. Mr. Singh has substantial experience representing emerging and middle market companies in the banking, technology and government contracting sectors.

703-790-4683
Jeff Cohen, Corporate Transactions Attorney, Womble Carlyle Law Firm, Tysons Corner, Virginia
Partner

Jeff is a business-focused M&A/Corporate Transactions Partner who has served as a trusted advisor to high growth companies for nearly 20 years.  Jeff’s clients value his ability to focus on key issues and to solve complex problems.

As a veteran dealmaker, Jeff leads complex domestic and cross-border transactions for strategic and private equity backed technology companies (commercial and government contractors), global franchisors and clients across a variety of other verticals.  These transactions include mergers and acquisitions, private equity financings and joint ventures,...

703-394-2238
Dean Rutley, Corporate, Transactional, Securities, Tysons Corner, Virginia, Womble Carlyle Law Firm
Partner

Dean Rutley has 30 years of experience representing companies in a wide range of corporate, transactional, and securities matters. Mr. Rutley’s practice is concentrated on emerging growth and mid-market companies (both public and private) with regard to a variety of domestic and international business transactions, including mergers and acquisitions, corporate structure, compliance with federal and state securities laws, board of directors duties, and negotiated resolution of business disputes, as well as licensing and joint venture agreements. Mr. Rutley also counsels technology clients...

703-394-2256
Andy Tucker, Corporate, Public Offerings, securities compliance, Washington DC, Womble Carlyle Law Firm
Partner

Andy Tucker’s Corporate and Securities experience includes representation of issuers and underwriters in public offerings, ongoing securities compliance and capital markets transactions. His clients also include venture capitalists, emerging companies and private equity funds.

Andy has completed numerous public, private and cross-border mergers and acquisitions, representing financial and strategic buyers, sellers and controlling stockholders, and public offerings for international clients in a wide variety of industries. Those industries include software, online retailing,...

202.857.4448
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