Pitfalls in Asian IP Acquisition Deals

By Alan Adcock and Nicholas Redfearn (Rouse & Co. International)
Excerpt from a recent article in WorldTrade Executive's
Global Intellectual Property Asset Management Report

Merger and acquisition deals in Asia are taking on an increasingly significant IP component. But for a foreign company interested in an Asian target, are there any particularly tricky steps which deserve more attention than you might normally pay? This article identifies 10 major pitfalls, including the following:

The Non Disclosure Agreement – an important first step in deal planning or an over zealous over reaching attempt to look strong?

Obligations of non-disclosure and confidentiality are important for any type of deal touching on IP, not only for technology, IP and trade secret matters which may be the target of the purchase, but also for business strategies, new product ideas and financial and accounting information which are likely useful to decide whether a deal will go forward.

Non-disclosure and confidentiality undertakings are enforceable in Asia provided they be reasonable and fair and not do violate the public interest. Normal western style confidentiality undertakings setting out the agreed terms of what constitutes the “confidential information” and what does not, acknowledgement of proprietary interest in the confidential information and penalties for unauthorized disclosure, etc are also common in Asia.

However, sometimes your Asian counterpart may feel uncomfortable with your standard NDA. He may feel that you are taking too formal of an approach to a relationship he believes should be built on trust rather than legally enforceable rights. This is usually the reaction if the NDA and its obligations are one-sided. While non-reciprocal NDAs may be achievable in terms of a licensor/licensee relationship, a buyer-seller relationship is different and the necessary (and expected) disclosure of information needed to decide whether the deal progresses should be explained to your Asian counterpart. If this still cannot be agreed, then a prudent buyer will ask himself why uncertainty remains and whether this particular target is appropriate.

Sometimes, the non-disclosure undertaking you seek may not be directly with the target, but rather with employees or other third parties connected to the target or to the target IP. If you are not in a position to enter into a NDA directly with those people who know of the confidential information, you can ask your seller counterpart to add its own confidentiality restrictions (as riders to existing or in new agreements) to its own agreements with its employees, agents, etc and you should request copies of these. This is common and we would certainly advise it.

Disclosure Statement – what is the minimum expected and how much can/should you ask for?

The attractiveness of acquiring a business in Asia is not only the prospect of an instant market for goods or services the target already sells or manufactures, but also the ability to acquire valuable IP rights or to source materials at prices often more competitive than in other countries. Having a business here also makes for easy distribution within the Asia Pacific Region. However, when acquiring a business in Asia, it is imperative that you get the seller to identify defects in the IP, in the market and in the business which may effect your purchase price or which will need to be corrected (possibly with the help of the seller). Representations and warranties from the seller should be expressly set out in the acquisition agreement and the Disclosure Statement serves to limit these (save for fraudulent misrepresentation on the part of the seller) by identifying such problems and putting the buyer on notice that they exist. This should be explained carefully to your Asian seller so that he understands that this serves to protect him against future claims you may make for breach of warranties and representations.

Many times, sellers may not be able to answer all of the buyer’s questions on existing IP portfolio defects, disputes or business concerns. This is particularly true if the IP has not been carefully maintained (which occurs frequently in Asia with local domestic counsel and registries themselves making mistakes). There may be disputes over the IP both in Asian IP registries as well as on the ground with infringers or with others who claim that the IP you wish to buy infringes their rights. Sometimes, a seller’s business is stong in some countries, but not in others. You should be wary of any seller who paints only a rosy picture and fails to disclose any problems. In many Asian jurisdictions, the time and costs of litigating representations and warranties can be extremely high and will likely take years to resolve (if at all). This, of course, may delay rollout of your business plans. More

Dealing (and Dealmaking) with Mexican Grupos

Excerpt from
North American Free Trade & Investment Report
published by WorldTrade Executive, Inc.
by Alyssa A. Grikscheit and Javier Fierro
(Goodwin Procter LLP)


Grupos are the large family conglomerates that dominate the Mexican economy. If you are a strategic or private equity investor attracted to the increasing opportunities in Mexico what kind of structural issues are you going to encounter if you invest with Grupos?

In Mexico, Grupos have impeded competition, keeping near-monopolies in certain industries. For instance, there are only two beer companies, two major food processors, two television networks and six radio chains in the country.Some Grupos have successfully expanded outside of outside of Mexico.

There are three main common characteristics found in a Mexican Grupo. First, the Grupo will typically run several businesses, and often these businesses will operate within various industries. Second, the Grupo will generally be composed of more than one family, but their connections run deep. And third, the organizational structure is predominantly based on kinship.

Dealing with Grupos can be a thorny issue, especially when trying to exit the investment Some Grupos may not want to exit their investment because they want to pass down the business to their offspring. Other less scrupulous Grupos may use
their political and economic muscle to shift assets to other investments within the
Grupo.

On the other hand, a Grupo on an investor’s side can
be a significant ally in an emerging market. By integrating with
a Grupo, an investor will gain political power, acquire local
knowledge of the country, and avoid contractual problems
with other local firms, all while avoiding expensive search
costs. The question therefore arises: how to find a suitable
Grupo? As with any other investment opportunity, finding a Grupo will inevitably require the investor to do its homework.


Due Diligence
First and foremost, the investor needs to perform a background check on the family. The investor needs to identify red flags such as young and inexperienced family members in key management positions within the company. In addition, the investor needs to review their resumes. Are they educated professionals or are they simply in their positions because of their family name? A strong kinship bond within the Grupos sometimes displaces sound business judgment and good corporate governance.

The investor should also identify the family patriarch within the Grupo. Sometimes knowing who holds the power within the family may not be readily apparent because of the complexity of the Grupo network. Understanding the family organizational hierarchy will prove invaluable when a conflict arises. The investor should also verify whether the Grupo has the political and economic muscle they claim to have; sometimes it may just be pure bravado.

In addition, the investor should check to see if the Grupo has commitments with other foreign firms. Such commitments may mean a Grupo has already been required to keep family assets and company assets separate and to meet certain corporate governance standards. It may also mean the Grupo’s reputation will be affected by a major fallout with a foreign investor. While checking the Grupo’s commitments, the investor should also check for potential conflicts of interest that may arise from the transaction.

It is critical to identify the keyplayers in the Grupo. This is particularly important in the negotiation process. Negotiating with a family member with insufficient authority may mean that concessions made by the Grupo are later reversed, effectively giving the Grupo two bites at the apple.

It is also critical to build a relationship based on mutual trust. Although many Grupos have been successful in jurisdictions outside of Mexico where deals may go to the highest bidder regardless of emotional or other connections, they still tend to rely on building relationships before crafting and executing deals. Finally, it is crucial to note the long-term memory of most Grupos. Because of their family connections, management is typically not very fluid. The investor’s management team may change several times, while the Grupo’s team remains more or less intact. Perceived injustices by the investor will not be easily forgotten, and may impact future dealings with the Grupo.

Setting a Price
Earnouts can be a powerful tool in dealmaking with Grupos. They ensure that performance incentives are aligned and serve as both “sticks” and “carrots”. The stick is essentially the investor’s bargaining power in the event of future disputes, and the carrot, quite simply, is cash, which may be in short supply in Grupos that do not include a captive bank.

There are other possible leverage points as well. Sometimes a private equity investor will try to position itself as the information gatekeeper. The investor may try to hold certain valuable information or intellectual property separately from the portfolio company. Holding such information or intellectual property directly may allow the investor to exert external pressure on the Grupo without having to rely on weak institutions for enforcement. However, this approach may not be practical in Grupos where the management (and members of the Grupo) has an inherent information advantage. More