Technology M&A

The key laws applicable to technology M&A transactions are those related to industrial property, that is, trademarks and patents (Law No. 9,279/1996) and copyright (Law No. 9,610/1998). Matters specifically concerning software are governed by the Software Law (Law No. 9,609/1998).

Data privacy and internet regulation could also be relevant, which are conveyed in the Internet Law (Law No. 12,965/2014) and other sparse regulations and the recently enacted (which will be in force as of August 2020), the Brazilian Data Protection Law (Law No. 13,709/2018).

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Brazilian government has no step-in or march-in rights in intellectual property rights. The right to exclusive use of industrial property and copyrights, including software, is time-limited and after the expiration of such term, the intellectual property goes into the public domain.

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Legal title to industrial property derives from the registration of such Intellectual property asset with the Brazilian Trademark and Patent Office (INPI). Proof of title is conveyed in the certificate of registration issued by INPI (after performing a preliminary analysis of the application).

Legal title to copyrights (including software) derives from the authorship of the work and is subject to the legal requirements provided by specific law (eg, a software developed by an employee under the scope of its employment agreement should be deemed as employer’s property). Copyright does not depend on registration, differently from what is required by the industrial property regime. Copyrights may be registered as a proof of its date of creation in face of third-party intellectual property rights.

Registration in the case of copyright (with the exception of software registration) has as its principal registration body the National Library, while registrations related to software must be filed with INPI.

Intellectual property transfers are done by means of an assignment agreement. The effectiveness of industrial property assignment agreements depend on their filing with INPI. It is possible to transfer ownership of an already registered property as well as an application.

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Due diligence should confirm the target company’s title to its main technological assets and whether they are subject to any outstanding dispute. The legal analysis of the ownership of intellectual property assets should include the review of the certificates of registration with INPI (if it is an industrial property) and assignment agreements (in contractor or employment agreements). The use of third-party intellectual property rights or open source software should also be reviewed since it may negatively affect or restrict ownership.

Carve-outs or asset purchases may depend on the conclusion of the transfer of intellectual property by INPI, if it is considered an industrial property. Trademarks have specific regulation that may restrict the ability to perform an asset purchase (eg, the purchaser must have a corporate purpose compatible with the activities to be performed under the trademarks).

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INPI’s public databases are usually searched for applications and certificate of registration of industrial property. Court records are also publicly available for verification whether the asset is subject to any legal disputes.

Although domain names are not strictly considered an asset under Brazilian law, due diligence process usually reviews the domain name registration at Registro.br (the agency responsible for registration of domain names in Brazil).

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All types of intellectual property are registrable, although, the registration is not always necessary. Intellectual property is classified in two big groups: copyrights, whose registration is merely declaratory; and industrial property, whose registration is mandatory and necessary to ensure its ownership. It is worth noting that copyright falls upon artistic, literary and scientific creations in which protection is conferred to protect the author’s own personality, while industrial property rights, on the other hand, falls upon assets linked to corporate activity, such as trademarks, patents, industrial designs, integrated circuit topography and geographical indications.

In respect of copyright, the following actions are typically taken:

• assessment on the process of creation and modification of the intellectual property used by the target to understand the ownership of assets;
• analysis of the employment contracts with developers of intellectual property works searching for clauses that guarantee to the target the ownership of assets produced by its employees;
• assessment on the ongoing legal disputes (if any); and
• analysis of licensing and assignment agreements.

In respect of industrial property, the following actions are typically taken: (i) search on the public records of INPI to assess the ownership of assets; (ii) the ongoing legal disputes (if any); and (iii) analysis of licensing and assignment agreements.

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Liens or security interests may be granted on intellectual property. The due diligence process may change slightly depending on the type of intellectual property, but generally should cover certificates of registration of the relevant intellectual property, which should evidence any liens and collateral agreements disclosed by the target company.

In terms of process for perfecting, recording liens or security interest over intellectual property, the general rule is that the collateral agreements must be filed with the registry of deeds and documents and with INPI, as the case may be.

Collateral agreements regarding copyright, software, trade secret and know-how, in particular, may face enforceability limitations as such rights may not be fully or precisely described in the financing agreements given their confidential status.

Release of liens and security interests on intellectual property follow the recording steps required for the perfection of the lien (ie, the relevant release instruments must be filed with the registry of deeds of documents and with the INPI, as applicable).

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It is highly advisable to verify the agreements entered into by the target company and its employees and contractors that have developed or performed maintenance services of the technology (mainly the source code of a software). Lack of proper contractual protection over the intellectual property asset may trigger future legal disputes over the ownership of the asset and indemnification claims for undue use of third-party intellectual property rights.

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Transfer and assignment of industrial property are subject to registration with INPI. There is no difference in the legal treatment of exclusive or non-exclusive licences.

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To assess the unchallenged ownership of the software, due diligence typically covers:

• review of developers’ agreements;
• use of open source software and respective licences, since such licences may be subject to copyleft or somehow adversely affect the ownership of the software by the target;
• use and integration with hired-party intellectual property and respective licences;
• outbound licensing agreement; and
• review and assessment of risk of loss of the legal disputes.

Code scans are usually recommended to be conducted by specialised technical companies.

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Due diligence covering legal aspects of special or emerging technologies is still quite unusual in Brazil.

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It is customary to include representations and warranties in M&A agreements concerning the target company’s intellectual property, proprietary technology, cybersecurity. With the enactment of the Brazilian Data Protection Law, it has also become customary to add representations and warranties covering data privacy matters.

Intellectual property representations tend to cover ownership rights of proprietary intellectual property as well as absence of litigation. It would cover rightful and compliant use of a third party’s intellectual property by the target company, as applicable.

Representations regarding proprietary technology are expected to cover the rightful ownership, but also confidentiality of trade secrets and assignment of rights by third-party contractors and even employees.

Data privacy warranties could be quite long, but, in summary, would explicitly cover compliance with applicable law and privacy policy, as well as the absence of events of data violation as a result of leakage by the company or breach by third parties.

Cybersecurity representations are less common than the other representations described above, but usually intend to cover absence of breach or leakage of trade secrets, data and other confidential information and also the adoption of minimum standards of data security.

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The most common types of ancillary agreements seen in technology M&A transactions are licence agreements concerning carved-out assets (trademarks and software in great part) and transition services agreements with respect to software and platforms.

Asset sales could be quite unusual in M&A transactions in Brazil mainly owing to tax inefficiencies and succession liability.

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The most common types of covenants concerning intellectual property within M&A transactions are the following: delivery of source codes; performance of open source or other technical due diligence; execution and delivery of intellectual property rights assignment by third parties; filing for or registration of intellectual property with applicable government authorities; transfer of intellectual property ownership within group companies or persons; execution of ancillary intellectual property agreements.

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If intellectual property is deemed as a key asset within the transaction, the representations should watch the statute of limitations periods: 10 or even 20 years for patents.

On the other hand, if the target company’s intellectual property is not a critical asset within the transaction, the survival period of the representations and warranties of that nature would usually be set alongside with the general commercial and business representations (three years average).

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Not necessarily. Cap conditions can vary a lot from deal to deal.

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No, except if the intellectual property representation is deemed as a fundamental representation in the agreement.

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Yes. Indemnities for losses related to intellectual property, data security and privacy matters would be expected to be indemnified in full, subject to limitations that may be provided in the definitive agreements. Losses related to certain intellectual property should also cover loss of profits.

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This provision may vary significantly among transactions, but, in general, if the relevant agreement stipulates a walk right, the buyer would be allowed to walk away from the deal only if a breach or update of a representation occurred before closing would be deemed as a material adverse event to the company or the business. In any case, in the event that a representation is updated or corrected before closing, the losses or damage that the company or buyer may suffer as a result of such new fact or event could be indemnified by the sellers, subject to the terms and conditions of the definitive agreement.

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Key developments of the past year

20 What were the key cases, decisions, judgments and policy and legislative developments of the past year?

In 2019, Brazil solidified its data protection national policy and initiatives by passing a new law that created the National Data Protection Authority. The NDPA is made up of a board of directors, with five members, a National Data Protection and Privacy Council, with 23 representatives, as well as other internal administrative bodies. It will oversee compliance with the data protection law, apply sanctions and issue rules and guidelines to the general public concerning data protection. The members of the NDPA have not yet been appointed. The law will come into effect in August 2020.

The Brazilian government also passed a law in 2019 that allows companies to use client financial data for positive credit rating - the law is commonly referred to a Positive Credit Rating Law (or Cadastro Positivo). The Positive Credit Rating Law provides that, in general, only information regarding the regular payment of financial operations and certain commercial transactions that may entail financial risk may be used, which includes data arising from recurring services such as water, light and telecom services. The law sets out several obligations for database controllers as well as terms and conditions for the collection of data from data subjects. Authorisation for databases with information sourced in financial institutions will be granted by the Central Bank. The law still requires supplementary regulation with respect to certain matters.

Brazil also ratified the Madrid Protocol in 2019 where it accedes to the Madrid International Trademark System, which should expedite the registration, transfer and management of trademarks in Brazil as well.

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