DO NOT BLOCK THE EXITS

Common (But Avoidable) Problems for

MedTech Sellers in M&A TransactionsRob Tosti / Michael McGrail

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Background

Your IP strategy can add value, or waste resources Sellers in M&A deals have more fun, but . . . Sellers are subject to extensive due diligence If you have skeletons, assume they will be found Issues can delay closing, undermine your deal leverage or,

in some cases, break a deal that should otherwise be done Clean out the skeletons before meeting your buyer

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Three Easy Pieces

Be an Attractive Target -- Develop and Implement an IP Strategy that Adds Value

Don’t Create Road Blocks Today -- Avoid “Gotchas” in Your Commercial Contracts

Avoid Embarrassment and Loss of Deal Leverage -- Use Best Practices in Maintaining Internal Records

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Develop/Implement IP Strategy that Adds Value

Your company is not a science project – Obtain and use patents, trademarks, copyrights, and trade secrets strategically to provide a competitive advantage and exclude others

IP policies, educate, part of development, IP committee

Build and maintain your own IP portfolio

Understand the IP rights of others

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Develop/Implement Value-Add IP Strategy (Cont.)

Build and maintain your own IP portfolio Patents are business documents too, not just technical docs Patents should impede others and your patent strategy

should be aligned with business plan and competitive landscape

Insert IP checkpoints in product development process Establish and use an IP committee

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Develop/Implement Value-Add IP Strategy (Cont.)

Understand the IP rights of others Why even go looking? Use of lawyers Memorializing findings and positions Consider possibility of licensing in

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Avoid “Gotchas” in Commercial Contracts

Contracts that require the prior consent of the other party should be avoided

Governing law is important here, and a case-by-case analysis might be necessary – in some countries, the other party may have a statutory right to notice and consent

Definition of “Assignment” should exclude a change of control and a sale of substantially all assets

Alternatively, the contract could state that an assignment in connection with a change of control or a sale of substantially all assets shall not require the prior consent of the other party

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Avoid “Gotchas” in Commercial Contracts (Cont.)

Confidentiality can be a bad thing Many contracts provide that the existence and terms of the

agreement are “Confidential Information”, and cannot be disclosed to third parties

This is problematic when/if investors or potential buyers wish to conduct diligence

Confidentiality provision should include an exception that permits the Company to disclose the existence and terms of the contract to potential investors, acquirers, lenders and the company’s tax and legal advisors

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Avoid “Gotchas” in Commercial Contracts (Cont.)

Most Favored Nation clauses are not favored by all Consider your potential acquirer before agreeing to a MFN

provision in any agreement While your company may be able to live with an MFN

obligation, your acquirer may not Risk of inadvertent breach can have a chilling effect on the

acquirer If you have to agree to an MFN clause, try to narrowly tailor

its scope (i.e., “identical” products rather than “similar” products, geographic scope, duration, etc.)

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Use Best Practices in Maintaining Internal Records

Have your IP house in order Investigate past employment and academic affiliations Own everything with consultant/employee agreements and

also with specific assignments Obtain sufficient license rights if ownership not possible All details must be correct

Patent – inventorship, sale, foreign rights, maintenance fees TM – maintained, recited goods/services match, use ® and ™ Copyright – notices used, regs obtained Trade Secret – reasonable measures taken to maintain secret

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Use Best Practices in Maintaining Internal Records (Cont.)

Well organized capitalization records will avoid transaction expenses and surprises

Maintain a stock and option ledger Chronological history of all stock issuances, option grants

and other equity rights Should permit historical review of all grants, as well as a

“snap shot” of the issued and outstanding shares, options, etc.

Ensure all options, warrants and other equity rights are convertible or terminable at the election of the Company – goal is to avoid having third parties holding the deal hostage

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Use Best Practices in Maintaining Internal Records (Cont.)

Regulatory and QM professionals are your friends No buyer wants to step into a regulatory minefield Sloppy FDA filings could lead to negative responses and

delays, which could have a chilling effect on a potential buyer

Make sure your regulatory and quality records are complete Design history file (DHF), device master record (DMR), pre-

market applications, device modifications, complaint handling, adverse event reports, recalls, etc.

Best practices will save you time and money, both with the FDA and with potential buyers

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Use Best Practices in Maintaining Internal Records (Cont.)

Electronic records today might avoid administrative burdens later

Two of the greatest challenges of any transaction are (i) maintaining your focus on the company’s day-to-day business, and (ii) limiting the number of employees that know about the transaction

More often than not, the diligence process is the most time consuming undertaking, and requires the involvement of the greatest number of employees

Consider implementing an electronic records policy that will allow you to manage due diligence remotely through an e-room

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Recap

Your IP Strategy Should Add Value Make Sure Your Contracts Are Assignable Confidentiality Can Be A Bad Thing During Diligence Most Favored Nation Clauses Aren’t Always Favorable Have Your IP House In Order Well Organized Capitalization Records Will Avoid

Transaction Expenses And Surprises Regulatory Compliance Saves Money Electronic Records Today Might Avoid Administrative

Burdens Later

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Cooley Godward Kronish LLPFast Facts

Cooley Godward opened in 1920 in San Francisco.

Cooley Godward formed Draper, Gaither and Anderson in 1959—the first institutional venture capital limited partnership in the United States.

Cooley Godward was one of the first firms to open an office in Silicon Valley in 1980.

Cooley Godward LLP and Kronish Lieb Weiner & Hellman LLP of New York merged in October 2006 to become Cooley Godward Kronish LLP.

2007 Cooley opened an office in Boston, Massachusetts.

San FranciscoPalo Alto San DiegoNew York

Broomfield, ColoradoReston, Virginia Washington, DC Boston, MA