When participating in an M&A process involving a video game company, whether you are on the sell-side or the buy-side, there are certain key terms that are included in industry standard commercial agreements that the parties need to keep on their radar. Failure to identify these terms early in the due diligence process can create roadblocks for the parties as they near the finish line, whether that be signing the definitive acquisition agreement or closing the transaction.

A key aspect of the due diligence process is going to be the review of the developer’s publishing agreements, development agreements and/or tool license agreements with publishers and/or hardware or software suppliers. It is common that these agreements will include provisions that (1) restrict the developer from assigning the agreement to a competitor of the publisher or supplier, or (2) allows for the publisher or supplier to terminate the agreement upon a change in control that would result in the developer being owned or controlled by a competitor of the publisher or supplier.

You might be thinking, “what’s the big deal?” Two words: Proprietary Information. Publishers and suppliers do not want their proprietary or confidential information, used by or licensed to its competitors. This proprietary information, such as pricing/licensing fees or intellectual property, might be what gives it a competitive advantage in the market.

“How do we close our deal if we are selling to one of these competitors?” Fortunately, there are several alternative approaches that can be taken by a seller in anticipation of consummating an M&A transaction. First, while less common, it’s possible to secure the publisher or supplier’s consent to an assignment, or a waiver of its right to terminate the agreement. Of course, this requires disclosing the proposed transaction and likely the identity of the acquiror, who, if a competitor, may create some heartburn for the publisher or supplier. This also assumes the acquiror wants to keep the agreement.

An alternative would be to terminate the agreement prior to closing the transaction. This would typically be a condition precedent to the acquiror’s obligation to close, and in connection with such termination, the seller would typically (in coordination with the publisher or supplier) return all confidential information or certify its destruction.

Identifying these issues early in the process is critical, because the agreement may not expressly provide for termination by the seller.  It might be possible for the seller to negotiate liability parameters under the acquisition agreement if that publisher or supplier is unhappy with the early termination.  In any scenario, lead time will be required to work with the publisher or supplier on an agreed arrangement, so at the outset of an M&A process, a seller, in coordination with its deal counsel, will want to identify any such terms early and craft a strategy to address them.