Digital Media Law Seminar Internet M&A

1. Digital Media Law SeminarInternet M&A Mike Johnson Deputy GC

2. When I was in your chair… • Grades came in envelopes • Who uses a laptop? • Got my 1st email address • .com *everything*

3. [important disclaimer] • [legalese]

4. So what are we going to talk about? • Internet M&A landscape • Types of deals & how they happen • Ts & Cs • Focus on contracts, privacy policies& regulatory environment • Effective lawyering & the Internet • Q&A

5. Internet M&A landscape • Tech M&A turning a corner? • 2015 was sloooooowww for tech M&A, but 2016 saw some activity, esp. for public targets • MSFT + LNKD, VZ + YHOO, TWTR rumors • … but what about the “unicorns”? • Also lots of smaller deals for teams or products, including fire sales • Valuation remains a key issue • “you know what’s cool? … $1B$10B $20B… $70B!” • race to $1B+ partially enabled by recent entrants like institutional investors & sovereigns, also strategics • Rapid valuation climb = narrow M&A window • PR value of $1B+ is great, but may put companies in a trap- too expensive to sell, lacking fundamentals to justify value to public markets for many years, if ever • few acquirers play at this level & they seem content to wait • hard to “unsee” a stock price • CSCO + AppDynamics- outlier or harbinger?

6. Internet M&A landscape • Who are the participants? • entrepreneurs… an acquirer’s competition is often DIY • acquirers • serial deep pockets: Facebook, Google, Microsoft, Amazon, Apple, Salesforce, Oracle • emerging: Uber, Snapchat, [?] • foreign: Tencent, Baidu • private equity (PE) firms (Silver Lake, etc.) • investors/owners • angels and the Y combinators • VCs • founders and employees • strategics and institutions

7. Types of deals • 3 major categories • acqui-hire or “talent” deal • asset acquisition • merger

8. Acqui-hire • Always ask: why are we doing this? • Offer letters, sometimes more • Sometime you need to compensate the target company as well • Take on nothing but people • Taxes matter… • …and sometimes immigration too • Retention, retention, retention! • Fast, simple, efficient • Examples: Hot Studio, Branch Media

9. Asset deal • When you just want some stuff (and usually some people) and not a lot of baggage • But *can* they sell? • And what happens to what and who is left behind? • Can be easier to execute if the company is not too complicated (can also be a real PITA) • Beware successor liability • Taxes are a problem, though • Examples: Atlas, Beluga, AOL patents

10. Mergers • When you want (or have) to own it all • Diligence is critical • Retention also critical • Most complicated for buyer (generally) • But, can also avoid entanglements on contracts and other rights that encumber asset deals (more on that later) • Examples: WhatsApp, Instagram, Oculus

11. Stages of a deal • Sourcing - everyone (esp. corpdev) • Diligence - business team + legal • Structuring - legal + corpdev • Term Sheet - legal + corpdev • Execution - legal + corpdev+ business team • Integration - legal + corpdev + business team

12. Typical timeline • Sourcing - whenever • Diligence - days to months • Structuring - depends • Term Sheet - hours (yes, hours) to weeks • Execution - days to weeks • Closing - immediate to months or year+ • Integration - days to months to years

13. What matters in a deal • Alignment of vision and culture • People & IP • always lock up key people first • potential IP infringement is the costliest risk in almost every deal • Certainty • Liability and Risk • Preservation of the business, protection of relationships

14. Due diligence • Does the product work? • Who are your key people? • Do you own your IP? • Can you transfer your assets? • contracts • information • Skeletons in the closet? • Key recurring issues to vet: privacy, FCPA

15. What do acquisition agreements accomplish? • Structure a deal (duh) • Allocate risk • Document additional agreements

16. What if you bail on the deal? • Consider alternative structures • strategic investment • partnership • Build it yourself? • be mindful about NDAs and non-solicits • Always remember to tend to your reputation

17. Structure of a typical acquisition agreement • Article I- what’s the deal? • Article II- who is the seller? • Article III- who is the buyer? • Articles IV & V- what else are we doing? • Article VI- when do we close? • Article VII- who insures what? • Article VIII- how to we unwind this? • Article IX- blah blah blah

18. Key elements of an acquisition agreement • Reps & warranties • capitalization • IP • finances • liabilities • contracts & commitments • people • compliance • Disclosure schedules • everything that is not true about reps

19. Key elements of an acquisition agreement • Covenants • what do we need to do before closing? • what can a seller do while under contract? • people (compensation) • regulatory • publicity • taxes

20. Key elements of an acquisition agreement • Closing and termination • what needs to happen before acquisition executes? • contract assignments • fixing problems • key people in their chairs • stockholder approval • regulatory approval • when can parties walk? • MAC/MAE • drop-dead date

21. Focus on contract assignments • Important to know you have what you paid for • Avoid giving veto power to third parties • Can be key condition of deal (sellers hate this) • Leases are usual suspects • Inbound licenses are thorniest issues

22. Contract assignments • “This Agreement may not be assigned without the prior consent of the parties hereto.” vs. • “Assignments or transfers of this agreement are prohibited without the prior consent of the parties hereto, which consent shall not be unreasonably withheld. For purposes of this section [x], a change of ownership or control of a party shall be deemed to be an assignment.”

23. Contract assignments • “This Agreement may not be assigned without the prior consent of the parties hereto.” vs. • [silence] vs. • “Assignments or transfers of this agreement are prohibited without the prior consent of the parties hereto, which consent shall not be unreasonably withheld, conditioned or delayed. . For purposes of this section [x], a change of ownership or control of a party shall be deemed to be an assignment”

24. Focus on privacy policies • Key issue for all companies in our space • Relevant to most deals, and can drive outcomes of structure as well as future operations

25. Privacy policies • Critical charter document of internet cos. • What do you collect when I use your product? • What can you do with it? • How can I control it? • Who do you share it with?

26. More privacy policies • “If [Company] becomes involved in a merger, acquisition, or any form of sale of some or all of its assets, we will provide notice before personal information is transferred and becomes subject to a different privacy policy.” vs. • “If all or part of the company is sold, merged or otherwise transferred to another entity, the information that you have provided at this site may be transferred as part of that transaction. However,[Company] will take reasonable steps to assure that such information is used in a manner consistent with the [Company] privacy policy under which it was collected.”

27. And more privacy policies • “If [Company] should ever file for bankruptcy or merge with another company, we may transfer the information you provide to us on this to the company with whom we merge.” vs. • “[Company] may sell, transfer or otherwise share some or all of its assets, including the information identified in this Privacy Policy, in connection with a merger, acquisition, reorganization or sale of assets or in the event of bankruptcy.”

28. Focus on regulatory environment • Becoming a hot(ter) topic, especially in Europe • also China • Competition laws: know them, but really know who knows them well • Intersection of other regulators and merger control • Make sure your clients are educated

29. What else do you need to know? • Do it right the first time • assume your company will be sold • IP • capitalization • contracts • policies • cleanup happens, but an ounce of prevention is always better than a pound of cure

30. What else do you need to know? • Focus on communication, always • NYT rule for emails, messages, etc. • “never write anything down, and never take any pictures” –somebody at Hastings in 1998 • a/c priv: not always what it seems, but can be essential • smiley faces… don’t forget the smiley faces. • one-screen messages • don’t forget your role as a professional

31. What else do you need to know? • Business-first lawyers often succeed in M&A • when done right, it’s 1+1=3 • don’t be a scorekeeper • but don’t forget, someone is always keeping score • always ask: • What are we trying to accomplish as a business? • Why does this matter to our goals? • My own rule: why should Mark care?

32. What else do you need to know? • Relationships and reputation are everything • The Internet is about more than just the Bay Area… • …but this is ground zero for tech and Internet deals • very small legal community • what you do on one deal will be thrown in your face on the next one (and vice versa)

33. What else do you need to know? • Firms v. in-house counsel • know your roles, appreciate your limits • seek experts when you don’t know • stay educated (esp. in-house…) • network, even if you hate it

34. Questions?