Here’s our take:

In our experience, many M&A deals rise or fall on intellectual property (IP) matters. IP includes technology. But IP also includes brand names and customer goodwill in low tech and high tech.

Typical problems:

It is possible the technology doesn’t yet work. It is also possible there is insufficient legal protection against IP piracy.

And it is possible that an IP M&A deal may result in a potential monopoly / antitrust situation.

It is even possible that R&D personnel want to retire or move on.

All these are serious issues where they apply.

The real issue – tax:

In our experience, the biggest IP M&A issue by far has proven to be tax! If advisors don’t know this, they shouldn’t be advising.

In any M&A deal, the sellers usually prefer to sell shares in their company for tax reasons – there is only one layer of tax on a share sale which the shareholders pay.

But the buyer usually prefers to buy the assets to help avoid taking on hidden liabilities. In an asset sale, the selling company pays tax on the asset sale gain, then pass the net gain to the shareholders who pay a second layer of tax.

So if the sellers have something the buyer really needs, the sellers may succeed in selling shares not assets for tax reasons. 

But once the buyer group buys the company may want to transfer IP to an asset holding company, sometimes offshore. 

This is legitimate if it is part of a legitimate transfer pricing policy. Many US multinational groups have legitimate offshore asset holding companies.

The problem is that shifting IP out of a newly acquired tech company to an offshore asset holding company triggers another round of capital gains tax (and perhsps also VAT / sales tax?). This is on top of tax paid by the selling shareholders. 

The US Internal Revenue Code Section 338 helps US groups avoid a second round of US tax. But most other countries don’t have an equivalent section. 

Many IP M&A deals falter over this tax issue if the IP was held outside the US. And US groups may be unaware that other countries lack a Section 338 section. The result: surprise, upset, recriminations.

Possible solutions to consider:

Advisors must be aware of the IP double tax traps and warn M&A parties on both sides accordingly.

The non-US seller company could perhaps to avoid selling its IP but instead consider some or all of the following possibilities:

1. Merely license the IP in return for royalties (which will of course be taxable).
2. Enter into a cost sharing joint venture.
3. Develop a new generation of technology via the offshore IP holding company.
4. Possibly structure the M&A deal in a way that helps the tax authority of the country concerned apply a sort of Section 338 approach. 

In conclusion:

IP taxation issues require serious consideration in good time