What to consider in a tech acquisition due diligence in Bulgaria?

Products and IPRs

In Bulgaria copyrights in software developed by company’s employees belong to the company-employer, if created within the employment relationship and absent agreement with the employee to the contrary. Similar rules apply to inventions, but the company has a 3-month period upon notification to apply for a patent if it wants to preserve its rights.

Dissimilarly, copyrights in software developed by a contractor belong to the contractor unless the contract stipulates otherwise.

In this context, a legal due diligence should search for and identify potential third-party rights and claims related to IPRs in the target’s products (e.g. for (joint) authorship, additional remuneration, etc.), and confirm whether the target company has properly protected its IPRs. This requires a full review of among others:

• employment contracts, job descriptions outlining the concrete functions and tasks of the relevant key employees/developers;
• agreements and arrangements with independent developers (contractors) and their subcontractors;
• registrations and applications for registration of IPRs of the target company, including patents, trademarks, designs, domains, etc.;
• records in the public registries such as the state registers of trademarks and patents, the central register of debtors and court registers for pending enforcement and insolvency proceedings, etc.;
• any pending or threatening litigation or claims related to the target’s products/IPRs, and
• material contracts with suppliers, customers and partners/distributors, i.e. license agreements, SaaS agreements, master services agreements, service level agreements, etc.

Open-source software

Bulgarian tech companies could have implemented open-source software (OSS) in their products. OSS licenses vary significantly and some of them could raise red flag issues for the marketability of the target company’s product(s). Failure to identify OSS related issues at the due diligence stage could have negative impact post-closing, such as having to release the source code of an acquired proprietary product (e.g. under a copyleft license) or reengineering the product post-acquisition, etc.

Third-party IPRs

The due diligence exercise should identify the third-party IPRs, which are required or necessary for the conduct of the business of the target company and include a review of the relevant license and support/maintenance agreements.

IT infrastructure / technology assets

The due diligence of technology assets includes review of all lease/purchase contracts for IT hardware used by the company and any related maintenance contracts, warranties and potential encumbrances.  

Regulatory

In addition to industry-specific licenses, registrations and approvals, a key regulatory aspect of any tech M&A due diligence is data privacy compliance. Identifying at an early stage what personal data the target company collects and uses in its business activity should be a priority. The key aspects include:

• assessment of the legality of the data processing operations, i.e. existence of appropriate legal grounds, compliance with data processing principles etc.;
• review of data privacy policies, privacy notices, processing records and other documentation such as data processing agreements with third parties;
• review of information about data subjects’ requests, data breaches and investigations, and
• close cooperation and regular follow up with the acquirer’s tech due diligence team to verify, if privacy policies are implemented in practice.

Corporate

Typical key corporate issues for a legal due diligence involving a tech company established and operating in Bulgaria include:

• shareholders’ agreements, special and preemption rights and limitations on share transfers in the company’s statutes;
• encumbrances and third-party rights and claims over the target’s shares (e.g. option rights), and
• top management/key personnel management contracts, incentives and bonuses.

The information and opinions contained in this article are provided only for information purposes and do not constitute a legal advice under Bulgarian or any other law and should not be relied or acted upon as such.