Acqui-Hires And Shutterings

Microsoft has just acquired enterprise software startup BlueStripe Software and "shuttered" it: a process not uncommon in the software development community whereby the acquired target company ("Target") is shut down following the acquisition, its team of developers absorbed into the business of the acquirer, and its products discontinued and rebuilt under the purchaser's badge.

There are many opportunities out there today for corporate acquirers to snap up talented development teams and integrate them and their disruptive technologies into their product offering, and subsequently liquidate Target, thereby avoiding taking on the liabilities of the legacy business. But what are the legal issues faced with structuring such an acquisition, and how can an effective integration be achieved?

Is an "Earn-Out" appropriate?

One pricing mechanism adopted by a buyer to ensure it does not overpay for an asset is to make part of the purchase price subject to an earn-out, conditional upon the performance or profits of Target over a given period of time. Shuttering the newly acquired company however poses an obvious obstacle: how can you measure the performance or profits of an entity that no longer exists? That's not to say it is not possible to deploy an earn-out style structure, but careful thought needs to be had. It may be possible to use revenue based performance criteria, whereby the revenue of the purchaser's group which is directly attributable to Target's products or solutions to be sold by the purchaser's group is tracked and tested against a target threshold. If this is desirable, does the purchaser have the accounting software and systems to accurately track such revenue as distinct from revenues it would have generated in any event, and how do the parties agree what or what is not "directly attributable"?

Employees as Sellers

If the core asset being acquired is a team of skilled developers, then at the forefront of the purchaser's mind will be the retention of those staff in the purchaser's group going forwards, and incentivising them efficiently so that they stay. A number of issues can arise however where those employees have also been Sellers under the share purchase agreement, either as a result of being direct shareholders in Target from the outset (i.e. Founders), or holders of EMI options which have been exercised on completion of the purchase.

One such issue can arise where the parties are negotiating the consideration and...