Reboots and Restarts: Understanding Tech M&A Transactions in Asia Pacific

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1 Reboots and Restarts: Understanding Tech M&A Transactions in Asia Pacific

2 Table of contents FOREWORD 3 INTELLECTUAL PROPERTY 4-20 How would a buyer typically conduct due diligence on IP assets? What is the typical process for each category of IP right available?... 4 Where the IP asset does not have protection (eg, a trade secret/confidential secret which does not fall within any of the categories mentioned in question 1), how can a seller/ buyer protect itself in the due diligence process? Have the methods above been successful in providing sellers/buyers with a sufficient level of comfort to proceed with the deal?...18 DEAL STRUCTURING Given the volatile nature of the IP/technology market, how does the structure of IP/technology deals differ from deals in other sectors? What are some of the key post-integration risks for technology firms and how are these different? FOREIGN INVESTMENT CONSIDERATIONS Are there any foreign participation restrictions in the technology/ip sector? Where equity conditions exist, are there any typical investment structures used to circumvent these restrictions? Do offshore structures work and are they recognized? EMPLOYMENT Given the highly personalized nature of technology targets, how can buyers retain key employment? How can buyers prevent employees from starting up a competing entity/developing a competing product? ABOUT US 47 CONTACTS 48 REGULATORY AND LICENSING Are there any licenses or approvals required to operate, develop, acquire or transfer IP/IT assets and/or share sales? Are the licenses or approvals transferable or assignable for these assets and/or share sales? If not, are they difficult to obtain?

3 Foreword Technology continues to be a catalyst for change in key markets across Asia Pacific. This is evident in the burgeoning number of deals categorized under the tech banner. Among all M&A deals announced in 2016, 15% were acquisitions of technology companies accounting for more than all other sectors and totaling roughly USD 125 billion, according to Mergermarket. Some of the macro drivers in the industry worth noting include: Rise of the Internet of Things - The convergence of the physical and digital world dictates innovation today. IoT could create up to USD 11 trillion in economic value annually, according to McKinsey. Automation - Innovative platforms are redefining the way things are done in almost all sectors, leading dealmakers to take action whenever there is an opportunity. Big data - Businesses of all sizes produce data and should be collecting it at the same time. Market and customer intelligence is crucial to operations and dictates how far business goes. Technology will continue to drive M&A in the years to come, emphasizing the need to identify the challenges that lie ahead. To address these rapid innovation-led transformations, this guide provides an overview of key legal considerations when doing a tech M&A deal in Asia Pacific. In particular, our lawyers have answered some common questions in the following areas: Intellectual property Deal structuring Regulatory and licensing Foreign investment considerations Employees Ultimately, the guide will equip readers with relevant insights into the M&A battleground, made even more challenging in the technology space. 3

4 1 How would a buyer typically conduct due diligence on IP assets? What is the typical process for each category of IP right available? INTELLECTUAL PROPERTY AUSTRALIA Due diligence is simplest in relation to registered intellectual property assets, being trademarks, patents and registered designs. Similar diligence can also be conducted in relation to allied rights, such as registered company, business and domain names. These searches provide the following types of information: Trademarks Designs Patents Searches of the trademarks register reveal the goods and services for which the trademark applies, any disclaimers that apply, details of the owner, and the history of the registration process (including any previous registered owners). It may also reveal details of registered users. Unregistered trademarks are also subject to certain protections under consumer law, and due diligence enquiries can identify the use of unregistered trademarks. Due diligence in relation to trademarks can also identify the use of the assets in corporate and business names (searchable through a publicly available database), in domain names (searchable through a private database, although the accuracy cannot be guaranteed) and in social media identifiers (identifiable through the use of social media sites). Searches of the design register will reveal drawings showing details of the registered design, as well as details of the designer, the registered owner, the extent of the design right and the status. Australian law provides for two types of patents: a standard patent and an innovation patent. A search of the patent register will reveal drawings and a full specification of any patent and its operation, as well as details of the inventor, the registered owner and the status. Extended diligence enquiries can include assessment by external patent experts of the validity and enforceability of a patent being acquired, and/or "freedom to operate" enquiries about the likelihood that acquired assets will infringe the rights of existing patent applications or registrations. Due diligence can also be carried out in relation to intellectual property assets not capable of registration, including copyright, knowhow, confidential information, trade secrets and rights in databases. The diligence exercise should, via requests for information made to the seller: Identify the assets that are of importance 4

5 1 How would a buyer typically conduct due diligence on IP assets? What is the typical process for each category of IP right available? (cont.) INTELLECTUAL PROPERTY AUSTRALIA (cont.) CHINA HONG KONG Determine how the assets have been created, to assess the seller's rights of ownership over the assets Determine the extent to which IP assets have been disclosed to third parties to determine who may possess or have a right to use such assets China's legal system generally provides protection of patents, trademarks, copyright and trade secrets. The typical processes for conducting due diligence into these categories of IP rights are set out below. Patents (inventions, utility models, and designs) Identify relevant patents by liaising with the target Conduct proprietorship searches on the State Intellectual Property Office's (SIPO) register to verify ownership of patents, ensure that no applications or registrations were excluded from the asset schedule, and ensure that all relevant patents are held by the target Conduct searches to confirm maintenance and annuity fee status and to determine whether there are security interests, assignments, license recordals and any other encumbrances registered against the patents Review employment and consultancy agreements to confirm obligations of inventors to assign patent rights Review all license agreements and other agreements relating to the patents, eg, to confirm duration and whether termination will be triggered by the acquisition Optional expanded due diligence: review prosecution history and arrange validity searches to assess the scope and validity of the target's patent portfolio; and conduct freedom to operate search and analysis to identify key infringement risks Trademarks Identify relevant trademarks by liaising with the target Conduct proprietorship searches on the PRC Trademark Office's register to verify ownership of trademarks, ensure that no applications or registrations were excluded from the asset schedule, and ensure that all relevant trademarks are held by the target 5

6 1 How would a buyer typically conduct due diligence on IP assets? What is the typical process for each category of IP right available? (cont.) INTELLECTUAL PROPERTY CHINA HONG KONG (cont.) Conduct searches to confirm validity/status of the trademarks and any imminent renewal deadlines, and to ascertain whether there are security interests, assignments, license recordals and any other encumbrances registered against the trademarks Review all license agreements and other agreements relating to the trademarks, eg, to confirm duration and whether termination will be triggered by the acquisition Optional expanded due diligence: conduct trademark searches to determine if third parties have prior rights to any unregistered trademark and to assess possible infringement risks Copyright Identify works and all derivative works of particular importance by liaising with the target For copyright that has been registered, conduct searches on the relevant copyright database to confirm registration and ownership Review the target company's files relating to creation of works important to the business Review employee, works-for-hire agreement, assignment, consultant and independent contractor agreements to confirm obligations of authors to assign copyright in relevant works Review all license agreements and other agreements relating to the copyright works, eg, to confirm duration and whether termination will be triggered by the acquisition Trade secrets Identify trade secrets and knowhow used in the target's business Identify key employees involved in R&D and other activities that generate IP (including knowhow) Review confidentiality and non-compete agreements Review policies and procedures on confidentiality and security measures used 6

7 1 How would a buyer typically conduct due diligence on IP assets? What is the typical process for each category of IP right available? (cont.) INTELLECTUAL PROPERTY INDONESIA IP There are seven types of IP rights in Indonesia: trademarks and geographical indication, copyrights, patents, industrial designs, trade secrets, layout design of integrated circuits, and plant variety. The due diligence process is started by identifying IP rights relevant to the products and services offered by the target company. Due diligence on each IP asset typically covers searches in each of the relevant IP offices under the Directorate General of Intellectual Property Rights (such as the Trademark Office, Copyright Office, Industrial Design Office, and Patent Office) to verify the data on the IP assets, which would be essential to find any similar registered IP (such as trademarks) in the name of third parties, which may create an obstacle for the commercial use at a later stage. Trademarks For registered IP such as trademarks, patents and industrial designs, the assignment of rights should be recorded at the Trademark Office. Assigning trademark patent and industrial design rights can only be done once they are registered. Nevertheless, specific for trademarks, the Indonesian Trademark Law allows pending trademark applications filed after 25 November 2016 (the enactment date of the new Indonesian Trademark Law) to be carried out. Copyrights Under the Indonesian Copyright Law, copyright occurs upon fixation and not registration. Although the Indonesian Copyright Law provides a recordal mechanism for copyright owners to record their work at the Copyright Office, it is merely administrative in nature and does not create title or ownership. If the copyright is recorded at the Copyright Office, the Indonesian Copyright Law requires the assignment of such copyright to also be recorded at the Copyright Office. JAPAN Patents, utility models, designs and trademarks must be registered with the Japan Patent Office to be protected as an IP right. Therefore, the buyer typically obtains copies of registry and gazette entries from the Japan Patent Office to check the status of a registration, existence of a registered license, whether any opposition, cancellation action or invalidation action has been filed, and whether any mortgage is registered with the registration. There is also a special registration system for circuit layout and agricultural variety. Such registrations can be checked by obtaining copies of the registry from the competent registration body. For copyrights, there is no registration system. Therefore, confirmation of the existence of the right should be made by reviewing agreements concerning creation of the copyrightable work. 7

8 1 How would a buyer typically conduct due diligence on IP assets? What is the typical process for each category of IP right available? (cont.) INTELLECTUAL PROPERTY JAPAN (cont.) Pending litigation or disputes in relation to the purchaser's IP rights must also be checked. Because courts do not disclose information concerning pending litigation, the buyer needs to rely on the seller's disclosure and representation on all outstanding or anticipated litigation or dispute. Due diligence on open source software that the seller uses for its products or services is also an important issue because non-compliance of open source software terms may trigger copyright infringement action. Valuation of IP assets of the target company is critical to the buyer's assessment. As there is no standardized valuation method, it is important to carefully review the integrity of the valuation methodology in the particular transaction. MALAYSIA In general, the Malaysian legal system provides various levels of protection for five categories of IP rights: patents, trademarks, copyrights, registered designs, and confidential information and trade secrets. In addition to the typical due diligence process (eg, searching on registers, assessing contracts relating to IP, assessing the use of IP), specific steps in relation to certain types of IP protection can be taken during the due diligence process: Patents A patent review is typically undertaken by investigating a patent's development process to identify and evaluate any defects that may be detrimental to the patent. If appropriate (eg, where the technology is crucial), the interested party may commission a patentability study. It is important to identify, to the fullest extent possible, to the extent possible, whether products incorporating the patent have been or are being sold and, if so, when the product was first sold so that, in the event of a successful transaction, the buyer can pre-empt enforcement procedures. Trademarks Trademarks are protected regardless of whether they are registered or unregistered; however, each status affords a different level of protection. Unregistered trademarks only merit common law protection and are geographically based. As such, it is important to determine the geographic area of commercial exploitation. The buyer may consider commissioning a trademark search report to determine if other parties have superior or co-existing rights to the unregistered trademark in the event that the buyer intends to file an application to register any unregistered trademarks. 8

9 1 How would a buyer typically conduct due diligence on IP assets? What is the typical process for each category of IP right available? (cont.) INTELLECTUAL PROPERTY MALAYSIA (cont.) MYANMAR Registered designs An individual accused of infringing registered designs can defend himself/herself by proving that he/she was not aware, and had no reasonable means of making himself/herself aware, of the existence of the registered design in issue. As such, it is important for potential buyers within the region to ascertain whether there are any such users using the mark without being aware of the registration of the design. There is only one IP-specific law currently in force the Copyright Act of No copyright registry exists in Myanmar, and therefore no search exists for copyrighted works in Myanmar. No official trademark search exists in Myanmar. However, as a matter of practice, trademark owners register their trademarks at the Office of the Registration of Deeds, and thereafter publish cautionary notices in local newspapers. Various firms have been collecting these cautionary notices for several decades. These firms can be engaged to search their private records to see if a cautionary notice has been published. However, these searches are not official and not conclusive. Companies often keep their own record of the registration of IP rights and publication of cautionary notices in newspapers, which are produced for inspection. PHILIPPINES The Philippine legal system provides protection of differing levels for three main categories of IP rights: patents (including industrial designs and utility models), trademarks and trade names, and copyrights. Trademark searches can be done electronically. Other forms of IP (copyright and patents) require manual searches to be comprehensive. In addition to the typical due diligence process (eg, searching on registries, assessing contracts relating to IP, assessing the commercial and other use of IP), specific steps in relation to specific measures can be taken during the due diligence process: Patents There may be many valid and existing patents that do not apply in the market. It is important to identify whether products are sold or applied in the market to assess the true value of the patent. If the buyer would like to review the development process of a patent, the express consent of the patent owner is required to access the relevant Intellectual Property Office (IPO) records. 9

10 1 How would a buyer typically conduct due diligence on IP assets? What is the typical process for each category of IP right available? (cont.) INTELLECTUAL PROPERTY PHILIPPINES (cont.) Trademarks and trade names Generally, trademark rights are obtained through registration, under the IP Code that became effective in The law abandoned the first-to-use system and adopted the first-to-file system in obtaining trademark rights. However, trademarks that were used under the old law and that remain unregistered may arguably be entitled to trademark protection under the principle that rights accrued and vested while a statute was in force may not be impaired by the repeal of the said statute. Unregistered marks that may have been in use in the market for a considerable time to obtain goodwill, which is a separate property right entitled to protection under Philippine law, may also be protected through unfair competition laws. To determine whether an unregistered mark has attained goodwill, market surveys may be conducted to determine the reach and reputation of the marks. Under local law, trade names are protected in the same way as trademarks. However, under the IP Code, trade names need not be registered in order to be protected. Copyrights Copyrightable works are protected from the moment of creation. However, the Philippines has a copyright deposit system, wherein copyright owners may obtain copyright registration certificates for deposited works. These certificates are usually requested as additional proof of copyright ownership. Due diligence can also be carried out in relation to intellectual property assets not capable of registration, via requests for information made to the seller, to: Identify the assets that are of importance Determine how the assets have been created, to assess the seller's rights of ownership over the assets Determine the extent to which IP assets have been disclosed to third parties to determine who may possess or have a right to use such assets 10

11 1 How would a buyer typically conduct due diligence on IP assets? What is the typical process for each category of IP right available? (cont.) INTELLECTUAL PROPERTY SINGAPORE The Singapore legal system provides protection of differing levels for five categories of IP rights: patents, trademarks, copyrights, registered designs, and confidential information and trade secrets. Patents, trademarks and registered designs are registrable IP rights in Singapore. Due diligence over the registrable IP rights will typically begin by doing searches on the public registers of patents, trademarks and designs. This exercise is to ascertain if the target owns any applications or registrations in Singapore, followed by a review of the relevant documents (such as contracts and correspondence) to check if any patentable inventions, trademarks or designs have been created or used by the target but are not yet registered. The review of patents or patentable inventions will typically be undertaken by an investigation of its development process to identify and evaluate patent defects (if any), ownership as well as any prior disclosure or use which the target has made. Reviewing trademarks will involve an examination of the scope of the target's business and the marks used to ascertain if the target's brand is adequately protected by trademark registrations. Unregistered marks may also be protected as well-known marks or via the common law tort of passing off. In relation to unregistrable IP rights such as copyrights and confidential information/trade secrets, the due diligence review will focus on the targets' contracts with external parties (such as consultants and contractors), employment contracts and internal policies (such as the employee policy and IP management policy) to check the vesting of ownership of copyrights as well as the adequacy of protection over copyrights and confidential information/trade secrets. TAIWAN In addition to the typical due diligence process (eg, searching on registers, assessing contracts relating to IP, assessing use of IP), specific steps can be taken in relation to certain types of IP protection as part of the due diligence process: Patents Review of patents will typically be undertaken by investigating its prosecution history to identify and evaluate (if any) defects that may be detrimental to the patent rights. If appropriate (eg, where the technology is crucial), the interested party may commission a patentability study. It is important to identify whether products incorporating patented features have been or are being sold and what the corresponding dates of the products' first sale are so that, in the event of a successful transaction, the buyer is able to pre-empt the enforcement procedures. 11

12 1 How would a buyer typically conduct due diligence on IP assets? What is the typical process for each category of IP right available? (cont.) INTELLECTUAL PROPERTY TAIWAN (cont.) Trademarks In general, only registered trademarks will be protected under Taiwan's Trademark Act. An unregistered trademark can be protected by the Fair Trade Act provided it is distinctive and famous. However, there is no database for searching unregistered rights. A trademark license is not legally required to be recorded with the trademark authority, and licensing may raise some issues when using the trademark. Thus, for acquiring a company, it is suggested to engage an independent third party to conduct the due diligence process, use non-disclosure agreements and stage a due diligence process. Due diligence can also be carried out in relation to intellectual property assets not capable of registration, including copyright, knowhow, confidential information, trade secrets and rights in databases. The diligence exercise should, via requests for information made to the seller: Identify the assets that are of importance Determine how the assets have been created, to assess the seller's rights of ownership over the assets Determine the extent to which IP assets have been disclosed to third parties to determine who may possess or have a right to use such assets THAILAND Generally, a buyer typically conducts due diligence on registrable IP rights which are searchable, eg, trademarks and patents. Further, a buyer would assess contracts relating to IP and assess the use of IP by the seller. Due diligence is generally conducted in relation to registered intellectual property assets, including trademarks, patents and registered designs. Similar diligence can also be conducted in relation to allied rights, such as registered company names, business/trade names and domain names. These searches provide the following types of information: Trademarks Searches of the trademarks register (through a publicly available database) reveal the status of trademarks (eg, the owner of the registered trademark, the application filing date, the products for which the trademark is registered and the expiry date of the registration). 12

13 1 How would a buyer typically conduct due diligence on IP assets? What is the typical process for each category of IP right available? (cont.) INTELLECTUAL PROPERTY THAILAND (cont.) The right to use trademarks that are registered in Thailand may be licensed or transferred to others. However, in order for the license or the transfer to be enforceable, it needs to be in writing and registered with the Department of Intellectual Property. As such, the buyer can seek further evidence of registration of the licensed/transferred trademarks from the Department of Intellectual Property. Patents/Registered designs Searches of the patent/design register (through a publicly available database) reveal the details of patents/designs (eg, the applicants of the patents/designs, the inventors, summaries of inventions, and claims). Similar to trademarks, the license agreement or transfer of patent must be made in writing and registered with the Department of Intellectual Property. As such, the buyer can seek further evidence of registration of the licensed/transferred patents/designs from the Department of Intellectual Property. Copyright The law does not provide for registration of copyrights or registration of copyright assignments or licenses. However, it is possible to have a work "recorded" (but not "registered") with the Department of Intellectual Property. This record can then be used as a supporting document if the work becomes the subject of a dispute. Searches of copyright records (through a publicly available database) reveal the details of copyrighted work (eg, the author of the work, copyright owner and type or work). VIETNAM Vietnamese law provides for the protection of different categories of IP rights such as copyrights, patents, industrial designs, trademarks and trade secrets. A typical due diligence process has the objective of identifying the seller's rights and the risk of infringement of third parties' rights: Copyrights Assess the creation of the copyrighted work to identify the authors of the works Review contracts with independent contractors on the creation of works made for hire to identify the authors and the copyright holders 13

14 1 How would a buyer typically conduct due diligence on IP assets? What is the typical process for each category of IP right available? (cont.) INTELLECTUAL PROPERTY VIETNAM (for cont.) Trademarks Conduct searches on registers to identify registered, unregistered, pending or expired trademark registrations and the owners of the registrations Patents Review contracts relating to the licensing or assignment of the trademarks Assess the use of registered trademarks to evaluate the risk of the trademark being cancelled for non-use Conduct searches on registers to identify registered, unregistered, pending or expired patents and the holders of the patents Review contracts relating to the licensing or assignment of the patents Assess third parties' use of the patents to identify any right of prior use. Under Vietnamese Law on Intellectual Property, those who use an independently created invention before the publication date of the application for registration of that invention may continue using that invention after the protection title is granted) Industrial designs Conduct searches on registers to identify registered, unregistered, pending or expired industrial designs and the holders of the industrial designs Review contracts relating to the licensing or assignment of the industrial designs Assess third parties' use of the industrial designs to identify any right of prior use. Under Vietnamese Law on Intellectual Property, those who use an independently created industrial design before the publication date of the application for registration of that industrial design may continue using that industrial design after the protection title is granted Trade secrets Assess the trade secrets to identify whether they meet the requirements of trade secrets, ie, they: (i) are not known to the public, (ii) give business advantages to the owner, and (iii) are managed as a secret (eg, stored in a locked safe) Review non-disclosure agreements and other contracts, as well as the company's policy, if any, relating to trade secrets All disputes relating to the IP asset should also be reviewed as part of the due diligence process. 14

15 2 Where the IP asset does not have protection (eg, a trade secret/confidential secret which does not fall within any of the categories mentioned in question 1), how can a seller/ buyer protect itself in the due diligence process? INTELLECTUAL PROPERTY AUSTRALIA A buyer can seek to protect itself by: Making enquiries with the seller Reviewing contracts and confidentiality agreements that permit third parties to use the asset Questioning key employees who deal with the relevant asset Seeking warranties from the seller Seeking post-transaction restrictions on the seller and key employees who do not transfer with the business A seller can seek to protect itself by conducting a thorough review of the creation, use and handling (including licensing) of that asset by the business to identify defects that may be detrimental to the assets. CHINA HONG KONG The seller can protect itself by: Relying on confidentiality agreements to minimize the risk of unauthorized disclosure and misuse of the information disclosed in the due diligence process Limiting the disclosure and negotiating for incremental or staged disclosure in the due diligence process INDONESIA JAPAN MALAYSIA When carrying out due diligence for trade secrets/confidential information, parties mainly use non-disclosure agreements. Parties may also engage an independent third party to assist in the due diligence process, such as to verify the security measures used by the seller to maintain the secrecy of information. This is essential since, under the Indonesian Trade Secret Law, information is considered a trade secret only if the seller takes extensive measures to keep the information confidential. Under Japanese law, a trade secret is protected under the Unfair Competition Prevention Act only when it is (i) technical or business information useful for the business, (ii) not known to the public, and (iii) managed as a secret (eg, stored in a locked safe). Therefore, the buyer usually confirms what actions the seller takes so that the trade secret is actually protected by law. Methods of protection for both the buyer and the seller during the due diligence process for technology/ip assets vary. Potential avenues include engaging an independent third party to conduct due diligence, using non-disclosure agreements and conducting a staged due diligence process. 15

16 2 Where the IP asset does not have protection (eg, a trade secret/confidential secret which does not fall within any of the categories mentioned in question 1), how can a seller/ buyer protect itself in the due diligence process? (cont.) INTELLECTUAL PROPERTY MYANMAR This issue is not well developed in Myanmar; however, a buyer/seller can attempt to protect itself through the following: Third-party due diligence. It is possible to consider engaging an independent third party to conduct the due diligence process, use non-disclosure agreements and stage a due diligence process. Targeted due diligence. A buyer can seek to protect itself by making enquiries with the seller, reviewing contracts and confidentiality agreements that permit third parties to use the asset, questioning key employees who deal with the relevant asset, seeking warranties from the seller, and seeking post-transaction restrictions on the seller and key employees who do not transfer with the business. Product life cycle review. A seller can seek to protect itself by conducting a thorough review of the creation, use and handling (including licensing) of the asset by the business to identify any defects that may be detrimental to the asset. PHILIPPINES A buyer can seek to protect itself by: Making enquiries with the seller Reviewing contracts and confidentiality agreements that permit third parties to use the asset Questioning key employees who deal with the relevant asset Seeking warranties from the seller Seeking post-transaction restrictions on the seller and key employees who do not transfer with the business A seller can seek to protect itself by conducting a thorough review of the creation, use and handling (including licensing) of the asset by the business to identify defects that may be detrimental to the assets. Although not commonly used in the Philippines, a potential measure that may be explored would be to engage an independent third party to conduct the due diligence process for these types of assets. SINGAPORE Potential avenues include engaging an independent third party to conduct the due diligence process, who will report the outcome of the due diligence checks (eg, whether there are gaps in the way the seller's trade secrets/confidential information is managed or protected) without disclosing the details of such confidential information or trade secrets to the potential buyer until the seller agrees to make such disclosures, using non-disclosure agreements and staging a due diligence process. 16

17 2 Where the IP asset does not have protection (eg, a trade secret/confidential secret which does not fall within any of the categories mentioned in question 1), how can a seller/ buyer protect itself in the due diligence process? (cont.) INTELLECTUAL PROPERTY TAIWAN THAILAND Methods of protection for both the buyer and seller during the due diligence process for technology/ip assets have yet to be substantially explored. Potential avenues include engagement of an independent third party to conduct the due diligence process, use of nondisclosure agreements and a staged due diligence process. For IP assets that are not registrable and the buyer cannot conduct a search to verify the ownership of the same, the seller would represent and warrant to the buyer of its IP ownership and provide indemnity to the buyer. A buyer can seek to protect itself by: Making enquiries with the seller Reviewing contracts and confidentiality agreements that permit third parties to use the asset Questioning key employees who deal with the relevant asset Seeking warranties from the seller Seeking post-transaction restrictions on the seller and key employees who do not transfer with the business A seller can seek to protect itself by conducting a thorough review of the creation, use and handling (including licensing) of that asset by the business to identify detrimental defects. VIETNAM As mentioned, Vietnamese law does provide protection for trade secrets. However, for IP assets that do not have protection, a buyer can seek to protect itself by: Making enquiries with the seller Reviewing contracts and confidentiality agreements that permit third parties to use the asset Questioning key personnel who deal with the relevant asset Seeking warranties from the seller Seeking post-transaction restrictions on the seller and key personnel who do not transfer with the business A seller can seek to protect itself by conducting a thorough review of the creation, use and handling (including licensing) of that asset by the business to identify circumstances that may have compromised the assets. 17

18 3 Have the methods above been successful in providing sellers/buyers with a sufficient level of comfort to proceed with the deal? INTELLECTUAL PROPERTY AUSTRALIA Buyers generally obtain comfort through a combination of: The history of the seller's operation. The buyer may place some reliance on the history of the business, in particular if the business has traded for some time without any third-party challenges to the validity of its intellectual property rights. Due diligence. Diligence enquiries that focus on the creation, protection and handling of the intellectual property assets can give the buyer some assurances about the integrity of the assets being acquired. Seller warranties. Warranties regarding ownership, sufficiency and non-infringement of and by the intellectual property assets are always a key protection for buyers. CHINA HONG KONG INDONESIA There have been many cases where a transaction did not proceed simply because the seller was not comfortable with the level of confidentiality in the due diligence process. It is generally a business decision for the seller or the buyer to decide whether to provide or accept a limited disclosure under the due diligence process. Although enforceability may still raise concerns for investors, particularly with respect to M&A involving IP and technology, generally the sellers/buyers are comfortable to proceed with the deal using the above-described methods. Buyers generally obtain comfort through a combination of: The history of the seller's operation. The buyer may place some reliance on the history of the business, in particular if the business has traded for some time without any third-party challenge to the validity of its intellectual property rights. Due diligence. Diligence enquiries that focus on the creation, protection, and handling of the intellectual property assets can give the buyer some assurances about the integrity of the assets being acquired. Seller warranties. Warranties regarding ownership, sufficiency and non-infringement of and by the intellectual property assets are always a key protection for buyers. JAPAN Obtaining a copy of the registry and gazette entries for patents, utility models, designs and trademarks usually provides an acceptable degree of comfort for buyers as they constitute official evidence of status of the IP rights. A review of documents concerning ownership of copyright also provides some degree of comfort, but as the documents are not definitive evidence of ownership, additional comfort can be obtained by seeking representations and warranties from the seller. 18

19 3 Have the methods above been successful in providing sellers/buyers with a sufficient level of comfort to proceed with the deal? (cont.) INTELLECTUAL PROPERTY MALAYSIA MYANMAR There is little information available on the enforceability and trends of protecting parties to a technology M&A transaction. However, there have been instances where a deal has failed because the seller is unwilling to allow the due diligence process to commence due to the lack of protection of its technology/ip assets throughout the due diligence process. Given that this area has yet to be substantially explored, the availability of information is limited. Deals are, however, regularly completed in Myanmar, even though protections are imperfect. Buyers generally obtain comfort through a combination of: Due diligence. Due diligence enquiries that focus on the creation, protection and handling of the intellectual property assets can give the buyer some assurances about the integrity of the assets being acquired. Seller warranties. Warranties regarding ownership, sufficiency and non-infringement of and by the intellectual property assets are always a key protection for buyers. PHILIPPINES Buyers generally obtain comfort through a combination of: The history of the seller's operation. The buyer may place some reliance on the history of the business, in particular if the business has traded for some time without any third-party challenge to the validity of its intellectual property rights. Due diligence. Diligence enquiries that focus on the creation, protection and handling of the intellectual property assets can give the buyer some assurances about the integrity of the assets being acquired. Seller warranties. Warranties regarding ownership, sufficiency and non-infringement of and by the intellectual property assets are always a key protection for buyers. SINGAPORE Buyers generally obtain comfort through a combination of: The history of the seller's operation. Some comfort can be derived from the fact that the target has traded without any thirdparty challenges to its intellectual property rights. Due diligence. Strategic, thorough and targeted due diligence inquiries will give the buyer assurances over the integrity of the assets being acquired. Seller warranties. Warranties regarding ownership, sufficiency and non-infringement of and by the intellectual property assets are always a key protection for buyers. 19

20 3 Have the methods above been successful in providing sellers/buyers with a sufficient level of comfort to proceed with the deal? (cont.) INTELLECTUAL PROPERTY TAIWAN THAILAND Given that this area has yet to be substantially explored, the availability of information on the enforceability and trends on how to safeguard parties to a technology M&A transaction are limited. However, there have been instances where a transaction has failed because the seller was unwilling to allow the due diligence process to commence because of a lack of safeguards for its technology/ip assets throughout the process. Generally, yes. It provides a certain level of comfort for the parties to proceed with the deal. Buyers can generally obtain a higher level of comfort through a combination of: The history of the seller's operation. The buyer may place some reliance on the history of the business, particularly if the business has traded for some time without any third-party challenges to the validity of its intellectual property rights. Due diligence. Diligence enquiries that focus on the creation, protection and handling of the intellectual property assets can give the buyer some assurances about the integrity of the assets being acquired. Seller warranties. Warranties regarding ownership, sufficiency and non-infringement of and by the intellectual property assets are always a key protection for buyers. VIETNAM It is generally a business decision for the seller or the buyer to decide whether to provide or accept a limited disclosure in the due diligence process. 20

21 4 Given the volatile nature of the IP/technology market, how does the structure of IP/ technology deals differ from deals in other sectors? DEAL STRUCTURING AUSTRALIA The transaction structure and documentation must: Ensure the business has a clear right to use (and license others to use) its core IP/technology, including through the use of comprehensive IP warranties and indemnities Identify dependencies on third-party IP/technology, including systems and platforms used by the wider seller group, which typically involves documenting transitional service arrangements, under which the seller group provides temporary access to its technology and platforms while the target business migrates to the buyer's platforms Include key employee retention arrangements (see below), and non-compete and non-solicitation clauses Include appropriate deferred consideration models to support often unconventional business cases, such as earn-out clauses Manage the risk of regulatory intervention or government force majeure during the completion period, including through the use of Material Adverse Change (MAC) clauses, force majeure clauses, etc. (however, MAC clauses are difficult to enforce under Australian law unless very specific events are documented) CHINA HONG KONG In an IP/technology deal, the buyer would: Consider the typical acquisition structures (share acquisition, asset acquisition, to outright acquisition of registered or unregistered IPR) Take into account the typical pros/cons of each type of acquisition structure Deal with specific circumstances in determining the acquisition structure The structure of the deal is dependent in part on whether the buyer is a foreign entity or a domestic entity. Foreign buyers generally prefer acquiring offshore holding companies or offshore IP holding companies. Share acquisitions are typically more popular. INDONESIA IP can be held in the name of the founder, leading to the requirement for the IP to be assigned from the founder, and not from the target company. If the transaction is structured as a share deal, there will need to be a separate undertaking from the relevant parties to transfer the relevant IP/technology to the target company before closing. It is also common for the IP to be owned by a foreign entity and licensed to the Indonesian company operating the business in Indonesia. In this situation, there must be confirmation from the owner of the IP that, upon the transfer of the IP to the target company, there are no outstanding fees payable to the former owner of the IP. 21

22 4 Given the volatile nature of the IP/technology market, how does the structure of IP/ technology deals differ from deals in other sectors? (cont.) DEAL STRUCTURING JAPAN In technology M&A deals, to deal with the risk of the volatile nature of the IP/technology business, a complex consideration mechanism, such as earn-outs linked to the target's performance post-closing, is used more often than conventional transactions. The volatile nature of the technology market also leads to key employees of the target business frequently moving. Therefore, retention of key employees is considered an important deal term and there is more structuring around this issue to address this risk. Buyers put more emphasis on commercial due diligence to analyze and understand the business model of the target more deeply. MALAYSIA In a technology M&A transaction, it is likely that more emphasis will be placed on the use of break fees, Material Adverse Change (MAC) clauses, completion adjustment mechanisms and retained consideration mechanisms to safeguard parties' interests. However, in Malaysia, break fees and MAC clauses may not necessarily be enforceable: Break fees Section 75 of the Contracts Act 1950 provides that the liquidated damages determined by the parties to be paid upon breach of contract is entitled to the innocent party, whether or not actual damage or loss is proven. However, case law has distinguished circumstances in which this may occur and has held that these clauses are enforceable only to the extent that the amount is a genuine pre-estimate of damages suffered in the event of breach and does not amount to a penalty. Case law has indicated that, where there is no proof of actual loss, break fees are payable where the loss is difficult to assess due to there being no known measure of damages. MAC clauses Malaysian courts have yet to consider whether MAC clauses are enforceable. The Malaysian courts typically find the decisions of UK courts to be persuasive. The UK court's position on MAC clauses is that they are enforceable insofar as the clauses are drafted clearly and unambiguously. For example, if parties intend for a general state of affairs of a particular situation (eg, the general state of the economy) to be considered in determining a MAC, it should be clearly stated. MYANMAR The M&A market is currently developing in Myanmar, and not many transactions have happened in the IP/technology sector. IP/ technology deals tend to differ from other deals in the following ways: Conditions precedent. Conditions precedent focused on regulatory approvals, such as Post and Telecommunications Department approval, Myanmar Investment Commission (MIC) approval, and others. 22

23 4 Given the volatile nature of the IP/technology market, how does the structure of IP/ technology deals differ from deals in other sectors? (cont.) DEAL STRUCTURING MYANMAR (cont.) Confidentiality. Usually a key issue for both parties Use of comprehensive IP warranties Use of Material Adverse Change clauses PHILIPPINES IP/technology deals are generally structured similar to other M&A transactions. They may, however, have the following additional features: Strong and comprehensive IP and technology warranties and indemnities relating to the ownership or right to use (and to license others to use) of IP/technology Purchase price adjustments to account for changes in value between the last accounts date and closing Retained consideration mechanisms, such as earn-outs depending on agreed targets, to incentivize performance of management IP/technology deals may also make use of convertible debt instruments, particularly for start-up target companies in view of the risk profile of these deals, and to allow investors high rates of return after conversion of such instruments. This may present challenges from the perspective of Philippine taxation and corporate laws if the conversion results in the issuance of shares with a market value that is significantly greater than the amount of debt, as such conversion will require regulatory approvals, and Philippine regulators may raise issues on the valuation of the issued shares, particularly if the value of the debt is much lower than the book value of the shares. SINGAPORE If the M&A deal involves the acquisition of a technology, the deal would tend to have a longer due diligence period. Where the sellers require the buyer to enter into an agreement before allowing more due diligence, the buyer will be able to terminate the acquisition if it is not satisfied with the results of its due diligence exercise. The discretion will lie with the buyer (it is not based on a reasonableness test). Another aspect would be the retention of key employees who would have the knowhow surrounding the innovations. In technology acquisitions, a key part of the transaction will include negotiation on the retention arrangements for such employees. In M&A deals by IP/technology companies expanding into new markets/jurisdictions, the transaction tends to be a control transaction where the buyer (who has the IP/technology) will take control of the target, and the seller (if it remains invested in the target company) will be a minority shareholder. The target will license key technology from the buyer. This helps to ensure that the buyer maintains control over the use of the IP, even where there is a joint venture involved. TAIWAN In a technology M&A transaction in Taiwan, a higher emphasis is typically placed on IP validity, the retention of key employees, and deferred consideration mechanisms. 23

24 4 Given the volatile nature of the IP/technology market, how does the structure of IP/ technology deals differ from deals in other sectors? (cont.) DEAL STRUCTURING TAIWAN (cont.) IP validity Intellectual properties are usually one of the major driving forces for a technology M&A transaction. The technology due diligence will therefore play a heavier role than in transactions in other industries. The transaction structure and documentation must ensure the business has a clear right to use (and license others to use) its core IP/technology, including through the use of comprehensive IP warranties and indemnities. Key employees Generally, if the intellectual properties of the target company relate to internal manufacturing methods or knowhow protected by means of trade secret, the parties will spend more time identifying the key employees and discussing the proper method to keep those employees after the closing. Deferred consideration mechanism Earn-outs and other deferred consideration mechanisms to allocate the relevant risk are commonly used. Mergers are not the most popular M&A structure in Taiwan's IT industry A merger structure (as opposed to merely share purchase or share swap) will lead to a larger tax impact on the shareholders of the target company. In the IT industry, if the target company is merged, the product approval issued by its customer will usually become void and need to be reapplied, which may delay the post-merger integration. There are some assets and business deals in Taiwan's IT industry More often than not, these assets and business deal precedents in Taiwan happen when the seller is under reorganization or is in deficit. THAILAND Given the volatile nature of the IP/technology market, key employee retention arrangements must be taken into consideration in any deal structuring. Certain technologies require IT specialists to operate and manage the technical aspects of those technologies, eg, blockchain-based platforms. The buyer should identify the key IT person of the seller and structure the deal to include key employees to join the buyer post-closing. Retaining these key individuals will help ensure the buyer's ability to understand, maintain and further develop the acquired technology. 24

25 4 Given the volatile nature of the IP/technology market, how does the structure of IP/ technology deals differ from deals in other sectors? (cont.) DEAL STRUCTURING VIETNAM Evaluation of IP assets in IP/technology deals lends more complexity to the transaction. The transfer of certain IP assets, such as registered patents/trademarks, must be approved by the National Office of Intellectual Property (NOIP) and such transfer will take effect from the date of the NOIP's approval, rather than the date of the parties' agreement. 25

26 5 What are some of the key post-integration risks for technology firms and how are these different? DEAL STRUCTURING AUSTRALIA Often the target business relies heavily on key employees, which increases the importance of documenting and agreeing appropriate retention arrangements. Moreover, there are often considerable challenges in integrating the data, systems and technology of the target business into the buyer's platform. There are also associated data portability issues. CHINA HONG KONG INDONESIA IPR protection and retention of senior talent (management to engineering) are key components for conventional transactions, but these are accentuated for technology M&A transactions in China. The effect of a more fluid and dynamic job market for technology talent is exacerbated in a technology M&A transaction, especially in a post-integration setting, as senior talent and IPR can easily move to competitors. The transaction structure and documentation typically: Ensures the business has a clear right to use (and license others to use) its core IP/technology Identifies dependencies on third-party IP/technology, including systems and platforms used by the wider seller group this usually involves documenting transitional service arrangements, under which the seller group provides temporary access to its technology and platforms while the target business migrates to the buyer's platforms Includes key employee retention arrangements (see below), non-compete and non-solicitation clauses Some of the important post-integration considerations would be as follows: The process of integrating standard operating procedures and technological infrastructures between the buyer and the target company The process of applying policies where all IP/technology discovered will belong to the target company or the buyer, and not the employees JAPAN Key technology has a disproportionally high reliance on key employees and it is therefore important for the buyer to retain such personnel in technology transactions. Technology targets also tend to gather personal data from their customers, which is heavily regulated by the Personal Information Protection Act. Violation of the relevant data protection regulation sometimes raises a critical legal risk. Technology companies may also more often than not be start-ups and have less rigorous corporate governance structures in place. 26

27 5 What are some of the key post-integration risks for technology firms and how are these different? (cont.) DEAL STRUCTURING MALAYSIA MYANMAR When acquiring a technology company, an important post-integration consideration is whether the buyer has the standard operating procedures and technological infrastructure in place to support the incoming technology. Buyers will have to consider whether the technology company being acquired is self-sufficient or whether it will have to incur more costs to provide the infrastructure to support the technology being acquired. There are a few basic post-acquisition integration risks that all purchasers should be aware of when purchasing a company in Myanmar. They are as follows: Legal and regulatory compliance. It is important to be aware of all compliance deadlines that a company must comply with shortly after an acquisition. Changes in the law and regulations. The laws of Myanmar are often unclear, and are revised and updated on a regular basis. Foreign ownership of assets (immovable assets in particular). Foreign entities are not permitted to own immovable assets in Myanmar, and must have special approval to enter into a lease with a term longer than one year. Employment issues and the transfer of employees. Transferring employees is complicated, as it requires the consent of each employee, the former employer and the new employer. A tripartite agreement is typically used between the seller, employee and buyer. Anti-corruption. If the target company does not have proper anti-corruption measures and training in place, the employees may continue breaching various anti-corruption laws after the acquisition takes place. Key employees. Often the target business heavily relies on key employees, which increases the importance of documenting and agreeing on appropriate retention arrangements. PHILIPPINES SINGAPORE This area has yet to be substantially explored in the Philippines, therefore the availability of information on post-integration risks are limited. A key post-integration risk is that the founder(s) of the target company may leave and start up another competing or similar business post-acquisition. It is also crucial to ensure that the supply chains that have been acquired are able to withstand scrutiny from tax authorities, in light of the enhanced audit activity globally. Damage to reputation is often not covered in traditional due diligence or the M&A process. These risks are often discovered during the integration phase. 27

28 5 What are some of the key post-integration risks for technology firms and how are these different? (cont.) DEAL STRUCTURING TAIWAN THAILAND VIETNAM One of the most important post-integration considerations would be whether the technology, in particular the knowhow, can be properly kept in the company and managed by the new technology team assigned by the new owner. Some of the IT companies protect their knowhow and intellectual properties by means of trade secrets. Therefore, to fully obtain this knowhow and intellectual property for future operations, the new owner will have to retain the key employees or find other sufficient solutions so that the new owner can use it in the future. A key post-integration risk would be whether the infrastructure technologies used by the two merging firms are compatible and can be easily integrated with each other. A transition period during which the seller provides support for post-closing system integration and training is critical to the success of the acquisition. Employee inventors and authors may claim for certain rights in the IP assets that they have created (ie, the right to name the works and to attach ones' names or pseudonyms to the works, to be acknowledged when the works are published or used, to be named as the authors for invention/patents and to be acknowledged as authors in documents in which the inventions are published or introduced). If the employee inventors/authors continue to work for the seller, there may be risks to the buyer since the buyer will have limited or no control of such employee inventors/authors. 28

29 6 Are there any licenses or approvals required to operate, develop, acquire or transfer IP/IT assets and/or share sales? REGULATORY AND LICENSING AUSTRALIA CHINA HONG KONG INDONESIA JAPAN MALAYSIA There are no compulsory licenses or approvals required to transfer or operate technology per se. However, statutory licensing regimes apply to certain industries, for example, financial services, broadcasting, telecommunications and gambling. Depending on the nature of technology being used, these regimes may require buyers to obtain the requisite governmental or statutory license. China is still a highly regulated business environment, and many types of businesses, especially in the IT sector utilizing new technology or business methods, require government licensing. Examples range from requiring an internet data center license to operate a cloud computing business, to an internet content provision or online data/transaction processing license to run an e-commerce platform. Additional restrictions could apply for fintech businesses as additional regulators (banking, insurance, etc.) could be required in the case of online banking, peer-to-peer lending, etc. There are no compulsory licenses or approvals required to transfer or operate technology per se. However, statutory licensing regimes apply to certain industries (such as financial services, broadcasting, and telecommunications) and, depending on the nature of technology being used, these regimes may require buyers to acquire a governmental or statutory license. Assignment of registered IP (eg, trademarks) should be recorded at the relevant IP Office. Depending on the nature of the business, registration with or notification to the Minister of Internal Affairs and Communications under the Telecommunication Business Act is sometimes required to operate IT-related business. There is no general restriction on foreign equity ownership in the technological development sector. However, approvals may be required if the transaction is an overlap between the technological sector and another sector. For example, the acquisition of technology by insurance companies to engage in insurtech activities is restricted and will require certain approvals by the Central Bank of Malaysia. Additionally, there is no blanket requirement to obtain approval for technology transfer agreements. Nevertheless, within the manufacturing sector, the approval of the Malaysian Ministry of International Trade and Industry (MITI) must be obtained before entering into any technology transfer agreements involving foreign partners. MYANMAR Statutory licensing regimes apply to certain industries, for example, financial services, broadcasting and telecommunications. Depending on the nature of technology being used, these regimes may require buyers to obtain the requisite governmental or statutory license. For example: Telecommunications. Companies operating in the telecommunications sector will be required to obtain a permit/approval from the Post and Telecommunications Department to operate, develop, acquire and transfer IP/IT assets and/or share sales. 29

30 6 Are there any licenses or approvals required to operate, develop, acquire or transfer IP/IT assets and/or share sales? (cont.) REGULATORY AND LICENSING MIC approval. Depending on the size of the investment, and whether or not it requires long-term leases, an MIC permit or endorsement may be required to develop and operate the project. If an MIC permit or endorsement is required, then MIC approval will be required for any share transfer. PHILIPPINES There is no blanket requirement to obtain approval for technology transfer arrangements (TTAs). However, TTAs, which are defined under local law as "contracts or agreements involving the transfer of systematic knowledge for the manufacture of a product, the application of a process, or rendering of a service including management contracts; and the transfer, assignment or licensing of all forms of intellectual property rights, including licensing of computer software except computer software developed for mass market," are heavily regulated. Local law requires TTAs to include specified mandatory provisions and exclude prohibited provisions. Non-conformance with such prohibited and mandatory clauses will automatically render the TTA unenforceable, unless the TTA is approved and registered with the IPO, which is allowed only under exceptional cases. Compliant TTAs do not need to be registered with the IPO. SINGAPORE TAIWAN There is no requirement to obtain approval for technology transfer agreements in Singapore. Approval is required to operate, develop, acquire or transfer IP/IT assets and/or share sales. If a party is a foreign (including PRC) entity, approval from Taiwan's Investment Commission (IC approval) must be obtained before the closing of the transaction. When reviewing the foreign investment, the Investment Commission will take into account the background of the new investor, the advantages and disadvantages to the concerned industry, and the impact on Taiwan's economy and national securities, among other things. Usually, it takes two to three months to obtain IC approval. There are no compulsory licenses or approvals attached to the transfer or operation of technology per se. However, statutory licensing regimes apply to certain industries, such as financial services and broadcasting. Depending on the nature of technology being used, these regimes may require buyers to obtain the requisite governmental or statutory license. THAILAND In general, there is no requirement to obtain licenses or approvals to operate, develop, acquire or transfer IP/IT assets, whether in an asset sale or share sale transaction. However, there may be certain approval regimes that apply to certain industries governed by specific legislation, such as broadcasting and/or telecommunications. Depending on the nature of the technology acquired and the structure of the deal, these regimes may attract separate approval requirements. 30

31 6 Are there any licenses or approvals required to operate, develop, acquire or transfer IP/IT assets and/or share sales? (cont.) REGULATORY AND LICENSING VIETNAM Generally, under a share sale, the foreign investor and the target company are required to conduct the following procedures: The foreign investor must obtain an M&A approval if (i) the foreign ownership in the target company is 51% or more after the acquisition, or (ii) the business scope of the target company includes sectors that have specific restrictions applicable to foreign investors, as provided under the law. For example, certain sectors such as telecommunication, maritime auxiliary services and advertising services require the foreign investor to form a joint venture with a Vietnamese party, while also limiting the foreign capital contribution (eg, not exceeding 49%/51%/65% depending on the specific business line). Additionally, please also note that the conditions applicable to these conditional sectors are not only related to the market access restriction (ie, foreign ownership percentage) but also the operational conditions (eg, condition of business location, investment method, scope of investment, Vietnamese partners participating in the investment, etc.). For more specific information, please refer to Vietnam's WTO commitments and the list of conditional investment sectors in Vietnam's Investment law. Upon the issuance of the M&A approval (if required), the target company must amend its enterprise registration certificate or the shareholders' register to reflect the name of the foreign investor as the new owner/shareholder. If the acquisition involves the transfer of an IP right that was registered in Vietnam (eg, a trademark or patent), then the parties will need to execute and register an assignment agreement for that IP right before the authority that granted the registration for that IP right (eg, the National Office of Intellectual Property). 31

32 7 Are the licenses or approvals transferable or assignable for these assets and/or share sales? If not, are they difficult to obtain? REGULATORY AND LICENSING AUSTRALIA Where an acquisition occurs by way of share sale, a license held in the name of the company will generally transfer along with the assets of the business. However, licenses which impose requirements on key individuals may not be directly transferable. Licensing regimes where this may arise include financial services, broadcasting and gambling or gaming licenses. Acquisitions that occur by way of asset sales will not automatically transfer any licenses, although regulators may assist in the process of granting a replacement license, or transferring the existing license. CHINA HONG KONG INDONESIA JAPAN MALAYSIA MYANMAR In share sales, licenses/regulatory approvals generally transfer with the target company (although there could be exceptions where regulators vet or re-vet shareholder qualifications). Share deals must also take into account foreign investment regulatory restrictions as there are still major restrictions on foreign buyers in the technology space. In an asset transaction, licenses/approvals are, in general, not assignable and the buyer must re-apply for them. No licenses and approvals are not transferable and assignable. The difficulty to obtain the licenses/approvals really depends on the role of each relevant authority. For IT assets such as electronic systems, the new owner will only need to re-register the electronic system to the Minister of Communication and Informatics. For share sales, the company must obtain approval from the Indonesian Investment Coordinating Board and a notification receipt/approval from the Minister of Law and Human Rights. In share deals, registration/notification under the Telecommunication Business Act normally survives the change of control. In asset deals, the registration/notification is normally transferable as long as the target sells the entire telecommunication business to the buyer. Otherwise, the buyer must secure the registration/notification. An entity acquiring the telecommunication business from the target through an asset deal has to satisfy certain requirements under the Telecommunication Business Act. MITI approval for technology transfer agreements involving foreign partners is required to ensure that: (i) the agreement will not impose unfair and unjustifiable restrictions on the local party; and (ii) the agreement will not be prejudicial to national interests. Share sale. Yes, telecommunications licenses may be transferred as part of a share sale with ministry approval. Additionally, Post and Telecommunications Department approval is required to transfer the shares of an entity holding a telecommunications license. Specifically, the transfer will be scrutinized for compliance with the Competition Rules for the Telecommunications Sector of the Republic of the Union of Myanmar,

33 7 Are the licenses or approvals transferable or assignable for these assets and/or share sales? If not, are they difficult to obtain? (cont.) REGULATORY AND LICENSING MYANMAR (cont.) PHILIPPINES Asset/business transfer. Telecommunications licenses may be transferred as part of a business sale. The transferee must obtain approval from the Post and Telecommunications Department to hold the license. The transfer will be scrutinized for compliance with the Competition Rules for the Telecommunications Sector of the Republic of the Union of Myanmar, Where an acquisition occurs by way of share sale, a license held in the name of the company will generally be acquired together with the assets of the business. However, licenses which impose requirements on key employees may not be directly transferable. Licensing regimes where this may arise include financial services and broadcasting. Acquisitions that occur by way of asset sales will not automatically transfer any licenses although regulators may assist in the process of granting a replacement license, or transferring the existing license. SINGAPORE TAIWAN N/A IC approval is not transferable/assignable. The difficulty level depends on the nationality of the investor and the industry of the target entity. Other licenses or approvals usually belong to whoever applied for such licenses or approvals and are not transferable/assignable, even if there is a change of control. Therefore, for a share deal, the license and approvals will usually be kept in the target company. On the other hand, the seller is not normally able to transfer licenses or approvals in an assets deal. THAILAND Where an acquisition occurs by way of share sale, a license held in the name of the company will generally be acquired together with the assets of the business. However, licenses that impose requirements on key individuals may not be directly transferable. These individuals may have to transfer assets to be in the name of the company, if required by the buyer. In general, acquisitions that occur by way of asset sales will not automatically transfer any licenses. However, in certain industries, such as broadcasting and/or telecommunications, a license to operate is the exclusive right of the licensee and is not transferable. To obtain a new license, the buyer must follow a particular application process. VIETNAM For the share sale, such certificates/approvals are not transferable. The licensing authority will issue such documents upon receiving a full and valid application dossier. The process is straightforward and well regulated. 33

34 8 Are there any foreign participation restrictions in the technology/ip sector? FOREIGN INVESTMENT CONSIDERATIONS AUSTRALIA Australia has a foreign investment regime which applies generally to acquisitions by foreign persons (including foreign government investors) in Australian businesses. Transactions with a deal value above the applicable threshold require notification to and pre-approval by the Treasurer. There are lower notification thresholds for investments by foreign persons in "sensitive" sectors, including media, telecommunications, encryption and securities technologies, and communications systems. While the vast majority of investment proposals are generally approved, the Treasurer has discretion to prohibit acquisitions for general public policy reasons. There is particular scrutiny of investments by foreign government investors. CHINA HONG KONG China has significant entry barriers to foreign investment in the technology sector. The country maintains a Foreign Investment Catalogue that lists certain types of investments as restricted or prohibited for foreign investment. China is in the midst of transitioning to a negative list foreign investment regulatory regime where entry barriers to foreign investment in certain business sectors will be clearly listed. In terms of the technology sector, foreign participation in basic telecommunications services is limited to no more than 49% and valueadded telecommunication services is limited (with some exceptions in selected free trade zones) to no more than 50%. Some of this is relaxed (such as for value-added telecommunications) and foreign investment is permitted up to 100% for selected businesses in certain free trade zones (such as the Shanghai Free Trade Zone). Additional foreign investment restrictions apply if traditional businesses are carried out using new technology platforms (such as online banking, peer-to-peer lending). China imposes significant restrictions on foreign investment in the banking/finance sector. INDONESIA JAPAN Yes. The business line of marketplace operator with an investment value of less than IDR 100 billion is limited to 49% foreign ownership. Meanwhile, retail trade through mail order or the internet for certain goods is 100% open to foreign investment, but requires a partnership with micro, small and medium businesses. It depends on the nature of the relevant business to be acquired. Foreign investment in certain industries and situation is subject to mandatory reporting requirements or approval procedures under the Foreign Exchange and Foreign Trade Act of Japan. Approval procedures are required for certain industries such as nuclear, arms manufacturing, aircraft, etc. Normally the technology sector is not covered by approval procedures. Even if approval is required due to the nature of the relevant business, the Japanese government generally approves such transactions and would block a transaction only in very extreme situations. Post-completion reporting is required for various industries including, among others, the telecom sector. 34

35 8 Are there any foreign participation restrictions in the technology/ip sector? (cont.) FOREIGN INVESTMENT CONSIDERATIONS MALAYSIA MYANMAR PHILIPPINES Within the technology development sector, there are no foreign equity restrictions. However, there are certain local shareholding requirements if a company wishes to apply for certain types of incentives under the Malaysian Investment Development Authority (MIDA). For example, MIDA offers incentives to companies acquiring a foreign company for high technology, provided the buyer is a locally owned company that is incorporated under the Companies Act 1965 (or under the Companies Act 2016). No foreign participation restrictions apply. The IP/technology sector per se is not subject to foreign equity restrictions in the Philippines, provided that: The corporation cannot operate as an internet service provider or otherwise provide value-added services as regulated by the National Telecommunications Commission. A corporation with more than 40% foreign equity must have a paid-in capital of at least USD 200,000, if it will operate a domestic market enterprise (as opposed to an export enterprise). However, certain industries, which may involve the use of technology, may be subject to foreign equity restrictions, such as the operation of a public utility (which currently includes the telecommunication industry) and mass media. Activities that are subject to foreign equity restrictions are listed in the Negative List of the Philippines Foreign Investments Act (FIA). Separately from the foreign investment requirements, statutory licensing regimes also apply to certain highly regulated industries, such as financial services, broadcasting and telecommunications. Also, depending on the nature of technology being used, certain businesses may require buyers to obtain the requisite governmental or statutory license. SINGAPORE TAIWAN There are no general restrictions on foreign equity ownership in the technology sector in Singapore. Nevertheless, it is not uncommon for IP to feature heavily in structures adopted by technology firms. The Singapore government tends to grant technology targets with a heavy Asian presence business incentives which require significant economic investment into Singapore. The M&A process has to take this into account to determine how to best leverage these incentives once the transaction is completed. For foreign (other than PRC) investors, the IC has developed a Negative List for Investment (Negative List), which includes prohibited industries (industries totally prohibited from foreign investment) as well as restricted industries (industries with restrictions on foreign participation). Investment in industries outside the scope of the Negative List is generally approved. Other than military IT equipment manufacturing, the technology/ip sector is outside the scope of the Negative List. 35

36 8 Are there any foreign participation restrictions in the technology/ip sector? (cont.) FOREIGN INVESTMENT CONSIDERATIONS TAIWAN (cont.) THAILAND For PRC investors, the IC has developed a Positive List for Investment (Positive List), which identifies industries in which PRC investors are allowed to invest and the relevant participation restrictions. Only if all the business items of the target company are covered by the Positive List and the participation restrictions are fully complied with will the IC approve such investment. In general, the manufacture of computers, electronic and optical products is in the Positive List. There were cases where the IC had rejected an application on the grounds of national security, even though the investment was covered by the Positive List. Generally, a number of laws and regulations govern foreign participation in business activities in Thailand. The main governing law is the Foreign Business Act, B.E (1999) (the FBA), which defines "foreigners" as natural persons or juristic entities who do not possess Thai nationality. Companies are considered "foreign" for these purposes if 50% or more of their share capital belong to foreign individuals or juristic entities. The FBA limits the rights of foreigners to engage in certain business activities in Thailand. This includes service business whereby the foreigners may engage only upon receipt of permission from the Director-General of the Department of Business Development, the Ministry of Commerce, with the approval of the Foreign Business Board. Therefore, if the business activity in the technology/ip sector that the foreigners may engage in is categorized as service business or another type of business that is restricted under the FBA, the permission from the relevant authority as stated in the FBA will be required. VIETNAM Depending on the specific business activities, there may be restrictions in terms of foreign equity ownership. For example, for telecommunication services, a foreign investor is required to establish a joint venture company with a local investor, where the foreign equity ownership must not exceed 49% (for facilities-based services) or 65% (for non-facilities-based services). For computer and related services, however, a foreign investor may establish a 100% foreign-owned company to provide such services in Vietnam. 36

37 9 Where equity conditions exist, are there any typical investment structures used to circumvent these restrictions? Do offshore structures work and are they recognized? FOREIGN INVESTMENT CONSIDERATIONS AUSTRALIA The Australian Foreign Acquisitions and Takeovers Act contains sophisticated anti-avoidance rules, making it very difficult to structure equity investments so as to avoid these rules. These rules include tracing provisions, meaning Australian businesses that are "controlled" by foreign persons are themselves deemed to be foreign persons for the purposes of the legislation. Control includes where a foreign person holds more than a 20% interest in the Australian business. CHINA HONG KONG Offshore structures can work in some instances (discussed below), but generally China looks through the shareholding structure to determine foreign ownership/control at the highest level, in relation to its foreign investment regulatory regime. Nominee structures are still relatively popular in the market where foreign buyers may set up a wholly owned subsidiary in an unrestricted sector to pair with a wholly domestic entity owned by Chinese nationals to hold licenses in regulated sectors and businesses. The legality of these structures is not entirely clear, although regulators are aware of their existence. For more sensitive industries, such as mapping, the regulators have forced nominee structures to be unwound and converted into more conventional and acceptable structures (where the shareholding/control structure may still involve overseas holding companies but there are Chinese nationals ultimately in control at the top shareholding levels). INDONESIA Article 33 of the Indonesian Investment Law stipulates that domestic investors and foreign investors investing in the form of a limited liability company are prohibited from entering into agreements or making statements confirming that the shareholding in the limited liability company is for and on behalf of other persons. If the domestic investors and foreign investors enter into agreements or make statements as mentioned, the agreements will be null and void. In practice, the typical structure used to get around the foreign ownership limitation is to use contractual arrangements whereby a foreigner in substance acts as the owner of the shares in the Indonesian company, where it otherwise would not be permitted. The arrangement will be documented in the form of financing documents between the foreigner and the local shareholder (a local partner). Note that this "local shareholder arrangement" in reality offers little security, and for all intents and purposes relies on the goodwill of the Indonesian parties. These arrangements are prohibited by the Indonesian Investment Law. JAPAN MALAYSIA Such structures are not commonly used. Circumventing equity restrictions by using trust structures is unlikely to be enforceable. A trust is enforced under equitable principles, one of which states: "He who comes to a court of equity must come with clean hands." Case law in Malaysia has indicated that the Malaysian courts will strike down a trust arrangement on public policy grounds if it was entered into to circumvent the effect of equity restrictions. 37

38 9 Where equity conditions exist, are there any typical investment structures used to circumvent these restrictions? Do offshore structures work and are they recognized? (cont.) FOREIGN INVESTMENT CONSIDERATIONS MALAYSIA (cont.) MYANMAR PHILIPPINES A structure that is more likely to be enforceable would be a contractual/security arrangement, which vests both the legal and beneficial ownership of shares in nominee shareholders. This option will, in summary, entail the granting of a loan to local shareholder for the purposes of allowing the local shareholder to subscribe for or acquire the required number of shares directly in the company. Such loan would be redeemable upon notice by the lender and secured against, among other things, a share charge and call option over the local shareholder's shares. However, the contractual arrangement will have to be structured in a manner that is arm's length and on terms that are generally available in the market in respect of the applicable sector or industry. This may require giving the local shareholder the opportunity to receive a certain percentage of the profits and returns generated by the company. N/A. Under current law and jurisprudence, activities where foreign equity is prohibited, such as mass media, are likely prohibited from having any direct or indirect foreign equity. For activities that are subject to foreign equity limitations, such as telecommunication where foreign equity is limited to 40%, the FIA provides legal basis for a holding structure in which a Philippine corporation that is at least 60% owned by Filipinos shall be considered a Philippine national. As such, its investment in a partially nationalized corporation shall be counted as part of the Philippine equity in such corporation. The Anti-Dummy Law generally applies to businesses where foreign equity is prohibited or limited to 40% under relevant laws. Under the Anti-Dummy Law, nominee arrangements or trust arrangements in which control or beneficial ownership of the businesses is given to foreign nationals, in excess of their allowable ownership of the business, are prohibited. The same law also prohibits foreign nationals from intervening in the management and operation of a nationalized or partially nationalized business, in any capacity, except as members of the board of directors or governing body to the extent of the actual and allowable foreign equity, or as technical personnel with prior approval from the Philippine Department of Justice. SINGAPORE TAIWAN There are no equity restrictions in Singapore for technology/ip companies. As IC will request the foreign investor to issue an undertaking about its shareholding, and may, at its discretion, ask the investor to provide the ultimate shareholder list, offshore structures are not an effective tool to get around equity restrictions by using offshore structures. 38

39 9 Where equity conditions exist, are there any typical investment structures used to circumvent these restrictions? Do offshore structures work and are they recognized? (cont.) FOREIGN INVESTMENT CONSIDERATIONS THAILAND If the business activities fall into the categories that foreigners are restricted from engaging in under the FBA, the foreigners must obtain permission as stipulated under the FBA. However, in some instances, foreigners may be exempt from certain requirements imposed by the FBA, including when The foreigners have been granted investment promotion from the Board of Investment (BOI) in accordance with the Investment Promotion Act, B.E (1977). The foreigners have been granted permission to operate industrial or export businesses by the Industrial Estate Authority of Thailand (IEAT) in accordance with the Industrial Estate Authority of Thailand Act, B.E (1979). VIETNAM Unfortunately, no. We also do not recommend a nominee arrangement because there could be a significant level of uncertainty and risk. For example, a nominee structure is not legally recognized and protected under Vietnamese law, and thus, there is no legal obligation or basis for Vietnamese courts/authorities to uphold such nominee structures. Practically, the success of a nominee structure will also depend on the trustworthiness of the nominee. Although certain contractual arrangements may be executed to manage the relationship, there is uncertainty as to the actual level of control. Lastly, depending on the control/limitations, there could also be causes for the government to challenge these arrangements. 39

40 10 Given the highly personalized nature of technology targets, how can buyers retain key employment? EMPLOYMENT AUSTRALIA Under a share shale agreement, employees will automatically be acquired and retaining those employees can be achieved through a combination of incentivization (through allocation of shares, salary and benefits, or otherwise) and appropriate contractual restraints on the individual's post-employment activities. If employees are employed by a services company that is not a target company, these employees should be transferred to a target company before completion. Under an asset sale agreement, retaining employees will need to be specifically addressed in the sale and purchase agreement. CHINA HONG KONG The most common method used is retention bonus agreements. These establish that installment payments will be paid once each year and usually have a duration of one to three years. Payment of any installment will be forfeited if the employee resigns or is terminated for cause prior to the payment date. Another common incentive used is equity incentives. These vest over an extended period (three or four years), which will be forfeited if the employee resigns or is terminated before the annual vesting dates. For senior managers, another additional incentive often used is annual performance bonuses, where the bonuses are calculated based on company performance and achieving stipulated profit targets. INDONESIA JAPAN There is no specific requirement on how to retain key employees after acquisition of the employer. In practice, the target company (as the employer) may offer a bonus to key employees to persuade them to continue their employment with the target company after it has been acquired. Buyers may include the retention of key employees as one of closing conditions in the transaction document. Retaining key employees can also be a metric for the earn-out mechanism. If such key employees are also owners of the target, buyers sometimes request the owner to retain a certain portion of the shares for a specified period after closing, rather than buying all the shares held by such owner. MALAYSIA MYANMAR There is no avenue to ensure that key employees remain with the buyer. It is, however, possible to use buyer employment agreements, buyer stay bonuses, earn-outs and equity compensation to incentivize key employees under the employment of the buyer. Retention of employees is a complicated matter in Myanmar. Generally speaking, any contract that restrains lawful trade is invalid, to that extent. Further, non-compete clauses are unenforceable under various provisions of the relevant labor laws. However, a buyer can attempt to retain key employees through the following actions: 40

41 10 Given the highly personalized nature of technology targets, how can buyers retain key employment? (cont.) EMPLOYMENT MYANMAR (cont.) Tripartite agreement. Retaining employees is usually achieved by means of a tripartite agreement among the seller, employee and buyer. Incentives. Offering increases in salary and other benefits is a common tactic used to retain key employees. Statutory compensation. Employees are usually given the option of either transferring to the new employer or accepting statutory compensation. PHILIPPINES Buyers can retain employees through an equity sale. Through this method of acquisition, key employees, as well as other employees of the target company, will automatically become part of the buyer. If the target company's employment contracts with its key employees allow the target company to unilaterally assign these contracts, the buyer may retain key employees through an asset sale coupled with an assignment of the employment contracts of key employees to the buying company. The buyer may offer a retention bonus to key employees where the bonus is paid after a certain period, paid over a certain period, or paid at the outset but with clawback for breach. The retention bonus may include a non-compete commitment of the key employees. SINGAPORE TAIWAN THAILAND In Singapore, there is no legislation that ensures that key employees remain with the acquiring company. In practice, most buyers use a mix of incentives, such as generous employment agreements, buyer stay bonuses, earn-outs and equity compensation, to incentivize key employees to remain under the employment of the buyer. Disincentives, such as non-compete restrictions, are also commonly used. In Taiwan, there is no avenue to ensure that the key employees remain with the buyers. However, it is possible to use buyer employment agreements, buyer stay bonuses, earn-outs and equity compensation to incentivize the key employees to remain under the employment of the acquiring company. Under a share shale agreement, employees will automatically be acquired, and retaining those employees can be achieved through a combination of incentivization (through allocation of shares, salary and benefits, or otherwise) and appropriate contractual restraints on the individual's post-employment activities. If employees are employed by a services company that is not a target company, these employees should be transferred to a target company before completion. Under an asset sale agreement, retaining employees will need to be specifically addressed in the sale and purchase agreement. 41

42 10 Given the highly personalized nature of technology targets, how can buyers retain key employment? (cont.) EMPLOYMENT VIETNAM Buyers use a combination of the following: Retention bonus agreements where employees must work until a particular date to receive a significant bonus payment Equity in the Vietnamese subsidiary's offshore parent company (the law was recently amended so that Vietnamese nationals can now participate in offshore equity programs) Generous annual leave and education opportunities In general, offering employees benefits that are more favorable than those offered by the seller and other competitors in the market encourages employees to stay with the target entity. 42

43 11 How can buyers prevent employees from starting up a competing entity/developing a competing product? EMPLOYMENT AUSTRALIA Restrictive covenants in employment contracts (or termination agreements) can help to prevent key employees from entering the market as competitors by specifying the agreed scope of activities from which the employee is restrained post-employment, geographies to which the restraint applies and the duration of the restraint. However, these restraints (even if contractually agreed) will not be enforceable unless they are reasonably necessary to protect the buyer's legitimate commercial interests. In New South Wales, legislation permits restraints of trade to be "read down" by courts in case of a dispute. Courts in other states, however, can only determine enforceability of the language as drafted and can only strike out impermissible restraints. Securing technology and assets that are key to the business is an important practical step to prevent employees from using IP and knowhow to compete with the acquired business. This requires vigilant management of the transition process. Retaining employees that possess important knowhow and operational information can limit the number of individuals capable of starting a competitive business. If the competitive business uses acquired IP assets or confidential information without authorization, or its conduct is likely to mislead or deceive consumers or other business that its goods or services are the goods or services of the acquired business, the buyer may be able to commence litigation to prevent or limit the operation of the competing business. It is important to note that, unless an employee violates an enforceable restraint, infringes the buyer's intellectual property or other rights, or engages in misleading or deceptive conduct, there is no guaranteed protection against a former employee merely using the idea or concept of the acquired business and attempting to compete against the acquired business in the market. CHINA HONG KONG INDONESIA Companies often use non-compete agreements with key employees. Post-employment non-compete agreements are enforceable for a maximum duration of two years, but extra compensation must be paid on a monthly basis during the non-compete term. If key employees are also shareholders, the share purchase agreement can include a separate non-compete clause addressing them in their role as shareholders, which arguably is not subject to employment law requirements and restrictions. It is possible to include a post-employment restrictions (eg, non-compete) clause in an employment agreement. However, it is difficult to determine the enforceability of such a clause. Subject to fulfilling certain requirements (such as the restrictions being reasonable in scope, geography and duration), post-employment restrictions (eg, non-compete) are permitted in Indonesia. They are regulated under the Indonesian Civil Code. Law No. 13 of 2003 on Labor is silent on the matter. It is generally understood understood that it is very hard for an employer to enforce post-employment restrictions against an exemployee. In light of this, in Indonesia post-employment restrictions are generally used only as a deterrent, ie, the employer knows that they will likely never seek to try to enforce the restriction. 43

44 11 How can buyers prevent employees from starting up a competing entity/developing a competing product? (cont.) EMPLOYMENT JAPAN MALAYSIA A typical method of preventing this is to structure stringent and rigorous non-compete clauses under the employment contract. If the target business utilizes trade secrets, they can be protected by the Unfair Competition Prevention Act (UCPA). Certain unauthorized acquisition, use or disclosure of a trade secret will be regarded as unfair competition under the UCPA and, in such case, the original owner of the relevant trade secret can seek damages and/or injunction against the relevant employee. To obtain protection under the UCPA, the relevant trade secret must satisfy certain requirements such as the confidential treatment of the trade secret. Section 28 of the Contracts Act 1950 prevents any contract from including a clause which effectively restrains trade. In this regard, noncompete clauses are unenforceable if they attempt to cover a period after the employment has ended, regardless of how reasonable it may appear to be, as they will create a restraint on trade. Employers can only include clauses to the extent that the employee is subject only to non-disclosure and confidentiality obligations prior to their termination and provided that such clauses do not deprive the employee of earning a livelihood. However, the Malaysian courts have held that where an employee has been employed to develop for the company, it owes a fiduciary duty to its employer. The fiduciary duty arises out of the relationship of trust and confidence which is formed when one party undertakes to act in the interests of another or places himself/herself in a position where he/she is obliged to act in the interests of another. Under this duty, if there is a dispute over anything created during that time of employment or incorporating information known from the course of the employee's employment, the courts have indicated that the developed product may be held on trust for the employer. MYANMAR PHILIPPINES Non-compete clauses (even if contractually agreed) are unlikely to be enforceable. The Myanmar Contract Act renders void any contract clauses that restrain trade, although non-compete clauses for a particular period are frequently seen, particularly in executive contracts. Their effectiveness is therefore uncertain. However, they are frequently used in contracts and, provided there is a severability clause in the contract, they can be used, at the very least as a deterrent. There is no case law on this subject. Non-compete, non-solicitation, confidentiality and other agreements are typically used. These agreements are enforceable. As regards non-compete and non-solicitation agreements, they have to be reasonable (eg, limited to one year from employment termination and to business that the employee was involved in) to be enforceable. In addition, because a court might not issue a decision on the enforcement action within the restraint period, the complainant may end up recovering monetary damages only. SINGAPORE Buyers can prevent this by having employees provide post-employment restrictions such as non-compete or non-solicitation obligations. These post-employment restrictions need to be drafted carefully as the Singapore courts will only enforce them if they protect a legitimate business interest and are reasonable in scope. 44

45 11 How can buyers prevent employees from starting up a competing entity/developing a competing product? (cont.) EMPLOYMENT SINGAPORE (cont.) TAIWAN Buyers can also rely on the non-disclosure and confidentiality obligations normally found in the employees' employment agreements. These are typically enforceable indefinitely after the termination of the employees' employment. Post-employment non-compete clauses are common. The post-employment non-compete clause will only be enforceable if all of the following requirements have been met: The employer has proper business interests that require protection. The position or job of the employee entitles him/her to have access to or be able to use the employer's trade secrets. The period (up to two years), territory, scope of occupational activities and prospective employers with respect to the non-compete restriction shall not exceed a reasonable extent. The employer shall reasonably compensate an employee who does not engage in competing activities for the losses he/she incurs, and such reasonable compensation: Shall not include remuneration received by the employee during employment Shall be agreed to be paid to the employee in a lump sum or on a monthly basis to the employee after termination The amount of monthly compensation shall not be lower than 50% of the employee's average monthly salary at the time of termination Employers can include clauses to the extent that the employee is subject to non-disclosure and confidentiality obligations subsequent to the termination of their employment. Employers can include clauses to specify that the employer shall be the owner/author of any IP made by the employee in the course of performing his/her duties. Employers may take civil or criminal actions and apply for injunctions to prevent the employee from disclosing or using the employer's trade secrets. THAILAND Generally, an employment agreement may contain a non-compete clause that restricts an employee from working for a competing entity or developing a competing product for a certain number of years. Even though there is no law or regulation governing this non-compete issue specifically, the Thai courts generally consider non-compete clauses to be enforceable to the extent that they are reasonable and do not negatively affect the employee's occupation and living on an ordinary basis and in good faith. 45

46 11 How can buyers prevent employees from starting up a competing entity/developing a competing product? (cont.) EMPLOYMENT VIETNAM Non-competition agreements are quite common. However, they are not specifically addressed under Vietnamese law. Hence, their enforceability is questionable since the Labor Code explicitly permits employees to enter into multiple labor contracts, provided the employee can fulfill the contents of each labor contract. In general, Vietnam is very pro-employee so the courts are reluctant to restrain an individual's ability to work. Nevertheless, we are aware of cases where the court has enforced a non-compete agreement. In practice, the court appears more inclined to enforce the agreement if: (i) the individual in question holds a senior level position; (i) the individual in question has access to sensitive confidential information; (iii) the duration of the non-compete does not exceed 12 months; and (iv) the geographical scope of the restriction is limited to Vietnam. Confidentiality and non-disclosure agreements are more readily enforceable in Vietnam, and are thus recommended to prevent employees from starting up competitive entities and/or products. Buyers should, however, ensure that they have treated such sensitive information appropriately under the law so that it is considered a "trade secret." Please see Q1(b). Agreements on IP rights would also be recommended in this situation, addressing issues such as the ownership over works made for hire and the employee's waiver of moral rights in their work. 46

47 About us The Baker McKenzie Asia Pacific M&A Group Our M&A group helps clients address challenges at all phases of a transaction from corporate setup to forming joint ventures and partnership agreements, to merging with or acquiring private or public companies, to divesting non-core and other assets. As a full-service law firm, we also work closely with our network of colleagues specializing in tax, antitrust, finance, employment, compliance and intellectual property to provide comprehensive support before, during and after deal execution We have extensive experience in partnering with significant multinational corporations, listed companies and investment banks in various Asia Pacific jurisdictions on a variety of M&A deals. Over the years, we have been able to develop strong ties with local regulators, bar associations and industry bodies, which enables us to address business, legal and regulatory issues with greater ease. This experience and understanding of specific target markets also helps us anticipate potential critical issues that may arise in transactions and help clients manage and mitigate risks, where possible. Access our Global M&A website to learn more. The Baker McKenzie Asia Pacific TMT Group Our TMT group delivers full-service solutions across multiple areas of practice equipped with deep experience helping major industry players navigate through legal and commercial risks of their cross-border transactions and ventures in the TMT sector. We understand the challenges and rewards of staying innovative amid fast-paced change in the industry. We pride ourselves on being innovative by mobilizing a multi-disciplinary and multijurisdictional team of specialists to address issues and opportunities in the industry. We are ideally placed to guide financial institutions and technology companies through the legal and commercial issues and opportunities brought about by the rapidly evolving fintech sector. We take a multi-disciplinary and cross-jurisdictional approach by mobilizing specialists across our global network with deep expertise in areas such as TMT, compliance, data protection, employment, financial regulatory, venture capital, cybersecurity, trade and tax. Access our Global TMT website to learn more. 47

48 For more information about this guide, please contact: AUSTRALIA CHINA/HONG KONG INDONESIA LIST OF CONTRIBUTORS: Australia Adrian Lawrence, Partner China/Hong Kong James Halliday Partner Tel: JAPAN Howard Wu Partner Tel: MALAYSIA Isabella Liu Partner MYANMAR Daniel Pardede Partner Tel: PHILIPPINES Mita Djajadiredja Partner Jonathan Isaacs, Partner Zhenyu Ruan, Partner Grace Wong, Special Counsel Mai Lin, Associate Japan Daisuke Tatsuno, Partner Myanmar Dustin Combs, Associate Philippines Kiyoshi Endo Partner Tel: SINGAPORE Brian Chia Partner Tel: Ross Taylor Partner Tel: TAIWAN Bienvenido Marquez III Partner Tel: THAILAND Christina Macasaet-Acaban Partner VIETNAM Kenneth Chua, Partner Frederick August Jose, Associate Singapore Daryl Seetoh, Associate Thailand Dhiraphil Suwanprateep, Partner Kritiyanee Buranatrevedhya, Legal Professional Natthawait Incham, Legal Professional Vietnam Ken Chia Partner Tel: Sze Shing Tan Principal Tel: Henry Chang Partner Tel: Sumet Orsirivikorn Partner Tel: ex 4204 Yee Chung Seck Partner Tel: Minh Tri Quach, Partner Tuan La, Associate 48