On almost every transaction a buyer will want the sellers to make certain promises known as warranties. The warranties of particular interest are likely to reflect those areas which were focused on more closely during the due diligence. If any of these warranties turn out to be incorrect, and the buyer suffers a loss as a result, they will then seek to bring a claim for breach of the warranty. It is key for the sellers to limit this liability as much as possible.
Whilst many areas will be similar to any acquisition, some of the areas most closely focused on in a life sciences transaction might include:
Intellectual Property
The intellectual property (IP) of the company is one of the most important areas in a life sciences acquisition. The buyer will want full details of all registered and unregistered IP which can be quite burdensome, especially if the company has not historically registered any registerable IP. Know how will be included here which clearly could be extensive. They will also want comfort that the IP is valid, that it does not infringe anyone else’s rights and that no one else has rights in the IP. Contracts should be reviewed carefully to ensure the company owns the requisite IP and assignments are in place as required.
As this IP is often the reason for the purchase in this sector, qualifications based on the sellers’ awareness might not be accepted and the risk for any problems with the IP can be placed squarely at the sellers’ door with the use of the warranties.
Contracts
There may be critical licences or third parties providing important services that the buyer will want to know all about. This may well overlap with the Intellectual Property section if some of the IP is licensed in it would be critical to the buyer to ensure that the company will continue to have the right to use this.
Customer contracts will be an area of great scrutiny where there are a few customers placing high-value orders.
Regulatory compliance
Compliance is key and warranties around this are likely to be significant. References will be made to ensuring compliance where appropriate with the approvals of the company by the MHRA including the relevant GxPs and marketing authorisations. There is likely to be a long list of industry-specific regulations or a catch all simply requiring the sellers to confirm they have complied with all relevant laws.
It is possible that the buyer would request details of all correspondence over a period of time with regulators such as the MHRA, EMA and others such as DEFRA where appropriate.
All approvals and regulatory audits (routine or not) may well need to be disclosed.
Product authorisation and inventory
Marketing authorisations of any pharmaceutical products will likely be requested along with approvals for any other products created by the company. Details of any products held and the specifications and records demonstrating GMP or other regulatory requirements may be required.
Where appropriate authorisations for clinical trials, previous sign offs and details of all ongoing trials may need to be disclosed.
As with many deals a warranty confirming that the stock levels are adequate and not excessive would be common.
Claims and adverse event reporting
To the extent there are pharmaceutical products as part of the company’s offering the buyer will likely want confirmation that adverse event reporting has been carried out as required and possibly even records. Details of any significant adverse events are likely to need to be disclosed along with any claims or potential claims and details of the insurances held by the company.
Employees
Employees are critical. They hold the knowledge and create the intellectual property that the whole company is based on. They are quite literally the brains behind the operation in many cases.
Buyers will want confirmation that the IP created by employees is properly vested in the company but they are likely to also want details, as with most deals, of those employees that are crucial to the company. It is possible that they will want to tie these employees in in some way. For employee shareholders this is likely to be by way of an earn-out or similar, for non-shareholders it could be an incentive scheme following completion. Be aware, though, that an earn-out relying on certain employees remaining with the company could mean that others who have no control over this lose out if someone were to leave within the earn out period.
Disclosure
Whilst the agreement will include some level of limitation of liability in relation to the warranties, the best protection a seller can give themselves is to formally tell the buyer of any discrepancies with the warranties.
This is done through a process called disclosure. Although a rather tiresome process, it is one of the most important uses of a seller’s time throughout the transaction. Providing sufficient detail of a matter that is inconsistent with a warranty is notified to the buyer correctly, and with sufficient detail to enable them to understand the nature and extent of the risk, a buyer should not then be able to bring a claim for a breach of warranty arising from that risk.