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Five (avoidable) legal mistakes made by games companies - part one

View profile for Andy Moseby
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$1.5 billion for Mohang, $2 billion for Oculus VR, $970- billion for Twitch. It’s hard to ignore the numbers and it’s no wonder that many of the games developers we see have a clear exit strategy and an even clearer dream of appearing in next year’s Rich List.

In every transaction, there are two sides. A seller wants to maximise the price on an acquisition. The buyer - from a legal point of view anyway - wants to protect the value of business it’s buying. 

Due diligence – the laborious exercise of providing all financial information, corporate history and commercial arrangements to a buyer – is key to this.  But it’s also a way in which the purchaser can chip away at the price.  If skeletons lurk in the closet, you can guarantee that a thorough due diligence process will drag them out into the open, and suddenly the luxury yacht in the Caribbean has to be scaled back to a dinghy in Margate.

Many of the issues revealed during the due diligence process are understandable. They come from a time when the company was starting out or focussing on generating income rather than spending money on legal niceties. But time and again, the same things crop up, and they have a habit of slowing the acquisition process down, leading to extra costs and pulling management away from running the business, or resulting in the sellers receiving less than they anticipated. 

Here is the first instalment of my short guide of the five most common legal pitfalls.  For anyone who has already fallen into these traps: don’t worry – far better to identify and fix them now, than trying to do it in the midst of a sale under the watchful gaze of a buyer.    

1.  Tax and structuring

There are many different reasons to look at clever financial structures for your intellectual property. There may be attractive industry-specific tax breaks. You may be able to off-shore your intellectual property in a country with a low tax rate on IP income or attractive R&D incentives.

If you are going to pursue this strategy, not only should you carefully assess the commercial reasons for doing so, but you should also make sure the tax breaks apply to what you’re developing. 

It sounds like common sense, but control of IP can be key. In an industry where IP is frequently licensed in or owned by publishers not studios, developers need to fully understand the parameters of tax credits, especially as many tax incentive regimes have only recently been established (and their application criteria barely tested).

Even where IP portfolios have been successfully established off-shore, mistakes can easily be made. We have seen cases where deals have collapsed or been severely delayed simply because the developers have failed to put in place licences to the on-shore group businesses exploiting that IP.

To put that simply, they didn’t have the right to use their own intellectual property.

These decisions go to the heart of how your business will ultimately be structured (and how attractive it can seem to a buyer), and can be extremely difficult to unwind at a later date.   

Read more about how we can assist you with tax and structuring.