by Andria Papageorgiou

Acquisitions, Company Law, CorporateSeptember 23, 20240 comments

Q&A: due diligence for tech M&A in Cyprus

As the technology sector thrives in Cyprus, mergers and acquisitions (M&A) involving tech companies have become increasingly common. Conducting thorough due diligence is essential to ensure that intellectual property (IP) and technology assets are accurately evaluated, and potential legal or regulatory risks are addressed before completing a transaction. This process requires specialized knowledge in areas such as IP ownership, licensing, data protection, and cybersecurity.

With over a decade of experience in the fintech industry and extensive expertise in GDPR compliance, intellectual property, and regulatory frameworks, our Law Firm is well-equipped to guide clients through the complexities of tech M&A in Cyprus. We understand the unique challenges that tech companies face during the necessary due diligence phase, and our deep sector knowledge ensures that every aspect—from IP rights to data protection—is carefully reviewed to safeguard our client’s interests.

In this article, we present the key areas of tech M&A due diligence in Cyprus, outlining the distinct approaches for share acquisitions versus asset purchases, and highlighting the legal and regulatory considerations specific to the local market. With our expertise, both buyers and sellers can confidently handle these transactions, ensuring a seamless and legally sound process.

1. What are the typical areas of due diligence undertaken in tech M&A in Cyprus?

In Cyprus, due diligence for tech M&A focuses on reviewing the target’s technology and intellectual property (IP) assets. This includes confirming the ownership, licensing, and protection of technology and IP rights, assessing IT infrastructure (e.g., cloud-based or on-premises systems), reviewing data protection compliance (especially with GDPR), and evaluating cybersecurity measures. Due diligence also assesses contractual obligations, key third-party relationships, the handling of open-source software, and any regulatory filings triggered by the transaction.

2. How does due diligence differ between share acquisitions and asset purchases in Cyprus?

In a share acquisition, the buyer acquires the entire company, including all assets and liabilities, which typically means a more extensive due diligence process. This includes verifying IP ownership and identifying potential third-party disputes over rights. In asset purchases, the focus is on ensuring the transferability of the specific IP and technology assets, as well as contracts, with potential restrictions on transfer. Asset purchases may also require separate approvals for data transfers, particularly where customer data is involved.

3. What public searches are typically conducted during tech M&A due diligence in Cyprus?

Public searches typically involve checking Cypriot IP registers for patents, trademarks, and design rights to verify ownership and status. Searches may also include international IP databases, company registers, and records for liens or security interests on intellectual property. Additionally, searches may be made through the Department of Registrar of Companies for annual reports, charges, and encumbrances on the target’s assets.

4. Can liens or security interests be placed on intellectual property or technology assets in Cyprus?

Yes, intellectual property and technology assets can be pledged as security in Cyprus. Due diligence will involve checking the Department of Registrar of Companies for any registered liens, pledges, or security interests on IP assets. Ensuring that proper documentation for the release of such security is in place is crucial as part of closing the transaction.

5. What is the due diligence process for employee-created intellectual property in Cyprus?

In Cyprus, IP rights created by employees during the course of their employment typically belong to the employer, unless agreed otherwise. Due diligence should review employment contracts to ensure that they include clauses transferring IP rights to the company. Similarly, contractor agreements should be reviewed to confirm that the company holds ownership of any IP or technology developed by external third parties.

6. What due diligence is conducted regarding the target’s use of open-source software?

The buyer will assess whether the target uses open-source software in its proprietary technology and confirm compliance with relevant licenses. Open-source licenses, especially those with “copyleft” provisions, may require that modifications or derivative works be made publicly available. Due diligence will also check if the target has policies to manage the use of open-source software, and, if necessary, the buyer may request code scans to identify potential risks.

7. How is software licensing typically reviewed during tech M&A due diligence in Cyprus?

Software due diligence involves reviewing both licensing in (software the target uses) and licensing out (software the target licenses to others). Key issues include confirming that the software licenses cover the necessary users (especially in group structures) and assessing whether there are any restrictions on transferring licenses to the buyer. Agreements with third-party software providers should be reviewed to ensure continued support and maintenance post-acquisition.

8. What are the data protection considerations in tech M&A in Cyprus?

Compliance with data protection laws, including GDPR, is a significant focus in tech M&A. Due diligence will involve reviewing the target’s data processing activities, internal policies, and any potential data breaches. For transactions involving customer data, especially in asset purchases, it is important to assess whether customer consent is required for transferring personal data, as this may complicate the transaction.

9. Are there specific regulatory concerns for tech companies in Cyprus?

Yes, certain sectors may have additional regulatory requirements in Cyprus. For example, tech companies dealing with sensitive data or operating in sectors like telecommunications or financial services must comply with sector-specific regulations. Due diligence will assess whether the target company has made the necessary regulatory filings or received the appropriate approvals, and whether any filings are triggered by the transaction.

10. How are intellectual property rights (IPR) transferred in tech M&A in Cyprus?

The transfer of intellectual property rights is generally straightforward in Cyprus but may require specific agreements, especially in asset purchases. Transfer of licenses, particularly software licenses, often requires the consent of the licensor. Exclusive and non-exclusive licenses may be treated differently, with exclusive licenses requiring more stringent review. It is essential to ensure that all necessary consents and assignments are obtained before closing the transaction.

In case you have any questions, please do not hesitate to contact us for further professional assistance.

Disclaimer: The information contained in this article is provided for informational purposes only, and should not be construed as legal advice on any matter. Andria Papageorgiou Law Firm is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information.