The lawyers of REVERA shared their experience in supporting venture transactions over the past year, highlighting common points for all of them.
Irina Golubich and Anna Solovey, lawyers of the M&A practice at REVERA IT Company
Our team specializes in supporting transactions in the IT sector (including in the gaming industry).
In 2022, we have accompanied more than 10 restructurings and venture deals with game studios. All transactions had common features that were previously less typical of the market. We will talk about these features, which we consider trends today.
1. Target distribution and multi-jurisdiction
Previously: transactions, as a rule, were characterized by a fairly simple structure: there is one target company and one investor company. It took up to three months to support transactions (taking into account legal due diligence*).
*Legal due diligence (in Russian, legal audit) is a process in which the legal documentation and transactions of a company are checked as part of its purchase, sale or merger with another company. The purpose of this process is to identify risks and problems related to the legal aspects of the business.
Now: several legal entities located in different jurisdictions began to act on the side of target. According to our experience, now the target is present in 2-4 countries at once. For example, one of the group’s companies acts as a common holding company and often an IP holder, while others are development studios. But that’s not all. Sometimes additional operational legal entities are created.
When concluding such transactions in each region, it is necessary to involve local lawyers who can conduct legal due diligence of the target on the spot, as well as check the transaction documents for compliance with local mandatory regulation.
In such transactions, the role of a leading consultant – lawyer who coordinates the work of a group of local consultants from all jurisdictions in which a target is present in one form or another comes to the fore.
Due to the more complex structure, the terms of legal due diligence, approval and preparation of documents, and compliance procedures have increased*. As a result, the average term of support for such transactions has increased to three to six months.
*Compliance (from English compliance – “compliance”) is a set of procedures aimed at bringing the company’s activities in accordance with the requirements of legislation, as well as corporate, social and ethical standards.
Important: previously, companies also entered new markets, but not so confidently. It was only last year that it took shape as a trend.
Reasons: the distribution of the target between different legal entities and, as a result, investing in several companies at once is associated with the desire to expand the business and enter new markets.
By the way, not only the owners of the business, but also the investor before the transaction can offer to restructure in order to invest in a more familiar and understandable jurisdiction.
2. Co-investment
Previously: usually, one company acted on the investor’s side, which completely acquired the shares for itself.
Now: transactions are more common when not one, but several companies act on the investor’s side. This approach allows you to diversify risks and reduce the transaction check for each individual investor.
The more interested parties, the more opinions and positions that need to be taken into account in the negotiations, and then fixed in the transaction documents. In such cases, it is necessary to approach the draft very carefully, carefully prescribe who has what rights and obligations, the degree of influence on the business, take into account whether the rights are exercised collectively or individually by investors.
Reasons: firstly, co-investment reduces the degree of risk for the investor when assessing the prospects of the target, since joint expertise is more reliable in terms of determining the potential of the business.
Secondly, co-investment allows you to reduce the size of the check per investor.
Thirdly, co-investment often involves the distribution of roles, which allows investors to vary the degree of their involvement in the transaction. For example, a lead investor can take on the main burden of preparing documents, conducting legal due diligence and negotiations, and co-investors rely on his expertise.
3. Complication of bank compliance
Earlier: different stages of the transaction were previously accompanied by close attention from banks, but at the same time, the terms of such compliance and KYC procedures* usually took up to several weeks.
*KYC stands for Know Your Customer (in Russian, “know your customer”). We are talking about the customer verification procedure before making a transaction or before providing a service. The task of KYC is to establish the authenticity of the client’s identity, verify his connections (whether he was involved, for example, in money laundering or terrorist financing) and financial capabilities.
Now: checks by banks are becoming much deeper, the volume of requested information is increasing, requests for KYC are becoming more detailed. Inquiries throughout the chain of ownership of the company and the final beneficiaries now require greater transparency and the degree of disclosure, additional requests for information are increasingly coming. As a result, the terms of bank compliance can stretch up to several months. So that bank compliance does not come as a surprise to you and does not stop work on your project, it is worth starting compliance in advance.
Reasons: the complication of bank compliance is associated with stricter regulatory requirements. In addition, sanctions compliance is now coming to the fore, assuming additional restrictions and control of counterparties.
4. Postponement of the provision of investments
Previously: payment for shares was usually not split or split into a maximum of two tranches (prepayment and post-payment).
Now: the amount of investments is distributed into several tranches, paid during a set period (a year or even more). Such payments may be linked to certain dates or to the company’s fulfillment of established KPIs. With such payment of shares, the gradual entry of the investor into the company is more often characteristic, that is, the investor does not receive the entire pool of shares at once, but only the part that is paid.
Reasons: the decision not to invest the entire amount at once is again due to the investor’s desire to hedge* risks. Step-by-step payment allows the investor to reinsure his investments. At the same time, deferred payment may allow target to control the extent of the investor’s influence on the business, if the parties agree that the investor receives shares not in full, but gradually, in the amount in which they are paid.
* Hedging (from English to hedge – “protect”, “limit”) is a mechanism for reducing risks by means of “making additional transactions covering losses from the main investment“.
***
The listed features in different variations were found in almost all gaming deals of 2022 and continue to appear in deals of the beginning of 2023. In our opinion, these trends will be relevant in the future, so we recommend taking them into account when preparing for a deal.