Do’s and don’ts in the exit process within Life Sciences industry

There are several challenges in an exit process and particularly within the Life Sciences industry. Lack of funding might rush the process, while the emotional attachment of funders to the business might slow the process. Having an exit strategy is important from day one, but when you find yourself surrounded by bidders, advisors and others, there are still some legal do’s and don’ts to consider. Here is a shortlist!

Do…

… sign an engagement agreement with the advisors
Before you initiate the exit process, sign an engagement agreement with both financial and legal advisers and make sure to choose and evaluate them beforehand. Find out their track record, are they part of an international network, how do they propose to conduct the process, what is included in their services (and what is not), what is the remuneration (fixed price or variable), and what are the terms of payment?

… sign a confidentiality agreement with the buyer
In the confidentiality agreement both sides agree to keep discussions and materials related to the deal confidential. Remember to regulate how the information should be treated, who is allowed to receive the information and how long the confidentiality obligations are valid. Most important is perhaps that the confidentiality agreement prevents so-called “fishing expeditions” by unserious buyers who are simply looking to gain insight into your business.

… sign a letter of intent with the buyer
A letter of intent addresses issues of confidentiality, the conditions for the acquisition, timetable and exclusivity. Remember: only the clauses concerning exclusivity, choice of law and confidentiality are binding; the rest of the agreement is considered to be a non-binding agreement.

… remember that transfer of marketing authorization might take some time
If the marketing authorization is to be transferred from the currently approved holder to a new holder (a different person/legal entity), this will most likely be done after signing, but before the deal closes. Remember that it might take some time. So don’t forget to estimate and consider the time and potential delay in the timetable. 

… be aware of the fact that know-how is formally not recognized as an intellectual property right in Sweden
Know-how is formally not recognized as an intellectual property right in Sweden, but is protected under the Trade Secrets Act (Sw. Lag om skydd för företagshemligheter, SFS 1990:409) if the knowhow can be defined as a trade secret. Thus, if know-how should be part of the transfer it is not enough to specify it as intellectual property.

… consider options other than a transfer of ownership such as joint ventures, consortium agreements, commercial research and development agreements, product distribution agreements or co-promotion agreements
The above agreements may fulfill the same purpose as an exit. Partnering may grant funding, new ideas, maximize product presence on the market, and ensure solid continuation of practice with or without your help.

Don’t…

… let regulatory approvals delay you
In the Life Sciences industry many acquisitions and disposals involve compounds or devices that have not yet received regulatory approval. However, don’t let regulatory approval delay your exit. For example, additional payment, or contingent consideration arrangements based on the outcome of future events can be convenient ways of validating a company’s value and of sharing economic risk between buyer and seller.

… wait with conducting vendor due diligence, which includes an inventory of all your agreements with customers, suppliers, consultants, CROs and universities etc.
In the due diligence phase, the buyer examines your books and records to confirm everything you have claimed. Vendor due diligence will let you know about your strengths and weaknesses before the buyer does and before you end up in discussions of appropriate considerations, liabilities and warranties. Also consider whether it is worth sharing information step by step, rather than revealing everything from the start.

… forget to consider the transfer structure before the negotiations
Should the transfer be done as a share sale or asset sale? Cash considerations or other? All or some shares or newly issued shares? There are several different methods, all of which have different tax effects. Remember to that a share sale limits liabilities such as tax liabilities, outstanding guarantees, and pension obligations which will be transferred to the new owner, while an asset sale may be more complicated since the status of all assets must be reviewed (e.g. are they leased or pledged and is a transfer of them allowed). 

… forget to consider if re-registration of intellectual property rights are required
In most cases, re-registration of intellectual property rights is not mandatory since it has no legal effect on ownership, but only on the rights in rem. Under Swedish law, both the patent application and the granted patent can be assigned by contract or inheritance.

… undertake far-reaching prohibition of competition
An entrepreneur who sells his/her company will often be forced to sign a prohibition of competition clause. Remember that such undertakings must be reasonable and may not last indefinitely. Customary is 2-3 years after the transaction depending on the scope.

… forget measures that might remain after closing
Even if the transaction has closed and you’ve successfully exited your company, don´t forget that there might be measures that remain or arise after closing, such as coverage of variable purchase price, integration and warranty claims. In order to monitor the buyer’s activities you might want to include postexit audit rights of the company in the acquisition agreement.