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Help Tackle Law in Gaming & eSports M&A

The most common deal structures are a stock purchase, an asset purchase, and a merger. In a stock purchase, the buyer acquires the target company in its entirety, including all its assets, liabilities, and employees. In an asset purchase, the buyer acquires only specific assets, such as a particular game’s intellectual property, without inheriting the seller’s liabilities. A merger involves the legal combination of two companies into a single entity. The choice of structure is a critical decision driven by tax, liability, and operational goals.

An earnout is a contractual provision in an acquisition agreement that makes a portion of the purchase price contingent on the acquired business achieving specific performance milestones in the future. It is frequently used when buying a game studio to bridge a valuation gap, especially when the studio has unreleased games. It aligns the interests of the sellers with the buyer by incentivizing the founding team to stay and ensure their upcoming games are successful, as their final payment depends on it.

In a gaming M&A deal, key intellectual property representations and warranties are legally binding promises made by the seller. These typically include a warranty that the company exclusively owns or has valid licenses for all the IP essential to its business, that its games and technology do not infringe on the rights of any third party, and that there are no pending or threatened lawsuits concerning the company’s IP. These clauses are crucial for protecting the buyer from inheriting significant and costly legal problems.

Player data is both a valuable asset and a major legal risk in a gaming M&A deal. During due diligence, the buyer’s lawyers will meticulously scrutinize the target company’s data privacy policies, its methods for obtaining user consent, and its data security practices. The goal is to ensure full compliance with applicable data protection laws. A failure in compliance could mean the buyer is inheriting a business that is subject to massive regulatory fines and a loss of player trust, significantly devaluing the acquisition.

Key legal strategies for retaining talent after an acquisition involve structuring financial incentives through formal agreements. Retention bonuses are a common tool, offering lump-sum payments to employees who remain for a set period post-closing. Issuing equity awards, like stock options in the acquiring company, aligns the long-term interests of key talent with the new ownership. For founders, earnout clauses that tie a portion of the purchase price to future business performance are also an effective retention mechanism.

An esports league franchise agreement is a critical asset that can significantly impact an M&A deal. The agreement will almost certainly contain a change-of-control clause that requires the esports league’s prior approval for any sale or transfer of the team’s ownership. Securing this consent is a crucial condition for closing the deal. The terms of the franchise agreement, such as revenue sharing and operational rules, are also a key focus of due diligence as they directly affect the team’s valuation and profitability.