Business Legal Checklist for Purchasing A Digital Media Company Using Videogame Developers & Publishers As Case Studies

Due Diligence Issues/Checklist What kind of company is being sold or bought? Developer of Videogame Software Publisher of Videogame Software One or the other or both?

Recent Interactive Entertainment &A Deals Buy-Side – Represented Ubisoft Entertainment SA in its purchase of Driver from Reflections/Atari Sell-Side – Represented Centerscore in its sale to Vivendi Buy-Side – Represented D3P in its purchase of Vicious Cycle Currently working on… Purchase of an MMO Publisher Purchase of an Online Background Music Provider Online Advertising Roll-up Online Music Company IPO

IP Due Diligence Checklist – What is the asset or asset base that is being sold or acquired? Type of Videogame Software Product Third Party Licensed Tools & Code Internally Developed Tools & Code Base External Development Console/PC/Internet/Wireless Open Source/Public Domain Software Software Development Processes Asset Buckets: – Trade Secret – Copyright – Patent – Trademark

Development Legal Documentation Inbound Technology or Content Licenses – Change of control provisions Consents needed or not – Is Developer/Licensee in compliance with terms of inbound licenses? – Open Source or Public Domain Software i.e., has Developer created a situation where it has to share its work product intentionally or inadvertently, because it has used open source or public domain software? – Are there any major brand or content licenses?

Developer Legal Documentation (continued) Internal Development – Have all employees and consultants signed confidentiality/invention assignment/work for hire agreements (i.e., do they own their website)? – How has source code and technology processes been treated from a legal perspective? Trade Secret? Patent? Copyright? – Are there any patent or copyright filings for the code or other technology?

Developer Legal Documentation (continued) External Development – How are these relationships documented? What kind of development agreements exist? Who owns what? Work for Hire? License? Work for Hire & License? Milestone Schedules? Payment of Milestones who will pay for what pre/post acquisition?

Publisher ~ Licensor Considerations How is the software product monetized? – Direct to Consumer – Sales of Single User License Software Retail Web Via Third Parties – B to B Direct to Business – Enterprise Licensing Issues & Considerations Value Added Resellers & Distributors – Other OEM/Bundling Shareware Open Source/Service Model Services Only

Documentation of Distribution & Customer Relationships – How are these distribution/customer relationships documented? Distribution Agreements such as with Web Portals, Brick & Mortar retailers such as Walmart, Telecom Carriers, Software Aggregators or Bundlers E-Commerce stores Internet Advertising Agreements VAR Agreements Software License Agreements End User License Agreements Service Agreements – What will be the impact of a change of control on these legal relationships?

Personnel What is a software developer - Collection of talented programmers, designers, engineers, and managers What is a publisher of software – collection of developers,and then sales, business development, marketing, accounting, finance, service, ops management, and administrative people – Who are they? Who are the key people? Whom do you want to retain? – How are people tied into the company? – How are the relationships papered? Employment Agreements Restricted Stock Agreements Stock Option Agreements

Personnel (continued) – Whom do you want to keep? – Whom to you want to get rid of or who wants to leave? – What will happen with a change in control? Business Legally

Personnel (continued) What are the objectives of the Buyer & Seller with respect to the deal and after the closing? – What are the deal terms with respect to: Purchase price? Holdback? Earn Out? – What will the key people that you want to retain get in their new employment agreements as far as compensation? – What is the equity compensation component? Stock Options ISOs vs. Nonquals Restricted Stock – What is the non-compete and what is the law of the jurisdiction in question with respect to non-competition and non-solicitation? California – non-competes are enforceable with respect to a shareholder the sale of a business but not otherwise?

Tax Issues What are the tax implications of the deal structure? Are there losses that can be used? How will the deal structure affect the acquirer's balance sheet and be tax advantaged for the seller (who doesnt want capital gains)? What will the software transfer pricing scheme post acquisition? – i.e., where does the acquirer want to put the asset so that it can use the software in a legitimate way vis a vis the acquirer's present transfer pricing scheme What will be the amortization scheme for the intellectual property acquired and which entity in the acquirers group will hold the intellectual property?

Deal Structure, Timing, & Typical Process Asset Purchase Stock Purchase Merger Stock, Cash Consideration, or Assumption of Debt or some combination thereof? Financing? What is the timing? What are the alternatives for the buyer and seller? LOI, Due Diligence, Definitive Agreement, Pre-Close Obligations (Consents & Employment Agreements), Close, Post Close Obligations