1. Internet Mergers and Acquisitions Edward Black: eblack at ropesgray.com Patrick Murphy: pmurphy at ropesgray.com R. Newcomb Stillwell: nstillwell at ropesgray.com Ropes & Gray

2. Case Study Agenda Case Study: KB Toys acquires eToys. The Players and the Scene The Deal The Issues: –Acquisition of intangibles –Special Regulation: User Privacy –Internet Culture & Politics: eToys v. etoy

3. The Players & The Scene Buyer: KB Toys & the Toy Business –Owner: Bain/KB –Lawyers: Ropes Team Target: eToys –Seller: Bankrupt Estate –Lawyers: Morris, Nichols, Arsht & Tunnell (eToys) and Traub, Bonacquist & Fox, LLP (Creditors).

4. Possible Deals: M & A Stock Purchase Forward Merger –Target merged into Buyer and ceases to exist. Reverse Merger –Buyer forms sub and merges sub into Target with Target surviving as new sub. Asset Transfer –Buyer buys assets of Target, Target survives w/o operations.

5. The KB/eToys Deal eToys bankruptcy Means of Transfer is by Type Three Pronged Deal: –Tangible Inventory –Real Estate –Intangibles Handout Asset Transfer

6. Assets of an Internet Business The Assets v. The Business –See: Valuation Models Example: eToys name –eToy corporate name –eToy trade name –eToy URL –eToy trade/service mark

7. Intangible Assets of an Internet Business Brand –names, marks, URL, dress (architecture), advertising, etc. Technology Implementation –software, hardware, database infrastructure, etc. Relationships –Users –Suppliers of users (e.g. traffic relationships) –Technology suppliers (e.g., software license) – Functionality suppliers (e.g., credit card processing)

8. Intangible Assets of an Internet Business Brand –Owned assets: use + registrations Technology Implementation –Owned assets: patents, copyrights, trade secrets, plus related registrations/certificates, etc. Relationships –Licensed assets: contracts + legal regulations Each asset must be specified and transferred under rules particular to the asset type. –Problems abound.

9. The KB/eToys Problems Transfer of ‘recognizable’ user data. Transfer of licenses Avoiding the transfer of a special ‘liability.’

10. Data Privacy Refresher User data is ‘recognizable’ data Applicable Governmental Law: –EU Directive –COPPA –Financial Services regulations –Torts, Unfair Business Practices ‘Law of the Site’ –Terms and conditions –Click-throughs

11. The Problem eToys Terms and click-throughs had promised that user data would not be transferred—period.

12. The Solution ‘Wrap-around’ agreement. –Handout

13. Refresher on License Transfers Three parties to a license transfer: –Licensor –Licensee-transferor –Licensee-transferee

14. Refresher on License Transfers Why should the Licensor be forced to deal with a new business partner? They agreed to it. –Express consent –Implied consent by license terms: The right to act like an owner? There is an overriding interest the law should recognize. –E.g., in bankruptcy executory contracts partially or entirely void-able to allow restructuring. –Licenses are per se executory.

15. License Terms Consent Sell Yes? No? Sell Yes? Bankruptcy No? Don’t Sell Yes? No? Petition to Transfer By Asset/License Type Non-Exclusive & not “owner” like Exclusive & “owner” like Assumption? Catapult Repeat

16. License Transfer The solution in the deal: –Call for transfer in agreement but then re-license directly from licensor.

17. Internet Politics eToys.com v. etoy.com Rights under the law. In the deal, real world politics. The solution: –Call for settlement of the suit in the agreement and force as a closing condition. –Handout.

18. Questions & Comments