Mergers, Acquisitions, and Divestments for Game Developers Part 1: Divestment

Given the recent news in the corporate realm for developers Bizarre Creations and Bungie, I thought it would be a good time to discuss some basics of corporate transactions. Accordingly, this will be the first of two articles on Mergers, Acquisitions, and Divestments. Given that today is Bungie's "independence day," I thought it would be appropriate to start with divestments, even though the industry seems to have far more mergers and acquisitions.

The basic concept is a spin off. An element of a company, for one reason or another, is pushed into an independent entity, or to another acquiring company. In the event of the latter, the points on mergers and acquisitions are equally relevant.

It would be almost impossible to outline every element of a divestment, and no two divestments are identical just based on the differences between companies. Rather than try to explain the process in depth, this article will give a short outline and some points to keep in mind if your group is being divested.

Generally, a divestment starts with a decision from some level of the corporation that the group needs to be spun off. Once the decision is ratified by the necessary people, then a new entity is set up to move the group into. The assets of the group are then sold to the new entity, and someone is appointed to be the head of the entity. The staff is then re-hired to the new entity, but typically all of this happens in a very short period of time with essentially no lag between the old and the new. Often, the original parent takes an interest in the new entity in exchange for the things being given to the new entity. The alternative is generally a promissory note of some sort, whereby the new entity will pay off the things they're getting from the old company.

Some important points to consider if your group is being divested:
1. Don't panic. Don't take it personally. Ultimately, this is just a business decision, and it's hard for a lot of people to separate "business" and "personal." If you treat it as a business decision and stay calm, it will make the transition a lot easier.
2. Get independent counsel. Odds are that a company large enough to have a divestment usually has an in house counsel or a law firm they do most of their deals with whom you've met or been used to dealing with. No matter how much you trust them, you want your own, independent counsel from an unrelated firm who has experience with transactions. When it comes right down to it, you want to have someone who is in your corner and has no possibility of having a divided interest. There is really no scenario under which this is a bad idea.
3. Make sure you get the important stuff in writing. Promises that are not in writing are generally not going to be honored. That is the unfortunate truth. However, if you took point 2 to heart, you will likely have an attorney you hired saying the same thing. If they promise you can take your really popular game series with you, from engine to trademark, make sure it's in a signed writing.
4. The whole thing is governed by the contract. This relates back to point 3. Typically, the writing in question is going to be the contract itself or an exhibit to the contract. There are really two important things to remember here:
1. If it's not in the contract, it's not going to happen.
2. A contract is an infinitely flexible document, and pretty much anything you want can be drafted into it, given a little work and, in some cases, creative thinking.

5. Make sure to resolve everything. One thing counsel should be able to offer you is experience, and that experience means most every little detail and strange contingency should be addressed in the contract. Keep in mind there is more to deal with than just the IP you created in the company. Things like what happens to employee health benefits, office furniture, parking spaces, etc. are all important. Moreover, if you're keeping the same office space, there will likely be a number of lease issues to deal with, or if the company owns the building, a lease will need to be drawn up. Even issues like interim working capital may be in the agreement, if separate funding is not occurring. Because there are so many details and contingencies, point 2 is really relevant from the time the decision is made since even the location and/or structure of the new entity can have different effects on things like taxation.

All in all, transactions like this occur daily in the corporate world, and so the basic concepts apply to all industries.

Two comments to the Bungie deal specifically:
1. If you're expecting the Bungie IPO to follow shortly, it seems unlikely in the immediate future given the choice of an LLC as an entity. Not to say it couldn't happen, but the choice of an LLC seems to suggest that isn't an immediate goal.
2. This might give more viability to the Halo DS theories.

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