Level I – Introduction

For almost three decades, the computer gaming industry has found itself in a fast paced and highly dynamic development and change process. The games have developed in all of their aspects, including graphics, sound, music but also storytelling and art. The interest for playing computer games has steadily increased on all platforms with a peak on mobile gaming nowadays. The computer gaming industry has thus become a multi-billion dollar business attracting investors globally.

As a result of this development, the invention, development, production and distribution of computer games have become highly complex and require a wide array of highly specialized people. This has led to distributors and development studios competing for creative minds and artists, capable programmers, sound engineers, etc. Competitive advantages are frequently achieved by acquiring other game publishers and game developing studios (hereinafter “Gaming Company” or “Gaming Companies”) together with their directors, employees and contractors. Therefore, it is not surprising that the number of M&A transactions and the values of such transactions in the gaming industry has increased significantly in recent times. This includes for example the 1.2 billion investment in Epic Games, Supercell’s investment in Redemption Games and the acquisition of Koch Media group by THQ.

This article focuses on the key legal aspects that investors and buyers need to be aware of when investing in or acquiring Gaming Companies.

Level II – Legal Due Diligence – “Wanting something does not give you the right to have it.” (Ezio Auditore, Assassin’s Creed 2)

As in any other industry, it is essential to conduct a thorough due diligence of the target company in order to identify potential issues that may have an impact on the value of the target company. Such due diligence will typically cover finance, tax and operations. With regard to the legal due diligence, the typical legal areas of relevance are: corporate, IP, IT and employment.

1. Corporate / Shareholding Issues – The Players or “Does this unit have a soul?” (Legion, Mass Effect 3)

Game studios very often begin as small studios with start-up structures. These studios are usually financed by the founders or seed/venture capital investors in the form of equity, debt or mixtures thereof (convertible loans, option rights, etc.). Such financing structures often result in complex shareholding structures with shareholders having a variety of rights in and to the shares in the Gaming Company. These rights are usually stipulated in the articles and by-laws of the Gaming Company or separate shareholder agreements between the shareholders. These documents typically include veto rights regarding the sale and transfer of shares by other shareholders, rights of first refusal, pre-emptive rights and/or option rights. Additionally, shareholders may have redemption rights and/or the right to request the sale of their shares to the buyer if another shareholder sells its shares to the buyer (tag along right).

As a consequence, the investment in the Gaming Company and acquisition of shares in the Gaming Company usually requires a disentanglement of such complex shareholder structures in order for the buyer to receive all or the intended ratio of shares in the Gaming Company.

In cases where outside lenders are financing the Gaming Company with loans, they usually request collateral securing their repayment claims. In case of Gaming Companies, this means that that the IP rights to the developed and distributed games may be encumbered.

2. IP Issues – The Creators or “The right man in the wrong place can make all the difference in the world.” (G-Man, Half-Life 2)

The games and its creators are the heart of a game studio. Almost everything that is created in the process of making a game can be considered intellectual property. This includes the art design, the music, the storytelling, the technology, the source code and much more. For an investor and a buyer of a game studio it is thus of utmost importance that the intellectual property rights in and to the creations belong to the game studio. The same applies to a publisher’s licenses to such intellectual property in the distributed games.

Very often, a review of the agreements with employees and/or independent consultants of Gaming Companies reveals that the transfer and ownership of intellectual property rights is poorly drafted in the employment and/or consultancy agreements. In particular, it often remains unclear and ambiguous whether the employee/consultant or the Gaming Company becomes the owner of the created intellectual property. This applies in particular to jurisdictions where a “work made for hire”-concept does not exist. Additionally, it often remains unclear if the employer obtains the exploitation rights only or also the rights to edit the work.

In jurisdictions where the ownership of such intellectual property rights is not regulated by law, the investor/buyer cannot be certain whether it actually acquires the relevant intellectual property rights.

3. IT Issues – The Technology or “AAAAAAAAAAAAHHHRHGHHHGH thump” (Tarhiel, Elder Scrolls III: Morrowind)

(a) Equally important as the creators and the created IP is the used technology and the rights to use such technology. 

Game studios create games for all kinds of gaming platforms. Such platforms are for example Xbox, Playstation, Switch, etc. The companies developing such platforms, in particular Microsoft, Sony and Nintendo usually conclude license agreements with the studios, which allow the studios to use development kits in order to create the games for these platforms. Very often, these license agreements provide for the game studios granting broad rights to the developers of the gaming platforms such as Microsoft. Of particular interest in M&A transactions are so called change of control clauses in the Gaming Company’s important agreements which give the other party the right to terminate the respective agreement without notice if the majority shareholder of the Gaming Company changes or if the licensor is not informed in time about such transfer.

Additionally, the smaller game studios tend to be imposed with overly burdensome obligations in license and service agreements with big IT firms. An example is a broad compliance clause pursuant to which the Gaming Company as licensee is obliged to be in compliance with any existing laws at all times. As a consequence, the game studios have the Sword of Damocles hanging over them that they may lose the important software licenses in case of any breaches of law.

(b) As of 25 May 2018, the European Union (“EU”) Data Protection Regulation (“GDPR”) has replaced the comprehensive 1995 European Union Data Protection Directive. The GDPR established multiple new data protection requirements that are generally stricter and more comprehensive than pre-GDPR requirements. The GDPR also made enforcement more rigorous, introducing data breach notification requirements and substantially increasing penalties for non-compliance. Due to the high fines of up to EUR 20M or up to 4% of the total worldwide annual turnover, compliance with the GDPR is crucial also for Gaming Companies.

4. Employment Issues – The Force or “We all make choices in life, but in the end our choices make us.” (Andrew Ryan, Bioshock)

(a) We have spoken about the creators above. Very often, in the legal due diligences, it is discovered that not only issues around the created IP exist, but also around the creators themselves.

Frequently, external service providers such as consultants and developers are hired by the Gaming Companies to support the Gaming Companies’ own employed teams. This allows the Gaming Companies to access special knowledge and creative potential of third persons and/or to cover temporary high demands without having to employ them permanently.

However, buyers and investors of Gaming Companies are repeatedly confronted with the question whether such external service providers may be characterized as employees of the Gaming Companies from an employment law perspective. This is generally the case if the external service providers are integrated in the Gaming Company’s daily business organization similar to an employee. Indications for such integration are (i) obligation to follow instructions, e.g. by the Gaming Company’s directors, (ii) use of the Gaming Company’s email address and telephone, (iii) amount of hours worked in the offices of the Gaming Company and (iv) amount of other work of the service provider.

If the external service providers are in fact to be characterized as employees this has several consequences reaching from the obligation of the Gaming Company to subsequently pay social security contributions and taxes for the respective service providers to criminal liability.

(b) Considering the focus of game studios to create products of art, it is understandable that legal issues are often times neglected. It thus comes at no surprise that many employment contracts with the creators lack employment terms that are market standard in bigger corporate organizations. This may create issues for the game studios in particular when it comes to the employment contracts of key employees. Quite often, their employment contracts do not provide for (post-contractual) non-compete or confidentiality clauses. As a consequence, the creators are theoretically free to work for a competing game studio during and after their employment at the respective Gaming Company. The buyer/investor thus faces the risk of competitors already possessing the knowledge, in particular the know-how of the creators, which often times is the main asset of the transaction.

(c) Third, employment issues can result from the factual circumstances of how the work is carried out at the Gaming Company. A widespread phenomenon at game developers are so called “crunches” (see for example: https://www.digitaltrends.com/gaming/how-crunch-affects-game-developers/). These crunches usually occur shortly before the expiry of deadlines when ambitious projects need to be finished. Legally, crunches can be characterized as illegal overtime work breaching employment laws such as the German Working Time Act. This may result in severe penalties and criminal liability.

Level III. Negotiating Solutions in the Acquisition Agreements – Boss Fight or “Life is a negotiation. We all want. We all give to get what we want.” (Mordin Solus, Mass Effect 2)

We have seen that acquiring or investing in game studios and distributors bears several risks. Such risks can and should be addressed in the transaction documents (i.e. the acquisition or investment agreement). Generally, such risks can be mitigated and/or shifted to the seller (i) by including seller representations and warranties and specific indemnities in the acquisition agreement, and/or (ii) by setting incentives for the seller(s) e.g. in the payment terms.

1. Payment terms

(a) More frequently than average, share purchase agreements in the gaming sector provide for earn-out payments. Earn-outs means that the payment of parts of the purchase price are deferred and subject to certain targets being achieved, such as a certain EBITDA, revenue or other success indicators.

Such earn-outs often times bridge the parties’ disagreement about the purchase price, in particular if the purchaser is uncertain about the target company’s ability to achieve its business plan on which the seller’s purchase price expectations are based. Game Companies usually have one or several games in the pipeline when they are acquired. The future economic success of such games is almost always uncertain and thus there is a high risk for the purchaser/investor to pay too much. As such, the use of earn-outs is often a useful tool for the parties to overcome their disagreement on the purchase price resulting from such uncertainty and to nonetheless conclude the transaction.  

(b) Another method is to pay the seller with shares in the purchaser. Reason for such payment in shares can be that the purchaser does not have or cannot obtain sufficient cash funding to pay the purchase price, e.g. if the purchaser is a small game studio itself. Moreover, the buyer incentivizes the seller to remain interested and engaged in the business of the acquired company since the value of such shares increases if the acquired Gaming Company is successful. 

2. Corporate concerns

In particular, when the buyer faces start-up or venture capital structures in the shareholding structure of the game studio, the buyer needs to make a decision if he wishes to acquire all shares or only a (majority / minority) participation in the Gaming Company.

(a) If the buyer wishes to acquire all shares, the buyer needs to convince all shareholders to sell their shares. This usually results in strenuous negotiation proceedings because often times the different sellers have deviating and/or conflicting interests.

(b) Also in cases where the buyer wishes to acquire only a participation in the Gaming Company, the buyer is usually confronted with a mixed bag of issues that need to be considered:

Prior to being able to sell shares in the Gaming Company, the willing shareholder(s) and the purchaser need to deal with the pre-emptive rights, rights of first refusal, and/or tag along rights of the other shareholders. Such rights are often stipulated in shareholders’ agreements or the articles of the Gaming Company. Such share transfer restrictions entitle the other shareholders to either acquire the shares of the willing shareholders at the terms offered by the buyer or to sell their own shares to the buyer together with the willing shareholders’ shares. This means that the buyer may end up acquiring no shares at all or too many shares respectively. Typically, such rights of the other shareholders are tackled by buyers asking the willing shareholders to obtain waivers from the other shareholders prior to signing or closing the transaction. In addition to such waivers, also approvals and/or consents are frequently required and need to be obtained from the other shareholders in order to sell and transfer the shares.

Additionally, the rights and obligations of the buyer as a future (majority or minority) shareholder within the group of shareholders need to be agreed and regulated. This is typically done by amending or replacing the existing shareholders’ agreement and adapting the articles so that they reflect in particular any future minority/majority rights and the corporate governance of the Gaming Company.

3. Representations and warranties

An investor will try to protect itself as much as possible from the aforementioned risks and issues by requesting representations and warranties from the seller. Such reps and warranties cover in particular unknown and rather abstract risks when acquiring a Gaming Company. In brief, representations and warranties regarding IP, IT and employment issues as outlined above are key and should cover at least the following:

  • IP warranties: As part of the IP warranties, the Seller should guarantee the validity and enforceability of the IP created and/or owned in the Gaming Company. In particular, with regard to IP created by the employees of the studio, the seller must guarantee that the Gaming Company is and has been compliant with the German Employee Invention Act. Additionally, the seller should guarantee that other parties do not infringe the Gaming Company’s IP and that the Gaming Company does not infringe other parties’ IP. Also crucial is that any litigation regarding the owned or licensed IP rights of the Gaming Company be fully disclosed.
  • IT/GDPR warranties: A core warranty with regard to the Gaming Company’s IT is that all software is owned and/or all software is licensed that is required and will remain in place for a sufficient time period after Closing to conduct the business of the Gaming Company. This means in particular that no change of control rights exist that allow the contract partner to terminate the license agreement as a consequence of the transaction. If such change of control right is identified in course of the due diligence and the software license is material to the Gaming Company’s business, the investor should request that a waiver of such termination right is obtained from the contract partner prior to the completion of the transaction. Additionally, the Seller should warrant that the hardware of the Gaming Company is protected against viruses and attacks or unauthorized access; that the data is secured and backups are made regularly, and that no interruptions or data losses have occurred in the past.
  • Crucial with regard to the development of games is also an open source warranty. Seller should guarantee that if open source software has been used to develop or integrated into a game or other software in connection therewith, the use and integration of open source software does not create any obligation for the Gaming Company to grant to any third party any rights in the created software or to disclose any source code of the created software.
  • Last but not least, compliance with data protection rules, in particular the General Data Protection Regulation, has gained a high attention since breaches of such rules may result in immense fines (see above). Warranties in this regard are thus nowadays standard and should also not be missed when investing in Gaming Companies.
  • Employment: Representations and warranties with regard to the employment structure of the sold Gaming Company usually form a big part of the reps and warranties section. There are material employment reps and warranties, which should be given by the seller. One of the most important guarantee is the compliance with employment laws. This includes in particular social security laws, tax laws, working time laws, employee protection laws, employee leasing laws and employee invention laws. With regard to freelancers, it needs to be ensured that all salaries and – if applicable – social security contributions and taxes have been paid. By negotiating a guarantee regarding the compliance with working time laws, Seller may find out about crunches that happened in the past.
  • Compliance with laws: The above-mentioned compliance with laws guarantee is also important with regard to other areas. However, there are certain areas, for which such guarantee will be difficult to obtain. This applies in particular with regard to recent developments and new phenomena in the gaming industry. Such new developments are for example loot boxes which may be characterized as gambling according to gambling laws (see for example: https://www.linkedin.com/pulse/loot-boxes-belgium-reports-criminal-prosecution-what-sebastian/). Additionally, several publishers and developers intend to use the new technology blockchain as part of the games (see for example: https://blockchaingamealliance.org/). Such new technologies need to be assessed in light of existing laws and court decisions, which may complicate the investment.

4. Specific indemnities

Representations and warranties usually do not cover risks, which are known to the investor or buyer of the Gaming Company, for example as a result of the due diligence or a disclosure by the seller. Such known risks will need to be addressed in specific indemnities. In such specific indemnity, the seller undertakes to defend, indemnify and hold harmless the investor or buyer from and against any and all liabilities (whether present or future, actual or contingent), damages, losses and reasonable out-of-pocket costs and expenses arising out of or in connection with the identified risk. For example, if freelancers were used and the buyer identified a concrete risk that these freelancers may qualify as employees of the game studio, seller would need to indemnify buyer and/or the company from any outstanding social security contributions, taxes, termination costs and fines.

Level IV. Game Won? or “Thank you Mario! But our Princess is in another castle!” (Toad, Super Mario Bros.)

After the Gaming Company has been acquired, the post-merger integration process needs to be carried out. This usually means a transformation process for the Gaming Company that can have quite an impact on the culture of the Gaming Company and its employees. Such post-merger integration usually includes the change of the governance structures (amendment of articles and by-laws; implementation of rules of procedure, reporting obligations, etc.), the amendment of employment contracts, exchange of IT soft- and hardware etc.

In the case of a successful acquisition, the investor may have finally found its princess in the castle. 


Tino advises clients with planning and implementing multi-jurisdictional and domestic mergers and acquisitions, and corporate reorganizations. Tino also advises on general German corporate law. As a field of particular interest, Tino focuses on transactions in the gaming and media industry.