Risks related to social media assets during a merger or acquisition
When a company is preparing for a merger or an acquisition, it is expected to prepare a list of all its assets. The buying company will then review this list of specific assets and include a series of representations and warranties in the purchase agreement that are designed to decrease the buyer’s liabilities while ensuring the buying company maximizes the potential value of a selling company’s different assets.
Despite the detailed treatment given to assets such as office printers or company cars, most purchase agreements either fail to address social media assets or give these assets a superficial treatment. This superficial treatment regarding social media assets is increasingly problematic due to businesses’ increasing reliance on influencer marketing and social media marketing.
A company’s Facebook, Twitter, Instagram page and associated connections and followers can sometimes be one of the more valuable business assets a company owns. A recent study by Forbes found that people between the age of 25 – 34 are 60% more loyal to companies they follow on social media. With social media driving customer loyalty, companies are predicted to spend $120 billion in digital marketing by 2021 – this number accounts for 46% of the total spent on marketing in the United States per year.
By failing to provide detailed treatment to these valuable assets, buyers are finding that after the deal is closed, the selling business does not actually have transferable title in the social media assets and must face expensive litigation to gain ownership of these valuable digital assets. This ends up being an expense the buyer must cover if the purchase agreement did not include any representation or warranty regarding the selling company’s ownership in its social media assets.
Seller’s lack of ownership or transferable ownership in social media assets
One of the most unpleasant surprises a buyer may face after a deal is closed is that the selling business does not actually own its social media assets. Instead, the buyer is faced with a low-level employee asserting ownership over the company’s social media assets because the company lacked appropriate policies and contracts that ensured all employee IP is transferred to the company.
This conflict of ownership between employee and company is particularly relevant during merger and acquisition (M&A) transactions, due to frequent termination or turnover of employees during an acquisition. These disgruntled employees, who controlled the social media accounts, may refuse to turn over the passwords because they believe the social media assets are their intellectual property.
Employee ownership in social media assets was recently addressed in a settled California case. In this case, an employee refused to turn over control of the company’s Twitter account with over 17,000 followers. The company then filed a complaint against the employee asserting $340,000 in damages. The employee based his decision to not turn over the Twitter account on four premises:
- Twitter owned the account instead of the company, because, according to Twitter’s terms of service, Twitter accounts belong to Twitter and not Twitter users;
- The followers do not belong to the company, because Twitter followers are humans with the ability and discretion to follow and unfollow accounts;
- As the company cannot own the account or followers, any value attributed to the Twitter account was his intellectual property because he created the tweets and the follower’s interest were in his tweets; and
- Industry precedent is that “absent and agreement prohibiting any employee from doing so, after an employee leaves and employer, they are free to change their Twitter handle.”
As this matter was settled out of court, these issues were never fully adjudicated. However, whatever the settlement ended up being, the employee has ended up keeping the Twitter account and the Twitter followers suggesting that the employee’s argument had merit. But most importantly, it shows the importance of companies adopting clear policies related to their business-related social media assets, as it is unlikely the employee’s argument would have held if there were clear policies and contracts.
How can I protect my business?
When undergoing due diligence, buyers should review the selling company’s employment policies to ensure appropriate protections. An example of employment policies saving the day is in a recent case where a terminated employee asserted ownership of the social media accounts. Fortunately, the company had a policy requiring all employees to sign an agreement stating that all work created by the employee “shall be the sole and exclusive property” of the company. Even though this line does not specifically mention social media assets, the New York Court found this line in the employment agreement sufficient to hold the company owned all rights to all social media accounts created by the employee.
If the company does not have hiring policies that initial ensure ownership of employee-created IP, an option on the back-end is to have the employee sign a Proprietary Information Agreement (“PIA”) or another assignment contract that covers social media asset ownership. Simple steps like this can ensure that a buying company will gain clean ownership to a selling company’s social media accounts.
Guaranteeing ownership is not the only hurdle buyer’s face regarding social media assets. My next post will cover the growing number of third-party liabilities buyers unwittingly open their business up to without appropriate warranties and representations in the purchase agreement.