Acquiring or selling companies — or parts of them — is one of the most common business dealings in the videogame industry. By parts, we don’t mean physical objects, but rather a stake, or, as it’s also known — equity. Technically, private individuals can be the investor, but usually, the investor is a company looking to acquire full or partial ownership of another business.
“It can be that a company needs capital to make certain changes in the company and therefore finds someone who purchases a stake. Alternatively, a company sees potential in another company and because of that wants to acquire a part of it,” said Viktor Sunnersjö, lawyer at Lawyer.se who has equity as one of his focus areas.
The process of acquiring equity can be done in different ways and different rules apply if the company being acquired is publicly traded or privately held. Here, we will stick to privately owned videogame studios, as the majority of studios in Sweden are privately owned.
From a legal standpoint, the process of equity acquisition can be simplified into three parts, Sunnersjö explained. (An exhaustive description of the process, which includes several key elements not specifically mentioned here, is beyond the scope of this article.)
The first one is due diligence, which is a review of the company being acquired; the second is the share purchasing agreement, which includes the terms of the actual purchase of the shares: and the third is the shareholders’ agreement, which dictates the relationship between the old and the new stakeholders in the company.
Negotiations to acquire a part of a videogame studio resemble those of other industries. What has become more common is venture capitalists who work exclusively with the videogame industry.
“We also see large publishers looking to acquire studios to secure the right to publish future games from these studios,” Sunnersjö said.
A recent example is Microsoft, which in 2021 finalized the $7.5 billion acquisition of ZeniMax Media, the parent company of Bethesda Softworks, the studio behind the Elder Scrolls franchise and Starfield.
“One thing that could differentiate the videogame industry from others is that it’s fairly young,” Sunnersjö noted. “There isn’t much institutional knowledge about how to handle the type of cash influx that we are now seeing.”
This can lead to challenges for studios being acquired, he said, adding that, on a general level, there are three things to be aware of in such negotiations.
“The first one is the ‘letter of intent’,” Sunnersjö explained. It lays out the basic terms of the deal. Once those terms are settled, parties can move on to the details of the deal.
“It is paramount to know which parts of the letter of intent are binding and which aren’t,” he said. As a rule, letters of intent are not legally binding, but parties can negotiate to make binding some of the terms in such a letter.
However, it’s not uncommon for a party to be mistaken in the belief that, since letters of intent as a rule aren’t binding, none of the clauses are, either. But if some of the terms have been specifically stated as binding, a mistake like this can land you in a whole lot of trouble if disagreements arise later in the negotiations.
“You are bound to those terms, it’s not something you can get out of.”
The second thing to remember relates to the share purchasing agreement and the shareholders’ agreement. Here, Sunnersjö said, you need an attorney by your side.
“If you don’t, it’s really hard to secure your rights and responsibilities.”
Third, you need to make sure that you have all your basic agreements within the company, like employment contracts; It’s necessary for when a potential investor does its due diligence.
Sunnersjö added, “If you are a smaller studio with an interest in having capital invested in the company at some point, you will scare potential investors away if you don’t have your paperwork in order.”
For videogame studios, Sunnersjö highlighted that making sure documents detailing the transfer of rights — intellectual property rights in particular — are written properly is especially important.