License considerations for the biorefining industry

March 10, 2011

BY Ron Kotrba

I covered the topic of buying industrial assets with the possibility of not receiving license to use the process technologies inside them just yesterday on my F.A.M.E. Forum blog at www.biodieselmagazine.com, and it strikes me that this is a very appropriate issue to the biorefining industry as well, particularly if a project developer is looking to buy a distressed, existing first-generation biofuel plant with intentions of modifying the process.

John Eustermann, partner attorney with Stoel Rives, says some technology licenses have clauses that state if any modifications or upgrades are made, the licensor would own the rights to the modified process technology. He adds that there is really a lot involved in buying an existing process facility: signability provisions; contractual assets for technology and feedstock agreements; the language of licensing regarding upgrades and modifications; and much more.

“If you’re buying assets, what representations are the sellers making, and what warranties are there?” he says. He likens it to buying a car—are you getting a warranty with it, or is the sale as is?

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So if you’re buying a plant and plan to upgrade a first-gen plant to produce advanced biofuels and biobased chemicals, for instance, do your due diligence.

Eustermann says get the lay of the land on how to evaluate the deal, maybe get a letter of intent signed, or a nondisclosure agreement from the potential buyer so, if the sale is not public, no undue hardship is caused if others find out.

He also says to maybe get a no-shop provision. But, he points out, there’s a cost to that. “Don’t just walk around the plant and say, ‘Okay, it’s running, let’s go!’ Look at the contractual assets and make sure there are no risks, or if there are risks, you know how to deal with them,” Eustermann says.

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Dean Edstrom, partner attorney with Lindquist & Vennum, says it is a very important part of due diligence work on behalf of potential buyers to scrutinize the terms of the technology license, and determine first if it is transferable or not. There might be several process technologies under license that a biorefinery project developer may want to continue using in their new, upgraded facility.

“[The license] may not be transferrable on the sale of the assets,” Edstrom says. There are ways to get around this, if the seller and the buyer can agree. For instance, a merger between the selling entity and the buyer, or a subsidiary of the buyer, may allow continued use of the technology license since there technically isn’t any “transfer” of ownership or use rights. However, if the license is drafted tightly, Edstrom says it could terminate on merger and/or bankruptcy.

There’s also the possibility of a reverse merger, which intuitively may not make sense but by some magic of the law, as Edstrom says, it works. He says the REG Blackhawk Biofuels deal was completed through a reverse merger. If the buyer is really in a jam though, they can try to renegotiate with the technology licensor.

These are just a few of the many heavy considerations potential buyers of existing industrial assets must address in doing their due diligence. Under these circumstances, the importance of project developers having a good, knowledgeable attorney on their side has never seemed more critical.

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