Investors’ cash injection in the metaverse and Web3 has created increased M&A activity. Deploying an acquisition strategy to take over new technologies and capabilities is nothing new. The RTFKT acquisition by Nike is indeed considered a stepping-stone to M&A in the metaverse. Many M&A transactions will be in the gaming sector because of the cross-over potential between technologies and markets. Other deals will be pure metaverse play. This progress brings with it a host of legal challenges, however. Much of the application of existing laws as well as potential creation of new laws in the metaverse remains unknown. The scope of all laws and regulations that can or might be implicated in a metaverse is practically unbounded and might generate countless legal challenges. In this Series, we explore some of the key issues that dealmakers should consider when entering the metaverse M&A arena.
Owning, Licensing and Protecting IP
The IP value of targets, which is assessed proportionally to the market value of targets, continues to grow. IP in the metaverse M&A are particularly relevant since the metaverse encapsulates a range of technologies, literary and artistic works, designs, logos, symbols and imagery, most of which have been historically protected by IP laws. Although the metaverse is opening new avenues for new technology creators, it will challenge the known principles of copyright works and rights ownership, for example, and trigger questions such as whether its information landscape and virtual creations qualify for legal protection and ownership at all. It will also change the way we think about content licensing: licensors want robust protection, licensees want the licenses to be sufficiently broad to adapt to evolving use cases, and end-users will focus on user experience. Although existing frameworks that protect intangible property rely heavily on a centralized authority involving regulators and courts, the metaverse is based on a vision of decentralized internet with a preference for distributed consensus mechanisms.
Ensuring Data Protection and Privacy
Data privacy is playing an ever-increasingly important role in determining the value of M&A deals. However, applying today’s privacy and data protection laws to the metaverse will be challenging, and some of the existing rules could become obsolete in that sphere. How should we determine which individual rights apply, and who is responsible for complying? How should we implement and enforce privacy laws that are focused on transparency, tracking and monitoring in the metaverse? How should we manage the mass sharing of personal data and set up contractual accountability and the privacy obligations that are required to protect its use?
Examining Antitrust Issues with Caution
Antitrust law is key in M&A, and the metaverse will not change that. Competition authorities would likely want to ensure that there is sufficient access to product or services that are considered to be indispensable for effective competition in the metaverse. The rules for addressing market power among certain digital players will continue to be relevant in the metaverse. Also, especially since advertising markets in digital ecosystems have been the subject of several competition investigations, the authorities will continue to be keenly interested in digital advertising in the metaverse. They are expected to increasingly enforce premerger screenings in the context of metaverse M&A to discourage “killer acquisitions” in which there is a risk that an incumbent’s acquisition of a new challenger would eliminate promising and likely competing innovation.
Navigating Tax Complexity
A deal’s tax treatment is typically a primary consideration of the parties in negotiating the deal structure. The metaverse and its underlying Web3 technology can raise tax challenges. This adds a layer of complexity and risk for international businesses that must carefully navigate this fast-changing tax landscape. Rather than adopting new legislation, jurisdictions are taking steps to extend existing legislative frameworks. While the decentralized and widely unregulated nature of the metaverse is problematic, the metaverse also holds tools, like blockchain, that make it easier to efficiently collect the right tax at the right time. Real-time tax reporting engines could indeed be built on top of blockchain transactions, which automatically share transaction information with tax authorities as they happen.