Intellectual Property due diligence in Mergers and Acquisitions
Posted: 24th July 2017 08:29
Intellectual property (IP) is often a key part of the rationale for an M&A transaction. Early planning, especially when you are the seller, can certainly make the difference between success and failure. It is surprising how often companies do not know what IP rights they own. Identification of all assets: patents, trade marks, designs, copyright, know-how and materials all add to the value of a company and none should be assumed valueless. Also consider licensed rights – these have a value too if exclusive.
Ensuring all such rights are identified, documented and ownership is demonstrated via a “paper trail” is critical, especially if the rights have passed through several pairs of hands to the current owner. Where patents are concerned, inventor assignments and/or employment contracts demonstrating that all rights belong to the seller should be identified; where trade marks or software are involved, the copyright for those must have been assigned - this also applies to the company website and any other corporate materials.
A seller should be prepared and clearly present their intellectual property in a report, setting out its relevance to the various aspects of the business on a product-by-product or service basis. Legal-standard documentation on assets, carefully documented and listed in a secure dataroom, can make a huge difference to the length of time taken, cost and the likelihood of success of the process. It can also have a positive impact on the impression created on the prospective buyer. If the rights do not appear to be as stated, suspicion can be aroused that other aspects of the business have been poorly managed; on the reverse, a professionally presented IP position and set of documents can suggest a very well run company.
If your IP legal advisor is also providing the dataroom service this can prove very efficient since the most relevant documents can be quickly identified and put into the dataroom. In such a situation this IP advisor should also be experienced in handling specific issues, such as limiting access to chemical structure data (in the case of pharmaceutical due diligence). The dataroom must have a high level of security and the ability to be “date stamped” or copied into a read-only format at different stages of the merger or acquisition process.
When looking to acquire, effective and targeted due diligence is essential, especially in respect of intellectual property, due to the cost. Considering what the key aspects of the transaction are and focusing due diligence on just those rights and/or territories can avoid significant displacement activity and time. Insisting on the seller providing quality documentation summarising their IP and its relevance can also save time. Background checks are helpful especially where the IP assets are know-how, to ensure that key individuals have documented everything during their time in employment. If employees are likely to leave as a result of the transaction, it is important to know that they are not going to remove with them key intellectual property assets from the company which exist only in their head, as this is notoriously difficult to prove or rectify. Warranties that everything has been documented can help but are no substitute for good due diligence.
The most effective management method is to allow a trusted patent attorney to interact directly with the lawyers and if possible the attorneys and lawyers acting for the other side – critical time and costs can be saved by allowing the experts from both sides to communicate. If the patent attorneys conducting the due diligence remain engaged to integrate and manage the acquired intellectual property it can represent a significant cost saving, because a good due diligence exercise will bring a patent attorney right up to speed with key issues and solutions.
It is critical to understand if there are any past, pending or future legal constraints, obligations to third parties where rights have been licensed and therefore are no longer available to the acquirer, inventorship or ownership and employee issues, as well as threats and potential infringement suits. Always ask about freedom to operate and what analysis has been carried out to establish it. It is not unreasonable to expect that major competitors and some key areas have been searched and analysed – but it is also unrealistic to assume a company has been exhaustive especially if the products or processes are still in development.
In a merger it is critical for due diligence that there are enough individuals involved to deal with evaluation of the other side’s IP and to respond to queries relating to your own – two teams working separately but in communication can be the most effective way.Lawyers practising in different jurisdictions, possibly also in different languages, can cause problems particularly with differences in interpretation of the law. It is also important to consider the tax implications of moving intellectual property between territories, as IP is a taxable asset in many jurisdictions.
The key to managing risk in an M&A transaction is to plan the process as much as possible; identify the key aspects of due diligence, the right resource to carry out the tasks, the budget for the job and a realistic deadline. A shortlist of questions that need to be answered – and not just lists of information to be supplied – can be an extremely helpful tool to check on the due diligence process as it proceeds.