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  • Writer's picturePaul Peter Nicolai

Intellectual Property Due Diligence in M & A

Updated: Jul 13, 2023

In today’s digital world, companies are building and accumulating significant intellectual property portfolios, whether trademarks in branding assets, copyrights to website pages, patents to artificial intelligence processing applications and modules, or trade secrets to a treasured recipe or a client list. As businesses combine, divide, and engage in merger and acquisition activities, many businesses find their value may be partly grounded in their intellectual property. Evaluating intellectual property assets is a core portion of the diligence behind such a transaction.

The goal of any intellectual property due diligence in a potential transaction includes determining the target's intellectual property and its value. It will also include understanding the target company’s policies and practices regarding document retention; intellectual property registrations across jurisdictions; past, ongoing, or anticipated disputes; intellectual property enforcement; intellectual property protection measures; and the location of any intellectual property owned or licensed by the target company, as well as the local practices and IP compliance environment.

In cross-border deals or deals involving target companies with foreign subsidiaries or affiliates, where the buyer company is looking at intellectual property assets abroad, the intellectual property due diligence aims to understand the relevant jurisdictions’ intellectual property laws. For example, in Canada, there is no “work for hire” concept, and moral rights in intellectual property not only exist but stay with the inventor or creator. In India, intellectual property in software is handled only by copyright and cannot be patented.

Assessing the quality and integrity of the intellectual property assets helps the acquirer determine the risks associated with them, their value, and the business's overall value. The integrity of the development, acquisition, and transfer of intellectual property from the creator to the eventual beneficial owner often surfaces as the most significant risk in transactions involving companies, especially those based in India.

Since India handles IP in software as only eligible for copyright and not patent rights, strict IP movement needs to be documented and quickly done. Issues may also arise when intellectual property is owned by a third party or jointly owned by a third party. In carve-out transactions, it is essential to inquire whether the intellectual property is owned or used by the target or an affiliate not being acquired. Often, the seller assumes that even after the intellectual property is transferred, it will continue to be used by third parties or affiliates.

While helpful, it is critical to understand that the disclosures and agreements provided by the seller often do not paint a complete picture of the target’s intellectual property portfolio, assets, and liabilities. It is essential to understand the deal and the parties’ motivations for exploring and entering into it and to seek more context from each party when necessary. In addition to the deal context, market standards, and practices are essential to remember while conducting intellectual property due diligence.

Only then can one articulate any issues that need to be remedied pre- or post-closing to solidify the buyer’s rights and ability to protect the intellectual property purchased in the M&A transaction.

Open source is a concern while reviewing software licenses and other documents related to the use of such software. In addition to the above, there are other pieces of standard information typically reviewed and requested, including:

  • Patents and patent applications;

  • Trademarks;

  • Copyrights;

  • Trade secrets (usually protected by contract);

  • Corporate names;

  • Domain names;

  • Tag lines, by-lines, slogans, and brand hashtags;

  • Publicity rights;

  • Written works;

  • Brand assets;

  • Websites, online publications, and social media;

  • Software;

  • Databases

Privacy and data security diligence often raise data and intellectual property issues. This mainly happens with trade secrets since maintaining their value and status largely falls on confidentiality, security, and privacy measures the holder takes. It also arises because of the digital nature of how businesses' intellectual property assets are captured, stored, transmitted, and used in, and concern digital medium, which inevitably and with any reasonable care requires data and security activity.

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