Intellectual property is an intangible asset which are patents, trademarks, copyrights, and trade secrets. So, what is intellectual property due diligence in M&A? Intellectual property due diligence (IP due diligence) is one type of due diligence that is sometimes overlooked. This can cause serious issues for the buyer. Our clients who have legal issues relating to IP due diligence can contact Apolo Lawyers (Tel: (+84) 903.419.479) to be consulted.
Here, you can find out why IP due diligence is so important in M&A, how to do it seamlessly (whether you are buy-side or sell-side) and when/who should complete the IP due diligence.
IP due diligence is essentially an audit to assess the quantity and the quality of intellectual property assets owned by, or licensed to, a company, business or individual. It should also include an assessment of how intellectual property is captured and protected by the relevant company or business. This activity is primarily intended to identify existing intellectual property assets of an enterprise by examining documents proving its ownership of an intellectual property object and determining whether there are any risks to these intellectual property rights. For example, whether the business is infringing upon the intellectual property rights of third parties, or whether there are any disputes in this regard or not.
In many M&A deals, buyers give limited or formal attention to the legal due diligence of the intellectual property. Instead, they focus primarily on issues related to the target capital structure of the company, asset ownership and liabilities. However, the intellectual property issue of a company often has many potential risks. So, the buyers should be aware of intellectual property due diligence in merger and acquisition process. Intellectual property due diligence is important for buyers because it can help them evaluate whether a target acquisition is worthwhile, to avoid deal-breakers, and/or determine how much the target company is worth.
The task of conducting an IP due diligence requires professional skills and should be conducted thoroughly. Ideally, IP due diligence should be conducted at the onset of the negotiations as it helps to identify any legal issues which may affect the value of the IP. When more time is allowed to complete due diligence investigation, this not only helps to determine a more reasoned value of the IP, but corrective action can proactively be taken if any legal concerns are identified.
Though every business transaction is different from each other and will have a different set of requirements for conducting an IP due diligence. Some of the general requirements that should be involved in an IP due diligence are:
In all businesses, patents, domain names, trademarks and brand names are the intangible assets and these are the intangible subject matter that needs to be identified.
Ownership is often one of the first issues investigated while conducting an IP due diligence. A series of questions are asked about each IP asset to establish the target rights of the company in it and whether those rights are free of any strains and can be easily transferred. If the ownership of the IP asset is disputed, the seller cannot transfer the title and rights of the asset to others. If the seller does not own the intangible asset, the evaluation will be done to check whether proper steps were taken to obtain the rights from the actual owner.
It is important to check the validity of each IP asset i.e., their term and territory. Most IP rights are limited to a certain territory only. So it is important to ascertain the territories in which the IP rights are protected. If the company operates in several countries and has not got the IP rights covered in all those territories, it might cause problems in the future.
IP assets like patents and copyrights are valid for a limited time period. On the other hand, copyrights can be protected perpetually. Local IP laws of each territory should be scrutinized to check the validity term of different IP assets.
Along with the ownership check, it is sensible to check any third-party claims or interests with respect to the IP asset of the seller. Sometimes rights can accrue in favor of a third party unknowingly also. So, scrutiny of all license and franchise agreements, joint venture agreements, and memorandum of understandings should be done to identify if any exclusive rights have been granted in relation to relevant IP. The records of the IP office can be perused with regard to the relevant IP asset to find any discrepancy.
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Further, while conducting IP due diligence it is important to check whether a third party is infringing an IP right of the company or it is the company that might infringe the right of a third party. In both cases, if the relevant IP rights are subject to any encumbrance, a dispute is likely to arise with the consequence of disrupting the business operations. A freedom to operate (FTO) search should be conducted to check whether the investor could make, use or sell the IP assets without infringing any third-party rights. This provides a more comprehensive insight into the patent rights of others and identifies any potential roadblocks. If any potential legal roadblocks are identified, steps can be taken to circumvent the issues that might arise later in the future.
IP due diligence is often completed before a sale of intellectual property. It can be completed by the seller and or the buyer and as part of an investment, merger, or acquisition. Intellectual property is just an area that might be acquired during a merger or acquisition. Intellectual property is often an afterthought. Often it is the most valuable aspect of a portfolio of a company.
Investigating intellectual property value and risk requires a highly specialized type of knowledge and skill set. IP due diligence takes a specialized set of skills. IP due diligence should be completed by an intellectual property attorney or team of attorneys.
If you are looking for help with intellectual property rights, due diligence in M&A, mergers and acquisitions or general advice, please do not hesitate to contact Apolo Lawyers via email at contact@apolo.com.vn or Hotline - (+84) 903419479 for the best legal advice and support. Our lawyers with legal experience can help to solve any of your problems.
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