The rapid increase in acquisitions of businesses with innovative and emerging businesses and technologies has created a need to identify and address key intellectual property (IP) considerations associated with such businesses and technologies. In such cases, IP is essential to the acquired business and thus a key driver, or even the sole purpose of the acquisition. As a result, the acquirers will need to conduct extensive legal due diligence on the target companies in terms of intellectual property.
Patents, designs, trademarks, geographical indications, protection of new plant varieties, and semiconductor integrated circuit layout designs are examples of statutory IP rights. Trade secrets in some countries are not protected by statute, but they are protected by equity and contractual law.
To effectively complete the acquisition, it is necessary to ensure that both the acquirer and the seller’s commercial objectives are met. The acquirer’s goal in acquiring an IP-driven business company would be to ensure that the business and underlying IP can be commercially utilized after the acquisition. The acquirer will require the following confirmations in this regard:
- the title of the seller to the IP of the product is clear and unencumbered;
- there are no third-party rights over the IP that restrict its commercial use post-acquisition;
- the acquired IP is valid and enforceable in all jurisdictions that the acquirer intends to operate in;
- there are no third-party infringement claims over the acquired IP;
- the acquired IP covers in its scope the entire product or technology sought to be acquired; and
- the IP protection term covers the period of its commercial exploitation.
The seller’s goal is to ensure that the IP sold is specific to the company concerned and does not apply to any of its other businesses. The seller will want the following assurances in this regard:
- that the IP is limited to the technology or business that is intended to be bought and does not include any other businesses or technologies, such as the seller’s preceding IP;
- the seller is not making assurances for any third-party IP such as open-code software or third-party licensed IP; and
- the seller does not assume risks for IP with inherent issues (eg, enforceability in a particular jurisdiction).
The following are some of the most important IP concerns that both the acquirer and the seller should take into consideration during the purchase transaction in light of the aforementioned goals.
The target company and the technology that is being sought after must both undergo IP due diligence, which must cover the following areas.
The IP’s legal owner the business
Since the target company’s business is the main focus of the acquisition, it is crucial that ownership of the IP in the business is transparent, unhindered, and documented in accordance with legal registration paperwork. In this regard, the acquirer is required to carry out a patent search in order to ensure that the target company is, in fact, the owner of the technology or product in question as well as the patents relating to it. In order to confirm that the patent actually covers the full technology sought after for acquisition, patent certifications must also be examined. Applications for or registrations of trademarks and logos must also be examined and verified.
It is also required to examine whether the IP was given to the target company by the parties involved in its development. It is frequently discovered that these people are no longer employed by the target company. In such cases, it is essential to determine if the target company will still be able to utilize the IP in the core business after the purchase (in the absence of IP assignment documentation).
It is also necessary to determine whether target company employees or consultants who contributed to the development of the technology have transferred their intellectual property to the target company, either in accordance with their employment or consulting agreement or in accordance with a different IP assignment agreement. It will also be necessary to determine if the scope of such assignment clauses covers the full technology or product, as well as any derivative forms.
In a cross-border acquisition, proper certificates of title as specified in that jurisdiction will have to be verified by the acquirer’s counsel to confirm the title to the important IP.
It’s crucial for the acquirer to comprehend how dependent the company is on intellectual property that cannot be registered or patented. For instance, algorithms and computer programs as a whole are not patentable innovations in some countries. Therefore, if the target company relies on such computer programs or algorithms, the consequences of non-patentability could be quite serious and could even contradict the goal of the acquisition.
Any technology that is supported by IP that has been licensed from a third party must be examined for dependence. Considerable factors include, for example, whether:
- the license of such IP would be extended on the same terms to the acquirer;
- any acquisition of the technology would trigger any change of control provisions of the licensed IP; or
- there are any other restrictions or consent requirements from the licensor of such IP in the event of any acquisition.
The acquirer will also check to see whether there are any third-party IP claims or legal actions related to infringement, ownership problems, etc.
IP rights are territorial in scope. In other words, unless measures are done in each country of concern to protect such IP, IP rights protected in one country do not protect the same IP in another. Determining the territorial scope of IP is important when an acquisition has global implications or involves many territories.
The regions or jurisdictions where the acquired IP is protected must be determined. In this regard, it becomes critical to ensure that the acquired IP is protected in the relevant jurisdiction. The IP would otherwise be available for free use by third parties in the relevant country, despite the acquirer paying a large sum of money for its transfer under the acquisition. If intellectual property is not protected in a territory, anyone may potentially exploit it there without restriction and there would be no way to stop them. The IP holder can only exercise the rights against an unauthorized user if the IP is protected by statutory or equitable rights.
IP-related representations and warranties
The following aspects must be covered by the IP-related representations and warranties in the acquisition of businesses with an IP-centric business model.
The seller’s representations and warranties regarding rights or ownership in the IP are the most important of all the representations and warranties relating to IP. The acquirer will want assurance that the seller is the only owner of all intellectual property related to each component of the technology and that this ownership is free from constraints, outstanding debts, and third-party rights. The seller would also want to make sure that nothing prevents it from taking full advantage of the technology’s intellectual property (IP). Any such restriction would decrease the technology’s value and might have an impact on how much the acquirer is willing to pay to acquire the target business and the related technology.
During the due diligence process, the acquirer will also verify to see if the seller has a license or other authorization to exploit any intellectual property (IP) belonging to third parties that is crucial to the target company’s technology or operations. If the target company merges or changes management, the acquirer will need to determine if these licenses or contracts will remain valid. In the event of a merger or acquisition, the acquirer will have to think about the implications of terminating these licenses and contracts and how it may affect the target company’s operations after the merger or acquisition.
The acquisition price will be impacted by the lack of continuity of these licenses and contracts in the case of a merger or acquisition of the target business.
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