Assessing the Value of IP Always Pays Dividends in M&A
An M&A deal is always exciting for both the buyer and seller. For some companies, it is a once-in-a-lifetime experience, while others may go through numerous transactions over the course of their lifecycle.
As a prospective buyer, you should always make sure that the target company's intellectual property is included in the scope of the due diligence review. IP due diligence is particularly important when the buyer is not familiar with the market or industry of the target company. A proper review will enable you to make an informed decision, as the value of IP could have a major impact on the valuation of the entire target.
Financiers also tend to be very interested in whether the company they are funding can mitigate the risks and avoid business interruptions that could be caused by, for example, a missing licence or a competitor's infringement claim.
To help you avoid some of the worst IP pitfalls, we have put together a list of six key issues for a buyer to focus on when preparing a deal.
1. What IP Does the Target Company Have?
- From the very start, it is a good idea to map out what IP the target company already has. The target company's IP could consist of trade names, trademarks, domain names, designs, patents, utility models and copyrights.
- If the IP can be registered, it is worth confirming whether they have already been registered or whether any applications are still pending.
2. Is the Target Company's IP Sufficiently Protected?
- If the target company has protected its products and services, for example, by registering trademarks, it's important for the buyer to check what classifications of goods and services the trademarks have been registered under. The classification determines the scope of protection.
- The geographic scope of the IP rights also needs careful review to make sure that the registrations are in force where the target company is actually doing business.
- If the target company has patented technology, it is worth checking the scope of protection provided by the patent. It is not uncommon to find that a patent alone does not provide sufficient protection for a target company's key products.
3. Who Owns the Target Company's IP?
- In the due diligence review it should be always checked who owns the IPs that are included to the deal. It is also vital to know, for example, whether the target company has granted licences to its own IP or uses licensed IP. If the IP is not in the name or ownership of the target company, this needs to be worked out with the target in advance and taken into account in the sale and purchase agreement.
- If the target company has licence agreements, the buyer needs to make sure the licences are transferrable or will otherwise remain in force following the deal. If not, the worst case scenario is that the target company's business could be interrupted after the deal.
4. Has the Transfer of IP Been Sufficiently Secured?
- It is the buyer’s interest to make sure that the IP included to the deal has been transferred to the target company. IP clauses in the target company's employment agreements are of particular importance. They need to be carefully drafted to ensure that the rights to the employee's work products are transferred to the employer, i.e. the target company, in a sufficient scope.
- If the target company has employee inventions, i.e. patented inventions made by employees, the buyer must also check that the employee and employer have signed separate assignment letters for each invention and the inventor-employee has been paid reasonable compensation as required by law.
- It is also worth carefully checking the IP clauses in the target company's other agreements, such as cooperation and subcontracting agreements. This way, the buyer can be certain that the IP transfers to the target company.
5. Is the Target Company Infringing Any IP?
- As a buyer, you also have to get the target company to confirm that no IP infringement claims have been made against it. IPs are rights to prohibit. This could mean that the target company could be ordered to cease the infringement, which at worst could mean that its operations would be interrupted or at least hindered.
- The buyer can also carry out a freedom to operate review to reveal whether any third parties have IPs that the target company's operations could be infringing. This kind of review can be particularly important in patent-intensive industries.
6. Does the Target Company Use Open Source in Its Products?
- The buyer should find out whether the target company uses open source components in its products. It would be good idea for companies to keep a list of the open source components they use to make identifying them easy in M&A situations.
- The use of open source is usually not a problem. In fact, it can be a very sensible use of resources.
- On the other hand, many buyers have nightmares about target companies that have used open source components in a way that leads to the overall product being encumbered by a highly detrimental clause.
Answering these questions will help you form a good picture of the risks related to your target company's IP. When you know exactly what you are buying, what the target company's IP portfolio contains and what the strengths and weaknesses of its IP protection are, you will have a solid base of information to bring with you to the negotiating table.