In today’s digital world and especially as businesses move toward building large brands, companies are building and accumulating significant intellectual property portfolios, whether it be trademarks in branding assets, copyrights to website pages, patents to artificial intelligence processing applications and modules, or trade secrets to a highly valuable recipe or a client list. As businesses combine, divide, and engage in mergers and acquisition activities, many businesses are finding that their value may be partly grounded in their intellectual property and that evaluating their intellectual property assets makes up a core portion of the diligence behind such a transaction.
A major part of intellectual property due diligence today also includes issues relating to technology (aka information technology due diligence). The goal of any intellectual property due diligence in a potential transaction will include determining what intellectual property (if any) the target holds and its value. It will also include understanding the target company’s policies and practices regarding document retention; its various 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 that involve target companies with foreign subsidiaries or affiliates, where the buyer company is looking at intellectual property assets abroad, the goal of such intellectual property due diligence will also be 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. And in India, for example, 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, whether domestic or abroad, not just determine the risks associated with them, but also their value and therefore the overall value of the business. For example, the integrity of the chain of development, acquisition, and transfer of intellectual property from the creator to the eventual beneficial “owner” often surfaces as the biggest risk in transactions involving companies based in India.
To illustrate: the way India handles IP in software (being only eligible for copyright and not patent rights) may be the reason why a strict movement of IP is not documented or easily done. There may also be issues that arise when intellectual property is owned by a third party or jointly owned with a third party. In carve-out transactions, it is important to inquire whether the intellectual property is owned or used by the target or an affiliate that is 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! Not all such inconsistencies are deal breakers, but they definitely are red flags.
As a buyer’s counsel providing a due diligence request list to the seller’s counsel, it is critical to understand that the disclosures and agreements provided by the seller, while useful, often do not paint the full picture of the target’s intellectual property portfolio, assets, and liabilities. It is, therefore, important to understand the proposed deal and the parties’ motivations for exploring and entering into the deal, and to seek more context from each party when necessary. In addition to the context of the deal, market standards and practices are important to bear in mind while conducting an intellectual property due diligence, both domestically and abroad. It is only then that one can 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 being purchased in the M&A transaction. For example, while in the West it is common for due diligence to be separated based on category or portion of the deal (like a separate intellectual property team or a separate security or privacy team), in India, due diligence teams typically report into the same partner to take a more holistic view, reviewing many elements, such as the findings on accounting and financials of the company, as well as the intellectual property due diligence report.