Intellectual Property

10 Key Intellectual Property Points For Every M&A Transaction (Part I)

IP due diligence requires careful and methodical steps to fully review the underlying documentation and weigh the risks involved.

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When it comes to mergers and acquisitions, there are very, very few transactions that do not involve some amount of intellectual property capital.  Whether the acquisition involves a small business or a merger of large multinational corporations, the transaction usually involves some quantity of intellectual property that is changing hands.  Sometimes the intellectual property is ancillary to the underlying transaction; sometimes it is absolutely seminal to the transaction (such as the acquisition of a technology startup that has a patent portfolio covering its products/services), In each case, the importance of properly addressing attendant intellectual property cannot be underestimated.

Think about it — unlike the brick-and-mortar companies of old, intellectual property now plays a more significant role in company operations.  From developed software integral to operations to company websites and attendant domain names, intellectual property covers a much higher percentage of company assets nowadays.  This makes due diligence of intellectual property assets in mergers and acquisitions essential.  For private companies, this process is more intricate by virtue of the fact that there no information to glean from public filings and little information available from public resources.  Make no mistake, missing something in intellectual property due diligence can result in a significant exposure to the company acquiring the assets.

Although such due diligence can be approached in different ways, there are a number of points that should always be considered when conducting intellectual property due diligence in M&A deals.  Here are a few of the ones I have found most important when conducting them:

Definitions Are Important. This may seem a little counterintuitive, but the asset purchase agreement definitions are an important part of the due diligence process.  Why?  Defining each element of “intellectual property” sets up the schedules and, by extension, the due diligence process.  From the main elements of intellectual property (such as patents/patent applications, copyrights, trademarks and trade secrets) to agreements pertinent to the ownership and licensing of such intellectual property (such as confidentiality and invention assignment agreements), the definitions cannot be ignored.

IP Due Diligence Covers More Than You Think. Scheduling the main elements of intellectual property is important, but there is a vast array of documentation that affects the ownership of such elements, as well as the manifestation of such elements.  For example, there may be domain names that include the company trademarks as the secondary level domain, so these registrations should be reviewed, not just scheduled.  Intellectual property assignments, third party licenses, liens on intellectual property, etc. are just some of the items that must be addressed, and the list goes on.  You get the point — take the time to unearth the entire breadth of the intellectual property assets.

Follow the Road for Development and Acquisition of Intellectual Property.  This area of due diligence never ceases to surprise me.  Whether it is missing intellectual property assignments or poorly crafted consulting agreements, there is almost always some element of intellectual property whose ownership by the acquiring company is not properly supported by the documentation.  Take the time to trace ownership and confirm it through due diligence.  If you cannot, remember that a representation and warranty for ownership under the asset purchase agreement may provide some contractual protection, but it does not correct the underlying deficiencies.

Be Careful with Open Source Software Licenses.  Open source software may have been used in the development of the seller’s software for a variety of reasons.   Essentially, open source software permits the open access to, and use of, underlying source code so that a broader development community can develop the program and help propagate it (such as the Mozilla Firefox browser and the Apache HTTP web server). Depending upon the open source licenses at issue, there may be an obligation to disclose the source code for the developed software to the development community.  In other cases, the license may not be compatible with the seller’s ownership of the developed code.  Great care must be taken to review all open source licenses, and any applicable representations and warranties.

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Carefully Review Key Provisions in All Intellectual Property Agreements.  It is not uncommon for any intellectual property-related agreements (as well as intellectual property licenses) to contain assignment provisions that restrict assignment without consent.   Mapping the consents necessary is essential to ensure appropriate transfer of these agreements to the new owner.  Be wary of “change of control” language contained in these agreements well — taken as a whole, this review can shape representations, warranties, indemnification language and may even reshape the structure of the underlying transaction to accommodate the constraints presented by the due diligence.

Of course, there are just a few thoughts, but they are important ones.  Every asset deal has different considerations, but you get the point.  Intellectual property due diligence in mergers and acquisitions requires careful and methodical steps to fully review the underlying documentation and weigh the risks involved. Remember: when it comes the intellectual property underlying the deal, you can never be too careful.

Tom Kulik is an Intellectual Property & Information Technology Partner at the Dallas-based law firm of Scheef & Stone, LLP. In private practice for over 20 years, Tom is a sought-after technology lawyer who uses his industry experience as a former computer systems engineer to creatively counsel and help his clients navigate the complexities of law and technology in their business. News outlets reach out to Tom for his insight, and he has been quoted by national media organizations. Get in touch with Tom on Twitter (@LegalIntangibls) or Facebook (www.facebook.com/technologylawyer), or contact him directly at [email protected].

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