Intellectual Property

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

Many of these potential legal land mines can be avoided with the proper focus and the assistant of astute counsel.

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As I indicated In Part I on this topic, there are very, very few M&A transactions that do not involve intellectual property capital of some form or another. Whether ancillary to the core assets or integral to the company’s bottom line, it is essential to address the intellectual property involved.  Unfortunately, such diligence is not always performed, or otherwise performed inadequately, and the company purchasing the assets is usually left picking up the pieces.

Oddly, in my experience, the little things really do matter in any intellectual property due diligence in an M&A transaction.  From missing licenses that expose the purchaser to potential copyright infringement (including, but not limited to, the ever-so friendly Business Software Alliance demand letter and software audit) to improper assignments of patents, you would be stunned at how the little things can add up to a heap of liability,  What is worse, many of these potential legal land mines can be avoided with the proper focus and the assistant of astute counsel.

I addressed 5 of the 10 key points that should be considered in any M&A transaction in Part I. Here is a list of the other 5 points that should not (and indeed, cannot) be ignored:

Beware Representation and Warranties Regarding Seller’s Ownership of IP. Representations and warranties serve a few functions in an M&A transaction, but with regard to intellectual property, they can provide both a contractual basis for cancellation of the deal (depending upon materiality of the representation(s), of course) or a basis for indemnification post-closing. Needless to say, representations and warranties regarding ownership are material and bear definite scrutiny, especially where there may be knowledge qualifiers involved. Of course, a seller will want to limit its representations to what it knows, and not inadvertently extend such warranties beyond closing. From the purchaser’s perspective, however, clear title and lack of encumbrances is key — the buyer will want to ensure that there are no third-party rights that may devalue any aspect of the intellectual property that is being acquired.  Take the appropriate time to correlate the intellectual property diligence results with the representations and warranties to ensure that such representations and warranties reflect an acceptable level of risk.

Beware Seller’s Representations and Warranties Regarding Infringement of Seller’s IP. When intellectual property rests at the crux of the transaction, the importance of the intellectual property representations of the seller cannot be underestimated.  Of course, known infringement claims need to be covered, but future claims are also part of the equation (at least for a period of time following closing, at a minimum).  There are a multitude of elements that should be considered, including but not limited to survival, potential liability caps and indemnification thresholds and baskets, to name a few. That said, the most important thing that a party can do together with its intellectual property counsel is similar to the process introduced above — correlate the intellectual property due diligence results to the representation and warranties and prioritize them.  In essence, you should develop a strategy to prioritize and address potential risks presented by the seller’s representations and warranties during negotiations.

Don’t Forget to Address Data Privacy.  In this age of online marketing and social media, the intellectual property assets of a company now extend far beyond traditional intellectual property buckets.  In fact, data and the analytics performed on such data are quickly becoming hugely important assets in M&A transactions, as such data is becoming exponentially more important to the bottom line.  That said, how such data is housed and protected is also essential to limiting potential risk (just ask any company that has experienced a hack and resulting data breach).  Minimizing this risk requires solid due diligence of the seller’s data policies, procedures and practices as well as any third-parry contracts involving data.  If any data breaches have previously occurred, then such due diligence becomes even more essential and should extend beyond data governance and business continuity policies to determine potential future exposure (especially in light of incorporating such data into seller’s own policies and procedures). Remember: Data security risks are real, and cannot be ignored within the context of M&A transactions.

Beware Disclaimers.  Disclaimers are used in M&A transactions to limit exposure.  As a result, purchasers need to be careful with the nature and scope of seller’s disclaimers.  Understandably, a seller will want to limit the scope and extent of representations and warranties by crafting disclaimers, so purchasers need to be careful.  Whether to limit potential fraud claims or otherwise allocate risk, disclaimers need to be weighed against representations, warranties, indemnification provisionsm and limitations clauses. Be careful!

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Interaction of Representations, Indemnification, and Limitations.  Given the previous points outlined here and in my previous installment, the final point becomes self-evident — all of the representations, warranties, indemnities, and limitations (to name a few) work together to address risk.  I cannot stress enough the importance of reviewing each of these sections of an asset purchase agreement to ensure that the level of risk is consistent with what was uncovered in due diligence and that it represents an acceptable business risk.  Sounds simple, but in reality, it is not — the allocation shifts with each draft being negotiated, and it is easy to lose sight of the overall risk. Bottom line:  Be as diligent in completing the transactions you are in initial intellectual property due diligence!

It should go without saying by now that the intellectual property components of M&A transactions simply cannot be ignored.  Of course, these 10 points do not cover everything, but do represent some of the key points for consideration regarding intellectual property in M&A transactions.  That said, these key points have been culled from experience over many years of practice, so ignore at your own risk.  Trust me — if you take heed, your clients (or company) will thank you for it.

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 tom.kulik@solidcounsel.com.

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