In fact, intellectual property dominated and still dominating the M&A transactions. With the current technology driven world, intellectual property rights have a prominent role in value creation for large companies as well as small and medium sized enterprises.
Due Diligence and Intellectual Property
Due diligence process is an important part of an M&A transaction. Due-diligence would be an important tool for identifying the intellectual property of the target company or the companies that are in the process of being merged. Intellectual property may both be in the form of an intangible asset or a tangible asset and identifying intangible intellectual property assets may be a challenge compared to intangible assets. Tangible intellectual property assets may include but not limited to: software, trademarks and patents and intangible assets may include but not limited to: know-how and trade secrets.
Identifying also includes determining the ownership of trademarks, registered patents and copyrights. A simple start point is to searching the databases of European Patent Office, World Intellectual Property Organization and depending on the place of transaction, databases such as Turkish Patent and Trademark Office and U.S. Patent and Trademark Office.
Documentation and Intellectual Property
Review of the documentation provided by the seller company concerning intellectual property is critical. Examples of such documents are:
- Patents and patent applications;
- Know-how and trade secrets;
- Software and databases;
- Domain names;
- License agreements;
- If the intellectual property in question is an employee invention, agreement signed with the employee regarding the invention and any royalties paid or being paid in accordance with such agreement and other relevant documents;
- Any document and information regarding any on-going dispute related with the technology in question;
- Information and documents related with any research development if applicable;
- Any agreement with any third party with regards to research and development projects, joint ventures and collaborations concerning a possible creation of an intellectual property; and
- Information and documents regarding liens and encumbrances on the target company’s intellectual property rights.
Open Source Codes
An open source code may have been used on a software of the target company and that may has an effect on the intellectual property rights of such software. In general, open source refers to any program or software whose source code is made available for use or modification as users or other developers see fit. Open source software is usually developed as a public collaboration and made freely available. However, the user of such open source may have to comply with the license terms of the open source code and the software. As per the relevant license term, the software that developed by using an open source code may be subject to free use rights. This may have an adverse effect on the intended use of the software by acquirer post transaction.
The acquirer company may request representations and warranties from the target company to the effect that no open source or similar software has been incorporated into any of its software or products in a way that would require the seller to disclose the source code of any software or intellectual property in its products, and that there has been no breach of any open source licensing agreements applicable to the software of the target company. That outcome may have a serious impact on the operations of the target company post transaction.
Intellectual Property Agreements
Any agreement that the target company has entered into related with any intellectual property or intellectual property development may include change of control clauses. Such clauses may prescribe that in the event of a change of control of the target company that is party to the abovementioned agreements, an approval may be required by the other party. As per such clause, the other party may terminate the agreement if the approval is not given or not sought.
Warranties and Indemnification
The acquirer through the share purchase agreement may stipulate the following clauses for the future claims and damages as a result of such claims:
- The acquirer may warrant that there are no infringement claims exist on the relevant intellectual property right. Existence of an infringement claim may seriously impact the operations of the acquirer. It would be substantial for acquiring company to be indemnified against possible infringement claims.
- The acquirer may warrant that the acquisition of the company does not have any affect or infringe the intellectual property rights of the target company or third parties.
Due-diligence and warranties regarding intellectual property is especially important for intellectual property centric M&A transactions since the valuation of the transaction is mostly based on the intellectual property that the target company owns. Third party claims or undisclosed information prior to the closing of the M&A would most probably have serious consequences for the acquiring company.
Author: Batuhan Ecin