Intellectual Property may be part of a company that is acquired or with which another company merges. The Intellectual Property can take the form of Trademarks, Patents, Designs, Trade Secrets, Copyrights, Plant Breeder’s Rights, Integrated Circuits, etc.
Unfortunately, in merger and acquisition transactions, the Intellectual Property due diligence is often overlooked and the intellectual property is typically “thrown in with the deal”. This can be an unfortunate situation, since the real value of the intellectual property may never be realized. If analyzed, the intellectual property may be a source of income in terms of licensing fees, fees generated from sale of the assets, fees associated with assignments, trade of intellectual property for other intellectual property and monetary consideration. If the due diligence concerning the intellectual property is done prior to closure of the transaction, there is a distinctive vantage that can be realized; assuming the intellectual property is in good standing and there are no encumbrances (see below), the result could be a value-add proposition for the transaction which can also provide the concomitant advantage of expediting the transaction, increasing the transaction price among other attractive benefits.
As a further advantage, there may be an opportunity for a joint venture with another company to better position the purchasing company in a specific industry.
RISKS COMPONENTS TO BE CONSIDERED:
On other side of the coin, the intellectual property may be a detriment. It may be that some of the intellectual property infringes the rights of others or that licensing fees are owed to licensees or that licensees are owed fees that in turn are owed to the target company. Further still, there may be real or imminent litigation involving the intellectual property.
THE IMPORTANCE OF DUE DILIGENCES:
In any event, a due diligence should be conducted concerning the intellectual property. Although the prospect of conducting a due diligence may seem daunting, the procedure is extremely useful and can yield very profitable results for the purchaser. In general overview, there are a few simple procedures which, if observed, can go a long way to benefit the purchaser of the target company.
One should initially determine if the company being acquired properly owns or has the adequate license(s) in place to use to the technology. Second, a review of all agreements into which the target company has entered is required. This will ascertain whether the company’s licenses are of sufficient breath to cover future use and/or modifications of the technology and ownership indications for improvements. The issue of infringement should also be addressed. The company being acquired should fully disclose potential infringement issues to the purchasing entity whether they have been resolved or are pending.
The existence of any royalty obligations of the target company should also be analyzed in the form of licensing fees, lump sum payments, emissions, etc. as well as duration of payment and any conditions related thereto.
Finally, a further important consideration to bear in mind is employee requirements regarding intellectual property issues. It should be confirmed that all contractors/employees have signed agreements vesting the intellectual property to the target company. It is an important aspect and avoids competition issues as well as having to try to track down employees that may have been terminated or moved on after the transaction has been completed.
CONCLUSION:
It should be borne in mind that this is a general overview of the considerations involved in intellectual property assets in the merger and acquisition environment. There are tax consequences to be also considered as well as a series of other nuances that require professional assistance.
Should you require any additional information regarding the protection of intellectual property rights in the case of mergers and acquisitions, you are invited to contact the undersigned.
Paul Sharpe is a Registered Patent Agent in our Intellectual Property Group and can be reached at 613.567.0762 or psharpe@mbm.com.