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IP Due Diligence in M&A- 4 points to consider

May 22, 2020

By Priya Adlakha and Vibhuti Vasisth

With the rapid growth in technology in the last two decades, the Mergers and Acquisitions (M&A) landscape has evolved drastically in India. In the modern day, technology assessment and Intellectual property due diligence has become an important part of M&A deals. The valuation of Intellectual Property Rights (IPR) becomes indispensable for parties while undergoing an M&A deal and a poorly structured IP plan can be detrimental to the entities involved in an M&A deal. Therefore, it is important to draft a list of necessary cautionary reviews of certain aspects of an M&A deal that involve the IPRs owned by both the parties.

In this article, we have elaborated four major aspects of the IP due diligence that should be duly performed while entering an M&A deal. The following points form an important part of the necessary precaution that must be taken to protect Intellectual property rights while finalising an M&A transaction:

  1. Technology Transfer

Technology transfers play a key role in M&A deals in the modern day. Technology transfer is a process where research and innovations which were developed into commercially exploitable techniques and products are transferred from one entity to another for some basic consideration. All companies have specific strategic goals in the market and hence, their approaches to M&A depend upon several factors which sometimes revolve around the technologies owned by the other company involved in the deal.

Acquiring a business method or technology developed by another company through an M&A deal helps in strengthening your companies position in the market and also in preventing a possible competitor in the market. Data protection, privacy laws and IP protection are some important points to consider while entering into an M&A deal that majorly targets the acquisition of certain technology possessed by the target entity.

The following laws are relevant for such M&A transactions in India are:

  • Copyright Act, 1957
  • Trade Marks Act, 1999
  • Patents Act, 1970
  • Designs Act, 2001
  • Information Technology Act, 2000
  • Payment and Settlement Systems Act, 2007

(Note: Similarly, for jurisdictions outside India, the counterparts of these Acts will govern technology transfers)

The identification of innovative technologies or partnering with special technological capabilities is crucial. The following precautions must be adopted in this regard:

  • Assessment of technological capabilities, selection of the most promising ones and the terms of the acquisition in this regard;
  • Transfer of the technology to the acquirer (technology acquisitions), if these negotiations have been successful.
  1. Confidential Information

As a part of legal due diligence, a review of the target company is a standard procedure which followed while finalising an M&A transaction in the modern day. It is inevitable that during the course of review, the acquiring entity will come across some confidential information about the target company itself and its business relations. For finalising a M&A deal, several accesses have to be granted to review sensitive and confidential corporate data of the target entity. Therefore, for the purpose of protecting the interest of both the parties, it is advisable that they enter into a non-disclosure agreement (hereinafter “NDA”)

It is to be noted that the confidential information that is being disclosed will most definitely include the important information regarding IP protections availed by the target company and also various strategies adopted for businesses, which may be a result of the intellectual or professional efforts of several individuals working for the company. This may include copyrights, inventions, details about customers/clients, trade secrets, databases and business methods

Taking necessary and adequate precautions for protecting, as also preventing misuse of the above-mentioned confidential information is a critical part of the IP due diligence. It is important for parties to enter into a NDA to protect sensitive information of the business entities which includes information that forms a part of the IP owned by the entities. However, the obligations arising out of the NDA cannot be derived from the IP laws of the relevant jurisdiction and only the contractual laws will function as the backbone of these agreements.

  1. Valuation of the Intellectual Property

Intellectual property is not an end in itself but a powerful means for achieving the end of/for a brand success. Their value is much more than being passively available on a register. They must be used creatively and should be used as commercially valuable assets than mere legal concepts and enforceable rights. This can be achieved primarily by putting them to work as tools for creating and developing a brand value for fostering the business. Strong brand image is a result of various efforts like the brand strategy, communication, marketing, media usage, quality control, trying to have an edge over the competitors.

In a majority of situations, the primary reason for considering an M&A deal is the value of the IP assets owned the target company. IP valuation allows the parties to make an informed decision on the cost of capital of the target company and in deciding on financial leverage strategy to be adopted for the transaction. Hence, it plays a key role in determining resulting company’s value and determining share prices.

Some factors to be considered for IP valuation include the study of the industry, entry barriers in the industry, market share of the owner, economic condition of the business, profits, possibilities of business expansion, possession of new technologies, concentration and level of competition in the market.

IP is an intangible asset and hence, its valuation is a slightly complicated. However, valuation of IP owned by the target company forms a crucial part the process of IP due diligence for M&A deal.

3.1.   IP Audit for IP Valuation Purposes:

The valuation process necessitates gathering much information about the IP assets as well as in-depth understanding of economy, industry, and specific business that directly affect the value of the IP. This information can be obtained by conducting (‘even driven’) IP audit and background research as well[1].

An Intellectual Property audit is a review of a company’s IP assets and related risks. IP audits are helpful in assessing the opportunities arising out of M&A deal for a company and these audits also play a critical role in enhancing and preserving the IP of a company undergoing M&A.

These audits can correct defects in IP rights, identify risks such as the products or services that infringe another’s IP, put unused IP to work and ensure that best practices for IP asset manager are followed by both the parties. A proper IP audit involves not only a mere review of an entity’s IP assets, but also a thorough review of the company’s IP related agreements, procedures, competitor’s IP and policies.

For more information on this subject, please refer to our detailed article on IP Audits here.

  1. Registering IP acquired in a Mergers and Acquisitions deal in all relevant Jurisdictions

All IP rights acquired after an M&A deal have to be transferred immediately to the new owner in all such jurisdictions where the right exists. There should be a timely recordal of such transfer of rights, as any delay caused may lead to loss in/of royalties.

Furthermore, though the unregistered IPRs are protected as the proprietor has a recourse to common law remedies, they offer a very narrow scope of protection and a limitation on assertion of the proprietary rights. Therefore, IP registration is recommended in relevant jurisdictions since it makes the proprietor the exclusive owner of the intellectual property across the applicable territory.

Conclusion

For the survival and growth of any company it is important to protect the company’s IP assets in the M&A deals. A proper IP structure focusing on transfer and dissemination of technology can be helpful to achieve their common technological goals. Further, it becomes pertinent that all steps, as mentioned in the preceding paragraphs, in regards to the M&A transaction must be taken with great caution so as to protect both the parties involved in the said transaction.

[1] WIPO – Module 11: IP Valuation, available at: https://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_11_learning_points.pdf

 

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