IP Due Diligence
Definition of Due Diligence: An evaluation, performed by investors or their agents, into the details of a potential investment or purchase, where the evaluation involves a verification of all the material facts relevant to the investment or purchase.
The purpose of an IP due diligence is to:
- Give the Acquirer a better understanding of the business of the Target
- Give the Acquires an insight into the Target's liabilities
- Reduce the risks of the acquisition in order to avoid significant losses for the Acquirer after closing of the acquisition
- Allow the Acquirer to cancel the acquisition or negotiate at a lower price if certain facts are revealed about the Target
Objectives of the due diligence
Every due diligence investigation will start through the execution of a good non-disclosure agreement between the Acquirer and Target.
The following will effect the objectives of the due diligence:
- If the Acquirer's primary purpose is to acquire employees and know-how the inquiry will emphasise issues related employees. Have all employees signed IP assignments with their employer? Have key employees signed confidentiality agreements with their employer? Who are the key employees and what methods are being used to motivate them to stay with the Acquirer? Are key employees willing to work for the Acquirer? Can key employees be restricted from competing against the Acquirer if they are not employed by the Acquirer?
- If the Acquirer's primary objective is to acquire a critical piece of technology, the investigation should emphasise issues related to technology. What IP protection is available for the technology? Does the technology infringe any third party IP rights? Could a license for the technology be negotiated at a lower price than an acquisition of the technology?
- If the Acquirer's primary objective is to eliminate a competitor, the due diligence will focus on whether the necessary restraints of trade and non-competition clauses in the agreement will be enforceable in the specific jurisdiction
- If the Acquirer's primary objective is to increase earnings per share the due diligence may be less important than a review of the Target's financial statements and future business plans as well as market synergies
- If the Acquirer's primary objective is to enter a new market or to expand its market presence the due diligence should focus on whether the Target has secured the rights to its brand name and goodwill
- If the Target is a high technology company a significant portion of the Target's value will be in the patent portfolio and the due diligence should focus on the strength and protection of such patents
- If the target is a content or information based company a significant portion of the Target's value will be in its database and copyrighted assets and the due diligence will focus on the protection and rights in the database and copyrighted assets and whether any licenses where granted to third parties
- If the target is a software company, a significant portion of the Target's value will be its copyright and trade secrets and the due diligence should focus on copyright protection, maintenance of the software, ESCROW agreements and possible patent protection
- If the Target is an owner of product or service brands with substantial market recognition, the Target's value may be in its trademark portfolio and the due diligence will focus on an investigation of registered trademarks, jurisdictions of registration, and maintenance of the trademarks
- If the agreement is for the purchase of certain assets the due diligence should only focus on those assets and the Target's ability to assign such assets to the Acquirer three of any third party rights
- If the agreement is a share purchase, the due diligence is more important as the Target will be a wholly owned subsidiary of the Acquirer with all its risks and liabilities
- If the agreement is a merger it will be necessary to determine which form the merger should take to shield the Acquirer against liability, for example a reverse triangular merger will not trigger most "no assignment" provisions in the Target's contracts, provided that the subsidiary is not dissolved after the merger
- Notwithstanding the above, it is very important to investigate whether the Competition Commission will allow the deal to continue and the due diligence should also focus on this important issue
Procedural aspect of an IP due diligence
The acquirer's due diligence team should preferably include its management, accountants and legal counsel.The following components of the investigation should ideally be conducted by the following due diligence team members:
- Interviews with Target's management - all members
- Technical due diligence - management and legal counsel
- Inquiries as to suppliers and customers - management
- Physical inspection of assets - management and accountants
- Examination of intangible assets - legal counsel
- Review of regulatory approval and licenses - legal counsel
- Domain name, trademark and patent searches - legal counsel
- Review of major contracts and business plans - management and legal counsel.