14 May 2021
Co-Managing Partner James Scicluna shares his thoughts on the legal aspects of the due diligence process on intellectual property. This episode is the first in a series of videos that will tackle key areas of the due diligence process which a prudent buyer should carry out on a target business prior to acquiring it.
What is due diligence?
Quite simply, due diligence entails getting to know as deeply as necessary the affairs of a business, frequently this is done with the assistance of your professional advisors, and importantly with the input of the target business’ current owners and management. This exercise is pivotal to your decision to proceed with a deal and to determining the sort of contractual protections which you will need to obtain.
There are several key areas to be considered. We shall deal will all of them in separate videos. Today let’s put a spotlight on due diligence on Intellectual Property – or IP for short. What distinguishes this type of property is that it is intangible, such as the business’ name, brand and so on.
What questions should you ask about intellectual property?
Well, there are many! For instance, has the current owner secured trademarks to protect the business’ name, logos and marks used to promote the business’ brand? What about its website, and other apps?
Is the business fully or in some measure reliant on the development of software, the creation of processes, databases, designs, content, including perhaps literature? All of these can be proprietary.
You’ll need to ask yourself which, if any, of the IP in the target business is capable of being registered. And if so, has it in fact been registered?
As a prospective buyer you also need to know who in the business is developing the intellectual property, so which individuals and how the target business ensures that any rights of those individuals are passed on to it, so that they are then capable also of being passed on upon a sale.
Let’s move to other equally crucial questions. Has the business licensed any of its IP to third parties? And If so, did it do so on normal commercial terms? How will the sale impinge on those licenses, if at all? Are there any other parties, perhaps competitors of the target business, which might be or which are, in fact, infringing the target business’ IP rights? And If so, what is the target business doing about it? Indeed, how is the target business monitoring the full integrity of its IP?
The list goes on. If the business is not actually creating IP, is it using third-party IP? Practically, every business does this, whether it’s software, whether it’s chemical compounds, photos or content. Has the target business got the required licenses from those third-party IP rights holders? What is its exposure if it doesn’t? Are those licenses structured on terms which allow it to continue to trade seamlessly after a transfer of ownership? Or might there be terms in those contracts which expose the buyer to the risk of termination, or to increased costs due to a change of ownership?
Although exhausting to rattle off, this list of questions is certainly not itself exhaustive. There are other questions related to IP which you will need to ask during the due diligence process.
How do you kick start a due diligence exercise?
The customary first step is to submit a questionnaire to the seller.
With IP, answers to some of the questions posed can be obtained through searches of IP registers. The results of these searches should then be fruitfully cross-checked with the seller’s declarations and the declarations of the target business’ management. Procedurally, it is perfectly acceptable to request that documentation is made available to you in a data room, that is a shared space where the seller and the target business can upload material relating to the business.
It is also extremely useful to complement such information gathering exercise with meetings with the seller and with the target business’ management and key personnel. As always, nothing substitutes assessments gleaned from face-to-face interaction.
This video is not and is not intended to constitute legal advice and should not be relied on as such. It is intended for general information purposes only.
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