Intellectual property (IP) is becoming an increasingly important component of business value, making it essential that buyers, sellers, and investors conduct thorough IP due diligence prior to any transaction taking place.
In corporate transactions, due diligence is the process of assessing a company’s strengths, weaknesses, and risks. It is usually done before a merger or acquisition, an investment, or any other major transaction that involves the company.
Due diligence is designed to help parties to a transaction make informed decisions, and to identify potential liabilities or issues that could impact the value of a company or transaction. Due diligence can involve reviewing financial statements, tax returns, legal documents, and intellectual property. It may also include reviewing customer contracts, employee contracts, and other information.
Due diligence is usually conducted by a group of professionals including lawyers, accountants, and other experts with expertise in different areas. Due diligence findings are used to negotiate the terms of a transaction including the price, warranties, representations, and other conditions.
Due diligence is a vital component of any corporate deal and ensures that all parties are aware of the risks and potential opportunities.
This article aims to give an overview of what to expect and how to conduct a successful IP due diligence investigation in corporate transactions. It covers key IP areas such as patents, trademarks, copyrights, and trade secrets.
Identifying the Intellectual Property
Identification of intellectual property (IP) in a corporate transaction is an essential step that safeguards all parties involved. Although it can seem daunting, this step is essential in any commercial deal.
As either the buyer or target, it is essential to recognize and comprehend any intellectual property that pertains to your transaction. This may include patents, trademarks, copyrights, and trade secrets.
Reviewing a company’s patent portfolio is an essential step to assess the value and strength of its intellectual property assets. A patent search is aso important. The purpose of patent search due diligence is to evaluate the novelty and potential patentability of an invention, identify any potential infringement risks, and inform decision-making processes. The USPTO and Espacenet are important tools for patent searches.
Once the intellectual property has been identified, a due diligence investigation will be conducted to identify how it has been protected and where it resides. This information allows you to assess its worth as well as any legal complications that could impact the deal.
Before closing on a transaction, it’s essential to check the relevant registries to guarantee there are no encumbrances on IP assets. This could include security interests, liens, or licenses which must be released by the buyer before finalizing their purchase.
It is essential to investigate any licensing agreements a target company may have with third parties, as this will determine how the IP will be protected and whether any utility regulatory issues arise during the transfer of assets.
Establishing a federal chain of title for intellectual property is an essential step that guarantees no last-minute surprises when the deal closes. Additionally, it enables parties to carry out closing duties without needing to alter public records of the IP after it has been settled.
In addition to a federal chain of title, you must determine who owns each intellectual property asset and ensure its registrations are up-to-date. To do this, contact the filing office for each type of IP and identify its creator or author.
Additionally, make sure all renewal filings are current and any liens filed on IP assets have been released. Doing this can prevent unexpected issues at closing that could prove disastrous to your business, helping avoid having to reprice these assets or require the seller to obtain their release before closing.
Identifying the Owners
Intellectual property can be a gold mine of untapped business opportunities for companies. With proper due diligence and some hard work, those enticing assets can be turned into tangible assets that generate cash in the bank. The fine print requires the usual suspects and an exhaustive pre-transaction review of the target’s most sensitive information and data.
To achieve this goal, companies should conduct a multi-phased review of their most significant business units, senior employees, and key subordinates. The document set will not only give the buyer a comprehensive overview of the company’s key business processes, but it also serves as an effective template for strengthening existing internal controls to guarantee an effortless transition from the old entity to the new one.
Furthermore, this outcome could give them an invaluable competitive edge should such opportunities arise. Ultimately, all this effort will pay off handsomely with positive outcomes for all parties involved.
Identifying the Legal Issues
Intellectual property assets are essential components in corporate transactions such as mergers and acquisitions, licensing agreements, and distribution contracts. Unfortunately, if not properly managed or avoided, they can present serious risks.
To avoid such issues, companies and their legal counsel must understand the legal ramifications of IP due diligence in corporate transactions. Here are a few key points to take into account:
Ownership of intellectual property
The initial and most critical issue that needs to be addressed is ownership of intellectual property. This will determine if it’s worth purchasing and how much it would be worth in a sale. If the owner cannot be located, this may prove detrimental or at least force changes to the terms of the transaction.
IP in a foreign jurisdiction
Another pressing concern that must be addressed is whether the company owns and controls its IP in a foreign jurisdiction. This issue becomes especially pertinent in international transactions where foreign entities may own similar intellectual property to that which US entities hold, creating an issue for buyers after closing when it becomes unclear what rights they can claim from the seller.
Licenses
Finally, it is essential to identify any licenses associated with intellectual property and guarantee that the target has permission to utilize it. These licenses may contain exclusivity or other limitations which could restrict their usage by the target.
As such, conducting IP due diligence that is tailored to a corporate transaction and the parties’ business goals is essential. To accomplish this effectively and efficiently, in-house counsel should be involved early on in the process to set guidelines that minimize waste and maximize efficiency.
Intellectual property due diligence involves four levels: Levels 1, 2, 3, and 4. Based on your business goals, each level can be reviewed individually.
Identifying the Risks
No matter the sector of business, much of a company’s value may reside in its intellectual property. Therefore, IP due diligence plays an integral role in any corporate transaction; whether it’s an acquisition, merger, or licensing deal, timely completion of this process helps guarantee any risks associated with the deal are properly identified and mitigated.
When performing IP due diligence, the most common issues to identify are IP ownership, status, encumbrances, and legal matters. Additionally, it’s essential to determine how an asset is utilized and what measures are taken by its owner to safeguard its rights.
Once all these issues have been addressed, it is critical to review the assets under consideration and take into account the business objectives of the acquiring company. Doing this allows IP due diligence investigations to focus on what is most valuable for the target company rather than just what might prove problematic in a deal.
One of the primary concerns during an investigation is potential patent or other intellectual property infringement. It’s essential to confirm that no rights have been infringed and the owner has the authority to pursue claims against third parties who use their IP without permission.
Another issue to assess is the quality of trademarks utilized by a target company. If these marks aren’t being monitored and utilized to ensure consistency in products or services to which they are applied, then their owner may have no option but to abandon them altogether.
Finally, IP due diligence should also be conducted to review any licensing agreements the target company has entered into with third parties. It’s essential that these licenses aren’t hindered by encumbrances such as change of control provisions.
The risk that a purchase of a company could void its patent is an increasingly prevalent worry, as it has the potential to have a devastating effect on the buyer’s business operations. Enforcing patents is not only essential for keeping a business running smoothly, but it can also provide other tangible advantages.
Financial statements
Financial statements provide an overview of the financial performance and position of a business over a certain period. Companies typically prepare three main financial statements:
The income statement is also called the profit and loss report. It shows the company’s income, expenses and net income over a specified period of time, usually a month, a quarter or a year. The income statement shows a company’s profit and loss.
Balance sheet
The balance sheet is a snapshot of an organization’s financial situation at a particular point in time. This can be the end of a month, quarter or year. The balance sheet reveals a company’s liabilities, equity, and assets. Assets are the resources that a business owns or controls. Examples include cash, inventory or property.
Liabilities include obligations a business owes others such as taxes, loans, and accounts payable. Equity is the value left over after subtracting liabilities from a company’s assets.
Cash flow statement (cash flow statement)
The cash flow statement is a statement that shows the company’s inflows and withdrawals of cash over a specified period. This can be a month, a quarter or a year. It shows how a business generates cash and uses it, such as its operating activities, (e.g. sales and expenses), investment activities, (e.g. capital expenditures, investments), and finance activities, (e.g. loans and equity issues).
Small venture Investors, creditors and other stakeholders need financial statements to assess a company’s performance, solvency and liquidity. Financial statements can be used to compare the performance of a company to that of its peers and industry standards, as well as to identify areas in which a firm can improve its financial performance.
Employee agreements
It is vital to conduct due diligence when reviewing employee agreements to ensure they are compliant with all applicable laws and regulations and protect both the company’s and employees’ interests. Here are a few key areas to take into consideration:
a. Term and Conditions
Check the terms and conditions in the employee agreement and make sure they are comprehensive and clear. Verify all terms required, including the job description and compensation, benefits, hours of work, and termination conditions.
b. Non-Disclosure Agreements and Non-Compete
I. Check
Check any non-disclosure agreements and non-compete contracts that employees signed to make sure they are reasonable, enforceable and comply with the law.
ii. Verify
Verify that the agreements protect confidential information, intellectual property and trade secrets of the company, without unduly restricting future career opportunities for the employee.
c. Employee Benefits
Verify that the benefits agreed upon are being provided by the company. This includes health insurance, pension plans and paid leave. Verify that the benefits are in compliance with applicable laws and regulations.
d. Termination and Severance
Review the employee contract to determine the conditions that allow the termination of the employee, as well as the possible severance or other benefits offered. Make sure that termination and severance provisions are fair and reasonable.
e. Employee contract
Check that the employee contract is in compliance with all applicable laws, including employment laws, labor standards and anti-discrimination legislation. Verify that the employee agreement doesn’t contain any discriminatory or illegal clauses.
Companies can protect their interests and ensure compliance with the law by reviewing employee agreements in the context of due diligence.