13 Key Intellectual Property Issues In Mergers And Acquisitions
March, 28th 2016
Mergers and acquisitions, particularly those involving privately held companies in the technology sector, often involve a number of significant intellectual property (IP) issues. In a private company acquisition, the seller has not been subject to the scrutiny of the public markets, and the acquirer has little ability to obtain all of the IP-related information it requires from public sources. Thus, before an acquirer will definitely commit to an acquisition, it will typically do extensive due diligence on the selling company’s patents, copyrights, licenses, trademarks, and other intellectual property.
The following is a summary of the most significant activities and issues relating to intellectual property connected with a typical acquisition of a privately held company. It is critical that the seller involve experienced IP counsel, working closely with its primary M&A counsel, to advise on and administer these matters. By planning these activities carefully and properly anticipating the related issues that may arise, the seller will be better prepared to go through a successful sales process.
1. Intellectual Property Documentation The seller needs to have prepared for the acquirer’s review an extensive list of all of the IP (and related documentation) that is material to the seller’s business, including:
Patents and patent applications (including patent numbers, jurisdictions covered, filing, registration and issue dates) Confidentiality and Invention Assignment Agreements with employees and consultants Recommended by Forbes
A variety of these items will typically need to be included in the disclosure schedule that accompanies the acquisition agreement (see Item 13 below: “Key Disclosure Schedule Issues Concerning IP”). To facilitate an acquirer’s due diligence, the seller will usually have all of these documents (perhaps other than trade secrets) housed in a virtual data room. Assembling these documents and setting up and maintaining the data room is a time-consuming task for the seller to undertake, and therefore it is critical that the company undertake this as early as possible in the sale process.
2. Development and Acquisition of the IP An acquirer will want to confirm that the value it places on the selling company, particularly if the seller is a technology company, is supported by the degree to which the company owns (or has the right to use) all of the IP that is critical to its current and anticipated business. It is not uncommon for private companies, particularly those that did not have IP counsel involved at early stages of the company’s existence, to find that there are uncertainties as to the ownership of (or the right to use) its key IP. These problems may be exacerbated if individuals who were involved in the creation of such IP are no longer with the company (or worse, now work for a competitor). The acquirer will also want to know that the seller will continue to be entitled to exploit such rights after the closing of the acquisition.
If the seller’s IP was developed jointly with another party or developed using government, university, or military resources, these arrangements may also restrict the transfer of the IP, mandate sharing or ownership of the IP with third parties, or require a payment in connection with the acquisition.
The employees and independent contractors of the seller, particularly those involved in the creation of the seller’s IP, are ?usually required to sign (at the outset of their employment with or relationship with the company) an agreement assigning to the company any of the intellectual property developed by them related to the company’s business. This typically includes a waiver or assignment of any moral rights?. See Key Issues Associated with Confidentiality and Invention Assignment Agreements with Employees. The due diligence associated with Confidentiality and Invention Assignment Agreements typically includes the following:
Is the form of agreement adequate to convey all IP rights developed by the employee or independent contractor that should properly be owned by the seller? Have all employees and contractors involved in creating the seller’s IP signed such an agreement? Have the employees or contractors excluded from the effect of the agreement (in a schedule of exceptions) any IP that is critical to the company? 3. Open Source Software Issues Many software engineers and developers use open source software or incorporate such software into their work in developing products or technology. But the use or incorporation of such open source software by a selling company can lead to ownership, licensing, and compliance issues for an acquirer.
One particular issue is that some open source licenses require any user modifying and distributing the open source software to make its source code generally available to other users and to license its software to third parties under the same terms as the open source license. For an acquirer relying on the ability to exclusively use the seller’s technology, open source issues could become a deal killer.
The acquirer will expect representations and warranties from the seller to the effect that no open source or similar software has been incorporated into any of its software or products in a way that would obligate the seller to disclose to any persons the source code of proprietary software or IP in its products, and that there has been no infringement or violation of any open source licensing agreements.