Large parts of commercial businesses in modern economies are technology driven.

The constant number of acquisitions, joint ventures and takeovers in the information technology sector makes the intellectual property an increasingly important topic. Entities participating in the transactions as mentioned above need to protect themselves adequately against being misled or overestimating the value of the transaction. For this reason, they will inevitably need to conduct intellectual property due diligence.

Properly carried out intellectual property due to diligence can be beneficial both to the buyer and the seller. For the purchaser, the results of the proper analysis can be crucial in determining whether or not the transaction is economically viable and in line with the business’ policies and expansion strategies. On the other hand, the seller has an opportunity to compare his or her estimates of the business’ worth with those conducted by the buyer.

Caveat Emptor

Since the doctrine of ‘caveat emptor’ applies to most acquisition transactions it is for the benefit of both parties to properly carry out due diligence. Under the doctrine, the buyer is not able to recover any losses suffered as a result of defects that the seller had not intentionally kept hidden from the purchaser. Therefore, the buyer has to ensure that all facts about the intellectual property are scrutinised. On the other hand, the seller so long as he or she fully cooperates with the buyer and facilitates the buyer’s due diligence does not have to worry about being sued for any post-completion defects.

What to check?

Below you will find a list of essential tips for conducting efficient intellectual property due diligence process. The list is by no means exhaustive, and you should always seek professional advice from legal specialists and accountants before acquiring any business, engaging in joint venture or just entering into an agreement.

Firstly, it is surprisingly common for the buyer to fail to scrutinise basic facts about the intellectual property assets subject to the transaction. Right at the start the buyer should verify the following:

  • Who is the actual owner of the goods in question?
  • Is the asset at issue adequately protected (i.e. not expired)?
  • Is the agreement in question for exclusive or non-exclusive rights?

Secondly, especially when undertaking a full audit during a merger, acquisition, takeover or licensing arrangement where copyright, trademark or patent rights are involved; it is important to at least follow the below checklist:

  • Employ an experienced IP professional who will evaluate the actual value of the IP rights in question. If the estimation does not reflect your expectations discuss it.
  • Fully understand what assets and rights are subject to the transaction.
  • Verify all documentation provided by the seller with particular emphasis on registration documents. Commission an independent professional specialist to verify and confirm the history of the IP rights in question. Ensure that all registration fees have always been paid on time and that at no point has the IP been examined by a third party. It is also important to check for any potential pending disputes and litigation.
  • Request formal disclosure of ownership details for all IP owned by the seller. Check if the seller does not himself or herself own any conflicting intellectual property rights that would put limitations on the acquired IP.
  • Conduct relevant searches to ensure that the IP is not subject to any finance debt arrangements (i.e. subject to the mortgage).
  • For patent rights, it is important to ask for any related patent rights, especially any future improvements to the existing pattern that might have been discovered and subject to patent protection as well.
  • Request details regarding third party interests in the IP in question.