Written by Saanvi Singla , pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) offered by Lawsikho as part of his coursework. Saanvi is a 5th year Law student at UILS, Panjab University and pursuing B.A. LLB (Hons.).
In any corporate transaction that is involved in acquiring any business or a stake in a business, it is the duty of the acquirer to conduct a proper due diligence of the target company’s assets and liabilities, in order to determine whether that business is worth being acquired in the long term and to analize any form of risks to the business. The acquirer must weigh the extent of the value of the assets, liabilities and potential risks that could be associated with the transaction and finally negotiate a fair prize for the transaction.
Intellectual property (IP) due diligence has become an integral part of the process of legal due diligence process. Most times a huge amount is at stake with in respect of intangible assets of the target business, particularly in these times. So, the main task of IP due diligence is to investigate the intellectual intangible assets of a business, checking any valid or invalid IPRs subsisting therein and the scope of their protection, understanding the risks involved and in turn, assessing their current potential value.
The Volkswagen-Rolls Royce deal: An eyeopener
Ignoring crucial aspects of any type of intellectual property during the process of due diligence can actually cost a buyer / investor a ton of money. The Volkswagen-Rolls Royce deal of 1998 is the perfect example in this regard. Volkswagen at that time was quite interested in acquiring Rolls Royce and thus owning the automobile brands of Rolls Royce and Bentley. So, Volkswagen acquired Rolls Royce Motor Cars Ltd for a sum of $790 million. The irony of the whole acquisition deal was that till the end of the transaction, Volkswagen had no idea that it had merely acquired the right to the factory, facilities and right to make and sell the respective cars only for a period of 5 years along with the rights to use the marks of Bentley and Rolls Royce. They had in no way acquired the ownership over the name and brand Rolls Royce. In reality, the brand Rolls Royce was actually owned by its parent company with the name Rolls Royce Plc, and the parent company was mostly interested in granting license and further transferring the ownership to the competing group, BMW. After 5 years from the period of the so-called acquisition, BMW in the end became the exclusive right holder of brand of Rolls Royce and also acquired the rights to manufacture Rolls Royce vehicles. By not being vigilant and careful about assessing the true state of IPR ownership relating to Rolls Royce, Volkswagen had to pay a superfluous amount of money for the return it received from the abovementioned deal. This case has proved to be one of the best examples to show how undermining the importance of IP due diligence during any commercial transaction can lead to unprecedented and completely avoidable losses to the buyers / investors.
Points for Maximum Diligence
IP due diligence is an integral part of any M&A transaction in today’s world and is an essential in transactions such as project finance, joint ventures, investment (PE / VC) transactions, issuance of new stocks and securities etc. In spite of there being different sets of requirements for investigation, analysis, and valuation of various target companies, the below mentioned are the general requirements in an IP due diligence exercise for mostly all corporate transactions these days.
Identification of relevant ‘protected’ and ‘protectable’ subject matters under IP laws
The first and most basic action would be to comprehend the essential nature of target’s business and to properly identify all the intangible subject matters that are relevant to the business and will be the main subject matter of the investment or acquisition. The said subject matters could easily be ‘protected’ by registration of Trademarks, Copyrights, or Patents as applicable. The target must have taken some appropriate measures to guard its subject matters or products under the given IP laws. The target company may not have identified the subject matters that need protection. It is for precisely this reason that the first step in any case of IP due diligence is proper identification of protected and protectable subject matter.
If the given business is technology / product / software based, its new products, technologies, designs, unique business methods, and the like will be its principal IP-protectable subject matter. The same will later give rise to design rights, patent rights, trade secrets and/or copyrights as its important IP apart from the trademarks.
Analysis of IP rights over the subject matter (status check)
Once all the subjects have been identified, the next logical step is to check if all the specific IP rights that have been registered in favour of the target or are required to be registered by it. It is not only imperative to identify all the relevant IP-protectable subjects, but it is essential to identify whether such subjects meet the requirements for protection the under IP laws.
For the protection of know-how of a particular product, information and ideas, there are absolutely no statutory laws in India that govern, protect and regulate the same. The principles to protect the same have only been formulated under the common law (only through judicial pronouncements). Hence, appropriate steps should be taken to protect any type of significant business information, methods, pricing formulas and customer information, as trade secrets and confidential information should be concealed by way of non-disclosure and confidentiality agreements.
Check for applicable territory and terms (validity check)
Most of the IP rights are only valid for limited period and territories. One has to individually protect their IPs in all its areas of operation with the exception of copyright. According to the Berne Convention for the Protection of Literary and Artistic Works, if the copyright of any subject matter is protected in one of the countries that is a part of the Berne Union, then the same copyright shall also valid in the other member countries. Hence, it is also imperative to examine the particular territories in which the relevant IP rights are applicable or protected. If the target has operations in various countries, but it’s important IPs have not been protected and/or registered in all those jurisdictions, the same could become a major issue in the future for the prospective buyer / investor. In the process of IP due diligence process, the validity and the terms of validity should be checked.
Check for the origin of IP rights creation (ownership check)
This is one of the most important aspects of any IP due diligence: Determination of the Ownership. If the target is not the owner of a particular IP asset then it cannot transfer any title, rights and interests in the same to the investor.
When there are numerous associated parties, like a parent company, foreign associate companies, subsidiaries, etc., it is quite possible in this scenario that the IP is actually in the name of the associated units and the target merely possesses the right to utilize the same. Many a times, the companies that hold the IP rights are separately incorporated by corporate groups. In this case the specific IP holding companies own all IP rights and further grants limited rights to use to its associate companies, wherever deemed necessary, for utilizing the IP rights it owns.
Unless the complete ownership of relevant IP rights is completely transferred to the target before the transaction, the returns to the buyer / investor so far as they relate to the full utilization of the same, will indeed be at stake.
Third-party’s claims on the IP rights involved (claim check)
Any type of third-party claims or interests with respect to the relevant IP of the target is required to be checked out. This is primarily done to determine whether any third party has any kinds of rights or interests over the relevant IP. So, scrutiny of all joint venture agreements, license and franchise agreements, memorandum of understandings, distributorship contracts, etc., should be carefully done to determine if any exclusive rights have been granted in relation to relevant IP.
Due diligence in Intellectual Property is a tedious and tricky process. But as the saying goes-Better be safe (Diligent) than sorry.
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