This article is written by Aditya Kasiraman, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Today the market offers a very large number of intangible assets that consist predominantly of intellectual property. Intellectual Property (IP) is a fragmented, intangible assets group and one of the largest classes in the company. Intellectual property is also recognized in almost every type of transaction. Therefore, it is important to know the role intellectual property plays in a transaction.
IP has become a driver for profitable prices – especially mergers and acquisitions (M&A) transactions. The complexity of effective M&A should not be overstated because it contains too many IP issues. M&A operations lead a legitimate business to grow or decrease in size – by combining multiple combinations into one or more ownership units or other operating units (s). In any case, both consist of tracking deals and transferring the rights of others, and giving special importance to IP issues in the integration and marketing of purchases.
The growth of e-commerce and the digital age are key factors that encompass the value the market puts in IP today. In fact, the European Intellectual Property Office (“EUIPO”) conducted research on the provision of intellectual property rights (IPRs) to the economy and the results were outstanding. According to the EUIPO, the consumer industries account for 45% of total economic activity in the EU and the IPR industries account for most trade.
In addition, the above-mentioned IP character has created a tendency for companies to make the most of it, depending on their trading values. IP status has therefore gained prominence, especially in commercial applications – with a particular emphasis on integration and availability.
Mergers and acquisitions involve many IP issues. When the exchange or transaction of receivables is in the process of negotiation, certain important issues must be addressed. The process of conducting an investigation to determine the financial and legal status of the target business is called, as it is known to all, “due diligence”, but holding different diligence given IP, can help the consumer not only deal with which intangible assets will fall under the situation, but also avoid potential conflicts. It is important to identify not only the existing problems but also the potential problems. Therefore, dedicated IP should help in dealing with pre-transaction problems or issues that may arise thereafter.
Mergers and acquisitions, especially those involving privately-owned companies in the technology sector, often involve many important IP issues. In the acquisition of a private company, the seller has not been tested in public markets, and the acquirer has limited access to all the IP-related information needed from public sources. Therefore, before the acquirer commits to the acquisition, he or she will generally make extensive use of the company’s patents, licenses, trademarks, and other intellectual property.
The following is a summary of the most important tasks and issues related to the inventory associated with the common acquisition of a privately owned company. It is important for the seller to incorporate experienced IP advice, working closely with its principal M&A advisor, to advise and manage these items. By planning these activities carefully and with reasonable anticipation of related issues that may arise, the seller will be better prepared to deal with an effective marketing process.
IP due diligence
“The view of due diligence is that conducting this type of inquiry contributes significantly to decision-making by improving the quality of information available to decision-makers and ensuring that this information is systematically used to consult the current decision and all costs, benefits and risks” observes CE Chapman on the subject of due diligence.
Given the fact that IP includes many internal rights, such as patents, trademarks, trade secrets, software, database rights, and so on, not all rights are registered. In addition, by working hard for IP, the consumer gets to know the status of the information, what they are buying and what they are expected to receive. In that account, a portfolio of audits to evaluate all company entries may be required to determine the pros and cons given the fact that IP itself is considered a “risk-sharing issue” itself.
In addition, during and after M&A processes, there are potential conflicts that could result in exposure problems. In the case of pending lawsuits, third party claims, license agreement obligations, specialties, existing debts or money laundering, security measures in respect of data protection, border transactions and so on may discourage the consumer from exercising his moral authority. M&A transactions involving IP have a high risk of exposing alleged breaches or potential liability.
During M&A negotiations, proper IP activation is often brought too late in the process to work or not work at all, and in fact, must be done at the beginning of the process. Strategically the right pre-existing due diligence can help take the right action and also determine the IP effectively.
The range of IPRs is quite wide as mentioned earlier. In that space, the size of IP assets meets the company’s targeted engineering. “In order to have the right IP and the right goals, one must first understand the target company and its business. What should be available – the whole company or only part of it? The most important factor in identifying the appropriate points to be assessed is the economic objectives of the planned acquisition. Is the transaction aimed at strengthening investors’ IP portfolio? Answering these questions is a very important factor in the determination of proper IP” says Dr. Winkelmann. Obtaining the required IPRs affecting the targeted business, and the phasing of these rights would make the risk assessment more appropriate.
An adequate supply means that the goods purchased to make up the amount needed by the company to do business. In order to lay the foundation for asset sufficiency, it is important to understand the company’s IP structure.
First, there is “Company IP” which includes IPRs such as registered IPRs and unregistered IP such as trade secrets, information, and more. This is the category of IP assets in which a company basically sells its assets. Then there is the “Transferred IP” that is targeted and needs to be transferred to the customer as part of the project. Lastly, there is a “stored IP” that is usually licensed.
When all three come together, they form the basis for an asset that includes all the IPRs that a company needs to run its business.
Please note that, if the activity is recording, IP issues are very important. Considering whether the IP in question is intentional and if so, determining whether the right will be transferred is of paramount importance.
Payment service list
- Ownership: The first step is to make a list of all registered rights, and verify ownership. Checking the registered rights of the relevant registrants – depending on the authority – can be the first step. Since registration gives the exclusive right to use and provides a legal guarantee, identifying the beneficiary is very important.
IP ownership is usually attached to the business or person who developed it, at least this is a very common case. In addition, it can be a right to use and freedom to work. Having said that, it is possible for some parties to be involved in having the right to use that IP permanently.
- Freedom to work: It is also important to consider the scope of registered rights such as patents, and whether they include products or services available by the company. Ensuring that they are free to work is actually more important than registering. It should be noted that the names used are not always the same for the people involved.
- License agreements — or other IP agreements: A key issue to investigate will be those agreements that affect IP because they are more likely to have an effect against the consumer. Problems often arise in the event of existing license agreements. The property in question may belong to a third party in accordance with this agreement. The obligations arising from these agreements will reduce consumer exploitation in those IPRs.
In this regard, it is very important to ensure that IP licenses are allocated as there may be third-party approval required to transfer the intended business licenses. If the licensee’s consent is required for further licensing rights after closure, a relationship between the licensor and the licensee will be required because obtaining the permit may create challenges. Therefore, the terms of the non-assignment clause are very important and it is important to consider in relation to the type of M&A.
However, it should be noted that IP terms and licenses may be subject to agreements that may not always be identified as “license agreements.” This may be subject to IP distribution agreements, trade agreements, cross-licenses, conversion service agreements, and much more.
Consideration of whether there are any licensing obligations or protective and restrictive provisions is also required as it is highly likely to have an adverse effect on the consumer, following closure.
- Intangible assets as collateral: In the past, IP was the intangible asset of a targeted business. Intangible assets are more difficult to verify compared to tangible assets. However, according to Jenna Ross, “In just 43 years, intangibles have already shifted from supporting assets to major investments – today, they make up 84% of total business value in the S&P 500, a significant increase from only 17% in 1975. In a study of institutional investors conducted by Columbia Threadneedle, it was found that 95% agreed that intangible assets contain important information about the future potential of a company’s business.”
With this, the tendency to host IP as security has become more common. “Business transfers also fall into the category of fixed-income investments,” said Marc-Andre Maheu. It is usually driven by liens and encumbrances. Any existing lien and IP restrictions need to be disclosed by what is intended for potential buyers. Besides, finding out that collaterals exist is often possible by diligent investigation, because targeted businesses may not disclose details in good faith.
Therefore, investigating and talking to IP beneficiaries and existing debts as well as the diminished duration of IP time will determine the consumer judgment. Liens and encumbrances should be dealt with post-closing at the latest.
- International trade: Globalization has grown exponentially, leading to increased international trade. Consistent with the fact that intangibles have become a major concern for investors, the market has changed dramatically. The growth of international trade and structural changes came with problems as a result of natural consequences.
When M&A transactions are cross-border, the mechanisms and explanations in legal regulations should also be included in most countries. It is important to consider what type of targeted products and services are offered and what the authorities are.
It should be noted that, in particular, IP varies widely between different systems. For example, in some countries, IP licenses must be registered in order to be binding on third-party holders, who, according to some laws, may be without notice. Currently, IP laws in some countries do not require licenses to be registered at all.
Another issue to point out is the foreign defense mechanisms that provide even applications for registration while others do not. Various transactional authorities across the border should be considered so as not to take away rights.
With this in mind, a thorough investigation and action on balance is the key to eliminating some conflicts especially when the transaction involves an external object.
- Performance verification: Issues of risk assessment protection from current and future conflicts eliminate the risk of violation claims. However, pre-transaction or post-transaction, there are important issues that need to be addressed from time to time. In particular for registered rights, in order to preserve the acquired rights, it is important to ensure that maintenance payments are paid and the installation of renewals is done extensively. After the transaction, the buyer must ensure that the records are verified, the renewal process is completed, the fees are paid and the timeframe for the corresponding transaction is followed.
- Payment risk management: Because of these important issues, risk management in the payment system should also be implemented. Escrow is basically a financial and contractual arrangement in which a third party holds and withdraws funds after the appropriate actions of the parties in accordance with the agreement. It also eliminates post-closing claims for potential violations during purchase agreements. It should be noted that escrow is the most common process used in most M&A transactions.
Where there is a particular issue regarding the intellectual property of a company, for the buyer to insist on a certain amount of escrow set for that particular claim would be a delay for the seller. How much the fair amount of the fund should be set aside, the length of time it will be released, the process of issuing an escrow, and how the claims are actually made will be central to escrow negotiations regarding the company’s IP assets.
As mentioned above, IP issues during M&A transactions are well worth the information and scrutiny. Therefore, insisting on using an escrow for IP-concerned claims can be a major security measure.
Articles of intelligence building
The seller needs to prepare the acquirer’s review for a comprehensive list of all IP (and related documents) that belongs to the merchant’s business, including:
- Copyright and patent applications (including patent numbers, consolidated administration, filing, registration, and release dates);
- Confidentiality and Establishment Agreements with employees and supervisors;
- Trademarks and service marks;
- Key trading secrets and related information;
- Technical licenses from third parties;
- Technical licenses from the sales company to third parties;
- Software and details;
- Contracts that provide for third party penalties for IP items;
- Open-source software used (or used to create) merchant products and services;
- Claims of IP infringement, including any IP claim or arbitration;
- Domain names;
- Liens or encumbrances on IP;
- Source code or object code scrolls;
- Social media accounts (Twitter, Facebook, LinkedIn, etc.)
A variety of these items will need to be included in the disclosure schedule that accompanies the acquisition agreement. To facilitate the appropriate efficiency of the acquirer, the merchant will have all of these documents (possibly excluding trade secrets) placed in the visible data chamber. Combining these documents with setting up and maintaining a data room is a time-consuming task for a trader, so it is important that the company does this as soon as possible in the sales process.
IP development and discovery
The acquirer will seek to ensure that the value it places on the sales company, especially if the seller is a technology company, is supported by the level of the company that owns (or is entitled to use) all sensitive IP in its current and expected business. It is not uncommon for private companies, especially those that did not have IP consultants involved in the early stages of the company’s existence, to discover that there is uncertainty about the ownership (or right to use) of its primary IP. These problems can be exacerbated if the people involved in creating such an IP no longer have a company (or worse, they are now working for competitors). The acquirer will also want to know if the seller will continue to have the right to exercise those rights after the acquisition closure.
If the vendor IP is developed in partnership with another group or developed through government, university, or military resources, these arrangements may also limit IP transfer, redistribution of IP authority, or third party ownership, or require payment for the acquisition.
Employees and independent merchant contractors, especially those involved in building a reseller IP, are often required to sign (at the outset of their employment or company relationship) an agreement that gives the company or any intellectual property created related to the company’s business. This includes the withdrawal or granting of any moral rights. Proper due diligence associated with Confidentiality and Establishment Agreements usually includes the following:
- Is the form agreement sufficient to transfer all IP rights developed by the employee or independent contractor to be properly managed by the seller?
- Have all the employees and contractors involved in creating the vendor IP signed such an agreement?
- Have employees or contractors excluded from the outcome of the agreement (in a separate order) any IP important to the company?
Open-source software issues
Many software developers use open-source software to incorporate products or technologies into their work. However, the use or installation of such open-source software by the retailer may result in ownership, licensing, and compliance issues.
Another specific problem is that some open source licenses require any user to modify and distribute open-source software to make its source code generally available to other users and license its software to third parties under the same terms as an open-source license. The acquirer relies on the ability to use only the merchant’s technology, open-source problems can be the killer of the contract. The acquirer will expect a warranty from the seller until no open source or similar software is installed on any of its software or products in such a way as to compel the seller to disclose to any third party software the source code or IP in its products, and that no violations of any open source license agreements have taken place.
Of course, the retailer will try to limit any such representation with educational qualifications and knowledge.
As a precautionary measure, an acquaintance planning vendor may want to use software programs such as Black Duck or Paramida to analyze whether they have an open-source problem. These programs can scan large amounts of code and test them by comparing open-source data, which allows for quick testing of potential problems.
IP identity submissions and warranty
IP presentations and warranties on the acquisition of a private company, as well as other representations and warranties of a defined acquisition agreement, usually serve two purposes. First, if the acquirer finds that the IP representations and warranties were incorrect at the time of the transaction (or would not be true from the proposed closing date), at the level of the material as agreed in the acquisition agreement, the acquirer may not need to terminate the acquisition (and may have the right to terminate the agreement). Second, if IP submissions and warranties are not valid in one of these cases, the acquirer may be entitled to protection against any damages arising from such misrepresentation by the seller. The seller will want to limit this discount to a fraction of the purchase price (held by a third party), and the acquirer may claim the right to receive up to every purchase price if the IP representations and warranties appear to be unreliable.
Merchant submissions and credentials regarding IP IDs are among the most important IP submissions and credentials. The acquirer wishes to be satisfied that the merchant is the sole and exclusive owner of each IP item claimed to belong to the merchant and that such IP is not subject to any delays or restrictions that improperly restrict the seller’s ability to use that IP or grant such invalid third party IP rights. The acquirer will also want to know if the merchant has the right, by license (special or otherwise) or another contractual arrangement, to use any third-party IP owned by the merchant’s business.
However, the merchant will want to ensure that they do not have to make representations and warranties about IP ownership following the closure, where there may be factors beyond his control (including previous agreements made by the acquirer) that limit the seller or acquirer’s right to use IP.
The following are a few examples of things that can hold or limit a merchant’s ability to use his or her own IP following a block of acquisition:
- Third party claims that copyrights are valid (due to the presence of “original” or other art);
- Liens on IP support banks or other lending institutions;
- Third-party claims that IP infringes the copyright or other IP rights;
- Insufficient evidence that employees or contractors involved in the creation of IP granted their rights to the IP to the vendor;
- First, exclusive or similar denial rights in favor of third parties in relation to IP;
- Failure to obtain any third party permissions required for IP transfer to the merchant (if not originally done by the company);
- Extensive licenses go to IP in favor of third parties competing with the seller;
- Open source issues;
- Failure of the vendor to properly register IP with an active governing body.
Submissions and warnings related to IP violations
The acquirer generally requires that the selling company represent and ensure that:
- The operation of the company that sells its business does not infringe, violate, or infringe any IP rights of other parties;
- No other party is infringing on the law, abusing it, or infringing on the rights of an IP marketing company;
- There are no charges and no claims to cover any of the above that is pending or threatened;
- The scope and limitations of these representations and warranties are generally negotiated. The acquirer is concerned about the risk of serious anonymous criminal claims that third parties may bring to the plaintiff after signing or closing.
However, the retailer usually tries to limit the size of non-infringement submissions and warranties by:
- Material suitability;
- Information filtering;
- Submissions are limited to infringement of copyright (and not all other IP rights);
- Removes any ambiguous submissions (such as no third party “filtering” merchant IP);
Here is an example of the best seller’s sales form and warranty for IP violations:
“Intellectual Property, As far as it is concerned, from the date the Company owns or has sufficient legal rights to all Intellectual Property (as described below) required for the conduct of the Company’s business (“Company Intellectual Property”) without any known infringement or known infringement of the rights of others of the Company, as of this date, no product or service being marketed or sold by the Company infringes any license or infringes any rights to any patents, patent applications, trademarks, copyrights, trade secrets, licenses, domain names, mask functions, details and procedural rights (collectively, “Intellectual Property”) of any other party. Unless otherwise stated in the Disclosure Schedule, no outstanding written is available: exit option, license, agreement, claim, encumbrance, or shared interest of any kind relating to the Company Intellectual Property except for agreements with the customers, and the Company is not bound by the party to any incoming options, licenses, or agreements of any kind in respect of the Intellectual Property of another. The Company has never received any written communication alleging that the Company has infringed or, by conducting its business, infringes any Intellectual Property Rights of any other person.”
The extent of the merchant’s exposure to infringement and warranty-related infringement warrants may also be limited by including the language of protection in the provisions of the acquisition agreement, including restrictions, the right to control third party claims protection, and the limit for IP infringement.
Key issues related to IP agreements
The following are some of the key issues that may arise in the context of the acquisition of a privately owned company associated with the IP-related contracts of the commercial company:
- The acquirer will want to carefully review the provisions that require permission for the “allocation” of IP-related agreements.
- Another common issue that arises from the discovery of a privately owned company involves clauses in the seller’s IP-related contracts that go beyond certain acquisitions. For example, some IP-related agreements include clauses that bind all potential “partners” with the merchant. This raises the question of whether the acquirer in a stock acquisition or a merger transaction or which is not actually a party to the IP-related agreement, may acquire themselves and other subsidiary companies under these terms with respect to their businesses after the acquisition closure.
- The acquisition agreement for the acquisition of a privately held company will require, between the signing and closure of the goods, that the seller complies with its obligations under all IP-related agreements that are owned or bound by it, and takes (or ceases to take) certain actions under such agreements. Merchant management, as well as IP consultants, will need to consider how well the company complies with these agreements without harming the company and its business. Wherever possible, the acquisition agreement should provide that if the seller decides that should he deviate from any of these agreements, the acquirer’s consent to such deviation should not be unduly restricted, delayed, or conditional. Therefore, in order to invoke these issues, it is better to have a lengthy pre-closing period rather than a shorter one.
The acquirer will carefully review the merchant’s involvement in any current or previous IP disputes or other disputes. This review may include disclosing any declaration to the merchant in IP claims and to the extent that the seller intends to enforce his rights. Of particular interest are unresolved third-party claims that do not lead to proceedings before the court, and the terms of the previous settlement of claims, disputes, and lawsuits (including issuance and non-litigation agreements). Current IP cases and unresolved claims can lead to compensation for a special obligation to protect the acquirer from the risk of severe judgment.
In negotiating the terms of the purchase, the trading company and its advisers need to be prepared for possible attempts by the recipient to reduce the agreed price for a special penalty provision such as compensation for purchasing a company while awaiting trial or risk of a recent IP-related dispute. In addition to the claim for this fine, the seller also requires the acquirer to claim a direct deduction or additional rebate or a refund of a portion of the purchase price in excess of the prescribed amount in the normal penalty claim.
The seller is also required to anticipate the consequences of an IP claim related to the acquisition and closure agreement. The preferred negotiated condition found is that the acquirer should not be obliged to close the acquisition once that claim is made. From the seller’s point of view, this type of closure is difficult to accept since the trading company and its executives will opt for a higher guarantee of closure. These issues can be announced when the acquisition will be announced publicly before closing, as third parties may be encouraged to file claims during that time, believing that pending acquisitions increase their ability to receive immediate payments. Accordingly, the seller will need to provide post-closing collateral as an alternative to this situation. Of course, such refunds cannot be granted without limitation: usually, the seller will require a cap on its disclosure and the right to defend such a claim after closing.
Websites and social media
Merchant websites and the presence of social media can be an important part of its business. Thus, the acquirer may have the following concerns:
- Does the merchant appear to be the registered owner of a valid domain name registration, on all of the key merchant domain names?
- What are telecommunications company accounts? Are they registered in the name of the company or in the name of the employee or coordinator?
- Are there any issues with users posting content or posting comments on company websites or social media accounts?
- Who owns the content posted on company websites or social media accounts? Is the company free to use that content?
- Has the seller complied with the Digital Millennium Copyright Act?
Data protection and privacy issues
The acquirer will seek to ensure that the merchant applies and maintains appropriate policies, practices, and security with regard to data protection and privacy issues. Diligence in this may include:
- Updates on any cyber attacks or intruders into merchant programs;
- Review of third-party contracts to ensure that third parties are properly held accountable for confidentiality obligations;
- Review of any claims or complaints involving violations of privacy or data;
- Review of the vendor’s IT business continuity plan;
- A review of the seller’s safety guidelines on employment, including whether background testing, drug testing, credit testing, or other testing procedures are performed;
- Verification of whether the seller has internal systems and procedures on request for any security breaches;
The acquirer may also wish to enter into an agreement for the receipt of certain representations and warranties relating to the seller’s compliance with data protection laws and privacy laws. It is also pertinent to note that European Data Privacy laws are much tougher than U.S. laws. The misuse of personal information by European citizens could also lead to further exposure.
Scope of merchant returns with IP Issues
The acquirer will require the seller or its owners to block the acquisition by violating IP-related submissions, all known claims (including pending claims), and, more often, future claims related to the merchant’s IP. Negotiating the terms, conditions, and limits of these refund provisions is one of the most important negotiations in the M&A agreement, especially where the real seller’s value is in its IP.
Indeed, in an acquisition, the acquirer expects to be indemnified in relation to various other matters in addition to IP matters. Similarly, in order to successfully develop IP-related collateral negotiations, the seller and his or her legal advisers need to develop priorities and a negotiation strategy where negotiation transactions lead to acceptable results in terms of IP returns. It is very important for the seller to take advantage of the amount he is using when discussing a timeline or letter of intent to address IP and other refund points.
The most important refund points are:
- The Width and Survival of the Guarantee: The seller must apply for a refund that violates the IP submissions and the refund obligation expires when the regular submission period expires. Usually, the acquirer will need longer to survive IP claims.
- Capitalization on Disclosure: The seller must claim the cap on its own (or the seller’s stock) obligation. Ideally, a cap can be similar to that of a standard presentation (usually 5 to 15 percent of the purchase price), although it is common for the acquirer to request that IP refund claims are less than the higher claim (for example, 25 percent or 50 percent of the purchase price).
- Affairs not limited by the Cap: The acquirer will sometimes insist on a variety of non-limiting criteria, such as fraud claims, intentional breach of representations, or breach of contract. Retailers almost always oppose this issue on the grounds that if stock sellers do not agree with the company’s sales, the exposure of the sellers will always be limited to their investment and nothing else. From the point of view of the seller and the shareholder, the “cap” should always be the purchase price – if not, why would the stock sellers risk having to go back to the acquirer over that amount?
- Thresholds and Deductibles: In almost all transactions, the acquirer will agree that it will not deal with the seller or shareholders unless the claims exceed (completely) the agreed limit (e.g. 1 percent of the purchase price). Sometimes this value is a “reduced basket” (once the value has been transferred, the acquirer has the right to be reimbursed for all damages, returned to the original dollar), and sometimes to be a “true security” (collateral is limited to prices above the threshold).
- Claims Protection Regulation: Although the finders generally insist that they must control the protection of any third party IP claim, dispute, or litigation, the seller should not hesitate to challenge this position. The acquirer makes good use of brokers’ money and may not be as enthusiastic as the shareholders of the trades to make the defense as effective as possible, and maybe encouraged to pay claims for prices in excess of their actual value in these deposits.
Disclaimers by the seller
One of the most important claims an unhappy receiver can make to a seller is that the seller has committed fraud. The acquirer may complain that the information provided to him or her during the course of his or her dealings with management or that the documents in the database are false or misleading. Unfortunately, once a consumer’s remorse enters, it is much easier for the adoptive attorney to open a case involving fraud allegations, no matter how clean the seller’s business was or no matter how unfair the claim is.
Recognizing that cases of closure after periodic submissions by unhappy recipients (unlike recipients who have been truly harmed by the seller’s misconduct), retailers are advised to use other precautionary measures that have been approved by the courts:
- First, make sure that the acquisition agreement includes a statement made by the seller and that the seller is aware that the seller made the representations and warranties set out in the acquisition agreement. Basically, the seller should refrain from making any representations or assurances regarding any future guesses, predictions, or results.
- Second, the acquirer must expressly state in the acquisition agreement that it has conducted its investigation into the merchant’s business and does not rely on any representation or warranty of the seller (or its officers, employees, or advisers) other than those specified in the acquisition agreement.
Here is an example of a statement that a Delaware court in Abry Partners V, L.P. v. F&W Acquisition LLC considered mandatory:
“The recipient acknowledges that no company or dealer stockholder has ever made a representation or warranty, express or implied, in respect of the Company or any other subsidiary of the Company or the accuracy or completeness of any information about the Company or any other subsidiary of the Company provided or made available to the acquirer and its representatives unless otherwise stated in this agreement… and the company or stockholder dealer shall not be under any liability to the acquirer or any other person created for distribution to the acquirer, or the use of the acquirer or to rely on any such information or any other information, documents, or equipment made available to the acquirer in any “data chambers,” “visible data chambers,” presentations by management, or in any other expected or related manner, and the functions considered in this regard.”
Additionally, marketers are well advised to explain exactly what the word “fraud” really means. Without limiting the scope of the term, the seller may have more exposure to common “genuine fraud” ideas (such as credit for negligent statements, constructive frauds, or statements that are not dependent on the acquirer). In this regard, the seller should consider defining a “fraud” that corresponds to the general definitions of state law:
“Fraud means actual fraud under [Delaware’s] law (including the requirements for (A) false representation, (B) knowledge or belief that representation was false in the making, (C) for the purpose of making the plaintiff act or refrain from committing, (D) the plaintiff’s act or omission is based on the representation and (E) the applicant was harmed by such trust and as determined by the standard of the evidence applicable to that deception itself).”
With clauses of this kind in the acquisition agreement, the seller will reduce the likelihood that the acquirer has a second impression of the acquired business and will be successful on suspicion of being misled and bought by the seller.
Assignment/modification of control issues
IP licenses and other IP-related agreements usually contain provisions that require the consent of another party to change the control of the sales company or the granting of the agreement by the seller. The extent to which that permission is most needed opens up the structure of the adoption function. In most cases, the sale of the property will require the consent of a third party. Conversely, whether a third-party permit is required for the sale of a stock company, or a merger involving a trading company, will require a careful review of the contract language and applicable lawsuits.
Failure to obtain the required permit may violate an IP license or other IP-related agreements with the commercial company. As a result, the acquirer will require the seller to represent in the acquisition agreement whether the employee requires any such permits. In addition, the acquirer will seek to have a closed state when obtaining the most important permissions and, further, may seek refunds if failure to obtain the required permissions will result in the loss of the IP license or related IP agreement.
Given these possible outcomes, the seller and his advice will need to thoroughly review the “anti-distribution arrangements” included in all IP company licenses and other IP-related agreements. In addition, the seller will need to consider which item to sell poses a significant risk to the sellers’ shares if such a permit is not readily available without significant expense to the seller.
For example, a stock purchase or merger may be preferred for the purchase of goods if the seller’s agreements with third parties require permission for the “provision” of the IP but not the “regulatory change” of the seller. In-stock purchases or transactions constructed as a “repeating triangular combination,” there is usually no “distribution” of IP assets, but there may still be third-party rights created by “regulatory changes” arising from this activity.
If the merchant has a key IP that is transmitted to the acquirer only with the consent of the third party, the seller may wish to obtain that consent before entering into a specific acquisition agreement. However, an attempt to obtain such permission actually requires disclosure of the proposed acquisition to a third party, including matters of confidentiality. Failure to obtain such consent before signing the acquisition agreement may result in the seller being at risk of having the transaction fail if a third party later refuses to grant his consent. In addition, a third party may claim payment for the fee or may require a material change in his or her IP agreement with the seller, such as the granting fee.
Key schedule issues regarding IP
The disclosure document is a document that accompanies a purchase agreement that sets out the seller’s required disclosure in respect of outstanding contracts, IP, employee details, pending claims, and much more. A well-prepared disclosure system is essential to ensure that the seller does not violate the representations and warranties in the acquisition agreement, as the disclosure system is “eligible” for such representations and warranties.
As such, this is a very important document to be ready at the beginning of the marketing process, and it takes a lot of time to get complete and accurate. Often, a trading company undermines the effort to obtain this right, requiring many drafts to delay the agreement.
The main mistake made by vendors is the inadequate review of all IP representations and warranties in the acquisition agreement, and then not listed separately for those in the disclosure schedule. Avoiding this mistake is very important in avoiding potential debt. Some key IP issues from the disclosure schedule include the following:
- Failure to list all copyright and patent applications, dates, and authorities included;
- Failure to list all required license agreements and technical agreements;
- Failure to accurately identify contract titles, their parties, dates, and any amendments;
- Failure to include a list of merchant domain names, trademark, and service marks;
- Failure to filter any IP claims against the merchant;
- Failure to document any customer contracts in which the seller has provided an IP guarantee;
- Failure to list any bank loans or other failures in the IP of the seller.
Completing, managing intellectual property especially with due diligence during the merger and acquisition of assets is a way to conclude a successful agreement. Diligently obtaining disclosed IP is the best way to determine the number of assets targeted and to recover potential debt from future claims by competitors and other parties.
There are many features of IP due diligence: timespan, identification, adequacy, ownership, freedom of operation, existing IP agreements, debt, border transactions, performance appraisal, payment risk management, and more. IPRs require risk testing because not all can be obtained by registration and there are many players involved. However successful transactions can be concluded as a result of timely, systematic, and comprehensive testing.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join: