Four IP Issues In Mergers & Acquisitions With Devastating Consequences

W

hen it comes to mergers and acquisitions, many business leaders tend to value a business based on specific assets, mostly tangible assets like office buildings, employee count, office furniture, equipment, and so on. 

There is nothing wrong with assessing these assets, but neglecting intangibles like intellectual property can have devastating consequences in the future. Here are four (4) of the most common intellectual property issues in mergers and acquisitions:

01. Issues Surrounding Intellectual Property Ownership

Issues Surrounding IP Ownership are perhaps the most common IP problems in merger and acquisition transactions. This issue, or if we may say, negligence, comes in different forms. For example, a business leader interested in acquiring another firm will take all the required time to audit the accounts of the seller as well as identify physical assets owned by the seller. 

However, he or she may not carry out due diligence to identify the IP assets owned by the seller as well as assets that the company co-owns or cross-licenses with third parties. Having a thorough knowledge of the ownership structure of the seller’s intellectual property can put you in a favorable negotiating position.

Moreover, knowing the IP assets owned by a firm, their present and future commercial values, and the extent of exclusivity accruable from the assets will determine the nature of agreements to be drafted.

02. Issues Surrounding Employee and Contractor Rights

 

In most jurisdictions, ownership of intellectual property rights vests with individual creators such as employees, external consultants, contractors, agents, etc.

Although having a definitive transfer of ownership agreement takes care of this legal loophole, most employers and companies still neglect to take the necessary measures.

Even in common law countries where the “work made for hire” doctrine applies, the ownership of intellectual property rights for any work produced outside the scope of employment remains with the creating employee unless such rights are transferred to the employer through a written agreement.

Thus, to avoid potential conflicts with employee inventors or creators and contractors, it is best to obtain IP assignments from anyone involved in the creation of target IP assets.

Also, effort must be made to resolve pending and potential disputes before consummating the transaction.

03. Open and Potential Disputes

We have seen many instances where a company acquired a new business or business unit intending to add an asset to their business but end up inviting future lawsuits. During mergers and acquisitions, it is essential to carry out IP searches with relevant authorities to identify assets owned by the seller.

However, searching IP databases isn’t enough. It is vital to ensure that the target IP assets are not being infringed on. In the same vein, it is necessary to ensure that the target IP assets are not infringing on a third party’s rights. In the event that there is an infringement on any of the target intellectual property or a violation of a third party’s intellectual property rights, steps must be taken during the merger and acquisition process to avert future lawsuits. 

For instance, standard “non-infringement” representations, warranties, and indemnification in the purchase agreement can help to prevent future disputes.

In addition, there should be a definitive post-closing agreement to protect the buyer from financial risks, including future IP claims.

04. Issues Surrounding Intellectual Property Validity

Another common aspect of IP due diligence often neglected during mergers and acquisitions is IP validity. Not considering IP validity during transactions can have two significant consequences.

Firstly, for the seller, the transaction may fall through if the prospective buyer discovers that some of the IP assets are not valid. This is usually the case if the IP assets are considered a key element in the supposed transaction. For the buyer, acquiring or merging with a business or business unit without checking the validity of the intellectual property also has its consequences.

First, the business may acquire or merge with a company that hasn’t been maintaining its IP portfolio. Thus, the proposed IP assets may be lapsed, abandoned, and in a worst-case scenario, registered by a competitor. Besides, even if the company is prompt with all renewal filings, some IP rights, although issued, may not have met some validity criteria and can be prone to invalidation claims. This issue is mainly associated with patents.

For instance, if certain “prior art” is an essential component of an invention but was not fully considered during a patent examination, the validity of such patent, even when granted, can be contested.

Thus, it is essential to employ the services of an experienced IP consultant to carry out an all-round assessment of the target IP assets before finalizing any merger and acquisition deal.

Have any questions about IP transactions and IP Due Diligence, feel free to contact us on info@palladium-ip.com

AboutTafadzwa Chibamu