A busy time for M&A activity inevitably includes increased due diligence work. Let's be honest: due diligence is the necessary, essential, but the oh-so-very grunt work of a transaction. Middle and junior level staff, rather than senior lawyers (excluding this hoary Kat, who quite likes being involved in IP due diligence) tend to be engaged in carrying out the bulk of the work.
Being in the midst of such a period at the moment, I am once again struck by the special nature of due diligence in connection with IP, being one part forensics and one part document discovery. Starting with a tabula rasa about a company, we proceed to try and figure out: (i) what IP rights the company owns or uses; (ii) how robust are these rights; and (iii) how unassailable are the company's claims to these rights. If we get it wrong, and it turns out that the company does not have that the IP rights that it claims, in whole or in part, reliance on the breach of a warranty or representation to the contrary may be of limited solace to the frustrated acquirer. For that reason, perhaps delusionally, I like to believe that IP due diligence is special.
Against this backdrop, there are number of generic issues regarding IP due diligence that seem to pop up time after time. Permit me to share some of them below:
I think that I will settle for these 11 questions. Readers' further thoughts and comments to the list are most welcome.
Being in the midst of such a period at the moment, I am once again struck by the special nature of due diligence in connection with IP, being one part forensics and one part document discovery. Starting with a tabula rasa about a company, we proceed to try and figure out: (i) what IP rights the company owns or uses; (ii) how robust are these rights; and (iii) how unassailable are the company's claims to these rights. If we get it wrong, and it turns out that the company does not have that the IP rights that it claims, in whole or in part, reliance on the breach of a warranty or representation to the contrary may be of limited solace to the frustrated acquirer. For that reason, perhaps delusionally, I like to believe that IP due diligence is special.
Against this backdrop, there are number of generic issues regarding IP due diligence that seem to pop up time after time. Permit me to share some of them below:
1. What is the company's cost/benefit analysis in having the IP due diligence becarried out by a one-stop shop law firm versus preferring an IP specialist firm for certain issues, such as prosection and validity of IP rights?
2. What is the best way to handle multi-country patent or trade mark portfolios as part of due diligence (and how does legal insurance impact on this)?
3. Within the law firm, should the IP due diligence be coordinated separately from other aspects of the transaction's due diligence process?
4. To what extent should the persons with overall responsibility for the due diligence be present at meetings or telephone calls regarding IP matters?
5. Should certain categories of contracts, such as employment agreements and licensing contracts, be reviewed in their entirety by a single person, or should their review by divided among the appropriate practice groups, including from the IP angle?
6. How much pressure should be brought to bear on the target company to disclose relevant IP information and documents, some of which may form the basis for extensive scheduled exceptions to the warranties and representations, or should the acquirer prefer to rely on broad undertakings in the representations and warranties?
7. To what extent should the relevant persons at the target be interviewed during the due diligence process and at what stage?
8. To what extent should the IP due diligence run on a parallel track to the negotiations over the relevant IP representations and warranties, or should the two be conducted in seriatim?
9. Should the law firm ask to see any and technical due diligence carried out on behalf of the client and under what conditions should the client company decline to share this information?
10. With respect to IP due diligence, is there a time factor in the process and does it work to the tactical advantage of the acquirer or the target?
11. To what extent does the nature of the transaction--acquisition versus investment--affect the scope and focus of the IP due diligence?
I think that I will settle for these 11 questions. Readers' further thoughts and comments to the list are most welcome.
Ruminations on IP Due Diligence
Reviewed by Neil Wilkof
on
Friday, March 11, 2011
Rating:
Reviewed by Neil Wilkof
on
Friday, March 11, 2011
Rating:
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Is it just me or is the amount spent on due diligence often disproportionately big (e.g. when a funding body wants some freedom to operate searching and some patentability searching performed to support an application for a grant of, say, £2000) or disproportionately small (e.g. some "box ticking" due diligence exercises I have been aware of [but not been involved in, I should hasten to add])?
ReplyDeleteNeil, A few thoughts:
ReplyDelete1. I think careful thought needs to be given the purpose and scope of the due diligence before doing it. I have been involved in IP due diligence exercises, as an in-house lawyer, where external lawyers did a standard and extensive exercise that provided very little value to the client but "ticked the boxes". Getting reams of paper may not help the commercial client. It may be much more useful to identify key areas of concern in advance and focus on them. It is also important to understand what the client wants. I think there is a danger sometimes of providing a standard product that may make the lawyer's file bullet-proof but doesn't help the client. How does the client process information? Is he or she someone who likes detailed documents, or a commercial overview, or someone who wants to be told, face to face, or is there some other preference? How risk averse is he? What will he do with the information? This stuff doesn't get taught at law school (as far as I know).
2. In my view due diligence on the IP portfolio needs to be done by patent agents, whilst due diligence on IP contracts needs to be done by specialist solicitors.
3. Depending on the purpose of the DD exercise, it may be appropriate to involve someone more senior on the IP due diligence than on other aspects. For example, when reviewing IP contracts, if it is to go beyond stating basic points like who owns the IP and whether there are any relevant assignment and change of control clauses,it may be important to have someone at the level of experience that would be required to draft the IP agreement in the first place. In some cases this may be, eg someone at least 5 years qualified.
Neil, before attacking those questions (which are very good) for me, the first question is "how important is IP to the deal?" Those of us who are in the biz often tend to think that we are the end-all, be-all of importance in closing a deal. However, as I found out when I left law firm life for a corporate gig, often this question is not considered prior to the hurry-scurry of a M&A transaction. If IP (and intangibles generally) are indeed important, I then want to find out how IP fits into the overall value proposition, specifically how these assets will support the overall valuation of the deal. If IP is critical to the desired outcome of the deal over time, then we have to assess whether it is reasonable to obtain the proposed long term value from the deal. This is as easy as asking "what are we hoping to accomplish from this deal in 6 months, 18 months and 36 months?" Only then is it relevant to ask these detailed questions, IMHO. And, if IP is only part of the value of the deal, then we need to take care not to over-analyze the issues, picking out those issues that make sense given the deal structure. That being said, if IP is all that that there is, you need to pull out all of the stops to interview inventors etc.
ReplyDeleteIf at all involving the US market, I consider that IP due diligence should uncover everything that might be uncovered through a discovery process. As we know, this even goes to the inventors' notes, sketches, etc. This is to avoid nasty surprises later.
ReplyDeleteHowever, the whole matter of due diligence in connection with mergers or acquisitions that have a sufficiently large influence on the market structure to attract the attention of e.g. the EU commission is a major problem. If an acquisition is prohibited, the potential acquirer has obtained a complete evaluation of the smaller company, and competition in the marketplace will be distorted anyway. I consider this a rape.
This speaks for letting all due diligence, in respect of all activities, be performed under discovery conditions, which prevents direct feedback to the company that desires to act on the information.
George Brock-Nannestad
It is rational for an organisation to seek to generate the maximum possible returns from its assets. In order to do this, an organisation needs an accurate inventory of its assets, along with an understanding of the potential revenues that could be generated and the resources that will be needed to exploit and protect the assets.
ReplyDeleteThis type of analysis could assist when reviewing an organisation’s mission statement and strategy, in addition to affecting current value. Ultimately, the potential costs of litigation will need to be factored into any risk management or IP strategy equations.
Legal protection is available which will indemnify the costs of pursuing infringers across required jurisdictions. In order to obtain such insurance an organisation will need to list the rights it owns. The robustness and unassailability of these rights forms part of the considerations that a prudent underwriter will make when pricing such a risk. Advice from experts assists in the underwriting process and in reducing the level of uncertainty surrounding an insurance proposal.
Bob Knock, Intellectual Property Product Manager, FirstAssist Legal Protection