By Richard D. Harroch, David A. Lipkin, and Richard V. Smith
Mergers and acquisitions, particularly those involving privately held companies in the technology sector, often involve a number of significant intellectual property (IP) issues. In a private company acquisition, the seller has not been subject to the scrutiny of the public markets, and the acquirer has little ability to obtain all of the IP-related information it requires from public sources. Thus, before an acquirer will definitely commit to an acquisition, it will typically do extensive due diligence on the selling company’s patents, copyrights, licenses, trademarks, and other intellectual property.
The following is a summary of the most significant activities and issues relating to intellectual property connected with a typical acquisition of a privately held company. It is critical that the seller involve experienced IP counsel, working closely with its primary M&A counsel, to advise on and administer these matters. By planning these activities carefully and properly anticipating the related issues that may arise, the seller will be better prepared to go through a successful sales process.
1. Intellectual Property Documentation
The seller needs to have prepared for the acquirer’s review an extensive list of all of the IP (and related documentation) that is material to the seller’s business, including:
- Patents and patent applications (including patent numbers, jurisdictions covered, filing, registration and issue dates)
- Confidentiality and Invention Assignment Agreements with employees and consultants
- Trademarks and service marks
- Key trade secrets and proprietary know-how
- Technology licenses from third parties to the selling company
- Technology licenses from the selling company to third parties
- Software and databases
- Contracts providing for indemnification of third parties for IP matters
- Open source software used in (or used to create) the seller’s products and services
- Claims for infringement of IP, including any IP litigation or arbitration
- Domain names
- Liens or encumbrances on the IP
- Source code or object code escrows
- Social media accounts (Twitter, Facebook, LinkedIn, etc.)
A variety of these items will typically need to be included in the disclosure schedule that accompanies the acquisition agreement (see Item 13 below: “Key Disclosure Schedule Issues Concerning IP”). To facilitate an acquirer’s due diligence, the seller will usually have all of these documents (perhaps other than trade secrets) housed in a virtual data room. Assembling these documents and setting up and maintaining the data room is a time-consuming task for the seller to undertake, and therefore it is critical that the company undertake this as early as possible in the sale process.
2. Development and Acquisition of the IP
An acquirer will want to confirm that the value it places on the selling company, particularly if the seller is a technology company, is supported by the degree to which the company owns (or has the right to use) all of the IP that is critical to its current and anticipated business. It is not uncommon for private companies, particularly those that did not have IP counsel involved at early stages of the company’s existence, to find that there are uncertainties as to the ownership of (or the right to use) its key IP. These problems may be exacerbated if individuals who were involved in the creation of such IP are no longer with the company (or worse, now work for a competitor). The acquirer will also want to know that the seller will continue to be entitled to exploit such rights after the closing of the acquisition.