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One of the biggest mistakes an entrepreneur can make, especially in the context of acquiring or selling a company, is not to conduct thorough and extensive due diligence when its comes to Intellectual Property (“IP”) issues during a mergers and acquisitions (“M&A”) transaction.
A miscue here by either the acquiring company or the target company can cause millions of dollars in lost revenue and/or disastrous results for the business transaction itself. It could dramatically affect the valuation and pricing of the proposed transaction. What if you bought a company, but some other company wound up with the trademark? That actually happened to Volkswagen in 1998 when it bought ROLLS-ROYCE only to find out that BMW had acquired the ROLLS-ROYCE trademark.
What kind of IP rights are we talking about? Typically, the IP assets at issue consist of Patents, Copyrights, Trademarks, Trade Secrets, and possible licensing and joint venture IP agreements.
IP and M&A present a complicated set of issues and should be handled by legal counsel experienced in M&A transactions. Here are some basic concepts to keep in mind.
Does the target company actually own the IP rights? Even though a target company may assert ownership of the IP, due diligence may reveal that the company let it lapse, that they were not properly assigned or perhaps were previously contracted away.
Are there any prior agreements concerning the target company’s IP that would seriously dilute the acquiring company’s exploitation abilities and financial projections? Prior transactions may place prior limitations on IP use and territorial restrictions. Such prior transactions may have occurred during a former executive’s tenure and slipped through the cracks. Properly conducted due diligence should eliminate such issues. Remember to always allow for and conduct a thorough and extensive due diligence process.
Are there any pending or threatened IP infringement claims? Does the target company have any current litigation or even threatened litigation with respect to the IP assets? This alone could be a deal breaker – or, at a minimum, reduce the buyer’s valuation of the target company and/or impact the payment schedule of the purchase price. Any existing or potential IP claims must be examined thoroughly to evaluate the impact on the transaction. At the same time, have the target company’s IP assets been infringed and is there a plan for enforcement after the transaction?
Finally, are there any liens against the IP assets? During the due diligence process, make sure you check with various regulatory agencies, including the United States Patent and Trademark Office (USPTO), to search for any filed liens against the target company’s trademarks, patents or copyright IP assets.
The Metcalf Adair Law Firm offers experienced business counsel and can assist with your IP issues in an M&A transaction. To learn more about the intersection of IP and M&A, or how we can assist you, contact us today to schedule a consultation.