When M&A goes bad: overlook IP due diligence at your perilPosted on
According to a Harvard Business Review article, “Deal making is glamorous; due diligence is not”. Do you think this is a harsh, but fair, summary? The article goes on to say: “That simple statement goes a long way toward explaining why so many companies have made so many acquisitions that have produced so little value”.
The author may have a point, it is certainly a succinct outline of the due diligence process and the potential consequences facing those who have cut corners.
Due diligence is usually carried out as part of the purchase process of a company. It is a far-reaching investigation into the business, legal and financial affairs of the potential acquisition, a process that collects and assesses all the legal documents and information relating to the target company. The resulting due diligence report gives both the buyer and the seller the chance to scrutinize any legal risks, such as lawsuits or intellectual property details, before closing the deal.
Intellectual Property (IP) due diligence is an important and complex part of the process. The purpose of IP due diligence is to identify, review and assess any IP rights and their reach.
It is vital not to dismiss IP due diligence as a matter of formality, because it can go horribly wrong. And, unfortunately, there are many examples of this.
One of the most extreme examples happened in 1998, when German carmaker Volkswagen purchased the assets of Rolls-Royce Motors and Bentley Motors Limited for around $900 million. However, it was not until the deal closed that Volkswagen realised the IP assets did not include the right to use the ROLLS-ROYCE® trade mark. This right belonged to a different third party not involved in the sale: BMW.
Volkswagen had in effect acquired all the rights necessary to manufacture a ROLLS-ROYCE® car: it could look like a ROLLS-ROYCE® car; it could drive like a ROLLS-ROYCE® car; it could even have a model number given only to a ROLLS-ROYCE® car; it just could not be called ROLLS-ROYCE®.
A similar issue was encountered by mass media company Viacom Inc., during the purchase of YouTube by Google. It came to light that YouTube infringed rights of Viacom which had not been taken into consideration by Google during the acquisition. Although the parties settled mutually, and not much harm was caused, the lack of sound due diligence on the part of Google might have landed the purchasers in huge trouble.
Therefore, while it is not the most glamorous function in any IP advisor’s jobs, it is one of the most critical. A mistake in the due diligence process can have far reaching consequences.
So what are our top five tips?
1. Check the actual status of trade marks and do not just rely on the schedules provided
Is the information you have been provided with up to date? Has the IP been renewed when it should have been? Is the IP protected in the territories it should be? What stage is the IP at in the application process? Does the seller own what they have said they own?
2. Check that you can perfect the chain of title, including checking the ability of the owner to sign documentation now and in the future in case their assistance is required
Invariably, additional documentation is often required to effect the transfer of IP. Is there an obligation on the seller to continue to assist the purchaser when the transaction has completed, by signing additional documents if required? What happens if the seller goes into administration? Is there an obligation on the Administrators to assist?
3. Consider future costs in terms of recording the assignment
Is the seller going to make provision to assist in this respect? Costs can quickly escalate especially when additional documents are required. In addition, many countries require the transfer to be recorded so the buyer can enjoy the benefit of the IP. Can you afford to record the assignment of the IP?
4. Assess the implications of ongoing matters which involve the IP, whether being defended by the seller or enforced by the seller
When you acquire ownership are you going to immediately become the defendant in a legal battle? If so, it would be wise to seek indemnities from the seller for past infringement claims. If you are about to buy IP which is being infringed, are you prepared to take the necessary steps (and the cost) to prevent the same?
5. Check the implications of existing agreements in place involving the IP and check what recordals are already in place against the IP such as charges, licences.
Always check any existing third-party agreements already in place to see what obligations you will be bound by. In terms of other recordals such as charges and licences, what happens when you acquire the IP? Is the seller entitled to sell the IP if any such recordals have been made against the IP? Are you going to be bound by the recordals?