5 Important Intellectual Property Considerations for M&A Transactions
Almost all M&A transactions involve intellectual property. And for some, the key value driver is IP. It’s impossible to overestimate the importance of addressing this IP, especially when it adds critical value to the transaction. In many companies, IP is the single most valuable asset—far more valuable than real estate or tangible goods. So proper due diligence is essential. Private companies must undertake an even more rigorous process since there’s little information to be gleaned from public sources.
Don’t rush. Missing something during IP due diligence is a source of extensive exposure that may also sideline the deal. There are numerous ways to approach IP due diligence. A skilled and experienced advisor can help structure the process in a way that makes sense for your company. Here are a few considerations that are likely to be highly important.
The Role of Definitions
The asset purchase agreement definitions play key roles in due diligence. Defining each aspect of intellectual property establishes disclosure schedules and the process of due diligence. Don’t be general or broad. Specific definitions protect all parties.
Ensure Appropriate Acquisition and Development of IP
Missing agreements, contracts, and licenses are a common discovery during IP due diligence. Your documentation must fully and completely support your ownership if valuable intellectual property. Spend some time tracing ownership. If you can’t, know that representation and warranty for ownership offers some contractual protection. It will not, however, address the underlying deficiency. You may need to ask for an indemnification agreement to release you from liability if there are shortcomings in the IP documentation.
IP Due Diligence is a Complex Process
A vast range of documents affect the ownership of intellectual property. For example, the company may have hired freelancers to create content or logos, and never clarified who owns these documents. Or there may be trademark concerns. Be mindful of intellectual property, liens, and third-party assignments. Take time to trace each piece of IP back to its source.
Be Mindful of the Perils of Open Source Licenses
Open source software can be a helpful asset that enables companies to develop their own software. Depending on the license, you might be obligated to disclose source code for any content developed from the software. In some cases, the open source license may eliminate the possibility of the owner selling new code developed from open source code. Carefully review any and all such licenses.
Get Help to Review IP Agreements
Intellectual property agreements often contain assignment provisions that require consent before assigning the agreement. You must understand the necessary consents, then ensure these agreements are properly transferred. Change of control language is particularly onerous because it can shape representations, warranties, indemnification agreements, and possibly even the structure of the underlying transaction. In almost all cases, the safest route is to have an IP lawyer review these agreements. Don’t rely on the seller’s representations, and don’t blindly hope that if there’s a glaring problem you’ll recognize it. Sometimes shortcomings in IP agreements are quite subtle, especially to an untrained reader.
About Edgemont Partners
Edgemont Partners is a specialist healthcare investment banking firm providing the highest level of mergers and acquisitions advisory services to founder-owned and entrepreneur-run healthcare and life sciences companies in the lower middle and middle markets. Our world-class transaction expertise is a result of our extensive and proven track record of success. We have advised on over 150 transactions representing more than $60 billion in combined value.