10 Tips for Meticulous IP Due Diligence in Mergers and Acquisitions

10 Tips for Meticulous IP Due Diligence in Mergers and Acquisitions

Understanding how to manage Intellectual Property during mergers and acquisitions is extremely important for all stakeholders involved in that commercial deal. Savvy investors and business owners always conduct IP due diligence in mergers and acquisitions. Why? IP due diligence can be the difference between a really good deal, and a really bad deal.

But all too often, IP due diligence is thrown in at the last minute as a box that needs to be ticked to see the already done deal through to completion.  To add value, IP due diligence should be used to decide whether or not the deal is actually worth it in the first place.  Our IP specialists are advocates for proactive management of Intellectual Property and are sharing their top 10 tips for meticulous IP due diligence during a merger and acquisition, with a focus here on trade marks.

What is IP Due Diligence?

IP due diligence is essentially an audit to assess the quality and value of intellectual property assets owned by, or used by a company, business or individual. In terms of mergers and acquisitions, thorough IP due diligence will be conducted by a buyer’s legal team to assess the validity of the deal.  

 

Why is IP Due Diligence so important?

Intellectual Property is seen as one of the single most valuable assets that a company can own, failure to conduct adequate and detailed IP due diligence can render a deal almost worthless, because getting the deal over the line is pointless if the buyer isn’t getting what they believe they are getting. 

Our key message is that subsistence is not everything, and most issues affecting the real value of a portfolio arise post-completion, for example, if it becomes apparent that it is not possible to record the assignment, you may find that the portfolio is ineffective against third parties. Below we share our top tips detailing how to avoid the common pitfalls of trade mark due diligence, and how to avoid them.

Tip 1 – Check that you can perfect the chain of title for every trade mark

A seller will produce a list of trade marks that it believes it owns.  Your IP due diligence in a merger and acquisition should cross reference those trade marks with the official registers.  If discrepancies in the ownership details arise, you should ask yourself the following question:-

  • Does the seller actually own these trade marks?  If the recorded owner name is different to the seller name, can the seller produce historical assignment documents giving them legal ownership of the trade marks? If not, you should walk away.

Even where the seller can produce an assignment document, you should ask yourself the following question:-

  • Is the recorded owner still legally able and willing to sign documentation?  See Tip 2 below for the implications here

Tip 2 – Check the ability of recorded owner to sign documentation

Many countries will require new, original signed documentation on behalf of the recorded owner to record an assignment. 

Where the recorded owner ceased to exist years previously, you will not be able to obtain a signature.  This essentially means that you will not be able to record the assignment into your name.  Many countries do not recognize an assignment unless it has been recorded at the relevant registry, and therefore an inability to record an assignment will render the portfolio useless in enforcing against third parties.

Tip 3 – Ensure adequate provision for additional documentation

Because signed documentation is always required in recording an assignment, you should always ensure that specific clauses relating to the provision of those documents are included.  This is particularly important where an IP portfolio is being purchased out of administration where administrators will be providing the signatures.

Administrators are notoriously hesitant to provide signed documents required for IP recordals and can run up tens of thousands of pounds rewording documents to meet their own requirements, which unfortunately do not meet the needs of the end country.  Ultimately, you can end up with a pile of very expensive, useless documents, and a portfolio which cannot be recorded into your name (see Tip 2 above for implications). 

To avoid this situation, you need to ensure that your deal includes express undertakings to provide all necessary documentation to perfect the assignment and the recordal of the assignment.  Many deals will have a time limit on this kind of clause, for example, six months, however you should note that a large international assignment recordal project is almost never completed within six months. 

You need to ensure that you have all required documents ready for signing very shortly after completion of the deal in order to avoid a situation where administrators refuse to sign in the future.  Bear in mind that where trade mark registrations are due for renewal imminently, you will need to obtain signatures from the administrators for this also.

Tip 4 – Ensure that the acquisition of evidence of use is included within the deal

In many countries, a trade mark registration will be vulnerable to cancellation on the basis of non-use if it has not been put to use within a particular period of time. 

If you are acquiring an old IP portfolio, you should ask whether the trade marks have been used and should ask for proof of use to be included in the purchase documents.  Failure to do so could mean that you will not be able to defend your registrations against a future non-use attack, meaning that you are essentially sitting on a ticking time bomb which could obliterate your portfolio. 

Tip 5 – Check implications of existing agreements

Always conduct a thorough review of any existing third party agreements that are already in place. IP agreements can take many forms and may involve restrictions and limitations on use and registration of trade marks to a particular form, geographical territory and/or range of goods and services.  In addition, the agreement is likely to limit the adverse actions that each party is entitled to take against the other. 

Careful checking of the terms of any of these agreements is required in order to be sure that you will not be prohibited from using and dealing in the trade marks in the way that you plan to in accordance with your IP strategy.

Many agreements will contain clauses indicating that the rights will not be assigned without prior notification to the other party in writing.  Failure to adhere to these clauses may render the overall agreement void, and may mean that you will not be entitled to place any reliance on the agreement.

Tip 6 – Assess the implications of ongoing matters

Does the IP portfolio include any pending applications or adverse actions, for example, trade mark oppositions? If there are any pending matters ongoing, be sure to check how this may impact on the rights that you are acquiring.  Is the trade mark that is the subject of the action a lynch pin for the entire portfolio, and would the portfolio still be worth having if the application fails?

You also need to understand whether any current negotiations will have an impact on your intended strategy for the brand, and whether any terms that are currently being negotiated will harm your plans.  Some countries will not permit a change of party during ongoing proceedings – you should check whether you will be entitled to become a party to the proceedings post-completion.

Tip 7 – Deep dive into the actual status of trade marks

Many official registers are not regularly updated.  An indication that a trade mark is “registered” may not actually be factually correct. A deep dive into all relevant details and dates is required to ensure that the trade mark has not actually lapsed through failure to renew, bearing in mind that some countries attribute new registration numbers upon renewal.  This information can actually be hidden deep within official register details, but your IP advisor has experience of this, and will be able to provide you with accurate data behind the face details on the register.

Wherever a trade mark renewal date has passed with no indication on the register that a renewal application has been filed, the assignor should be asked to provide evidence that a timely renewal application was filed. 

Tip 8 – Consider future costs

Assignment recordals can be very expensive, running into tens of thousands of pounds.  In many territories it is imperative to record the assignment in order to enjoy the full benefit of the assignment.  These future costs need to be taken into consideration when agreeing a deal – there is little point in undertaking significant costs in the purchase of an IP portfolio only to discover that you cannot then afford to record the assignment, and cannot therefore enjoy the benefit of the rights that you have acquired.

Tip 9 – Check what licenses are already in place

Are there any active licenses in place, and how do these impact on your strategy for the brand post-acquisition?  Where a licence has been recorded, that licensee is deemed to take precedence over any subsequent licenses that may be put into place, and you as they buyer are deemed to be on notice of its existence and may not claim ignorance of the existence of the licence in the future. 

Where you do not wish a licence to continue, you will need to check the termination clauses of the licence, and ascertain whether termination of the licenses needs to form part of the deal.

Tip 10 – Appoint an experienced IP specialist

Whether you are the target company or the buyer in a business transaction, an accurate valuation of an IP portfolio – trade marks, designs, copyright and trade secrets – can only be achieved through meticulous IP due diligence. At Sonder IP, our highly-experienced Trade Mark Attorneys skilfully define and examine a company’s IP portfolio to empower wise investments and commercial deals. We will provide straightforward guidance and advice for each of the above areas and more. Learn more about our IP due diligence service and how we can strategically support your next business move.

Choose a new kind of IP law firm

Sonder IP are intellectual property specialists providing expert trade mark, design and copyright services to start-ups, SME and global brands at a fixed, transparent price. With almost two decades of experience at Europe’s leading IP firms, our founders Matt Sammon and Rachel Nicholls provide straightforward, expert IP advice tailored to each client’s unique business needs and goals. Learn more about our IP protection and IP strategy services or get in touch with us for a complimentary IP audit today.