IPcopy and Keltie LLP were treated to an excellent presentation by Rob Carter of K2 IP on the subject of due diligence from an in-house perspective (Rob worked in Shell’s intellectual property legal team for over 25 years, the last 10 years as Associate General Counsel and as part of the Global IP leadership team).

A typical M&A transaction passes through a number of stages and IP plays a key role in many of these stages:

• Identification (to work out what IP is key?, how to extract value from the IP? etc.);
• Assessment (what information will need to go into the data room?, what IP assets does the target company have? what IP agreements will be needed?)
• Select (How do the IP due diligence results affect the proposed transaction?)
• Define (what IP-related agreements will be required – a brand licence, process licence, patent/trade mark assignments, etc?. What IP rights will a retained business need?)
• Execute (Negotiation and drafting of the IP-related agreements)
• Operate (the fun task of recording licences and assignments and transferring files)
• Asset Review (how did it go? How can we do better next time?)

Why? Rob noted that the purpose of a due diligence could be seen either as the process of trying to uncover a needle in a haystack or trying to identify skeletons in the closet. However, in reality IP and other intangible assets may often account for up to 70% of the market value of a company and so a proper due diligence process is vital.

Amongst other things a due diligence process may confirm the existence of IP rights and the status of those rights, the value of the potential deal and may identify IP related risks that need to be addressed either by representations and warranties or via a renegotiation of a deal.

When? Due diligence exercises may be considered/needed when a buyer is interested in acquiring another company, when a venture capitalist wishes to invest, where there’s  licensing opportunity, where a financial loan is sought or where a company is looking to divest.

Rob noted that if your company happens to be the target of an acquisition then it is a good idea to have your own internal due diligence exercise running in order to identify things where action is required or to have a consistent story about the reasons for the way things are!

Key to a good due diligence is to build a good team, to establish the objectives of the exercise, to agree common reporting formats for the various participants in the exercise (nothing worse than wasting time just to reformat otherwise good information), to work out the interaction between various team members (e.g. HR, Finance, Legal, Tax and Technical), to regularly share results within your own team and with other team members and to build good relationships with the other side (you may be more likely to get more information and assistance if there are good relationships in place).

Paper v Virtual? Data rooms may either be paper based on virtual and a choice will have to be made between the two at an early point. The size and scope of the due diligence exercise needs to be assessed here. A paper based data room will have the not insignificant advantage that teams can talk with one another balanced against the need to bring all the teams to the location of the data room. Although there are now a number of virtual data room providers it was noted that virtual rooms do not come cheap.

Scope? The scope of an IP due diligence may encompass identifying IP assets, verifying the ownership and existence of IP (e.g. chain of title), checking for restrictions on the IP assets in the form of licences, mortgages and co-ownership, potentially checking the strength (validity) of the assets along with identifying an invention pipeline.

Potential infringement issues may also be assessed both from the context of 3rd party’s infringing the rights of the target to the possibility of the target infringing the rights of others.

Rob noted however that it is important to determine how much the due diligence is to cover and when to stop. Important aspects within this include working out what issues might be regarded as show-stoppers and how to report such issues back up the chain (Rob’s suggestion: report it succinctly, quantify the risk and present possible solutions along with a recommendation!).

Housekeeping. A good indexing system is vital as it will speed the retrieval of key information when needed at a later date. A copy of the data room should be kept in case of a future challenge or litigation. All questions and answers should be in writing and the access to the data room should be strictly controlled. Finally, the date the data room is meant to close should be set along with a defined Q&A period.

Final Report. The output of the due diligence exercise needs to balance a need for brevity along with key findings. The deal’s assumptions regarding IP need to either be confirmed or challenged and the IP identified. Any risks need to be categorised but it should be remembered that businesses want solutions over problems and appropriate recommendations need to be made.

Summary

In summary Rob noted that having good IP management practices will mean you’ll be ready for that next deal and you’ll be able to present your business in a good light and give prospective partners a good feel about your business. He suggested it was good to ensure:

• all IP assets have been captured
• the title to the IP and the scope of IP is understood
• unused rights are weeded out
• the infringement situation (both incoming and outgoing) is understood
• the record system is kept up to date

Finally Rob highlighted that he would be pleased to provide more information on due diligence or other aspects of IP in mergers or acquisitions, and is always happy to have an informal discussion at the early stage of potential projects.

Mark Richardson 14 July 2015