IP in merg­ers and ac­qui­si­tions

Buy­ing com­pa­nies should in­ves­ti­gate in­tel­lec­tual prop­erty of the tar­get com­pany at be­gin­ning of deal

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - ILSE DU PLESSIS

WITH merg­ers and ac­qui­si­tions con­tin­u­ing to surge, a sur­pris­ing num­ber of trans­ac­tions are con­cluded with­out any in­ves­ti­ga­tion into the tar­get com­pany’s in­tel­lec­tual prop­erty (IP). Last year saw an in­crease of 133% in merg­ers and ac­qui­si­tions ac­tiv­ity in SA alone and yet, in many cases, IP ex­perts are only con­sulted at the end of these trans­ac­tions, if at all, when it is usu­ally too late to have an ef­fect.

Con­tract­ing par­ties and their at­tor­neys do this at their peril and should con­sider the ad­van­tages of car­ry­ing out a proper in­ves­ti­ga­tion as well as the risks of ig­nor­ing it.

Volk­swa­gen’s ac­qui­si­tion of the Rolls-Royce de­sign and man­u­fac­tur­ing busi­ness in 1998 is of­ten used to il­lus­trate the point. The com­pany paid a re­ported $790m for the busi­ness, but failed to in­clude the fa­mous ROLL­SROYCE trade­mark in the trans­ac­tion, with the bizarre re­sult that it could pro­duce, but not sell, its new lux­ury ve­hi­cles un­der this brand. BMW even­tu­ally bought the brand for a mere $65m. This ex­pen­sive les­son could have been avoided had Volk­swa­gen ini­tially in­ves­ti­gated the own­er­ship of the trade­mark.

A due dili­gence in­ves­ti­ga­tion, there- fore, plays a cru­cial role in en­sur­ing that the buyer of a com­pany does not end up empty-handed or over­pay­ing for the as­sets of the tar­get com­pany.

Large trans­ac­tions usu­ally in­volve a suite of IP items, such as trade­marks, copy­right, de­signs and patents, in a num­ber of coun­tries. Usu­ally the in­ves­ti­ga­tion dis­closes that the tar­get com­pany has reg­is­tered some but not all of the IP used in re­la­tion to its prod­ucts. Fur­ther, in some cases the IP may not have been pro­tected in all of the ter­ri­to­ries where the com­pany op­er­ates, and in oth­ers, the com­pany may have ne­glected to main­tain its reg­is­tra­tions. Over and above this, an in­ves­ti­ga­tion should also be de­signed to iden­tify ac­tual or po­ten­tial third party chal­lenges which, in turn, could di­min­ish the value at­tached to the tar­get com­pany’s IP.

A prop­erly con­ducted IP due dili­gence can also pro­vide the par­ties with a pow­er­ful ne­go­ti­at­ing tool prior to the

A prop­erly con­ducted IP due dili­gence can also pro­vide the par­ties with a pow­er­ful ne­go­ti­at­ing tool

con­clu­sion of the trans­ac­tion. For ex­am­ple, if the in­ves­ti­ga­tion shows that the tar­get com­pany’s IP has not been ad­e­quately pro­tected, the scales may be tipped in favour of the ac­quir­ing com­pany. On the other hand, the in­ves­ti­ga­tion could also ben­e­fit the seller where the tar­get com­pany is shown to have a his­tory of hav­ing im­ple­mented proper IP pro­tec­tion ac­tions, such as iden­ti­fy­ing IP prior to im­ple­men­ta­tion or dis­clo­sure, tak­ing steps to en­sure early pro­tec­tion, and in­volv­ing all de- part­ments, from mar­ket­ing to re­search and de­vel­op­ment, in the process.

Not only will this fa­cil­i­tate the due dili­gence in­ves­ti­ga­tion, but it will also pay off when the com­pany de­cides to cap­i­talise on its in­vest­ments.

Due dili­gence in­ves­ti­ga­tions can be ex­pen­sive and time-con­sum­ing which is off-putting to some com­pa­nies. How­ever, an ex­pe­ri­enced IP at­tor­ney would be able to as­sess whether in fact a full scale in­ves­ti­ga­tion is ac­tu­ally ap­pro­pri­ate as in some cases, it is not al­ways nec­es­sary. For ex­am­ple, if the tar­get com­pany has been in ex­is­tence for a num­ber of years, its busi­ness will prob­a­bly rely on cer­tain key IP items, such as a par­tic­u­lar brand or trade­mark, patent, soft­ware or busi­ness process. Iden­ti­fy­ing these items can be in­volved, but at the very least, the aim should be to iden­tify those in­tan­gi­ble as­sets which the com­pany would not be able to con­tinue with­out. Once this has been done, the in­ves­ti­ga­tion can be­come more fo­cused and cost-ef­fec­tive by elim­i­nat­ing the need to sift through vo­lu­mi­nous, ir­rel­e­vant doc­u­ments.

It is also use­ful to have the buyer’s in­put prior to launch­ing into a com­pre­hen­sive in­ves­ti­ga­tion. It may be that the buyer is only in­ter­ested in cer­tain as­pects of the tar­get com­pany’s IP, in which event the in­ves­ti­ga­tion could be scaled down con­sid­er­ably.

The re­sults of an in­ves­ti­ga­tion may not al­ways match the par­ties’ ex­pec­ta­tions. How­ever, de­spite this, it is im­por­tant to pre­pare an un­bi­ased re­port of the state of af­fairs, point­ing out the strengths and weak­ness of the tar­get com­pany’s IP. If, for in­stance, the in­ves­ti­ga­tion dis­closes prior con­flict­ing marks which could po­ten­tially bar use and reg­is­tra­tion of a key trade­mark, the costs in­volved in cor­rect­ing or de­fus­ing the sit­u­a­tion should be cal­cu­lated and clearly set out. Gaps in the dis­clo­sure process should also be doc­u­mented metic­u­lously so that ap­pro­pri­ate war­ranties and price ad­just­ments can be ne­go­ti­ated.

A thor­ough due dili­gence in­ves­ti­ga­tion is vi­tal to en­sure the long-term suc­cess of a deal and to avoid any nasty sur­prises.

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