|Intellectual Property Due Diligence in Commercial Transactions - An Overview|
Technology companies whose main assets are intellectual property rights (“IPR”) could be a target of acquisitions. It is important to conduct IP due diligence on such companies to ensure no lemon is bought.
What is due diligence?
Due diligence is a process of evaluating the feasibility of a prospective business decision, e.g., whether to acquire a target company. Such a process typically involves the gathering of information on the assets and liabilities of the target company to assess the merits and risks associated with the proposed business transaction.
IP Due Diligence
Because IPR are intangible rights generated by law, IP due diligence is somewhat different from due diligence on conventional or tangible assets. In particular, IP due diligence is complicated because of the multifaceted nature of IPR. For example, IPR can be “registered”, “unregistered”, “registrable” and “un-registrable”.
Patents, registered designs and registered trademarks ® are examples of registered IPR that have legal force only upon official registration. Trade-secret, know-how and business goodwill (which gives rise to a right under the law of passing-off) are un-registrable and unregistered IPR which have legal force without registration. On the other hand, trademarks, copyrights and designs can be both un-registered but registrable. Further, the registrability of IPR could be jurisdictional dependent. For example, copyrights are registrable in the USA and China, but not registrable in Hong Kong or England. Hence, a basic understanding on the nature of the relevant IPR of a target company is essential before IP due diligence could be meaningfully and effectively conducted. Another characteristic of IPR is that not all IPR confer an exclusive right to its owner, and exclusivity is clearly an element which will affect the value of a property. For example, a copyright owner could not prevent other parties from producing an identical piece of work if there is no element of copying.
Each due diligence study is dependant on the nature of the transaction, the business objectives of the parties, and the short-term and long-term business goals of the company. However, IP due diligence generally seeks to gather and evaluate the following areas:-
Information or documents that are typically required to conduct an effective IP due diligence include:-
The above initial due diligence steps would produce a big picture on the IP portfolio of a company, but they are by no means the end of a serious IP due diligence. Where a piece of IP is of particular importance, it may be necessary to conduct more in-depth due diligence to ascertain the strength, scope or validity of an IP. For example, the real scope of a patent has to be determined on the basis of claims with reference to the state-of-the-art and cannot be ascertained from its face.
IP due diligence is a very complicated process and the expertise of an IP professional can make a difference between buying a valuable company and buying a lemon. This article should not be treated as an exhaustive discussion thereof. IP due diligence should always be conducted by experienced IP lawyers.
Without knowledge of the background/facts of the individual matter, we do not intend for the above summary to deal with every important topic or to cover every aspect of the topics with which it deals. Such summary is for general information purposes only and is not intended to provide legal advice.
Please contact members of our Intellectual Property Practice Group:
Senior Partner, Head of Intellectual Property & Technology Practice Group
+(852) 2107 0315
+(852) 2107 0337
|Dr .Toby Mak
+(852) 2107 0351
Published by ONC Lawyers © 2009