Important IP Considerations for Startups in Mergers and Acquisitions

With the rise of startups and enhanced knowledge of business valuation, Intellectual Property Rights (IPRs) can be highly valuable assets and, like other intangible property, should be evaluated in m&a transactions.

With a number of technology start-ups being purchased, it’s possible that they’ll have a portfolio of patents or copyright protecting their software and products, which could be the target companies’ most valuable assets. As a result, determining the value of IPRs is critical since it aids the parties in reaching an agreement on the buyer’s consideration.

Given the importance of IPRs, it is vital to evaluate certain major problems that should be considered and procedures that the parties should take to properly transfer IPRs during a merger or acquisition. Among them are:

Due diligence

In a merger or acquisition transaction, it is critical to conduct due diligence. During a due diligence assessment, the following actions should be taken:

Define the IPRs to be Transferred — The first step is to determine which IPRs will be transferred as part of the transaction. This is because the target company may have other intellectual property (IP) that it does not own but has licensed or franchised.

In addition to the information provided by the target identifying existing IPRs, an independent search should be conducted to confirm whether any further IPRs have been overlooked.

Because some businesses fail to secure ownership rights to IPs created by other parties such as software engineers or developers, ownership validation is essential. For example, some software developers create digital platforms for clients and may attempt to claim ownership of the technology used to create the platform.

Even if it appears that the corporation owns the IPRs, if there is no effective transfer of ownership, a third party may emerge and challenge ownership.

Validity — When it comes to validity, it’s important to remember that some IPRs have expiry dates. A trademark, for example, is valid for 10 years in the first instance before expiring and needs to be renewed for another 10 years in some jurisdictions. After that, renewals would happen every 10 years. Patents are also only valid for one year and must be renewed every year for a total of twenty years, after which the patent expires and becomes public domain.

As a result, the validity of the IPRs must be checked at the time of purchase, because if an IPR has expired and the renewal period has passed, the purchaser will be purchasing an IPR with no value.

Use of the IPR – It is critical that the buyer evaluates the IPR in question to see if it is appropriate for the proposed use. Trademarks, for example, are classified into different classifications.

However, if the fintech registers its trademark in Class 35 (advertising services delivered via the internet), the applicable class will afford no protection. As a result, anyone who buys a trademark and wants to use it for a fintech company will not have a relevant trademark to protect it. As a result, this must be carefully examined to assure proper protection.

Disputes – You should also obtain the information on any pending or threatening lawsuits or claims. The nature of the claims or possible damages should be evaluated because it may have an impact on future IPR exploitation and serve as a foundation for estimating the transaction’s worth.

Examine all existing IP-related contracts

Following the identification of IPRs, it’s critical to obtain and evaluate all IP-related agreements for any terms or conditions that can affect the transaction or the utilization of the IPRs. Licensing Agreements, Franchising Agreements, Deeds of Assignment, Co-existence Agreements, Settlement Agreements, and Distribution Agreements are some of the essential agreements.

Change of ownership, assignability, exclusivity, rights to additions and improvements, the scope of use, jurisdictional boundaries, and the right to sublicense are some of the terms and clauses to watch out for.

Social media, websites, and domain names

Because many startups today conduct their business through these platforms, the seller’s websites, domain name, and social media accounts may be a significant aspect of its operation. In reality, many businesses have a small physical presence and conduct most of their business virtually, using social networking sites like Twitter, Instagram, and LinkedIn. An acquirer may have the following issues in this regard:

• Is the seller the registered owner of all of the seller’s important domain names?
• What social media accounts does the company have? Are they registered in the company’s name or an employee’s or consultant’s name?
• Are the seller’s Terms of Use Agreement and Privacy Policy adequate to protect the business?
• Who owns the content shared on the company’s websites or social media pages? Is the business free to utilize whatever content it deems appropriate?

Before purchasing these platforms, which are part of the company’s IPRs, these and other pertinent questions must be answered.

Seller’s Liability for IP Issues

An acquirer would demand that the seller reimburse it for any breaches of IP-related statements, all known claims (including active litigation), and, in many cases, future claims relating to the seller’s IP. Negotiating the terms, conditions, and limitations of these indemnity agreements is one of the most critical conversations in an M&A deal, especially when the seller’s actual worth is in its IP, as is often the case with startups.

Take out warranties and indemnities

In a merger or acquisition, the acquirer should get specific IPR-related warranties and/or indemnities from the seller to preserve its interests. The following should be included in these warranties/indemnities: that the seller is the owner of the IPRs; that all renewal and maintenance fees have been paid; that the IPRs are valid and subsisting; that the IPRs do not infringe on any third party’s rights; and that no rights have been created in respect of the IPRs (e.g. licenses) that could interfere with the buyer’s enjoyment of the IPR.

Draft Transfer of Intellectual Property Rights Agreements

Proper documentation, such as Deeds of Assignment and Licences, should be drafted and executed by the parties to effectuate and correctly evidence the transfer of the IPRs. It’s crucial to do so ahead of time, especially if one of the parties will go out of business after the transaction and won’t be able to sign the necessary documents.

Consider whether the target is required to get consent from any third party for the transfer of any IPR while structuring the agreements. If this is the case, the acquirer should compel the target to state in the agreement that all necessary consents have been received, as well as to commit to indemnify the acquirer if the representation is fraudulent.

Furthermore, once the agreements have been executed, they must be registered with the appropriate Registries.

Intellectual property rights are among the most valuable assets that a company can own. When considering a merger or acquisition, it’s critical to proceed cautiously when it comes to intellectual property rights. Failure to do so may result in the undervaluation or overvaluation of IPRs. As a result, parties to a merger or acquisition involving the transfer of IPRs should seek the advice of expert intellectual property lawyers throughout the process.