Chronicle Editor
Aleck Ncube, Intellectual Property
DUE diligence should be used to investigate and evaluate a business opportunity. The term due diligence describes a general duty to exercise care in any transaction. As such, it spans investigation into all relevant IP-related aspects of the past, present, and predictable future of the business of a target company.
There are many reasons for conducting a due diligence regarding the general aspects of the business, including the following; confirming that the business is what it appears to be, identifying potential “deal killer” defects in the target and avoiding a bad business transaction, gaining information that will be useful for valuing assets, defining representations and warranties, and/or negotiating price concessions and verifying that the transaction complies with investment or acquisition criteria.
The exercise of conducting IP due diligence is a technical one and it certainly requires professional skills. It is, therefore, recommended that the assistance of an IP professional be sought to carry it out.
I. Identify IP assets
The initial goal of any IP due diligence is to identify a company’s IP assets — patents or patentable assets, trademarks, designs, confidential business information, copyright, domain names and so forth. This will show the IP that is or is not used and the opportunity of changing the use for different business purposes. It will also demonstrate the relevance of the asset concerned to the core business of the company (e.g., whether it is a principal or a supplementary asset).
II. Verify ownership and existence of IP
An assessment of the intangible is made based on whether it is owned by the company (e.g., sole or joint ownership, exclusive or non-exclusive licence, etc.). This not being the case, it will be evaluated to find out if proper steps were taken to obtain adequate rights and if not, whether their acquisition is necessary. This will serve to see if there are some ownership problems, why they exist and what should be done to avoid or fix them. It will also reveal if there is an appropriate system to protect intangible assets with employees and business partners.
III. Detect restrictions on IP asset use
To check if the value of the asset would not be diminished by any previous transfer of IP rights, an analysis of transactions such as licences, collaboration agreements, joint ventures and the like is needed to make sure that there are no other restrictions on the use of the intangible concerned; namely, that the IP concerned can be commercialised with limited risk of liability for infringement — what is referred to as freedom to operate.
IV. Ascertain the validity and strength of IP rights
An assessment of the validity of the IP rights in force will be made, as well as an estimation of the legal duration and exploitation lifespan of the asset. As for the latter, this would aim at predicting the time during which the IP asset that is the object of the transaction is expected to maintain its market value.
V. Evaluate potential IP infringements
This would be the case when either a third party is infringing a company’s IP right or it is the company that might infringe a third party’s right. In both cases a dispute is likely to arise with the consequence of disrupting the business operations.
Advantages of a due diligence
The advantage of undertaking a due diligence by an SME is that the due diligence defects that the licensee, venture capitalist or IP buyer would have discovered, are instead discovered by the IP owner/manager.
This gives the SMEs the opportunity to identify issues, and to fix them, before the deal with the licensee, venture capitalist, or IP buyer.
In this way, the defects are being identified and fixed first. As a result, there is a reduced possibility that the licensee’s, venture capitalists or IP buyer’s due diligence may result in the deal being devalued, abandoned or delayed.
The bargaining position with a joint owner is also strengthened. These risks may not just be reduced, they may be eliminated. The other advantage to conducting a due diligence is that it offers an opportunity to the SME to prepare an IP map, and to present it to the licensee, venture capitalists, or IP buyers.
A firm that performs a due diligence and prepares an IP map before the deal, finalises the deal much quicker, with less likelihood of the deal being delayed, abandoned or renegotiated.
SMEs that do not perform a due diligence run the risk of delays with an increased likelihood of the delayed deal being abandoned or renegotiated. Summing up, the basic elements investigated when performing an IP due diligence are, Intellectual Property identification, IP ownership, IP validity.
The three biggest risks that a due diligence report may reveal are; that the company is not the owner of the IP, that the IP is not valid any more — it reached the end of its duration and that the company does not have the freedom to operate the business or technology due to infringement risk of third party IP rights.
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