Due diligence on corporate transactions

30th October 2018

In this day and age, it is rare to not have a significant element of a corporate transaction focussed around the intellectual property rights of a company. Whilst previously key assets were often considered to be real property or tangible assets, intellectual property rights such as domain names and trademarks are taking precedence and a vast number of businesses see the intellectual rights they hold as their greatest and most valuable asset.

Therefore, whether you are buying a company, or selling a company or its assets, it is imperative to ensure that due diligence is carried out thoroughly and effectively.

If you are considering acquiring a company, you need to be comfortable that the target has all of the ownership rights it purports to have.

During the due diligence process, it is common to discover, for example, that a website which was first registered many years ago, still remains in the personal name of the employee who registered it. Equally, if you are acquiring a company out of a group, it may well be that the ownership of the IP rights (IPR) you would like to acquire actually lies elsewhere within that group and the right to use the IPR has never been formalised or documented.

A fair amount of publically available information can be achieved through online searches, but it is surprising how often, even with an exit in mind, sellers fail to spot the basic errors in registrations relating to their IP.

So, if you are selling a company, make sure that all of your registrations are up to date, and are not due to expire during a sale process or soon afterwards. Transactions can be delayed for any number of reasons, but discovering that a trademark or other registrable intellectual property right has expired can often lead to further unnecessary delays whilst it is sorted out. Delay usually favours the buyer, so the seller needs to be on top of this to ensure that any delays are kept to an absolute minimum.

The other area that is often overlooked is provisions in employment contracts to confirm that any IP developed in the course of employment belongs to the company.

With employees there is a presumption of ownership by the company, but it is important to establish a clear chain of title showing both legal and beneficial ownership to establish whether any third party could have rights to any IP. Any uncertainty of ownership should be rectified by a confirmatory deed of assignment delivered before completion. It is not always so clear cut where the shareholder is also a director and employee and has other companies, all with various elements of IP, developed over a significant period of time and not necessarily as part of a 9-5 job.

The key therefore is, if you are planning to exit your company, to make sure you carry out due diligence on yourself before the sale process begins. Keep a register of all of the company IPR and use the pre-sale period to tidy up any anomalies in registrations or ownership. Are you sure that you own the content of your website? This is another common area where it is only through the investigations of the buyer that the sellers discover the copyright in the website (or the ownership of it) has never properly been transferred by the developer. Once a developer knows that you want that ownership back, negotiations can become more strained, and ultimately costly.

If you are a buyer, it is essential to carry out a proper due diligence process and not just rely on online searches. There may be IP which is used by the target company, but not owned by them. Ensure that any such use of intellectual property rights is licenced and that the licence cannot be terminated on a change of control of the company, or on a sale of its assets.

Finally it is also imperative that you request any source codes, passwords or log in details as part of the completion deliverables. This is an area which is often overlooked and, even if there is a requirement on a seller to assist with handover post completion, actually laying your hands on those details can take time. You would not complete on the purchase of a property without a handover of the keys, and the same principle should apply in respect of intellectual property. Please contact Alison Scott at [email protected] for more information.

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