With mergers and acquisitions (M&A), it is likely that an overarching due diligence investigation will be required to allow the parties to the transaction to gain a strong understanding of the other side’s financial, corporate, and legal standing. This is a particularly rigorous process when there are substantial assets or significant risks at stake. In addition, in some transactions, there may be additional types of due diligence investigations needed, often in conjunction with or alongside the main process. For certain industries, usually anything associated with technology, this will normally entail a review of one or both companies’ intellectual property (IP). After all, many M&A deals are based on the innovative and invaluable aspects of a company’s IP. Here is what a company will likely need to provide and/or review to conduct appropriate IP due diligence:

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Comprehensive List of IP Assets

One of the first things that must be addressed to conduct IP due diligence is the identification of a company’s IP assets. Of course, in addition to understanding whether IP exists, it is also important to examine which assets, if any, necessitate strict scrutiny. Obviously, some types of IP are more important than others, so the identification process requires an examination of whether and to what extent the IP adds value to the deal. Initially, it will likely be easiest to review a comprehensive list of a company’s IP assets. Then, once there is a concrete list of the relevant items, it will be important to narrow down which IP must be further evaluated. The IP that will usually demand the most scrutiny is the type that influences competitive advantage and/or potentially exposes a party to liability or other issues.

Information Regarding IP Development, Acquisition, and Ownership

Thinking that a party developed, acquired, and/or owns IP and actually being able to demonstrate the development, acquisition, and/or ownership of that IP are two entirely different things. It is critical for a prospective investor or purchaser to know who actually owns and controls any relevant IP. In order to do this, there will no doubt be requests for information that definitively prove that the party holding the IP does in fact have the right to own and utilize it. This can be trickier than it seems, as employees sometimes create IP for a company, and if the appropriate safeguards are not put into place from the beginning, it may be ambiguous as to who has the rights to it. As a result, this will be a crucial facet of the IP due diligence investigation.

Copies of Applications, Registrations, and all Other Pertinent Records

One of the best ways to indicate that the IP utilized is in the right hands is by taking the correct steps to register it, apply for a patent, or take some other measure to assert one’s legal rights to the data in question. Thus, in addition to providing information regarding the creation and acquisition of the IP, it will be necessary to show what steps were taken to safeguard it legally. The mere process of examining a company’s patents can be incredibly convoluted and time-consuming, so it is key to keep all of the pertinent records meticulously organized.

Contracts and Legal Agreements Associated with IP

Sometimes companies enter into licensing agreements or other types of contracts to allow other parties to use their IP in some way. Because this can have fairly significant ramifications, IP due diligence will undoubtedly require an examination of these agreements to determine whether they will create any issues subsequent to the deal closing. A deal may not be able to proceed if the company has entered into a ton of different agreements, especially if the parties are in foreign jurisdictions, which makes it a lot harder to track and enforce IP rights. As a result, IP due diligence will definitely entail a rigorous evaluation of any contracts or other agreements in which a company’s IP has been more or less lent to others.

Information Relating to IP Protection and Existing or Potential Disputes

This is similar to the aforementioned category, but this will require furnishing evidence of actual disputes. There are often challenges to IP usage or claims that a company’s patents are unenforceable or legally unsound in some other manner. Patent challenges have become particularly common, and the rules surrounding them are less than ideal. It is obviously important to provide companies with some type of IP protection to foster creativity and innovation, but too much protection can actually end up stifling that very innovation, as the lack of protections can deter firms from investing too much time and money into an endeavor that may end up being permissibly pilfered.

Ultimately, IP due diligence during an M&A deal is just another important step in the long list of steps that must be taken to seal the deal. The easiest way to navigate the process is to become and remain organized from the get go and to take all appropriate precautions to protect a company’s IP.

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