IP Legal Risk Considerations in M&A deals

Guest Post by Omeed Tabiei

1) IP Licenses of Target problems.

a) Say you're a buyer and you buy a SaaS business which licenses its technology to a customer.

b) Typically, these agreements are structured so that the business will be licensing all of its and its affiliates related technology.

c) The problem here, is that this word "affiliate" is interpreted to include the acquirers entity in Delaware.

d) So, for example in one case, this can mean that you have just granted a license to all of your main company's technology to all of the licensees of this small business that you have just acquired.

e) There are a few ways this can be structured around, but none are perfect.

f) For example, in an asset deal the buyer may try to not acquire a problematic license or package the contract and try to sell it.

2) IP leakage covenants.

a) When employees hear of an acquisition, they universally get a tinge of fear as to their continued role.

b) When they do decide they are unlikely to have job security, the first thing everyone does today is copies their files over.

c) This is critical information of the business that is protected, but how can the buyer protect this from happening before a closing, before they take control?

d) With the rise of data security and IP leakage ever increasing, it's important for buyers to ask for covenants related to data security as early as the term sheet stage. This may include terms such as maintaining and reporting access logs to a company's dropbox, or for a larger organization, reviewing and reporting read / write logs from the date of the term sheet - not from the date of the closing.

e) You also want to impose some interim operating covenants, such as restricting the target from licensing or selling any of its IP, and to require the seller to maintain, protect, and enforce its IP before closing. It's customary for sellers to accept such restrictions.

3) Post acquisition: prevent future IP leakage.

a) When you take over the business, you want to immediately implement transparent policies that there's zero tolerance rule for lifting any company files etc, and have your IT admin begin monitoring this.

4) Post acquisition: IP leakage minimization through incentivization

a) Imagine if you're buying an ecommerce company that has a few key employees.

b) Not many people in the market will know your customer data and product better than them.

c) Imagine that one of them went to a competitor - they will essentially be bringing your business's playbook with them.

d) Also, if they're skilled enough, nowadays people can just go make a copycat store and source the exact same product, and implement the exact same marketing plan.

e) So, it behooves you to retain these employees.

f) One thing buyers often don't realize is that employees are highly incentivized even by tiny equity awards and a conversation about keeping them motivated.

g) They don't have the same lofty, $1m+ profit expectations that you do.

h) They just want something that proves their time is valuable, that they are getting something done, that they have a reason to be there for the long-term. A long-term story they are literally bought into. The longer the horizon of the award, like a standard 4 year vesting period, the better.

5) Offensive IP searches

a) Most acquirers just kind of make several assumptions about the target's IP portfolio, and wish them to be true.

b) This is not always the most effective practice.

c) Instead, it is recommended that you have counsel spend a couple of hours to do offensive IP searches around the company's assets.

d) One good example is for trademarks. You may take for granted that a company has a trademark, and think that's the end of the story.

e) Especially in today's age where so many businesses are operating cross-jurisdictionally online, and thousands of new brand names and logos are being developed every day, it is no surprise that there is a higher likelihood of conflict than ever.

f) One client right now has this very issue from a competitor across the world in Germany.

g) So, in this example, a few basic varieties of potentially conflicting trademarks would be searched.

h) This should be done before closing. Why?

i) Because, if it's a share sale, you will be bearing the risk of potential litigation, and this is not something that a seller often due diligences.

j) In the case of a patent, you can quickly unveil on the USPTO if there have been any third party filings that contest the filings of your client's key patents.

k) You can also see the examination history, which will showcase whether the target's patents really cover what they claim to cover.

l) In the examination history, you can also see competitor prior art, which elucidates who are key competitors to the target business from an R&D and learning base perspective.

6) IP: Dependent on third party services

a) More-so today than ever, target businesses use a range of third-party services as their backbone.

b) It can be highly costly and inefficient to consider changing one part of that backbone which you had not planned as part of your post-acquisition restructuring.

c) Prior to getting too high of expectations on the transaction, you should first ask whether there are any irreplaceable services as part of the backbone.

d) For example, a biotech that uses a specific human tissue specimen supplier, or an artificial intelligence guided patient analytics dashboard.

e) One big issue today is that most SaaS businesses rely to some extent on open source code.

f) Those supplier contracts and relationships should immediately be inquired into to ensure that they will hold-up long-term post-acquisition.

g) Moreover, in the due diligence phase these license agreements need to be reviewed for any anti-assignment provisions and change of control provisions.

7) IP: Got the signature?

a) When employees sign PIIAs, proprietary information and invention assignment agreements, employees agree that they will sign any future requested document by the company related to the prosecution of any IP, say, for example, a patent.

b) It's easy to take this for granted.

c) The buyer should be aware of whether key engineers have left the business recently, or are no longer easily reachable.

d) This issue can be pre-empted entirely by due diligence-ing the chain of title and filing documents related to the relevant IP.

Omeed contact https://calendly.com/otabiei/meetings

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Sebastian Amieva

M&A Expert / Investor / Mentor

PS to get personally mentored by Sebastian Amieva or get help to exit your business at a higher price book a call here https://calendly.com/sebastianamieva/call