Unlocking the value of intellectual property (IP)
Hardly anyone could argue against the constantly increasing importance of IP to companies. IP not only affects the business models of companies but also brings additional value to the table (e.g., in addition to its client list and personnel, a target offers proprietary software solutions facilitating and supplementing the company’s normal business activities). This is true not only for the “usual suspects” such as technology companies, FinTech startups, gaming studios, and pharmaceutical companies, but also for companies previously not so heavily dependent on IP assets, such as financial institutions, insurance companies, and retailers.
Because of the above, in recent years we have seen an increasing number of transactions driven mainly by the IP assets of targets. In some cases, a company’s IP might be the actual target of the buyer. IP assets might be not only the main value drivers of the transaction, but also the ones to determine the structure of the deal – an asset deal (e.g., if the buyer is mainly interested in (part of) the target’s trademarks or industrial design portfolio) or a share deal (e.g., when company’s personnel and proprietary software solutions are the drivers of the transaction, certain limitations on copyright transferability should be considered).
How IP can adversely affect the different stages of an M&A transaction
As a result, we have often witnessed how issues with IP assets, whether owned or used by a target, identified in the due diligence process can adversely affect the transaction. The findings could have a negative impact on any of the following aspects of a transaction:
In IP-driven transactions, such findings could easily widen the gap between sellers’ and buyers’ expectations, both in terms of the structure (including post-closing integration) and the value of the deal. This is often the case when founders sell their first project to multinational IP-rich or tech-heavy groups. Usually, the latter has adopted strict and detailed compliance- and IP-protection-related policies and procedures across their jurisdictions, which are to be implemented and followed by their new structure as well. In some cases, such implementation could even require changes in the business structure and processes of the target. Further, in cross-border transactions, this gap could be widened by the differences in the legal rules on IP rights available in buyers’ and sellers’ jurisdictions (especially valid when a US or a UK company/fund acquires a company in Bulgaria).
Frequent IP deficiencies identified in the due diligence process
Most of the IP-related issues that we see in our practice come from a combination of sellers’ failure to identify their core IP assets and the lack of knowledge of the particular legal requirements for the protection of the different types of IP and quasi-IP assets (e.g., patentable inventions, utility models, trademarks, industrial designs, hardware/graphic design, software solutions, databases, trade secrets and know-how, audio-visual works, music, websites). This may lead to a failure to adopt an initial IP strategy or to the adoption of a strategy that does not use the right legal instrument(s) that best protect their title, rights, and interests in the particular IP asset. Some of the most frequent IP deficiencies on the market include:
It could even turn out that some of the above-mentioned IP deficiencies might adversely affect the company’s capability to (fully) comply with some of its contractual obligations towards its clients – for instance, when providing outsourcing services to third parties.
Striking a balance
Each company should increase its efforts to understand and evaluate its core IP assets from the outset, including its dependence on the material IP assets of third parties, and focus on unlocking their true value. A proper and effective IP strategy could help a company find the right business partners, investors or buyers, or at least will facilitate a potential transactional workstream.
At the same time, when evaluating a potential investment opportunity, buyers should pay attention to the IP aspects of both the target’s business and the transaction. If certain IP deficiencies are identified in the due diligence process, respective remedies should be taken to limit the buyer’s exposure to related risks.