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M&A and the important step in the legal assessment of the intellectual property

M&A and the important step in the legal assessment of the intellectual property

Friday 06, 03 2020
Therefore, performing due diligence on the target company's assets and intellectual property rights is particularly important in a merger and acquisition.

Intellectual property rights include copyrights and related rights, trademarks, patents, rights to industrial designs, utility solutions, semiconductor integrated circuit layout designs, and they are often considered intangible assets of a company. However, these intangible assets are becoming increasingly "tangible", as they are important in the consideration of the buyer as well as the success of the entire merger and acquisition (M&A) business.

Therefore, performing due diligence on the target company's assets and intellectual property rights is particularly important in a merger and acquisition. Indeed, through the due diligence process, the buyer can uncover potential risks associated with the target company's intellectual property assets, assisting with asset valuation, brand valuation as well as the value of the deal as a whole.

Unfortunately, in many deals, buyers only have a limited or formal interest in the legal examination of intellectual property. Instead, they focus primarily on issues related to the capital structure, ownership of assets, and liabilities of the target company. The intellectual property due diligence report will cover and analyze a wide range of related issues. However, this article only outlines some important issues that are often encountered in the due diligence process.

The work before conducting the due diligence process

The intention to carry out legal due diligence is often referred to as an Initial or Open Letter, Memorandum, or Terms Sheet, before the parties involved in the negotiation process sign contracts in service of merger and acquisition.

In the foregoing documents or agreements, the parties may make a number of intellectual property-related requirements as a prerequisite for completing the agreement. In addition, the buyer and the target company need to enter into a confidentiality agreement to serve the transfer of important information related to the intellectual property rights of the business.

Determine ownership of intellectual property

M&A and the important step in the legal assessment of the intellectual property

When conducting legal due diligence, consultants will verify the ownership of the target company against existing and identifiable intellectual property. In particular, for intellectual property rights established on the basis of registration, the verifier will check based on the qualifications that have been granted (for example, a trademark registration certificate if the intellectual property is a trademark or an industrial design registration certificate if the target company owns the intellectual property as an industrial design ...).

In cases where the intellectual property of the enterprise is a type of intellectual property which does not need or cannot be registered for protection titles (for example, business secrets or copyrights and related rights), the purchaser should check to see if the target company meets the legal requirements to be considered the owner of these intellectual property rights objects. In the process of determining ownership of common intellectual property objects, the verifier should pay attention to the labor relations in the target company.

In particular, the parties should note that Vietnam is a country with a strong tendency to protect workers. Although the current Intellectual Property Law states that copyright owners of works created by employees will belong only to employers, unless the parties otherwise agree, workers in fact still own the moral rights to the work they create (for example, the right to name the work, the right to protect the integrity of the work ...).

For technology companies, the verifier also needs to check whether the target company's products or services (such as websites, software, online platforms, etc.) are written, tested and developed by existing or former employees; whether third party developers are made based on written agreements under which all intellectual property rights related to the property product or service will be transferred to the target company.

In addition, the buyer also needs to ensure that, after acquiring the target company, this party will not need any additional consent, transfer or exemption from any third party to be able to use or transfer the intellectual property rights associated with the company's products and services.

​Identify potential disputes

In Vietnam, public awareness about respect and enforcement of intellectual property rights is generally limited. For that reason, the risk of potential disputes related to intellectual property is quite high and difficult to determine.

Therefore, before acquiring the target company, the buyer needs to ensure that the target company's intellectual property assets are not and will not be subject to any dispute or infringement of the intellectual property rights of a third party.

A prime example might be that the target company is using certain intellectual property under an agreement that allows use with restrictions on the transfer of capital by members or shareholders in the target company. In this situation, the transfer of capital or shares to the purchaser may entice the target company or its capital contributors and shareholders into disputes under a contract for the grant of the intellectual property rights above.

In most transactions, the seller must ensure that the products or services of the target company have not and currently do not infringe any third-party rights or interests related to intellectual property, as well as never received any request from a third party regarding the grant of the right to use any intellectual property.

Compliance with contractual obligations

Obligations related to intellectual property rights are one of the common obligations commonly prescribed in current commercial contracts, such as licensing agreements, franchise agreements, co-distributor, and agent contracts, etc.

Usually, a party to the contract (usually the owner of intellectual property related to the corresponding product or service of the contract) will impose one or some restrictions on the other party in respect of the use of such intellectual property rights (scope of work to be used, territorial scope ...), or even the right to register new intellectual property objects in the future (especially common in franchise contracts).

In a merger and acquisition transaction, if the target company is bound by too many restrictions as above, especially with the intellectual property important in the operation of the target company, the value of the acquisition will be significantly affected.

Therefore, through the legal due diligence of the intellectual property rights, the buyer's consultants will check if the target company is bound and comply with the obligations under these agreements or not to give appropriate advice for the transaction.

Regulations of foreign laws

In a cross-border merger, acquisition and merger transaction, the parties must be concerned about the other party's intellectual property regulations. The reason is that intellectual property laws reflect a very high territorial nature.

Each country will have different rules and approaches on intellectual property rights that apply in its territory. To avoid undue risks, the parties must ensure that they understand and comply with the different rules in their country.

​>> Top 10 M&A deals in 2019

Source: https://www.thesaigontimes.vn/

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