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Intellectual Property Due Diligence in A Commercial Transactions

Due diligence refers to a  process by which an individual or a company conducting reasonable inquiries for the purpose of timely, sufficient and accurate disclosure of all material statements, schemes or transactions. An intellectual property (“IP”) due diligence particularly indicates a detailed analysis of the financial, legal and operational or technical status and conditions of the IP assets which is usually performed in the context of negotiations of a commercial transaction to arrive to an inform decision on the proposed transaction.

When IP Due Diligence is Applicable?

IP due diligence normally applicable in merger and acquisitions, takeover or sale, joint ventures, licensing or franchise agreements, bank loans, venture capital financing and buying or selling a patent, trademark or copyright or other types of IP.

Purpose and Importance of Conducting IP Due Diligence

The purpose of an intellectual property due diligence includes the followings, depending on the respective situations:

Purpose and Importance of Conducting IP Due Diligence

The purpose of an intellectual property due diligence includes the followings, depending on the respective situations:

(a) In respect of the company’s IP assets:

(i) To understand the company’s business direction and prioritise IP assets that is valuable to the company;

(ii) To ensure that the company have the necessary rights over the IP assets by understanding the chain of title that the company derived the ownership of IP assets;

(iii) To know the value of the IP assets based on the quality and quantity owned by the company. This includes identifying IP assets that may have not been utilised by the company. In this case, the company may avoid from incurring unnecessary cost in maintaining the same;

(iv) To reduce or avoid losses in respect of future commercial transaction i.e. to negotiate for a higher price; and

(v) To ensure that the company have proper documentation in relation to the IP assets for future commercial transaction (if any).

(b) In respect of the target company’s IP assets:

(i) To have better understanding on the business of the target company;

(ii) To ensure that the target company has full entitlement of ownership over its IP assets. This is important to ensure that upon successful commercial transaction of the IP asset from the target company, the company will have the ‘freedom to operate’ the IP asset without infringing any third party IP rights;

(iii) To know the value of the IP assets based on the quality and quantity owned by the target company;

(iv) To identify liabilities attached to the IP assets which is owned by the target company;

(v) To understand the IP-related obstacles in respect of the transaction;

(vi) To reduce or avoid losses upon completion of the transaction i.e. in case the price has been fixed, to negotiate for a lesser price; and

(vii) To allow the parties involved in a commercial transaction to obtain all disclosure made in the documents or documents or prospectus with the defence that in making such disclosure, they have undertaken due diligence and made reasonable inquiries as to the truth and accuracy of the information and that there is no omission of material information.

Procedural Aspects of Conducting IP Due Diligence

A checklist containing the following procedures should be applied in conducting IP due diligence:

1. Complete list of IP assets – To obtain a complete list of IP assets of the company or the target company. The complete list of the IP assets can be obtained by circulating an IP due diligence checklist, interviewing the key management personnel and gathering the relevant documents governing the IP assets.

2. Protection of the IP assets – To ascertain whether proper protection of the IP assets has been put in place by the company or the target company. It is important to determine the registration status of the patent, trade mark and industrial design and whether voluntary notification has been filed for copyright materials with the relevant IP office. In the event that there is no application for the registration of the IP assets has been made, it is advisable to conduct relevant searches to ascertain the registrability of the IP assets. In the event that application has been filed, to check whether the application has been abandoned, registered, pending registration, expired, withdrawn or removed from Register.

3. Internal procedures to handle IP assets – To ascertain whether the target company has any internal procedures to handle the IP assets. If the answer is in the affirmative, to further ascertain whether such procedures are complied with.

4. Ownership of the IP assets – To ascertain the ownership of the IP assets. Ownership of the IP assets can be determined by perusing existing agreements governing the IP assets and conducting relevant IP searches at the IP office. Having said this, it is also important to ascertain whether there is any encumbrance imposed on the IP assets.

5. Dealing of IP assets – To ascertain any dealing involved with the IP assets. Dealing of IP assets can be identified through existing licensing or assignment agreement. In case of licensing agreement, to determine whether the said licensing arrangement is exclusive or non-exclusive. It is also important to look for clauses which may affect the proposed transaction.

6. Existing litigation and/or infringement actions – To identify any existing litigation and/or infringement actions. It is important to check whether there is any notice, cease and desist letter, complaint and the like in relation to the IP assets and to get confirmation from the solicitor of the target company. If there is none, the company should get confirmation from the target company.

7. Employment contracts – To check on the employment contracts. It is advisable for a company to check on the confidentiality clauses, status of the IP assets created in the course of employment as well as non-competition clauses in the employment contracts.

8. Regulatory approvals and licenses – It is important to check whether the necessary regulatory approvals and licenses have been obtained by the target company. If there is condition imposed, to see whether it affects the proposed transaction.

Tips and Best Practices

IP due diligence is indeed necessary to properly determine the value of an IP assets for future commercial transactions of the IP assets as well as to avoid costly mistakes in the said transaction. It is important for an individual or company to understand their business plan, the structure of the deal, the business goal and the scope of IP rights in relation to the IP assets. Further, it is also important to impose an adequate IP policy and procedure which includes a satisfactory IP due diligence as a condition precedent to proceed in a specific commercial transaction involving the IP assets. It is also advisable to follow-up continuously with the status of the IP assets after the completion of the transaction.

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