1. Purpose of the due diligence

The purpose of an IP due diligence is to:

*	Give the Acquirer a better understanding of the business of the Target;
*	Give the Acquires an insight into the Target's liabilities;
*	Reduce the risks of the acquisition in order to avoid significant losses for the Acquirer after closing of the acquisition;
*	Allow the Acquirer to cancel the acquisition or negotiate at a lower price if certain facts are revealed about the Target.

2. Objectives of the due diligence

Every due diligence investigation will start through the execution of a good non-disclosure agreement between the Acquirer and Target.

The following will effect the objectives of the due diligence:

*	If the Acquirer's primary purpose is to acquire employees and know-how the inquiry will emphasise issues related employees. Have all employees signed IP assignments with their employer? Have key employees signed confidentiality agreements with their employer? Who are the key employees and what methods are being used to motivate them to stay with the Acquirer? Are key employees willing to work for the Acquirer? Can key employees be restricted from competing against the Acquirer if they are not employed by the Acquirer?
*	If the Acquirer's primary objective is to acquire a critical piece of technology, the investigation should emphasise issues related to technology. What IP protection is available for the technology? Does the technology infringe any third party IP rights? Could a license for the technology be negotiated at a lower price than an acquisition of the technology?
*	If the Acquirer's primary objective is to eliminate a competitor, the due diligence will focus on whether the necessary restraints of trade and non-competition clauses in the agreement will be enforceable in the specific jurisdiction.
*	If the Acquirer's primary objective is to increase earnings per share the due diligence may be less important than a review of the Target's financial statements and future business plans as well as market synergies.
*	If the Acquirer's primary objective is to enter a new market or to expand its market presence the due diligence should focus on whether the Target has secured the rights to its brand name and goodwill.
*	If the Target is a high technology company a significant portion of the Target's value will be in the patent portfolio and the due diligence should focus on the strength and protection of such patents.
*	If the target is a content or information based company a significant portion of the Target's value will be in its database and copyrighted assets and the due diligence will focus on the protection and rights in the database and copyrighted assets and whether any licenses where granted to third parties.
*	If the target is a software company, a significant portion of the Target's value will be its copyright and trade secrets and the due diligence should focus on copyright protection, maintenance of the software, ESCROW agreements and possible patent protection.
*	If the Target is an owner of product or service brands with substantial market recognition, the Target's value may be in its trademark portfolio and the due diligence will focus on an investigation of registered trademarks, jurisdictions of registration, and maintenance of the trademarks.
*	If the agreement is for the purchase of certain assets the due diligence should only focus on those assets and the Target's ability to assign such assets to the Acquirer three of any third party rights.
*	If the agreement is a share purchase, the due diligence is more important as the Target will be a wholly owned subsidiary of the Acquirer with all its risks and liabilities.
*	If the agreement is a merger it will be necessary to determine which form the merger should take to shield the Acquirer against liability, for example a reverse triangular merger will not trigger most "no assignment" provisions in the Target's contracts, provided that the subsidiary is not dissolved after the merger.
*	Notwithstanding the above, it is very important to investigate whether the Competition Commission will allow the deal to continue and the due diligence should also focus on this important issue.

3. Procedural aspect of an IP due diligence

The acquirer's due diligence team should preferably include its management, accountants and legal counsel.
The following components of the investigation should ideally be conducted by the following due diligence team members:

*	Interviews with Target's management - all members.
*	Technical due diligence - management and legal counsel;
*	Inquiries as to suppliers and customers - management;
*	Physical inspection of assets - management and accountants;
*	Examination of intangible assets - legal counsel;
*	Review of regulatory approval and licenses - legal counsel;
*	Domain name, trademark and patent searches - legal counsel;
	Review of major contracts and business plans - management and legal counsel.

4. Timing of an IP due diligence

The due diligence should be done after signature of a non-disclosure agreement between the Target and the Acquirer and before any letter of intent, agreement or memorandum of understanding is signed. "Satisfactory completion of a due diligence" should never be a condition for an agreement; both the Target and the Acquirer may be at risk if the deal falls through. For example, the Acquirer should be concerned that the Target may claim that the Acquirer misused some of the information disclosed during the due diligence and it might be difficulty for the Acquirer to prove that some members of management did not use such information. Later independent development of IP assets or business plans by the Acquirer may be "tainted" after the deal fell through. Use of third parties to conduct sensitive portions of the IP due diligence may help to avoid these "contamination" issues.

5. Identification of IP assets in target

During the due diligence the Acquirer should obtain the following documents and information:

· Patents
A list of all the Target's patents that where issued and applied for, patent numbers, inventors' names, date of application, date of issue, prior owner (if any), any assignments, country of registration and the presence of absence of any security interests. Have all maintenance fees been paid for? Is there any current patent litigation? Which patents are "key" patents? Is the Target aware of any potential "blocking patents"? Has the Target received any letters asserting that the Target is infringing third party patent rights? Has the Target enforced its patents in the past and if so how? Has Target concluded any searches or analyses of competitors' patents? Are there any new products that require patent filings to avoid loss of rights?

· Trademarks
A list of all the Target's trademarks that was issued or applied for, trademark numbers, classes of registration, country of registration, date of applications, date of issue, prior owner (if any). Have any assignments been properly recorded so that an accurate chain of title exists? In which countries where trademarks registered? Have all required maintenance fees been paid? Has any trademark searches been done by the Target? Is the Target using the trademark in the same form and for the same products/services as registered? Has the trademark been in use? (a period of non-use creates a presumption that the trademark has been abandoned). Has the Target taken any actions to monitor and enforce its trademarks and prevent misuse? Has the Target received any letters or claims that a trademark is infringing any third party trademark rights? Has the Target granted any licenses to its trademarks? Identify the targets procedures or policy for selecting, clearing, using and protecting trademarks. Identify products or services that are not protected by trademarks. Is every trademark of the Target also a domain name?

· Domain names
A list of all registered domain names that is registered in the name of the Target as well as the jurisdiction these names are registered in should be required. Does all .com registrations also have .co.za registrations? Is all .co.za registrations also registered as .com, .biz, .ws, .tv, .info, .net and .org registrations. Are all domain names also registered as trademarks? Have the Target instituted any domain name infringement procedures? Is the Target the registered owner of any domain names that is potentially infringing third party trademark rights? If the Target is the owner of a ccTLD and a trademark in the same jurisdiction, are there any chances of success in obtaining the .com, .org. net, .tv, .ws, .info and .biz registrations. Are all the domain names registered in the name of the Target linked to bona fide web sites or not?

· Copyright
Because copyright exists in any work that is original and reduces to material form it will be impossible for the Target to list all copyrighted works. However, a list should be obtained from all copyrighted works with a significant market or commercial value, e.g. software, databases, books, music and the like. The Target should also disclose whether or not it used a proper digital rights management system to store and protect its copyrighted assets. The list of valuable copyrighted assets should state the name of the author, date of first publication, country of first publication and it should be stated whether this information is saved as metadata with the digital version of the asset. The Target should furthermore disclose whether any license or assignment was granted to any third parties and whether there is any pending litigation or claims of third party copyright infringement. Did the Target conclude assignment agreements with its employees? Have the copyrighted asset been available for download from the Internet and what protections where put in place to secure the on line asset? Does the Target have limited rights to the asset or does the Target own all rights in the asset? What is the Target's procedures or policy for clearing, identifying, using and protecting copyrighted assets?

Trade secrets and confidential information
The value of the Targets trade secrets and confidential information will depend on how well the Target and its employees protected such information. An investigation must be conducted as to the practices and procedures used by the Target to protect its own trade secrets and the trade secrets received from third parties in confidence. Has all employees signed non-disclosure agreement as part of their employment contracts? Has the Target signed good non-disclosure agreements with suppliers and those parties the Target outsourced to? Does the client have a good e-mail policy in place that restrict the mailing of confidential information?

During the IP due diligence all relevant documents and agreements must be reviewed, IP litigation should be assessed as well as the grant of security interest in the Target's IP.

Reinhardt Buys is a partner at Buys Incorporated, a law firm specialising in internet, media and intellectual property law. Click here to visit their site.

Back to www.bizland.co.za