IP assets may be more valuable than physical ones

By Baljit Singh Kalha and Nishant Malhotra, Titus & Co

The importance of a company’s intellectual property (IP) assets such as trademarks, copyrights, patents, trade secrets, designs, geographical indications and internet domain names, has grown immensely over the past decade.

Baljit Singh Kalha, Titus & Co, Advocates
Baljit Singh Kalha
Titus & Co

IP assets are the foundation for market dominance and continuing profitability of companies from all over the world.

Most mergers and acquisitions are driven by the monetary value of the technology and goodwill of the brands used in the business. The value of such IP assets in most cases defines the value of the merger or acquisition, as the case may be.

In several instances, the value of IP assets exceeds the combined value of the real estate, equipment and other tangible assets that a target company owns.

Due diligence

Nishant Malhotra,Titus & Co
Nishant Malhotra
Titus & Co

As an understanding of the inherent value of IP assets has grown, so has the need for an accurate, thorough and reliable due diligence assessment of IP assets.

There are a number of factors that must be considered when doing due diligence:

i) Determining the ownership of IP assets that the target company claims to own is the first and the foremost issue that arises in an IP due diligence process. Once the IP assets of the target company have been identified, it is necessary to confirm the title and status of all the recorded rights. This includes issued patents, patent applications, trademark applications and registrations, design applications and registrations, copyright applications and registrations and internet domain name registration. Apart from a rigorous review of all information provided by the target, independent searches of the records of the patent, trademark, and copyright offices and domain name registries must be made. These searches disclose any discrepancies in record chain of title, assignment to unrelated third parties, any pre-existing liens, or security interests applicable to the recorded assets. If such searches reveal the existence of any inconsistencies, these must be rectified by the target company.

ii) It is necessary to consider upcoming deadlines. The target company must provide a list of all upcoming deadlines over the course of the next year in order to assure continued maintenance and protection of the IP assets being acquired.

iii) Another factor is the validity and enforceability of the IP assets. In addition to ownership and status, the buyer should confirm the validity and enforceability of patents and trademarks acquired by the target company. Such reviews should take into account not only the IP assets of the target company but also those of its competitors. In this way, it is then possible to evaluate whether the patents and trademarks of the target company are valid and enforceable against third party infringers. Additionally, one may ascertain if the target company will be vulnerable to the claims of infringement by competing parties.

iv) Another factor that goes into play includes the various agreements that impact IP assets of a target company. It is imperative to identify and review all existing agreements such as licence agreements, settlement agreements, consent agreements, non-assertion agreements, disclosure agreements or any other agreements relating to the IP assets of the target company. These agreements generally contain limitations on the right to use IP assets and represent ongoing business relationships with third parties.

v) It is also necessary to take into account any possible pending litigation or infringement applications. Before making an acquisition, a buyer must establish whether there have been any charges of infringement made by the target company or against the target company with respect to its IP assets. The current status of any litigation or any rulings that may impact on the IP assets of the target company should also be determined.

vi) Finally there is the issue of judgments, orders and decrees, an important factor. An integral part of the IP due diligence process is identifying and reviewing all judgments, orders, or decrees that have been issued by any court or tribunal with regard to the IP assets of a target company. As such, judgments or orders may directly affect the validity and the scope of protection to which the IP assets may be entitled.

Complex process

A due diligence review of IP assets can be a time consuming and complex process.

However, a thorough due diligence can result in the adjustment of the acquisition purchase price, the renegotiation of key terms of the acquisition agreement (including representations, warranties and indemnifications), and the avoidance of unpleasant surprises after closing.

Baljit Singh Kalha is a partner at Titus & Co, Advocates and may be contacted at bskalha@titus-india.com. Nishant Malhotra is an associate at Titus & Co. He can be contacted at nmalhotra@titus-india.com. Titus & Co Advocates is a full service law firm based in New Delhi. The firm can be reached at titus@titus-india.com.

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