Traditionally, intellectual property (IP) has not played a significant role in stock purchase and merger transactions. Oftentimes, IP has been viewed by the acquirer as assets inherently bound to the business and revenue of the target’s business. However, as both the market size and the perceived value of intellectual property continue to evolve, IP starts to constitute a much larger portion of the value of companies today. It is no surprise that M&A activity is increasingly driven by IP assets.
This article is the first one of the blog series that discusses key aspects of IP considerations in stock purchase and merger transactions, and it will begin by providing an overview of intellectual property rights including related key concepts.
What is Intellectual Property
Broadly speaking, intellectual property is a category that includes intangible creation of the mind: inventions, literary and artistic works, symbols, names, and images used in commerce. The most well-known types of intellectual properties are patents, copyrights, trademarks, and trade secrets. As IP continues to evolve, now it includes certain other types of assets such as domain names, design rights, database rights, and rights of publicity. However, the IP coverage still has certain limitations under US law; for example, raw data, fashion design, or anything in the public domain is not recognized as intellectual property.
Unlike other intangible assets, IP is highly divisive and non-rivalrous; that is to say, it can be used by multiple people at once without generating additional cost to the IP owner. Under such characterization, the fundamental economic benefit of an IP lies in its right to exclude and its right to practice. For many companies, IP assets are quintessential to their value. Therefore, assessing the value of a target company’s IP can be one of the primary objectives for many M&A transactions. Thus, in corporate transactions, it is particularly significant to define which party has the right to practice a particular IP right and which party has the right to exclude.
Key Considerations During the Transaction
In most stock purchase and merger transactions, issues involving IP are handled separately by IP counsel, who will be responsible for identifying the target’s IP assets, determining their value, and addressing their transferability in order to manage the risk associated with the transaction. Specifically, when structuring the transaction, the IP counsel must carefully consider the IP aspects of:
- Transaction structure and the buyer’s objectives, as well as the associated implications of the target company’s IP assets and liabilities.
- Due diligence; this includes a wide range of objectives such as identifying and evaluating the relevant IP assets, their liabilities, and key relationships relating to the target’s IP,
- Representations and warranties when drafting and negotiating the IP and IT related provisions of the purchase agreement.
- Covenants and ancillary IP and IT agreements, including license, transition service agreements, and commercial arrangements.
- Post-closing IP matters, such as filing IP assignment documents with IP registries in applicable jurisdictions, preparing transfer documents, and preparing any required consent and notice letters for third-party contracts being assigned to the buyer.
Further details of the above aspects will be addressed in other articles in this blog series respectively; Meanwhile, if you would like some help with your company’s IP-related sale or purchase, please do not hesitate to contact us today for a consultation.