IP-related issues to be wary of in M&A

The post-pandemic economy still faces uncertainties brought on by the recurrence of the virus and a stricter regulatory environment, but the M&A market, with more IP intangible assets on the landscape, remains generally active. Due to its inherently territorial nature and valuation peculiarities, if an IP is the core asset in an M&A, its title, authorisation, defects of rights or disputes (if any) may hamper the smooth completion of the transaction.

Understanding key IP

If the target of an M&A includes IP, it is necessary to have a clear understanding of the type of the IP, its stability, whether it is a core asset, its title, and the time and territory it covers.

In terms of the type, we should consider whether the core IP is categorised as a trademark, patent, copyright or other. Furthermore, in cross-border M&A, we need to explore how core IP is protected in different territories. For example, the author has encountered certain targets in Europe with core technology that is wholly in the hands of core personnel, and jealously protected as a technical secret. However, to develop the Chinese market, it became necessary for them to export the technology to China to carry out production and sales. This was a case where the old method simply became unfeasible.

If protection depends solely on patents, the first problem is that one may not be able to patent all proprietary technologies. A second issue is that, even if it could be done, patenting all technologies is likely to lead to their disclosure to the public, which is certain to draw competition. Core technologies should be approached using different methods. Better results could be achieved by protecting some via patents and others as technical secrets.

If a trademark is the core IP of the target, it should be verified if it covers a sufficient range of goods or services, and whether any other third party has registered identical or confusingly similar trademarks in the same areas. In cross-border M&A, one should also examine the registration status of the trademark in the destination territory, and whether a corresponding Chinese trademark exists.

For copyrights, registration is not a prerequisite for receiving protection. Authors are further protected with China being a signatory to the Berne Convention. However, in the spirit of always preparing for a rainy day, one should also consider registering copyrights in China.

In many M&A transactions, a variety and great number of IPs are involved, which makes it necessary to thoroughly understand the core IP, such as the patent protection system built around key technology. Only by properly distinguishing the core patents from the ancillary patents and their values can critical omissions be avoided in the course of the M&A.

The title of IP

In the pre-transaction due diligence on the IP, title is the core issue of focus. But in practice, the real situation is often far more complex than it may initially appear.

The target may place its core IP under the names of different affiliates, or otherwise arrange its vesting. Accordingly, the allocation of the IP must be ascertained first. In the case of technology, one should determine all core and ancillary patents, as well as technologies that may be protected as trade secrets, and their titles. Also to be determined is any transfer, licensing or other such handling of the relevant technology and rights during the M&A. Only in this way can a smooth transition of the core technology be ensured.

In the case of overseas M&A, additionally consider how such IP is protected in different territories. Failure to promptly patent one’s core technology in the destination territory may lead to a loss of novelty and first-mover advantage, further resulting in unsound protection.

In the case of patented technology it is possible that, in later operations, the acquirer, and the target and their affiliates, are all involved in its improvement. The improved technology is also often the most practically significant version, with the highest market value. The title of such improved technology should also be considered and agreed on prior to the M&A.

Licensing, defects of rights

The licensing of IP is another issue meriting attention in an M&A. Whether it is a patent or a trademark it is crucial, in addition to the licences already filed, to carefully review those that have not been filed. The manner of licensing (exclusive, sole or simple licence) and the scope of the licence (time and territory) are also essential.

Any oversight could lead to time and energy-consuming disputes. For example, in one case, the target had exclusively licensed its trademark to a distributor, but the validity of the licence was preserved in the terms of the acquisition, something the acquirer failed to notice. Only when they licensed it to a new distributor after the acquisition did they discover the conflict with the previous arrangement, and had to devote a lot of time and energy in the aftermath.

One must also be attentive to the defects in IP rights. In addition to the stability of rights and the possibility of litigation, certain technologies are at risk of infringing the IP of third parties. If this is ignored at the time of acquisition, one may end up with a much more bothersome third-party infringement claim. Accordingly, it is just as essential to check for defects in the IP itself and reach an early agreement on accountability.

In summary, it is increasingly common for IP to be the primary target asset in an M&A, and IP can be operated in a great diversity of ways. Buyers in an M&A transaction are advised to examine the title and licensing of IPs in a timely fashion, and check for possible defects in their rights.

This article was originally published in China Business Law Journal.