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Essential Due Diligence for M&A and Investments in Technology Companies: Intellectual Property Check

When entering negotiations towards an M&A or an investment transaction with a technology-based company a thorough check of the intellectual property of the target is essential and crucial.

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Anyone contemplating an M&A transaction, or investment in a technology-based company should be well acquainted with the importance of the pre-contractual Due-Diligence process. Due Diligence is regularly performed when purchasing a house or a car, however, Due-Diligence performed when facing an M&A transaction, or an investment where advanced and innovative technology is involved, is trickier, and requires professional knowhow to ask the relevant questions and to perform a thorough review of the data provided by the target company.

First, one should define the technology which lies at the heart of the transaction, and then identify the Intellectual Property rights related to such technology. For example, if the target company has developed a software tool, it may already have patent protection, and copyright, and trademark rights (especially when the software tool has reached the marketplace and is already known under a certain trade name).

Once such rights have been identified, it is important to perform a thorough check of the patent portfolio protecting the software product, and the strength thereof. The ability to prevent others from using the same product has a direct effect on the price of the target tool, whereas in cases where the target company’s tool is not adequately protected, the entire transaction should be reconsidered.

No Due Diligence process is complete without ascertaining that the target company is the owner of all the rights in the technology discussed. Verifying the chain of title involves the review of employment agreements (whether these include any restrictions on the assignment of the works done by the employees of the target to the target itself); review of consultant and contractors agreements involved in the R&D stage of the target’s technology (whether these include an unconditional assignment of all the rights to the target); review of open source software if such was used by the target company, and verifying the terms of the licenses thereof, etc.

Lastly, despite protection provided through registration (of patents, designs, trademarks), it is important to identify the know-how of the target, and make sure such know-how is part of the transaction and was kept as a trade secret.

A proper Due-Diligence process involves legal and technological issues, thus it is always advisable to appoint a team comprised of legal counsels, as well as a patent attorney, in order to perform a comprehensive review. This will ensure that all relevant issues are addressed in a thorough and proficient manner.

Author: Advocate Orit Gonen, Partner in Gilat, Bareket & Co. of the Reinhold Cohn Group, specializing in counsel and legal services to corporates and start-ups in the Intellectual Property field.


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