Securing the Deal: The Power of IP Due Diligence in M&A Transactions

By Vikrant Rana, Rupin Chopra and Shantam Sharma

In today’s fast-paced business environment, mergers and acquisitions (M&A) have become an essential growth strategy for companies looking to expand their market presence, diversify their product offerings, or acquire innovative technologies. In such transactions, intellectual property (IP) often plays a critical role, especially when the target company’s core value lies in its proprietary technologies, brands, or trade secrets. Consequently, IP due diligence has emerged as a fundamental aspect of M&A transactions, ensuring that the acquiring company fully understands the IP assets it is acquiring and any associated risks.

The Significance of IP in M&A Transactions

IP due diligence is not merely a procedural formality; it is a strategic necessity in M&A transactions, especially in India’s rapidly evolving business landscape. For many companies, IP assets — such as patents, trademarks, copyrights, trade secrets, and designs — form the backbone of their competitive advantage. In some cases, IP may be the sole reason for the acquisition.

Key objectives for conducting IP due diligence include:

• Verifying clear and unencumbered ownership of IP.
• Ensuring that the IP is valid and enforceable in relevant jurisdictions.
• Identifying any third-party claims, restrictions, or infringement risks.
• Assessing the scope and term of IP protection.

Overview of IP Rights in India

India’s IP landscape is governed by a robust statutory framework, offering protection for various types of IP, including:

Unlike statutory IP rights, trade secrets are protected under equity and contractual laws, making it essential for businesses to rely on confidentiality and non-disclosure agreements for their enforcement.

Key Steps in IP Due Diligence

IP due diligence is a comprehensive process aimed at uncovering all material aspects of the target company’s IP portfolio. Below are the key steps and considerations in this process:

1. Identifying and Verifying IP Assets
   The due diligence process begins with identifying the target company’s IP assets, including registered and unregistered IP. This includes patents, trademarks, copyrights, trade secrets, and software, among others. In India, conducting searches in relevant IP registries, such as the Indian Patent Office and the Trademarks Registry, is critical to verify ownership and status.

   Additionally, it is essential to:

   • Confirm clear title to the IP and ensure there are no encumbrances.
   • Examine whether inventors, employees, or consultants involved in IP creation have assigned their rights to the target company.
   • Review IP assignment agreements to confirm compliance with Section 17[1] of the Indian Copyright Act, which governs ownership of works made for hire.
2. Assessing IP Scope and Validity
   A critical aspect of due diligence is to evaluate whether the IP adequately covers the target’s products or services. For example:
   • Does the patent claim protect the technology or product being acquired?
   • Are trademarks registered for the relevant goods or services in all operational jurisdictions?

   For unregistered IP, such as trade secrets, assessing the adequacy of protective measures like confidentiality agreements is vital.

3. Dependency on Third-Party IP

   Many businesses rely on third-party licenses or open-source software, which can introduce risks in an M&A transaction. Due diligence must:

   • Identify all third-party IP on which the target business depends.
   • Assess whether licenses are transferable and whether they contain change-of-control provisions.
   • Ensure there are no restrictions that could hinder the acquirer’s use of the IP post-transaction.
4. Reviewing IP Litigation and Disputes
   Disputes over IP ownership or infringement can significantly impact the value of an acquisition. In India, court filings are not public documents, making it essential to rely on disclosures by the target company and representations in the transaction agreements.

   Areas of focus include:

   • Pending or threatened litigation related to IP.
   • Claims of infringement by or against the target.
   • Settlement agreements or indemnification obligations.
5. Territorial Considerations

   IP rights are territorial, meaning they are enforceable only in jurisdictions where protection has been sought and granted. For Indian companies with global operations, it is necessary to:

   • Evaluate IP protection in all key jurisdictions; and
   • Identify any gaps in protection and assess associated risks.
6. Compliance with Indian Laws

Under Indian laws, agreements involving the transfer of IP rights require clear documentation and payment of applicable stamp duties. For example, in Delhi, stamp duty on IP assignments ranges between 6% and 7% of the consideration value. Ensuring compliance with such requirements is crucial to avoid disputes or enforcement issues post-acquisition.

Key Considerations for Acquirers and Sellers

The objectives of the acquirer and seller in an IP-driven M&A transaction often differ, necessitating careful negotiation and documentation:

For Acquirers:

• Ensure the IP is free from encumbrances and capable of commercial exploitation post-acquisition.
• Validate that the IP’s scope aligns with the business objectives.
• Protect against potential third-party claims through indemnity provisions.

For Sellers:

• Limit representations and warranties to avoid future liabilities.
• Ensure the IP transferred is specific to the business being sold and does not extend to other operations.
• Avoid assuming risks for third-party IP or open-source software included in the transaction.

Representations, Warranties, and Indemnities

To mitigate risks, acquisition agreements must include robust representations and warranties covering:

• Ownership and title of IP.
• Validity and enforceability of IP rights.
• Non-infringement of third-party rights.

Indemnity provisions are often used to protect the acquirer from losses arising from undisclosed claims or litigation.

Conclusion

In India, where the legal landscape surrounding IP is constantly evolving, conducting thorough IP due diligence is indispensable for ensuring the success of M&A transactions. It helps acquirers identify risks, unlock the full value of the target company’s IP assets, and avoid potential legal pitfalls.

Given the complexities involved, engaging experienced legal counsel and IP specialists is crucial to navigating the process effectively. For businesses aiming to thrive in an innovation-driven economy, IP due diligence is not merely a procedural step but a strategic necessity in safeguarding and enhancing value in M&A transactions.

[1] Section 17- First owner of copyright.