March 26, 2024
M&A Due Diligence: Top Intellectual Property Issues
This Gibson Dunn memo addresses the top intellectual property issues that buyers should consider during the M&A due diligence process. Here’s an excerpt from the memo’s discussion of the importance of identifying the IP used in the business to be acquired and the impact of the transaction’s structure on what needs to be done to secure that property:
In an equity purchase transaction, the buyer will typically acquire all of the target’s (or its parent’s) equity interests, and therefore inherit all of the target’s IP holdings automatically by virtue of the transaction. Conversely, in a transaction structured as a purchase of assets, a buyer will only acquire the IP that is expressly transferred under the purchase agreement. As such, it is critical to understand what IP is included and what IP (if any) will remain with the seller, and confirm that the transferred IP is sufficient to operate the target’s business.
It is also important to review any outbound licenses to determine whether the target has granted to a third party any exclusivity or ownership rights in the target’s IP, and understand whether any of the target company’s contracts contain a “springing license” that could grant to a third party IP rights by virtue of the consummation of the proposed transaction, as this could impact the valuation of the target company.
In addition to understanding what IP a target owns, it is important for a buyer to understand what third-party licenses are required to operate the target’s business. A buyer should review those licenses to identify any restrictions on the buyer’s ability to receive the benefit of those licenses post-closing. While license agreements will often flow through automatically in a transaction structured as an equity purchase, in an asset purchase scenario each license agreement must be expressly assigned by the seller to the buyer, which in many cases may require the consent of a third party.
Other topics addressed in the memo include commingling of IP among the seller’s various businesses, the treatment of IP in employee and consulting agreements, AI generated content, and IP-related disputes.
– John Jenkins