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Company Law - Intellectual Property Due Diligence

Tuesday, 20 March 2012

Some businesses, particularly software and other technology related businesses, have unique features that require particular attention when potential buyers investigate their assets and liabilities. Unlike a manufacturing or retail business with significant real estate or plant and equipment, a technology business’ main assets are intellectual property and people. The intangible nature of intellectual property means that a due diligence exercise will require a special focus.

Categories of Intellectual Property
Intellectual property is certainly not an asset unique to the technology industry and merits a degree of investigation in any business purchase. However, its relative value to a technology business should add weight to the level of attention it receives in a due diligence exercise. It is helpful to divide intellectual property rights into three categories:

  1. Rights owned by the business outright,
  2. Rights part-owned by the business, or
  3. Rights used under licence.
  1. Rights Owned by the Business

    The ownership status of intellectual property can be far from simple. In general, ownership of intellectual property created by employees in the course of their employment rests with the company. However, a company that has developed a particular piece of intellectual property still may not own all the rights to it. A new venture may not have actually employed individual developers in its early stages and external consultants may have been used. It is essential to establish that ownership does indeed rest with the company or has been assigned to the company in the case of non-employees or external consultants.
    Particular care must be taken if the property has been produced in partnership with a university, with another company in the same group or with an external company. Additionally, patentable rights that provide outstanding benefit to a business can give the inventor employee a right to remuneration for their contribution to the business.

  2. Rights Part-owned by the Business

    Any intellectual property rights not owned outright are likely to be subject to an agreement. The terms of the agreement must be checked to ensure that the business may still operate under those terms in the event of a change of ownership or change of control. Use of such jointly owned property normally requires consent of all its owners.

  3. Rights Licensed to the Business

    Licences might not be immediately obvious; they may be contained in commercial agreements, supply agreements or collaboration agreements. It is important to establish where and how rights are granted. Attention must be paid to the exact nature of the licence, that is its duration, termination provisions, whether it may be assigned, any exclusivity provisions, its geographical scope, royalties and sub-contracting provisions.

If you are a business buyer or seller and require assistance with legal due diligence, Rollingsons has experienced intellectual property lawyers who can help you. For advice or more information please contact James Crighton via e-mail or by phone on 0207 611 4848.