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Selling Shares and Businesses: Intellectual Property Rights Warranties

Tuesday, 20 March 2012

If a purchaser is buying a target company that derives significant commercial value from intellectual property rights then it is important to accommodate this in the sale and purchase contract by including specific intellectual property rights warranties in the buyer’s favour. These not only aim to protect the commercial benefits of the intellectual property but also reduce the potential for unexpected negative surprises after the transaction has taken place.

There are two primary aims regarding the inclusion of intellectual property rights warranties in a contract for the sale and purchase of a business (or shares in a company). The first is to give the buyer a full understanding of the extent and strength of the seller’s intellectual property portfolio. Details of what warranties a seller is actually prepared to give should give a buyer insight into the technical and geographical scope of the rights, their validity and enforceability and the strength of competing rights. The second aim is to reveal any potential liabilities that exist from the past, present or ongoing use of those rights.

In the case of companies whose intellectual property rights go to the heart of their business, additional warranties may be required and additional care taken by the buyer when negotiating the contract of sale. Technology companies, for example, may be valued almost entirely for their intellectual property rights meaning that their technical and commercial value must be carefully examined in the due diligence phase of the transaction and protected in the warranties.

Specific Intellectual Property Rights Warranties
The following represent the warranties one would normally expect to see regarding the seller’s ownership of the relevant intellectual property rights at the point of sale; sellers should warrant that the intellectual property rights:

  1. Are used exclusively in the business of the company;
  2. Are legally and beneficially owned by the company and are not held jointly or in common with any other person;
  3. Are valid, subsisting and enforceable;
  4. Are not subject to infringement, challenge, opposition or attack or the subject of any claim for ownership or compensation by any third party; and
  5. Where capable of registration (for example, trade marks capable of registration), are registered in the name of the company in all jurisdictions relevant to its business.

It is important to note that these warranties relate to intellectual property rights owned by the company; a company may licence certain intellectual property rights which must be dealt with separately. Also, sellers are likely to attempt to avoid providing some of these warranties on the basis that the issues covered can be investigated by the buyer prior to the transaction. How robust a set of sale contract warranties will be will therefore ultimately depend upon the negotiations conducted.

If you need advice on a company sale or purchase or have more specific intellectual property queries Rollingsons has experienced intellectual property lawyers who can help you; for more information please contact James Crighton via e-mail or by phone on 0207 611 4848.