In an earlier post, Patent Due Diligence in Mergers & Acquisition Transactions-Overview, we discussed the top level patent due diligence issues that should be considered by a multi-function Due Diligence Team in the acquisition of a "Target Company." We identified four major areas of patent due diligence:
- Ownership and Control of Target Company Intellectual Property
- The Structure of the Proposed Transaction
- Identify Strategic Value of the Target Company’s IP
- Target (and Acquiring) Company Exposure to Liability from Intellectual Property of Others
In the second article in this series, M&A Patent Due Diligence: Ownership and Control of Patent Assets, we dug into the details of due diligence relating to the ownership and control of intellectual property. In this current article we discuss the last three topics.
Structure of the Proposed Transaction
If the acquisition will be structured as an asset purchase then it is particulary important to make sure that the patent property listing is complete. In this case identification of any “missing” patent family members is key.
Other due diligence items for an asset purchase transaction include (1) review of foreign patent properties to ascertain whether assignments to the Target Company were properly drafted, executed and filed and (2) review of license agreements to ascertain whether they are assignable with or without consent of the other parties.
Identify Strategic Value of the Target Company's IP
An important goal of the acquisition due diligence process is to assess the strategic value of the patent portfolio to the Target Company’s business, including the extent of the exclusivity in the marketplace that these assets provide.
Ideally the Target Company has already mapped its patent portfolio to its products and services, showing which parts of the patent portfolio protect what lines of business. Unfortunately many companies have not done this basic analysis and because it can be time consuming it might not be practical to do in the short calendar time in which acquisition due diligence takes place.
Fortunately there are ways of obtaining a high level assessment of the strategic value of Target Company's portfolio. Specific areas to investigate include:
Identify Seminal Patents
Target Company Exposure to Liability from Intellectual Property of Others
Examining the strategic value of a patent portfolio provides insights into the potential “upside” that the portfolio may provide. Equally, if not more important from a due diligence perspective, is determining the extent to which the Target Company is at risk due to intellectual property rights of third parties – i.e., determining whether there is potential infringement liability in the Target Company’s current activities and in the anticipated post-acquistion activities.
Conducting a full infringement analysis of a Target Company can be a very time consuming activity but it may be warrented in specific circumstances. A more practical approach is for the Acquirer’s Due Diligence Team to investigate any “infringement letters” that the Target Company has received.
Another quick way to prioritize review and identify infringement potential is to find the patents that have been cited by the Target Company’s patents (“Backward Citation Patents”) that have also been highly cited by others – these patents should be investigated as potential “dominating patents” – i.e., a highly cited patent represents important prior patent art that may have relevancy to the business of the Target Company.
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