Due diligence in Intellectual Property acquisitions

• South Africa

• Intellectual property - Guides

02-03-2021

Whenever Intellectual Property (IP) is being acquired in the context of business transactions, either by way of an asset sale or through a merger/stock purchase, it is customary and prudent for the acquirer to conduct some due diligence before the close of the transaction to ascertain the nature and quality of the IP to be acquired.

Due diligence in furtherance of the acquisition of IP by way of an asset sale will typically involve:

• assessing the validity and enforceability of the target IP;

• conducting an enquiry into the relevance of the target IP to the business or business strategy of the acquirer;

• assessing whether the IP, if acquired, will provide a competitive or financial advantage to the acquirer, when considered in light of the acquirers’ industry and operating environment;

• assessing whether the acquirer will, out of necessity, need to acquire or license any third-party IP to successfully exploit the target IP; and

• assessing what licenses and other commercial arrangements the acquirer will be expected to continue honouring post acquisition

• assessing whether the target IP will infringe any third-party rights.

Due diligence in furtherance of the acquisition of IP by way of a merger/stock purchase will typically involve:

• conducting an enquiry directed towards understanding the target company’s business, products and services, and the market in which it competes;

• identifying the target company’s IP (both registered and unregistered);

• assessing the validity and enforceability of the target company’s IP;

• assessing the relevance and usefulness of the target company’s IP in the context of the target company’s business; and

• assessing the target company’s freedom to operate in respect of its IP and any conflicting third-party interests (vested or otherwise).

A thorough and well-considered due diligence exercise will assist a would-be acquirer in making an informed decision surrounding the intended IP acquisition transaction. Ultimately the aim is for the acquirer to extract the most value from the transaction, which may very well be not seeing the transaction through to close.

If you have plans to acquire IP through a business transaction you should seek advice to navigate the acquisition process, including any necessary transactional due diligence.