Critical Intellectual Property Elements in Merger Agreement Negotiations
Companies that consistently use cutting-edge technology, patented innovations, and other intellectual property can pose risks to potential buyers during merger and acquisition negotiations. Intellectual property typically forms a substantial basis for a company’s value and marketability. However, ownership issues, inadequate protections, and active third-party usage agreements can all influence how merger and acquisition agreements are drafted and how the company and potential buyers negotiate.
At Reinhardt IP, located in Stuart, Florida, Attorney Gerard Reinhardt represents startups and new businesses by providing practical guidance grounded in sound regulatory practices for patents, trademarks, copyrights, trade secrets, AI, and data security. If you are considering an M&A with another company, it is essential to identify the IP elements that potential buyers will likely want to consider and ensure you have the proper protections and rights in place before you proceed with negotiations.
The Potential for Proposed Divestiture
When two businesses seek to merge, or when one buyer seeks to obtain a business that has an autonomously operating set of intellectual property, one business’s IP properties could be divested under the merger or acquisition agreement. However, decisions to divest intellectual property typically require an up-front buyer, according to the Federal Trade Commission.
In order to proceed with a transfer of assets or a divestment of intellectual property, your business will need to ensure the business unit contains the required components that enable it to operate autonomously, that it is able to be separated from the parent company, and that the potential buyer will be able to maintain market competition immediately after purchase.
Critical Elements for IP in Mergers & Acquisitions
Intellectual property divestiture is not always possible during merger and acquisition agreements. In these cases, your company will need to provide comprehensive documentation regarding the ownership, protections, scalability, and operability of your intellectual property assets. For a sale or merger to be successful, potential buyers will need to confirm your business has the right to use, operate, and sell your IP without risk of infringement or liability.
Title & Ownership
Your company will need to prove without a doubt that it owns its intellectual property assets in their entirety. This could include patents, trademarks, copyrights, or trade secrets. If any current or former employees contributed to developing IP for your company, you will need to provide signed agreements stating that any IP developed for the company is the company's sole property. Joint ownership or unclear ownership can significantly increase risk and delay M&A negotiations.
Disclosures & Qualifiers
Potential buyers will examine whether your intellectual property assets are enforceable and will not infringe on another business’s IP rights. In mergers and acquisitions, you and your potential buyer will typically need to negotiate IP disclosure schedules, which will outline your registered intellectual property and any pending patent or trademark petitions. In some cases, you may be able to add a knowledge or materiality qualifier to limit your potential liability against unknown risk or third-party infringement.
Third-Party Licenses & Data Rights
For technology companies, potential buyers will frequently examine any past or active license agreements and data permissions to identify the security, value, and control of your IP assets. Your company may undergo a code audit during merger and acquisition negotiations to determine your compliance with open-source software regulations and identify potential licensing issues.
Trade Secret Protections
If your business manages its intellectual property as trade secrets rather than through patent, trademark, or copyright protections, buyers will typically ensure your company has implemented the appropriate security measures to protect them. This could include digital measures, such as maintaining trade secret data on private servers or behind protective firewalls, and physical measures, such as NDAs and non-compete clauses in employee contracts, to prevent unauthorized usage and establish strategies for pursuing legal action, if appropriate.
Indemnification & Warranty Considerations
During an IP merger or acquisition, you and your potential buyer should negotiate how your intellectual property assets will be allocated and secured. Indemnity clauses and warranties for IP ownership can typically be capped as a certain percentage and should be explicitly drafted to provide compensation for specific losses due to IP ownership disputes or third-party litigation.
If you have negotiated a knowledge or materiality qualifier, your exposure to potential indemnification may be limited. However, buyers will typically seek absolute indemnity for any unknown, unforeseen, or unrecorded disputes that arise after the merger or acquisition is complete.
Contact an Experienced U.S. Intellectual Property Attorney Today
Mergers and acquisitions offer considerable benefits to businesses and market competition. However, if your business holds considerable or high-value intellectual property, M&A agreements must be carefully negotiated and drafted to explicitly establish IP ownership, protections, and licenses, and agree upon potential qualifiers and indemnification clauses. Whether you are in the initial stages of a merger or acquisition negotiation or require assistance with finalizing an agreement, identifying risks and establishing ownership is essential to entertaining potential buyers.
At Reinhardt IP, Attorney Gerard Reinhardt offers individualized intellectual property guidance for businesses facing merger and acquisition negotiations by identifying IP ownership and protection issues and establishing strong IP strategies to close these gaps. Located in Stuart, Florida, he is licensed to practice in Florida, New York, Washington, D.C., and by the U.S. Patent & Trademark Office.
