The importance of IP in M&A transactions

After slumping last year due largely to rising interest rates, mergers and acquisitions (M&A) in the technology sector are expected to recover in 2024.

Interest rates are anticipated to decline this year while the artificial intelligence (AI) boom continues, as shares of Nvidia and Microsoft break new highs. PwC reports that 70% of business leaders expect to use M&A to accelerate adoption of technology processes.

In Canada, Ottawa has proposed the Clean Technology Investment Tax Credit and announced significant enhancements to its Tech Talent Strategy . Altogether, the outlook for tech M&A is bright but tech M&A carries a unique set of risks. What should stakeholders know before a tech company begins an acquisition?

The value of IP

In 1975, only 17% of the S&P 500’s total assets comprised of intangible assets, including intellectual property (IP) such as patents and brand value. By 2020, this figure reached 90% and now includes software, customer data and brand value as well as patents. More than ever, acquisition targets are leveraging the value of their IP to generate higher enterprise value. As a result, the need for targets to demonstrate clear title to its IP and reduced risk of infringement claims to the acquiror is becoming paramount.

The importance of IP in M&A transactions

MLT Aikins has helped a number of companies sell or acquire technology and IP-focused companies. What has become apparent is that a lack of understanding and awareness of potential IP issues that may arise in M&A transactions can lead to delays and significantly higher fees for all parties involved. In many cases, business owners may not have a full appreciation of how many IP considerations may exist in their business already, or where there exist IP-related issues that a perspective suitor may perceive as risk.

In one recent transaction, we worked with a seller who was under the impression that the business owned some key technology processes and IP embedded therein, but on further investigation the owner learned that they held merely a set of licences with limited rights rather than an unrestricted ownership interest in the underlying technologies.?The value of the transaction was significantly impacted and the transaction itself was delayed as a result of the need to re-negotiate a new licence arrangements – which came at great additional expense to the owner.

Preventative measures

Awareness is key

Nowadays, it is the exception and not the rule that organizations have no IP. Being aware of what IP your organization uses, licenses and owns, whether it is a business name, trademark, patent, copyright, domain name, know-how or other proprietary information, is key to understanding how to protect such IP and leverage its value during an M&A transaction.

Early intervention can mitigate costly issue later

Working with knowledge professionals on an IP strategy and ways to protect your IP right at the outset will undoubtedly end up saving resources, money and frustration later on. While not impossible to manage, sorting out IP issues when in the midst of an M&A transaction is less than ideal and can add significant costs and time to the deal.

Beyond basic due diligence

For acquirors, understanding what it is that your are purchasing is fundamental to making a good deal. From an IP perspective, it is crucial that all aspects of IP are examined and that due diligence goes beyond simply searching public records for registered IP. Acquirors need to satisfy themselves that the target is the legal and beneficial owner of the IP they purport to sell, that employees or consultants have properly and completely assigned their IP rights to the target and that the target had in place appropriate measures to protect its IP so as to mitigate against unauthorized disclosure.

It is also key to understanding who has been involved in the development of IP and whether any third parties – such as developers, consultants, academic institutions or government agencies – could have ownership claims to the purchased IP.

Focus on value

All in all, IP can be an incredibly valuable asset, both for acquirors and sellers. IP is an asset that drives valuation and sets organizations apart from others. Clarity around IP rights and ensuring proper IP strategies and protection mechanisms are in place can mitigate the likelihood of problems arising during an M&A transaction while at the same time increasing value.

MLT Aikins has an active Mergers and Acquisitions practice that includes transactions involving acquirers or target companies who have significant IP and technology portfolios. Our corporate and commercial lawyers work closely with our Innovation, Data and Technology group to maximize the value of IP for sellers while ensuring that proper due diligence is carried out for acquirors – all with the goal of ensuring a smooth transaction during the M&A process.

You can also download our Data, Technology & Innovation Legal Risk Management Checklist here.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.

Authors: Nicolas A. Joubert , Eric Buettner