Accounting for encumbrances on intellectual property

On Behalf of | Mar 30, 2020 | IP Agreements And Transactions |

Many mergers and acquisitions are based on the acquiring party’s ability to exploit any intellectual property associated with the deal. This is particularly true for business owners in the technology and digital space, where well-protected, vetted IP can be the lynchpin to a company’s future growth.

As part of the due diligence process associated with any merger and acquisition, buyers contributing valuable IP should be diligent in their search for any potential encumbrances. What might these obstacles be?

Types of IP encumbrances

An encumbrance on intellectual property should be disclosed and addressed in the seller’s representations and warranties. However, it is possible some go unremarked or potentially remain unknown.

There are many different types of encumbrances, as this Forbes piece explains, including:

  • Third-party claims that a patent is invalid
  • Liens on the IP as a result of lending
  • Infringement claims from third parties
  • Insufficient documentation regarding IP ownership
  • Clauses, such as right of first refusal
  • The use of open-source software
  • A failure to secure proper registration with all necessary governmental bodies

Addressing encumbrances

Ideally, these complications are discovered well in advance of closing, allowing the buyer and seller to evaluate the terms of the deal with complete knowledge of the facts.

However, encumbrances discovered after the merger or acquisition is completed can sometimes be addressed. The type of relief available will depend upon the circumstances – for example, whether there was a material misrepresentation on the part of the seller versus a non-material one.

This is just a small part of doing due diligence during a merger or acquisition. It is a process that requires experience, tenacity, and an eye for detail. Get it wrong, and you may feel the repercussions long after closing.

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