IP Due Diligence in M&A Transactions Conducting IP Investigations and Leveraging the Results During Deal Negotiations

Size: px

Start display at page:

Download "IP Due Diligence in M&A Transactions Conducting IP Investigations and Leveraging the Results During Deal Negotiations"

Aleesha Daniel
6 years ago
Views:

1 Presenting a live 90 minute webinar with interactive Q&A IP Due Diligence in M&A Transactions Conducting IP Investigations and Leveraging the Results During Deal Negotiations THURSDAY, DECEMBER 15, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Carey C. Jordan, Partner, McDermott Will & Emery, Houston J. Andrew Lowes, Partner, Haynes and Boone, Richardson, Texas Curt Kinghorn, Director IP, Volcano Corporation, San Diego The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

2 Conference Materials If you have not printed the conference materials for this program, please complete the following steps: Click on the + sign next to Conference Materials in the middle of the left- hand column on your screen. Click on the tab labeled Handouts that appears, and there you will see a PDF of the slides for today's program. Double click on the PDF and a separate page will open. Print the slides by clicking on the printer icon.

3 Continuing Education Credits FOR LIVE EVENT ONLY For CLE purposes, please let us know how many people are listening at your location by completing each of the following steps: Close the notification box In the chat box, type (1) your company name and (2) the number of attendees at your location Click the SEND button beside the box

4 Tips for Optimal Quality Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory and you are listening via your computer speakers, you may listen via the phone: dial and enter your PIN - when prompted. Otherwise, please send us a chat or sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

5 Stage 1: Project planning and the investigation of publicly available information Carey C. Jordan Boston Brussels Chicago Düsseldorf Houston London Los Angeles Miami Milan Munich New York Orange County Rome San Diego Silicon Valley Washington, D.C. Strategic alliance with MWE China Law Offices (Shanghai) 2010 McDermott Will & Emery LLP. McDermott operates its practice through separate legal entities in each of the countries where it has offices. This communication may be considered attorney advertising. Previous results are not a guarantee of future outcome. The following legal entities are collectively referred to as "McDermott Will & Emery," "McDermott" or "the Firm": McDermott Will & Emery LLP, McDermott Will & Emery/Stanbrook LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, MWE Steuerberatungsgesellschaft mbh, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP. These entities coordinate their activities through service agreements. This communication may be considered advertising under the rules regulating the legal profession.

6 Introduction to IP Due Diligence IP assets are a component of virtually every deal and drive many high technology merger or acquisition strategies. IP issues can materially affect deals: Failure to transfer important IP rights Inadvertently acquisition of potential or actual IP-related litigation The primary reason for IP due diligence is to value the Target s IP assets Value = competitive advantage IP adds to the deal 6

7 Introduction to IP Due Diligence Business goals should drive the focus of the IP due diligence Are the business goals realistic? Understand the industry and the IP issues that predominate the industry If intellectual property is expected to produce large profits or protect profitable markets, significant due diligence is often necessary In contrast, if other assets drive the value of the deal, the intellectual property deserves a more limited review 7

8 Stages of IP Due Diligence Stage 1: Project planning and the investigation of publicly available information Carey Jordan, McDermott Will & Emery LLP Stage 2: Continued investigation in cooperation with the Target under an NDA Andrew Lowes, Haynes & Boone LLP Stage 3: Managing the practical implications of the IP due diligence in the deal structure Curt Kinghorn, Volcano Corporation 8

9 Goals of Stage 1 of an IP Due Diligence Investigation Identify, categorize, and evaluate the Target s IP assets Establish and confirm ownership, title, scope and strength of those IP assets Evaluate Freedom to Operate and the surrounding competitive landscape Evaluate an initial value of the Target s IP Assets Identify issues to be resolved during Stage 2 of the due diligence process and formulate a strategy for requests 9

10 Preliminary Step - Due Diligence Team Assemble a due diligence team to take each piece of the puzzle Team can include the Buyer s best technical folks because this is public information Potential prosecution taint duty of disclosure obligations Establish data management protocols Spreadsheets, databases, e-rooms, etc. 10

11 Identify, Categorize, and Evaluate the Target s IP Assets Compile an initial list of the Target IP assets including patents, t trademarks, copyrights and domain names that t are publicly available. Public databases such as the U.S. patent and trademark office databases, Copyright Office, foreign databases, domain name registrars Regulatory submissions U.S. Food and Drug Administration identifies patents covering a product approved for marketing in the Orange Book SEC Filings Related litigations and court papers 11

12 Identify, Categorize, and Evaluate the Target s IP Assets Analyze the ownership and clean title of the IP verify the target can transfer CLEAN title! Assignment records Maintenance fee payment records Security interests Check to see if the assets have been asserted, licensed or enforcement has been limited. Court filings, regulatory filings, press releases, blogs, other social media 12

13 Ownership and Transferability It is essential to establish that the Target owns what it says it owns. A lack of rights can come from a target s inattention to the care and feeding of IP rights A failure to update the chain of title or ensure a proper chain of title can lead to potential problems Employee, contractor, joint developer assignment agreements Joint ownership issues Government march- in rights Beware smoke and mirrors Complicated interrelated corporate structures can require careful diligence of existing licenses 13

14 Significant Known Barriers Exist to Exploitation of the Technology Third party rights such as patents may prevent exploitation of the IP rights Deep pocket may change litigation landscape A freedom-to-operate study can identify existing third party patents that can prevent Company s exploitation of the assets If blocking IP is identified, potential design-arounds can be identified Blocking IP can be licensed or purchased if necessary Unknown barriers can still exist 14

15 Target Is or Has Been Subject to Infringement Claims Public information can be used to identify potential litigation (new reports, current litigation status, etc.) Signs of potential liability can include: Cease and desist letters Offers and negotiations for licenses Opinions of counsel Litigation risks can affect the valuation of the IP rights 15

16 Don t Damage the Goods Long-Term Buyer s counsel report to management Candor is essential. Written candor is not essential or typically recommended. Establish negotiation positions regarding impact of third party IP Rights, validity/scope of Target patents, potential problems that may limit future actions etc. and effect on value of the transaction Unless clearly retained, report to only a single client Other investors need separate counsel 16

17 Is the IP Worthwhile? Compare the target IP and the buyer s current and proposed products. Beware smoke and mirrors Determine how the target IP fits in the overall landscape of competitive products and competitor IP. Adapt initial valuation of the deal subject to verification in further due diligence 17

18 Buy It or Build It? Sophisticated patent counsel can generally find a way to enable the company to achieve its goals. Acquisition may not be the best option designing g around the patent portfolio and launching new products may provide better results. 18

19 Formulate Diligence Requests for Target Moving to Stage 2 Follow up on inconsistencies and problems from public due diligence Get further information related to potential litigation or competitive issues Consider common interest agreement Enter into a confidentiality agreement 19

20 Stage 2: Continued Investigation in Cooperation with the Target J. Andrew Lowes Haynes and Boone, LLP

21 Continued Investigation in Cooperation with the Target Confidentiality/Non-Disclosure Agreement provides Buyer with access to important information while protecting Target s confidential information 2011 Haynes and Boone, LLP 21

22 Confidentiality Agreement Overview Identifying i the Proper Parties Definition of Confidential Information Restrictions on Use and Disclosure Exceptions to Disclosure Prohibitions Return of Confidential Information Non-Solicitation and Standstill Obligations 2011 Haynes and Boone, LLP 22

23 Definition of Confidential Information nonpublic, confidential or proprietary in nature Existence of negotiations may be Confidential Information prepared by Buyer based on Target s information is subject to Confidentiality Typical Exceptions: (a) public information; (b) prior possession of information; (c) information disclosed by a third party who, to Buyer s knowledge, is not prohibited from disclosing such information; and (d) information acquired or developed without use of CI 2011 Haynes and Boone, LLP 23

24 Restrictions on Use Limited it to specific purpose of anticipated i t business relationship Prohibition against using Confidential Information in any way detrimental to Target may serve as a shorthand standstill provision and should be resisted by Buyer 2011 Haynes and Boone, LLP 24

25 Exceptions to Disclosure Prohibition Standard for disclosure legally compelled vs. requested in legal proceeding Target should require prompt notice and some level of cooperation Only information required by such legal process to be disclosed 2011 Haynes and Boone, LLP 25

26 Return of Confidential Information Counsel for Buyer may retain one copy of the confidential information to satisfy its obligation for retaining audit records and to address any claims under this Agreement Buyer shall use commercially reasonable efforts to destroy all memoranda, notes, reports and similar items produced by Buyer that are based on or contain confidential information 2011 Haynes and Boone, LLP 26

27 IP Diligence Roles Under NDA Buyer s counsel s inquiry: Any unacceptable risks/deal breakers? Any risks/problems that would drive the price down? Target s counsel s objectives: Help Target explain IP Rights & disclose material risks Demonstrate minimal infringement risks to Buyer Establish high value of IP to maximize deal value Both: Avoid creating later-arising arising problems Haynes and Boone, LLP

28 Confidential Due Diligence Target s Counsel - Tailored Disclosures Preserve attorney/client privilege il Limit access to freedom-to-operate opinions Avoid Buyer s relying on Target s opinions i Limit access to on-going litigation materials Comply with confidentiality agreements with third parties, including opposing litigants Haynes and Boone, LLP

29 Confidential Due Diligence Target s Counsel - Tailored Disclosures (cont.) Consider representations and warranties Is disclosure necessary for due diligence? Must not conceal material information Track materials to guard against misuse: what is actually disclosed to Buyer; and who is receiving the materials Haynes and Boone, LLP

30 Confidential Due Diligence Options for Target s Counsel 2011 Haynes and Boone, LLP Approach the third party Discloser to seek consent to share with Buyer or Buyer s counsel Create extract / summary to share with Buyer or Buyer s counsel Consider exactly how 3 rd party NDA defines Confidential Information and obligations Proceed to share in confidence and bear the risks 30

31 Confidential Due Diligence Buyer & Target - Common Cause Target disclosing 3 rd party confidential information could give 3 rd party grounds to sue Buyer and its counsel Initially consider sharing opinion list or opinion abstracts, with full opinion possibly shared later Ethics TIP: Consider a Joint Privilege Agreement between the Buyer and Target to protect against waiver of privilege when sharing opinions 2011 Haynes and Boone, LLP 31

32 Conflicting Ethical Duties The NDA usually prohibits disclosure of confidential information for any ypurpose. p Under 37 C.F.R. 1.56, patent counsel and others associated with patent application prosecution have a duty to disclose material information to the U.S. Patent Office Haynes and Boone, LLP 32

33 Confidential Due Diligence NDA restrictions may limit zealous advocacy and new innovations Diligence counsel involved in patent prosecution may have difficulty segmenting confidential information Buyer s diligence personnel conducting R&D may be accused of violating NDA even if new technology is independently d developed d Goal 1: Comply with duty of candor to the U.S. PTO Goal 2: Minimize Potential conflicts with NDA 2011 Haynes and Boone, LLP 33

34 Reporting to the Client Buyer s counsel report to management Written v. Oral Negotiation positions on impact of third party IP Rights, validity/scope of Target patents (cover Buyer products?), potential problems that may limit future actions Unless clearly retained, report to only a single client; other investors need separate counsel Reserve/designate issues for deep review post-closing, e.g., ongoing violation 2011 Haynes and Boone, LLP 34

35 Buyer s Side Tips to Diligence Retain (a) counsel, and (b) technical personnel, to conduct diligence without t triggering disclosure obligations and/or violations of NDA in patenting ti later tech. Careful preparation of financial projections based on advice of counsel to maintain attorney/client privilege 2011 Haynes and Boone, LLP 35

Target s Side Tips to Diligence Develop draft Reps/Warranties; test accuracy before Buyer due diligence Make necessary disclosures early Before diligence

36 Target s Side Tips to Diligence Develop draft Reps/Warranties; test accuracy before Buyer due diligence Make necessary disclosures early Before diligence determine what, if any, privilege waiver the client will agree to Request due diligence inquiries, and track disclosures, in writing 2011 Haynes and Boone, LLP 36

37 Stage 3: Managing the practical implications of the IP due diligence in the deal Curt Kinghorn Director IP (916)

legal Pointers: Communication is essential lawyers have to COMPLETELY understand the business

38 The Reality of Due Diligence The Due Diligence team includes lawyers and non lawyers Often have different understandings and objectives Often speak difference languages business vs. legal Pointers: Communication is essential lawyers have to COMPLETELY understand the business issues/objectives i Cooperation/coordination among deal team, inside and outside counsel is key 38

understandings and objectives Often speak difference

legal Pointers: Tailor Due Diligence requests to

39 The Reality of Due Diligence The Due Diligence team includes lawyers and non lawyers Often have different understandings and objectives Often speak difference languages business vs. legal Pointers: Tailor Due Diligence requests to accomplish business goals and objectives Be B thorough hbut prudent with ihwhat is asked kd 39

40 The Reality of Due Diligence Due Diligence is a living process/moving target Pointer: Make a plan, fly your plan, change your plan if things change Move deal terms forward in tandem with diligence Limit scopes of investigation using a phase gate approach 40

41 Due Diligence as a Living Process Ideally, complete thorough diligence before negotiations over final terms commence Evolve internal negotiation strategies based on Due Diligence findings Use Due Diligence as basis/support for securing key deal terms 41

9% Due Diligence Pointers: Make sure you have a good Due Diligence checklist Do post

42 The Reality of Due Diligence There is often a LOT of tension between getting the deal done quickly vs. doing a complete job The 95% Due Diligence vs. 99.9% Due Diligence Pointers: Make sure you have a good Due Diligence checklist Do post mortem update checklist Fix problems early when easy to fix rather than wait until later for inhouse counsel to clean up 42

43 The Reality of Due Diligence Often cultural issues influence Due Diligence: Individualism vs. collectivism Uncertainty avoidance Male l Female Roles Power Distance Pointer: Understand cultural differences and how they affect Due Diligence and final deal Get: Cultures and Organizations: Software of the Mind Geert Hofstede (Amazon.com $19.77) 43

44 The Reality of Due Diligence For in house counsel, there is often a race to do as little as necessary until as late as possible Pointer: Do as much as is necessary for that stage of Due Diligence and not more Let Due Diligence evolve with the pending deal negotiations 44

45 The Reality of Due Diligence Sometimes people lie to you??!! Pointer: If you have a hint that t there may be an issue here, put $$$ in escrow (as much as possible) until things can be verified Do not overlook terms of Escrow Release 45

46 The Reality of Due Diligence Sometimes the people you are working with at Target on Due Diligence don t want the deal lto go through h Pointers: Anticipate who might fall into this category Recognize g that they might not be fully accurately answering your questions Consider how you ask questions It s not just what you ask, it s how you ask! 46

47 The Right Mix of Broad and Specific in Questions Please provide all documentation regarding current or pending litigation vs. Is the Company or its Affiliates subject to any pending, threatened, anticipated or other litigation, arbitration, claims or actions? If so, please provide all documentation and a summary of management s analysis of the probability of success, potential ti exposure, opinions i of counsel and all related documents and correspondence. 47

buckets Pointer: At end of normal Due diligence, ask

48 The Reality of Due Diligence Sometimes there are things going on that don t fall squarely in anyone s Due Diligence buckets Pointer: At end of normal Due diligence, ask everyone you talk to: Is there anything else we should know about? 48

49 The Reality of Due Diligence Think long and hard about letting the same attorney play for both thteams Seller Buyer Sometimes see this if technology is arcane or to save money Pointer: If you use the same attorney, have another set of eyes look over the work 49

50 The Reality of Due Diligence Sometime, people are paranoid Just because I m paranoid, does not mean they re not out to get me ~Author (intentionally?) Anonymous 50

51 Managing Conflicts, Potential Conflicts and General Paranoia Target s Concerns: Protecting competitive ii IP assets/related dinformation i (e.g., know how) Weeding out casual interest /spies Trade secret/intangible IP disclosure consequences Inability to unlearn an idea or concept Novelty, limited industry expertise in subject Pointers: Distinguish between target s IP and acquirer s on going development efforts Set up firewall to insulate acquirer R&D and marketing from target Move to a phase gate model of moving through Due Diligence 51

Reluctance to answer usual IP questions Reluctance to deal with IP

52 The Reality of Due Diligence There is often a LOT of Tension Pointers: Consider the source of the tension, is it raising red flags? Reluctance to answer usual IP questions Reluctance to deal with IP warts Determine if Target really understands process educate if possible Money? 52

53 The Reality of Due Diligence The Target often doesn t understand the consequences of litigation they may be in or with which they have been threatened Pointers: Walk Target through what if you lose scenarios Injunction Damages Design around Indemnity/escrow provisions for pending/threatened IP claims 53

54 The Reality of Due Diligence It is sometimes tough to call in help (e.g. outside counsel, technical experts) Pointers: Don t wait, it will only get worse Firewall development personnel and conflicted executives Control documents and educate subject matter experts about use of diligence information Limit access to IP in data rooms Enlist independent experts to conduct third party review and analysis (engineering firms, independent consultants) 54

55 IP Diligence and Deal Terms Representations andwarranties Be wary of knowledge qualifiers Other Terms of Concern Representations and warranties may partially mitigate risk of non produced documents, IP issues Is target collectable post close? (i.e., are they good for their reps and warranties) Non Competes, Lock Ups, Break Up Fees Should be tailored and specific Finite terms, related to only disclosed materials, carving out existing IP and development activities of acquiring company May filter curious (but not serious) buyers 55

56 The Reality of Due Diligence Trademark Issues Consider relative value of trademark and tailor Due Diligence accordingly In some industries, trademarks very valuable, in others not so much spend your time/resources accordingly Reverse Confusion Third Parties marks vs. target company marks Self Confusion Target company marks vs. target company identifiers (e.g., address, phone number) 56

Presenting a live 90-minute webinar with interactive Q&A. Today s faculty features:

Presenting a live 90-minute webinar with interactive Q&A Getting M&A Deals Done: Legal Risks and Effective Strategies Managing Changes and Mitigating Risks Between Signing the Acquisition Agreement and