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, 2011 1pm 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 emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
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Stage 1: Project planning and the investigation of publicly available information Carey C. Jordan ccjordan@mwe.com, 713.653.1782 www.mwe.com 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.
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 www.mwe.com 6
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 www.mwe.com 7
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 www.mwe.com 8
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 www.mwe.com 9
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. www.mwe.com 10
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 www.mwe.com 11
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 www.mwe.com 12
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 www.mwe.com 13
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 www.mwe.com 14
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 www.mwe.com 15
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 www.mwe.com 16
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 www.mwe.com 17
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. www.mwe.com 18
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 www.mwe.com 19
Stage 2: Continued Investigation in Cooperation with the Target J. Andrew Lowes andrew.lowes@haynesboone.com, 972.680.7557 2011 Haynes and Boone, LLP
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
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
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
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
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
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
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 27 2011 Haynes and Boone, LLP
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 28 2011 Haynes and Boone, LLP
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 29 2011 Haynes and Boone, LLP
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
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
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. 2011 Haynes and Boone, LLP 32
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
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
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 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
Stage 3: Managing the practical implications of the IP due diligence in the deal Curt Kinghorn Director IP ckinghorn@volcanocorp.com, (916) 281-2768 37
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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