Transcript INTELLECTUAL PROPERTY ASPECTS OF MERGERS & ACQUISITIONS…

INTELLECTUAL PROPERTY
ASPECTS OF MERGERS &
ACQUISITIONS:
A CASE STUDY
Jeanne Hamburg
Partner
Attorneys at Law
www.nmmlaw.com
A HYPOTHETICAL CASE
You have been asked by your client, a sizable publishing
firm, to handle all intellectual property aspects arising
from the purchase of its assets by a large publishing
conglomerate. Fortunately, you are somewhat familiar
with the client’s publishing agreements, having drafted
the most recent company forms. You have also worked
on all the company’s IP matters for the past nine years.
What is the first thing you do?
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DUE DILIGENCE
Why?
– To aid in
Determining the advisability of the transaction
Minimizing the risk of exposure for the target client
Formulating a proposal for the transaction
Structuring, negotiating and drafting representations and
warranties that do not expose the client to risks and exposure
identified during the process
– Determining if closing conditions can/will be met
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DUE DILIGENCE:
INFORMATION GATHERING
What are we looking for?
– Anything that could materially affect the value of the
client or its IP position:
Potential or actual litigations that could result in
exposure
Agreements material to the company’s business
that may be affected by change of control
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DUE DILIGENCE:
INFORMATION GATHERING
Specifically, what are we looking for?
– Types of agreements
– Provisions in agreements
– Company policies and practices
– IP portfolio
– Litigation/arbitration/mediation
– Claims/threats of infringement
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DUE DILIGENCE:
HOW TO GATHER THE INFORMATION
Personnel Interviews
Document Review
Independent Investigation
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DUE DILIGENCE:
PERSONNEL INTERVIEWS
Identify the right people. In our hypothetical,
who?
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Contracts Department
Rights and Permissions
MIS/Technology Officer
Charged with web site
development/sales/subscriptions?
Senior Executives
CFO (liens, security interest)
Inside & Outside
Counsel
Licensing
Litigation
Company Policy
People
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DUE DILIGENCE:
PERSONNEL INTERVIEWS
You are interviewing the President and the CEO of your client.
They disclose to you that they showed some recent forms of
publishing contracts to the purchaser. The purchaser was
very pleased with the recent forms, of course, because you
drafted them. Among other things, they contain clear grants
of exclusive rights, including digital and electronic rights and
are assignable in the event of a change in control. In fact,
your client tells you that the purchaser entered into the deal
with the understanding that these were the forms the
company had used since inception of the business in 1965.
Is there an obligation to disclose to the purchaser that these
are not the only forms of publishing contracts?
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DUE DILIGENCE:
HYPOTHETICAL-INTERVIEWS
When you receive from purchaser’s counsel a copy
of the draft asset purchase agreement, there is a
representation by the seller that the 1995 forms are
the only publishing forms the company has ever
used.
Do you have an obligation to inform the purchaser’s
counsel that your client cannot make this
representation?
If so, do you have an obligation to tell your client that
you are going to do this?
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DUE DILIGENCE:
DOCUMENT REVIEW
So you’ve conducted your client interviews, and have
or will straighten out the form of agreement issue with
counsel for the seller at the appropriate time.
However, in addition to learning that there are
thousands upon thousands of publishing agreements,
you have also discovered dozens of software licenses,
web site development agreements, software
development agreements (none of the client’s systems
were innovated in-house) and a few co-distribution and
co-publication agreements.
What do you do first?
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DUE DILIGENCE:
DOCUMENT REVIEW
Make a wish list of what you’d like to review
Select a team of client representatives and attorneys
Make sure the team understands the context, purpose
and key terms of the intended business deal
Establish a timeline for collecting and reviewing
documents and a “data room”
Be selective but thorough: consider review of
representative documents
Communicate and coordinate with attorneys who
specialize in other areas working for the client
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DUE DILIGENCE:
DOCUMENTING THE DOCUMENTS
Once key documents are identified, and you
have gathered them, obviously you review them.
But how do you document what you learn?
Ideas?
Charts (after selected
doc review, team
feedback) E.g. charts
for contract review:
parties, subject matter,
red flags
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Target key clauses
for team members
to review (e.g. grant,
change of control)
Alert the client
immediately if an
area of exposure is
spotted
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DUE DILIGENCE:
KEY AGREEMENTS TO REVIEW
What sorts of agreements would these be?
 Publishing
 Employment
 Assignments
 Consulting
 Licenses
 Independent contractor
 Subscription (print, web
site, digital, etc.)
 Supply
 Co-distribution, copublication, or other joint
venture/teaming
 Service
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 Vendor
 Non-Disclosure
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DUE DILIGENCE:
HYPOTHETICAL – DOCUMENT REVIEW
You have completed the document review stage of due
diligence. You are of course happy with the form publishing
contracts you prepared. However, as noted these date back
only to 1995, when you first started working with your client,
which was founded in 1965. You and your team have also
reviewed representative publishing agreement forms used by
your client before 1995. In fact, several different versions of
each of these contracts exist. Among other issues, you notice:
– none of the agreements grant any rights electronic, digital or “new
media” rights
– all of the agreements are silent on whether they are assignable in the
event of a change of control
– there are no executed agreements for contributions to periodical
publications prior to 1995 and in one third of the cases after 1995
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DUE DILIGENCE:
HYPOTHETICAL – DOCUMENT REVIEW
You alert your client to these issues and it asks you for
recommendations and creative ways to address each of them.
– How would you recommend the agreement be structured to
address:
Failure to capture new media rights?
– Exclude pre-1995 rights from transfer
Potential assignability problems?
– Limit representations and warranties as to assignability of pre-1995
agreements and rights granted thereunder. See Gardner v. Nike,
Inc., 279 F. 3d 774, 61 U.S.P.Q. 2d 1529 (9th Cir. 2002)
Lack of exclusivity and assignability issues?
– Disclose the undocumented arrangements. Caveat emptor!
– Limit the representations and warranties (and consequent obligations
to indemnify) as to assignability of undocumented arrangements
– Limit reps and warranties by time period and/or rights granted (e.g.
rep assignability of all rights only after 1995)
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DUE DILIGENCE:
INDEPENDENT INVESTIGATION
You have completed your review of documents but want to be sure
there aren’t any issues you haven’t uncovered.
To assess other areas of potential exposure—and also the scope of
the client’s ownership rights in IP -- what documents are accessible to
you that you might review independently and buyer’s counsel surely
will?
• U.S. and foreign patent,
trademark and copyright
rights and filings
• PTO, WIPO web sites
• Assignment records and
maintenance fee/annuity
records for patents
• Commissioned Copyright
Office searches with chain
of title information and
information on any
security interest (e.g. lien)
or other encumbrance
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• UCC filings (security
interest)
• Internet/news database
searches
• Westlaw/Lexis or other
databases re: litigations
• Prosecution files and
assignment records
• If your client’s public, SEC
filings
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DUE DILIGENCE:
THE ANALYSIS
Once you’ve
interviewed the relevant people,
conducted your own investigation,
reviewed the documents and “documented”
them,
what is the next step?
– Prepare a report addressing major areas
of exposure or concern.
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DUE DILIGENCE:
THE ANALYSIS
What are some typical provisions that might raise a red
flag from an IP attorney’s perspective?
 Anti-assignment
 Silence on assignment
 Non-exclusive rights grants
to or from your client
 Ambiguous or ineffectual
rights grants
 Termination
 Loss of rights
 Indemnification (especially
if not limited)
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DUE DILIGENCE:
THE ANALYSIS
More red flags
 Covenants not to sue (any
covenant!)
 Automatic
reversion/transfer of
rights
 Government licenses
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 Sublicenses
 Assignments
 Non-compete
 Source code escrow
 Unusual jurisdiction
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DUE DILIGENCE:
THE ANALYSIS
Significant Copyright Issues:
– Scope of Rights (exclusive, non-exclusive)
– Grants Effective
– Rights Transferable
– Assignments in Proper Order
– WMFH or assignment where appropriate
– Registrations in Proper Order
– No Encumbrances/Liens
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DUE DILIGENCE:
THE ANALYSIS
Significant Trademark Issues:
– Assignments in proper order
– Federal versus common law rights
– Renewals timely filed
– Opposition/cancellation proceedings
– Classes
– Third party use
– Policing/Licensing
– Protests
– No encumbrances/liens
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DUE DILIGENCE:
THE ANALYSIS
Significant Trade Secret Issues:
– Confidentiality/security precautions and procedures
– Proper markings/legends
– Employment agreements
– Non-disclosure agreements
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DUE DILIGENCE:
THE ANALYSIS
Significant Domain Name Issues:
– Verification of record owners
– Assignments in proper order
– Status of registration and renewal
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DUE DILIGENCE:
THE ANALYSIS
Significant Litigation Issues:
– Assess risks, exposure of actual and threatened
litigation:
Indemnification (both ways)
Worst case scenario if client is defendant: Effect on business
Likelihood of success
– The claim not brought by the client may be as
important as the one brought by or against the client
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FINAL STAGE:
DOCUMENTING THE TRANSACTION
DRAFTING TIPS
Relevant Sections of Purchase Agreement:
– Definitions
Assets
Intellectual Property
– Scope of Transfer
– Representations and Warranties
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FINAL STAGE:
DOCUMENTING THE TRANSACTION
DRAFTING TIPS
Some typical representations and warranties:
– Here are some lists of all the IP seller owns, has licensed from
someone else and has licensed to someone else (see disclosure
schedule)
– Seller hasn’t given any IP or rights away unless it’s disclosed
– Here are all the co-publication and electronic distribution deals
– Seller owns or has acquired sufficient rights to exploit the works
in the way it is doing so currently
– Good and marketable title
– No liens or judgments
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FINAL STAGE:
DOCUMENTING THE TRANSACTION
DRAFTING TIPS
More Reps and Warranties:
– All registrations and applications to government entities with
respect to IP are valid and in full force and effect and all
registration and renewal fees due up to closing are paid.
– Right to use computer systems and software
– No pending, threatened claims against seller unless
disclosed
– Seller not violating any third party rights unless disclosed
– Third party not violating any Seller’s rights unless disclosed
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FINAL STAGE:
DOCUMENTING THE TRANSACTION
DRAFTING TIPS
Yet MORE typical reps and warranties:
– No pending, threatened claims asserted by seller unless
disclosed
– Domain names and trademarks are still in full force and effect as
of closing and no pending or threatened challenge to domain
names, opposition, cancellation, etc. as to trademarks
– Assignability of contracts, rights thereunder
– Owns rights to customer information, supplier information or
other lists included in the IP assets being sold
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FINAL STAGE:
DOCUMENTING THE TRANSACTION
DRAFTING TIPS
Qualifying reps and warranties:
– As to time period
– As to materiality
As to seller’s business
As to particular agreements’ effect on the seller’s
business “taken as a whole”, or “Individually”
Disclose, disclose, disclose!
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FINAL STAGE:
DOCUMENTING THE TRANSACTION
DISCLOSURE SCHEDULES
You have discovered that a number of the contracts
you’ve reviewed, in particular the software development
agreements and licenses, contain a requirement that
your client obtain a consent to their assignment to a third
party.
How do you recommend that the agreement deal with
this?
– Disclosure schedules
– Itemize all the contracts
– Seller will exercise “reasonable best efforts” to obtain consents
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DUE DILIGENCE:
FINAL STAGE
GOOD LUCK!
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Jeanne Hamburg, Esq.
Specializing in:
– all aspects of copyright
and trademark law,
– both in litigation and in
the transactional area
Norris McLaughlin & Marcus, P.A.
220 East 42nd Street
30th Floor
New York, NY 10017
(212) 808-0700
[email protected]
www.nmmlaw.com
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