DD-case-study

Client

Private Equity Firm

Background

Metis Partners was commissioned by a private equity firm (“the Client”) to conduct a commercial IP due diligence of an established electronics company with a vast patent portfolio protecting a plurality of technologies worldwide (“the Target”). At the foundation of the Target’s offering was a very unique platform technology which was wholly underpinned by trade secrets and know-how, the loss of which would detrimentally affect the Target’s commercial performance moving forward. The Target was a healthy and prospering business unit of a multinational conglomerate, and was being effectively carved out of its parent company, proposing to bring with it all relevant IP under a transfer agreement or by way of a grant of license from its parent company.

Assignment

Metis Partners was asked to:

  • identify intangible assets vesting in the Company (registered and unregistered IP), assess their strength in relation to competitive advantage and continuity, and identify risks which could undermine the value of these IP assets post-transaction;
  • assess the completeness of the patents (and patent applications) due for transfer or licensing and determine whether key patents were omitted and/or being licensed under terms which would limit the Target’s ability to exploit them appropriately in line with future R&D and commercial strategies;
  • identify any perceived post-transaction limitations or risks to the Target which could be caused by existing cross-licenses, collaborations or ongoing disputes to which the Target or its parent company were subject; and
  • review commercial terms around IP in the relevant legal documentation, and liaise with the Client’s IP attorneys in ensuring that appropriate language was introduced to mitigate risks or weaknesses identified through the course of our analysis.

Our Approach

With guidance from our subject matter experts, we deconstructed registered and unregistered IP assets relevant to the Target’s business.  We worked closely with our Client and the Target’s R&D team to understand strategic ambitions post-transaction, IP asset importance and relevance, as well as proposed transitioning plans (that is plans to move over all IP management activities from the parent company to the newly established independent Target).

Similarly, we discussed the importance and relevance of individual IP assets with the seller (parent company) and tried to determine whether any IP existed which was not properly captured as part of the transaction or in the case of patents being licensed, the parent company’s commercial objectives in retaining such patents.

The information we gathered and opinions we drew were regularly communicated with our Clients IP attorneys to ensure that necessary amendments to legal documentation could take place as well as help inform our Client’s negotiation position on the buyout.

The Outcome

Our IP due diligence assessment revealed that some patent filings within patent families critical to the Target’s business had been omitted from the transaction, and in some instances abandoned but left with a generous grace-period for resurrection.  This proved to be a significant risk given that undermined the Target’s (and our Client’s) ambition in growing the business in certain foreign markets.

Similarly, some of the patents proposed for licensing (rather than transfer) were identified as being critical to the Target’s business with very little value to the parent company’s current operations.  This again left the Target and our Client at risk, especially given that it could result in patents intrinsic to the Target being licensed-out to competitors.  In addition issues surrounding ownership and rights to generated foreground (future) IP were not discussed leaving entitlement to foreground IP the Target potentially generated on the back of licensed IP subject to interpretation.

Business continuity was also reviewed as part of our due diligence, and we identified a potential risk of critical undocumented know-how escaping the Target as it closed facilities abroad as result of the transaction.  What made this a significant concern was the fact that a competitor to the Target sat not-to-far down the road and would very likely become the employer of those who were asked to leave their posts.

Perhaps one of the most significant risks our assessment revealed was around trade secrets due to transfer.  While it became clear that these trade secrets wholly and fully protected a platform technology which underpinned the Target’s entire business, these trade secrets were not identified to any extent within legal documentation.  This meant that there was no clarity as to what trade secrets were being transferred over with the buyout of the Target and what trade secrets could no longer be used by the parent company.  This would leave both sides of the transaction at full risk of trade secret misappropriation – especially since management on both sides was likely to shuffle and change post-transaction.

While making risks very clear to our Client, we also provided viable and practical solutions our Client could take in order to mitigate most these risks, some of which required consideration in the drafting of legal documentation while others were just a matter of implementing certain systems and processes immediately post transaction.

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Photo credit: Wallpoper