Vaulting the Hurdle that is an Intellectual Property Due Diligence

A due diligence is usually part of a process in which one entity investigates and evaluates various aspects of another business, with a view to acquiring or investing in same. It can also be triggered during fundraising rounds, partnership agreements, or the sale of assets. The goal of a due diligence is to assess the legal and/or practical state of affairs in a business and to identify potential gaps or risks prior to acquiring or investing in it, in order to evaluate whether the transaction is worthwhile and/or whether there are issues that might affect the price.  

Part and parcel of a full due diligence is an investigation as to the target entity’s intellectual property. In South Africa, as with other jurisdictions, intellectual property represents a valuable asset, and ensuring that it is properly identified, owned, and protected is essential for any business looking to maximise its value during a transaction. With careful preparation, businesses can successfully navigate the complexities of IP due diligence and avoid common pitfalls. In preparing to undergo a due diligence investigation, three key aspects should be front of mind: identifying the key intellectual property in your business, ensuring that you are the owner of, or have a transferable right to use or a right that permits a change in control of, the intellectual property, and ensuring that the necessary steps have been taken to protect the key intellectual property where relevant and possible. 

1. Identifying the Key Intellectual Property in Your Business 

The first step in overcoming the intellectual property due diligence hurdle is identifying the key intellectual property assets within the business. This step requires a detailed and systematic review of operations, products, services, and any proprietary technologies or processes. 

Common forms of intellectual property that businesses often overlook include copyrighted works, trade secrets, know-how, domain names, patents, and trade marks. Intellectual property may also include proprietary software, designs, and customer databases, which could significantly contribute to the business's competitive edge. It is essential to map out the entire portfolio to understand what is truly valuable and forms the backbone of the business’s operations and their competitive advantage. 

Intellectual property needs to be accurately catalogued, and any documentation regarding the various intellectual property and/or licenses to use should be readily accessible. By identifying the intellectual property early in the due diligence process, and taking all relevant steps to document and protect same, businesses can mitigate the risk of red flags being raised during the due diligence process, which could result in the transaction failing if not addressed appropriately. 

2. Ensuring Ownership of your Intellectual Property Vests with Your Business 

Once the relevant intellectual property has been identified, the next critical aspect is ensuring that the business actually owns the intellectual property or has the right to use it under a license agreement that is transferable, particularly in the event of a change of control in the company.  

In South Africa, various legislation applies to the different forms of intellectual property and businesses should not only familiarise themselves with who ownership resides with, insofar as the creation of intellectual property is concerned, but also how to assign and or take ownership of the relevant intellectual property. In addition, businesses must ensure that they have clear, legally binding contracts with employees, contractors, or collaborators that assign ownership of any intellectual property created pursuant to these agreements, to the company.  

It is also critical to ensure that any license agreements for the use of any intellectual property are structured so they are transferable or allow for a change in control. In many cases, intellectual property licenses may contain clauses that restrict the transfer, or require consent from the licensor before a transfer can occur. These clauses can present significant barriers in a transaction if they are not properly addressed in advance. 

3. Protecting Your Intellectual Property 

The protection of intellectual property is an important aspect to bear in mind prior to undergoing a due diligence.  Businesses should take proactive steps to safeguard their intellectual property, if statutory protection and/or registration is possible.  For example, trade marks, which play an essential role in distinguishing the unique goods and services of the relevant business in the marketplace, can and should be protected by way of trade mark registrations in terms of the relevant legislation. 

For example, trade mark protection is crucial for all businesses and individuals, as it grants the proprietor a monopoly right in their brand which prevents others from not only mimicking your brand, but also prevents others from developing a brand which may be considered to be confusingly similar to yours in relation to the same or similar services. Trade mark protection also helps safeguard brand identity and ensures consumers can easily identify genuine products.  

By registering a trade mark, businesses not only protect their brand identity but also gain the legal tools to prevent infringement and take action against the unauthorised use of their brand. In an era of growing online commerce, where competition is fierce and consumers rely heavily on brand reputation, trade mark protection allows businesses to secure their intellectual property, maintain customer trust, and confidently engage with members of the public without the risk of infringement. 

In a highly competitive market, a well-protected trade mark becomes an asset that adds value to the business. Without proper trade mark protection, a company may be vulnerable to brand dilution, counterfeiting, and transactions failing as a result of the fact that a business’s intellectual property not being adequately protected and owned.  

The intellectual property due diligence portion of a larger due diligence is a complex and vital process that can make or break a business transaction. By preparing in advance and focusing on the three key aspects discussed above — identifying the key intellectual property in your business, ensuring that you own all the relevant intellectual property and ensuring that the appropriate steps have been taken in order to protect the key intellectual property, businesses can successfully navigate through a due diligence without too many issues arising, which may either result in a failed transaction, or one that negatively affects the price that the seller is able to negotiate.  

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