Intellectual property in company acquisitions

A company takeover is no longer just about buildings, stocks, and machinery. For many companies, a large part of their value lies in intellectual property (IP): think of brand names, software, designs, copyrights, customer/supplier data, trade secrets, and content. It is precisely these intangible assets that often determine market position, growth potential, and ultimately goodwill (the “added value” on top of the visible assets). That is why it is important to consider IP in the legal due diligence process during a takeover: an investigation in which the buyer checks exactly what is being purchased, what risks are involved, and what agreements need to be made in the takeover contracts.

Why intellectual property is so crucial

IP can be the legal “lock on the door” of innovation and reputation. Consider the following:

• A strong brand ensures recognition and trust;

• Software and technology make processes more efficient or form the core product; and/or

• Designs and content can create distinctive character.

However, this value is only truly ‘hard’ if it is clear who owns the rights, whether they are transferable, and whether there are any conflicts.

In practice, it often happens that a company operates as if it is the owner, but the legal rights are different. For example, because:

• a trademark has never been (properly) registered;

• software has been built by freelancers without a clear transfer of rights;

• open-source licenses unintentionally create obligations;

• a trade name or domain name is not registered in the company’s name;

• there are licenses that are not transferable in the event of a takeover.

These kinds of issues directly affect the acquisition price, the negotiating position, and the question of whether the buyer can continue the business without problems after closing. Only some of these issues can be found in the register, such as a trademark or model, but many cannot, such as copyright and database rights, models, and know-how.

IP in legal due diligence: what is usually examined?

In due diligence, IP is often assessed along three main lines: ownership, use, and enforcement/risk.

1) Ownership and chain of rights

The buyer wants to see that the target is actually the rightful owner (or is legally entitled to use the rights). This means, among other things:

• registrations of trademarks, designs, and (where relevant) patents;

• deeds of transfer or agreements with developers, employees, and external parties;

• proof of creation/development (e.g., in software projects);

• agreements within a group (IP holding structures, intra-group licenses).

2) Licenses and contracts

Many companies use IP on the basis of licenses (software, content, technology). In that case, it is important to know:

• whether the license is transferable in the event of a change of control;

• whether exclusivity has been agreed;

• what restrictions apply (territory, intended use, term);

• what grounds for termination there are and what costs are involved.

3) Infringement risks and ongoing disputes

A key question is whether the company is (unwittingly) infringing on the rights of others or is itself vulnerable. For example, in the case of:

• trademark infringement or likelihood of confusion with competitors;

• use of images, texts, or music without the correct rights;

• claims involving (former) employees who co-created and believe they are the rights holders;

• software with open-source components that activate reuse conditions.

Damage claims: why IP risks have an immediate financial impact

IP issues often quickly translate into damage claims or costs. Examples include:

For the buyer, these are not only “legal” risks, but above all business continuity risks. If the core product can no longer be delivered, or if a brand name is lost, sales can come under immediate pressure.

That is why IP risks in the deal are often mitigated through:

Goodwill: the “invisible” value often attached to IP

Goodwill accounts for a large part of the price in many acquisitions: the value of customer relationships, reputation, team, scalability, and growth expectations. IP is often the carrier of that goodwill:

• a well-known brand is directly linked to customer confidence;

• unique technology or software enables growth;

• a strong portfolio of content or designs accelerates sales.

If it later transpires that the brand does not belong to the target, or that the software is not legally ‘clean’, the goodwill may decline in value. In that case, the buyer has effectively overpaid for value that is not sustainable.

Practical considerations for buyers and sellers

Without going into legal depth, but with an eye for reality, here are some useful checkpoints:

• Make an inventory: which IP is crucial for turnover (brand, software, data, designs)?

• Put ownership in order: are registrations, domains, and accounts in the name of the correct entity?

• Check the development chain: are there contracts with employees/freelancers in which rights transfer and confidentiality are properly regulated?

• Review licenses: are there change-of-control clauses or non-transferable contracts?

• Scan for claims: are there letters, takedowns, disputes, or signs of conflict?

Conclusion

Intellectual property is often the core of the value and the core risk in a company takeover. Proper legal due diligence helps to determine whether the target actually owns what it is selling, whether the use of crucial assets is permitted, and whether there are any risks of damage claims or disruption to business operations. Because goodwill relies heavily on brand, technology, and distinctive character, IP is not a side issue but an essential part of a healthy deal. Those who identify IP at an early stage and clearly record agreements on this subject increase the chance of a successful acquisition without unpleasant surprises afterwards. An IP lawyer in particular knows what to look out for and ‘sees’ the partly invisible ‘rights or lack thereof’.