Today the market gives tremendous worth to intangible assets which consist largely of intellectual property[1]. Intellectual property (IP) is the divisible, intangible group of assets that is one of the largest asset classes that a company holds. Intellectual property is also becoming recognized in almost every form of transaction type. Accordingly, it is crucial to be mindful of how intellectual property plays into transactions.

IP has especially become a meaningful value driver -especially to mergers and acquisitions (M&A) transactions. The criticalness of IP for a prospering M&A should not be overstated since it comprises myriad intellectual property (IP) issues.

M&A transactions lead a legal entity either to expand or to go down in size -basically by the consolidation of multiple into one or one taking the ownership or operating units of the other(s). Either way, both contain pursuing deals and transferring others' assets and rights, which gives particular importance to IP issues in mergers and acquisition transactions.

The growth in e-commerce and the digital era are the main components that comprise the value that the market attributes to IP today. In fact, European Intellectual Property Office (“EUIPO”) has carried out studies on the contribution of intellectual property rights (IPRs) to the economy and the results were outstanding. According to the EUIPO, intellectual property industries generate 45% of the total economic activity in the EU and IPR intensive industries are accounted for most of the trade.

In addition, the aforementioned highly divisible character of IP has created the tendency for companies to benefit from it more, according to their commercial values. Thus the status-quo of IP has gained prominence especially in commercial activities -with a particular emphasis on mergers and acquisitions.

Mergers and acquisitions involve a number of IP issues. When a merger or acquisition transaction is at the negotiation process, certain key issues must be addressed. The process of holding an investigation to foresee financial and legal status of the target business is called, as is known to all, “due diligence”, but holding a separate due diligence dedicated to IP, would help the buyer not only to address which of the intangible assets will be within the power of disposition, but also to avoid prospective disputes. It is crucial to detect not only present but also potential problems. Therefore, undertaking an IP due diligence would help address the issues pre-transaction or the issues that may supervene after.


“The theory behind due diligence holds that performing this type of investigation contributes significantly to informed decision making by enhancing the amount and quality of information available to decision makers and by ensuring that this information is systematically used to deliberate on the decision at hand and all its costs, benefits, and risks.” notes CE Chapman on Conducting Due Diligence.

Given the fact that IP involves a number of rights within, such as patent rights, copyrights, trademarks, trade secrets, software, database rights and so on, not all of them are registered rights. Additionally, through IP due diligence, the buyer gets to know about the status of the information, what they are buying and what they are expected to acquire. On that account, auditing portfolio to assess all of the entries of a company would be necessary to detect pros and cons given the fact that IP itself is considered as a “risk allocation issue” by itself.

Furthermore, during and after the M&A procedures, there are possible and probable disputes that may arise which would lead to exposure problems. In the event of pending litigations, third party claims, licensing agreement obligations, exclusivity, existing liens or encumbrances, security measures regarding data protection, cross-border transactions and so forth may disable the buyer to exercise its' power of disposition. M&A transactions that involve IP have a higher risk of exposure to allegations of infringement or potential liability.



During M&A negotiations, IP due diligence is usually brought up either too late in the process to be effective or not at all, whereas essentially it should be conducted early in the process. Strategically an earlier timed due diligence would help take the right action and also to determine IP proactively.


The scope of IPRs is quite wide as stated before. In that vein, the scope of IP assets interconnect with the nature of the company that is about to become the target.

“In order to undergo a meaningful and goal-oriented IP due diligence, one must first understand the target company and its business. What is to be acquired -the whole company or only a part of it? Extremely important for the identification of the relevant points to be examined are the economic goals of the planned acquisition. Is the transaction intended to strengthen the investors' IP portfolio? Answering these questions is an important prerequisite for targeted IP due diligence.” says Dr. Winkelmann.

Spotting the necessary IPRs that concern the target enterprise, and categorization of these rights, would make the risk assessment much more qualified.


Sufficiency of assets mean the purchased assets constitute the necessary amount that the company needs to conduct its' business. In order to create the basis for the sufficiency of assets, it is important to understand the IP structure of a company.

First there is “Company IP” which includes IPRs such as registered IPRs and unregistered IP such as trade secrets, know-how and so on. This is the IP asset class where the company basically sells its own assets. Then there is “Transferred IP” which is owned by the target and needs to be transferred to the buyer as a part of the transaction. Last but not least, there is “Retained IP” which is typically license.

When these three all come together, they create the basis for the sufficiency of assets which constitute all of the IPRs that the company needs to operate its business.

Please note that, if the transaction is a carve-out, IP issues are especially intensive. Addressing whether the IP in question is owned by the target and if so, adjusting whether the right will be transferred is of vital importance.



            A preliminary level is to make an inventory of every right that is registered, and to verify the ownership. Checking the registered rights from the concerned registries -depending on the jurisdiction- would be the first step. Since registration confers an exclusive right to use and provides legal certainty, identifying the beneficiary is of great importance.

            Ownership of the IP generally sticks with that entity or person who developed it, at least this is the most common case. What is more to that would be, the right to use and the freedom to operate. Having said that, possibility of the other parties involved having the right to use that IP is always there.

Freedom to Operate

It is also crucial to see the scope of the registered rights such as patents, and whether they cover the products or services that the company is acquiring. Making sure they have the freedom to operate is actually more important than having a registry.

It should be noted that the usage terms are not always to same for the people involved.

Licensing Agreements -or Other IP Agreements-

A key issue to investigate would be those agreements that concern IP since it is highly probable for those to have a counter-effect on the buyer. Complications often occur in the event of existing licensing agreements. The asset in question may be within the disposition of a third party pursuant to that agreement. The obligations rising out of these agreements would limit the buyer's exploitation of those particular IPRs.

Regarding this, it is of great importance to ascertain IP licenses are assignable since there may be third party consents required in order to transfer target businesses' licenses. If the licensor's consent is needed for license rights to continue post-closing, the relationship between the licensor and licensee will be required because obtaining consent may pose challenges. Therefore, provisions on non-assignment clause are highly relevant and important to check regarding the type of M&A.

However, it should be noted that IP terms and licenses may be subject to agreements which are not always identified as “license agreements.” These may be subject to IP assignment agreements, commercial agreements, cross-licenses, transition service agreements and more of the like.

Considerations on whether there are any license obligations or protective and restrictive provisions is also a requisite because it is highly likely to have a counter-effect on the buyer, following the closing.

Intangible Assets as Collateral

Hereinbefore,  IP is an intangible asset of the target business. Intangible assets are more difficult to insure when compared to tangible assets. However, according to Jenna Ross, “In just 43 years, intangibles have evolved from a supporting asset into a major consideration for investors – today, they make up 84% of all enterprise value on the S&P 500, a massive increase from just 17% in 1975. In a survey of institutional investors by  Columbia Threadneedle, it was found that 95% agreed that intangible assets contain crucial information about the future strength of a company's business model.”

Herewith, tendency to seize IP as collateral has become more frequent. “Business transfers also fall into the category of intangible based financing.” Says Marc-Andre Mahue. It is often conducted through liens and encumbrances. Any existing lien and encumbrance on IP need to be disclosed by the target to potential buyers. Notwithstanding, ascertaining the existing collaterals is generally possible through diligently investigating, since target businesses may not always reveal data in good will, in practice.

Thereof, investigating and addressing the beneficiaries of the IP and also the existing liens and encumbrances during IP due diligence will be precisely decisive for buyers' judgement. Releasing liens and encumbrances has to be delt with post-closing at the latest.

International Transactions

Worldwide interdependence has grown remarkably which led cross-border trade between countries to increase significantly. Together with the fact that intangibles have become a major consideration for investors, the market has profoundly inverted. The growth in international transactions and structural changes came along with complications as a natural consequence.

When an M&A transaction is cross-border, approaches and interpretations to legal regulations have to become multilateral as well. It is important to address what kind of products and services the target provides and in which jurisdictions.

It should be noted that, especially IP differs significantly between different systems. As an example, in some countries IP licenses have to be registered in order to be obligatory for third parties who obtained the license, according to other legislations, it can very well be without notice. Meanwhile, IP laws in some countries do not require licenses to be registered at all.

Another matter to point out would be the protection mechanisms some countries provide even to applications for registrations while some do not. Different jurisdictions in cross-border transactions must be regarded in order not to forfeiture rights.

Herewith, a scrutinized investigation and taking action on balance is the key to eliminate further disputes particularly when the transaction involves a foreign element.

Verification of Validity

            Risk assessment matters for protection from present and prospective disputes and to eliminate the risk of infringement claims. However, pre-transaction or post-transaction, there are key matters that need to be controlled periodically. Especially with the registered rights, in order to maintain the acquired rights, making sure the necessary maintenance fee payments have been paid and the renewal filings have been made is substantial. Post-transaction, the buyer must ensure that records have been verified, updated renewal process is concluded, fees have been paid and prescribed time for related operations has been -and is being- complied.


Risk Management on the Payment

In light of these important issues, a risk management at the payment point should also be made. Escrow is basically a financial and a contractual arrangement in which a third party holds and disburses the money after the rightful actions of the parties in accordance with the agreement.  It also eliminates post-closing claims for breaches that may occur during purchase agreements. It should be stated that escrow is a very common procedure that is used in most M&A transactions.

When there is a particular issue regarding a company's intellectual property, for the buyer to insist upon a certain amount of escrow to be set aside for that particular claim will be a hold back for the seller. How much is the right amount of fund to set aside, length of the period for when the escrow will be released, the procedure for release of escrow and basically how claims are made are going to consist the backbone during negotiations on escrow regarding IP assets of a company.

As aforementioned, IP issues during M&A transactions are highly worthy of notice and scrutiny. Thus, insisting on using an escrow for the claims that concern IP would be a great measure of safety.  


To conclude, holding an exclusive intellectual property due diligence during mergers and acquisition transactions is the way to conclude a successful agreement. Diligently ascertaining the disclosed IP is the best way to determine the value of the targets' assets and also to drawback potential liability from future claims by competitors and other parties.

There are so many aspects of the IP due diligence; timespan, identification, sufficiency, ownership, freedom to operate, existing IP agreements, liens and encumbrances, cross-border transactions, validity checks, risk management on the payment and so on. IPRs need risk assessment because not all of them could be found through registries and there are lots of players involved. Yet a successful transaction can be concluded as an outgrowth of time prioritization and an organized, comprehensive scrutiny.


1 Because the IP value market today is astimated to be about According to a U.S. Department of Commerce report from March 2012, U.S. intellectual property today is worth approximately $5.06 trillion—equivalent to 35% of the GDP. A more recent and comprehensive Sonecon report suggests that the total value of patents, copyrights, and the R&D that produces them is a staggering $9.2 trillion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.