Did you know that, according to the Startup Centrum Turkey Startup Ecosystem Investment Report, 54 startups in the gaming industry received investments within the last year? That 46 startups that offer artificial intelligence solutions also received investments? Or, that data and analytics took third place with 39 startups?
Legal and financial due diligence exercises are crucial in a merger & acquisition ("M&A") transaction, and examining of a target company's assets includes examining intellectual property ("IP") rights.
Today, we see that gaming companies combine their own worlds with other virtual worlds and offer very different content to the players, such as the inclusion of heroes from the movies, concerts, independent of the game.
In an era like this, what is the importance of a company's IP rights and IP assets?
Currently, concepts such as artificial intelligence, blockchain, NFTs and the metaverse are part of our daily vocabulary, demonstrating that IP and intangible assets outweigh tangible assets in terms of value, regardless of a company's sector.
IP or IP assets may refer to various assets, including a company's trademarks, patents, designs, copyrights, trade secrets or know-how. To assess the real value of a transaction in an era where technology and intangible assets are at the center, it is important to conduct detailed IP due diligence in M&A transactions.
I. Know the business.
The first step is to identify the motivation behind the transaction. The parties may not always have a specific type of transaction in mind. Therefore, it is important to understand the parties' objectives. Legal counsel can offer appropriate advice, only after defining a transaction type.
II. Know the role of IP in the transaction.
The roles of IP rights vary according to the nature of the sector and the target company's product or service. A patent would likely be more valuable than copyright for a biotech company, whereas the opposite might be true for a software startup. It is always important to identify which IP rights the business needs to operate.
Whatever the nature of the sector and the target company's product or service, understanding how IP fits in. its business strategy and the transaction is vital. Understanding the role of IP will provide useful insight into the company, which will come in handy when assessing the company's dynamic internally, as well as with its competitors, customers, partners and suppliers.
III. Know the key IP issues.
Conducting IP audits or searches is as not as simple as it seems. Successful IP due diligence is more than detecting missing information in a trademark portfolio. Although proprietary searches are necessary, to complete basic information of registered IP rights by way of a simple review is unfortunately not enough.
In Turkish law practice, IP due diligence often reveals that the target company may have been using IP rights without a registration and/or valid license agreements. It is always important to remember that using unregistered IP rights and/or using IP rights without a valid license agreement may lead to serious infringement claims.
Some IP issues may become significant even years after a transaction's closing. Potential issues can be anticipated and curtailed by understanding the target company's business, trends and trademark vulnerabilities prior to, during and after the transaction.
IV. Know the owner.
One of the most important requirements of IP due diligence is the proprietor check. Sometimes, in transactions that include several parties such as parent companies, group companies and subsidiaries, the IP scheme may not be clear and straightforward.
In practice, it is also common to see standalone entities incorporated to own all IP rights, i.e. IP holding companies within a group. In an IP "dream-scheme", we would expect the target to own the IP right, but this is sadly not always the case.
Making a list of all related parent companies, group companies and subsidiaries, as well as the group's IP holding companies is highly recommended.
Needless to say, the same goes for IP rights developed by the target company's employees. In practice, there are also many independent consultants who develop IP rights for companies based on agreements executed by and between the target company and the consultant. A proprietor check is also recommended in such cases, since an employee or consultant may have claims on the IP rights they developed.
V. Do not buy a lawsuit!
A superficial IP due diligence may impose IP claims on the buyer that could have been avoided by conducting an in-depth IP due diligence.
It is always important to ask whether there are any potential IP disputes and to ascertain that the target company's IP rights are not subject to any legal challenges. It is recommended to know the third parties and make sure that the target company's activities do not infringe their IP rights.
Under Turkish law, a target company's trademarks, patents or designs can be invalidated due to third party lawsuits. The target would have to cease using the relevant IP right, otherwise the opponent can file a claim for trademark infringement to cease further use.
Regarding the target company's IP related pending lawsuits and potential damages, specific indemnities should be considered for any infringement claim, potential loss and damages based on an unauthorized trademark use or loss of rights of the challenged trademarks.
If lawsuits are initiated, which is a decision based on the significance of the challenged IP rights and whether they are crucial to the business, it could cost the parties involved years and a significant amount of funds before a judgment is reached. Do not forget that time and money are always valuable!
In Turkish law practice, the Turkish Patent and Trademark Office records sometimes reflect that a target's IP rights were seized. It is recommended to make sure that these seizures are lifted. If seized IP rights are actively used in the target company's operations, it is strongly recommended that the seizure of these IP rights to be lifted as a condition precedent to closing.
If the seized IP rights are not used in the target company's operations, it is important to state this warranty in the transaction. Indemnification provisions are always beneficial.
If the target fails to pay its debts and defaults for any reason, the pledgees may apprehend the pledged IP rights and obtain their receivables from the target.
If case the target company owns or has the authority to use all of the IP rights needed to run its business, it is important to ensure that the contemplated M&A transaction will not affect its right to continue using these IP rights.
In other words, avoid buying a lawsuit!
VI. Adopt today.
A properly conducted IP due diligence is never limited to addressing the above issues only. More necessities may arise, depending on the type of IP rights, jurisdiction, parties and/or type of the transaction.
In fact, an IP due diligence process may also reveal more potential issues. However, today, even a compact analysis of key IP issues can sometimes help avoid serious consequences.
Given the changing and wider landscape of IP, it is time that we all adopt a smarter practice of IP due diligence!
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.
