In 2021, mergers and acquisitions (M&A) activities across the globe recorded a staggering US$5.9 trillion in value, shattering records both in the United States and the world. The number represents a 64 percent increase compared to the value reached by global M&A deals in 2020. 

One cannot take a deep dive into a discussion of M&A without plunging into the topic of intellectual property and data privacy. 

IP assumes a critical role in M&A. This is especially true with M&A deals within the technology sector, which surpassed the US$1 trillion mark for the first time in 2021. 

This is not to say, however, that IP does not play as huge a role in M&A transactions in other industries such as pharmaceuticals and media. It does. 

“IP plays a significant role in the value totality of every company,” said Divina Ilas-Panganiban, a partner at Quisumbing Torres in Manila. 

So what kind of IP portfolio is an enterprise looking for in a company that it plans to acquire or merge with? 

“This really depends on the strategic reasons and business case for the acquisition or merger,” said Joyce Tan, managing director at Joyce A. Tan & Partners in Singapore. 

“The IP portfolio should be a set of valid IP assets that are relevant or contributable to the future plan or growth of the enterprise,” added Nuttaphol Arammuang, partner and head of IP at Rajah & Tann Asia in Bangkok.  

“For a manufacturing company, the IP assets an enterprise is looking for should be patent registrations for the core technology in the countries where the enterprise has set up or planned to set up its production base. For an e-commerce business, the IP assets can be a social media account or online market platform as well as the evidence of trademark registrations over these names in the key countries,” he explained. 

Tips for handling IP and data privacy matters in M&A 

Companies undergoing, or about to undergo, an M&A process must take note of IP and data privacy and protection matters that accompany the transaction and are advised to undertake the following: 

• The buyer needs to understand whether the IP they look after is actually vested in the target company that should have the right to continue to use the IP after closing. 

• Any IP material to the target company should be checked if the same was developed by employees or third-party contractors.  

Buyers should review applicable documents assigning ownership of IP developed for or on behalf of the target.  

“Sellers are usually asked to provide copies of the IP assignment agreements executed by its employees and contractors that develop IP for or on behalf of any target company,” said Panganiban. 

• Look into the following issues: how mature and well-looked after the IP portfolio is, how much revenue generation can be attributed to it, where the IP portfolio places the business in terms of competition in the marketplace, anticipated lifespan of the IP portfolio relative to the investment required for the acquisition or merger, potential for regeneration of the IP portfolio and potential commercial vulnerabilities  

• Buyers must also be aware of any incumbrances and liabilities attached to the IP, which must be addressed in the sale and purchase documentations. 

• Check on past, existing, or potential disputes arising from the IP of the target to evaluate the legal risks associated with the transaction.  

“The acquirer may suffer huge losses if it takes the place of the target company in an existing dispute arising from the target’s IP rights,” said Panganiban.  

• Ask for the appropriate measures the company has taken to protect sensitive IP assets from an insider or third party, if the IP is key to the M&A deal. According to Arammuang, sensitive IP assets include know-how, copyright and trade secrets, where the registration of ownership is not required and therefore ownership becomes arguable. Evidence of proof of ownership is also required. These include evidence of first creation, blueprint, original work, among others. 

• Review the target’s IP licenses, whether the target is the licensee or the licensor. 

• In the case of a merger, each party must disclose the IP management system they are using and discuss the similarity and differences of each party’s system and platform.  

“Each company’s IP manager or IP lawyer must be involved in the discussion. Then, the parties must select a common platform to be used and referred to by both parties going forward,” noted Arammuang. “This is to ensure that they will discuss on the same page.”   

• Each party in the merger must also disclose the relevance of each of its IP assets to the company’s business function or business sector. For example, the company may state, “Patent A is used for the manufacturing process of Product X, Patent B is used to support the packing process of all products, and Patent C is planned to be used for the new line of products in the next two years.” 

“Any research projects in the pipeline must also be disclosed and brought to the discussion. Once this information is disclosed, both parties will have a clearer picture of the entire IP portfolio of the company. Inputs from the business side of both companies are required at this stage to identify each other’s business plans and agree on the future business plan of the company after the successful merging by taking into consideration each party’s IP portfolio as well as understanding the strength, weakness and opportunity of the company based on the combined IP portfolio,” Arammuang added.  

Discussions may also include the following: key IP assets that should be maintained, the redundancy of IP assets including pending patents, and research projects between the two parties that should be abandoned, suspended or combined.  

• The parties should develop a single roadmap on IP assets and business plan. It should include the following: 

1. The company’s business plan and existing IP assets which are relevant or contribute to each item of the plan, including the action plan for the utilization of these IP assets 

2. Loophole technology or loopholes in research projects relevant to the company’s business and need to be fulfilled by additional research, cross-licensing or technology transfer 

3. Cost projection on maintenance of the company’s IP assets, including the cost for recordation of assignment of ownership from one owner to another after the merger 

4.  List of unutilized IP assets  

5. Persons who will handle the company’s IP portfolio going forward 

• Sellers and buyers should know if the privacy policies and procedures of the company it plans to acquire or merge with are executed properly. They must also determine if the seller’s policy allows the company to transfer information to a third party in connection with a corporate transaction. Due diligence must be conducted on the target’s privacy and data protection. 

“Be prepared to deal with any deficiencies,” said James Gong, a partner at Bird & Bird in Beijing. “This is particularly so after we have seen real cases where the buyers were penalized for violation of privacy laws by the target companies that have been purchased.” 

In the Philippines, said Panganiban, non-compliance or non-showing of compliance with data privacy regulations may expose a business entity to the following: compliance and enforcement orders, cease-and-desist orders, temporary or permanent ban on personal information processing, payment of fines (though the Philippines’ National Privacy Commission has yet to release its schedule of fines) and/or civil damages, when appropriate.  

In an M&A deal, it is the business enterprise which acquired the target company, that will eventually be at the receiving end of all these. 

“In order to mitigate risks, the transaction agreement can obligate the parties to implement measures to remedy the situation going forward after closing,” said Panganiban. “In particular, the agreement may call for adequate protection to enable the acquirer to implement a new data protection management/governance structure that is also suited to rectify existing gaps under applicable data protection law.” 

When an M&A deal involves different jurisdictions 

• “A consistent and globalized strategy with a well-established and concentrated IP management system with local support is key to make sure that the IP portfolios will be well protected,” said Gong. 

• Identify and prioritize issues that are key to all the jurisdictions involved in the M&A transaction. 

The buyers should do this while taking into account the IP portfolio’s maturity and how well it is looked after, the revenues it can generate, how it contributes to business competitiveness, its lifespan in connection with the investment required for the M&A, its legal and commercial vulnerabilities and other factors.  

“Address them in an initial sweep across all such jurisdictions,” said Tan. “Then depending on the outcome from each jurisdiction, further address them in stages in a cascading or knock-out approach, allowing judgments to be made on how further to advance the issues in each jurisdiction.”  

• Engage an international law firm or regional law firm to handle multi-jurisdictional M&A matters. 

The company must look not only into the firm’s expertise in IP, but beyond it as well. In particular, it should check the firm’s capabilities in taxation, international trade, personal data protection and other matters which may come across in IP due diligence. 

IP due diligence 

Due diligence, by both the seller and buyer, and at each level throughout the deal-making period, is very important. Hence, parties must review and understand the findings from due diligence.  

“Findings of IP due diligence – including on the state of regulatory compliance – can affect the value proposition and expectations of, accountability for and risk allocation in relation to and consequently the financial dynamics of the M&A transaction,” said Tan. 

“Due diligence lays the foundation for a successful M&A. Due diligence findings may affect reps and warranties, purchase price, indemnities and even the final purchase decision,” said Gong. 

“As IP registration is on a country basis and depends on various criteria under the local laws, a cross-check with IP lawyers in overseas countries may be required, especially for the multi-nation M&A,” added Arammuang. 

Panganiban stressed that due diligence and risk assessment can only be undertaken if documentation is provided.  

“For data privacy for example, if the target is unable to produce the complete information or documentation regarding data protection management or governance structure, the acquirer will not be in a good position to reasonably assess whether the target has taken sufficient measures to comply with applicable data protection law. It may also be difficult for the acquirer to evaluate whether data protection risks are properly managed,” Panganiban explained. 

Which is why IP lawyers and attorneys should really be part of M&A negotiations. 

IP lawyers and attorneys at the M&A negotiating table 

Panganiban mentioned the many benefits of having an IP lawyer and/or attorney around in the course of an M&A transaction: 

First, an IP lawyer can confirm if a certain IP right is stable and of value.  

Second, he can search the patent registry and file wrapper of a local patent to know if the relevant technologies of the target company do not have flaws. If a relevant technology is devoid of flaws, this means it would not be invalidated in whole or in part.  

Third, he can check whether the required maintenance forms are submitted on time to the local authorities. Timely submission proves that the target’s trademark registrations are active and subsisting.  

The IP lawyer can also monitor and facilitate the transfer process of IP assets. One upside of this is that possible delays in the IP acquisition and transfer process are avoided. According to Panganiban, it may take time for trademark and patent assignments to be effected and recorded at the national registries. It also serves both the seller and the buyer if mistakes in the transfer process and risks are minimized, thanks to the IP lawyer or attorney who took his place at the M&A negotiating table. 

“In addition, fast changes to technology and the newly emerging IP rights have driven change to IP laws and procedures in many jurisdictions. Such change can be very fast and not even be recognized by those who are not practicing IP regularly,” said Arammuang. “Therefore, to secure the company’s best interest, the involvement of IP lawyers and attorneys in the M&A negotiations is strongly recommended.”   

“IP lawyers are playing more and more prominent roles in M&A negotiations especially when the parties are negotiating key terms like warranties, price, indemnity and others,” Gong added. 

Indeed, M&A activities across the globe are increasing rapidly, putting IP lawyers and attorneys at the forefront of such transactions and thus, magnifying the critical role of IP and data privacy in the runup to the closing of the deal.  

“The design thinking that needs to drive – and hence structure and navigate – such an M&A transaction would not be well-served by approaching IP as an external piece artificially grafted onto the deal, even as a tail that wags the dog,” said Tan. “It needs to be the core that radiates to the distal reaches of the transaction.” 

- Espie Angelica A. de Leon