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IP Representations and Warranties

A previous post introduced representations and warranties (“Reps”), describing the main functions they serve in an M&A deal and how they might be made more broad or narrow by a party to the transaction. Reps serve the important role of memorializing the state of the target business at the time of the transaction, making the representing party accountable for the accuracy of any included statements.

For some businesses, Intellectual Property (“IP”) assets are a valuable set of assets that need to be addressed in the representation and warranties document. The buyer will typically seek representations and warranties from the seller about the ownership, validity, and transferability of key IP assets. These three topics are the primary focus areas for the IP due diligence review of the target.

In any transaction with IP assets, there are some standard representations and warranties encountered with respect to the intellectual property. The seller generally seeks Reps that are limited to matters that would impact the buyer’s ability to close the transaction. This can include payment of the purchase price, however arranged, and the buyer’s legal authority to enter and consummate the transaction. The buyer usually does not have to provide any Reps regarding its own IP assets.

The buyer will want the same assurances about the seller’s ability to enter and close the deal, and will expect the seller to make Reps that indicate so. Getting closer to the heart of the deal, the buyer will also want Reps from the seller that illuminate the quality and health of the assets to be acquired. The seller’s representations and warranties need to completely and accurately list all claimed IP rights, whether registered or unregistered. Specific assurances about those IP rights should be provided, which would usually fit in one of three general areas.

First, that the target company actually owns the listed trademarks, patents, copyrights, or other intellectual property, and that ownership right is currently valid and enforceable. These facts are highly important to a buyer for obvious reasons. Without valid and enforceable ownership rights to IP assets, the buyer cannot expect to exploit those assets for economic gain.

Second, the buyer needs to be assured that the target is not violating the IP rights of any other person or entity. This inquiry will help the buyer to assess the expected risk of litigation if it acquires the target, and if there is or has been any such violation, the expected value of the damages. Finally, some of the Reps will address whether the seller has any knowledge of any third parties violating the IP rights of the target company. Again, this will help the buyer to gauge litigation risk and expected expenses. All of these issues should be thoroughly explored during the due diligence period, so that both parties can get a clear picture of the status of the IP assets involved before making the final version of the agreement and closing the deal.

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