The nation is witnessing an increasing trend towards mergers and acquisitions. One of the most important factors in ensuring the success of an M&A deal is for the acquiring company to conduct proper "due diligence," lawyer-speak for the process whereby the potential buyer evaluates the target company and its assets.
While lawyers have long focused due diligence efforts on tangible assets, including land, buildings, and equipment, little attention has been paid to intangible assets, such as intellectual property, which can in some instances be as or more valuable to the company’s operations and profitability.
Due diligence should extend to a wide range of intangible assets related to intellectual property, including business information, employee know-how, licence agreements, marketing and distribution agreements, domain names and even intellectual property which is not legally protectable, e.g., business ideas. Like customer "good will", these types of intangible assets can be important elements of a target enterprise’s value, although evaluation of their worth is not an easy task.
Intellectual property itself is a term that has traditionally referred to copyrights, patents, trademarks and trade secrets. The concept of industrial property is further understood as including industrial designs, utility solutions, layout-designs of semi-conductor integrated circuits, trademarks, trade names, geographical indications, trade secrets, and rights to repression of unfair competition under the IP Law.
Well-known trademarks established on the basis of use, however, may be protected independent from registration procedures. However, a claim for protection of a well-known mark is complex, as it is normally made during cancellation or infringement proceedings. Therefore, the protection afforded by registration is more effective in most ordinary cases.
Unlike industrial property objects such as industrial designs and trademarks, objects which are protected by copyright do not need to be registered to afford protection. In this respect, Vietnamese law is consistent with international definitions of copyright which provide that copyright adheres in an original work of authorship published or fixed in a particular medium. Registration of the copyrighted work serves purposes of providing notice and evidence of the copyright.
When conducting due diligence into these types of intangibles, a lawyer must ask two fundamental questions: (1) what are the key rights and intangible assets needed to operate the business successfully? and (2) how can the business be assured the benefits of those rights and assets following the acquisition?
The lawyer then must confirm licences and ownership records, evaluate contracts and licensing agreements, and check for existing litigation and infringement notices. Issues uncovered in the course of due diligence may significantly alter the terms of an acquisition. For example, if the prospective buyer discovers the target company’s trademark is in use by another firm and rights cannot be secured to the target company, this could lead to significant costs involving re-branding and re-working marketing and promotional materials. Such information, revealed in the course of due diligence, could dramatically affect the target company’s value in the eyes of the prospective investor.
IP rights owned by another division within the target group would also need to be assigned or licensed to the target if the acquiring investor wants to secure these rights. Lawyers conducting due diligence must also ensure target company employees have signed confidentiality agreements and agreed in writing to assign inventions to their employer. This prevents critical copyrights, patents, and trade secrets from leaving the company with departing employees. For instance, a company might sell off a software division, only for the buyer to learn that it owns the copyright in original software but not in any modifications after the developer became an independent contractor.
In addition to ensuring control of IP rights before and during a merger or acquisition, lawyers must also consider what happens after the sale. Following any acquisition, patents will usually need to be re-assigned, licence agreements may need amendment, and notices about the transfer of rights may need to be issued.
Depending on the type of intellectual property, the lawyer must determine whether a particular form of intangible asset is transferable as a matter of contract or under the IP Law. For instance, most industrial property objects such as trademarks, patents, and industrial designs may be transferable, but the moral rights in a copyrighted work cannot be transferred, except under certain circumstances, pursuant to the IP Law.
In short, investigating IP issues in the course of due diligence is of paramount importance during an acquisition. Though often time-consuming and resource-intensive, solid IP due diligence will lessen risk, make valuation more accurate, and give an investor a better understanding of the target company’s business.
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