The importance of being diligent: intellectual property in corporate transactions


Financier Worldwide Magazine

January 2019 Issue

Any corporate transaction necessitates diligence. Depending on the type of business, a major share of a company’s value may reside in its intellectual property (IP) and therefore IP due diligence may be an important part of a business transaction. IP refers to intangible assets, including registered intellectual property rights (IPR) such as patents, utility models, trademarks, design rights and domain names, but also unregistered rights such as copyright, trade secrets, databases, unregistered design rights and know-how within the company. The impact of an IP due diligence analysis on the outcome of a transaction can be significant and a deal may even be cancelled if serious legal issues, such as infringement or invalidity of rights, are discovered.

Normally, the main purpose for conducting IP due diligence is to minimise, or at least mitigate, legal risks associated with the transaction. However, if one of the main drivers for the transaction is to get access to or divest certain technology owned by a target company of the transaction, IP due diligence directed at substantial aspects of the target company’s IP may also be used as a strategic business tool to analyse the value of the sought-after technology. Further, IP due diligence with a clear business focus may even contribute to increasing the value of the technology. Hence, even though the main purpose of IP due diligence analysis in connection with a corporate transaction may be to understand and reduce legal risks, the advantages that it may bring in terms of increased value and better understanding of the target company technology should not be neglected. To achieve those advantages, IP due diligence should be directed not only at formal issues relating to ownership of rights, but also at the actual content and the business-relevant aspects of the IP portfolio.

All parties involved in a transaction can benefit from thorough IP due diligence analysis. The potential acquirer or investor needs to know the value of the investment in order to calculate the risk associated with the transaction. The seller, on the other hand, needs to be aware of any potential weaknesses in the IP portfolio of the target company, and be able to properly handle issues or questions that may arise. An IP portfolio in order has the potential to increase the value of the transaction for all parties.

Substantial and formality issues

Several important questions should be posed during IP due diligence analysis of a technology-

based target company. As a starting point, all relevant granted patents, utility models and patent applications owned by the target company must be identified, as well as any licensed patent rights. Their status must be investigated and it needs to be established if said rights correspond to the company’s current and planned market activities. Additionally, it is important to find out whether the target company is aware of any information that may render said rights unallowable, invalid or unenforceable. It must also be ensured that the target company is entitled to the rights and that any previous transfers of rights have been properly documented, as both substantial and formal errors may lead to invalidity of said rights.

Evaluation of the patent portfolio

IP due diligence of a company whose assets are technology-based requires both legal and technical skills. For patents and utility models, the evaluation aims to analyse the scope and validity of the target company’s portfolio, which requires an understanding of the underlying technology.

To understand whether the IP portfolio matches the company’s market activities, it is necessary to evaluate the content of individual granted rights and applications of the portfolio. For example, the target company may have a patent portfolio including patents whose scope of protection has been limited during prosecution, such that the granted patents cannot be used to efficiently block competitors. In the case of filed but not yet granted patent applications, prior art may have come up during prosecution that is likely to hinder the allowance of patents with a relevant scope of protection. In such cases, the IP portfolio may appear strong at a first glance, but a more thorough investigation will reveal significant weaknesses.

The IP due diligence should therefore include reviewing the claims of granted patents to find out how well the scope of the claims covers the technology of interest for the transaction. Furthermore, the prosecution history of interesting patent applications as well as granted patents should be investigated in order to discover potential weaknesses that may later be used by a third party, such as in invalidation proceedings. For pending patent applications, publicly available search reports may be retrieved and reviewed. Any yet unpublished applications should be obtained from the target company for analysis. For key inventions, it may be advisable to perform an independent patentability search to reveal possibly troublesome prior art, in particular if no patents have yet been granted.

The evaluation of the IP portfolio may reveal IP of the target company which is of little interest for the transaction. Identifying such IP is advantageous both from a seller and an acquirer point of view. For the seller, the identified IP may be possible to carve out of the transaction and dispose of differently. The acquirer may be able to negotiate the price and get a head start in cleaning up the IP portfolio.

It is important to remember that patents are geographically limited rights. Hence, the protection scope may be different in different jurisdictions and patents may be in force in one country but not in another. Additionally, it may be investigated if other types of market exclusivity exist, which may offer complementary or extended protection.

For the acquirer, it may also be advisable to develop an understanding of the R&D processes within the target company and thereby identify valuable intangible assets. Visits to R&D sites and interviews with staff are useful tools. In particular, such an approach may help in identifying unregistered IP, including for example confidential information such as trade secrets, know-how and inventions for which patent protection is not yet sought. Since the acquirer may have a different IP strategy in mind for the target company, the due diligence may include evaluating whether IP in the form of confidential information should be kept secret, or whether it would be possible and desirable to aim at obtaining registered IP rights. If confidential information plays an essential role in the target company’s business, it is important to understand which processes are used to protect such confidential information, and identify any weaknesses in the protection of such information. Further, for the seller, a similar approach may also be advisable in order to identify valuable intangible assets which are not protected by any registered IP rights. Such analysis can provide a structured list of unregistered and registered intangible assets, which may be used to further emphasise the value of the target company for the acquirer.

Third-party rights

Apart from identifying and investigating the relevant IP potentially involved in the transaction, a thorough IP due diligence also involves checking for potential conflicts and IP infringements. In addition to any obvious infringement suits or other IP disputes, it should be examined whether the target company has received any licensing offers, warning letters or the like from third parties, as this may indicate that a third party considers that the target company infringes their rights. Information gathered from the target company should be independently verified and evaluated.

A careful due diligence analysis also involves a freedom-to-operate (FTO) analysis to establish whether current and planned product launches and market activities infringe or are at risk of infringing third-party rights. The target company may have had an FTO analysis performed earlier. Although costly, it is recommended that the acquirer considers whether an independent FTO analysis should be performed.

Can problems be solved?

Problems and issues discovered during IP due diligence do not necessarily have to be deal breakers. Many problems may be attended to and remedied, at least to some extent. For example, new assignment documents may be executed and recorded, licences may be renegotiated, and new patent claims may be filed with the authorities. It may even be possible to strengthen the IP portfolio of the target company and thus increase the value of the corporate transaction. As a seller, it may be beneficial to do an IP health check before initiating negotiations relating to a corporate transaction in order to identify and remedy potential risks in the IP portfolio.


If technology plays an important role in a corporate transaction, it is strongly recommended to perform thorough due diligence with respect to the substantial aspects of the IP portfolio. This means examining not only ownership chains, licence agreements and possible encumbrances, but also evaluating how well the IP portfolio is aligned to the business intentions of the transaction, such as evaluating whether the IP portfolio protects the actual products and processes of the target company and how well suited it is for use against third parties. To get an understanding of these aspects, it is recommended to hire an independent IP law firm, in other words a firm which is different from the one handling the IP portfolio on behalf of the target company, to assist in the evaluation. A well-performed evaluation of the IP portfolio not only requires proficient legal skills, but also technical skills and a clear understanding of the business rationale behind the transaction.


Joanna Applequist, Lisa Eurenius and Marcus Gentzel are patent attorneys at Valea AB. Ms Applequist can be contacted on +46 733 811 529 or by email: Ms Eurenius can be contacted on +46 733 811 520 or by email: Mr Gentzel can be contacted on +46 733 811 533 or by email:

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