Legal news and trends for Canadian in-house counsel and c-suite executives
Issue link: https://digital.canadianlawyermag.com/i/1181006
www.canadianlawyermag.com/inhouse 27 for a few months. "We had to work with the third party to figure out for the seller what the retrospective fee would be and figure out what the annual royalty fee would be for us," says Felicissimo. The type of due diligence required in mergers and acquisitions can vary quite widely, according to Jung-Kay Chiu, partner and national leader of patents and IP transactions at Norton Rose Fulbright Canada LLP. Chiu recommends following a three-tier approach, starting with an evaluation of the chain of title of the IP. "If there's one particular piece of IP such as a patent for a drug that's important to the valuation of the company, one would want to dig further than a public database to track the chain of title from the original inventors and make sure there is an unbroken chain," he says. It is also necessary at this stage to check that the IP is in good standing. If certain pieces of IP are found to be more valuable than others, it may be advisable to increase the level of scrutiny, which Chiu refers to as the second tier of diligence. This involves a deeper dig into the history of the IP and the examination records surrounding it. Chiu's third tier, the most onerous and That's your way of valuing that transaction," she says. Ensuring that a company you wish to purchase owns all IP directly is good practice, because complications can arise if a subsidiary company is involved. When there are multiple subsidiary companies, one may own the source code and another may own tech licences, for example. In one such case, Pethealth acquired a company in Europe, initially not realizing that the company had a separate wholesale subsidiary. "Certain trade secrets and proprietary information from the wholesale business were being used on the retail side," says Sidhu. "We were only interested in the retail side, but we had to buy certain portions of the wholesale IP to ensure we owned the business and could run it successfully." Felicissimo was involved in an acquisition last year of a European-based software provider in the car-rental space. Due diligence turned up a payment that couldn't be placed, so further digging uncovered a third-party vendor that was using the company's programming code. A proper licence was not in place, so the deal had to be put on hold time-consuming form of diligence, may be required in situations involving possible infringement, freedom to operate and validity. Looking beyond the IP of the acquisition target, lawyers also need to be sure that they are not infringing upon a third-party IP. "It's really important to prioritize the intellectual property and get a good under- standing of where the value lies in the transaction," says Chiu. "How important is the IP or certain pieces of IP? That will naturally flow into what level of diligence you need to do." Chiu was recently involved in a case that raised concerns about the chain of title surrounding a patent when a disgruntled researcher claimed that his idea had been stolen. Even though the patent had been granted, Chiu and his team re-opened the examination with the U.S. Patent Office, which delayed the transaction but ultimately provided comfort for their client. "Given that this was a key piece of tech, we needed comfort around the fact that this patent would stand up so, in that case, we had to dig down quite far into the allegations," says Chiu. "In order to bullet-proof the piece, we needed to determine that the patent was sound."