Due diligence for tech M&A in Czech Republic

Due diligence

What are the typical areas of due diligence undertaken in your jurisdiction with respect to technology and intellectual property assets in technology M&A transactions? How is due diligence different for mergers or share acquisitions as compared to carveouts or asset purchases?

Due diligence for IP assets customarily includes a detailed analysis of:

• all intellectual property applied for or owned by the target;
• any intellectual property used by the target at any time during the preceding three years, and any licences or other arrangements permitting the target to use such intellectual property;
• any intellectual property owned by third parties, the use or exploitation of which is or may be necessary or desirable for carrying on the business of the target, and of procedures that currently are or may need to be followed to avoid the infringement of any such rights;
• any licences or other arrangements permitting third parties to use intellectual property owned by the target;
• any objections to, or infringement (including alleged) by third parties of the target’s intellectual property and vice versa;
• any circumstances where the benefit, or the right of use, of any intellectual property may be lost or adversely affected (including on a change of control of the target), as well as any fact or matter that might make any of the intellectual property invalid or unenforceable;
• any claims by employees or former employees in any inventions, works or other developments made by such former employees while employed, and any facts or circumstances that may give rise to any such claims;
• any encumbrances or security interests granted in the target’s intellectual property; and
• all disputes, arbitrations, proceedings or settlements relating to intellectual property.

Due diligence for technology assets customarily includes a detailed analysis of the following:

• all IT hardware used, together with details of their ownership and any licences or agreements relating to them;
• all software used, together with copyright ownership in the software, any software licences and access to source code;
• all software or hardware maintenance or support arrangements for the target;
• information on any personal data processed by the target and compliance control with respect to the relevant legislation governing the usage of personal data; and
• any encumbrances or security interests granted in the target’s technology assets.

In transactions involving carveouts, substantial attention is given to the intellectual property owned by the seller’s group outside the transaction perimeter, but necessary for the conduct of business of the target; and IT services provided by the seller’s group to the target, and vice versa, to identify the relevant separation issues that should be covered by the transitional services agreement (TSA) and brand licensing agreement (BLA).

What types of public searches are customarily performed when conducting technology M&A due diligence? What other types of publicly available information can be collected or reviewed in the conduct of technology M&A due diligence?

Due diligence of targets in the Czech Republic customarily involves a search of the following public registers (not technology specific): the Commercial Register, the Trade Licensing Register, the Insolvency Register, the Criminal Records Register, the Central Register of Executions and the Cadastre of Real Estate.

Particular to technology M&A, additional intellectual property and technology databases and public registers are customarily searched:

• the Patent and Utility Model Database, the Industrial Design Database, the Trade Mark Database, the Database of Geographic Denomination and the Appellation of Origin (all enabling search by owner, applicant or originator data);
• the Database of Allocated Radio Frequencies (enabling search only by frequency data, making it time-consuming to perform the relevant search);
• the Database of Undertakings in Electronic Communications; and
• the list of broadcasters, retransmission operators and on-demand audio-visual media service providers.

What types of intellectual property are registrable, what types of intellectual property are not, and what due diligence is typically undertaken with respect to each?

As stated, IP rights under Czech law can be divided into Copyright and Related Rights (not registered) and IPRs (registration principles apply).

Upon submission of IPRs application with the CIPO, the applicant is granted the right of priority, which protects the applicant against subsequent applications for the same and is granted automatically for patent applications, utility model applications and national trademarks applications.

Additional EU and international IPRs protections also exist. The EU trademarks priority claim can be filed using the EU trademark application (which must be submitted within three months following the Czech application). The international right of priority may also be granted, if the international trademark application is filed with the WIPO via the appropriate national office (ie, the CIPO) within six months following the Czech application.

For due diligence typically undertaken with respect to intellectual property, see question 4.

Can liens or security interests be granted on intellectual property or technology assets, and if so, how do acquirers conduct due diligence on them?

Czech law permits liens or security interests on both IPRs and technology assets, with the exception of geographical denomination and appellations of origin.

In the case of IPRs that are registered in public databases or registers (ie, the Patent and Utility Model Database, the Industrial Design Database and the Trade Mark Database), the lien or security right is registered in such public register at the request of any of the parties to the pledge agreement. Therefore, when conducting due diligence, it is possible for acquirers to perform a search of such registers to determine whether there are any liens or security interests registered in respect of particular IPRs.

For technology assets (e.g, a particular hardware or technological equipment) that are not registered in any of the aforementioned public registers, the lien or security right can be registered in a special register maintained by the Notarial Chamber of the Czech Republic, the Registry of Securities. Any notary is entitled to provide, upon request, a copy or an extract of the record in the Registry of Securities or a certificate confirming that a particular asset is free of any security interest.

What due diligence is typically undertaken with respect to employee-created and contractor-created intellectual property and technology?

Due diligence of employee-created intellectual property and technology typically comprises detailed analysis of the following:

• employment contracts (in particular, the definition of the type of work performed by an employee and whether such definition covers all possible employee-created intellectual property or technology);
• any licences provided by employees for employee-created intellectual property or technology; and
• whether employees are authorised to transfer their property rights to third persons per their employment contracts. Due diligence of contractor-created intellectual property or technology typically entails of detailed analysis of work contracts and licence agreements with the contractors relating to intellectual property and technology.

The general rule under Czech copyright law grants employers the ability to exercise property rights over the work employees create in connection with their employment on the employees’ behalf. If the employer desires to transfer such property rights to third parties, the employer must acquire approval of the creator-employee (such permission is considered irrevocable and valid for all future transfers), except for transfer of the business enterprise, where such approval by creator-employee is not necessary.

Under Czech copyright law, for contractor-created work, the contractor is deemed to have provided a licence to the client. Unless agreed otherwise, the contractor remains free to licence such work to third persons, if such licence is not contrary to the legitimate interests of the client. A special rule exists for computer software and databases, which are considered to be employee-created, even if they are contractor-created.

Are there any requirements to enable the transfer or assignment of licensed intellectual property and technology? Are exclusive and non-exclusive licences treated differently?

The general rule under Czech law provides that an IP licence cannot be transferred to a third party without the licensor’s consent. The Czech Civil Code provides an exception under which, unless the parties agreed otherwise, the licensor’s consent is not necessary for transfer of intellectual property as part of the business enterprise (however, in these cases, IP rights cannot be transferred when such transfer is excluded by the relevant licence agreement or by the nature of such IP right itself).

In the case of transfer by way of legal succession, the licence is transferred to the acquirer automatically, unless such transfer is excluded by the licence agreement.

What types of software due diligence is typically undertaken in your jurisdiction? Do targets customarily provide code scans for third-party or open source code?

In the Czech Republic, the software due diligence is typically part of operational or technical due diligence (not legal due diligence). During legal due diligence, we customarily review only licence agreements, and contractor and employee contracts related to the development or licensing of software.

What are the additional areas of due diligence undertaken or unique legal considerations in your jurisdiction with respect to special or emerging technologies?

There is no special legislation for special or emerging technologies in the Czech Republic. Therefore, the Czech law treats modern technologies such as artificial intelligence or autonomous driving systems and software as assets (in line with the general definition of assets under the Czech Civil Code).

New legislation with respect to modern technologies, especially artificial intelligence and robots, is being discussed at the EU level. On 27 January 2017, the European Parliament adopted a report with recommendations to the European Commission on Civil Law Rules on Robotics, in which it urged the preparation of a draft legislative framework relating to the development and use of artificial intelligence within the next 10 to 15 years.