Due diligence for tech M&A in Switzerland

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?

In general terms, due diligence with respect to IP assets is aimed at revealing the value of the target company’s intangible assets by means of analysing the relevance of intellectual property for the valuation of its business. The scope and depth of a due diligence depends on the relevance of intellectual property for the valuation of the target company’s business and, hence, its impact on the value of the transaction.

The typical areas of due diligence undertaken in Switzerland include the identification of business-related intellectual property of the target company and the review whether the IP rights used for its business are actually owned by the company. If the intellectual property used by the target company is owned by third parties or shareholders, due diligence includes the analysis whether the target company has concluded sufficient licence agreements for a continued use of such intangible assets (and may include an analysis as to the prerequisites for the transfer of the intellectual property to the target company, if such transfer is contemplated).

The due diligence undertaken with regard to ownership includes the assessment whether the IP registrations are up to date, whether a clear and complete chain of title can be identified and the review of whether there are security interests or liens created over the intellectual property. The key focus of due diligence undertaken with respect to IP assets is to ensure the title to and scope of protection of the IP assets. The buyer has to analyse whether the IP rights are owned by the target company and validly registered in the countries where the company is conducting business.

Further areas of due diligence include the review of any IP-related litigation by and against the target company. The aim is to verify whether any third party is, or is suspected to be, infringing the target company’s IP rights and to verify that the target company is not infringing a third party’s IP rights (freedom to operate).

The sale of a company by way of a share deal entails the transfer of the company as a whole, with all assets and liabilities - which means that assets or liabilities do not have to be transferred individually.

Conversely, this also means that any liability in the company must be detected and assessed, because it will have a negative impact on the target - and, thus, also on the value of the technology. Accordingly, in transactions in the legal form of a share deal, a comprehensive due diligence with respect to all of the company’s intellectual property must be undertaken.

In an asset deal, to the contrary, the buyer acquires specific assets (and, if so agreed, liabilities) from the target company, often in a series of individual, although simultaneous and connected transactions. The due diligence of IP rights undertaken for transactions in the legal form of an asset deal is, therefore, limited to the IP asset or assets the buyer intends to acquire.

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?

The public searches that are customarily performed when conducting technology M&A due diligence in Switzerland include the verification of ownership of registrable IP rights in the IP registries. The Swiss Federal Institute of Intellectual Property (IPI) operates a database, which allows searches for registered Swiss and European patents and patent applications, Swiss trademark and design registrations and applications as well as registered topographies.

Further public searches that a buyer would typically perform when conducting IP due diligence include the database of the Swiss commercial register to ascertain publicly available information on Swiss registered company names, as well as publicly accessible internet domain name databases operated by Swiss registries.

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?

In Switzerland, registrable intellectual property include trademarks, patents, designs, topographies and some specific indications of source, while copyrights (rights of authorship) are not registrable. There is no copyright registration system under Swiss copyright law. With respect to the registrable type of intellectual property, due diligence includes the verification that the respective IP rights are registered in the name of the target company through searches in the relevant databases.

With regard to non-registered (whether non-registrable or not) technical know-how, data and secrets, key due diligence areas will typically include employment and employees as well as advisers (contracts, non-competition agreements, remuneration and incentives), organisation (measures in place to preserve the confidentiality of know-how and data) and customers (customer base and behaviour, customer contracts).

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

Swiss law provides for the possibility of granting security interests over IP rights. The types of security interests that are typically used in relation to intellectual property under Swiss law are the granting of a lien (or pledge) on intellectual property or the assignment of intellectual property for security purposes. The provisions governing the creating of security interests over IP rights are set out in the general provisions of the Swiss Civil Code (SCC) and in the individual codes governing specific types of intellectual property (eg, the Federal Act on Patents for Inventions, the Federal Copyright Act, the Federal Trademark Act).

The Swiss Federal Trademark Act, as well as the Swiss Federal Design Act, specifically mention the possibility to create a lien on trademark and design rights. The creation of a lien over other IP rights is governed by the general provisions of the SCC and, in general terms, requires the transfer of the property rights to intellectual property. As a rule, property rights to intellectual property are transferable under Swiss law. There are, however, exceptions to this rule including, for example, name and company name rights as well as moral rights to intellectual property, such as the right to be named inventor. These rights are considered as non-transferable under Swiss law.

The lien granted on a registrable intellectual property may be recorded in the pertinent IP registries. If a lien is not recorded, it is not effective vis-à-vis a bona fide acquirer of the underlying IP right. Accordingly, due diligence must include the search of the applicable registers to ascertain whether intellectual property is subject to a lien. For the cancellation of the recorded lien, IPI requests an explicit waiver by the pledgee, which must be provided by the trademark or design right owner with a written request for cancellation.

Under Swiss law, IP rights can further be transferred for security purposes. The assignment of intellectual property for security purposes is governed by the general principles of contract law. A security assignment entails the transfer of full ownership to the security interest beneficiary. The security interest provider typically requires an exclusive licence in return for transferring ownership in the IP asset. The release of a security assignment over an IP right or technology assets requires that ownership of the IP right or technology asset be transferred back in accordance with the provisions applicable to the individual IP rights. Due diligence undertaken with respect to intellectual property that has been transferred by the company for security purposes includes the review of the underlying security assignment agreement and an analysis whether the company has ensured the continued use of the intellectual property based on a licence agreement.

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

Under Swiss law, employee-created inventions, designs and software for computer programs created during the course of work while performing an employee’s contractual duties belong to the employer, provided that nothing else is agreed in the employment agreement. Employee-created inventions, designs or computer programs created during the course of work, but which are not part of the employee’s contractual obligations, must be reported to the employer if this has been agreed in writing. The employer can then decide whether he or she wants to obtain the invention, design or computer program in question for a reasonable consideration. Accordingly, due diligence undertaken with respect to employee-created intellectual property includes the review of the respective employment agreements in place with employees.

There is no general rule under Swiss law whether contractor-created intellectual property belongs to the contractor or the customer (principal) but, rather, this depends on what is agreed in the contractor agreement. Hence, due diligence includes the review of the respective contractor agreements to ascertain information whether it has been contractually agreed that any inventions or designs originated by the contractor shall be transferred to the target company.

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

Under Swiss law, a licence is a contractual right granted by the licensor to use certain IP rights according to the provisions set forth in the licence agreement. Therefore, the transfer of a licence from a current licensee to a new licensee generally requires approval by the licensor. This is not the case if the licence has been designated as transferable in the licence agreement. If an approval for the transfer of a licence is necessary, the licensor can give it in a form-free way (ie, no formal requirements apply). These same principles apply both to exclusive and to non-exclusive licences.

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?

Under Swiss law, software is usually protected by copyright. Unlike trademark and patent protection, copyright protection arises when work is created, and there is no copyright register.

In Switzerland the types of software due diligence include the due diligence of the target company’s own software and the due diligence of the third-party software used by the target company. In relation to the company’s own software, the key element of due diligence consists of the verification of the ownership of or adequate licensed rights to use the software.

To that purpose, due diligence includes the review of the originator of the source code underlying the software and whether the copyrights have been effectively vested in or transferred to the company. If the source code was developed by an employee while performing his or her employment activity and contractual duties, the copyrights belong to the employer. If the source code was developed by a non-employed contractor, copyright transfer agreements are necessary to ensure the company’s title in the software. If several persons contributed to the development of the source code, a software is considered to be co-owned. As a rule, co-owners may only use the software with the consent of all owners.

With respect to third-party software used by the company, due diligence typically includes the review of the relevant licence agreements to ensure continued use of the software. It is not customary in Switzerland for targets to provide code scans for third-party or open source code software.

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

Additional areas of due diligence undertaken with respect to companies with a digital business model include the due diligence of the company’s data handling. Data handling due diligence includes the review whether the company complies with the applicable data protection regulations of the relevant jurisdictions, as well as the review of the company’s data security measures against the misuse of data and to protect business and trade secrets.

One important legal aspect with respect to artificial intelligence is that under Swiss law only individuals can be the inventor of a patentable invention or the author of copyright protected work. Based on current Swiss law, it will, therefore, be difficult to protect inventions and works created by machines using artificial intelligence. For this reason, in IP law it will become unavoidable to adapt legislation to a certain extent to new technologies such as artificial intelligence or the internet of things.

With respect to big data, one legal aspect to consider is that under Swiss law, data (at least raw data) is not protected by IP rights and there are also no other ownership rights to data by operation of statutory law.