Due diligence for tech M&A in India

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?

The typical areas with respect to technology and IP assets are:

• determining ownership of the asset to start with (eg, whether the entity that is being acquired, or from which the asset is being acquired, legally created the asset or acquired the asset; or whether assignment agreements with proper clauses have been executed and the stamp duty has been paid);
• determining if there are any third-party components or open source codes forming part of the assets that may impact its complete ownership or use or royalty obligations, etc;
• ascertaining whether there are any infringement claims from third parties with regard to such assets; and
• whether the technology or asset is protected by the grant of a patent and, if not, whether it is likely to infringe any patents.

There is no difference in due diligence as far as technology and IP assets are concerned. However, general due diligence in the case of mergers or share acquisitions involve various other aspects, such as title to the shares and authority for the merger or sale.

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?

Patent and design searches may be conducted for technology assets. In addition, court databases may be searched for verifying if the party or person from whom the technology asset is being acquired is party to any litigation.

A public notice may also be issued out of abundant caution.

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?

Copyrights, patents, trademarks and designs are all registrable. Trade secrets are not registrable but can be protected through non--disclosure agreements. The typical due diligence undertaken is to ascertain:

• if the intellectual property is registered in the name of the seller or if any application for registration has been made by conducting online searches;
• if the intellectual property has been acquired from a third party;
• whether there is an instrument of assignment, with proper assignment clauses and stamp duty paid; and
• whether there are any ongoing disputes with regard to the intellectual property for which searches are conducted in the publicly available databases and court records.

Further, relevant teams and inventors are interviewed to ascertain if they were or remain aware of issues such as open source code, third-party components and prior art searches.

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

Yes, these can be created. However, there is no specified procedure for creation of a security interest under the intellectual property laws, except for patents and designs. Under the Patents and the Designs Act a specific section is prescribed for recognition of rights of a mortgagee, and that provides that an application must be filed in form 16 and form 12, respectively, with the controller to record rights obtained as a mortgagee. Due diligence to ascertain if any such interests have been created would entail a review of all contracts and agreements, interviews with the bankers and management, and inspection of the register of charges maintained by the registrar of companies, etc.

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

For contractor-created intellectual property and technology, as stated above, it is critical to ascertain whether there is an instrument of assignment, with proper assignment clauses and consideration, and stamp duty paid. As far as employees are concerned, the contract of employment must be verified to ascertain:

• if stamp duty has been paid;
• whether it is truly an employment contract or an independent contractor contract;
• if consideration has been paid; and
• most importantly, whether the contract provides that employee or employer shall be the first owner of the work, etc.

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

These would depend on the licence available with the licensee and any restrictions thereupon. Exclusive and non-exclusive licences are treated very differently in India, as the name suggests. Non-exclusive licences would not entitle the licensee to any sole rights to use or exploit the technology, whereas exclusive licences would.

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?

Typically, the due diligence undertaken involves interviewing the coders, perusing contracts with the coders and getting third-party specialist teams to ascertain if any third-party or open source code has been used. Target providing code scans is based on mutual agreement and on a case-to-case basis.

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

These are all new and emerging areas of laws in India, and thus the laws are not yet developed. However, the government is examining these new and emerging areas of law. For example, in the case of drones, the Ministry of Civil Aviation has finalised a national drone policy and permitted civil use of drones from 1 December 2018. Similarly, for artificial intelligence the Ministry of Industry and Commerce set up a task force that issued a report in March 2018.