Due diligence for tech M&A in Mexico

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 a share acquisition or merger dealing with technology and IP assets, the due diligence that is undertaken typically includes the review of:

• corporate documentation (deed of incorporation, by-laws and amendments thereto, powers of attorney, corporate books and registries, current distribution of capital stock of the target and subsidiaries, among others);
• a list of licence agreements for the use of patents, trademarks and trade-names, either licensed by or to the target and subsidiaries;
• licences and ownership documents regarding the relevant technology and IP rights;
• a list of technical assistance, services and know-how agreements, either licensed by or to the target and its subsidiaries;
• a list of trademarks, patents and commercial denominations registered before the IMPI on behalf of the target and subsidiaries or applications thereof and current status;
• copies of all standard contracts used by the target or subsidiaries (or any agent or distributor of any of them) to grant licences and which involve payments to the target or subsidiaries on other than a one-time, flat fee basis (ie, contracts that involve payments of a per customer or percentage of revenue or usage-based fee);

a list of any trade secrets on which the target´s business depend;

• copies of all confidentiality and invention assignment agreements with current and former employees and consultants;
• information on any third parties infringing on the target’s intellectual property rights;
• information on any intellectual property litigation or other disputes;
• information on any open source or third party’s software incorporated by the target company;
• review of relevant foreign investment registries; and
• mergers, acquisitions, consolidations or joint venture agreements, including agreements relating to any sale of assets or business in the past five years, among others.

In an asset purchase dealing with technology and IP assets, due diligence will be focused on the ownership and maintenance of the asset, including any payments of fees, royalties or annuities regarding the relevant patent or technology, all liens, charges or attachments, along with all contracts, agreements, indentures or instruments related to the relevant assets.

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?

Public searches and available public information regarding patents in Mexico is done through the IMPI website (www.gob.mx/impi), including patent applications, granted patents, granted utility models and granted designs. Also, the search engine SIGA (siga.impi.gob.mx) may be used for searches regarding publications in the Official Gazette related to intellectual property. Some of the relevant results may include granted patents, administrative proceedings, writs and related payment documents.

Regarding copyrights, searches may be conducted through MARCANET (marcanet.impi.gob.mx) where any copyrights, trademarks, commercial names, among other information, is available to the public. Notwithstanding the foregoing, an on-site search at the offices of the IMPI and Indautor is advisable to gather the most recent information.

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?

The following types of intellectual property are registrable under Mexican law:

• Industrial property or patents: this type of intellectual property includes any invention with inventive technical features, as long as it has an industrial application and novel characteristics and includes utility models, design rights and industrial designs. The following may not be registered as industrial property assets: plant varieties, the human body or any living matter regarding human bodies, any animal breeds, all biological or genetic material existing in nature and biological processes for obtaining and reproducing plants and animals.
• Copyrights: computer programs, radio and television, music, cinematographic, artistic or literary works and any compilation works (including big data), among others.
• Trademarks: word marks, design marks, combined marks, three-dimensional marks, advertising slogans and trade names. Slogans and trade names are not registered, but published for the purpose of establishing a presumption on their adoption and use in good faith.
• Appellations of origin: these may only be registered on the Mexican government’s behalf and include any geographical region of Mexico that creates a special designation for a product originating from it.
• Layout design for integrated circuits: electronical arrangements designed for an electronic device.

Reservation of rights are not registrable assets; however, the Mexican government provides a protection to such rights by securing a reservation of rights certificate before Indautor. These rights include: names of serial publications whether printed or electronic, names of shows broadcast on television, radio or the internet, original characteristics (physical and psychological) of characters, artistic names and original advertisement mechanisms.

Trade secrets and confidential information are not registrable; however, Mexican regulation recognises the right to protect confidential information, such as through the use of non-disclosure agreements or other similar arrangements. Confidential information may be construed as industrial secrets whenever such information is used in the manufacturing method or distribution process of products or services or whenever non-obvious information is used by a technical expert to achieve competitive or economic advantage. Industrial secrets are protected under Mexican law, and therefore the non-authorised use of industrial secrets may be punishable through the imposition of fines or the payment of damages.

See questions 4 and 5 regarding the due diligence typically undertaken with respect to the foregoing.

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

Liens and security interests may be granted on a patent through a non-possessory pledge agreement, which shall be formalised in writing and registered before the IMPI to be enforceable against third parties and to establish a right of pre-emption for the secured party. In the case of copyrights, moral or economic rights may not be directly subject to liens or security interest; however, an indirect lien may be obtained by granting a security interest over the proceeds of the commercial exploitation of the economic rights. Such security interest may be granted through a pledge agreement or a guarantee trust agreement.

The enforcement of such security interests requires a formal resolution dictated by a competent Mexican court, except for the case of a guarantee trust agreement, where in addition to the foregoing an out-of-court expedited process may be agreed by the parties.

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

According to federal labour law, employers own any industrial property rights to all inventions developed by their employees as long as the invention is within the scope of their employment, and the main purpose of the employment is the development of such invention. Regarding copyrights, the moral rights are owned by the employee but the economic rights must be divided equally between the employee and the employer, unless the employment contract already determines otherwise. The same applies to contractor inventions and copyright works.

Because of these rules, the due diligence process regarding employee-created and contractor-created intellectual property and technology involves the review of:

• a sample of the target’s different types of employment agreements, including definite term or specific job agreements, as well as independent professional services agreements;
• the benefits granted to the employees, either mandatory or at the target’s or subsidiaries’ discretion, indicating granting criteria, costs for the target, subsidiaries and employees, discount form, including any differentiated benefits granted to executives;
• contracts with human resources providers;
• termination policies and corresponding payments;
• labour lawsuits or contingencies and their current status, settlement agreements, arbitration awards, judgments, resolutions or orders in employment matters;
• confidentiality and invention assignment agreements with current and former employees; and
• any labour unions documentation, among others.

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

Except for the requirements mentioned in question 3 above, no additional requirements exist for the transfer or assignment of licensed intellectual property and technology.

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?

Generally, software due diligence is undertaken following the same principles as with any other M&A or asset purchase due diligence (see question 4). Note, however, that the specific transaction and asset particulars may require additional documentation and processes that should be reviewed by the buyer. In some cases the provision of code scans or open source code may be required from the target; if this is the case, an applicable non-disclosure agreement or confidentiality agreement may be warranted.

Additionally, owing to new competition criteria adopted by the Federal Antitrust Commission, when two or more competitors, suppliers, clients or economic agents are involved in a merger, acquisition of control or other similar transaction, and such transaction requires sharing relevant strategic information (such as, inter alia, software and codes), the recipient of such information should not be involved in the strategic decision-making of the company that such recipient represents and should be shared through a third party or a ‘clean team’.

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

M&A transactions in Mexico involving special or emerging technologies, such as artificial intelligence, internet of things and big data, are still relatively new and, therefore, a specific market practice has not yet been established, although general principles and market standards will continue to apply as a general matter. However, purchasers in the transaction will rely heavily on the representations and warranties provided by the sellers and, therefore, drafting of the representations and warranties, as well as potential indemnities to cover breaches or inaccuracies regarding same, will be an important part of the negotiation in the transaction.