Due diligence for tech M&A in Taiwan

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 target company is usually requested to provide detailed information of the technology and IP assets to be transferred, including but not limited to registration certificate of IP rights; relevant licence, development and labour agreements with contractors or employees if the technology and IP assets are not exclusively owned or developed by the target company; pledge agreement (if any); protection measures adopted to protect and maintain the enforceability and entirety of the technology and IP assets; and disputes or potential disputes arising from the technology and IP assets.

In comparison with due diligence for mergers or share acquisitions, which puts more focus on the performance of whole target company, the due diligence investigation for carveouts or asset purchases tends to place the emphasis on whether the assets to be transferred have any de jure or de facto defects resulting in the buyer not being able to acquire and use such assets free of encumbrance. In addition, buyers often elect to retain specific technology teams to conduct relevant technology investigation and assessment.

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 registration information on IP rights may be retrieved from the following websites:

• Patents: the Taiwan Patent Search System (https://twpat1.tipo.gov.tw/tipotwoc/tipotwekm). The information available for public search includes the:
• patent or publication number;
• title;
• issue or publication date;
• application date;
• application number;
• certification number;
• international patent classifications;
• inventor;
• applicant;
• attorney;
• priority number; and
• patent right change, such as licence, pledge, assignment, trust and citation.
• Trademarks: the Trademark Search System (https://twtmsearch.tipo.gov.tw/OS0/OS0101.jsp?l6=en_US&isReadBulletinzh_TW=true). The information available includes:
• trademark name;
• application number;
• priority;
• applicant;
• attorney;
• class;
• goods and services;
• registration history;
• reproduction of the mark;
• textual analysis of logo; and
• current registration status.
• Rights in circuit layouts: the Taiwan Patent Search System (Chinese version only) (https://twpat1.tipo.gov.tw/tipotwoc/tipotwekm). The information available includes:
• application number and date;
• name of circuit layouts;
• publication date;
• certification number and issuance date;
• case status;
• brief explanation;
• creator;
• applicant;
• attorney;
• classified organisation; and
• technique and function.
• Plant variety rights: the COA website (https://newplant.afa.gov.tw/English/Search). The information available includes:
• publication number;
• application number;
• Latin name;
• denomination;
• application date;
• publication date;
• rights status;
• plant variety rights coverage;
• applicant’s information; and
• denomination’s pictures.

Moreover, a buyer may check whether a target company involves any IP rights litigation or disputes from conducting public searches on Law and Regulations Retrieving System operated by the Judicial Yuan (http://jirs.judicial.gov.tw/eng).

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?

Registrable IP rights include patent rights, trademark rights, plate rights, rights in circuit layouts and plant variety right; but copyright and trade secrets are not registrable.

As for the registrable rights, public research on registration information is the most important measure to confirm the enforceability of the rights and the target company is always requested to provide relevant licence, development, pledge, non-disclosure and non-competition agreements for review. The buyer will check whether the currently registered scope is complete and sufficient and whether there are potential risks that such registered rights may be subject to infringement claims from competitors or other parties.

With respect to non-registrable rights, due diligence will focus on whether the target company fulfils stipulated requirements for acquiring such rights. For copyright, the target company is required to provide documents evidencing the creation of the work and licensing and pledge agreements (if any) for review. As for trade secrets, the target company is usually requested to prove that: the secret is not known to persons generally involved in the information of this type; the secret has actual or potential economic value owing to its secretive nature; and the owner has taken reasonable measures to maintain its secrecy.

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

According to the applicable laws, liens may be granted on patent rights, trademark rights, copyrights, rights in circuit layouts and plant variety rights, and no written documents are required. However, the lien holder will not have locus standi against any third party unless the grant of liens is registered with the competent authorities. The lien registration with respect to patent right, trademark right, and plant variety right may be available from the websites indicated in question 5. As for liens granted on copyright, public information is available from the TIPO website (https://www.tipo.gov.tw/lp.asp?CtNode=6974&CtUnit=3459&BaseDSD=7&mp=1).

The required application documents and registration process varies for different rights. As per TIPO’s internal guidelines, the lien registration and release thereof shall be completed within one month (for trademark rights) or 20 days (for patent right) after TIPO’s receipt of the complete application package. In practice, unless otherwise agreed by the parties, the release of liens is usually stipulated as a condition precedent to the closing.

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

According to the applicable laws, if an employer and employee or a principal and contractor enter into agreements on the ownership of employee-created and contractor-created intellectual property and technology, the agreements will govern. Thus, to ensure that the target company owns the titles to such intellectual property and technology and the accrued IP rights, especially for non-registrable copyright and trade secrets, the target company is required to provide any written agreements executed with employees or contractors stipulating that the target company owns the right to any employee-created and contractor-created intellectual property and technology. In practice, a buyer will further check whether the target company has adopted any notice scheme for employees and contractors filing written notice to the company on the creation of the intellectual property or technology.

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

Since the transfer or assignment of licensed intellectual property is essentially the same as transferring the original licence agreement between the licensor and the licensee to a third party, the licensor’s prior consent is required, and the transferee has no locus standi against any third party unless the transfer is registered to the competent authority. There is no difference between the transfer of exclusive and 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?

As for software that may be categorised as patent right, copyright and rights in circuit layouts, see question 9. In Taiwan, it is less common for legal due diligence purposes to request the target company to provide code scans, but a buyer may retain professional technical team to do code audits if necessary. With that said, once a codes scan shows that open source code is used, the legal team will review whether the terms of use for the open source code have been complied with.

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

In addition to legal due diligence, a technology due diligence is strongly recommended to see whether the technology and IP assets to be transferred is sufficient and complete for meeting the buyer’s business needs. If the target company used the assets to be transferred to engage in any projects sponsored by government authorities, the buyer needs to closely investigate the restriction or prohibition stipulated in the sponsorship plan. In addition, if the assets or technology to be transferred involves the collection of personal data from the public, such as big data, the buyer should further focus on personal data protection issues.

Further, the Financial Supervisory Commission (FSC) officially stated on 3 July 2019 that ‘security’ as defined under the Securities and Exchanges Act includes cryptocurrencies that have security features. The cryptocurrencies with security features means cryptocurrencies which use cryptography and distributed ledger technology or other similar techniques to represent a value which may be stored, exchanged or transferred in a digital form, and such cryptocurrencies have liquidity and investment nature, which means that a person invests his/her money in a common enterprise or plan and expects profits solely from the efforts of the issuer of the cryptocurrency or a third party. Thus, if the assets to be transferred include security tokens or if fundraising is made via security token offering (STO), the buyer should further check the compliance with the relevant securities laws and regulations, including but not limited to the upcoming STO rules, which are still under the promulgation process.