Due diligence

Typical areas

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 (ie, 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 third-party components or open-source code form part of the asset and may impact the asset’s complete ownership, its use, or its royalty obligations;
  • ascertaining whether there are any infringement claims from third parties with regard to such assets; and
  • whether the technology or asset is protected by a 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 shares and the authority to authorise a merger or sale.

Customary searches

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 to verify 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.

Registrable intellectual property

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 includes ascertaining:

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

Liens

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 intellectual property laws, except for patents and designs. Under the Patents and the Designs Act a specific section is prescribed for the recognition of a mortgagee’s rights, and that provides that an application must be filed in the prescribed form with the controller to record rights obtained as a mortgagee. Due diligence to ascertain if any such interests have been created would include 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.

Employee IP due diligence

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, it is critical to ascertain whether there is an instrument of assignment, with proper assignment clauses and consideration, and whether stamp duty has been 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.

 

Transferring licensed intellectual property

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

Software due diligence

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. Whether the target is required to provide code scans is based on a case-to-case basis by mutual agreement.

Other due diligence

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 law in India, and thus the law is 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 finalised a national drone policy and permitted the civil use of drones from 1 December 2018. Similarly, the Ministry of Industry and Commerce set up a task force on artificial intelligence that issued a report in March 2018.