Drafting Intellectual Property Representations and Warranties in M&A Agreements | Practical Law

Drafting Intellectual Property Representations and Warranties in M&A Agreements | Practical Law

Drafting considerations for intellectual property (IP) representations and warranties in M&A transactions.

Drafting Intellectual Property Representations and Warranties in M&A Agreements

Practical Law Legal Update 4-554-2986 (Approx. 4 pages)

Drafting Intellectual Property Representations and Warranties in M&A Agreements

by Practical Law Intellectual Property & Technology
Published on 14 Jan 2014 • USA (National/Federal)
Drafting considerations for intellectual property (IP) representations and warranties in M&A transactions.
Intellectual property (IP) attorneys often advise clients and corporate attorneys on IP-related issues in corporate transactions, including drafting and negotiating IP-related representations and warranties in M&A transactions.
Like other representations in an asset, stock or purchase agreement, IP-related representations and warranties are statements of fact and assurances made by the target company or seller that:
  • Disclose material information about the seller or target company's IP portfolio and agreements, as well as IP-related practices and disputes.
  • Allocate risk between the parties.
  • Serve as the foundation for an indemnification claim in case of a breach.
  • Impact a party's obligation to close the transaction or right to walk away by terminating the agreement before closing.
IP representations and warranties vary in length and complexity based on the particular transaction. Factors to consider include:
  • The nature of the relevant IP assets, including whether the transaction involves a diversified IP portfolio or only certain key IP assets.
  • Whether the transaction involves the assets and liabilities of a mature company or a start-up company.
  • The parties' relative bargaining positions.
  • The specific facts learned through or concerns raised by the buyer's due diligence investigation.
Although the representations and warranties must be tailored for particular transactions, the buyer typically seeks representations and warranties concerning:
  • The seller or target company's ownership or right to use the relevant IP, and the sufficiency of the IP assets to operate the business.
  • The IP's validity and enforceability.
  • Relevant IP licenses and other agreements.
  • Non-infringement.
  • Efforts by the seller or target company to protect relevant trade secret and other confidential information.
If the target business operates in certain industries, owns specific types of valuable IP or otherwise relies heavily on IP licensed from third parties, the number and scope of the IP representations may need to be expanded. For example, additional representations may be necessary to address:
  • Material patent rights.
  • Research and development.
  • Material software or other IT assets, including use of open-source software.
In some cases, the representations and warranties may be subject to materiality, knowledge or other qualifiers. For sample representations and warranties with drafting notes including additional guidance, see Standard Clauses: