BY André J Maré AND Hugo Biermann
A guide to IP due diligence investigations in South Africa
IP is often a key element in commercial transactions, whether this involves purchasing shares in a target company or acquiring a business outright. Because of this, a target’s IP should be carefully and critically analysed through an IP due diligence (“DD”) exercise.
We explore below the most important considerations for an IP DD exercise under South African law.
What are the target’s IP assets?
An obvious starting point of an IP DD is to verify the existence and status of the most common statutory IP assets of a target. These commonly include trade marks, patents and registered designs, but may also include other types of IP assets such as plant breeders’ rights.
Most of the data around these assets should be readily available for an IP DD. We suggest that when conducting this phase of an IP DD, the focus should be on the bibliographical information of these assets to confirm that they are in force and, if so, until when.
Another element to look out for is asset ownership, including verifying assignment (transfer) recordal with the appropriate authority and ensuring that the target entity either owns the assets or has sufficient control over the owner of the assets to ensure successful transfer to the purchaser. Obviously, many of these aspects are dictated by the structure of the proposed transaction.
Both targets and purchasers are advised to use this phase as an opportunity to verify the accuracy of the target’s IP data and to correct any deficiencies following the IP investigation. We recommend that the investigation deliverables be designed so that they can be used to ease implementation of the transaction, should it be successful. One simple example may be to draft the IP schedules so they can be easily uploaded to the purchaser’s IP management system, which saves a lot of cost and effort during transaction implementation.
An element that is often overlooked in this phase is the domain name portfolio, web pages and social media accounts of the target. These assets can be difficult to conduct due diligence on because of privacy laws. as most of the South African “WhoIs” database that lists domain name owners was redacted following implementation of the GDPR. However, care should still be taken to verify these assets and consider any possible risks, as web pages and social media accounts can, of course, be extremely valuable assets of a business. An important point to look out for is the “ownership” of domain names, which are often registered in the name of a service provider or employee rather than in the name of the target entity.
A practical point to consider is also to ensure that full access details (user names, passwords, linked authentication keys/accounts and the like) are properly investigated to ensure practical transfer of the domain names, websites and social media pages is possible during close.
Copyright remains a difficult but extremely important aspect of IP DD projects. Copyright works of a target entity range from relatively low value assets (artwork creation, brochures etc) to, as we find more and more often, the crown jewel of the transferring assets. This is especially true when the target is a tech-heavy entity with bespoke software such as computer programmes or mobile applications.
Virtually all transactions that we have recently worked on have some level of software element. This included seemingly straightforward transactions in the agricultural industry (where a vital computer program was developed and was the cornerstone of the operation of the target) and a delivery service (where bespoke software and applications drove the logistics functionality of the target). In both cases, the software was by far the most valuable aspect of the target assets without which the transaction would not have been contemplated by the purchaser.
When considering copyright elements, the provisions of the underlying agreements are of supreme importance. The South African Copyright Act, 1978 is an archaic piece of legislation that is not ideal for managing the complexities of modern tech developments by employees or consultants. Clients are therefore advised to manage these elements under contract and a common finding in IP DD investigations is that standard IP clauses may be used in agreements, but they are not appropriate to secure the desired outcomes of the purchasers.
A common example is that many agreements for consultants or development houses do not include an effective assignment of copyright into the hands of the intended owner, meaning that the IP ownership of the underlying copyright is, at best, uncertain. In many cases, the copyright remained the property of the developer, which comes as a great surprise to the target who believes that they have paid for the asset and therefore own it (a common misconception is that payment alone is sufficient to ensure transfer of copyright, which is not the case).
Ownership allocation can become very complex in co-development and requires deep consideration. For example, it is common for internal development efforts of employees to be supplemented by external consultant efforts. These efforts may be further complicated by the introduction of third party licenced software modules, or open source code.
The ownership in all these elements is often treated differently under law and should be aligned to ensure that the IP is housed in the correct entity or entities, and that any transfers meet all formal requirements.
Exchange control approval remains a thorn in the side of many IP-heavy companies in South Africa, ranging from start-ups to multinationals. Approval from the South African Reserve Bank is required for the transfer of any IP owned by a South African exchange control resident to a non-resident (or for the licensing of IP to a non-resident). Practically, this means that there is a process to be followed if, for instance, IP is to be transferred from a South African IP developer to an overseas entity. This is particularly problematic with intra-group arrangements where the intention of the parties is for IP to be developed in South Africa and housed in another jurisdiction.
Any service agreement or development agreement leading to the creation of IP and subsequent transfer (or licensing) thereof needs to be carefully considered to determine if exchange control approval was required and if it has been properly obtained. A common finding is that the correct approval was not obtained which means it needs to be retrospectively corrected – to the extent possible – as a condition precedent (CP) or post-closing obligation in the transaction, which leads to risk and uncertainty in closing. Additionally, the target may inadvertently be guilty of an offence and fine which needs to be dealt with in the transaction warranties.
As South Africa has a fairly stringent exchange control regime when it comes to IP. This is an aspect that foreign purchasers are often not aware of and is a common sticking point late in negotiations where any form of IP is involved.
Highly regulatory industries
IP does not exist in a vacuum and it remains important to consider the IP in the context of not only the transaction, but also within the specific industry. Highly regulated industries in particular tend to require additional knowledge to understand where and how the IP fits into the wider assets of the target. Recent examples include biotechnology, pharmaceutical, agricultural and financial transactions.
For example, there may be financial/insurance regulatory registrations of product names (read: trade marks) that need to be considered in the continuous exploitation of transferred “financial products”, which can either delay the transaction or, in one recent example, was not possible leading to a forced re-brand (and a devaluation of the transferring assets).
If the target operates in a heavily regulated field, it is strongly recommended that appropriately skilled IP professionals be sought out who have the requisite knowledge and skills in the target industry.
It is anticipated that IP DD work will continue to be important and will become more nuanced as individual industries evolve and become more IP heavy. Purchasers and targets are advised to seek out appropriate IP counsel to assist with these investigations as early as possible in the transaction process, to avoid any “nasty surprises” during the advanced stages of a deal.
For more information, please contact:
André J Maré
IP | Executive
+27 82 440 1517
IP | Patent Attorney | Senior Associate
+27 81 482 3447