This case study on the ..Hazel Trade Secret Management tool is worth a read if you are looking into the subject.
Case study: M&A IP Due Diligence & Trade Secrets
This case study focuses on M&A IP due diligence and trade secrets.
It involves a major Law Firm, one of the top UK based law firms as measured by worldwide revenues. The Law Firm has a global team handling a large volume of corporate transactions for a range of diverse clients. It possesses strong transatlantic capabilities and the Law Firm is frequently engaged on cross-border mandates.
Due Diligence:
Although the due diligence process can be time consuming and sometimes overwhelming, especially for a target company unfamiliar with the process, it is a crucial component to significant corporate transactions.
The Law Firm in this case study has a particular focus on M&A due diligence work mostly on the buy but also on the sell side.
M&A transactions typically involve a substantial amount of due diligence by the buyer. Before proceeding with the transaction, the buyer will want to ensure that it knows what it is buying and what obligations it is assuming. It will want to know the nature and extent of the target company’s contingent liabilities, problematic contracts, litigation risks, and much more.
This is particularly the case with private company acquisitions, where the target company has not been subject to the scrutiny of the public markets, and where the buyer has little if any ability to obtain the information it requires from public sources.
What about IP?
Such due diligence exercises naturally include IP.
IP due diligence is essentially an audit to assess the quantity and the quality of IP assets owned by, or licensed to, a company. It should also include an assessment of the IP related risks facing the relevant company plus details of if and how these IP related risks are being mitigated.
IP poses many risks to M&A transactions:
- The value of the deal may reduce.
- The transaction may be delayed while IP due diligence defects are fixed.
- One or more licenses or assignments are necessary to enable the transaction to proceed.
- IP due diligence defects are discovered that result in the deal being abandoned altogether.
What about trade secrets?
Trade secrets are a crucial part of the IP portfolio of most companies, and of course should be included into any IP due diligence exercise.
Auditing the trade secrets of a target company is therefore a crucial part of any such exercise, but one which poses major challenges, given the very nature of trade secrets.
The Law Firm in this particular case study found that in many instances…
- The target company was not properly managing its trade secrets with no clear ownership of the trade secret management process or the secrets themselves.
- Documentation about the trade secrets was poor.
- Access to and access control around its trade secrets was very ad hoc.
- Protection mechanism deployed to safe guard its trade secrets was poor or non-existent.
- There was a lack of any classification of the trade secrets by the target company.
- Details on whether trade secrets had already been shared with 3rd parties was often missing
- Information of any trade secrets belonging to 3rd parties but entrusted to the target company was scarce.
The Law Firm was prompted to update its approach to trade secrets given that the European Council was about to adopt the EU Trade Secrets Directive, and the USA was about to pass the Defend Trade Secret Act.
Old mode of operation:
Prior to making this change in their approach to IP due diligence, the Law Firm was concerned that they were not conducting such IP due diligence exercises thoroughly enough and that trade secrets were somewhat neglected.
They had some issues with the manner in which they were gathering data on trade secrets. They also faced some challenges articulating the trade secrets identified and assessed to their clients in a professional manner.
It was clear from a number of discussions with the Law Firm that trade secrets were handled in a very ad hoc manner in their IP due diligence projects previously.
New mode of operation:
To better address how trade secrets were addressed within their IP due diligence exercises, the Law Firm decided to start their IP due diligence activities much earlier in the M&A process.
Secondly, they created a detailed trade secret identification and assessment process together with associated check lists to guide them when examining any such assets within the target company. This provided the Law Firm with a much better approach for first identifying such assets and then assessing them properly and professionally.
As trade secrets are important but fragile assets, their process also improved their assessment of the risks of IP leakage post-acquisition.
Thirdly, the Law Firm took a trade secret management tool into use, which underpinned their process. They shared their process and the tool with the target company to ensure both sides were better aligned during the actual exercise.
The Law Firm now has a much more structured approach in place, and utilizes this dedicated tool which serves as a central repository for the target company’ trade secrets and allows for that information to be properly sorted. Its key function is to provide the client of the Law Firm with significant information on the trade secrets of the target company, thus allowing the client to really understand the nature of these trade secrets…
- Name
- Type
- Classification
- Owner
- Date created
- Access
- Access level
- Access control
- Shared (if applicable)
- Protection mechanisms
- Last review date
- Legal advisor
- Value
- Expiration date (if applicable)
- Etc.
The benefits:
Although very early days yet, the Law Firm believes that it has greatly improved its efficiency and effectiveness when conducting IP due diligence exercises. The new approach has improved client satisfaction and led to more constructive discussions with the client around the specifics of the trade secrets belonging to the target company.
The fact that the tool underpinning their new approach was a dedicated trade secret management tool was key. The fact that it was easy to install, to configure and to take into use also proved a major USP.
The reporting functionality especially the combination of case specific reports as well as graphical analysis type reports proved of tremendous value.
The technology platform underpinning the tool meant that it was easy in utilize and integrate with the virtual data room platforms they use regularly. In some cases they are still involved in M&A deals using physical data rooms and again in such cases, they envisage that the tool will work well.
As a result, the IP professionals involved in handling trade secrets kept much clearer records of each due diligence step completed and the results of any reviews.
The Law Firm strongly believes that it has greatly enhanced its document management practice when it comes to auditing the trade secrets of a target company.
Final thoughts:
Each M&A deal is unique and every deal has both time and budget constraints. However, I trust that this paper has helped raise the importance of IP due diligence and especially the review of the trade secrets of the target company.
This is an area I believe has been somewhat neglected in the past. However, it is an area which cannot be ignored going forward.
Although this particular case study focuses on M&A deals, IP due diligence is applicable in many contexts, ranging from M&A deals, JVs, VC & PE financing, IPOs, and securitization of IP assets.
Case studies provide a means for highlighting and extracting practical principles and methods for shaping and accelerating progress in solving real world problems.
Although I appreciate that this particular case study is very recent and that I do not yet have much historical data to analyse, I trust that this paper is of interest and of value to anyone involved in IP due diligence work.
Donal O’Connell is the Managing Director of Chawton Innovation Services Ltd. The company’s Hazel Trade Secret Management tool is the one featured in this case study.
