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RECOVERY
M&A RISKS
Your best defence against IP claims Traditional R&W policies can fall short of providing claims protections. Here’s why a standalone IP policy is needed… B Y K R I S T I A N K O L S A K E R A N D A N G U S M A R S H A L L , CFC Underwriting
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ntellectual property (IP) has caused a dramatic shift in the valuation of companies. Intangible assets, including IP, now make up anywhere from 70% to 90% of a typical company’s balance sheet. As a result, IP often plays a significant role in an acquisition. How can buyers protect their investment against IP infringement allegations arising from past or future activities? When an acquisition takes place, the buyer usually obtains representations and warranties (R&Ws) from the seller regarding the company or assets being acquired. Representations are essentially statements of fact at a point in time. They typically address certain historical circumstances, not future issues. Accordingly, the buyer is usually able to seek indemnity from the seller for a breach of representation only if the issue that caused the breach occurs before the representation is given, and discovered after the transaction has closed. In most instances, R&Ws will include statements in relation to the target compa36
February/March 2021 | Canadian Underwriter
ny’s IP. It’s common for the seller to rep- reason. The extent to which a company resent that the operations of the target’s infringes a third party’s IP rights canbusiness do not infringe, misappropriate, not easily be discovered through due or violate any other party’s IP rights. diligence; and due diligence will never To protect against financial loss result- eliminate infringement risk. This is priing from a breach of R&Ws, buyers are marily because of resource constraints increasingly turning to R&W insurance. in searching for relevant IP rights from While this affords IP infringement pro- a sample of millions; also, it’s impossible tection, its extent varies depending on the to anticipate spurious or opportunistic scope of the IP R&Ws negotiated between infringement allegations. the seller and the buyer. Consequently, sellers are cautious in Differences in bargaining positions can providing broad IP representations in reaffect the scope and breadth of all R&Ws, spect of the target company’s infringement including IP, which is especially relevant of third-party IP. Including qualifiers to when acquiring a company in a compet- representations such as “…to the seller’s itive auction. A potential gap can exist knowledge...” and materiality qualifiers between the protections provided under are a common way to reduce significantly the IP representations (and consequent- the ability of the buyer to claim against the ly under the R&W insurance policy) and seller for a breach of representation. the exposure brought about by an IP inIP insurance offers a solution because fringement allegation made against the it will respond to any allegation of IP inacquired company. fringement, regardless of whether the seller’s representations are limited in any way. Filling the gaps IP infringement R&Ws are heavily ne- Prospective IP infringement exposures gotiated in transactions, and for good Acquired companies are exposed to IP
