Tuesday, July 16, 2013

The recent commissioning of Konza Technology City as a hub for technology innovators, the explosion of mobile money technology platforms as a business model in Kenya, the establishment of innovation research labs, the incorporation of software development companies and establishment of Nairobi as a preferred hub for technology multinational corporations in Africa are a direct result of this investment by the Kenyan government.

Invariably, there will be an increase in deals in the technology sector where private equity funds, financiers, or other investors will seek to acquire some of these companies so as to benefit from expected economic growth similar to what was witnessed in Silicon Valley.

Intellectual Property (IP) assets will probably be the key assets acquired in these deals and should not be overlooked. It would be important as a first step to understand the structure of the transaction so that an assessment can be made on the transaction’s impact on the intellectual property assets of the seller company. While most people would focus on traditional assets such as patents, copyrights and trademarks, it is hugely important to review any license agreements and other IP or technology use agreements that may be in place, and which are important aspects of the seller technology company’s business. For this reason, it would be important for the acquirer to consider whether the seller company’s intellectual property assets and liabilities (for instance, royalty based agreements as licensee) sit with the seller company or belong to a subsidiary, joint-venture, associated, or holding company. The objective of the buyer company would be to ensure that it obtains ownership, control and right to use over the intellectual property assets.

Proper due diligence of the target company is mandatory, especially because of the risks involved. Buyers must ensure they obtain as much information as possible in the due diligence process, and obtain representations and warranties from the seller on the intellectual property assets owned or licensed by the seller company to reduce risk of unexpected post-closing claims and liabilities. While the Kenyan judicial process has improved it would be prudent to ensure that unnecessary disputes are avoided as the dispute resolution process in Kenya is still dilatory and expensive.

Carve out transactions are common in technology deals and may pose a peculiar problem because the intellectual property assets, including license agreements, may be shared between the seller company and the carved out business of the seller company. The buyer will need to get clarity on what intellectual property assets will be transferred to the carved out company as part of the closing obligations, and take licenses over any other intellectual property assets that will remain with the seller company.

Generally, due diligence of intellectual property assets covers a thorough review of proprietary IP whether registered or unregistered, IP that belongs to third parties and has been licensed to the user, any litigation and disputes, threatened or actual, and a review of the proprietary and licensed IT assets. It is not uncommon to discover that many Kenyan companies, whether large corporations or small to medium enterprises, do not undertake IP audits and hence have no knowledge of the full scope of IP assets they own or have licensed. Registration or protection of significant IP assets may be lacking. In some cases, it is not uncommon to discover that a significant number of Kenyan companies may be breaching key terms of the IT licensed software that they are using or have not entered into clear contracts with consultant developers and employees who developed IT platforms for their businesses. Potentially, this poses a significant risk of exposure to litigation from third parties.

We would always recommend that a buyer requests a clear schedule of all IP assets from the seller and a disclosure of the status of the IP and IT assets in question, as well as a disclosure on the innovation processes in the seller company relating to the IP and IT assets to formulate a due diligence strategy. In short, depending on the information revealed by the seller company, the buyer may decide to conduct a deep or low dive due diligence exercise, or seek very robust representations and warranties. The findings need to be properly reviewed while considering the bigger commercial objective of the buyer. Depending on the value of the IP assets involved, for instance if it relates to patent protected technology, that forms the backbone of the seller company, or which has significant commercial benefit, the deal price may be affected in a negative manner.

Some of the peculiar issues that are common in Kenyan technology businesses on the IP front include:

  • lack of protection of key brands and assets,
    • ignorance of the unregistered IP portfolio of the company (there is no register in place),
  • a lack of clear confidentiality procedures,
  • a lack of visible enforcement strategies leading to acquiescence issues arising in dispute resolution,
  • patent applications that have been abandoned mid stream or on which annuities have not been paid up,
  • unpublished patent applications that are not revealed,
  • missing employee statements of inventorship assignments,
  • general non-use of trademarks,
  • trademark applications that have not been prosecuted to registration,
  • trademark registrations that have not been renewed,
    • gaps or other inconsistencies in the chain of title in relation to recording of changes in title,
  • a lack of IP license agreements between subsidiaries leading to non- use cancellation actions exposure, and
  • a lack of chain of title in respect of copyrights over proprietary software applications, use of domain names that breach well known trademarks and a likelihood of copyright infringement over software owned by third parties.

While great strides have been taken by the Government in seeking to set up a technology based economy, any investor in the IT sector in Kenya needs to exercise caution by conducting a thorough due diligence exercise.