In today’s knowledge economy, the most valuable assets a business owns are often intangible. Intellectual property rights (IPRs) are the legal rights that protect the outputs of human creativity and innovation, and now drive enterprise value across virtually every industry. Whether this relates to technology companies relying on proprietary algorithms, pharmaceutical firms whose revenues rest on a single patent, consumer brands whose goodwill is embodied in a trade mark, or agri-tech businesses built on plant breeders’ rights, intellectual property (IP) is not merely an asset on the balance sheet, it is the business itself. This reality is perhaps most acutely felt in mergers and acquisitions (M&A) transactions, where a failure to rigorously investigate the target’s IPRs can leave an acquirer exposed to defective, disputed, or non-transferable rights, and ultimately undermine the very value the transaction was intended to capture.
What is IP
IPRs are a cluster of legal rights that protect the intangible outputs of innovation. In Kenya, the legal framework governing IPRs is anchored by the Constitution of Kenya, 2010, the Industrial Property Act, 2001, the Trade Marks Act (Cap 506), the Copyright Act, 2001, the Seeds and Plant Varieties Act (Cap. 326), and the Anti-Counterfeit Act, 2008. This is complemented by international instruments including the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, the Paris Convention, the Berne Convention, and membership of the African Regional Intellectual Property Organization (ARIPO) via the Harare Protocol. The principal forms of protection for IPRs are:
- Patents: These grant the holder an exclusive right to prevent others from making, using, selling, or importing a novel invention, typically for 20 years from filing. Patents are critical in technology, pharmaceutical, and manufacturing sectors.
- Trade marks: Trade marks protect distinctive names, logos, and signs that identify the source of goods or services. A strong brand encapsulates years of goodwill and customer loyalty and can constitute a business’s most valuable assets.
- Copyright: Copyright protects works such as literary, artistic, musical and audio-visual works and, arises automatically upon their creation. It protects the expression of ideas, not the ideas themselves, a distinction of particular importance in software-intensive businesses.
- Trade secrets: These protect commercially valuable confidential information which may include algorithms, formulas, customer data, and processes. Protection subsists for as long as secrecy is maintained, potentially indefinitely.
- Industrial designs: These protect the aesthetic features of products resulting from one or more visual features of the shape, configuration, pattern or ornamentation of a product;
- Utility models: Utility models protect new and industrially applicable functional innovations or improvements that provide a technical effect, utility, advantage, saving or environmental benefit; and
- Plant breeders’ rights: these rights protect proprietary plant varieties respectively, the latter being especially significant in Kenya’s agricultural economy.
IP due diligence: What must be investigated
IP due diligence is an essential part of every M&A transaction and it involves a structured investigation designed to answer three fundamental questions: what IPRs exist, who owns them, and what risks they carry.
The key areas of review are:
- Ownership and chain of title: IPRs do not always vest in the entity that use them. Under Kenyan law, intellectual property developed by employees in the course of their employment generally vests in the employer, subject to any agreement to the contrary. Businesses that engage freelancers or outsource development without securing written assignment agreements may discover that significant IP assets are not legally owned by the company, which is one of the most common and consequential findings in IP due diligence exercises. Particular care is also required in group structures, where key IPRs may be held by a parent company, a fellow subsidiary, or a shared services entity rather than the target itself. Meaning that an acquisition of the target alone may not carry with it the IPRs on which its business depends. Similarly, in the case of start-ups and founder-led businesses, core IPRs including in source code, product designs, and brand assets may never have been formally assigned by the individual founders to the company, leaving it legally owned by natural persons rather than the corporate entity being acquired. In both scenarios, the acquirer must confirm precisely where IPR ownership resides and ensure that appropriate assignment or licensing arrangements are in place before closing of the transaction.
- Registration and renewals: Registered trade marks, patents, and designs must be confirmed as being in force, properly renewed, and protected in all relevant jurisdictions. Lapsed registrations may expose the business to trade mark squatting and competitor free-riding. Further, Kenyan registration does not extend to other markets since, for example, trade mark registrations are territorial and a registration in one jurisdiction does not extend protection in another.
- Licensing arrangements: Each inbound and outbound licence must be reviewed with respect to scope, term, exclusivity, and critically what happens upon a change of control or change of ownership of a party. A change of control, whether arising from a share acquisition, a sale of business and assets, or a corporate restructuring, may trigger provisions requiring the prior written consent or approval of the counterparty to the licence. Where such consent is not obtained, the licence may be considered void and the counterparty may be entitled to terminate the licence, resulting in the loss of the right to use the licensed IP on which the business relies. The consequences can be severe: a target that depends on third-party technology, brand licences, or distribution rights may find its core operations fundamentally compromised. It is therefore essential that all licence agreements are carefully reviewed during due diligence, change-of-control and assignment clauses identified early, and a strategy for securing the necessary counterparty consents is built into the transaction timetable.
- Infringement risks: The due diligence must assess whether the target’s products infringe third-party IPRs, and whether competitors are infringing the target’s rights. A successful challenge by a third party, whether by way of opposition, revocation, or infringement proceedings, may result in the target being compelled to cease use of the relevant IP, pay damages, or surrender the contested right entirely. The loss or impairment of a key patent, trade mark, or copyright directly diminishes the value of the target’s business and may fundamentally undermine the commercial rationale for the acquisition.
- Encumbrances: Security interests registered over IP assets under the Movable Property Security Rights Act, 2017 (MPSR) must be identified and released prior to closing. Failure to do this, may impair the transferability of IPRs to the acquirer.
IP valuation: Pricing what you are buying
IP due diligence does not only identify risk, it assists with the allocation of the IP value and consequently, the transaction value. IP valuation is the process of estimating the monetary worth of an IP asset. The World Intellectual Property Organization (WIPO) recognises three principal approaches to IP valuation. The cost approach estimates the cost of reproducing or replacing the asset, although development costs may not reflect commercial value. The market approach derives value by comparing the asset to similar transactions, but its application is often constrained by the confidential nature of IP transactions and the unique characteristics of patents, trade marks and other IP rights. The income approach which is the most widely used approach and involves valuing IP by reference to the present value of future income it is expected to generate, adjusted for risk and the remaining period of legal protection.
IP valuation directly informs deal pricing. From a balance sheet perspective, IP assets whether recognised as intangible assets under applicable accounting standards or carried off-balance sheet as internally generated goodwill form a significant component of enterprise value. A patent nearing expiry or a trade mark unregistered in key markets will support a lower valuation.
A well-governed IP portfolio, with clear title, current registrations, and a track record of commercialisation, strengthens the seller’s negotiating position and may justify a material price premium. Conversely, where IP governance is weak, acquirers will invariably seek to reflect that risk in the transaction terms, whether through purchase price reductions, escrow arrangements, enhanced warranty and indemnity protection, or conditions precedent requiring remediation before closing. Businesses that proactively manage their IP protect their ability to command full value on exit while those that neglect it, risk being measurably undervalued.
Red flags and how they are addressed in transaction documents
Common IP red flags that are usually revealed during IP due diligence include missing assignment agreements, lapsed registrations, change-of-control clauses in licences, pending or threatened IP claim against the target’s business, and undisclosed MPSR encumbrances. Each of the above carries implications for deal value and risk allocation. These may however be addressed in transaction documents through:
- Conditions precedent: Material IP issues identified during the due diligence, such as change control approvals, must be resolved before the transaction can complete and usually as conditions to the closing of the transaction.
- Post-completion obligations: Certain matters (such as the novation of licences or recordal of assignments at Kenya Industrial Property Institute (KIPI) and Kenya Copyright Board (KECOBO) may be attended to within an agreed period after closing. Note that transfers and licensing of IP in Kenya require formal recordal at KIPI and KECOBO to be effective against third parties.
- Warranties and specific indemnities: The seller in this case issues warranties on the status of the IP in the company or business, and where there are known contingent liabilities with respect to the IP, it is not uncommon for a buyer to require the Seller to provide targeted indemnities.
- Purchase price adjustments and escrows: Where IP issues are quantifiable and indemnities are insufficient, the buyer may require a reduction of consideration or adjustment of the purchase price.
IP governance: The strategic imperative
The lessons of IP due diligence in M&A point to a broader truth. Proactive IP governance as well as the ongoing management, protection, and commercialisation of a business’s IP assets, are fundamental components of sound business practice and not merely a transaction consideration. Businesses that maintain clean IP registers, ensure all IPRs are correctly assigned to the operating entity, keep licensing arrangements under review, and conduct periodic IP audits are better positioned to attract investment, access financing under the MPSR regime, and maximise returns on exit.
In the M&A context specifically, robust IP governance prior to a transaction significantly reduces the risk of value erosion during negotiations. A seller that can demonstrate a well-maintained IP portfolio with documented chains of title, up-to-date registrations, comprehensive assignment agreements from all contractors and former employees, and a clear schedule of all licensing arrangements is far less likely to face aggressive price adjustments or protracted due diligence requests. Conversely, acquirers with strong internal IP governance frameworks are better equipped to integrate acquired IP assets efficiently, identify synergies with their existing portfolios, and avoid post-closing disputes over ownership or scope of rights.
Businesses that embed appropriate M&A-focused governance practices into their ongoing operations are not only better prepared when a transaction arises, they are also more attractive to potential acquirers and investors, who increasingly recognise that well-governed IP is a reliable indicator of operational maturity and long-term value creation.
