Top 5 Legal Due Diligence Findings in Dutch M&A Transactions | #4 Intellectual Property Legal Red Flags 

About This Series: Top 5 Legal Due Diligence Findings in Dutch M&A Transactions
In the dynamic landscape of mergers and acquisitions (M&A) in the Netherlands, the legal due diligence investigation remains one of the most critical phases of any transaction. During this stage, information from the seller is thoroughly validated, potential risks are identified and the deal value is ascertained or sometimes fundamentally reassessed. A comprehensive due diligence process not only safeguards the purchaser by identifying risks and informing negotiation strategies, but it also benefits the seller and the target company by clarifying obligations, identifying operational improvements and aligning expectations.

This article marks the fourth in a five-part series on the Top 5 Legal Due Diligence Findings in Dutch M&A Transactions. For this series, we performed an in-depth analysis of the due diligence reports of our recent Dutch M&A transactions and identified the Top 5 Legal Due Diligence Findings. Each article in the series explores one of these findings as well as related topics in detail.

Summary of the article: Intellectual Property Legal Red Flags in Dutch M&A Transactions
In this fourth article, we examine common findings encountered during legal due diligence of intellectual property rights (IP rights) in Dutch M&A transactions. Topics covered include:

• unclear ownerships and defects in title;
• missing IP rights provisions in agreements with employees or contractors;
• trade secrets, unregistered rights and pre-filing disclosure risks; and
• restrictive provisions in license agreements.

This article highlights the importance of tailoring the due diligence review to the nature of the target companies’ IP rights and explains how IP rights due diligence review often reveals issues that can materially affect valuation and even deal certainty.

What to cover during IP rights-focused due diligence
There is no “one size fits all” approach to IP rights due diligence. The appropriate scope, depth and methodology must be tailored to the specific nature of the IP rights used in the target company’s business. In practice, IP rights due diligence is often confined to verifying ownership of registered rights (such as patents, trademarks and designs) and a high-level review of software licences. Unregistered rights and the adequacy of the target company’s IP rights protection measures are frequently overlooked.

Unregistered IP rights
Unregistered IP rights include most notably copyright, unregistered designs and confidential know-how such as trade secrets and R&D data. The legal protection of such rights is inherently conditional upon the implementation of adequate protective measures by the rights holder.

Where protection and commercialisation through patents is contemplated, strict confidentiality of the relevant invention prior to filing is essential. Any disclosure of the invention before the filing date may destroy its novelty and thereby jeopardize patentability. Under applicable patent law, an invention is considered to lack novelty if it has been made available to the public before the filing date in such a way that it forms part of the “state of the art”, i.e. all information that has been made available to the public anywhere in the world, in any form, before that date. This includes any disclosure that enables a person skilled in the art to access or derive the technical teaching of the invention.

A comparable principle applies in the context of registered design rights under Benelux and EU law. As a general rule, a design must be new and possess individual character at the filing date. Novelty is lost if the design has been made available to the public prior to filing (subject to limited grace periods under EU design law). A design is deemed to have been made available to the public if it has been disclosed in such a way that it could reasonably have become known, in the normal course of business, to the circles specialised in the sector concerned operating within the European Union, irrespective of where such disclosure originally took place. Accordingly, a disclosure in, for example, China or the United States may equally destroy the novelty of a Benelux design if that disclosure could reasonably have become known within the relevant sector in the European Union.

Inadequate control over pre-filing disclosures – whether through publications, marketing activities, customer interactions or internal leakage – can therefore materially impair the availability and enforceability of both patent and design protection and should therefore be a key point of attention in any due diligence exercise.

While premature disclosure may jeopardize patent and design protection, the position is even more stringent in the context of trade secrets, where protection depends entirely on the existence of secrecy in the first place.

Under article 1 of the Dutch Trade Secrets Act (Wet bescherming bedrijfsgeheimen), information qualifies as a trade secret only if it:

1. is secret in the sense that it is not generally known or readily accessible to persons within the circles that normally deal with such information,
2. has commercial value because it is secret, and
3. has been subject to reasonable steps, under the circumstances, by the person lawfully in control of the information to keep it secret.

This legal framework creates a fundamental methodological difficulty for due diligence purposes. Unlike registered IP rights, trade secrets cannot be assessed through traditional “title due diligence”. Their very existence and enforceability depend on whether the target company has implemented appropriate confidentiality policies, access controls and contractual safeguards vis-à-vis employees, contractors and business partners. Where such measures are absent or insufficient, trade secrets may not benefit from legal protection at all, irrespective of their commercial importance or the investments made in their development.

Unclear ownership and defects in title
One of the most frequently encountered findings in an IP rights due diligence investigation is that the target company is not the legal owner of all IP rights that are material to, or appear to be used in, its business. This finding can take several forms:

• IP rights may be registered in the name of an affiliated company or person (such as the founder of the target company) rather than in the name of the target company;
• assignment agreements may be absent or invalid; or
• the chain of title may be unclear or inadequately documented.

A particularly problematic issue arises when IP rights have been developed by multiple parties over time, without proper documentation of transfers at each stage. This scenario frequently occurs in relation to software. By way of illustration, a software application may initially have been developed by a founder, subsequently modified by employees, and later further enhanced by external third-party contractors. If written assignments have not been duly obtained from each contributor for each phase of development, the chain of title may become fragmented and uncertain. In such circumstances, it may be practically impossible to determine which party owns which elements of the relevant IP rights and whether the target company has legal title to use them.

This risk is further amplified in the context of AI-assisted development. Increasingly, content, code and other outputs are generated with the assistance of AI systems. However, recent case law and the prevailing view among IP scholars indicate that such outputs may fall outside the scope of copyright protection. Copyright protection requires that a work constitutes the author’s own intellectual creation, reflecting free and creative choices attributable to a human author. Where output is generated through the operation of (semi-)autonomous algorithms, the resulting content will, in many cases, not qualify as copyright work of the user providing the input, as the final form of the output is not sufficiently determined by human creative control.

Accordingly, even where the input provided to an AI system is highly original, creative and commercially valuable, this does not necessarily result in output that qualifies for copyright protection. This gives rise to a structural risk in transactions involving AI-assisted development, including uncertainties as to ownership, enforceability and the exclusivity of key outputs. In such circumstances, protection may need to be secured through mechanisms such as contractual arrangements and trade secret protection. Consideration may also be given to evidentiary or quasi-protective tools (such as the i-DEPOT system of the Benelux Office for Intellectual Property), rather than reliance on traditional copyright regimes.

This risk is especially pronounced for software and other works that are subject to continuous development and iteration. Under Dutch copyright law, derivative works are protected independently from the underlying work. However, both the creation and exploitation of a derivative work require the consent of the owner of the underlying work. As a result, deficiencies in the chain of title at any stage may materially impair the target company’s ability to lawfully exploit its IP rights.

Under Dutch law, ownership of IP rights does not automatically vest in a company simply because it commissions, pays for the development of or uses the IP rights. Ownership of IP rights is acquired either originally (i.e. through creation by the rights holder) or derivatively (i.e. through a valid transfer from the original rights holder as assignor to an assignee). Different categories of IP rights may be governed by distinct legal frameworks with fundamentally different requirements for their creation, protection and enforcement. The following applies across the main IP rights categories:

• Copyright: Under article 7 of the Dutch Copyright Act (Auteurswet), unless agreed otherwise, the employer is deemed to be the maker of works created by an employee in the course of employment. This statutory allocation does not extend to the employee’s moral rights (persoonlijkheidsrechten), which remain with the natural person. Moreover, the exception does not apply to works created by independent contractors, consultants or other third parties, irrespective of whether their activities were commissioned and remunerated by the target company. Consequently, for the target company to acquire full and undisputed ownership of copyright in commissioned works or works created by non-employees, an explicit written assignment is required. 
• Patents: Under the Dutch Patents Act (Rijksoctrooiwet 1995), the right to apply for and own a patent initially vests in the inventor. An important statutory exception applies where an employee makes an invention in the execution of an employment agreement that includes an obligation to perform inventive activities. In that case, the employer has the right to the patent (Article 12 of the Dutch Patents Act). In practice, several issues frequently arise. First, it may be unclear whether the employee’s role and employment agreement indeed include an obligation to perform inventive work. Second, statutory allocation does not apply to inventions created by independent contractors, consultants or other third parties. Third, even where the employer is entitled to the patent by operation of law, it is generally advisable to have formal assignment documentation in place to avoid disputes and, in the context of M&A, in order to satisfy the documentary requirements of potential purchasers.
• Trademarks and designs: Trademark and design rights are established through registration or, in certain cases, through use (when it comes to trademarks) or disclosure (when it comes to unregistered community designs). Registered rights offer significantly greater legal certainty and enforceability. For registered trademarks and designs, the person or legal entity recorded in the relevant register is presumed to be the owner of the right. 
  If a trademark or design is registered in the name of a person other than the target company (such as the founder), the target company will generally lack enforceable rights against third parties, even if there is an informal understanding that the founder holds the rights on behalf of the target company. A valid assignment must therefore be executed in accordance with the applicable formalities and recorded in the relevant register to be effective against third parties. 
  Registered IP rights require ongoing maintenance, including timely payment of renewal fees and, in the case of trademarks, genuine use. Failure to comply with these requirements may result in the lapse or cancellation of valuable rights.
• Internet domain names: Internet domain names, in a strict legal sense, are not IP rights. A domain name is not owned in the same way as a copyright or patent; rather, it involves a contract with a registrar (such as ICANN or, for the Netherlands, SIDN) for the exclusive right to use the name for a specified period. Given the importance of the internet for information and sales, domain names may have extreme value for a company’s business. Typical problems with domain names encountered in IP rights due diligence include that domain names might be registered by and in the name of the founder, other group companies, or even individual employees (such as the IT manager) of the target company. It is also frequently found that the identity of the registrant is not publicly disclosed by the registrar. 
• Trade secrets and confidential know-how: Trade secrets and confidential know-how are protected under Dutch law through a combination of contractual arrangements, the Dutch Trade Secrets Act (which is based on the EU Trade Secrets Directive) and general principles of tort law (onrechtmatige daad). Unlike registered IP rights, “ownership” of trade secrets is a less clearly defined concept. Where trade secrets or know-how have been developed by employees or third-party contractors, the target company's rights depend on the existence of adequate confidentiality policies and assignment provisions. In the absence of such policies and provisions, it may be difficult for the target company to establish exclusive rights to such trade secrets or know-how.

The impact of unclear ownership or defects in title will largely depend on the materiality of the respective IP rights. Where the relevant IP rights constitute core assets, defects in title may be deal-critical and, in extreme cases, may lead to aborting the transaction altogether if valid ownership by the target company cannot be established or obtained. Where possible, a purchaser will typically require full remediation prior to closing of the transaction, which is commonly achieved through the inclusion of one or more condition(s) precedent in the transaction documentation, obliging the seller to procure valid written assignments from all persons or legal entities that may hold rights to (parts of) the relevant IP rights. Such assignments must identify the transferred rights with sufficient specificity. Broad or generic formulations such as “all rights are transferred” may be inadequate to effectuate a valid transfer. In the case of registered IP rights, any transfer of ownership must also be duly recorded in the relevant registers to be effective against third parties.

Even where the affected IP rights are not considered business-critical, defects in title give rise to residual legal and commercial risks that must be factored into the overall deal assessment and appropriately addressed in the transaction documentation. Third parties may assert (co-)ownership claims, potentially resulting in costly litigation, injunctions restricting the target company’s use or exploitation of the IP rights and/or claims for damages or other financial compensation.

Resolving title defects can have a material impact on transaction timing and execution. Identifying all relevant IP rights, verifying ownership, tracing historical contributors and securing their cooperation to execute the necessary documentation can be a time-consuming and resource-intensive process that may delay signing or closing. If the target company is involved in IP rights litigation, this may even be the end of a transaction.

Missing IP rights provisions
Another common finding, as we have also briefly addressed in our third article of this series on employment law due diligence findings, is the absence or inadequacy of contractual provisions addressing IP rights in agreements with employees, independent contractors, freelancers, consultants and other third-party service providers. While many companies include some form of IP clause in their standard employment and contractor agreements, these provisions are frequently incomplete, inadequate, ambiguous or sometimes entirely absent from the relevant agreements.

The absence of clear IP rights assignment provisions can create significant uncertainty regarding the ownership of IP rights. As elaborated above, ownership of employee or contractor-created IP rights must generally be established by contract; in the absence of explicit agreement, such rights in general do not automatically vest with the employer or service recipient. Even where contractual clauses exist, the scope of the employer’s ownership depends on whether the creation of the invention or work falls within the employee’s actual job responsibilities, which can be ambiguous without precise contractual definitions.

The consequences of missing or defective IP rights provisions can be far-reaching:

• the target company may lack clear ownership of critical assets;
• third parties may retain rights to use or commercialize IP rights independently; and
• the target may be exposed to claims for additional compensation or profit-sharing from individuals who contributed to IP rights development.

Restrictive licences and change-of-control clauses
Many target companies do not own the intellectual property rights essential to their business operations, but instead rely on licences granted by third parties. Such IP rights licences frequently contain restrictive provisions, including:

• limitations on the licensee’s ability to transfer, assign or sublicense the licensed rights; and
• termination or renegotiation rights triggered by a change of control of the licensee.

While licensing arrangements are a common and often efficient feature of modern commercial operations, they inevitably introduce dependencies and vulnerabilities that can materially affect the timing, valuation and, in some cases, even the feasibility of an acquisition. If you wish to learn more about the content and impact of change of control clauses we refer you to the first article of this series in which we already addressed these aspects in detail.

Where critical IP rights are licensed rather than owned, restrictive licence terms can give rise to significant transaction risk. In extreme cases, the licensor’s right to terminate the licence or withhold consent to a change of control may grant the licensor a “de facto” veto over the transaction. As a result, the purchaser’s ability to continue the target company’s business post-closing may become contingent on obtaining third-party consent. Securing such consent can be a time-consuming and uncertain process, potentially delaying the transaction. In addition, licensors who become aware that their consent is required may seek to use this leverage to renegotiate licence terms to their advantage. Finally, restrictions on transfer, assignment or sublicensing of licensed IP rights may materially limit the purchaser’s intended post-closing integration strategy or future exit options, thereby directly impacting the overall transaction rationale and value.

Top 5 tips: assessing IP rights issues

1. Tailor IP rights due diligence to the nature of the target company’s IP rights – assess whether the scope, depth and methodology of the review are appropriate for the type of IP rights used by the target company.
2. Take purchaser’s post-closing plansinto account – if the target company relies on licences granted by third parties, also include purchaser’s post-closing plans for the target company and its IP rights when reviewing those licences.
3. Identify transaction-triggered provisions – analyse whether the contemplated transaction, or events occurring in connection with it, may trigger any change of control provisions in IP rights licence agreements or other material contracts.
4. Include appropriate conditions precedent in transaction documentation – if the target company does not own or validly license IP rights considered critical to its business, or if a dispute exists in that respect, make the transfer, assignment or licensing of such IP rights, or the settlement of the dispute, a condition precedent to closing to safeguard the value of the business.
5. Obtain required documentation early – establish which assignments, waivers and approvals are required (and from which parties), engage with the relevant stakeholders and initiate the process of obtaining the necessary documentation as soon as possible to avoid any delays in the transaction.

Need advice on IP issues under Dutch law?
Do you want to assess whether a company’s IP rights are validly owned or licensed, or whether certain information qualifies as a trade secret – and, if not, how this could affect the risk allocation in transaction documents and any post-closing plans? Please do not hesitate to contact Friederike Henke or Deniz Xinyi Bussing of our Corporate M&A practice, or Philip ter Burg or Julia Mascini of our commercial and intellectual property practice, who would be pleased to advise you and provide tailored guidance on these matters.

• Stay tuned: in the final part of our Top 5 Legal Due Diligence Findings in Dutch M&A Transactions series, we will explore commonly flagged real estate issues during legal due diligence.