When Johnson Matthey (JM) completed the acquisition of lithium-sulfur battery developer, and UK company, Oxis Energy in July, it described the move as having two main benefits. Firstly, the facilities acquired as part of the deal can be adapted for the manufacture of components for green-hydrogen production to enable the production of tens of thousands of catalyst coated membrane parts per year for electrolysers, which supports JM’s green hydrogen business.
Secondly, the acquisition of a “considerable IP portfolio in next-generation lithium-sulfur and adjacent battery technologies” presents opportunities for JM’s battery materials business to advance its development of future battery material technologies.
Essentially, the desirability of the deal for JM comes down to property – physical property for the present to support a need for manufacturing capacity, and intellectual property (IP) for the future to support the next generation of technologies.
Having the opportunity to acquire manufacturing capacity that is largely pre-configured for their needs was clearly an advantage for JM. However, the difference between IP and physical property is that the knowledge, skill and development time to generate the IP from scratch can be much more difficult to achieve than building a factory.
For many technology companies, and particularly ones who are making new roads into previously undeveloped areas of technology, the IP is the key asset and is what carries the value and makes the company attractive to a buyer or an investor. IP provides the security for future growth, which is a significant factor when making an investment.
The presence of a substantial and well-managed IP portfolio is a good first indicator that there is something worth investing in but performing effective due diligence is the key to really understanding the IP and the business around it.
IP under the microscope
Oxis had a developed intellectual property portfolio; publicly available data shows that it was in the top five UK filers of patent applications relating to battery technology along with Hyperdrive Innovation and Nexeon.
They had made 343 patent filings in total, and current figures show that 121 of those became granted patents that are in force with a further 101 currently pending applications.
Looking geographically, the Oxis portfolio included the most filings in the UK and US followed closely by patent filings in Europe, Japan, China and South Korea, which appeared to be their key filing territories. There were a lower number of filings in Brazil (where they had some business interests), Canada, Hong Kong, India and Taiwan, which appear to form the second-tier filing choice.
The number of patents, the territories covered and the status of the patents are certainly key indicators of a patent portfolio that will pique the interest of a buyer. However, due diligence should not end there if the true value of the IP and the company as a whole is to be evaluated properly. These headlines are typically what are presented to give a flavour of the extent of the IP portfolio. However, the numbers can only tell a limited part of the story. To determine the appeal and worth of a patent portfolio we need to dig deeper (see table).
Importance of due diligence
So what are some of the key topics that should be covered when performing due diligence?
Due diligence in the world of IP is the process of identifying and assessing the IP rights as part of a buy-out or when an investor makes an investment into a business. It often involves the compilation of a list of the IP and perhaps an assessment of the validity of the IP rights. However, for due diligence to be truly effective, we must move beyond the facts.
To consider only the spreadsheets and bare validity opinions makes an assumption that the investor is investing in the IP alone. The reality is that investment in a technology-based business is typically much more. It is an investment in its ideas, products, people and plans. Accordingly, the due diligence programme should account for this and then it can reveal much more valuable information.
Ownership of IP
Innovation, especially in start-ups but also in scale-ups, can occur before commercial relationships and business processes have been formally defined, which can make determining IP ownership less clear-cut. Generally, the IP owner can be traced back to the creator of the IP. The entitlement to the ownership of rights initially resides with the creator, although there may be an automatic transfer of entitlement arising from employment or contractual obligations.
If there are co-creators of the IP, there is the possibility of multiple parties being jointly entitled to the ownership of the IP. Thus, for example, if the IP has been developed in collaboration with a university, consultant or another third party, it is important to check agreements are in place to clearly transfer ownership of any IP rights to the company. Since an IP right can be challenged on grounds of the rights holder lacking entitlement to ownership, it is crucial to correctly identify the IP creator, which will then enable the IP owner to be identified. If ownership issues are identified, it is normally possible to draw up agreements to tidy matters up— provided the appropriate signatories are available and willing. It is therefore reassuring when buying or investing in a business to see that they maintained an open dialogue about IP ownership and kept clear records of the inventors.
Knowledge is IP
However, less obvious information relating to the research and development can be just as valuable, such as details of failed experiments and tests, which could save valuable time when new problems are encountered. Clearly, the trade secrets of Oxis are not public knowledge but a buyer should ensure the trade secrets, and know-how they are acquiring as part of the deal, are understood.
Synergistic IP strategy
When IP is an important part of a business, a buyer or investor will want to see a close synergy between the IP strategy and the business plan. The presence of a solid IP strategy that shows an understanding of how the IP rights will help to deliver the business plan is reassuring. It demonstrates that the company understands its commercial objectives and responsibilities, including how any investment will be safeguarded during future funding rounds or at exit. It is always encouraging to see IP being discussed at board level, as well as a disciplined approach to processes such as an established innovation capture process and evidence of an internal IP register.
Relevance to the business plan
Seeing that patent applications have been filed as new products and processes are invented is reassuring, but it is important to go a step further and ask if the IP rights were acquired and maintained with focus and an eye on the direction of the business.
An effective due diligence process should map the rights to the products that are sold, and the commercial opportunities described in the business plan, to determine if the business has the necessary rights to support the longer-term objectives. Prosecuting patent applications and maintaining IP rights around the world can be costly but the expense is wasteful if the IP rights and the business aims have become misaligned as time has gone by.
Handling risk
It is possible that third parties have IP rights that prevent the free exploitation of the IP of a company. Thus, even if a patent has been granted, for example, to a new electrode processing technique, it is still possible to infringe a third party right, which may be directed to the underlying electrode material.
An effective IP due diligence process will examine how thoroughly the company has explored its freedom to operate (FTO) position and what steps they have taken to mitigate any risks that may have been identified. FTO is not an issue that can be left until an opportunity to exit presents itself.
Ultimately, the due diligence required for the acquisition of IP is much more than spreadsheets and searches. Due diligence should cover the facts along with how the IP supports the business and how the business manages the IP. This involves understanding the business plan, the knowledge and people in the business and the wider business landscape.
Read more of Ben Lincoln’s series of patents below.
