EXECUTIVE SUMMARY
In many transactions, IP rights have become the most valuable asset. Drafting their warranties with traditional templates from consumer-goods deals leaves the buyer exposed to costly risks — particularly regarding open-source code and former-employee IP claims.
In a growing number of today’s transactions, intellectual property rights have become the most valuable assets of the target company — sometimes more valuable than all tangible assets combined. Yet IP warranties in many Share Purchase Agreements are drafted with a brevity that does not match the importance of these assets, opening legal gaps the buyer pays for later.
In this article, we examine the practical framework for drafting IP warranties that protect the buyer in Saudi M&A transactions, particularly in technology and creative sectors.
- What Should an IP Warranty Cover?
An IP warranty is not limited to “trademarks.” The rights that must be covered include:
▪ Registered and unregistered trademarks, logos, and trade names.
▪ Patents and pending patent applications.
▪ Copyright in software, marketing materials, and digital content.
▪ Trade secrets, customer lists, and confidential information.
▪ Domain names and social media handles.
▪ Inbound licenses for IP the company uses.
▪ Outbound licenses the company has granted to others.
The drafting “the Company owns all intellectual property necessary for its business” — the most common formulation — is insufficient because it does not require the seller to enumerate these rights in detail, and it does not address licenses. Accordingly, depending on the sector in which the target company conducts its business (e.g., finance, pharmaceuticals, telecommunications, etc.), the SPA should include provisions requiring the Company to hold all licenses, permits, and approvals necessary from the relevant authorities to conduct its business as currently operated. Such licenses, permits, and approvals shall be valid, in full force and effect, and fully complied with at all times.
2. “Full Ownership” vs. “Licensed” — The Practical Difference
Some companies operate on IP licensed from third parties rather than owned. This distinction is fundamental for the buyer:
▪ Full Ownership: transfers automatically with the share transfer and is unaffected by change of control.
▪ License: may terminate upon Change of Control, may require licensor consent, or may granted be for a limited term.
A strong warranty must expressly differentiate between owned and licensed assets, and include a schedule of licenses with their material terms — particularly Change of Control clauses.
3. Non-Infringement Warranty
In technology sectors, the risk of third-party infringement is relatively high, even unintentional. The non-infringement warranty protects the buyer from surprises such as:
▪ Subsequent claims from tech companies that the target’s product infringes their patents.
▪ Later discovery of open-source code use under a license requiring full code disclosure (Copyleft).
▪ Images or content taken from the internet without commercial use license.
The warranty should cover three scenarios: (1) no actual infringement of third parties, (2) no current claims of infringement, (3) no knowledge of any threatened infringement.
4. IP Developed by Employees
This is a nuanced point under Saudi law. The Labor Law regulates ownership of employee inventions, but leaves other details, such as everyday code and creative content to individual employment agreements.
A strong warranty must include representations that:
▪ All current employees have signed contracts containing IP assignment clauses to the Company.
▪ All independent contractors and freelancers who participated in IP development have signed explicit assignments.
▪ There are no current or potential claims from former employees regarding IP they assert ownership of.
5. Open-Source Software Warranty
This warranty has become a necessity, not a luxury, in technology M&A. Much modern software uses open-source libraries, and some of these (such as GPL) impose conditions that could turn the entire commercial product into open-source.
The warranty should include:
▪ A schedule listing every open-source library used in the Company’s products and its license.
▪ A representation that use of these libraries complies with the terms of their licenses.
▪ A representation that no Copyleft-licensed open-source code is embedded in the core commercial products.
Core Takeaway
In technology companies, relying on a standard “IP warranty” template borrowed from consumer-goods transactions leaves the buyer exposed. IP is a sensitive asset that deserves a specialized warranty at the same level of detail enjoyed by financial warranties.
Investing in carefully drafting this warranty costs effort at negotiation, but saves the buyer far more when disputes arise.
For counsel on drafting and reviewing IP warranties in M&A transactions, the M&CO team brings the combination of legal expertise and technical understanding you need.
KEY TAKEAWAYS
◆ “The Company owns all IP necessary for its business” is insufficient.
◆ Distinguish owned vs. licensed assets, with a schedule of licenses.
◆ Non-Infringement warranty is essential in technology sectors.
◆ All developers (employees and contractors) must have signed express IP assignments.
◆ Open-source code warranty has become a necessity, not a luxury.
PRACTITIONER’S CHECKLIST
▪ Request a detailed schedule of all registered IP.
▪ Audit open-source license obligations in products.
▪ Obtain copies of IP assignments signed by employees and contractors.
▪ Examine Change of Control clauses in inbound IP licenses.
▪ Conduct patent searches in primary markets.
▪ Verify trademark registrations in relevant geographies.
▪ Audit trade secrets and internal protection procedures.
▪ Document ownership of domain names and social media handles.
REGULATORY REFERENCES
- Saudi Patents, Layout Designs, Plant Varieties, and Industrial Designs Law, RD M/27/1425H.
- Saudi Trademarks Law, RD M/21/1423H.
- Saudi Copyright Law, RD M/41/1424H.
- Saudi Labor Law — employee inventions provisions.