Intellectual Property Considerations in Merger and Acquisition Deals

Introduction: Previously, company’s assets were considered as its valuation. For Example Company’s plant and equipment and its intellectual property were ascribed little. In 1980s the value company’s intellectual property on their balance sheet came in existence. Now it is recognized that intellectual property rights are valuable corporate assets which represent a noteworthy proportion of a company’s venture. Consequently, in the current market, businesses need to appreciate the importance of intellectual property and the significant role that it plays in merger and acquisition (M & A) deals.

Intangible assets cover a larger proportion of a company’s market value. Indeed, in heavily branded consumer businesses for instance Nike, brands, including the trade mark, can account for up to 80 per cent of a company’s value. Other industries like pharmaceutical industries and patents are similarly valuable.

An M and A deal can prove to be a costly oversight in the early stage of the failure to appreciate the intellectual property Portfolio. For example ,in 1998 Volkswagen purchased Rolls Royce Motor Cars Group from Vickers Plc, paying £493 million for the Rolls Royce business which only a third of which was net tangible asset value. After completion of the deal Volkswagen realized that the Rolls Royce trade mark had not actually been acquired in the sale, as it belonged to another company. From both the US and UK point of view this article provides a high-level synopsis of the intellectual property considerations in M & A deals from the perspective of the buyer. +Zamal Uddin 

Identifying the relevant intellectual property:

From the beginning a detailed investigation into a business’s intellectual property is critical. Many deals are adversely affected from the beginning. Mostly, a purchaser needs to be able to:                                                                                                                                                

(1)Identification intellectual property assets;

(2) Confirmation of ownership of those assets;

(3) Making sure assets are valid and free from defects or encumbrances; and

(4) Verifications of those assets that can be transferred.

These are the foundation of identifying the necessary steps to affect a proper transfer of title; the warranties may be required in the deal documentation to support the transfer. Apart from these an information memorandum is necessary in order to allow the buyer to carry out the business which provides details of the intellectual property owned or used by the

Business and also includes copyrights, trade marks, trade secrets, patents, patent applications. Consequently, at the time of  due diligence process, the buyer should ensure that the seller is asked targeted questions, the responses to which can provide the buyer with a more accurate picture, not only of the intellectual property that is offered for sale, but also that which is being retained by the seller.

The due diligence questions should cover the following areas:

• What registered and material unregistered intellectual

property is owned by the business?

• Whether ownership of the intellectual property assets lies with the seller (and not a subsidiary or other related company), and whether there is a clear chain of title from each prior owner;

• whether there are any registry or administrative proceedings in process or likely with regard to any applications or registrations for intellectual property rights;

• Whether there are any grounds for the loss of registered rights, such as non-use or non-payment of fees;

• What intellectual property is used in the operation of the business that is licensed in from third parties?

• whether or not any material agreement relating to the operation of the business is still in effect and whether or not there has been or is any current material breach or threatened breach of such agreement by any party;

• Whether or not there are any risks to the value of the intellectual property, such as any threatened infringement claims, pending litigation or risk of future litigation associated with the use of the intellectual property that can be identified and quantified; and

• Whether the intellectual property actually covers the commercial

Products sold or to be sold.

Value the assets:

In due meticulousness, care must be taken to make sure that all rights being transferred are still legally enforceable. Registered trade marks can be attacked and revoked if they are not used for a three- or five-year period depending on the authority. Registrations for both patents and trade marks will descend if renewal fees are not paid or deadlines missed. Likewise, introduction to claims of patent or trade mark breach or assertions of the inappropriate appropriation of trade secrets can detract from the worth of a company.

For the reasons given above, the buyer should also ask for copies of all the applicable documentation connecting to the nature and scope of the intellectual property rights and the ownership, validity, enforceability and transferability of such rights. The buyer should then make sure that a full assessment of these documents is conducted. This review should be conducted on the basis of the buyer’s strategy for the deal, including whether or not it is involved in the intellectual property rights; why it is paying attention to them; and its aims for the future. This will provide a background to the legal team so that it is enabled to conduct significant due diligence. Depending on the buyer’s plans in respect of the various intellectual property rights, various separate issues should, in particular, be verified. These are recognized below.

Trade marks:

As lay down above, the first question is to conclude what trade marks the seller owns. It may seem clear, but for any removal, it is decisive that the items being sold are obviously recognized. The buyer must then come to a decision how vital these marks are to the business and accordingly to the deal. The buyer should therefore be asked to supply details of its plans for using the trade marks, counting on which products or services and in which geographic areas it intends to make use of them.

If the trade marks are measured to be very important parts of the continuing business, acquired by the buyer, it is necessary to make available the buyer with an assessment of the strengths and weaknesses of the script. A company’s trade mark rights only be present as long as the marks continue to supply as designators of foundation and origin. As trade marks can be subdivided into different categories, each category may be dealt with variously. so, a company may have unintentionally damaged or cracked its trade marks rights.

Therefore the buyer will need to assess inter alias:

• What registered and unregistered marks are used by the business?

• Whether the trade mark registrations are up to date (and all renewal fees have been paid);

• What goods and/or services the marks are registered for;

• In which territories the marks registered are;

• How typical the marks are;

• whether the trade marks are being second-hand properly, i.e. is a registered mark being used in line with its registration, as conflicting to another description of the mark that is not registered;

• What the seller’s measures are for monitoring inner use of the trade marks?

• What actions have been taken next to contradictory trade mark applications to keep away from intensity of the marks?

• What actions have been taken next to third party usage of the same or similar marks?

• What, if any, trade mark rights have been licensed to or from third parties;

• Any circumstances the seller is aware of whereby it is likely to lose any of its trade marks (e.g. for non-use); and

• Whether there have been claims made by third parties that the seller’s intellectual property infringes the third party trade marks, or the claims that trade marks are unacceptable.

Each and any of these factors can decline a trade mark. If there are limitations on the geographical range or product market, a buyer may not be able to use the trade marks for their planned purposes.

In addition, it may be the case that although a trade mark is valid in one product or service market, it is confusingly alike to a mark or registration in another product market section and therefore invalid for those purposes. If there are licenses out, the buyer may be limited in the use it can create the marks upon purchase.

Wide use by third parties can also weaken trade marks as they become less unique. Equally, if a company does not police its marks, they may become weaker.

Patents:

Similar issues apply with patents as with trade marks. Again, it is important initially to determine the buyer’s tactic for the compact and the value which the buyer is placing on a patent collection. In some instances, a buyer is alert on the technology of the objective which will be incorporated into the buyer’s offered business.

In other deals the target business, including its technology, is the focal point, as this can complement the buyer’s existing business. If the patents are essential to the buyer’s business, their strengths and weaknesses need to be evaluated. Patents can also be subdivided into categories by area under discussion matter, for example patents connecting to business methods, software or computer-implemented inventions, biotechnology, methods of medical management, etc, each of which may be dealt with variously.

It is vital to set up the countries where the buyer either intends to make use of the patents or requires patent protection. Each country must be measured individually and advice given consequently, having regard to the following:

• What technology the buyer is purchasing;

• What patents and patent applications are owned by the seller for this technology;

• Whether the patents are legal;

• If the seller business’s technology is not enclosed by patents, how is the technology confined (whether through trade mark, copyright, trade secret, or other protections);

• Whether any of the patents have been licensed to third parties and if so whether on an exclusive or non-exclusive basis, with or without rights to grant sub-licenses;

• Whether there have been any claims by third parties that the patents are void;

• Whether there is any known unlicensed use of the technology; and

• Whether there are any connect arrangements connecting to the patent licenses requiring required purchase of non-patented products, as these may be anti-competitive and unenforceable.

Further additional factors in respect of ownership which are irregular to patents must also be considered. If the patent has been filed and issued in the name of the inventors and not the seller, the seller will not actually have any rights to the patent unless the inventors have assigned their rights. Each patent in the course of application should therefore be checked to make sure that the seller has the rights to dispense. Likewise, the patent may be mutually owned, in which case, again, the seller will not be able to sell the whole patent unless the applicable assignments have been executed. On the other hand, if only the seller’s piece of the patent is being sold and the buyer is only becoming a combined owner with a third party, the value of the patent will be considerably abridged. The power of the patent and the rights acquired by the buyer may also be limited if there are licenses out of the patents. In such a case, although the seller may hold the patent, it may be not capable to observe the technology because a third party has been granted elite rights.

Copyright:

Although copyright is not a registered intellectual property right, depending on the business it may comprise a valuable part of the intellectual property belongings of that dealing.

One input consideration for exclusive rights is ownership. This may be trickier to resolve on as there is no registered testimony of ownership. The general rule of copyright is that ownership vests in the author of the work. Therefore, it can never be unspecified that a seller is the real owner of the copyrighted fabric without good evidence, such as service contracts or coursework. It is also wrong to take for granted that copyright is owned by a business because it specially made a work: if the work is shaped by an employee in the course of his service, the copyright will vest in the employer; in the United Kingdom if the vocation is created by a advisor then copyright will vest in the advisor unless assigned by written agreement. It is decisive to verify that there are agreements confirming ownership. This can be done by requesting lists of all the persons who authored, participated in the progress of, or else contributed to the copyright mechanism, and copies of the assignments from those persons. It is also significant to make sure that the works have not actually been resulting from any pre-existing work, and that there are no such claims asserted.

Trade secrets:

Usually, in the United States in the event the trade secrets need to be identified for legal proceedings following the deal. Generally, a buyer should ask for a list containing details of exactly what the seller considers to be its material trade secrets, for example, processes, materials and associated information. Use or misappropriation can be prevented by the owner of information through trade secret protection. But it does not exclude other forms in order to obtain the information through lawful ways. As a trade secret actually remains secret to that extent it is valid and valuable.

Therefore, trade secret consists of a greater part of the value of business. The following information’s are necessary including the review of seller’s procedures to protect it’s trade secret information:

• The development and acquiring process of the trade secret information,

• The place and manner of stores of the trade secret information,

• what kinds of  steps are taken to maintain by the seller in its trade secrets which includes trade secret journals; limiting access to trade secrets; and confidentiality obligations in employment and consultancy agreements; and

• Whether the seller has appropriated non-disclosure and non-complete agreements in place with its employees and contractors.

Additionally, where the seller acquired the trade secrets from the third parties by copies of assignment document which include associated non-disclosure agreements, it should be verified, not only to ensure that the trade secrets remain secret, but also to make sure that the third parties do not retain any rights to the trade secrets. But the authentication as to secret information or resources of any third party’s equally.

Third party licenses:

In any due attentiveness work out, a important amount of time should survive devoted to review the intellectual property licenses either settled to or granted by the seller. In particular, the following Provisions should be measured:

•the rights granted—whether elite or non-exclusive;

•the territory—including any field of use limitations;

•any sub-licensing rights;

•any co-existence preparations;

•rights of first compromise, first denial, last denial;

•non-competition supplies (limited actions; geographic

And sequential range);

•period (extinction provisions; effect of extinction; existing

Clauses);

• Warranties (scope; disclaimer of implied warranties; carve-outs);

• Indemnities (scope; carve-outs);

• Limitations on liability (or lack thereof; carve-outs);

• Assignment (with prior consent/consent required for merger); and

• Transferability of the agreement.

Any one of these provisions may affect the buyer’s ability to acquire or the seller’s right to dispose of the intellectual property assets. For example, if there is an exclusive license to one of the intellectual property rights, the seller may not be entitled to sell without the consent of the licensor. The deal may therefore be dependent on obtaining the necessary third party consents not only to transfer the agreement, but also, in some cases, to use the intellectual property post-completion. This will once more impact on the value of the deal and the seller’s ability, and perhaps the buyer’s desire, to proceed.

Other issues for consideration:

Any M & A deal is teamwork between a numbers of Stakeholders on behalf of the buyer and seller. Intellectual property lawyers cannot give advice in a vacuum and must work with colleagues in various disciplines to make sure the transaction is executed competently and no issues are unnoticed. Several areas are key to these business issues. The corporate lawyers will be accountable for advising on the structure of the holding post-completion. In doing so they will frequently take into account a number of issues counting the effects on value and deal costs of employment and tax issues. Unless they are advised to do so, they may not consider the intellectual property issues. The acquisition of intellectual property may provide a unique opportunity for the consolidation of rights which have previously been fragmented. It is not unusual for a number of various group companies to apply for trade marks and for each to use the various marks on an informal and unlicensed basis. Such structures are now becoming the focus of revenue authority scrutiny as they may be deemed to fall foul of transfer pricing rules. As such, on acquisition the centralization of intellectual property in a holding company not only consolidates ownership, but, by removing the conflicting rights of the previous owning entities, creates an unfettered value in the intellectual property that is greater than the sum of its previously fragmented parts.

It also provides a platform for the buyer to establish a licensing regime from which a new revenue stream can be created. Tax issues in some deals the buyer may opt to structure the deal so that the newly acquired intangible assets are sold to a third party (in which it may or may not own a substantial portion of the shares) which will then grant a license to the buyer to use the same. Such structures can give rise to tax efficiencies especially if the owner of the intangible assets is a holding company which then licenses back the assets for use by the operating company. However, when considering such structures, the tax team often needs to be made aware of intellectual property issues which they would not otherwise consider.

For example, patent applications can only derive the benefit of certain international treaties (such as the Paris Convention and the Patent Cooperation Treaty) dependent upon the location of the applicant company. Thus, if the company is located in a jurisdiction that is not a signatory to these international treaties, it may not be able to benefit from filing under the treaty. Although most nations are signatories to such treaties, some of the smaller offshore jurisdictions are not. This is often overlooked when considering the post-completion deal structure. Employment issues As noted above, it is crucial to understand the terms on which the employees and consultants to the business have been engaged in order to ensure that intellectual property rights and confidentiality issues are addressed and documented, such that, if necessary, adjustments to the purchase price can be made, or, as is often the case, written assignments of copyright or other intellectual property rights from consultants are made conditions precedent to the completion of the deal. Technology issues Where the deal involves the acquisition of software, either commercially available computer operating systems for employee desktops or bespoke packages, and applications relating to the operation of the business’s products, it is critical that a review is undertaken to ensure the business will have a right to continue using the software post-completion. Many software packages contain change of control provisions which mean that the buyer will need to negotiate new licenses with the software provider. This can have an adverse effect on the purchase price. Similarly, if software contains open source coding, the buyer will need to be aware of the restrictions these places on its ability to develop or modify the software without being obligated to share such modifications with the open source community.

Deal documentation:

Sale agreement is very important which the intellectual property advisers are invited to review, consider and/or are concerned in the drafting and registration. The sale agreement will often hold warranties which are given by the seller as to the sale of intellectual property. But it is essential whether the information inadequate or erroneous in respect of the intellectual property assets. Further, in the event that only part of the seller’s business is being transferred, it will be necessary to structure the deal so as to make sure that there is insignificant risk that the seller’s continued business has an unpleasant impact on the intellectual property rights which the buyer acquires with the business being purchased. For example, if the buyer has paid a important amount for the exclusive trade mark rights, it will need to make sure that the seller is not at liberty to continue to use those trade marks. It is therefore usual in deal documentation to take in limitations on future use of the subject intellectual property in certain fields. This may comprise a saloon on registration of related names and the embargo on the right to make challenges against any of the intellectual property being sold. Any such limitations or prohibitions should, however, be cleared by competition or antitrust counsel to ensure they are enforceable.

As some transfers and licenses of registered intellectual property need to be recorded in the relevant registries to be deemed efficient, it is also critical that the deal documentation contains a further assurances clause under which the seller is compelled, preferably at its own cost, to effect any required documentation necessary to give effect to the terms of the sale agreement post-completion. One issue to be aware of, though, is that a further assurance clause is only effective if there is an entity able to complete the obligations ascribed to it. This is especially true in an asset sale whereby the assets have been sold and the purchase monies moved to a new holding company, and thus the selling entity dissolved. In addition, as the documents provided to the registry to evidence the transfer become public documents, it is advisable to draft simple intellectual property assignments which refer to the main deal documents but provide no commercial details of the deal. This will ensure the ongoing confidentiality of the daily commercial terms.

Finally, as claims relating to intellectual property may occur post-completion, in relation to the period prior to completion, the buyer should seek to limit its exposure to such claims either by way of full indemnity from the seller or by a hold-back of some of the purchase price. The hold-back should be placed in escrow and held subject to an agreement detailing the release events under which the monies will be released to the buyer (usually following a third party claim) or to the seller (following the passage of time, for example, the first anniversary of completion).

Conclusion:

The intellectual property right of a business may represent a significant proportion of its value .It is necessary that a buyer ensures that it gets what is paying for. The intellectual property rights including validity, enforceability and transferability will directly impact on the deal. However there is an adequate focus on from the inception of M and A deals on intellectual property.

The full value for money is depended on the ability of a buyer to ensure and its ability to evaluate the intellectual property assets of the target company. By due diligence process and by undertaking further independent investigation the buyer should be able to assess the limitations which are placed on the intellectual property. On the buyer’s ongoing process whether any intellectual property rights will be retained that may have an adverse material effect

As to reflect the negotiated deal the due diligence exercise should be considered and the deal price revisited is drafted.