The awareness of intellectual property as an important feature of commercial transactions reached its peak in the recent past during the 'dot com era'. Notwithstanding that the 'dot com' bubble burst in early 2000, the importance of intellectual property (IP) has in no way diminished, rather it has attained a greater legitimacy than was present in those hyperactive times. That legitimacy now makes it an essential consideration for any merger and acquisition type of transaction. The implementation of the new accounting standards for intangibles commencing from 1 January 2005 will further increase that importance.
This article seeks to identify 10 key ingredients for successfully dealing with intellectual property matters in a mergers and acquisitions (M&A) context. That success is considered not only from a time and cost perspective—ie least time and least cost to achieve the desired outcome—but in minimising post closing difficulties. The ingredients are also considered not only with a view to addressing purely legal issues, but with a view to addressing the approach of the key players to those issues and each other. Those key players are the client, the lead M&A lawyer and the lead IP lawyer in the transaction. The ingredients are presented from an acquirer's perspective.
Early Warning Signal Of The Importance Of IP
The extent to which the price proposed to be paid for the relevant acquisition exceeds the value of net tangible assets should be adopted as a 'rule of thumb' for determining the importance of intellectual property to that transaction. The greater the disparity between the proposed price and the value of net tangible assets, the more likely intellectual property is to be important to the transaction, and therefore the greater the reason to properly investigate the seller's intellectual property. This 'rule of thumb' derives from examples such as the Volkswagen acquisition of Rolls Royce, where Volkswagen agreed to pay approximately US$790 million for the Rolls Royce business against a net tangible asset value of US$250 million for that business, but where among the significant intellectual property that was not acquired upon closing, was the 'Rolls Royce' trade mark1 In that case, use of the above 'rule of thumb' would have prompted an early warning to adopt greater rigour in checking the seller's entitlements to the 'Rolls Royce' trade mark.
Determining The Place Of IP In The Transaction
The lead M&A lawyer, the lead IP lawyer and the client should, at the outset of the transaction, and where appropriate during its course—eg following the first substantive due diligence report—meet together to determine the importance of intellectual property to the transaction. This will aid in overcoming the not uncommon initial position of the lead IP lawyer thinking that intellectual property is the most or one of the most important aspects of the transaction and that of the lead M&A lawyer trivialising its importance. This process gives the parties a common understanding of the place of intellectual property in the transaction and therefore minimises the tensions that can flow from the adoption of the initial extreme positions mentioned above.
Characteristics Of The Lead IP Lawyer
The lead IP lawyer should first be a 'generalist' in relation to intellectual property, in the sense that he or she should have a good working knowledge of all forms of intellectual property likely to be relevant to a transaction, and second should have principal experience in the transactional aspects of intellectual property and not the litigation aspects. That type of lawyer will not only be in the best position to identify and deal with relevant IP issues, but most importantly know when to bring in more specialist IP expertise. Additionally, by reason of the second characteristic, that type of lawyer is more likely to understand the commercial imperatives of the transaction.
No IP Due Diligence Is Perfect
While every effort should be made to ensure that a thorough due diligence occurs in the time available, all parties must recognise and make allowance for the fact that there is no such thing as a perfect due diligence in relation to intellectual property. Relevant materiality signposts should therefore be established that are both quantitative and qualitative.
Aligning The IP Being Acquired Against The Business Being Acquired
The intellectual property to be acquired should be considered by reference to what is actually being used or required to be used in conducting the business to be acquired and not in a theoretical vacuum. For example, an extensive portfolio of granted patents may be of no or little value to a business if none or very few of the products made or processes used in the business are referrable to those patents, and worse still, if those products or processes infringe third party rights.
Key Analysis Points For IP
The intellectual property to be acquired should be properly categorised by substantive type—eg granted patent, patent application, registered trade mark, common law trade mark etc; by its ownership; by third party interests involved in that intellectual property and by disputes related to that intellectual property. These factors will provide the foundation to identifying the necessary steps to effect a proper transfer of title, the obstacles to such transfer that need to be overcome, as well as the warranties that may be required.
Tax Considerations Governing The Structure Of The Deal
The structuring of an acquisition is frequently governed by tax considerations. The lead IP lawyer must be alert to the consequences arising from any particular structure jeopardising intellectual property rights. For example, transferring all the intellectual property to a separate IP holding company while transferring all tangible assets to a separate operating company, will cause problems if common law trade marks are involved, because common law trade marks cannot be validly assigned separately from the goodwill attaching to the business assets sold.
Foreign Laws Impacting On IP
It is not uncommon in present day acquisitions for rights in intellectual property to arise in various jurisdictions—eg foreign registered trade marks, granted patents etc—or in the case of licences, for those to be governed by the laws of jurisdictions outside Australia. In such a context, two factors are particularly important: first, to have access to a network of good quality intellectual property counsel to address issues arising from such laws and second, to begin with the presumption that the laws in those jurisdictions will be different to Australian law on intellectual property issues fundamental to the acquisition—eg US law treats the assignment of intellectual property licences by licensees differently to Australian law. Adopting such an approach means that issues are more likely to be dealt with on their merits, and as a consequence, this lessens the risk profile for the acquirer.
Distinguishing Between, And Identifying Tangible And Intangible Assets
Not only does a clear distinction need to be made between the tangible and intangible assets to be acquired, but a clear identification needs to be made of what is comprised in the intangible assets. This is necessary for four principal reasons: first, to ensure that the provisions of the contract governing the acquisition are appropriate—eg provisions relating to the transfer of title in the medium on which software is recorded are different to the provisions which relate to the exercise of copyright rights in that software; second, the provisions of the contract governing the acquisition of a certain type of intellectual property may be different to the provisions required for another type of intellectual property—eg provisions relating to the transfer of copyright are different to the provisions relating to the transfer of registered trade marks; third, there may be tax depreciation benefits that flow to an acquirer from identifying values relevant to specific patents, registered designs, copyright as well as the licences for those rights; and fourth, it will make it much easier to comply with the new accounting standards for intangibles, which come into force from 1 January 2005.
The Deal Should Not Be Viewed As Complete Until Recordal Of The Transfer Of Title Has Been Effected
Prompt recordal of assignments of any registered or granted rights, any rights the subject of an application for registration or grant, or if appropriate, any rights as a licensee, is always to be preferred over any substantial delay in that process. This is the case in order to prevent third parties recording prior interests, and so as to ensure that all records are updated, for when the next dealing with that right occurs—eg by transfer, licence or mortgage. Too often, effecting such recordal is given a very low priority and this gives rise to unfortunate consequences and additional costs.
The preferred position also means that all relevant documents relating to such recordal should be handed over on closing and not at some later time; the seller should be obliged to sign such other documents as may be necessary to complete the process; and the seller should also be obliged to assist in answering any requisitions in respect of applications that may be assigned.
While each M&A deal has its own peculiarities, and the above ingredients do not purport to be exhaustive, bringing the above factors into play should go a long way to ensuring that, so far as intellectual property is concerned, the best possible result is achieved, in a timely and cost effective manner.
1. Rights to the 'Rolls Royce' trade mark were obtained subsequently, but at an additional cost.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.