With the growth of startups and heightened awareness around the valuation of businesses, Intellectual Property Rights (IPRs) can be very valuable assets and ought to be considered, like other proprietary rights, in merger and acquisition transactions.
For instance, some of the most valuable IPRs include the Amazon and Apple trademarks valued at $416bn and $352bn respectively. Furthermore, with a number of technology start-ups being acquired, there is the possibility that they would have a portfolio of patents or copyright that would cover their software and products and these may form the most valuable assets of the target companies. Consequently, the determination of the value of IPRs is vital as it helps the parties reach an agreement on the consideration to be paid by the buyer/acquirer.
Taking into contemplation how critical IPRs are, it becomes necessary to consider certain key issues that should be addressed and steps that ought to be taken by the parties to effectively transfer IPRs during a merger or acquisition. These include:
Conduct Due Diligence
Conducting a due diligence exercise in a merger or acquisition transaction is crucial. The following steps should be adopted during a due diligence exercise:
a) Identify the IPRs – The first step is to identify the IPRs that are to be transferred as part of the transaction. This is because the target company may have other IPs that it does not own but has used under a licensing or franchising arrangement.
In addition to information regarding the existing IPRs that the target may have provided, an independent search should be conducted to confirm whether there are any other IPRs which may have been omitted.
Ownership confirmation is crucial as some companies fail to secure ownership rights of IPs that may have been built by third parties such as software engineers or developers. For instance, some software developers build digital platforms and may still want to claim ownership over the technology used to build the platform for the client.
In the absence of effective transfer of ownership, even though it may appear that the company owns the IPRs, a third party may emerge who may then contest ownership.
b) Validity – With regards to validity, it is pertinent to note that some IPRs have expiration periods. For instance, a trademark is valid for seven years in the first instance and then it expires and so should be renewed for another period of fourteen years. The renewals would then take place every fourteen years. Patents are also valid for one year and should be renewed annually for a period of twenty years, following which the patent lapses and goes into the public domain.
It is therefore necessary that the validity of the IPRs are determined at the time of the acquisition because if an IPR has expired and the renewal period has lapsed, the purchaser will be obtaining an IPR that lacks value.
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When contemplating a merger or acquisition, it is vital to proceed carefully with respect to the IPRs. Failure to do this may lead to the undervaluing or overvaluing of the IPRs.
c) Use of the IPR – It is important that the purchaser examines the IPR being obtained to determine if it is suitable for the intended use. For example, trademarks are registered in different classes. A fintech company would typically have its trademark registered under Class 36 (financial services provided through the internet) and so if the trademark is being acquired, it is expected that it would be registered in that class.
However, if the fintech registers its trademark in Class 35 (advertising services provided through the internet), it would mean that there is no protection under the relevant class. Thus anyone who acquires the trademark and intends to use it for the fintech company would not have a relevant trademark to ensure adequate protection. Thus, this must be looked at closely to ensure adequate protection.
d) Disputes – Information regarding any threatened or pending litigation or claims should also be obtained. The nature of the claims or potential damages should be assessed as this may have an effect on the future exploitation of the IPRs and serve as a basis for determining the value of the transaction.
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Review all existing IP Related Agreements
After identifying the IPRs, it is vital to obtain and review all IP related agreements for terms or conditions that would impact the transaction or the exploitation of the IPRs. Some of the relevant agreements are Licensing Agreements, Franchising Agreements, Deeds of Assignment, Co-existence Agreements, Settlement Agreements and Distribution Agreements.
Some of the terms and clauses to look out for include those relating to change of control, assignability, exclusivity, rights to enhancements and improvements, the scope of use, jurisdictional limits and the right to sub-license.
Websites, domain names and Social Media
The seller’s websites, domain name and social media accounts may be an important part of its business as a lot of startups now conduct their businesses through these channels. As a matter of fact, a lot of startups have minimal physical presence but conduct most of their business virtually and through their social media platforms such as Twitter, Instagram and LinkedIn. In that regard, an acquirer may have the following concerns:
● Is the seller the registered owner for all of the key domain names of the seller?
● What are the company’s social media accounts? Are they registered in the name of the company or in the name of an employee or consultant?
● Are the seller’s Terms of Use Agreement and Privacy Policy sufficiently protective of the company?
● Who owns the content posted to the company’s websites or social media accounts? Is the company free to use such content as it determines appropriate?
These and other relevant questions need to be asked before acquiring these platforms which form part of the company’s IPRs.
Indemnification by Seller on IP Issues
An acquirer will demand that the seller indemnify the acquirer for breaches of IP-related representations, all known claims (including pending litigation) and, frequently, future claims related to the seller’s IP. Negotiating the terms, conditions, and limitations of these indemnification provisions is one of the most important negotiations in an M&A deal, especially where, as is usually the case with startups, the seller’s real value is in its IP.
Obtain Warranties and Indemnities
In a merger or acquisition, the acquirer should, as a way of protecting its interests, obtain certain IPR-related warranties and/or indemnities from the seller. These warranties/indemnities should include the following: that the seller is the owner of the IPRs; that all renewal and maintenance fees have been paid; that the IPRs are valid and subsisting; that the IPR does not infringe any third party’s rights, and that there are no rights that have been created in respect of the IPRs (e.g. licences) that could interfere with the buyer’s enjoyment of the IPR.
Draft Agreements for the Transfer of Intellectual Property Rights
To effect and properly evidence the transfer of the IPRs, proper documentation such as Deeds of Assignment and Licences should be drafted and executed by the parties. It is important to do this in good time, especially if one of the parties will cease to exist after the transaction and may no longer be able to sign the relevant documents.
In drafting the agreements, it is pertinent to consider whether the target is required to obtain consent from any third party for the transfer of any IPR. If this is the case, then the acquirer should require the target to represent in the agreement that all required consents have been obtained and also undertake to indemnify the acquirer in the event that the representation is false.
In addition, once the agreements have been executed, they should be filed at the relevant Registries.
CONCLUSION
Intellectual Property Rights are some of the most valuable property rights that an organisation may hold. When contemplating a merger or acquisition, it is vital to proceed carefully with respect to the IPRs. Failure to do this may lead to the undervaluing or overvaluing of the IPRs. As such, it is advisable for parties to a merger or acquisition involving the transfer of IPRs to seek the assistance of experienced intellectual property lawyers at every step of the transaction.
