Intellectual Property Due Diligence in Mergers and Acquisitions
IP issues Differe Different nt categories of IP assets of a company. Valuation of IP assets as sets. Aligning the IP assets being acquired. Means of acquiring IP assets of a Company Transfer of Domain names Tax considerations Foreign Laws impacting on IP.
Introduction: What is IP?
Most creations creations resulting from human endeavors endeavors in various fields of art, literature ,science and technology constitute Intellectual Property
Ownership Valuable Assets
Special Rights
Transferable
Intangibles
Intellectual Property
Time & cost intensive
Additional Profits
Why are IP assets important ?
Its creation is both time and cost c ost intensive
Requires an assembled trained workforce for its creation Requires building of goodwill through advertising programs
Generates Customervalue loyalty Adds to commercial of organization Its exploitation brings consistent additional profits to an organization
Trademark & domain names
Copyright
Trade secrets
Patent
Categories of IP rights Utility model/Designs
Geographical Indications
Plant Breeder¶s rights
Different
Acts governing IP assets Acts
Trade Marks Patents Copyright Designs Geographical Indications
The Trade Marks Act, 1999 The Patents Act, 1970 The Copyright Act, 1957 The Designs Act, 2000 The Geographical Indications Of Goods Act, 1999
Plant Varieties
The Protection of plant varieties and Farmers¶ Right Act, 2001
Semi conductor IC layout
Semi conductor IC layout design Act,2000
Rights
that different IP assets protect
Intellectual Property can be clearly distinguished from Goodwill. UK & Australian Generally Accepted Accounting Principles (GAAP) has specified goodwill as an umbrella concept consisting of unidentifiable intangible intangible assets and should not include those Intellectual Properties which are capable of individual identification and can be sold separately. Copyright - is a bundle of rights granted to an author of an artistic, literary or musical work to print ,publish and sell copies of his work and other allied rights. Copyright protection also extends to cinematographic film and sound recordings. Designs-- The designs entitled to protection are new and original Designs designs having aesthetic value which have not been previously known or published in India or elsewhere.
Trademarks-- is an identification symbol which may be a word, a Trademarks device, a label numeral etc. o rpurchasing a combination thereof used in the course of tradeor that enables theor public to distinguish one traders goods from similar goods of other traders
The purpose of Brand of Brand is: To uniquely identify a company and its product. pr oduct. differentiate fromvalue, competitor. To enhance the them perceived the quality and satisfaction that a customer experiences. To evoke distinct associate stands for certain personality traits and carries emotional attachment. Above all brand is supposed to inspire trust. Trust failure can lead to brand failure and brand failure can be fatal.
Patents-- is the grant of a monopoly right to an inventor who has Patents used his skill to invent something new.
IP adds value at every stage of the innovation and commercialization process
Patents / Utility Models
Industrial Designs Trademarks
Invention
Exporting
Product Design Licensing
creation
Copyright
All IP rights
Commercialization Marketing Financing
Literary / artistic
Trademarks, Ind. Designs, Geo. Indications
All IP rights
The
IP of Gillette
Gillette Company Valu Va Value($) lue( e($) $) Total Tota To tall Asset Values in US $ Working W orking Capital Capital Fixed/other F ixed ix ed/o /oth ther er as asse assets sets ts
2,850 5,13 5, 5 ,1 131 31
4.9% 4.9% 8.8% 8.8%
IIntangible ntangible assets assets
5,854
10.0% 10.0%
IP IP Total Invested Capital
44,700 58,535 58,535
76.3% 76.3% 100% 100%
World's three most valuable trademarks!
1992 Financial Week listed, as the world's three most valuable trade marks,
billion US dollars, and "Budweiser", worth 10.2 billion US dollars.
5 0
Budweiser
IP-- Duration of Term of IP Protection
Patents (20 years) Trademarks (10 years + renewals) Copyrights in published literary, dramatic, musical, and artistic works (Lifetime of author +60 years). Copyright in photographs ,cinematographic film, sound recordings (60 (60 years from year in which it was published) Broadcast reproduction rightright -( -(25 years from the beginning of the calendar
year next following the year in which the broadcast is made.)
Performers rightright -( -(25 years from the beginning of the calendar year next
following the year in which the performance is made)
Industrial designs (10 years+ renewal permitted once for 5 years ) Trade--secrets Trade -secrets and know how collectively proprietary technology (contract period--protected period -protected by contract provisions, doctrine doctrine of breach of trust)
IP--Flow -Flow in Mergers and IP Acquisitions
A merges into B Company A (Owns IP)
-> ->
Surviving company (B)
(IP of A becomes property of B) ( IP of A transferred to B)
IP--Flow -Flow in Mergers and IP Acquisitions
In a corporate acquisition, there is no transfer of interest in the IP. Company which IP, gets acquiredCompany by Company A, B and by owns virtuethe of such acquisition, B gets control over all assets of Company A, including its IP. In a takeover, the ownership over the IP continues to remain with the Target Company, though the acquirer company gets effective control over the IP
determine the Value ?° ¯How to determine What underpins the cash flows of this business - fixed assets, people ,IP assets , knowknowhow ? business
People
Once you have worked out what drives the value make sure that it is still there after you have acquired Fixed assets
the business!
Intangibles - usually a part of business valuation
B
rand valuation
The modus operandi of the valuation would vary in each case as they are strongly influenced by existing environments. The environments broadly are internal & external environment and environment and the major variables aretechnical internal knowstrength, scenario, consumer perception, know -howmarketing -how and its changing speed, growth prospective, competition scenario, government policy, impact of globalization among others. To valuate a brand and other intellectual properties the valuator requires careful analysis, keen judgment, thorough professional knowledge and a team of members who have expertise in finance, marketing, technical knowknow-how, -how, and in legal fields. There are forty odd variables, which in generic term are called environments that affect the value of the brand. br and.
W HY HY DO WE NEED IP VALUA TION?
Intangible
benefits-
Enhanced
Confidence ,Indicator of effective utilization , Credibility to the real worth, Strategy development
Tangible
Benefits in Mergers and Acquisitions-
A) Can help in Capitalization Capitalization:: A Balance Sheet which incorporates a brand value provides a more realistic picture and goodwill arising from an acquisition can be reduced as goodwill invariably needs to be amortized where as the brand value can stay in the Balance Sheet giving more realistic presentation of capitalization b) Merger & Acquisition: Acquisition: It is of critical importance for an acquirer, as well as for the vendor to understand and evaluate their real worth for negotiating the correct price. As the valuation report does not only indicates value, the report also shows as to how the value has been worked out elaborating all assumptions, which provides the real insight and would be of great value to the acquirer C) For taxation purpose: purpose: Taxation department desires that all such transfers must be executed at Arms length transaction. Valuation certification from an independent establishment of repute is the best way to establish that the value of transaction as reflected is a true value
Reasons
Why IP is Ignored Under
estimation of its importance Time Required for Grant of a Patent/registration of TM
Lack of Awareness
Myth that it cant be computed /valued
Cost of Patenting
Enforcement of IPR
Importance of Intellectual Property due diligence
The increased profile, frequency, and value of intellectual property related transactions have elevated the need for all legal and financial professionals and IP owner to have thorough understanding of the assessment and the valuation of these assets, and their role in commercial transaction Intellectual Property due diligence generally provides vital information specific to future benefits, economic life and ownership and the limitations of the assets all of which affectsrights final value.
Therefore due diligence is prerequisite to the valuation process, regardless of the methodology used.
IP due diligence in Mergers & Acquisitions
IP
Due diligence is the process of investigating a partys ownership, right to use, and right to stop others from using the IP rights involved in sale or merger ---the ---the nature of transaction and the rights r ights being acquired will determine the extent and focus of the due diligence review. Due-diligence should reveal Who owns the rights? Are the rights valid and transferable and enforceable? Are there any agreement or restriction that prevent the party for granting rights to other? Is the property registered in the proper office? Any shortcoming or default on payment? Any the pastproperty or potential po tential litigation? Has being misused in the past rendering right unenforceable? Any encumbrances? It should also evaluate agreements material to the companys co mpanys business that may be affected by change of control, co ntrol, agreements that may vest rights in intangibles, and company policies and practices.
Pre Pre--due -due diligence formalities
Before the due diligence commences, counsel of both the parties must consider important legal issues related to conducting the due diligence such as confidentiality obligation of the target company and execution of the due diligence should also be arranged between between the parties
Legal basis for due diligence diligence--often -often starts in the form of letter of intent or memorandum of understanding and commonly regulates the due diligence process process. Confidentiality agreement between buyer and .Target Company is one of the necessity and both should ensure that it is carefully drafted and shall include the scheduling, modus operandi operandi and deadlines, with due emphasis on AttorneyAttorney-Client -Client privilege
The
scope of Intellectual property due diligence
The scope of Intellectual property due diligence will be determined by a number of factors factor s such as parties goal in the transaction tr ansaction such as capital contribution, assets transfer, security of loan, or internal assessment of its own and will be influenced by budgeting, available human resources, the size and complexity of target company and its intellectual property portfolio among other such issues. Buyer having done the preliminary due diligence with respect to current status of Intellectual Property portfolio should evaluate the portfolio with respect to function strategy to work out :
Target company should make a preliminary assessment of the current status of its intellectual property portfolio and management including: Current holding and their status. Goals for the portfolio. Historical and prospective investment in Intellectual Property
acquisition, protection and exploitation. This would also help the target company to define its perspective. If the due diligence were being conducted for internal purpose the goal would be quite different than the due diligence for external reason.
What an IP attorney ought to consider
The most significant provisions of the agreement from the IP attorneys perspective are: (1) definitions of assets and IP; (2) the scope of the transfer; and (3) representations and warranties. warranties. the representations disclosure schedulesand warranties, indemnification provisions, and Disclosure schedules are also critical because typically the seller is not liable, unless the purchase agreement otherwise provides, for any monetary damages resulting from disclosed events. Due diligence conducted at three levelslevels-personal interviews, document review ,and independent investigation Review of Agreements material to the companys business that may be affected by change of control
DUE DILIGENCE:
What are some typical provisions that might raise a word of caution? THE ANALYSIS
Anti-assignment Silence on assignment -
Non exclusive rights grants to or from your client Covenants not not to sue (any covenant!) Automatic
reversion/transfer of rights reversion/transfer Government licenses
Ambiguous or ineffectual rights grants Termination Loss of rights Indemnification (especially if not limited) Sublicenses Assignments Non-compete Source code escrow Unusual jurisdiction
Important Impo Im porta rtant nt ch chec checklist eckl klis istt--cop -ccopyright opyri yrigh ght t
Scope of Rights (exclusive, nonnon-exclusive) -exclusive)
Grants Effective Rights Transferable
Assignments in Proper Order
assignment where appropriate Registrations in Proper Order
No Encumbrances/Liens
Significant Trademark Issues
Scope of Rights (exclusive, nonnon-exclusive) -exclusive)
Grants Effective Rights Transferable
Assignments in Proper Order
assignment where appropriate Registrations in Proper Order
No Encumbrances/Liens
Significant Trade Secret Issues: Issues:
Confidentiality/security precautions and Confidentiality/security procedures
Proper markings/legends
Employment
agreements
Non--disclosure Non -disclosure agreements
Significant Domain Name Issues:
Verification Verificatio n of record owners Assignments in proper order Status of registration and renewal
Crucial Factors for IP due
diligence xtent of statutory protection IPRs enjoy e njoy
E
Value of each IPR Level of risk infringement of third party rights and infringement by others. With respect to the agreement involving the acquisition, it is critical that the seller appropriate warranties such as warranty that it owns ow ns full title in the provides intellectual property as well as representations regarding controversies, litigations, litigations, claims of infringement, title disputes, and any other specific matters that are important to the buyer and the transaction. Technology Valuation-important considerations Size:: Whether there is market for the product of technology Size Scale: scale of operation of technology is appropriate to that market Maturity:: Whether technology is market proven or new Maturity Obsolescence:: whether it is about to be replaced by new developments Obsolescence Environment adaptability: adaptability: whether technology can be satisfactorily operated in transferees environment environmentss Appropriateness: Whether technology is appropriate for infrastructureinfrastructureavailable power, telecommunications, transport etc
ISSUES THAT
NEED EXAMINATION WITH RESPECT TO TRADE AND SERVICE MARKS
Definition
of Rights Registered marks Pending applications Trademarks exploited by Target Company but not subject of registration Ownership Marks created by Target Company Com pany employees Marks created by independent contractors Marks assigned to Target Company by third parties Liens and other mortgages Third Party Rights Concurrent use and consent agreements Licenses from third parties Freedom to useuse- - Protection/Registration
Status and and scope scope of of registered marks Status pending applications NonNon-registered -registered marks (marketing/registrability) Proper use of markings Exploitation Inventory of products/services on or o r in connection with which marks are used Licensing practicespractices- general/misuse InterInter-company -company licensing practices Internet use/licensing Nonuse Enforcement/Disputes Company thre atened, pending actions against parties Target Third party threatthreatened, threatened, ened, pending actions against Targetthird Company Summary, Conclusions, General Comments Examine and evaluate opinion letter and cease and desist letters.
LICENSING OF INTELLECTUAL PROPERTY
Every
merger and acquisition poses a Question: whether merging companies intellectual intellectual property license rights r ights would remain intact pursuant to merger. General principles of contract law provide that rights under agreements are presumed to be assignable unless the statute, the contract, or publicconsequences policy provides or there exists a material adverse to otherwise the other party. Case example: example: General radio and appliances Co ltd v MA Khader (1986) 60 com cas 10131013-facts -facts transferor company in amalgamation was tenant ,rent agreement specifically prohibited subletting without written consent of landlord . Landlord instituted eviction proceedings against transferee. Court held transfer of tenancy rights under scheme of amalgamation was bad in law being made without consent of landlord. Similar position in law with respect to trademark and copyright copyr ight licenses.. licenses
Challenges of Valuing IP Asset As Assets setss in case case cas e of M& M&A A
Assets that may qualify as a company's IP may be easily overlooked, like;
information maintained maintained in notebooks and/or stored on a computer by any employee. a pending patent application assigned to the company an invention disclosure from an engineer to company decisiondecision-makers -makers for consideration as to whether to pursue patent protection, proprietary software source code developed ininhouse.
Challenges of Valuing IP Assets
Valuing IP assets is often a difficult task because their true value may not be readily apparent The value of an IP asset may not be recognized in income received by the company. Indeed, the full value of an IP asset is likely never recognized in income because much of the asset's value resides in the negative right to prevent others from doing something they would otherwise be permitted to do Valuing an IP asset is further complicated complicated because such value is generally not stagnant. Rather, the value of an IP asset often changes over time. Consequently, a company should periodically (e.g., annually) rere-assess -assess the value of its IP assets
Challenges of Valuing IP Assets Contd.
The pending patent application is an asset representing a potentially enforceable enforceable right that may be conferred to the company in the future. If the would company were to acquiredtobyitsanother, value certainly bebe attributed pendingsome patent applications applications as company "assets" in determining a fair purchase price for acquiring the company. If the company were to be acquired, no value may be attributedprice to thefornotebooks determining a fair the purchase acquiring in the company because notebook's content may be largely unknown. Consequently,, a company may possess a vast amount Consequently of IP, some of which is readily identifiable and others of which are difficult to identify
Reorganising and structuring deals
If all or most of the IP owned by the corporate seller is not assignable as a result of the contracts vesting ownership in the of seller, then aisstock purchase, in which the assignability the assets not important, may be preferable preferabl e to an asset purchase. In this case, both parties are protected: the seller is not forced to make representations about assignability that are impossible to meet, and the purchaser is not forced to assume the risk of claims of infringement or the inability to enforce IP rights arising from the ineffectua ineffectuall transfer of rights.
Due Diligence
If
for valuation
helps build strategy
Intellectual Property asset is underplayed the plans for maximization would be discussed. If the Trademark has been maximized to the point that it has lost its cachet in the market place, reclaiming may be considered. If mark is undergoing generalization generalization and is becoming generic, reclaiming the mark from slipping to generic status would need to be considered. Certain events can devalue an Intellectual Property Asset Asset --events events in respect of IP could be adverse publicity or personal injury arising from a product. An essential part of the due diligence and valuation process accounts for the of information product andrevealed companyin-related company-related on assets management canimpact use risk the dueevents diligence.
Due diligence could highlight contingent risk which do not always arise from Intellectual Property law itself but may be significantly affected by product liability and contract law and other non Intellectual Property realms.
Methods for valuation of Intellectual Property
The choice of approach will be determined primarily by the type of Intellectual Property asset is to be valued, the circumstances of the specific transaction, the availability of information and the level of due diligence that the corporate is willing to take on. When multiple approaches are Cost approach applied a comparison and reconciliation of resulting value is possible.
Valuation Methods
Market approach In Inco come me Ap Appr proa oach ch
Othe Ot hers rs
Principles of Valuatio aluation n
The cardinal rule of commercial valuation is: the value of something cannot be stated in the abstract; all that can be stated is the value of a thing in a particular place, at a particular time and in particular circumstances. Value of an asset or liability is the present value of future f uture economic benefits or losses that can be reasonably anticipated anticipat ed to accrue to the owner of that asset or liability.
Cost based approach
Based on the principle of substitution, i.e., value of an asset is estimated on the basis of cost to construct a similar asset at current prices.
Components of cost approach
Cost of reproduction Cost of replacement Depreciation cost Original cost
Book cost
Cost approach
Valuation Process
Identify historical Costs of developing the intangible asset, adjust for time value of money Add an appropriate rate of return to calculate developers profit Disadvantage:: it seeks to correlate cost with value. Disadvantage Caution: NOT ALL DEVELOPMENTS BASED ON INVENTIONS LEAD TO SUCCESSFUL PRODUCTS
Market Based approach
Estimates
the value of an intangible asset based on market prices of comparable intangible assets
that have been bought/sold bought/s old or licensed between independent parties. Also referred to as the Comparable Uncontrolled Transaction (CUT) method, and is similar to the Comparable Uncontrolled Price (CUP) method.
B
Requisites Market
ased
An active, public market. assessment of fair market value An exchange of comparable products comparison with with the sale value of similar assets There are various elements of comparison, which should be given due importance while analyzing and comparing the transactions such as, functional characteristics characteristics of intellectual property, physical characteristics charact eristics of intellectual property, the size of industry in which the intellectual property is transferred, the economic condition, the existence of any special term and the legal rights that have been transferred.
Limitations:
In practice difficult to find sufficiently comparable transactionstransactions-price -price information, sales or licensing statistics usually confidential.
Income based approach
Estimates
the value of an intangible asset based on the expected income attributable to the intangible asset during its remaining economic life. Also known as Discounted cash flow analysis
Income based approach Contd.. Essential Elements
The amount of the income stream that can be generated by the property
An assumption as to the duration of the income stream
An assumption as to the costs and risks associated with the realization of the forecasted income
Income based approach Contd..
Valuation Process
Forecast income and costs associated with using
Compute Net Present Value of future cash flows (use
the property over the life of the property
appropriate discount rate reflecting risk of investment)
Limitations Estimating income Suitable where fair Financial projections can be made
Attributable to intangibles, its economic life, appropriate Discount rate
Other
Approaches
Other Internationally accepted approaches include:
Market Capitalization method Profit based methods Profit split method The Economic Benefit Approach
Table
shows how big the economic
contribution made by brands to companies
Instances of Brand Valuation in M&A
In 1988, UK UK--based -based GrandMet acquired the Pillsbury company. It wasitestimated that 88% price paid consisted of of the "goodwill" i.e., GrandMet paid approximately $990 million (L608m)) to acquire the Pillsbury (L608m brand name and its other branded properties (Green Giant, Old EllPaso, HäagenHäagen-Dazs, -Dazs, etc.).
Tangibl e Assets 12%
Intangi ble Assets, 88%
Instances of Brand Valuation in M&A
Volkswagen, bought the assets of the RollsRolls-Royce -Royce automobile corporation for $780m against a net tangible asset value of US$250 million But it somehow did not include the brand in the deal... The rights to use the RollsRollsRoyce trademark were subsequently purchased by rival BMW for $65m and many analysts believe that BMW got the better deal.
$800 $700 $600 $500 $400
Vo ks a gen
$300
W
$200 $100 $0
Assets
Aligning the IP being acquired against the business being acquired
The intellectual property property to be b e 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 vacuum.
For example, an extensive portfolio of granted patents may be of no or little value tothe a business none or very few of thepatents, products made or still, processes used in businessifare referrable to those and worse if those products or processes infringe third party rights
The intellectual property property to be b e acquired should be properly categorised by substantive type typeeg eg granted patent, patent application, registered trade mark, common law trade mark etc; by its ownership; by third party interests involved 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.
Aligning the IP being acquired against the business being acquired
IP your company is acquiring will allow it to benefit from the transaction in the way it expects. For example, if your company is buying a business to use its trade mark, the business may be less valuable if the tradeof mark registration does not cover the appropriate classes goods or services.
Similarly, a business with a number of patents may not be as valuable as it appears if the key product manufactured by the business is not covered by those patents, or if the key product infringes another patents and of no value either,persons so checkpatent. that IPLapsed renewals are up to designs date. are
Search all relevant local and foreign patent, design and trade mark registers to ensure that IP protection is available in all of the key markets of the business.
Means of acquiring IP assets Mergers & Acquisitions
Transfer documents
Supplemental Closing Documents
Asset Sale
Purchase Agreement Stock Sale
Share purchases & stock purchases
Share purchases will transfer the entire rights in the intellectual property by operation of law. If the acquisition is structured as a stock purchase, documents transferring the assets generally are not necessary, instead, documents which transfer the stock will allow the buyer to indirectly become the owner of the assets. In the context of intellectual property assets, very often they will be separately transferred to a holding company company and either licensed back to the operating company company or become the subject of a subsequent sale to the ultimate purchaser.
Stock purchases
In the context of a stock purchase acquisition, ownership of trademarks and other intellectual property still remains with the acquired company. Purchase of shares will not affect distinct property rights in intangible assets or other intellectual proper property ty to be properly transferred, although a separate agreement is usually necessary to underscore the parties intentions.
Asset Purchase
If the transaction is structured as an asset purchase, the intellectual property assets will be either specifically mentioned in the acquisition agreement or become the subject of a separate bill of sale. However, very often intellectual property property assets are the subject of a separate s eparate agreement in light of the fact that they require recordal of the new owner in the respective jurisdictions in which they are validly owned and used. Furthermore, the forms and requirements for valid transfers differ from country to country and become a matter of public record
Sale of assets
If a business is sold as a going concern, the intent to transfer trademarks trademarks and the goodwill associated therewith is presumed, even though not expressly provided for. An exception to this concept lies in the context of transactions between parent corporations and their wholly-owned subsidiaries. Asset-based purchases in this context will not automatically include intellectual intellectual property rights, rather, ownership of the intangible assets will remain with the parent corporation unless the underlying agreement agreement expressly provides for transfer to the subsidiary
Transfer
of Domain Names
Domain names
Domain names perform the function of a trademark if it denotes the source or origin of goods/servic goods/services. es. Ownership of domain names can be transferred transferred in M&A
Transfer of ownership
The transfer of ownership of a domain name should consist of no less than three documents; the Acquisition Agreement, Agreement, a document issued by the relevant domain name registry attesting to the transfer (if such change is not done electronically) and an assignment agreement.
Documents
The latter two documents may be set forth as exhibits to . the Acquisition Agreement or delivered as a post-closing obligation.
Transfer of domain names
The Acquisition Agreement should make certain to address the intersection to domain names and trademark law. In addition to stating the intentions of the parties and transferring the domain name itself, all common law trademark, copyright and other intellectual property rights related to the domain name should be should be subject to the transfer as well. Representations and warranties to the effect that the seller is the sole owner and that the subject domain name is not subject to any claims of infringement or other claims or actions should be made, together with indemnity provisions in favor of thefrom buyer. The agreement should further prohibit the seller registering or using a similar or related domain name
Transfer of domain names
Specific reference reference to the domain name registrar
should bebuyer madeand withseller an affirmativ affirmative e obligation on both the to execute any documents it requires. In most instances, the buyer is responsible for filing any required documents with the relevant domain name registry and this should be explicitly set forth in the Purchase Agreement.
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.
Tax considerations considerations
Depending upon the scope of the business activities of Depending the purchaser, it may choose not to simply obtain record title to intellectual property assets received in a merger or acquisition, rather, it may choose to sell its newly acquired intangible intangible assets to a third party (which it may or may not own a substantial portion of the shares) and receive a license to use same.
Very often, this can be achieved in the most tax efficient manner by placing ownership of the intangible assets in a holding company which then licenses back the assets for use by the operating company.
Tax Entities
which create or acquire IP assets has the ability to claim a tax deduction for their costs
costs includes patent or trademark registration fees, royalties, legal costs and salaries and equipment costs for R&D activities
ss 10A 10B, 80IA, and 80IB of the IT Act.
considerations IPR were brought under the service tax law w.e.f. 10th September 2004.
IPR holders are required to get registered with the appropriate authority under service service tax rule for providing IP Services for consideration of Royalty Royalty.. liable to pay service tax @ 12.24% (12% service tax + educational cess @ of .24 % of the tax) on the gross amount charged fromservice the receiver Not available for the tax year in which amalgamation / demerger take place
These incentives are thereafter allowed to the amalgamating /resulting company company,,
Foreign laws impacting on IP
It is not uncommon in present day acquisitions for rights in intellectual property to arise in various jurisdictions jurisdictionseg eg foreign registered trade marks, granted patents etc etc or in the case of licences, for those to be governed by the laws of jurisdictions or outside India. 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 second different to Indian law on intellectual property issues fundamental to the acquisition acquisition eg US law may treat the assignment assignment of intellectual property licenses by licensees differently likely to beto dealt Indian withlaw. on their Adopting merits, such and anas approach a consequence, means that thisissues lessens are the more risk profile for the acquirer.
The deal should not be viewed as complete until recordal of the transfer of title has been effected
WORLDWIDE RECORDAL OF INTELLECTUAL PROPERTY RIGHTS .
N ecessity ecessity for Prompt Recordal : The intellectual property rights of the acquired company need to be
transferred where into thesuch name of the new owner in each jurisdiction rights exist. First, if a change of ownership is not promptly recorded, a misconception can arise in the marketplace as to the identity of the actual owner, leading leading to a possible loss of rights where a trademark no longer functions as a true indication of origin. Second, the new owner may not be able to prosecute infringements, infringeme nts, file oppositions or attend to renewals or annuity payments.
N ec essi essity for Prompt Recordal
Third, fines and/or penalties may be assessed for late recordal of a transfer. Fourth, the failure or delay in recording a transfer of ownership may result in a possible loss of royalties. Fifth, license recordals and registered user entries will no longer be current and may affect the validity of the use by a licensee and/or governmental approval approval for foreign exchange authorizations for remission of royalties.
N ec essi essity for Prompt Recordal
Finally, in the event an equitable transfer occurs the requisite official patent changeand of recordwithout ownership at the relevant trademark offices offices throughout the world, the th e new owner will encounter enormous difficulties when confronted with the maintenance, sale,and/or enforcement, hypothecation, licensing use of the intellectual property property rights.
THE FINAL WORD
It is anticipated that intellectual property will be the dominant force in future commercial transactions comprising tomorrows mergers and acquisitions!