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Intellectual Property Due Diligence in Mergers and Acquisitions

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1 Intellectual Property Due Diligence in Mergers and Acquisitions
Conference: ITC Hotel Grand Maratha Sheraton & Towers, Mumbai 28-29 June Karnika Seth, Attorney at law & Partner SETH ASSOCIATES ADVOCATES AND LEGAL CONSULTANTS

2 © Seth Associates, 2006 All Rights Reserved
Presentation Plan Different categories of IP assets of a company. Valuation of IP assets. 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. © Seth Associates, 2006 All Rights Reserved

3 Introduction: What is IP?
“Most creations resulting from human endeavors in various fields of art, literature ,science and technology constitute Intellectual Property” Ownership Valuable Assets Intangibles Intellectual Property Special Rights Time & cost intensive Transferable Additional Profits © Seth Associates, 2006 All Rights Reserved

4 Why are IP assets important ?
Its creation is both time and cost intensive Requires an assembled trained workforce for its creation Requires building of goodwill through advertising programs Generates Customer loyalty Adds to commercial value of organization Its exploitation brings consistent additional profits to an organization © Seth Associates, 2006 All Rights Reserved

5 Categories of IP rights
Utility model/Designs Plant Breeder’s rights Geographical Indications Trade secrets Trademark & domain names Copyright Patent © Seth Associates, 2006 All Rights Reserved

6 Different Acts governing IP assets
The Trade Marks Act, 1999 Trade Marks The Patents Act, 1970 Patents The Copyright Act, 1957 Copyright The Designs Act, 2000 Designs The Geographical Indications Of Goods Act, 1999 Geographical Indications The Protection of plant varieties and Farmers’ Right Act, 2001 Plant Varieties Semi conductor IC layout design Act,2000 Semi conductor IC layout © Seth Associates, 2006 All Rights Reserved

7 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 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 having aesthetic value which have not been previously known or published in India or elsewhere. © Seth Associates, 2006 All Rights Reserved

8 © Seth Associates, 2006 All Rights Reserved
Trademarks- is an identification symbol which may be a word, a device, a label or numeral etc. or a combination thereof used in the course of trade that enables the purchasing public to distinguish one trader’s goods from similar goods of other traders The purpose of Brand is: • To uniquely identify a company and its product. • To differentiate them from competitor. • To enhance the perceived value, 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 used his skill to invent something new. © Seth Associates, 2006 All Rights Reserved

9 IP adds value at every stage of the innovation and commercialization process
Patents / Utility Models Trademarks, Ind. Designs, Geo. Indications Industrial Designs Trademarks All IP rights Invention Commercialization Marketing Exporting Financing Product Design Licensing Literary / artistic creation Copyright All IP rights © Seth Associates, 2006 All Rights Reserved

10 © Seth Associates, 2006 All Rights Reserved
The IP of Gillette Gillette Company Asset Values in US $ Value($) Total Working Capital 2,850 4.9% Fixed/other assets 5,131 8.8% Intangible assets 5,854 10.0% IP 44,700 76.3% Total Invested Capital 58,535 100% © Seth Associates, 2006 All Rights Reserved

11 World's three most valuable trademarks!
1992 Financial Week listed, as the world's three most valuable trade marks, "Marlboro", worth 31 billion US dollars, "Coca-Cola", worth 24 billion US dollars, and "Budweiser", worth 10.2 billion US dollars. © Seth Associates, 2006 All Rights Reserved

12 IP- Duration of Term of 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 years from year in which it was published) Broadcast reproduction right-(25 years from the beginning of the calendar year next following the year in which the broadcast is made.) Performers right-(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 and know how collectively “proprietary technology” (contract period-protected by contract provisions, doctrine of breach of trust) © Seth Associates, 2006 All Rights Reserved

13 IP-Flow in Mergers and 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) © Seth Associates, 2006 All Rights Reserved

14 IP-Flow in Mergers and Acquisitions
In a corporate acquisition, there is no transfer of interest in the IP. Company A, which owns the IP, gets acquired by Company B and by virtue of such acquisition, Company 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 © Seth Associates, 2006 All Rights Reserved

15 Intangibles - usually a part of business valuation
“How to determine the Value ?” What underpins the cash flows of this business - fixed assets, people ,IP assets , know-how ? business People Once you have worked out what drives the value make sure that it is still there after you have acquired the business! Fixed assets Intangibles - usually a part of business valuation © Seth Associates, 2006 All Rights Reserved

16 © Seth Associates, 2006 All Rights Reserved
Brand 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 the major variables are internal strength, marketing scenario, consumer perception, technical know-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 know-how, and in legal fields. There are forty odd variables, which in generic term are called environments that affect the value of the brand. © Seth Associates, 2006 All Rights Reserved

17 WHY DO WE NEED IP VALUATION?
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: A Balance Sheet which incorporates a brand value provides a more realistic picture and goodwill arising from an acquisition can be reduced as goodwill invariable needs to be amortized where as the brand value can stay in the Balance Sheet giving more realistic presentation of capitalization b) Merger & 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: Taxation department desires that all such transfers must be executed at Arm’s 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 © Seth Associates, 2006 All Rights Reserved

18 Time Required for Grant of a Patent/registration of TM
Reasons Why IP is Ignored Under estimation of its importance Time Required for Grant of a Patent/registration of TM Lack of Awareness Cost of Patenting Myth that it can’t be computed /valued Enforcement of IPR © Seth Associates, 2006 All Rights Reserved

19 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 rights and the limitations of the assets all of which affects final value. Therefore due diligence is prerequisite to the valuation process, regardless of the methodology used. © Seth Associates, 2006 All Rights Reserved

20 IP due diligence in Mergers & Acquisitions
IP Due diligence is the process of investigating a party’s ownership, right to use, and right to stop others from using the IP rights involved in sale or merger ---the nature of transaction and the rights 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 past or potential litigation? • Has the property being misused in the past rendering right unenforceable? • Any encumbrances? It should also evaluate agreements material to the company’s business that may be affected by change of control, agreements that may vest rights in intangibles, and company policies and practices. © Seth Associates, 2006 All Rights Reserved

21 Pre-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 the parties Legal basis for due diligence-often starts in the form of letter of intent or memorandum of understanding and commonly regulates the due diligence 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 and deadlines, with due emphasis on Attorney-Client privilege © Seth Associates, 2006 All Rights Reserved

22 The scope of Intellectual property due diligence
The scope of Intellectual property due diligence will be determined by a number of factors such as parties goal in the transaction 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: • Ownership strategy. • Protection strategy. • Exploitation strategy. • Enforcement strategy © Seth Associates, 2006 All Rights Reserved

23 Preliminary assessment
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. © Seth Associates, 2006 All Rights Reserved

24 What an IP attorney ought to consider
The most significant provisions of the agreement from the IP attorney’s perspective are: (1) definitions of assets and IP; (2) the scope of the transfer; and (3) representations and warranties. the representations and warranties, indemnification provisions, and disclosure schedules 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 levels-personal interviews, document review ,and independent investigation Review of Agreements material to the company’s business that may be affected by change of control © Seth Associates, 2006 All Rights Reserved

25 Independent investigation methods
Due diligence check at Indian registries of patent ,trademark and copyrights, designs U.S. and foreign patent, trademark and copyright rights and filings PTO, WIPO web sites Assignment records and maintenance fee/annuity records for patents Commissioned Copyright Office searches with chain of title information and information on any security interest (e.g. lien) or other encumbrance UCC filings (security interest) Internet/news database searches Westlaw/Lexis or other databases re: litigations Prosecution files and assignment records If your client’s public, SEC filings © Seth Associates, 2006 All Rights Reserved

26 © Seth Associates, 2006 All Rights Reserved
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 to sue (any covenant!) Automatic reversion/transfer of rights 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 © Seth Associates, 2006 All Rights Reserved

27 Important checklist-copyright
Scope of Rights (exclusive, non-exclusive) Grants Effective Rights Transferable Assignments in Proper Order assignment where appropriate Registrations in Proper Order No Encumbrances/Liens © Seth Associates, 2006 All Rights Reserved

28 Significant Trademark Issues
Scope of Rights (exclusive, non-exclusive) Grants Effective Rights Transferable Assignments in Proper Order assignment where appropriate Registrations in Proper Order No Encumbrances/Liens © Seth Associates, 2006 All Rights Reserved

29 Significant Trade Secret Issues:
Confidentiality/security precautions and procedures Proper markings/legends Employment agreements Non-disclosure agreements © Seth Associates, 2006 All Rights Reserved

30 Significant Domain Name Issues:
Verification of record owners Assignments in proper order Status of registration and renewal © Seth Associates, 2006 All Rights Reserved

31 Some typical representations and warranties
Here are some lists of all the IP seller owns, has licensed from someone else and has licensed to someone else (see disclosure schedule) Seller hasn’t given any IP or rights away unless it’s disclosed Seller owns or has acquired sufficient rights to exploit the works in the way it is doing so currently Good and marketable title No liens or judgments © Seth Associates, 2006 All Rights Reserved

32 © Seth Associates, 2006 All Rights Reserved
More Reps and Warranties: All registrations and applications to government entities with respect to IP are valid and in full force and effect and all registration and renewal fees due up to closing are paid. Right to use computer systems and software No pending, threatened claims against seller unless disclosed Seller not violating any third party rights unless disclosed Third party not violating any Seller’s rights unless disclosed No pending, threatened claims asserted by seller unless disclosed Domain names and trademarks are still in full force and effect as of closing and no pending or threatened challenge to domain names, opposition, cancellation, etc. as to trademarks Assignability of contracts, rights thereunder Owns rights to customer information, supplier information or other lists included in the IP assets being sold © Seth Associates, 2006 All Rights Reserved

33 Crucial Factors for IP due diligence
Extent of statutory protection IPRs enjoy 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 provides appropriate warranties such as warranty that it owns full title in the intellectual property as well as representations regarding controversies, 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 Scale: scale of operation of technology is appropriate to that market Maturity: Whether technology is market proven or new Obsolescence: whether it is about to be replaced by new developments Environment adaptability: whether technology can be satisfactorily operated in transferee’s environments Appropriateness: Whether technology is appropriate for infrastructure-available power, telecommunications, transport etc © Seth Associates, 2006 All Rights Reserved

34 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 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 use-• Protection/Registration • Status and scope of registered marks • Status and scope of pending applications • Non-registered marks (marketing/registrability) • Proper use of markings • Exploitation • Inventory of products/services on or in connection with which marks are used • Licensing practices- general/misuse • Inter-company licensing practices • Internet use/licensing • Nonuse • Enforcement/Disputes • Target Company threatened, pending actions against third parties • Third party threatened, pending actions against Target Company • Summary, Conclusions, General Comments • Examine and evaluate opinion letter and cease and desist letters. © Seth Associates, 2006 All Rights Reserved

35 LICENSING OF INTELLECTUAL PROPERTY
Every merger and acquisition poses a Question: whether merging companies intellectual property license rights 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 public policy provides otherwise or there exists a material adverse consequences to the other party. Case example: General radio and appliances Co ltd v MA Khader (1986) 60 com cas 1013-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 licenses. © Seth Associates, 2006 All Rights Reserved

36 Challenges of Valuing IP Assets in case of M&A
Assets that may qualify as a company's IP may be easily overlooked, like; information 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 decision-makers for consideration as to whether to pursue patent protection, proprietary software source code developed in-house. © Seth Associates, 2006 All Rights Reserved

37 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 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) re-assess the value of its IP assets © Seth Associates, 2006 All Rights Reserved

38 Challenges of Valuing IP Assets Contd.
The pending patent application is an asset representing a potentially enforceable right that may be conferred to the company in the future. If the company were to be acquired by another, some value would certainly be attributed to its pending patent 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 attributed to the notebooks in determining a fair purchase price for acquiring the company because the notebook's content may be largely unknown. Consequently, a company may possess a vast amount of IP, some of which is readily identifiable and others of which are difficult to identify © Seth Associates, 2006 All Rights Reserved

39 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 seller, then a stock purchase, in which the assignability of the assets is not important, may be preferable 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 ineffectual transfer of rights. © Seth Associates, 2006 All Rights Reserved

40 Due Diligence for valuation helps build strategy
• If 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 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 -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 impact of product and company-related events on assets - management can use risk information revealed in the due 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. © Seth Associates, 2006 All Rights Reserved

41 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 applied a comparison and reconciliation of resulting value is possible. © Seth Associates, 2006 All Rights Reserved

42 Principles of Valuation
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 economic benefits or losses that can be reasonably anticipated to accrue to the owner of that asset or liability. © Seth Associates, 2006 All Rights Reserved

43 © Seth Associates, 2006 All Rights Reserved
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 © Seth Associates, 2006 All Rights Reserved

44 © Seth Associates, 2006 All Rights Reserved
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 developer’s profit Disadvantage: it seeks to correlate cost with value. Caution: NOT ALL DEVELOPMENTS BASED ON INVENTIONS LEAD TO SUCCESSFUL PRODUCTS © Seth Associates, 2006 All Rights Reserved

45 © Seth Associates, 2006 All Rights Reserved
Market Based approach Estimates the value of an intangible asset based on market prices of comparable intangible assets that have been bought/sold 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. © Seth Associates, 2006 All Rights Reserved

46 © Seth Associates, 2006 All Rights Reserved
Market Based Requisites An active, public market. assessment of fair market value An exchange of comparable products comparison 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 of intellectual property, physical characteristics 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 transactions-price information, sales or licensing statistics usually confidential. © Seth Associates, 2006 All Rights Reserved

47 © Seth Associates, 2006 All Rights Reserved
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” © Seth Associates, 2006 All Rights Reserved

48 Income based approach Contd..
Essential Elements An assumption as to the costs and risks associated with the realization of the forecasted income The amount of the income stream that can be generated by the property An assumption as to the duration of the income stream © Seth Associates, 2006 All Rights Reserved

49 © Seth Associates, 2006 All Rights Reserved
Income based approach Contd.. Valuation Process Forecast income and costs associated with using the property over the life of the property Compute Net Present Value of future cash flows (use appropriate discount rate reflecting risk of investment) Limitations Estimating income Attributable to intangibles, its economic life, appropriate Discount rate Suitable where fair Financial projections can be made © Seth Associates, 2006 All Rights Reserved

50 © Seth Associates, 2006 All Rights Reserved
Other Approaches Other Internationally accepted approaches include: Market Capitalization method Profit based methods Profit split method The Economic Benefit Approach © Seth Associates, 2006 All Rights Reserved

51 © Seth Associates, 2006 All Rights Reserved
Table shows how big the economic contribution made by brands to companies © Seth Associates, 2006 All Rights Reserved

52 Instances of Brand Valuation in M&A
In 1988, UK-based GrandMet acquired the Pillsbury company. It was estimated that 88% of the price it paid consisted of "goodwill" i.e., GrandMet paid approximately $990 million (L608m) to acquire the Pillsbury brand name and its other branded properties (Green Giant, Old El-Paso, Häagen-Dazs, etc.). © Seth Associates, 2006 All Rights Reserved

53 Instances of Brand Valuation in M&A
Volkswagen, bought the assets of the Rolls-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 Rolls-Royce trademark were subsequently purchased by rival BMW for $65m and many analysts believe that BMW got the better deal. © Seth Associates, 2006 All Rights Reserved

54 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 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. © Seth Associates, 2006 All Rights Reserved

55 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 trade mark registration does not cover the appropriate classes of 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 person’s patent. Lapsed patents and designs are of no value either, so check that IP renewals are up to date. 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. © Seth Associates, 2006 All Rights Reserved

56 Means of acquiring IP assets
Stock Sale Supplemental Closing Documents Transfer documents Mergers & Acquisitions Asset Sale Purchase Agreement © Seth Associates, 2006 All Rights Reserved

57 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 and either licensed back to the operating company or become the subject of a subsequent sale to the ultimate purchaser. © Seth Associates, 2006 All Rights Reserved

58 © Seth Associates, 2006 All Rights Reserved
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 property to be properly transferred, although a separate agreement is usually necessary to underscore the parties’ intentions. © Seth Associates, 2006 All Rights Reserved

59 © Seth Associates, 2006 All Rights Reserved
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 assets are the subject of a separate 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 © Seth Associates, 2006 All Rights Reserved

60 © Seth Associates, 2006 All Rights Reserved
Sale of assets If a business is sold as a going concern, the intent to transfer 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 property rights, rather, ownership of the intangible assets will remain with the parent corporation unless the underlying agreement expressly provides for transfer to the subsidiary © Seth Associates, 2006 All Rights Reserved

61 Transfer of Domain Names
Domain names perform the function of a trademark if it denotes the source or origin of goods/services. Ownership of domain names can be transferred in M&A The transfer of ownership of a domain name should consist of no less than three documents; the Acquisition 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. Transfer of ownership Documents . The latter two documents may be set forth as exhibits to the Acquisition Agreement or delivered as a post-closing obligation. © Seth Associates, 2006 All Rights Reserved

62 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 the buyer. The agreement should further prohibit the seller from registering or using a similar or related domain name © Seth Associates, 2006 All Rights Reserved

63 Transfer of domain names
Specific reference to the domain name registrar should be made with an affirmative obligation on both the buyer and seller 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. © Seth Associates, 2006 All Rights Reserved

64 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. © Seth Associates, 2006 All Rights Reserved

65 © Seth Associates, 2006 All Rights Reserved
Tax considerations… Depending upon the scope of the business activities of 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 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. © Seth Associates, 2006 All Rights Reserved

66 Tax considerations IPR were brought under the service
tax law w.e.f. 10th September 2004. Entities which create or acquire IP assets has the ability to claim a tax deduction for their costs IPR holders are required to get registered with the appropriate authority under service tax rule for providing IP Services for consideration of Royalty. costs includes patent or trademark registration fees, royalties, legal costs and salaries and equipment costs for R&D activities liable to pay service 12.24% (12% service tax + educational of .24 % of the service tax) on the gross amount charged from the receiver ss 10A 10B, 80IA, and 80IB of the IT Act. Not available for the tax year in which amalgamation / demerger take place These incentives are thereafter allowed to the amalgamating /resulting company, © Seth Associates, 2006 All Rights Reserved

67 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 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 different to Indian law on intellectual property issues fundamental to the acquisition—eg US law may treat the assignment of intellectual property licenses by licensees differently to Indian 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. The deal should not be viewed as complete until recordal of the transfer of title has been effected © Seth Associates, 2006 All Rights Reserved

68 WORLDWIDE RECORDAL OF INTELLECTUAL PROPERTY RIGHTS.
Necessity for Prompt Recordal : The intellectual property rights of the acquired company need to be transferred into the name of the new owner in each jurisdiction where such 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 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, file oppositions or attend to renewals or annuity payments. © Seth Associates, 2006 All Rights Reserved

69 Necessity 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 for foreign exchange authorizations for remission of royalties. © Seth Associates, 2006 All Rights Reserved

70 Necessity for Prompt Recordal
Finally, in the event an “equitable transfer” occurs without the requisite official change of “record ownership” at the relevant patent and trademark offices throughout the world, the new owner will encounter enormous difficulties when confronted with the maintenance, sale, enforcement, hypothecation, licensing and/or use of the intellectual property rights. © Seth Associates, 2006 All Rights Reserved

71 THE FINAL WORD… It is anticipated that intellectual property will be the dominant force in future commercial transactions comprising tomorrow’s mergers and acquisitions! © Seth Associates, 2006 All Rights Reserved


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