INTRODUCTION
Mergers and Acquisitions commonly referred to as M&A have inherently offered a wide set of benefits and advantages to companies that are new to a particular industry with diverse options of investment and various avenues of capital exchange between the same horizontal segment apart from reducing cut-throat competition and developing a niche market base. Transfer of technology acts as an indispensable element for multifarious M&A, hence Intellectual Property Rights performs a major chunk in the diversification of the business regime. Any corporate entity while indulging itself in the process of transactional actions undertakes a basic due-diligence process to determine the integrity and goodwill of the company it is getting associated with in a prospective view. This process of due diligence is undertaken to assess the potential value a company beholds and to calculate the risks and implications on the protection of company assets which are both tangible and intangible to create shareholder value. The infamous case of the Rolls Royce and Volkswagen acquisition happened in the year 1998, with the peculiar acquisition deal of owning the brand name of Rolls Royce. The deal was never made of the acquisition of the brand name but the Volkswagen company only owned the rights and facilities to use the product for 5 years until the closure of the deal. It was an imbecile mistake of not verifying the assets and failing to conduct due diligence giving lessons to the investors on the conspicuous need of verifying and vetting the companies.[1]
ESSENTIAL CONSIDERATIONS FOR IP DUE DILIGENCE
Nuances of IPR Portfolio
The substantial amount of work in IP Due Diligence is to check the ownership of the IPR creation along with accrediting the owner with adequate rights and liabilities. The distinction of territorial jurisdiction wherein the IPR is being created and protected is also to be determined in the process of IP Vetting.[2] It is of utmost importance that the IP Due Diligence process is not to be targeted alone taking into consideration of financial statements of the company alone and has to expand beyond the scope of the IPR Brand Portfolio of the particular company, trademarks, patents, copyrights, domain names, trade secrets, semiconductors, geographical indications, etc. Time is the essence of M&A deals with the instance when IP Activation is to be made and the asset recognition has to be entered upon by the parties to the M&A transaction.
The impending threat is to distinguish between the company-owned IP and the IP rights owned by the consumer or individual parties to the transactions and its subsequent valuation. Furthermore, there is a distinction between registered and unregistered IPs and their subsequent protection regime. This becomes an emanating issue in cross-border transfers and data localization along with asset recognition.
Licenses and Registration of IPRs
With the issuance of protected technology, in the form of shares, stocks, and bonds, there comes the question of freedom to operate in lieu of the rights of third parties. With assets like registered and unregistered IPRs, the search for encumbrances comes up to check up on the liability and the utility value an IPR holds. A review of the IP Office’s records pertaining to the pertinent IP in question is required.[3] In the case of a firm, it is also important to examine the Registrar of the Company’s records regarding the target.[4] Any applications submitted by the transferee company, for recording encumbrances on registered intellectual property or any other IP assets, would be disclosed in these investigations or the process of negotiations.[5] A consideration in the case the IP rights are not protected and there is the scope of protection of IP rights, there comes a financial aspect of the cost attributed to calculating the monetary considerations to protect that particular IPR property in the form of licensing and registration. This licensing can be undertaken through 3 modes essentially; Exclusive Licensing, Non-Exclusive Licensing, and Sole Licensing.[6] In case of involvement of a foreign entity or there is a case of cross-border merger, WIPO states 3 major licensing modes through which are Technology License Agreement, Foreign License Agreement, and Copyright License Agreement.[7] There is also an investigation of pre-existing contractual obligations conducted such as assignment to third parties disabling control, prevention from using patented technology etc.[8]
Ownership Issues
In many cases, IP assets are owned by more than one individual or company. The IP assets of two or more businesses that combine their resources for R&D may be jointly owned. A joint owner should know whether he or she is allowed to transfer full ownership of intellectual property unilaterally or only with the other joint owner’s consent.[9] An asset transaction can only involve IP rights that have been legitimately owned by the seller. A share transaction will only transfer these rights if the company selling the shares owns them. It is therefore imperative that the relevant IPRs in the seller’s possession are proactively consolidated before the M&A transaction. A seller may not be the rightful owner of some intellectual property assets that he or she claims to own. If a patent or developed technology has not been assigned all necessary rights can result in this circumstance. When there is no obligation to assign, the buyer can seek to demand that the seller acquire all of the rights to the intellectual property asset before the deal closes at its expense.[10]
Valuation of IPR
It is crucial to take into consideration the future potential of cash flows generated by IP assets in addition to previous data. IP valuation is a complex process that may result in an acquiring firm overpaying for a valuable IP asset or becoming embroiled in expensive IP litigation. The process of valuation can be undertaken through three modes that are Discounted Cash Flow method, Market based valuation and Cost based valuation on the basis of type of assets.[11] Such a valuation would be dependent upon the usage of the IPRs, economic yield that can be derived upon future use, etc.
CONCLUSION
A successful M&A transaction depends on early identification, description, categorization, and listing of relevant IPRs. IP laws and antitrust laws in all jurisdictions must be compatible if the acquiring company intends to use the IP asset across multiple jurisdictions. When IPR assets are transferred, particularly in cross-border mergers, this is a potential risk or conflict of interest. If a transaction like M&A is to succeed and be commercially sustainable, it must consider the challenges posed by IP assets. While IPR is considered the most treasured asset of a company, a significant leak of essential IP Portfolio happens in a company ranging from trademarks, trade secrets, and copyright along with patents and semiconductor resources causing a significant loss of value. Therefore, integrating IPR seamlessly into a firm’s assets is an effective way to gain a competitive advantage over other major players in the industry and thus keep intact the commercial interests of the parties along with the market value a company holds in a specific industry.
Author(s) Name: Aathira Pillai (Maharashtra National Law University, Mumbai)
References:
[1] S Katarki and AV Thakur, ‘Intellectual Property Due Diligence – Trademark – India’ (Mondaq, 03 December 2015) <https://www.mondaq.com/india/trademark/448686/intellectual-property-due-diligence> accessed 09 February 2023
[2]Paridhi Jain, ‘Territorial Jurisdiction in Intellectual Property Disputes’ (Manupatra, 05 August 2021) <https://articles.manupatra.com/article-details/Territorial-Jurisdiction-in-Intellectual-Property-Disputes> accessed 21 February 2023
[3]Ibid
[4] ‘IP Due Diligence in Mergers and Acquisitions’ (CFD,12 August 2021) <https://www.cfd-ip.com/practices/ip-due-diligence-in-mergers-and-acquisitions> accessed 21 February 2023
[5] S Sharma and S R Anand, ‘Licensing in India’ (Lexology, 04 January 2019) <https://www.lexology.com/library/detail.aspx?g=dc3b949b-7da8-48d6-8387-c59bc30ce758> accessed 21 February 2023
[6] ‘Role of Intellectual Property in M&A Transactions’ (Amlegals, 17 March 2022) <https://amlegals.com/role-of-intellectual-property-in-ma-transactions/> accessed 12 February 2023
[7] ‘Technology Licensing in a Strategic Partnership’ (WIPO) <https://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_7_learning_points.pdf> accessed 22 February 2023
[8] P Widmer and P Bigler, ‘Key Intellectual Property Issues in M&A Transactions’ (Lexology, 15 September 2021) https://www.lexology.com/library/detail.aspx?g=5140363e-7bde-4824-964b-f6de39e3bd55 accessed February 22, 2023
[9]S Sharma (n 5)
[10] ‘Intellectual Property Licensing in India’ (Obhan & Associates) <https://www.obhanandassociates.com/blog/intellectual-property-licensing-in-india/> accessed 22 February 22 2023
[11]Technology Licensing in a Strategic Partnership (n 7)
