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How to protect against IP issues in corporate transactions

Intellectual Property (IP) can help create substantial value in a business by protecting investment in innovation, originality and brand. As a result the importance of fully considering and investigating the IP involved in a transaction and its influence on a transaction's future success should not be overlooked.

By way of an example of the consequences of failing to manage properly the IP involved in a transaction, a number of years ago, Volkswagen purchased the assets of the bankrupt Rolls-Royce Motors for £430 million. Volkswagen purchased the necessary manufacturing rights but did not realise until after completion of the deal that the Rolls-Royce trade marks were owned by a separate entity, Rolls-Royce plc. Unfortunately, Rolls-Royce plc decided to licence the trade marks to Volkswagen's rival BMW instead, who had been supplying the car's engines, and BMW obtained these for just £40 million. As a result Volkswagen was eventually forced to give up the Rolls-Royce brand to BMW. 

IP issues to be aware of

If you are looking to acquire or sell a company, here are the key IP issues that you should be thinking about:

Ownership of IP rights

As a seller you should ensure that:

  • You own and control the IP you need for the sale to proceed without any hitches. This includes making sure that where IP has been developed by contractors, in conjunction with third parties or with the funding/resources of any government entities or academic institutions, that these entities do not retain any rights in the IP and that appropriate assignments of the IP to you are in place.
  • Your company domain names are registered in the name of your company and not your company's website developer or IT professional, as is often the case.
  • Everything you own that could be registered, is registered as this will add value to your business. In relation to registered rights, the relevant register should accurately reflect your ownership. If past assignments have not been recorded, the rights will still be registered in the name of a past owner. Where possible this should be resolved at the earliest opportunity.

As a buyer you should ensure that:

  • You have identified the IP rights the target company uses and then ensure that it does actually own those rights.
  • The target company arranges for any transfers of rights to it pre-completion so that once the sale completes, you will have full ownership and control in the future.

Maintenance of IP rights

As a seller you should ensure that:

  • Your registered rights have been effectively maintained, this includes making sure that you are aware of the expiry and renewal dates of your registered rights and ensuring that any appropriate fees have been paid.

As a buyer you should ensure that:

  • You have conducted appropriate due diligence into the seller's registration and use of its trade marks if those trade marks are necessary to your operations post-completion.
  • You have reviewed the classes of the seller's trade marks to ensure that they are relevant to your future business. If not, you may need to consider filing new trade marks.

Impact of prior agreements

As a seller you should ensure that:

  • You are aware of, and have records of, any prior agreements such as settlement agreements or trade mark co-existence agreements which restrict the use of your rights or require consent to be obtained for future trade mark applications. 

As a buyer you should ensure that:

  • You understand what, if any, restrictions there are arising from prior agreements which may limit your future use of the IP rights you hope to acquire.

Disputes

As a seller you should ensure that:

  • Where possible, any disputes are concluded before negotiations or a sale as they may slow the sale process or have an impact on your sale price. 

As a buyer you should ensure that:

  • You are aware of any disputes. Disputes can be time and money consuming to manage and resolve and ultimately you may find that you have a perpetual limitation on your ability to use the brand or invention that you have purchased.

Software 

As a seller you should ensure that:

  • The software that you use in your business (ie for accounting, IT systems management, marketing or for the design, manufacture and delivery of your products or services) is proprietary or alternatively that you have all the appropriate licences for use in place.

As a buyer you should ensure that:

  • The seller is licensed to use its software and that any licences are subsequently assigned to you where appropriate.
  • If software or its source code is held by third party escrow agents, any escrow agreements are transferred to you accordingly.

Conclusion

IP can add an enormous amount of value to the sale of a business; indeed it is often central to the transaction. Sellers should ensure that they have thoroughly reviewed their IP at an early stage of a deal with a view to maximising price and minimizing delay. Buyers should ensure that their due diligence is carried out thoroughly and that the results are analysed against the plans for the business.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2015. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

TLT LLP is a limited liability partnership registered in England & Wales number OC 308658 whose registered office is at One Redcliff Street, Bristol BS1 6TP England. A list of members (all of whom are solicitors or lawyers) can be inspected by visiting the People section of this website. TLT LLP is authorised and regulated by the Solicitors Regulation Authority under number 406297.

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