intellectual property due diligence in mergers & acquisitions

© Seth Associates, 2006 All Right© Seth Associates, 2006 All Rights Reserveds Reserved

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Presentation PlanPresentation 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.


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Introduction: What is IP?Introduction: What is IP?

Intellectual Property

Ownership

Intangibles

Time & cost intensive

Additional Profits Transferable

Special Rights

Valuable Assets

““Most creations resulting from human endeavors in various fields of art, Most creations resulting from human endeavors in various fields of art,

literature ,science and technology constitute Intellectual Propertyliterature ,science and technology constitute Intellectual Property””


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Why are IP assets important ?Why are IP assets important ?

Its creation is both time and cost Its creation is both time and cost intensiveintensive Requires an assembled trained workforce for Requires an assembled trained workforce for

its creationits creation Requires building of goodwill through Requires building of goodwill through

advertising programsadvertising programs Generates Customer loyaltyGenerates Customer loyalty Adds to commercial value of organizationAdds to commercial value of organization Its exploitation brings consistent additional Its exploitation brings consistent additional

profits to an organizationprofits to an organization


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Categories of IP rights

Categories of IP rights

Utility model/Designs

Plant Breeder’s rights

Geographical Indications

Trade secrets

Trademark & domain names

Copyright

Patent


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Different Acts governing IP assetsDifferent Acts governing IP assets

Trade Marks

The Patents Act, 1970Patents

The Copyright Act, 1957Copyright

Designs

The Protection of plant varieties and Farmers’ Right Act, 2001

Geographical Indications

Plant Varieties

Semi conductor IC layout design Act,2000

The Designs Act, 2000

The Geographical IndicationsOf Goods Act, 1999

The Trade Marks Act, 1999

Semi conductor IC layout


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Rights that different IP assets protectRights that different IP assets protect Intellectual Property can be clearly distinguished from Intellectual Property can be clearly distinguished from

Goodwill.Goodwill. UK & Australian Generally Accepted Accounting UK & Australian Generally Accepted Accounting Principles (GAAP) has specified goodwill as an umbrella Principles (GAAP) has specified goodwill as an umbrella concept consisting of unidentifiable intangible assets and concept consisting of unidentifiable intangible assets and should not include those Intellectual Properties which are should not include those Intellectual Properties which are capable of individual identification and can be sold capable of individual identification and can be sold separately. separately.

CopyrightCopyright- is a bundle of rights granted to an author of an - is a bundle of rights granted to an author of an artistic, literary or musical work to print ,publish and sell artistic, literary or musical work to print ,publish and sell copies of his work and other allied rights. Copyright copies of his work and other allied rights. Copyright protection also extends to cinematographic film and sound protection also extends to cinematographic film and sound recordings.recordings.

Designs-Designs- The designs entitled to protection are new and The designs entitled to protection are new and original designs having aesthetic value which have not been original designs having aesthetic value which have not been previously known or published in India or elsewhere.previously known or published in India or elsewhere.


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TrademarksTrademarks- is an identification symbol which may be a - is an identification symbol which may be a word, a device, a label or numeral etc. or a combination word, a device, a label or numeral etc. or a combination thereof used in the course of trade that enables the thereof used in the course of trade that enables the purchasing public to distinguish one trader’s goods from purchasing public to distinguish one trader’s goods from similar goods of other traderssimilar goods of other traders

The purpose of The purpose of BrandBrand is: is:• To uniquely identify a company and its product.• To uniquely identify a company and its product.• To differentiate them from competitor.• To differentiate them from competitor.• To enhance the perceived value, the quality and • To enhance the perceived value, the quality and satisfaction that a customer experiences.satisfaction that a customer experiences.• To evoke distinct associate stands for certain personality • To evoke distinct associate stands for certain personality traits and carries emotional traits and carries emotional attachment.attachment.• Above all brand is supposed to inspire trust. Trust failure • Above all brand is supposed to inspire trust. Trust failure can lead to brand failure and brand failure can be fatal.can lead to brand failure and brand failure can be fatal.

PatentsPatents- is the grant of a monopoly right to an inventor who - is the grant of a monopoly right to an inventor who has used his skill to invent something new.has used his skill to invent something new.


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IP adds value at every stage of the IP adds value at every stage of the innovation and commercialization processinnovation and commercialization process

Literary / artisticcreation

Invention

Financing Product Design

CommercializationMarketing

Licensing

Exporting

Patents / Utility Models

Copyright

Industrial DesignsTrademarks

Trademarks, Ind. Designs,

Geo. IndicationsAll IP rights

All IP rights


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The IP of GilletteThe IP of GilletteGillette Company Gillette Company Asset Values in Asset Values in US $US $

Value($)Value($) TotalTotal

Working CapitalWorking Capital 2,8502,850 4.9%4.9%

Fixed/other assetsFixed/other assets 5,1315,131 8.8%8.8%

Intangible assetsIntangible assets 5,8545,854 10.0%10.0%

IPIP 44,70044,700 76.3%76.3%

Total Invested Total Invested CapitalCapital

58,53558,535 100%100%


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1992 Financial Week 1992 Financial Week listed, as the world's listed, as the world's three most valuable three most valuable trade marks,trade marks, "Marlboro", worth 31 "Marlboro", worth 31

billion US dollars,billion US dollars, "Coca-Cola", worth "Coca-Cola", worth

24 billion US dollars,24 billion US dollars, and "Budweiser", and "Budweiser",

worth 10.2 billion US worth 10.2 billion US dollars.dollars.

0

5

10

15

20

25

30

35

Coca-Cola

Marlboro

Budweiser

World's three most valuable World's three most valuable trademarks!trademarks!


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IP- Duration of Term of IP- Duration of Term of ProtectionProtection

PatentsPatents (20 years) (20 years) Trademarks Trademarks (10 years + renewals)(10 years + renewals) CopyrightsCopyrights in published literary, dramatic, musical, and artistic works in published literary, dramatic, musical, and artistic works

(Lifetime of author +60 years). (Lifetime of author +60 years). Copyright in photographs ,cinematographic film, sound recordings –Copyright in photographs ,cinematographic film, sound recordings –

(60 years from year in which it was published)(60 years from year in which it was published) Broadcast reproduction right-(Broadcast reproduction right-(25 years from the beginning of the 25 years from the beginning of the

calendar year next following the year in which the broadcast is calendar year next following the year in which the broadcast is made.)made.)

Performers right-(Performers right-(25 years from the beginning of the calendar 25 years from the beginning of the calendar year next following the year in which the performance is made)year next following the year in which the performance is made)

Industrial designsIndustrial designs (10 years+ renewal permitted once for 5 years ) (10 years+ renewal permitted once for 5 years ) Trade-secrets and know howTrade-secrets and know how collectively “proprietary technology” collectively “proprietary technology”

(contract period-protected by contract provisions, doctrine of breach (contract period-protected by contract provisions, doctrine of breach of trust)of trust)


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IP-Flow in Mergers and IP-Flow in Mergers and AcquisitionsAcquisitions

A merges into B A merges into B

Company A (Owns IP) Company A (Owns IP) ->-> Surviving company (B) Surviving company (B) (IP of A becomes property of B)(IP of A becomes property of B)( IP of A transferred to B)( IP of A transferred to B)


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IP-Flow in Mergers and IP-Flow in Mergers and AcquisitionsAcquisitions

In a corporate acquisition, there is no transfer of In a corporate acquisition, there is no transfer of interest in the IP. interest in the IP.

Company A, which owns the IP, gets acquired by Company A, which owns the IP, gets acquired by Company B and by virtue of such acquisition, Company B and by virtue of such acquisition, Company B gets control over all assets of Company B gets control over all assets of Company A, including its IP.Company A, including its IP.

In a takeover, the ownership over the IP continues In a takeover, the ownership over the IP continues to remain with the Target Company, though the to remain with the Target Company, though the acquirer company gets effective control over the IPacquirer company gets effective control over the IP


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““How to determine the How to determine the Value ?”Value ?”

What underpins the cash flows of this business - fixed assets, people ,IP What underpins the cash flows of this business - fixed assets, people ,IP assets , know-how ?assets , know-how ?

business Peoplebusiness People

Fixed assets

Once you have worked out what drives the value make

sure that it is still there after

you have acquired the business!

Intangibles - usually a part of business valuation


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Brand valuationBrand valuation

The modus operandi of the valuation would vary in each The modus operandi of the valuation would vary in each case as they are strongly influenced by existing case as they are strongly influenced by existing environments. environments.

The environments broadly are The environments broadly are internal & external internal & external environmentenvironment and the major variables are internal strength, and the major variables are internal strength, marketing scenario, consumer perception, technical know-marketing scenario, consumer perception, technical know-how and its changing speed, growth prospective, how and its changing speed, growth prospective, competition scenario, government policy, impact of competition scenario, government policy, impact of globalization among others. globalization among others.

To valuate a brandTo valuate a brand and other intellectual properties the and other intellectual properties the valuator requires careful analysis, keen judgment, thorough valuator requires careful analysis, keen judgment, thorough professional knowledge and a team of members who have professional knowledge and a team of members who have expertise in finance, marketing, technical know-how, and in expertise in finance, marketing, technical know-how, and in legal fields. legal fields.

There are forty odd variables, which in generic term are There are forty odd variables, which in generic term are called environments that affect the value of the brand. called environments that affect the value of the brand.


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WHY DO WE NEED IP WHY DO WE NEED IP

VALUATION?VALUATION? Intangible benefits-Intangible benefits-

Enhanced Confidence ,Indicator of effective utilization ,Enhanced Confidence ,Indicator of effective utilization , Credibility to the real worth, Strategy development Credibility to the real worth, Strategy development

Tangible Benefits in Mergers and Acquisitions-Tangible Benefits in Mergers and Acquisitions-

A) A) Can help in CapitalizationCan help in Capitalization: A Balance Sheet which incorporates a brand value provides : A Balance Sheet which incorporates a brand value provides a more realistic picture and goodwill arising from an acquisition can be reduced as 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 goodwill invariable needs to be amortized where as the brand value can stay in the Balance Sheet giving more realistic presentation of capitalization Balance Sheet giving more realistic presentation of capitalization

b) b) Merger & AcquisitionMerger & Acquisition: It is of critical importance for an acquirer, as well as for the : 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 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 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 value has been worked out elaborating all assumptions, which provides the real insight and would be of great value to the acquirerand would be of great value to the acquirer

C) C) For taxation purposeFor taxation purpose: : Taxation department desires that all such transfers must be Taxation department desires that all such transfers must be executed at Arm’s length transaction. Valuation certification from an independent 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 establishment of repute is the best way to establish that the value of transaction as reflected is a true value reflected is a true value


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Under estimation of its

importance

Cost of Patenting

Enforcement of IPR

Time Required for Grant of a Patent/registration of TM Lack of Awareness

Myth that it can’t be computed /valued

Reasons Why IP is IgnoredReasons Why IP is Ignored


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Importance of Intellectual Property due Importance of Intellectual Property due diligencediligence

The increased profile, frequency, and value of intellectual The increased profile, frequency, and value of intellectual property related transactions have elevated the need for all property related transactions have elevated the need for all legal and financial professionals and IP owner to have legal and financial professionals and IP owner to have thorough understanding of the assessment and the thorough understanding of the assessment and the valuation of these assets, and their role in commercial valuation of these assets, and their role in commercial transaction transaction

Intellectual Property due diligence generally provides Intellectual Property due diligence generally provides vital vital information specific to future benefits, economic life and information specific to future benefits, economic life and ownership rights and the limitations of the assets all of ownership rights and the limitations of the assets all of which affects final value.which affects final value.

Therefore due diligence is prerequisite to the valuation Therefore due diligence is prerequisite to the valuation process, regardless of the methodology used. process, regardless of the methodology used.


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IP due diligence in Mergers & IP due diligence in Mergers & AcquisitionsAcquisitions

IP Due diligenceIP Due diligence is the process of investigating a party’s ownership, right 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 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 merger ---the nature of transaction and the rights being acquired will determine the extent and focus of the due diligence review.determine the extent and focus of the due diligence review.

Due-diligence should revealDue-diligence should reveal • • Who owns the rights?Who owns the rights?

• • Are the rights valid and transferable and enforceable?Are the rights valid and transferable and enforceable?• Are there any agreement or restriction that prevent the party for • Are there any agreement or restriction that prevent the party for granting rights to other?granting rights to other?• Is the property registered in the proper office?• Is the property registered in the proper office?• Any shortcoming or default on payment?• Any shortcoming or default on payment?• Any past or potential litigation? • Any past or potential litigation? • Has the property being misused in the past rendering right • Has the property being misused in the past rendering right unenforceable?unenforceable?• Any encumbrances?• Any encumbrances?

It should also evaluate agreements material to the company’s business It should also evaluate agreements material to the company’s business that may be affected by change of control, agreements that may vest that may be affected by change of control, agreements that may vest rights in intangibles, and company policies and practicesrights in intangibles, and company policies and practices. .


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Pre-due diligence formalitiesPre-due diligence formalities

Before the due diligence commences, counsel of both the Before the due diligence commences, counsel of both the parties must consider important legal issues related to parties must consider important legal issues related to conducting the due diligence such as conducting the due diligence such as confidentiality confidentiality obligationobligation of the target companyof the target company and execution of the due and execution of the due diligence should also be arranged between the parties diligence should also be arranged between the parties

Legal basis for due diligence-often starts in the form of Legal basis for due diligence-often starts in the form of letter of intent or memorandum of understanding and letter of intent or memorandum of understanding and commonly regulates the due diligence processcommonly regulates the due diligence process. . Confidentiality agreement between buyer and Target Confidentiality agreement between buyer and Target Company is one of the necessity and both should ensure Company is one of the necessity and both should ensure that it is carefully drafted and shall include the scheduling, that it is carefully drafted and shall include the scheduling, modus operandi and deadlines, with due emphasis on modus operandi and deadlines, with due emphasis on Attorney-Client privilege Attorney-Client privilege


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The scope of Intellectual property The scope of Intellectual property due diligencedue diligence

The scope of Intellectual property due diligence will be determined The scope of Intellectual property due diligence will be determined by a number of factors such as parties goal in the transaction such by a number of factors such as parties goal in the transaction such as capital contribution, assets transfer, security of loan, or internal as capital contribution, assets transfer, security of loan, or internal assessment of its own and will be influenced by budgeting, assessment of its own and will be influenced by budgeting, available human resources, the size and complexity of target available human resources, the size and complexity of target company and its intellectual property portfolio among other such company and its intellectual property portfolio among other such issues.issues.

Buyer having done the preliminary due diligence with respect to Buyer having done the preliminary due diligence with respect to current status of Intellectual Property portfolio should evaluate the current status of Intellectual Property portfolio should evaluate the portfolio with respect to function strategy to work outportfolio with respect to function strategy to work out: :

• • Ownership strategy.Ownership strategy.• Protection strategy.• Protection strategy.• Exploitation strategy.• Exploitation strategy.• Enforcement strategy• Enforcement strategy


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Preliminary assessmentPreliminary assessment

Target company should make a preliminary Target company should make a preliminary assessmentassessment of the current status of its intellectual of the current status of its intellectual property portfolio and management including: property portfolio and management including: • Current holding and their status.• Current holding and their status.• Goals for the portfolio. • Goals for the portfolio. • Historical and prospective investment in • Historical and prospective investment in Intellectual Property Intellectual Property

acquisition, protection and exploitation.acquisition, protection and exploitation.This would also help the target company to define This would also help the target company to define its perspective. If the due diligence were being its perspective. If the due diligence were being conducted for internal purpose the goal would be conducted for internal purpose the goal would be quite different than the due diligence for external quite different than the due diligence for external reason. reason.


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What an IP attorney ought to What an IP attorney ought to considerconsider

The most significant provisions of the agreement from the The most significant provisions of the agreement from the IP attorney’s perspective are: IP attorney’s perspective are: (1) definitions of assets and (1) definitions of assets and IP; (2) the scope of the transfer; and (3) representations IP; (2) the scope of the transfer; and (3) representations and warrantiesand warranties. .

the representations and warranties, indemnification the representations and warranties, indemnification provisions, and disclosure schedules provisions, and disclosure schedules

Disclosure schedulesDisclosure schedules are also critical because typically the are also critical because typically the seller is not liable, unless the purchase agreement seller is not liable, unless the purchase agreement otherwise provides, for any monetary damages resulting otherwise provides, for any monetary damages resulting from disclosed events. from disclosed events.

Due diligence conducted at three levels-personal Due diligence conducted at three levels-personal interviews, document review ,and independent interviews, document review ,and independent investigation investigation

RReview of Agreements material to the company’s eview of Agreements material to the company’s business that may be affected by change of controlbusiness that may be affected by change of control


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Independent investigation Independent investigation methodsmethods

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


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DUE DILIGENCE: DUE DILIGENCE: What are some typical provisions that might raise a word of What are some typical provisions that might raise a word of

caution?caution?THE ANALYSISTHE 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


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Important checklist-Important checklist-copyrightcopyright

Scope of Rights (exclusive, non-exclusive)Scope of Rights (exclusive, non-exclusive) Grants EffectiveGrants Effective Rights TransferableRights Transferable Assignments in Proper OrderAssignments in Proper Order assignment where appropriateassignment where appropriate Registrations in Proper OrderRegistrations in Proper Order No Encumbrances/LiensNo Encumbrances/Liens


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Significant Trademark Significant Trademark IssuesIssues

Scope of Rights (exclusive, non-exclusive)Scope of Rights (exclusive, non-exclusive) Grants EffectiveGrants Effective Rights TransferableRights Transferable Assignments in Proper OrderAssignments in Proper Order assignment where appropriateassignment where appropriate Registrations in Proper OrderRegistrations in Proper Order No Encumbrances/LiensNo Encumbrances/Liens


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Significant Trade Secret IssuesSignificant Trade Secret Issues::

Confidentiality/security precautions and Confidentiality/security precautions and proceduresprocedures

Proper markings/legendsProper markings/legends Employment agreementsEmployment agreements Non-disclosure agreementsNon-disclosure agreements


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Significant Domain Name Significant Domain Name Issues:Issues:

Verification of record ownersVerification of record owners Assignments in proper orderAssignments in proper order Status of registration and renewalStatus of registration and renewal


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Some typical representations Some typical representations and warrantiesand warranties

Here are some lists of all the IP seller owns, has Here are some lists of all the IP seller owns, has licensed from someone else and has licensed to licensed from someone else and has licensed to someone else (see disclosure schedule)someone else (see disclosure schedule)

Seller hasn’t given any IP or rights away unless Seller hasn’t given any IP or rights away unless it’s disclosedit’s disclosed

Seller owns or has acquired sufficient rights to Seller owns or has acquired sufficient rights to exploit the works in the way it is doing so exploit the works in the way it is doing so currentlycurrently

Good and marketable titleGood and marketable title No liens or judgmentsNo liens or judgments


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More Reps and Warranties:More Reps and Warranties: All registrations and applications to government entities with respect to All registrations and applications to government entities with respect to

IP are valid and in full force and effect and all registration and renewal IP are valid and in full force and effect and all registration and renewal fees due up to closing are paid.fees due up to closing are paid.

Right to use computer systems and softwareRight to use computer systems and software No pending, threatened claims against seller unless disclosedNo pending, threatened claims against seller unless disclosed Seller not violating any third party rights unless disclosedSeller not violating any third party rights unless disclosed Third party not violating any Seller’s rights unless disclosedThird party not violating any Seller’s rights unless disclosed No pending, threatened claims asserted by seller unless disclosedNo pending, threatened claims asserted by seller unless disclosed Domain names and trademarks are still in full force and effect as of Domain names and trademarks are still in full force and effect as of

closing and no pending or threatened challenge to domain names, closing and no pending or threatened challenge to domain names, opposition, cancellation, etc. as to trademarksopposition, cancellation, etc. as to trademarks

Assignability of contracts, rights thereunderAssignability of contracts, rights thereunder Owns rights to customer information, supplier information or other lists Owns rights to customer information, supplier information or other lists

included in the IP assets being soldincluded in the IP assets being sold


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Crucial Factors for IP due Crucial Factors for IP due diligencediligence

Extent of statutory protection IPRs enjoyExtent of statutory protection IPRs enjoy Value of each IPRValue of each IPR Level of risk infringement of third party rights and infringement by others.Level of risk infringement of third party rights and infringement by others. With respect to the agreement involving the acquisition, it is critical that With respect to the agreement involving the acquisition, it is critical that

the seller provides appropriate warranties such as warranty that it owns the seller provides appropriate warranties such as warranty that it owns full title in the intellectual property as well as representations regarding full title in the intellectual property as well as representations regarding controversies, litigations, claims of infringement, title disputes, and any controversies, litigations, claims of infringement, title disputes, and any other specific matters that are important to the buyer and the transaction. other specific matters that are important to the buyer and the transaction.

Technology Valuation-important considerationsTechnology Valuation-important considerations SizeSize: Whether there is market for the product of technology: Whether there is market for the product of technology Scale: scale of operation of technology is appropriate to that marketScale: scale of operation of technology is appropriate to that market MaturityMaturity: Whether technology is market proven or new : Whether technology is market proven or new ObsolescenceObsolescence: whether it is about to be replaced by new developments: whether it is about to be replaced by new developments Environment adaptabilityEnvironment adaptability: whether technology can be satisfactorily : whether technology can be satisfactorily

operated in transferee’s environmentsoperated in transferee’s environments Appropriateness:Appropriateness: Whether technology is appropriate for infrastructure- Whether technology is appropriate for infrastructure-

available power, telecommunications, transport etc available power, telecommunications, transport etc


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ISSUES THAT NEED EXAMINATION WITH RESPECT TO ISSUES THAT NEED EXAMINATION WITH RESPECT TO TRADE AND SERVICE MARKSTRADE AND SERVICE MARKS

• • Definition of RightsDefinition of Rights• Registered marks• Registered marks• Pending applications• Pending applications• Trademarks exploited by Target Company but not subject of registration • Trademarks exploited by Target Company but not subject of registration • Ownership• Ownership• Marks created by Target Company employees• Marks created by Target Company employees• Marks created by independent contractors• Marks created by independent contractors• Marks assigned to Target Company by third parties • Marks assigned to Target Company by third parties • Liens and other mortgages• Liens and other mortgages• Third Party Rights• Third Party Rights• Concurrent use and consent agreements• Concurrent use and consent agreements• Licenses from third parties• Licenses from third parties• Freedom to use-• Protection/Registration• Freedom to use-• Protection/Registration• Status and scope of registered marks• Status and scope of registered marks• Status and scope of pending applications• Status and scope of pending applications• Non-registered marks (marketing/registrability)• Non-registered marks (marketing/registrability)• Proper use of markings• Proper use of markings• Exploitation• Exploitation• Inventory of products/services on or in connection with which marks are used• Inventory of products/services on or in connection with which marks are used• Licensing practices- general/misuse• Licensing practices- general/misuse• Inter-company licensing practices• Inter-company licensing practices• Internet use/licensing• Internet use/licensing• Nonuse• Nonuse• Enforcement/Disputes• Enforcement/Disputes• Target Company threatened, pending actions against third parties• Target Company threatened, pending actions against third parties• Third party threatened, pending actions against Target Company• Third party threatened, pending actions against Target Company• Summary, Conclusions, General Comments• Summary, Conclusions, General Comments• Examine and evaluate opinion letter and cease and desist letters.• Examine and evaluate opinion letter and cease and desist letters.


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LICENSING OF INTELLECTUAL LICENSING OF INTELLECTUAL PROPERTYPROPERTY

Every merger and acquisition poses a Every merger and acquisition poses a Question: whether merging Question: whether merging companies intellectual property license rights would remain intact companies intellectual property license rights would remain intact pursuant to merger. pursuant to merger.

General principles of contract law provide that rights under General principles of contract law provide that rights under agreements are presumed to be assignable unless the statute, the agreements are presumed to be assignable unless the statute, the contract, or public policy provides otherwise or there exists a contract, or public policy provides otherwise or there exists a material adverse consequences to the other party. material adverse consequences to the other party.

Case exampleCase example: : General radio and appliances Co ltd v MA KhaderGeneral radio and appliances Co ltd v MA Khader (1986) 60 com cas 1013(1986) 60 com cas 1013-facts -facts transferor company in transferor company in amalgamation was tenant ,rent agreement specifically prohibited amalgamation was tenant ,rent agreement specifically prohibited subletting without written consent of landlord . Landlord instituted subletting without written consent of landlord . Landlord instituted eviction proceedings against transferee. Court held transfer of eviction proceedings against transferee. Court held transfer of tenancy rights under scheme of amalgamation was bad in law tenancy rights under scheme of amalgamation was bad in law being made without consent of landlord.being made without consent of landlord.

Similar position in law with respect to trademark and copyright Similar position in law with respect to trademark and copyright licenseslicenses..


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Challenges of Valuing IP Challenges of Valuing IP AssetsAssets in case of M&Ain case of M&A

Assets that may qualify as a company's IP Assets that may qualify as a company's IP may be easily overlooked, like;may be easily overlooked, like; information maintained in notebooks and/or information maintained in notebooks and/or

stored on a computer by any employee. stored on a computer by any employee. a pending patent application assigned to the a pending patent application assigned to the

company company an invention disclosure from an engineer to an invention disclosure from an engineer to

company decision-makers for consideration as company decision-makers for consideration as to whether to pursue patent protection, to whether to pursue patent protection,

proprietary software source code developed in-proprietary software source code developed in-house. house.


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Challenges of Valuing IP Challenges of Valuing IP AssetsAssets

Valuing IP assets is often a difficult task because their Valuing IP assets is often a difficult task because their true value may not be readily apparent true value may not be readily apparent

The value of an IP asset may not be recognized in The value of an IP asset may not be recognized in income received by the company. Indeed, the full income received by the company. Indeed, the full value of an IP asset is likely never recognized in value of an IP asset is likely never recognized in income because much of the asset's value resides in income because much of the asset's value resides in the negative right to prevent others from doing the negative right to prevent others from doing something they would otherwise be permitted to do something they would otherwise be permitted to do

Valuing an IP asset is further complicated because Valuing an IP asset is further complicated because such value is generally not stagnant. Rather, the such value is generally not stagnant. Rather, the value of an IP asset often changes over time. value of an IP asset often changes over time. Consequently, a company should periodically (e.g., Consequently, a company should periodically (e.g., annually) re-assess the value of its IP assets annually) re-assess the value of its IP assets


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Challenges of Valuing IP Assets Challenges of Valuing IP Assets Contd.Contd.

The pending patent application is an asset The pending patent application is an asset representing a potentially enforceable right that representing a potentially enforceable right that may be conferred to the company in the future. may be conferred to the company in the future.

If the company were to be acquired by another, If the company were to be acquired by another, some value would certainly be attributed to its some value would certainly be attributed to its pending patent applications as company "assets" in pending patent applications as company "assets" in determining a fair purchase price for acquiring the determining a fair purchase price for acquiring the company. company.

If the company were to be acquired, no value may If the company were to be acquired, no value may be attributed to the notebooks in determining a fair be attributed to the notebooks in determining a fair purchase price for acquiring the company because purchase price for acquiring the company because the notebook's content may be largely unknown. the notebook's content may be largely unknown. Consequently, a company may possess a vast Consequently, a company may possess a vast amount of IP, some of which is readily identifiable amount of IP, some of which is readily identifiable and others of which are difficult to identify and others of which are difficult to identify


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Reorganising and structuring Reorganising and structuring dealsdeals

If all or most of the IP owned by the corporate seller If all or most of the IP owned by the corporate seller is not assignable as a result of the contracts vesting is not assignable as a result of the contracts vesting ownership in the seller, then a stock purchase, in ownership in the seller, then a stock purchase, in which the assignability of the assets is not which the assignability of the assets is not important, may be preferable to an asset purchase. important, may be preferable to an asset purchase.

In this case, both parties are protected: the seller is In this case, both parties are protected: the seller is not forced to make representations about not forced to make representations about assignability that are impossible to meet, and the assignability that are impossible to meet, and the purchaser is not forced to assume the risk of claims purchaser is not forced to assume the risk of claims of infringement or the inability to enforce IP rights of infringement or the inability to enforce IP rights arising from the ineffectual transfer of rights.arising from the ineffectual transfer of rights.


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Due Diligence for valuation Due Diligence for valuation helps build strategyhelps build strategy

• • If Intellectual Property asset is underplayed the plans for maximization If Intellectual Property asset is underplayed the plans for maximization would be discussed.would be discussed.

• • If the Trademark has been maximized to the point that it has lost its If the Trademark has been maximized to the point that it has lost its cachet in the market place, reclaiming may be considered.cachet in the market place, reclaiming may be considered.

• • If mark is undergoing generalization and is becoming generic, reclaiming If mark is undergoing generalization and is becoming generic, reclaiming the mark from slipping to generic status would need to be considered.the mark from slipping to generic status would need to be considered.

• • Certain events can devalue an Intellectual Property Asset -events in Certain events can devalue an Intellectual Property Asset -events in respect of IP could be adverse publicity or personal injury arising from a respect of IP could be adverse publicity or personal injury arising from a product. An essential part of the due diligence and valuation process product. An essential part of the due diligence and valuation process accounts for the impact of product and company-related events on assets - accounts for the impact of product and company-related events on assets - management can use risk information revealed in the due diligence.management can use risk information revealed in the due diligence.

• • Due diligence could highlight contingent risk which do not always arise Due diligence could highlight contingent risk which do not always arise from Intellectual Property law itself but may be significantly affected by from Intellectual Property law itself but may be significantly affected by product liability and contract law and other non Intellectual Property product liability and contract law and other non Intellectual Property realms.realms.


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Methods for valuation of Methods for valuation of Intellectual PropertyIntellectual Property

The choice of approach will The choice of approach will be determined primarily by be determined primarily by the type of Intellectual the type of Intellectual Property asset is to be Property asset is to be valued, the circumstances of valued, the circumstances of the specific transaction, the the specific transaction, the availability of information availability of information and the level of due and the level of due diligence that the corporate diligence that the corporate is willing to take on. When is willing to take on. When multiple approaches are multiple approaches are applied a comparison and applied a comparison and reconciliation of resulting reconciliation of resulting value is possible. value is possible.

Valuation Methods

Cost approach Income Approach OthersMarket approach


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Principles of ValuationPrinciples of Valuation The cardinal rule of commercial The cardinal rule of commercial

valuation is:valuation is:the value of something cannot be stated in the abstract;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, all that can be stated is the value of a thing in a particular place, at a particular time and in particular circumstances.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.


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Cost based approachCost based approach Based on the principle of substitution, i.e., value Based on the principle of substitution, i.e., value

of an asset is estimated on the basis of cost to of an asset is estimated on the basis of cost to construct a similar asset at current prices.construct a similar asset at current prices.

Components of cost approachComponents of cost approach Cost of reproductionCost of reproduction Cost of replacementCost of replacement Depreciation costDepreciation cost Original costOriginal cost Book costBook cost


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Cost approachCost approach

Valuation ProcessValuation Process Identify historical Costs of developing the Identify historical Costs of developing the

intangible asset, adjust for time value of intangible asset, adjust for time value of moneymoney

Add an appropriate rate of return to calculate Add an appropriate rate of return to calculate developer’s profitdeveloper’s profit

DisadvantageDisadvantage: it seeks to correlate cost with : it seeks to correlate cost with value. value. Caution:Caution: NOT ALL DEVELOPMENTS NOT ALL DEVELOPMENTS BASED ON INVENTIONS LEAD TO SUCCESSFUL BASED ON INVENTIONS LEAD TO SUCCESSFUL PRODUCTSPRODUCTS


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Market Based approachMarket Based approach Estimates the value of an intangible asset Estimates the value of an intangible asset

based on market prices of comparable based on market prices of comparable intangible assets that have been intangible assets that have been bought/sold or licensed between bought/sold or licensed between independent parties.independent parties.

Also referred to as the Comparable Also referred to as the Comparable Uncontrolled Transaction (CUT) method, Uncontrolled Transaction (CUT) method, and is similar to the Comparable and is similar to the Comparable Uncontrolled Price (CUP) method.Uncontrolled Price (CUP) method.


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Market BasedMarket Based RequisitesRequisites

An active, public market. assessment of fair market valueAn active, public market. assessment of fair market value An exchange of comparable productsAn exchange of comparable products comparison with the sale value of similar assets comparison with the sale value of similar assets

There are various elements of comparison, which should be given due There are various elements of comparison, which should be given due importance while analyzing and comparing the transactions such as, importance while analyzing and comparing the transactions such as, functional characteristics of intellectual property, physical functional characteristics of intellectual property, physical characteristics of intellectual property, the size of industry in which the characteristics of intellectual property, the size of industry in which the intellectual property is transferred, the economic condition, the intellectual property is transferred, the economic condition, the existence of any special term and the legal rights that have been existence of any special term and the legal rights that have been

transferredtransferred.. Limitations: Limitations: In practice difficult to find sufficiently In practice difficult to find sufficiently

comparable transactions-price information, sales or licensing comparable transactions-price information, sales or licensing statistics usually confidential.statistics usually confidential.


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Income based approachIncome based approach Estimates the value of an intangible Estimates the value of an intangible

asset based on the expected asset based on the expected income attributable to the income attributable to the intangible asset during its intangible asset during its remaining economic life.remaining economic life.

Also known as “Discounted cash Also known as “Discounted cash flow analysis”flow analysis”


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Income based approach Income based approach Contd.. Contd..

An assumption An assumption as to the as to the duration of the duration of the income streamincome stream

An An assumption as assumption as to the costs to the costs and risks and risks associated associated with the with the realization of realization of the forecasted the forecasted incomeincome

Essential Elements

The amount of The amount of the income the income stream that can stream that can be generated be generated by the property by the property


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Valuation Process

Limitations Limitations Compute Net Compute Net Present Value Present Value of future cash of future cash flows (use flows (use appropriate appropriate discount rate discount rate reflecting risk reflecting risk of of investment)investment)

Income based approachIncome based approach Contd..Contd..

Forecast Forecast income and income and costs costs associated associated with using the with using the property over property over the life of the the life of the propertyproperty

Suitable where fair Financial

projections can be made

Estimating income

Attributable to intangibles,

itseconomic

life, appropriate Discount rate


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Other ApproachesOther Approaches Other Internationally accepted Other Internationally accepted

approaches include:approaches include: Market Capitalization methodMarket Capitalization method Profit based methodsProfit based methods Profit split methodProfit split method The Economic Benefit ApproachThe Economic Benefit Approach


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Table shows how big the economic Table shows how big the economic contribution made by brands to contribution made by brands to

companiescompanies


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Instances of Brand Valuation in Instances of Brand Valuation in M&AM&A

In 1988, UK-based GrandMet In 1988, UK-based GrandMet acquired the Pillsbury company.acquired the Pillsbury company.

It was estimated that 88% of It was estimated that 88% of the price it paid consisted of the price it paid consisted of "goodwill" i.e., GrandMet paid "goodwill" i.e., GrandMet paid approximately $990 million approximately $990 million (L608m) to acquire the Pillsbury (L608m) to acquire the Pillsbury brand name and its other brand name and its other branded properties (Green branded properties (Green Giant, Old El-Paso, Häagen-Giant, Old El-Paso, Häagen-Dazs, etc.).Dazs, etc.).

Tangible

Assets 12%

Intangi

ble Assets,

88%


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Instances of Brand Valuation in Instances of Brand Valuation in M&AM&A

Volkswagen, bought the Volkswagen, bought the assets of the Rolls-Royce assets of the Rolls-Royce automobile corporation for automobile corporation for $780m against a net $780m against a net tangible asset value of tangible asset value of US$250 million US$250 million

But it somehow did not But it somehow did not include the brand in the include the brand in the deal... deal...

The rights to use the The rights to use the Rolls-Royce trademark Rolls-Royce trademark were subsequently were subsequently purchased by rival BMW purchased by rival BMW for $65m and many for $65m and many analysts believe that BMW analysts believe that BMW got the better deal.got the better deal.

$0

$100

$200

$300

$400

$500

$600

$700

$800

Assets

Volkswagen

BMW


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Aligning the IP being acquired against Aligning the IP being acquired against the business being acquiredthe business being acquired

The intellectual property to be acquired should be considered by reference to The intellectual property to be acquired should be considered by reference to what is what is actually being usedactually being used or or required to be used in conducting the business required to be used in conducting the business to be acquired and not in a theoretical vacuumto be acquired and not in a theoretical vacuum. .

For example, an extensive portfolio of granted patents may be of no or little 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 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 used in the business are referrable to those patents, and worse still, if those products or processes infringe third party rights products or processes infringe third party rights

The intellectual property to be acquired should be properly categorised by The intellectual property to be acquired should be properly categorised by substantive type—egsubstantive type—eg granted patent, patent application, registered trade granted patent, patent application, registered trade mark, common law trade mark etc; by its ownership; by third party interests mark, common law trade mark etc; by its ownership; by third party interests involved in that intellectual property and by disputes related to that involved in that intellectual property and by disputes related to that intellectual property. intellectual property.

These factors will provide the foundation to identifying the necessary steps 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 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.be overcome, as well as the warranties that may be required.


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Aligning the IP being acquired Aligning the IP being acquired against the business being against the business being

acquiredacquired IP your company is acquiring will allow it to benefit from the IP your company is acquiring will allow it to benefit from the

transaction in the way it expects. For example, if your transaction in the way it expects. For example, if your company is buying a business to use its trade mark, the company is buying a business to use its trade mark, the business may be less valuable if the trade mark registration business may be less valuable if the trade mark registration does not cover the appropriate classes of goods or services. does not cover the appropriate classes of goods or services.

Similarly, a business with a number of patents may not be Similarly, a business with a number of patents may not be as valuable as it appears if the key product manufactured as valuable as it appears if the key product manufactured by the business is not covered by those patents, or if the by the business is not covered by those patents, or if the key product infringes another person’s patent. Lapsed key product infringes another person’s patent. Lapsed patents and designs are of no value either, so check that IP patents and designs are of no value either, so check that IP renewals are up to date. renewals are up to date.

Search all relevant local and foreign patent, design and Search all relevant local and foreign patent, design and trade mark registers to ensure that IP protection is trade mark registers to ensure that IP protection is available in all of the key markets of the business. available in all of the key markets of the business.


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Means of acquiring IP Means of acquiring IP assetsassets

Stock Sale

Supplemental Closing Documents

Transfer documents

Mergers & Acquisitions

Asset Sale

Purchase Agreement


5757

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.


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Stock purchasesStock 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.


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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


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Sale of assetsSale 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


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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

Domain names

Transfer of ownership

Documents .

Transfer of Domain NamesTransfer of Domain Names

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.

The latter two documents may be set forth as exhibits to the Acquisition Agreement or delivered as a post-closingobligation.


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Transfer of domain namesTransfer 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


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Transfer of domain namesTransfer 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.


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Tax considerations governing the Tax considerations governing the structure of the dealstructure of the deal

The structuring of an acquisition is frequently governed by The structuring of an acquisition is frequently governed by tax considerations. The lead IP lawyer must be alert to the tax considerations. The lead IP lawyer must be alert to the consequences arising from any particular structure consequences arising from any particular structure jeopardising intellectual property rights. jeopardising intellectual property rights.

For example, transferring all the intellectual property to a For example, transferring all the intellectual property to a separate IP holding company while transferring all tangible separate IP holding company while transferring all tangible assets to a separate operating company, will cause assets to a separate operating company, will cause problems if common law trade marks are involved, because problems if common law trade marks are involved, because common law trade marks cannot be validly assigned common law trade marks cannot be validly assigned separately from the goodwill attaching to the business separately from the goodwill attaching to the business assets sold.assets sold.


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Tax considerationsTax 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.


6666

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.

IPR were brought under the service tax law w.e.f. 10th September 2004.

Not available for the taxyear in which amalgamation / demerger take place

These incentives are thereafter allowed to the amalgamating/resulting company,

Tax considerationsTax considerations

IPR holders are required to get registered with the appropriate authority under service tax rule for providing IP Services forconsideration of Royalty.

liable to pay service tax @ 12.24% (12% service tax + educational cess @ of .24 % of the service tax) on the gross amount charged from the receiver


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Foreign laws impacting on IPForeign laws impacting on IP

It is not uncommon in present day acquisitions for rights in intellectual It is not uncommon in present day acquisitions for rights in intellectual property to arise in various jurisdictions—eg foreign registered trade property to arise in various jurisdictions—eg foreign registered trade marks, granted patents etc—or in the case of licences, for those to be marks, granted patents etc—or in the case of licences, for those to be governed by the laws of jurisdictions outside India. governed by the laws of jurisdictions outside India.

In such a context, two factors are particularly important:In such a context, two factors are particularly important: firstfirst, to have access to a network of good quality intellectual property , to have access to a network of good quality intellectual property

counsel to address issues arising from such laws and counsel to address issues arising from such laws and secondsecond, to begin with the presumption that the laws in those jurisdictions , to begin with the presumption that the laws in those jurisdictions

will be different to Indian law on intellectual property issues fundamental to will be different to Indian law on intellectual property issues fundamental to the acquisition—eg US law may treat the assignment of intellectual the acquisition—eg US law may treat the assignment of intellectual property licenses by licensees differently to Indian law. Adopting such an property licenses by licensees differently to Indian law. Adopting such an approach means that issues are more likely to be dealt with on their 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.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 The deal should not be viewed as complete until recordal of the transfer of title has been effectedtitle has been effected


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WORLDWIDE RECORDAL OF INTELLECTUAL PROPERTYRIGHTS.

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.


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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.


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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.


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THE FINAL WORD…THE FINAL WORD…

It is anticipated that intellectual property will be the dominant force in future commercial transactions comprising tomorrow’s mergers and acquisitions!