The importance of IP in mergers and acquisitions
A portfolio of intellectual property (IP) rights can, if properly managed and maintained, add significant value to your business and make you an attractive proposition to a buyer. The acquisition process for buyers can be much smoother if a seller is able to provide a complete picture of their owned or licensed IP, and any restrictions on its use, at the outset.
IP rights, brand value and product or innovation portfolios have, for decades, been one of the key drivers behind merger and acquisition activities. The classic example that I often talk to clients about is the acquisition of the Rowntree business by Nestlé which, in 1988, was the largest ever foreign takeover of a UK company. Nestlé agreed to pay around US$ 4.5 billion for Rowntree PLC in a deal where the main objective was to acquire brands such as Kit Kat, Yorkie and Rolo.
More recently, the acquisition of luxury Italian fashion house Versace by Michael Kors is a deal driven by the buyer’s desire to access new product lines and markets through the acquisition of an established brand and IP portfolio. While most clients are not multinational confectionery manufacturers or fashion houses, the value of IP is still vital. In fact, I recently acted for a client in the sale of one of its unused brands and associated trade mark portfolio for a modest consideration in the tens of thousands of pounds.
In order to maintain value, companies need to ensure that their brands, product designs and innovation are protected — and that they have accurate, up-to-date records of their IP rights.
Due diligence (DD) is the process that buyers and sellers go through, often with their legal and financial advisors, when they contemplate a merger or acquisition. It’s during the DD process that the buyer asks questions about the business or assets that it’s considering acquiring. Often, a deal may fail because the seller either cannot satisfy the buyer of the veracity of its rights, or questions lead to uncertainty as to the buyer’s ability to exploit the business in the future.
I recently acted for a buyer on a transaction which failed. Our DD revealed that the seller was unable to operate in a key market for the buyer and to do so would infringe a third-party’s IP rights. Ultimately, the freedom to operate in a key market will have a material effect on the price that a buyer is willing to pay or, if the buyer opens themselves to avoidable risk, whether the transaction completes.
In the utopia lawyers dream of, the seller will have a complete record of the IP that it owns or licenses, as well as any agreements it has entered into which restrict its activities. In my experience when acting for buyers, this level of information is rare, particularly if the transaction is of a distressed business or the deal needs to be completed quickly.
For this reason, if you’re contemplating selling your business, it’s advisable to undertake an audit of your IP portfolio at an early stage. The audit should focus on ensuring that you’ve protected key assets and that you have an up-to-date record of your rights. It’s particularly important to ensure that the ownership recorded on the IP registers is correct. Of course, not all IP rights are registered, and therefore it’s important for a seller to be able to point to business papers which demonstrate ownership of copyrights and design rights, confidential information, licences and agreements.
The audit will provide details to the buyer of the rights that they’re buying and allow them to undertake searches to verify this information and/or ask questions of the seller.
When IP rights are bought and sold, it’s necessary to record the change of ownership on the relevant registers. If the change of ownership isn’t recorded, the buyer may not be able to enforce or exploit the acquired rights against third parties.
Even if an IP audit was completed prior to completion, it’s advisable to undertake a further audit once the deal has completed. It’s likely that the priorities of the buyer will be different from those of the seller and, therefore, an audit will highlight gaps in protection for the new owner. An audit will also allow the buyer to make an informed decision about recording the change of ownership against the acquired IP rights.
Updating IP ownership is not always a simple or low-cost process. Most jurisdictions have their own requirements and fees, from the simple completion of a form in, say, the UK to more onerous processes which can involve the provision of legalised documents, the payment of high fees and the time limits to file the application to record the change of ownership. If the acquired IP portfolio has rights in countries in the Middle East, the cost of recording a change of ownership can come as a surprise to the uninformed buyer.
IP plays a key role in most mergers and acquisitions. We have many years’ experience in advising buyers and sellers about all aspects of IP-related transactions. If you’d like to find out more, please feel free to get in touch with us.