Intellectual property: Discover what happens to the IP in a mergers and acquisitions deal

In this podcast, John Andrews speaks to specialist intellectual property lawyer Lakmal Walawage about how ip transfers during an M&A deal. They also talk about the value of IP and how important it is to understand the value and to audit your IP.

Transcript

00:00:00:00 - 00:00:34:14
Unknown
Hello, welcome to the Deal Lawyer Podcast. I'm John Andrews. Today I'm joined by my colleague Lakmal Walawage, who is the head of our intellectual property team at JMW. Welcome to the podcast. Thank you, John. Thanks for having me. So the topic this week is intellectual property in the context of sales and acquisitions of businesses. IP is obviously a key asset, which obviously which quite often gets overlooked in the process of the purchase process.

00:00:34:16 - 00:01:13:15
Unknown
So what I'm gonna ask you is in terms of IP, just tell me, tell me what it is and very simple terms how you describe it. So intellectual property. John is, is intangible assets. Basically that's a business builds up and creates throughout its sort of business lifecycle. And there are different types of IP trademarks relating to brands, copyright relating to creative works and all the other written and image works, designs relating to product design and patents relating to sort of inventive technological products.

00:01:13:17 - 00:01:42:19
Unknown
And really, these can form a cornerstone of of a company's businesses value and its offering to its to its consumers or the offering of its of its services. The key thing is to protect these rights adequately make sure that maintained well and then at the point of a commercial transaction, making sure that all your ducks in a row and that is consent properly over to the buyer.

00:01:42:21 - 00:02:09:14
Unknown
Okay. So if we were to say like Coca-Cola, obviously we look at that brand, then the design of that brand. So that side of it would be what would be trademarks. Yeah, definitely the brand. I mean, brand value nowadays can exceed. I mean, there's a Kantar Report recently which put brands like Coca-Cola up in the hundreds of millions in terms of just their brand value.

00:02:09:14 - 00:02:31:02
Unknown
We're not talking about any equity in the business, but just the brand value. I mean, Oppo's brand value is now over £1,000,000,000. I always find that incredible because I'm old. I don't remember when I was, you know, years and years ago when I first started my legal career, the Apple, the record company was, I think it was the Beatles had trademarked.

00:02:31:04 - 00:02:51:01
Unknown
That was somebody who tried to sue a small computer company, the court system, and they've just gone ahead to do that in terms of brand value. It just hasn't been enough for anyone. So we have we have this confidence that the brand inside of it and design. So let's talk about trademark and then we're looking at the kind of the invention side of it.

00:02:51:01 - 00:03:13:24
Unknown
So like maybe the formula for Coca-Cola. Absolutely. And how else would you use that? That would be that would be well, that would be a formula. So a trademark of possibly a patent. I don't think the formula for Coke itself as a patent being being sold at the moment, but also trade secrets and knowhow that they will have within the business.

00:03:14:01 - 00:03:47:22
Unknown
And, you know, if that is the recipe and it is written down for food and beverage companies, that may be also protected by copyright. Okay. As a literary work. But but where we get to is is that what I'm trying to lead is that we're looking at intangible, intangible items that have real significant value for businesses. And in the context of an M&A transaction example, I would say to any clients that come to me that it's a two year process to grab property for sale.

00:03:47:24 - 00:04:18:07
Unknown
Yeah, look, look, look at your contracts, your suppliers. I'll make sure they were employment contracts or nice and tight and in writing. But in the context of intellectual property, what, what, what, what, what's required? Well, I think, you know, obviously I'm an IP evangelist, so I'd say from the beginning of the lifecycle of the business, you want to get all your IP sort of registered and maintained well.

00:04:18:09 - 00:04:48:02
Unknown
But if you are, you know, you have a particular sort of sale in mind. You know, with the two year timeline, there are a few things that you might want to want to look at just to make sure that the buyer doesn't come up with any surprises during the transaction. You know, this this can be, for example, you want to make sure all your your IP that is registered is registered so that maybe your brand is not yet registered as a trademark.

00:04:48:02 - 00:05:18:05
Unknown
It should be registered as the trademark. Similarly, designs or anything else that can be registered patents over time limits on on when you can release this and register it. But in general, you want to make sure everything that is registered is registered because those are the strongest IP rights rather than registered rights. But during those registration, as you're sort of entrenching your rights to those particular suits.

00:05:18:07 - 00:05:39:18
Unknown
So absolutely. That avoids challenges post completion. Yes, absolutely. And a case of intangibles for by you can say, well, these are our rights. This is what we've registered for sure. For sure. And after you've registered something like a trademark, it's really easy to point to the ownership of that rather than with the unregistered position, not in passing off on goodwill.

00:05:39:18 - 00:06:17:23
Unknown
And you've got to show a change of title and all of those sorts of things, which is much harder. So, you know, registrations, if they can be done, must be done. And those registrations also then need to be recorded at the various intellectual property offices, or if there are transactions that there were, that there were relating to previous registrations, that you had, for example, in in group structures, you've seen this quite a lot where there's been a transfer somehow to to one company within the group, maybe a holding company that actually a different companies licensing that mark and using that mark.

00:06:17:23 - 00:06:44:22
Unknown
But there's no agreement in place for all of this. So really, you want to get those contracts in place to make sure there are specific terms that deal with any intra group situations dealing with the IP. So and those need to be recorded at the IPO as well, because there are certain time limits that apply in relation to registering those and getting the IPO website to display the correct information.

00:06:45:00 - 00:07:08:22
Unknown
Okay. And once you've registered, do you have to keep those registry such as do they need to be renewed or. Yes, they need to be renewed every ten years. They also need to be sort of if there are, say, for example, you know, you might be thinking of sending a particular entity within the group into voluntary liquidation or some other form of administration.

00:07:08:24 - 00:07:31:05
Unknown
You want those to be transferred out to a different company. So again, that needs to be updated on the IPO register. Even if you have a change of address really, or a change of name of the company, you want that to be reflected on the IPO website. So there is a bit of maintenance required that you want to get on top of before you get to a transaction and the buyer asks you all of these questions.

00:07:31:07 - 00:08:10:11
Unknown
And one of the things that is really important with IP rights and something that really needs to be looked at in the context of a corporate transaction, well, well before you get to it is the chain of title of various IP, because I mean, IP can originate from from a number of sources for businesses, right? So for example, take a particular scenario if you are developing, say, software or, you know, even a website, you might get external contractors to to help with that and work on that and maybe actually do some of the development of the code.

00:08:10:13 - 00:08:39:00
Unknown
Then. So now in the UK code, software code, you know, website code websites themselves in terms of what the displaying is protected by copyright, which is an unregistered right. So it never gets picked up until you realize that the first order of copyright. So for example, an external developer contractor is the owner of that copyright even if you paid for that software to write about it.

00:08:39:02 - 00:09:05:22
Unknown
So what happens is people don't get the right agreements in place to assign that IP from the external contractor. Really, it should be done upon the final payment of of that invoice over to the company so that they can show that the chain of title is intact for the company. Often what we'll find is you get to the transaction and actually when someone questions who actually drafted the code for this software, you find it's someone externally, they've left that business.

00:09:05:22 - 00:09:45:22
Unknown
You know, all sorts of problems can arise. So that's something that that's a really good point you raised that we're talking about to about the chain of transport gas, I mean, such a property, right? So another area where I've seen that can arise is in the context of employees that have developed software through the course, their employment. And this probably ties in with employers having good employment contracts, obviously, because again, typically if I withdraw from the contract for a client that's an employment contract or service agreement, I'm going to make sure that any work that employee does in terms of development software, for example, belongs to the employer, because otherwise we don't do that, right?

00:09:45:24 - 00:10:11:20
Unknown
Yeah, absolutely. I think, you know that there is a there's a statute in the copyright design, the Patents Act, there's a provision that transfers employees work to the business, to the employer. However, it's not always a catch all because it's a bit, you know, that's quite a bit of based on what comes within the course of someone's employment and without.

00:10:11:22 - 00:10:53:16
Unknown
So, you know, to cut off any arguments as to whether, you know, someone went and did it home, someone did it outside their working hours, all of those. So exactly. You have the employment contract really tight and really sort of in favor of the employer. And another scenario that comes across quite commonly and I often advise clients to do this, is that where there were always factual property rights that capable of being licensed or sold, you know, quite often I'll advise clients of a group structure and one of the companies in that group for a sole purpose will be to hold the IP rights, and then it licenses those rights out to other companies within

00:10:53:16 - 00:11:20:13
Unknown
the group. So again, that's another pitfall. If you're buying one company or one particular subsidiary, but you're not buying the subsidiary that's got the right. So I think it's absolutely, John. And I think, you know, having that group structure with a separate holding company for the IP assets is is, you know, very advisable because it includes those IP assets from any liability or litigation risks and liquidation risk.

00:11:20:13 - 00:11:40:17
Unknown
Exactly. Exactly. So it's a good bet that holding company is there. But you definitely need to make sure that that holding company is then involved in the sale or included in the sale because they hold all the IP assets. Yeah. So, you know, whether that means a transfer to the you know, you could deal with that in a couple of ways.

00:11:40:17 - 00:12:02:19
Unknown
You can either transfer it to the industry that's been sold prior to the purchase. Yeah. Or you could include that entity within the sale and provide a ready made sort of company that bears all of the IP. Okay, great. Since when is sort of is leading me to is this So we talk about what you need to do as a set out to to protect your rights.

00:12:02:19 - 00:12:30:08
Unknown
Yeah we're actually for a purchaser particularly if it's could be a software business or business that involves literary works, artworks, artwork, that kind of stuff. We would typically involve you guys in the transaction to do an IP audit. Yeah, as part of the due diligence process, when you're doing that in such a box, you will get to see if you could summarize for us what you're looking for, what your tick box is going to be.

00:12:30:09 - 00:13:02:16
Unknown
Yeah, absolutely. Very key part of the process, writing an and you know, the place to start is for some folks or a good IP lawyer who has experience in the area in terms of understanding the business that is being sold and understanding where and how the IP of that business originated. So that's where you pick up. So you'll be asking queries that you normally ask and this is where you learn about things like that.

00:13:02:22 - 00:13:26:16
Unknown
External developers from the software or we had a an employee only only employed on a contractual basis. So three months and they left all of these sorts of questions. Or you might say, you know, there were a few different entities for this family business and some of them have gone into liquidation. Which entities were using the mark at these specific times?

00:13:26:16 - 00:13:56:23
Unknown
Is there a chain of title there? So really it's about understanding that business has been bought and signposting where IP may have arisen either in an unregistered context or registered context and then making sure you ask the right queries of the of the seller, look at what documentation they are able to produce and ensure review that documentation and ensure that you know everything's in order ready.

00:13:57:00 - 00:14:18:08
Unknown
And that's where most of the, you know, the query stage is where most of the problems are. Right, Exactly. So I guess in terms of in terms of the various areas it might be looking at, if you bought a business that's got a lot of IP involved, if if you had if you had software developed like set of contracts, you should be looking for the contract with that contractor to make sure that the rights were signed.

00:14:18:10 - 00:14:42:24
Unknown
And then if they were taken by an employee to one type service or employment agreement in place, if, if the intellectual property rights are owned by a company that's external, you'll be looking to acquire in that company. Yeah, over there should be a license hopefully for a minimal or no fee and in perpetuity for to use any necessary intellectual property rights that we sort of have.

00:14:42:24 - 00:15:05:14
Unknown
As you're looking at. Absolutely. You you'd assign it over to, to the company that's been being sold. I mean you might also look at and this may be in the interests of the seller as well, getting that those IP rights, particularly if IP is, you know, a large part of the value of a setting company, getting them valued.

00:15:05:16 - 00:15:36:18
Unknown
And that's where an IP audit comes in as well. Okay. And that brings me on. So a thorny question, how do you value IP? I mean, that's the real Holy Grail, to be honest, with valuation and different countries update different approaches over time. I mean, the most traditional approach was the accountancy approach of the cost method, which was how much have you invested in bringing about these IP rights or registering these IP rights?

00:15:36:20 - 00:16:11:10
Unknown
But this doesn't I mean, in recent times it's been clear that this doesn't do full justice to the value of IP. So, you know, what's most common now is an integration of various methods, including the market method and the income method, which is what would the value of this IP be on the market And in terms of the income method, what income is this IP generating by way of, say, a license to a third parties, a software, a source arrangement, software as a service arrangement?

00:16:11:10 - 00:16:49:09
Unknown
What are the values of these these sales that are being made? And that all informs the value of that IP portfolio. The key thing is really to get a good IP lawyer to audit your IP portfolio and make sure that everything is already sort of tightened and correctly in place prior to a valuation taking place. Because if the valuation expert gets to it and there are problems, say for example, there's an infringement claim in respect of one of the IP rights or one of them one of the IP rights of the brand, you can't prove the chain of title.

00:16:49:11 - 00:17:18:08
Unknown
This will affect the valuation. That's where you'll get to typically fractions for a buyer. You will either ask for retention or some deferred consideration or intend to say Yes, of course all of these sorts of things or price check and none of those things as a set out you want to have happen, which is yes, why? We were talking earlier about the importance of getting this with documentation in place early doors, but certainly when in advance of any consultation sale.

00:17:18:14 - 00:17:40:22
Unknown
Absolutely. Once you have an idea that there are some really good valuation experts on the market now, that have, you know, done good innovation over the last few years as well, and have tools such as even software tools that they use now that you can put the IP on it through the watch, reduce the value I guess you valuation.

00:17:40:22 - 00:18:20:09
Unknown
Yeah. So you know, your IP lawyer should should have those contacts in terms of the best valuation experts to go to. But there are plenty of that. Yeah. And the importance of a good due diligence process in a business is IP reliant on the heavy becomes apparent when you look at the cost of taking in disputes. If you don't have sites or or defective times which from IP so know as a corporate lawyer, when we drafting purchase agreements, we have a whole raft of warranties or promises that a set of makes about the business, which is fine.

00:18:20:11 - 00:18:52:24
Unknown
But if as a purchaser post completion you'll have to transfer lined eyes warranties to sue as set up. I know that litigation is notoriously expensive to pursue the best time consuming parts and saves quite technical calculation. What are the potential losses? And really my sacrifices, if you haven't heard a lot of warranties, rather than conducting a full due diligence process presale, you're you're saving yourself up a lot of the trouble.

00:18:53:00 - 00:19:27:19
Unknown
Yeah, absolutely, John. I mean, I've seen situations where, for example, the seller gives gives a warranty that the brand, for example, a unregistered mark or sign associated with the company is all intact. And then you get to the other side and find out that actually the company that is using the mark in the 1990s from the 1980s onwards was liquidated and that followed that goodwill positive trial.

00:19:27:21 - 00:19:47:07
Unknown
So and then in the meantime, in the early 2000 someone else comes comes in with the mark and uses it before the new buyer has time to use the rights across the preceding rights. Now, in that sort of situation, I mean, the buyer has the rug pulled out from under their feet in terms of the entire business. Right?

00:19:47:07 - 00:20:17:14
Unknown
They can no longer use that brand anymore. And the sellers are given a warranty that the brands and everything's in place of Both are a lose lose situation. Yeah. Unraveling a problem that should have been done a review of the purchase. Yeah my that's been a fascinating conversation about set amount flipping in context of M&A. If any of our listeners the podcast want to get in touch with you to discuss any of the messages we've been talking about, what's your email address?

00:20:17:14 - 00:20:46:21
Unknown
What's your contact number? So my email is lot model one to walk a J.M.W. Echo dot UK and my phone number is 715372417. And yeah, I'd be happy to speak to anyone who has any queries about about IP in this context or any other, to be honest. Greg, thanks very much. Thanks, John. Thanks for having me. Thanks very much for listening to the podcast.

00:20:46:23 - 00:21:25:08
Unknown
If you'd like to contact me to discuss some of the messages in this podcast or indeed any previous podcasts when I was John Andrews. My email address is John Dot Andrews at J.M.W.Dot Co dot UK.