IP Issues in Mergers and Acquisitions

Intellectual Property (IP) is the latest form of wealth in today’s largely information based economy where tremendous value is placed on inventions, discoveries and knowledge of the same, as production and growth depends on them. As a result, IP assets which range from well-known assets like patents, copyright, trademarks, know-how and trade secrets to newer ones like mask-works and internet domain names form a substantial part of company assets.[1] For quite sometime now they have played a key role in mergers and acquisitions both at the national and global level, many of which take place with the sole aim of acquiring IP assets belonging to the transferor/target company and all rights therein.[2] One reason for this is the fact that given the rapid pace at which technology is developing, most companies find it more economical to purchase newly developed intellectual property. Also, developing one’s own technology may be too expensive or uncertain which means acquisition is the only way of staying competitive. Further, doing so helps to expand and improve business performance depending on factors like the value of the IP assets and rights in them, potential benefits etc.

Prior to acquisition of intellectual property through a merger or acquisition, a due diligence must be performed to ascertain the validity of the assets, their value, ownership and rights over them, adequacy of protection available etc.[3] In this context confidentiality agreements, license agreements, joint venture agreements, agreements confirming payment of maintenance fees and taxes etc are useful.[4] They help the transferee/takeover company to determine by how much the concerned IP assets add to the value of the target company’s assets. Here it is relevant to note that due to their intangible nature, it is sometimes difficult to value IP assets especially in fields where technology and products are constantly and rapidly evolving.[5]

In addition, warranties given by the transferor/target company regarding the IP assets listed, absence of liens or encumbrances therein, non-infringment on third party rights, absence of litigation, etc are necessary as they enable the transferee/takeover company to claim breach of contract and relief after the merger/acquisition has taken place in case they turn out to be incorrect.[6] All these give an idea of the strengths and liabilities of the transferee/target company or specfic IP assets belonging to it, which influences the decision of the transferee/takeover company regarding a merger or acquisition.

Another important issue regarding IP assets is the question of how far employment agreements drawn up protect the rights of the transferee/takeover company over intellectual property created by its employees in the course of their employment. For instance, in case of copyright it is necessary to ascertain whether or not the contract signed was one of ‘work for hire’ enabling the company to be deemed by statute as the author so that it has copyright over the work created. Similarly, when the transferor/target company’s disclosures include inventions that have not yet been patented or assigned, the inventor’s obligations to assign must be ascertained. It is important that all listed inventors have assigned to the target company so that there is no gap in the chain of title.[7]

Once these issues have been settled and a decision is made to acquire the IP assets, this may be done through purchase of specific IP assets used by the transferor/target company in its business, or by purchasing stock in a company having IP among other assets. It is relevant to note here that in case of acquisition by purchase of IP assets, the transfer agreement need not specifically mention the right in these assets as these are presumed to have been acquired through such sale. But when acquisition is through purchase of stock, it should be noted that the takeover company does not acquire rights over the target company’s IP assets which are presumed to remain with the acquired company unless otherwise specified. Therefore an express written agreement may be needed to obtain effective ownership and control over them.[8]

Moreover, the target company may not have rights over all aspects of intellectual property used by it, such as when it has obtained a license to make use of intellectual property belonging to a third party. In such cases, if the licensee desires to assign its rights to an acquiring company, it may have to obtain the licensor’s consent to such transfer. Even when such consent is not required, it has to give notice to the licensor of the proposed transfer.

Post the merger/acquisition, the relevant IP assets have to be recorded as belonging to the transferee/takeover company in all jurisdictions where they exist for the company to be conferred with valid rights of ownership and use under law. Otherwise there may be confusion regarding ownership and the company may lose its newly acquired rights to the asset(s). This is especially possible with regard to well-known marks that are extensively used so that they no longer act as an indicator of origin. In such a situation the company may not be able to avail of certain reliefs like enforcement of IP protection, prosecution of infringments and damages thereon, injunction orders etc. A failure to record the change in ownership can also lead to loss of royalties and affect the acquiring company’s rights to engage in further transactions.[9]

One last issue to be noted in this regard is that the status and extent of protection given to IP often varies from one country to another depending on their level of economic and technological development. Difference may be with regard to the ease with which property rights may be established by the transferor company, the duration of time for which these rights exist and extent to which they are enforceable, remedies available in case of infringement etc. These have to be taken into account in case of international mergers and acquisitions.