This article is written by Prateek Mudgal, Faculty of Law, Aligarh Muslim University. The article deals with intellectual property issues in merging and acquisition, along with it also deals with how IP proves to be an asset in merging and acquisition.
One of the most important assets in the growing business and technological world is that of Intellectual Property. It has always been a very hard job for people to assess and transfer the value of anything intangible. Tangible assets are easily assessed and hence valued, but the problem comes with an intangible asset, its transfer, etc. It is very clear that such transfer of knowledge, know-how, know-why, and know-what is a very complex issue. These assets, unlike tangible assets, cannot be returned once provided. For instance, trademarks give a very strategic advantage to industry. Maintenance of quality is often considered important by big companies to keep up with their set standard in the market.
Mergers and acquisition in the new economy
The instances of mergers and acquisition in the new economy are increasing every year, it is seen quite often in the business world, but what is the reason behind these merging and acquisitions increasing with advancements in technology. Let’s find out.
It is very obvious that companies work on the principle of profit maximization, for-profit maximization companies need to grow. It is no more a hidden fact that to grow in the business world is not a cat-walk. The competition is known by everyone, apart from this growth requires time and resources. Therefore mergers and acquisitions come out to be an easy way to grow. Example of such merging is ITC Classic with ICICI, an example of acquisition is Raasi Cement by Indian Cement
Variety in services
Another reason for the acquisition is providing service from various product lines. To provide diverse products, companies often acquire other companies dealing with diverse products. This helps companies to maximize profit and cope-up with loss in a more significant manner. Different products show different periods of profit-maximization.
Acquiring companies help various businesses turn into an empire. Various companies dream of tackling over their competitors, such competition requires lots of marketing improvisation and apart from the increment in assets a lot of time is required. To make their task easier various companies simply absorb their rival competitors by acquiring them. An example of such acquisition is the acquisition of Tomco by Hindustan lever, another very interesting acquisition is by Computer Associates Internationals which acquired around twenty other companies.
Availability of new platform
By this what I mean is, whenever a company tries to establish its market in a new nation, the best way is to acquire certain local companies or already well-established companies. It must be noted that the reason behind such acquisition is to ease out the process. An example is the acquisition of Parle by Coke.
Intellectual property: an asset to M&A
In the above points where I mentioned why companies merge, I couldn’t suppress my urge to stick to tangible and material benefits of merger and acquisition. Now, I would like to stress how Intellectual Property proves to be beneficial in merging and acquisition.
Adding value to the portfolio
With growing technology, various companies are cautious of their portfolio. Their existing portfolio shall meet with their business objectives, this may help in the fulfilment of those objectives. The new innovation, technology, R&D, etc, are first time consuming, and second, in the dynamic market, a lot of investment in new technology can be very risky. M&A lower that risk by proper implementation of IP, new innovative technology and methods can be used that improve the asset portfolio of a company.
M&A helps companies to acquire unique technology and capabilities, this helps the company to acquire a strong market hold apart from this it helps to give the company an edge over its competitor using acquired knowledge.
Transfer of technology
Acquiring IP assets is very beneficial because it allows technology transfer from one person to another, or you can say from one business entity to another business entity. The list does not stop here there are various other advantages of Merger and Acquisition as well. It is to be noted that various issues are involved while acquiring IP assets lets focus on some of them and understand what these issues are:
Starting from scratch, one of the major issues involved in M&A is the documentation required for assigning and analyzing various IP assets while merging or acquisition takes place a set of documents is required which may include the following:
- Patents, Patent application
- Service and Trade Marks
- Trade secrets and other information
- Contracts regarding IP assets
- Licenses and Any other relevant information that may prove an intellectual property.
- Open Source Software used by, other software and databases involved
Such documentation, ideally, will have been already done by the seller with all the required and necessary documentation. But in reality, such documentation is not already prepared therefore at the time of merging or acquiring it becomes a tedious job, therefore enough time should be given for documentation, this facilitates the transaction and makes it smooth.
IP ownership: representation and warranties
This is another important issue that arises during merging and acquisition. IP ownership representation and warranties serve a very important purpose. The need for representation and warranties in the agreement arises for several reasons. For example, such an issue may arise when there is co-ownership of IP assets with a third party, or when the license of IP asset has been given to a third party. Such representation helps the acquirer to cancel the agreement and it may refuse to consummate the acquisition. Due to the following reasons, the seller may not be able to exploit its intellectual property assets:
- Third-party claims regarding the invalidity of patents.
- If IP assets infringe third-party patents or third-party intellectual property rights.
- Lack of evidence about contracts by which the employees responsible for creating intellectual property have sold the right to the seller.
- The seller, if fails to register IP with an appropriate government body, then various legal issues may arise.
Intellectual property validity
Even when there is no ownership issue, there may be a potential threat of validity issue. For instance, while considering the patent application, The United States Patent and Trademark Office, may have not considered ‘prior art’. In such cases, there is always an issue of future legalities in which claims regarding ‘prior art’ may come.
This happens when ‘prior art’ was not considered initially in the patent application. Various precautions may be taken to tackle the problem, but one cannot be sure without a proper judicial determination. Another important issue that arises, when proper governmental maintenance fees have been paid critical registered patent, trademarks, along with this there should be proper renewal fees paid to avoid expiration and loss.
This is one of the most important issues that arise during merging and acquisition. Merger or acquisition is a relatively quick transaction because of various reasons. When the sale comes in Public knowledge both seller and buyer come at a risk. Whenever the sale becomes public various opportunists lay claim for intellectual property, such claims infringes the right of the seller to exploit its intellectual property. At the same time buyers also face stiff competition from various other potential buyers.
Therefore both buyer and seller look for a speedy deal. The buyer provides the seller with a disclosure schedule, which the seller has to complete within a limited time framework. The document is very detailed and also very complex because it contains a lot of information like patents license and much other important information. It is a very delicate process and shall be completed with due care only. An IP specialist shall be hired for this process, many times this process is overlooked by the seller.
Multiple drafts regarding this documentation are completed and the result is the delay in deal and transaction. Therefore it comes out to be an important issue which must be properly dealt with. Following are the common issues that arise in disclosure schedule:
- Failure of listing Patents
- Failure of listing license and technological agreements
- Failure of listing domain names, trade and service marks
- If third-party IP claims are not listed
Open Source Software Issues
Another major issue that arises is regarding the usage of open-source software in the development of technology and software. Open-source software is often used by engineers and employees. Use of such open-source software leads to various IPR issues that may cause a problem while acquiring and merging. The issue arises because open source licenses require that any modification made in the code should be made available to third party users, apart from this license of newly developed software should be similar to open-source software. These issues prove to be an obstacle for the seller, and the attractiveness of the deal also fades away.
The best way to find any open-source lurking behind the codes is by using third-party software like Black Duck and Palamida, this software helps to cross-check the code and find out the open-source potential threat.
Disputes: Open or Potential
An acquirer before finalising the deal will make a careful review of any ongoing IP claims or Potential IP claims. A careful review will also include that, how strictly the seller has claimed its own right in a previous matter. Acquirer carefully looks for any ongoing litigation or any potential litigation, the main focus is on unresolved third party claims which have not yet led to litigation. These are very major issues and must not be looked over, considering the same acquirer may insist on special indemnity so that acquirer is protected from any future judgment which goes against the interest of acquirer and in favour of the third party.
Grey areas in the agreement
It has to be made clear that IP laws recognize the rights of employees and independent contractors who provide the company with intellectual property assets. Therefore such ownership confusion and disputes shall be cleared before the acquisition, it has to be noted that usually employees and independent contractors have patent rights when the invention has been done in an individual capacity, but if the employee was employed for the purpose of such invention then the ownership rights stay with the employer. The best way to prevent any potential claim the best way is by obtaining IP assignments from inventors, creators or anyone involved in making intellectual assets for the company, apart from this copyright assignment from co-authors, and patent assignment from co-creators and employees.
The seller has to ensure that between signing and completion of the acquisition, it complies with all IP-related agreements and takes necessary action in order to comply with the obligations made by the agreement during the period. The seller taking advice must try its best to comply with the agreement.
These are the major issues that are involved in forming the agreement, which the seller should take into notice. Special attention should be given to these problems to avoid any type of pro.
Intellectual property is a very important asset in merger and acquisition, with the growing economy many instances of merging or acquisition have been seen. Technological and business advancements have further increased both the frequency and need of merging and acquiring. With M&A along with transfer of tangible assets transfer of intangible assets has also taken place. Intellectual assets are such intangible assets and are one of the most important assets of many companies.
These intellectual assets play a major role in business development, certain business secrets, if leaked, may prove lethal for the business organization. Therefore, IPR plays a very important role, and the transfer of intangible assets becomes a very difficult job. Various precautions have to be taken before proceeding with such transfer because of the various issues involved as discussed above.
Transfer of IP is not a laymen task and must involve a specialist, without which the company may fall prey to various IP opportunists, and other complex legal problems. In the times to come instances of merging and acquisition are surely going to rise, with the rise in such instances issues of IPR will increase as well, therefore IPR specialists will become a necessity for various companies.
INTELLECTUAL PROPERTY ASPECTS OF MERGERS & ACQUISITIONS, available at https://norrismclaughlin.com/articles/intellectual-property-aspects-of-mergers-a-acquisitions-part-i-of-ii-conducting-due-diligence/
13 Key Intellectual Property Issues In Mergers And Acquisitions, available at https://www.forbes.com/sites/allbusiness/2016/03/17/13-key-intellectual-property-issues-in-mergers-and-acquisitions/#5a227ecc3f4e
IP representations and warranties in tech M&A, available at https://www.deallawwire.com/2017/09/28/ip-representations-and-warranties-in-tech-ma/#:~:text=Representations%20and%20warranties%20related%20to%20IP%20infringement,is%20infringing%20the%20seller’s%20rights.
Open Source Issues in Mergers & Acquisitions, available at https://www.morse.law/news/open-source-issues#:~:text=Open%20Source%20Issues%20in%20Mergers%20%26%20Acquisitions&text=In%20a%20merger%20or%20acquisition,software%20(%E2%80%9COSS%E2%80%9D).
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