Procedure and Protection of IPR in Mergers and Acquisitions.
Mergers and acquisitions (M&A) refers to transactions between two companies combining in some form. Although mergers and acquisitions (M&A) are used interchangeably, they come with different legal meanings. In a merger, two companies of similar size combine to form a new single entity. On the other hand, an acquisition is when a larger company acquires a smaller company, thereby absorbing the business of the smaller company. M&A deals can be friendly or hostile and may be structured either by way of agreement between the offeror and the majority shareholders or purchase of shares from the open market or by making an offer for the acquisition of the target’s shares to the entire body of shareholders.
Intellectual property rights are the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time.Most, if not all, corporate merger or acquisition (M&A) transactions raise intellectual property (IP), information technology (IT), or privacy and data security considerations. In some cases, the target company’s IP portfolio is the company’s most valuable asset. Even where IP does not play a central role, the target likely has software and other technology agreements or maintains information about customers or other persons.
The ongoing COVID-19 pandemic caused significant uncertainty in 2020 and its overwhelming impact on countries worldwide has not spared business and commerce. The trade tensions worldwide and regulatory pressures further exacerbated the problem. However, deal activity remained almost at par.
Despite the negative impact of the pandemic on the economy, deal activity in the first half of 2021 (from January 1 to June 15) totaled USD 40.7 billion across 710 transactions, including both private equity and M&A. Various timely policy and credit initiatives made by the Government of India (GoI) to resuscitate and strengthen the economy, as well as a strong banking system, have resulted in an increase in favorable emotions among investors.
With deals being closed at a whopping $90.4 billion in the first 9 months of 2021, M&A activity in India was at a 3-year high, with a 35.1% increase and the deal count grew by 10.1%.
The following are some of the important laws that govern M&A transactions in India:
• The Companies Act, 2013: The Ministry of Corporate Affairs administers the Act, and the Companies Act is the primary legislation that governs both the corporate sector and M&A activity.
• Foreign Exchange Management Act 1999 (FEMA): In accordance with the rules issued by the Government of India and the RBI govern capital inflows and outflows;
• Competition Act 2002: The Competition Act established the Competition Commission of India and it antitrust approvals are granted by the Commission;
• Income Tax Act 1961: The Income Tax Act is administered by the Income Tax Department. This Act regulates the tax treatment of M&A transactions; and
• Insolvency and Bankruptcy Code 2016 (IBC): The IBC is managed by the NCLT, and it regulates auctions under a corporate insolvency resolution.
• Copyright Act, 1957
• Trade Marks Act, 1999
• Patents Act, 1970
• Designs Act, 2001
• Information Technology Act, 2000
• Payment and Settlement Systems Act, 2007
Role of Intellectual Property in Mergers and Acquisitions:-
Value addition by acquiring technology and unique innovations
The current market is ever-changing, unpredictable, and highly competitive. M&A adds value to the portfolio of a company. It is not always possible to come up with something unique and thus companies acquire the technology and ideas of other companies. But before such a transaction, it is extremely essential for the companies to evaluate the portfolio of the company and check whether the current portfolio meets the requirement of the company’s objective.
M&A is driven by the company’s desire to expand and get an edge over its competitors. It also helps the company to explore and enhance different sectors of a business. It is very expedient to have pre-existing or pre-established resources at disposal before one starts a business, in addition to cost reduction and a diversified asset portfolio.
The main objective to implement the corporate strategy is to promote growth by creating value, enhancing performance, capturing maximum market share which in turn, would lead to maximization of profit. Industry analysts check the efficiency of a corporate strategy by a stock market assessment of the patents, copyrights, etc of a company.
Due diligence plays a major role in any M&A transaction. Any act of negligence while conducting due diligence can lead to overestimation of a company’s IP assets and can even lead to exposing the business to unknown risks and liabilities.
The need and objective of IP due diligence
A broad array of factors needs to be taken into account when undertaking M&A transactions. The acquiring companies generally assume the automatic transfer of all the IP assets of the acquired company. But sometimes it is not so. That accelerates the additional expense of purchasing the rights or lawsuits. One of the famous examples is of the Volkswagen-Rolls Royce deal wherein Volkswagen realized not prior to the deal being closed that it only acquired manufacturing rights and not the right to use the Rolls Royce trademark. Due diligence must include the prioritization of IP assets rather than just evaluating the financial statements of the company to avoid unexpected surprises. Just assembling a large team and large sums of money without conducting a fair analysis can lead to the production of little value.
Improper recording of the IP has three-fold downsides for the acquiring company i.e., their reputation being challenged, them incurring the additional expense of purchasing the IP assets and it can result in halting the progress of the M&A deal. IP due diligence will help in evaluating the worth of the IP assets and identify possible legal issues or deal-breakers. This makes the company well prepared ahead of the transaction.
Why is the protection of IPR important to the seller(target company)?
Conducting due diligence to evaluate IPR is important not just for the acquirer but also for the seller to identify any possible IPR issues beforehand.
Sources of information for due diligence
In this fast-paced world and with the advent of technology, most of the reporting by the corporate to the government has become electronic, and considerable if not always sufficient data is available on online portals either on payment of a fee or free of cost. It is important for the company to access these external sources of information in addition to the information provided by the target company because the acquiring company will be the most affected by any future IP issues with little compared to the other players, i.e bankers, lawyers, or target company. The information accessible in the public domain which needs to be reviewed ranges from charter papers, filings based on their commercial actions and decisions, shareholdings, borrowings, financial data, credit rating, pending cases to information relating to any filings or registered intellectual property (IP) holdings but also, patents and patent applications, trademarks, copyrights, and trade secrets, ‘Doing Business As’ names, Domain names, Slogans and brand hashtags, Publicity rights, Software, and databases.
How is Due Diligence Valuation carried out?
Due Diligence assessment of the intellectual property of the target company is prudent for the Buyer due to the discrepancy in the information about the value of net assets between the buyer and seller during the initial high-level business review of the target company. The transaction then proceeds to the next stage wherein a Letter of Intent or a Memorandum of Understanding is signed, and the parties agree on exchanging necessary data, papers and business plans, etc. In this process, a confidentiality agreement may be signed if the Intellectual Property includes certain trade secrets.
Due Diligence evaluates the remaining life span of an Intellectual Property i.e., functional, technological, economic, and legal as well as its decay rates, utilizing three different mathematical valuation approaches. :
o Market-Based Value – In this method, the IP assets are evaluated from the data readily available by using the market price. This is the most commonly used method and it is based on the comparison with the actual price paid for a similar IP asset under comparable circumstances. In the Market-based value method the results would be accurate if proper information on the nature and extent of rights transferred, circumstances of transaction for eg; license agreed in litigation settlement is found. This valuation technique is impeded by several factors as in the case of small companies it is difficult to find data as these companies are often not public and also it is difficult to evaluate individual patents, and also distort the effects of the peaks and troughs of economic cycles, etc.
o Cost-Based Value – The cost method evaluates the value of an IP asset by calculating the cost of developing a similar or same IP asset either internally or externally. It aims at determining the worth of an IP asset by aggregating the direct expenses and opportunity costs involved in its development and it also takes obsolescence of the IP asset into account. This method is not as popularly used as other methods and it is normally used if the IP is not generating any income for the business.
o Value Based on Estimates of Future Economic Benefits or the Income Method– This method evaluates an intellectual property asset on the basis of the amount of future economic benefit by way of income that the IP asset is expected to generate, adjusted to its current value. This is the most commonly used method.
IP Due Diligence Checklist
While conducting due diligence a checklist is required for an exhaustive coverage of all the possible IP issues. Therefore while assessing a target company the business must do the following:
- Identifying IP Assets
Request a list of all of the following types of IP assets owned or used by the target patents, trademarks, service marks, and certification marks, both registered and unregistered; fictional name filings, such as registered “doing business as” (DBA) names; internet domain names; other source identifiers, such as slogans, vanity telephone numbers, Twitter handles and commonly used hashtags; software and databases; registered and material unregistered copyrights; trade secrets and proprietary know-how, technology or processes; and rights of publicity, such as the right to use celebrities’ names and likenesses.
- Ownership and Status of IP
Review the IP search reports to confirm the accuracy of the disclosed information regarding the registered IP identified by the target company.
- Development and Acquisition of IP
Request information and documents to understand how the target’s IP has been developed or acquired.
- IP-Related Agreements
Request copies of all material license agreements and all other material IP-related agreements to which the target is a party.
- IP protection and Enforcement
Request information and documents regarding the target’s approach to IP protection and enforcement, focussing on the types of IP that may be material to the target’s business.
- IP-Related Disputes
Request information and documents (including copies of relevant pleadings, decisions or orders, and correspondence) regarding any pending, threatened or potential litigation, cease and desist letters, and registry proceedings concerning IP assets.
- Software and IT Systems
Software and IT systems are used in the conduct of every business, regardless of industry. Even if the target has no patents or other registered IP, the target likely uses software for design manufacturer, back and front office functions.
- Websites and Social Media
Request information and documents to evaluate the target’s use of websites and social media.
- Privacy and Data Security
Although privacy and data security diligence is not necessarily IP-specific, the IP legal team is often tasked with covering the impact of privacy and data security matters on the seller’s or target’s business and identifying any related issues.
Other examples of Mergers and Acquisitions
1. As of January 2021, the largest acquisition was the takeover of Mannesmann by Vodafone occurred in 2000 and was worth $203 billion. Vodafone after acquiring the German-owned conglomerate became the world’s largest mobile operator for years to come.
2. Rowntree’s business was acquired by Nestle in 1988 after Rowntree PLC accepted $ 4.5 Billion buyouts by Nestle becoming the largest foreign takeover of a U.K Company. The main purpose of Nestle was to acquire popular brands i.e., Kit Kat, Yorkie, and Rolo.
3. Acquisition of luxury Italian designer brand Versace by Michael Kors. Prior to that, Michael Kors bought luxury shoemaking brand Jimmy Choo for £896m. The main objective of this deal was to get access to a new line and a wider market through an established brand.
4. Google Inc. purchased Motorola Mobility, which gave the company entire control over Motorola’s patents. Motorola Mobility was later sold to Lenovo, however, the business retained control of Motorola Mobility’s patent portfolio. The key purpose of Google Inc. was to get hold of the large inventory of patents of Motorola mobility at a minimum cost.
IP Due Diligence Checklist
- Third-party Claim:
The third-party claim should also be scrutinized while investigating the ownership of the asset as sometimes third person rights are accrued unknowingly, however proper disclosure of such rights should be made by the owner of such an asset before the transfer.
- Evaluate possible IP infringement:
While carrying out the IP due diligence operations, it is important to check whether any third party is infringing on IP right or there is any company that might infringe a third party’s rights. In any case, mentioned above, it may give rise to any dispute in the future.
- Terms and territory checks:
Another important check which also has been made while conducting due diligence is the territory and terms of the IP asset. Some arrests are strict to certain regions or contain some terms and conditions for the use of the asset. Such terms should be clearly defined and no ambiguity should be present.
Intellectual property being a company’s intangible asset plays a critical part in its growth and even adds significant value to the company’s portfolio. The holding of IP assets is not only essential for a company’s existence but also contributes to its goodwill and helps in generating profit. Every company wants to prosper in terms of growth and M&A helps in the creation of asset portfolios by acquiring or merging with their established or potential competitors.
The acquiring firm, irrespective of its size, must stress the requirement of protecting its intellectual property rights. The acquiring business in order to identify any legal or financial issues early on and to increase its marketability must perform due diligence.
The value of IP assets of a company cannot be emphasized enough. It is essential for promoting innovation and also helps identify possible cost reductions. Certain intellectual property concerns like in-process evaluating like whether the target company’s IP assets or their business model are free of third parties can have a significant impact in an M&A transaction.
The advancement of technology has further increased the potential risks in Mergers and Acquisitions therefore, before closing the deal the intellectual property of the target firms must be evaluated. To arrive at a fair valuation, the tangible and intangible assets of the company must be prioritized which is why prior research becomes extremely important.
Written By –
1 Mergers & Acquisitions (M&A), CFI, (Nov. 27, 2021) https://corporatefinanceinstitute.com/resources/knowledge/deals/mergers-acquisitions-ma/
2 Team M&A, Mergers and Acquistions, NDA, (Nov. 27, 2021), https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Mergers___Acquisitions_in_India.pdf
3 What are intellectual property rights? WTO ( Nov. 27, 2021) https://www.wto.org/english/tratop_e/trips_e/intel1_e.htm.
4 Practical Law Intellectual Property & Technology, Intellectual Property in M&A Transactions Toolkit,Thomson Reuters Practical Law (Nov. 27, 2021) https://content.next.westlaw.com/8-564-3827?__lrTS=20200930204303047&transitionType=Default&contextData=%28sc.Default%29
5 PWC, Deals in India – Mid-year Review and outlook for 2021, July 2021, https://www.pwc.in/assets/pdfs/services/deals/deals-in-india-mid-year-review-and-outlook-for-2021.pdf.
7 Swaraj Singh Dhanjal, India M&A activity at a three year high, LIVEMINT, Oct 2, 2021.
8 The Companies Act, 2013, Act 18 of 2013.
9 PM DEVIAH,Practice Guides, India M&A,Elplaw.in.,https://elplaw.in/wp-content/uploads/2020/09/2020_India-MA_Book_secured.pdf.
10 Copyright Act, 1957, Act 14 of 1957.
11 Trade Marks Act, 1999, Act 47 of 1999.
12 Patents Act, 1970, Act 39 of 1970.
13 Designs Act, 2001, Act 16 of 2000.
14 Information Technology Act, 2000, Act No. 21 of 2000.
15 Payment and Settlement Systems Act, 2007, Act No. 51 of 2007.
16 Nidhi Poddar, Role of Intellectual Property in Mergers and Acquisition, Enhelion, (Nov 12, 2021), https://enhelion.com/blogs/2020/12/09/role-of-intellectual-property-in-mergers-and-acquisition/
18 Sagacious IP Editorial Team, The Role Of IP In Mergers And Acquisitions, Sagacious IP,, https://sagaciousresearch.com/blog/role-ip-in-mergers-and-acquisitions.
20 Carole Ayugi, Protecting Intellectual Property In M&A Transactions: Why Conduct A Proper Due Diligence, chambers and partners (Nov. 17,2021) https://chambers.com/articles/protecting-intellectual-property-in-ma-transactions-why-conduct-a-proper-due-diligence.
21 Patent Team, How to Avoid Another Rolls Royce? IP Due Diligence in M&A Transactions, IPEG,(Nov. 17, 2021) https://www.ipeg.com/how-to-avoid-another-rolls-royce-ip-due-diligence-in-ma-transactions/#_edn1
23 Supra Note 5.
24 Intellectual Property Due Diligence,ANASRADA (Nov. 12, 2021) https://www.ansarada.com/due-diligence/intellectual-property
25 KHL Attorneys, An Overview of the Main Stages in a Typical Private M&A Transaction (Nov. 17, 2021),http://www.khl.co.za/publications/usefulnotes/An-Overview-of-the-Main-Stages-in-a-Typical-Private-MA-Transaction-F-Terblanche.pdf
26 Mandavi Singh, Intellectual Property: The Dominant Force In Future Commercial Transactions Comprising, 3, Indian Journal of Intellectual Property Law, 180, (2008).
27 Khushboo Khullar, Management and Valuation of Intellectual Property,THE COMPANY NINJA (Nov.11,2021) https://thecompany.ninja/management-and-valuation-of-intellectual-property
28 Shubham Borkar and Neha Rani, India: What Is Intellectual Property Valuation? MONDAQ,(Nov 14,2021)https://www.mondaq.com/india/trademark/772158/what-is-intellectual-property-valuation
29 WIPO, IP Valuation, Module 11, https://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_11_learning_points.pdf/
32 Elaine D. Zeff Et. Al., IP Due Diligence in M&A Transactions Checklist, Practical Lawfile:///C:/Users/HP/Downloads/IP%20Due%20Diligence%20Issues%20in%20MA%20Transactions%20Checkli%20(1).pdf.
33 Marsha Lewis, Examples of the Most Successful Company Mergers and Acquisitions of All Time, DEALROOM,(Nov 13, 2021), https://dealroom.net/blog/successful-acquisition-examples/
34 Cotten Timberlake, Rowntree Agrees to $4.5 Billion Buyout From Nestle, AP NEWS (Nov. 16, 2021), https://apnews.com/article/6c2a8ce608b96e25c00116cf3d74bf93.
35 Gareth Price, The importance of IP in mergers and acquisitions, UDL INTELLECTUAL PROPERTY,(Nov 14, 2021) , https://www.udl.co.uk/insights/the-importance-of-ip-in-mergers-and-acquisitions
36 Rebecca Marsto, Michael Kors snaps up Versace for $2.1bn,BBC NEWS(Nov 15,2021), https://www.bbc.com/news/business-45637466
37 BBC, Jimmy Choo bought by Michael Kors in £896m deal,BBC NEWS(Nov 15,2021), https://www.bbc.com/news/business-40714083
38 Supra Note 30.
39 Netra Singh, International Journal of Business Policy and Management,2, (2015).