Mastering intellectual property transfer in M&A
During a merger or acquisition (M&A) transaction, the seller’s assets, including its intellectual property (IP), must be taken into consideration. IP rights pertain to registered or unregistered intangible assets such as patents, trade-marks, copyrights and industrial designs, but also to even broader categories of intangible information of value such as proprietary know-how, trade secrets, customer data or other confidential business information. In the M&A context, adequately dealing with all material aspects of the seller’s IP, such as chain of ownership title, registration status, encumbrances, scope of rights, potential infringement and validity concerns requires special care to avoid pitfalls once the transaction has been completed. Below are a few such aspects to consider.
A preliminary consideration is that some of a company’s most valuable IP assets are registrable at the appropriate national IP registries (e.g., patents, trade-marks [other than common law], copyrights [which usually are not registered], industrial designs) while others are not (know-how, trade secrets). These registries are therefore routinely consulted during M&A transactions to determine or confirm the ownership of the acquired assets.
Notwithstanding registered ownership, IP rights may however also be assigned or licensed via written or oral (except for copyright) agreements in whole or in part, and the scope of the transfer or licence may be limited to a specific region, or to a subset of the rights that are related to a particular IP asset. It should be noted that national IP registries may not be up-to-date if the relevant agreements have not been registered. It is therefore crucial during any M&A transaction to perform an IP-specific due diligence to identify and review any relevant agreement (e.g., employment contract, intercompany transfer, exclusive or non-exclusive licence, etc.), and validate the chain-of-title and ownership of the IP asset up to the owner pre-M&A. This will ensure the seller is effectively in a position to convey the IP assets to the buyer.
Another relevant consideration pertaining to IP ownership is to ensure the seller has obtained proper vesting of title in cases where intellectual property was created by its employees or independent contractors of the business.
The importance of registration
In an acquisition agreement, the seller’s IP assets will most often be listed in a schedule and various representations and warranties in connection with the IP assets will be made. Beyond IP asset ownership, the buyer will also need to check that the relevant rights are still valid and in force upon the effective date of the transaction.
If the acquisition is structured as a share purchase, title to the IP assets will generally not be transferred because all assets will continue to be owned by the target company (only the ownership of the shares changes). As a result, no document will need to be recorded. In an asset purchase, title will be transferred from seller to buyer and recordable documents will be needed. The recordable documents (e.g., confirmatory assignments) should be executed separately and apart from the acquisition agreement. The required formalities and the timeframe afforded to record such documents vary greatly between jurisdictions and local counsel should be involved early in the registration process to ensure the relevant steps be taken in a timely manner for a smooth transition of rights.
A failure to properly update the appropriate registries may have serious consequences for the buyer. In some jurisdictions, the transfer of the IP assets to the buyer may not be effective against a subsequent transferee that registers its ownership document first. The right to damages for infringement may also be lost. Proper care should also be given to understanding the specific implications on the continued ownership of the rights (for example, in the case of trade-marks) and the enjoyment of other benefits that flow from the rights (for example, the collection of royalties).