Mergers and Acquisitions in Relation to Intellectual Property Rights

Abstract

Mergers and Acquisitions (“M&A”) have turned into the corporate world’s most well known development procedures, particularly in quickly advancing organizations like Information Technology, Telecommunication, Business Process Outsourcing and Pharmaceuticals. This strategy currently comprises the swiftest, surest approach to securing skills and assets, opening new market roads, growing client base, and accordingly, keeping up with and further developing benefit. The consensus is that when companies combine their core activities through M&A, both substantial and immaterial resources of the Target Company are important for the assets to the Acquiring Company, and the hugest of these resources is the Intellectual Property. They structure a larger piece of the essential advancements of a company in the domestic or global market. The Intellectual Properties are likewise one of the different purposes behind which various companies go through the process of Mergers and Acquisitions as it reinforces their portion of the overall industry, advances improved and productive administration. This paper deals how the Mergers and Acquisitions of companies happen alongwith the process that how companies acquire IP Assets. Additionally, this paper expects to concentrate on the IPR issues, related with the Merger and Acquisition of a company. This paper has restricted its scope to the IPR issues related the mergers and acquisitions of company and furthermore remembers that how advantageous IP can be for Mergers and Acquisitions.

Introduction

Merger is that the one in every of the foremost common ways in acquiring another firm. A merger is that the absorption of one company by another company, as well as all its assets and liability. The firm that acquires retains its name and also the firm that may be acquired is not any a lot of a separate legal entity and is a part of the previous firm. A merger takes place once the shareholders of each the companies comply to merge with one and another and to require the share of the surviving company. Mergers not solely permit companies to realize access to Patents valuable product and processes, however conjointly produce Patent Pools that integrate patents concerning a selected technology standard, reduce litigation and licensing prices, and increase royalty shares. Whereas merger is absorption of another firm, acquisition is that the purchase of another firm. This means, a firm purchases the other firm and a sale deed is executed. In acquisition just some or all of the assets and liabilities of other firm are purchased. It deals with the acquisition of shares of another company.

In the previous few years, Mergers and Acquisitions became the key strategy for rising within the corporate world. Merger, within the simplest kind, means that an agreement whereby the assets of two existing companies are either vested into one company or they come below the management of one company. Whereas amalgamation happens once two or more companies merge so as to establish a brand new company and every one the liabilities and assets are allotted thereto. This trick of merging creates the speediest and steadiest way to secure assets and existence within the market that helps in exploring new market opportunities. Moreover, mergers may also simply expand its client base by eliminating competition and by sustaining and enhancing profit. Once corporations merge themselves through agreement all the tangible, moreover as intangible assets of a company, become a part of the revenue of the acquiring company and the property and its rights are the foremost vital assets among these.

Intellectual Property exists because the intangibles of Trademark, Copyright Assignments, world-wide Patents, Trade Secrets, Geographical Indicators, Domain Names, Registered Designs, etc. which produce worth, special rights, profits and generate goodwill and client loyalty. Nearly each business uses software, technology, produces branded product, runs analysis and Development cells, creates Designs, and invents Devices. The worth of the target firm, therefore, becomes enthusiastic about the worth of its earnings, assets and Intellectual Property.

IP Valuation

IP valuation plays a very important role in M&A and includes three stages, i.e. Pre-acquisition, The Deal, and Incorporation. These stages aim at protective and safeguarding the Intellectual Property. As a significant portion of the company’s business relies upon the Intellectual Property rights therefore the valuation of a similar is to be determined in such manner that these rights don’t seem to be undervalued.[1] The valuation should think about the undercurrents of parties’ business, the reasoning for M&A and also the profit and loss from the collaboration.

Valuation provides info on the economic property of M&A and suggests the potential use of Intellectual Property. Valuation relies on economic prospects and environmental cycles like ever-changing gross domestic product rates, stock exchange and international things that makes instability with company. IP valuation is additional unpredictable because it depends upon the present price of approaching economic profit or loss which will be expected to accumulate to the owner. Moreover, IP assets are tough to find and asses due to the assorted policies of the Government, market situations, and economic process. However if a valuation is completed with prudent expertise and analysis by professionals and specialists then it would turn out correct answers. Thus, it is an associate art of investigation through legal and financial specialists that facilitate in valuation of assets and this method is understood as Due Diligence Report.

How is Due Diligence Valuation Carried Out?

Due Diligence of IP is pivotal to the transaction because of the dissimilarity of data between the seller and the buyer. It begins with a Letter of Intent or a Memorandum of Understanding, in which the parties give consent to exchange essential data, reports, field-tested strategies, specifying the timetable, mode and deadlines. A Confidentiality Agreement might be contracted assuming the IP includes specific trade secrets, safeguarding Attorney-Client privileges.[2]

The Rule of the Thumb is first utilized to decide the significance of Intellectual Property of the Target Firm. In this manner, Due Diligence should evaluate the excess helpful life-physical, utilitarian, innovative, financial and lawful of the IP utilizing three potential strategies of the mathematical valuation of Intellectual Property[3]:

1. Market-Based Value, for example the purchase price determined by market cost of an equivalent property. This valuation procedure is blocked by a few elements, like hardships of tracking down property of practically identical and viable worth to the IP in hold, exceptional buyers, different negotiation skills, and the effects of the pinnacles and box of monetary cycles and so on.
2. Cost-Based Value, for example the price determined by the expense to make or the expense to replace. However this valuation-strategy is simple being used, it disregards changes in the time worth of money and overlooks support. As this strategy considers the expense for developing the business without any preparation, it is more appropriate in instances of build-operate-transfer deals.
3. Value Based on Estimates of Future Economic Benefits, for example the purchase price determined from an estimate of past and future monetary advantages, called the “Discounted Cash Flow”. Analysis of: 1) capitalisation of historic profits, 2) gross profit differential modes, 3) excess profit methods, and 4) the relief from royalty. This method thinks about the future income of the business and consequently the proper worth relies upon noteworthy and possible productivity of resources, projected incomes and expenses in future, margin between the branded and the equivalents of a product, expected capital surges, investment possibilities, number of long periods of projection, discounting rate and terminal worth of business. Discounted Cash Flow analysis is likely the most reliable and exhaustive of other relevant procedures, and is subsequently, by and large the favored choice.

How Companies Acquire IP Assets

When the Due Diligence Report has been approved by the parties and a Purchase Price affixed, the Acquisition Agreement requires a Stock Sale, which establishes transfer according to Law. The Assets Sale follows, however just for the tangible Assets and non-Intellectual Property Intangibles. The real IP Assets should be explicitly referenced in the Acquisition Agreement and obviously recognized during the Assets Sale, or moved through a different understanding, since they present tangible property freedoms and require recordal of the new proprietor in the particular locales wherein they are truly possessed and utilized. Expectation to move Trademark and Goodwill is by and large assumed during the Assets Sale, however not in situations where a parent enterprise obtains an independent auxiliary.[4] At last, supplemental shutting records are traded. Timing is basic. Reality may eventually show that the significant subtleties of an arrangement can be transformed for the time being into a sensible understanding mirroring the arrangement.

Intellectual Property Issues in Mergers and Acquistions

In merger, all the assets and liabilities of the acquired company get transferred to the acquiring company. Wherever it’s simple to value the assets it becomes equally difficult to price the intangible assets like copyright, trademark, patent and designs vest within the transferee company. Once a merger or acquisition transaction is at the negotiation stage, certain key problems should be addressed. The method of holding investigation to foresee financial and legal position of the target business is termed, as is thought to any or all, “due diligence”, however holding a separate due diligence dedicated to IP, would facilitate the client not solely to deal with that of the intangible assets are going to be at intervals the ability of disposition, however additionally to avoid prospective disputes. It is crucial to notice not only present however additionally potential issues. Therefore, undertaking IP due diligence would facilitate address the problems pre-transaction or the problems which will supervene after.

The Acquiring Firm usually uses the IP Asset in more than one country. Laws governing IP in parent country of the Acquiring Firm, are totally different from the IP Laws within the host country of the company such IP assets become victim to multiple foreign jurisdictions. The courts have to deal out problems on the premise of the benefit of IP alone.

How Advantageous IP can be in M&A

If an IP asset is transferred through an organized process, even the tiniest part of IP deal is sort of a treasure-trove as a result of this IP collection will increase the worth of the merging entities through numerous blends of business. For examples: Selling the IP asset to the maximum value user, Donating the patent for tax advantages, Spinning it off to startups in return of equity, Abandonment of patents for value reduction, Licensing the IP, etc.

But loads of entities are panic to administer the management their IP assets because it might lead to trailing their competitive profit or like gap a patent war or might produce a negative name for using IP diplomas. Licensing the IP assets may be a common strategy used by entities still as competitors. This strategy might not solely facilitate with money progressive however conjointly with money and strategic advantages.

Conclusion

There is incredible variety across the size of deal, the areas, as well as the investors in Merger & Acquisition Activity. Over recent years, a plenty of ways of transforming IP freedoms into money has been becoming progressively developed. The development of Merger-Auctions, direct deals, charge effective IP-arranging, online IP trades, and above all, key M&A Activity, have expanded Intellectual Property Rights proprietors’ choices extensively. A significant part of the fuel of this development is IP Financing-liquidity in the private equity and mutual funds markets, which keeps on developing, guaranteeing the future health of IP-related alliances. The financial community is awakening to the advantages of producing extra funding on the rear of licenses, trademarks and copyrights. For IP proprietors hoping to make their assets sweat, subsequently, the scope of choices is more noteworthy than any time in recent time. After discussing the idea of Mergers and Acquisitions exhaustively we reach to a conclusion that to support in the business it isn’t simply fundamental for maintain a business effectively however to combine and obtain with different organizations too, as today there is the need of great importance.

Reference:

[1] Intellectual Assets and Value Creation: Implications for Corporate Reporting¸ Organisation for Economic Co operation and Development, Corporate Affairs Division, December 10, 2016.

[2] Glenn A. Gunderson and Paul Kavanaugh, Intellectual Property in Mergers & Acquisitions, Trademarks in Business Transactions Forum 87 (International Trademark Association 1999)

[3] The greater the disparity between the Purchase Price proposed by the seller and the value of the Net Tangible Assets, the greater is the value of the Intellectual Property owned by the seller. A. Lanjouw, J. Pakes and J. Putnam, “How to Count Intellectual Property and Value Intellectual Property: The use of Patent Renewal and Application Data”, 46 Journal of Industrial Economics 405, 409 (1998). See also Ted Hagelin, “Valuation of Patent Licenses”, 12 Texas Intellectual property Law Journal 423 (2004)

[4] Glenn A. Gunderson and Paul Kavanaugh, Intellectual Property in Mergers & Acquisitions, Trademarks in Business Transactions Forum 87 (International Trademark Association 1999)