Legal Aspects of Company Sales: Intellectual Property rights
The extent to which a business relies on its intellectual property rights ("IPRs") will inevitably depend on the nature of the business. However, the increasing dependence of business on technology means that this is an area which must always be considered when a business is sold. In cases where the business enjoys substantial revenues from the exploitation of IPRs, the value of these intangible assets may well exceed that of the tangible assets.
1. Introduction
This guide considers the legal aspects of IPRs on the sale of a business principally from the perspective of a Purchaser, since it is the Purchaser who will be concerned to ensure that all relevant IPRs will continue to be available to the ongoing business. From the Seller's point of view, the subject of valuation of IPRs may only surface when a disposal is imminent. The Purchaser will generally wish to carry out an independent IPR audit, including making relevant searches, in addition to the protection derived from the Sellers' warranties.
2. Forms of IPRs
The range of IPRs which need to be considered on the sale of a business are:
- Patents;
- trade marks/service marks;
- design rights;
- copyright;
- trade secrets and confidential information generally.
The above list begins with patents, the form of IPR most readily dealt with on the sale of a business since these are by definition and registered and provide an absolute monopoly for a known period. Rights in industrial design and trade and service marks may be registrable or unregistrable. Copyright is not resgistrable in this country, and the extent of the copyright is often only established when infringement claim arises. Lastly, confidential information, including trade secrets and know-how, is notoriously difficult to protect. The parties should, at the outset of their negotiations, enter into obligations or mutual confidence and the Sale Agreement should include the Sellers' warranty to preserve confidentiality indefinitely until the relevant information comes into the public domain. Equally, in the event that the sale does not go ahead, the Sellers will wish to restrain the Purchaser from exploiting the knowledge it has acquired about the Company.
3. Intellectual Property Issues
Matters which need to be established on the acquisition of a business include:
- what IPRs are used in the business?
- which of these are critical to the business
- who owns those IPRs?
- are there any restrictions on the use of any IPRs in the business?
- which IPRs are registered and which are unregistered?
- are the unregistered IPRs registrable?
4. Due Diligence
Where IPRs are significant asset of the business, it is vital for Purchaser to carry out a due diligence IPR investigation, quite independent of the Sellers' warranties. Due diligence in respect of the registered rights is relatively straightford, but it is much harder to establish the extent of unregistered IPRs, particularly in relation to infringement. In this regard, no news is good news and one of the best protections may be the Sellers' unqualified warranty that none of the IPRs is the subject of a third party complaint.
Due diligence should include:
- checking registrations of registered IPRs and that all renewal fees have been paid;
- reviewing all assignments documentation;
- reviewing all licensing/registered user documentation;
- in the case of trade and service marks, checking that the Sellers have continued to use the marks, without which the mark may lapse.
- Marking enquiries as to whether proceedings have been issued for infringement of any IPRs, either by or against the target business.
5. Contractual Documentation
The registered IPRs used in the business (eg. patents and trade marks) will usually be scheduled in the Sale Agreement. The Sellers will normally be asked to warrant that these are the only IPRs relating to the business. They may also be asked to warrant, subject to any disclosures made in the Disclosure Letter, that each registered IPR is valid (and particularly that all licences are in force) and that its use by the business involves no infringement of any third party IPRs.
It is virtually impossible to list all unregistered IPRs (eg. copyright) used in business and so they are usually referred to only in general terms in the Sale Agreement. The only exception would be where a specific copyright is an important asset of the Company, for example the copyright in a successful computer program owned by a software house.
Finally, a prudent Purchaser may ask for a warranty that no disclosures of the target business's know how or trade secrets has been made to any third party other than under obligation of confidence.
6. Asset Sales
Where the business is being sold by way of transfer of assets rather than a sale of the company's shares, it will be necessary, in the case of proprietary IPRs, for there to be assignments from the Sellers to the Purchaser. Licensed IPRs will have to be transferred to the Purchaser, either by way of assignment of sub-licence or by the granting of a fresh licence by the licensor. It is worth noting that where the Sellers assign a licensed IPR or grant a sub-licence to the Purchaser, they remain primarily liable to the licensor for any breach of the licence. They will want an indemnity from the Purchaser in such cases, if the Purchaser is in position to give one. The terms on which IPRs are to be licensed must be established before completion of the purchase price.
7. Post Completion
In the case of a sale of assets rather than shares, the change of ownership of registered IPRs will need to be registered with the appropriate authorities. If time is short or if not it is confidential transaction, it may be that the necessary transfers of licences from licensors (or, in the case of share sales, consents to the change in control of the licensee) have not been obtained prior to completion. If so, the Sellers' co-operation may be needed post-completion. The sale Agreement should therefore provide for this and the Purchaser may wish to consider a retention of part of the purchase price pending the necessary licences or consents being obtained.
Contact
Tony Forster Head of Company Commercial
Martino Burgess Associate
Related Issues
Back to Company Commercial Articles
This article summarises the law on issues which we believe may be of interest to your business. It is not a comprehensive review of the subjects and accordingly is published without responsibility for loss occasioned to any person(s) acting or refraining from action as a result of information published. This document is provided for information only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.