IP issues

• Different categories of IP assets of a company.

• Valuation of IP assets.
• Aligning the IP assets being acquired.
• Means of acquiring IP assets of a Company
• Transfer of Domain names
• Tax considerations
• Foreign Laws impacting on IP.
 Introduction: What is IP?
“Most creations resulting from human endeavors in various fields of art, literature ,science and
technology constitute Intellectual Property”

Ownership
Valuable Assets Intangibles

Time &
Special Rights Intellectual Property cost intensive

Transferable Additional Profits

 Why are IP assets important ?

 Its creation is both time and cost intensive

 Requires an assembled trained workforce for
its creation
 Requires building of goodwill through
advertising programs
 Generates Customer loyalty
 Adds to commercial value of organization
 Its exploitation brings consistent additional
profits to an organization
 Trademark &
Copyright
domain names

Trade secrets Patent

Categoriesof
Categories of
IPrights
IP rights
Utility model/Designs Geographical
Indications

Plant Breeder’s
rights
 Different Acts governing IP assets
Trade Marks The Trade Marks Act, 1999

The Patents Act, 1970

Patents

Copyright The Copyright Act, 1957

Designs The Designs Act, 2000

The Geographical Indications

Geographical Indications Of Goods Act, 1999
The Protection of plant varieties and
Plant Varieties Farmers’ Right Act, 2001
Semi conductor IC layout design
Semi conductor IC layout Act,2000
 Rights that different IP assets protect
 Intellectual Property can be clearly distinguished from Goodwill. UK
& Australian Generally Accepted Accounting Principles (GAAP) has
specified goodwill as an umbrella concept consisting of
unidentifiable intangible assets and should not include those
Intellectual Properties which are capable of individual identification
and can be sold separately.

 Copyright- is a bundle of rights granted to an author of an artistic,

literary or musical work to print ,publish and sell copies of his work
and other allied rights. Copyright protection also extends to
cinematographic film and sound recordings.

 Designs- The designs entitled to protection are new and original

designs having aesthetic value which have not been previously
known or published in India or elsewhere.
 Trademarks- is an identification symbol which may be a word, a
device, a label or numeral etc. or a combination thereof used in the
course of trade that enables the purchasing public to distinguish one
trader’s goods from similar goods of other traders

 The purpose of Brand is:

• To uniquely identify a company and its product.
• To differentiate them from competitor.
• To enhance the perceived value, the quality and satisfaction that a
customer experiences.
• To evoke distinct associate stands for certain personality traits and
carries emotional attachment.
• Above all brand is supposed to inspire trust. Trust failure can lead
to brand failure and brand failure can be fatal.

 Patents- is the grant of a monopoly right to an inventor who has

used his skill to invent something new.
  IP adds value at every stage of the
innovation and commercialization process

Patents / Trademarks,
Utility Models Ind. Designs,
Industrial Designs
Trademarks Geo. Indications
All IP rights

Invention Commercialization
Marketing
Financing Product Design Exporting

Literary / artistic Licensing

creation

Copyright All IP rights

 The IP of Gillette
Gillette Company Value($) Total
Asset Values in US $

Working Capital 2,850 4.9%

Fixed/other assets 5,131 8.8%
Intangible assets 5,854 10.0%
IP 44,700 76.3%
Total Invested 58,535 100%
Capital
 World's three most valuable
trademarks!
 1992 Financial Week
listed, as the world's
three most valuable 35
Coca-Cola
trade marks, 30

25
 "Marlboro", worth 31
20
billion US dollars, Marlboro
15
 "Coca-Cola", worth 24
10
billion US dollars,
5
 and "Budweiser", worth Budweiser
0
10.2 billion US dollars.
 IP- Duration of Term of Protection
 Patents (20 years)
 Trademarks (10 years + renewals)
 Copyrights in published literary, dramatic, musical, and artistic works (Lifetime
of author +60 years).
 Copyright in photographs ,cinematographic film, sound recordings –(60 years
from year in which it was published)
 Broadcast reproduction right-(25 years from the beginning of the calendar
year next following the year in which the broadcast is made.)

 Performers right-(25 years from the beginning of the calendar year next
following the year in which the performance is made)
 Industrial designs (10 years+ renewal permitted once for 5 years )
 Trade-secrets and know how collectively “proprietary technology” (contract
period-protected by contract provisions, doctrine of breach of trust)
 IP-Flow in Mergers and
Acquisitions
 A merges into B

Company A (Owns IP) -> Surviving company (B)

(IP of A becomes property of B)
( IP of A transferred to B)
 IP-Flow in Mergers and
Acquisitions
 In a corporate acquisition, there is no transfer of
interest in the IP.
 Company A, which owns the IP, gets acquired by
Company B and by virtue of such acquisition, Company
B gets control over all assets of Company A, including
its IP.
 In a takeover, the ownership over the IP continues to
remain with the Target Company, though the acquirer
company gets effective control over the IP
 “How to determine the Value ?”
What underpins the cash flows of this business - fixed assets, people ,IP assets , know-
how ?

business People

Once you have worked out

what drives the value make
sure that it is still there
after
you have acquired
the business!
Fixed assets

Intangibles - usually a part of business valuation

 Brand valuation
 The modus operandi of the valuation would vary in each case as
they are strongly influenced by existing environments.
 The environments broadly are internal & external environment and
the major variables are internal strength, marketing scenario,
consumer perception, technical know-how and its changing speed,
growth prospective, competition scenario, government policy,
impact of globalization among others.
 To valuate a brand and other intellectual properties the valuator
requires careful analysis, keen judgment, thorough professional
knowledge and a team of members who have expertise in finance,
marketing, technical know-how, and in legal fields.
 There are forty odd variables, which in generic term are called
environments that affect the value of the brand.
 WHY DO WE NEED IP VALUATION?
 Intangible benefits-

 Enhanced Confidence ,Indicator of effective utilization ,

 Credibility to the real worth, Strategy development

 Tangible Benefits in Mergers and Acquisitions-

 A) Can help in Capitalization: A Balance Sheet which incorporates a brand

value provides a more realistic picture and goodwill arising from an
acquisition can be reduced as goodwill invariably needs to be amortized
where as the brand value can stay in the Balance Sheet giving more
realistic presentation of capitalization
 b) Merger & Acquisition: It is of critical importance for an acquirer, as well
as for the vendor to understand and evaluate their real worth for
negotiating the correct price. As the valuation report does not only
indicates value, the report also shows as to how the value has been worked
out elaborating all assumptions, which provides the real insight and would
be of great value to the acquirer

 C) For taxation purpose: Taxation department desires that all such transfers
must be executed at Arm’s length transaction. Valuation certification from
an independent establishment of repute is the best way to establish that
the value of transaction as reflected is a true value
 Reasons Why IP is Ignored
Under estimation
of its
importance

Time Required for Grant

Lack of Awareness of a Patent/registration of TM

Myth that it can’t be

computed /valued Cost of Patenting

Enforcement of IPR
 Importance of Intellectual Property due diligence
 The increased profile, frequency, and value of
intellectual property related transactions have elevated
the need for all legal and financial professionals and IP
owner to have thorough understanding of the
assessment and the valuation of these assets, and their
role in commercial transaction

 Intellectual Property due diligence generally provides

vital information specific to future benefits, economic life
and ownership rights and the limitations of the assets all
of which affects final value.

 Therefore due diligence is prerequisite to the valuation

process, regardless of the methodology used.
 IP due diligence in Mergers & Acquisitions
 IP Due diligence is the process of investigating a party’s ownership,
right to use, and right to stop others from using the IP rights involved
in sale or merger ---the nature of transaction and the rights being
acquired will determine the extent and focus of the due diligence
review.
 Due-diligence should reveal
 • Who owns the rights?
• Are the rights valid and transferable and enforceable?
• Are there any agreement or restriction that prevent the party for
granting rights to other?
• Is the property registered in the proper office?
• Any shortcoming or default on payment?
• Any past or potential litigation?
• Has the property being misused in the past rendering right
unenforceable?
• Any encumbrances?

It should also evaluate agreements material to the company’s
business that may be affected by change of control, agreements that
may vest rights in intangibles, and company policies and practices.
 Pre-due diligence formalities
 Before the due diligence commences, counsel of both
the parties must consider important legal issues related
to conducting the due diligence such as confidentiality
obligation of the target company and execution of the
due diligence should also be arranged between the
parties

 Legal basis for due diligence-often starts in the form of

letter of intent or memorandum of understanding and
commonly regulates the due diligence process.
Confidentiality agreement between buyer and Target
Company is one of the necessity and both should ensure
that it is carefully drafted and shall include the
scheduling, modus operandi and deadlines, with due
emphasis on Attorney-Client privilege
 The scope of Intellectual property due
diligence
 The scope of Intellectual property due diligence will be determined
by a number of factors such as parties goal in the transaction such
as capital contribution, assets transfer, security of loan, or internal
assessment of its own and will be influenced by budgeting, available
human resources, the size and complexity of target company and its
intellectual property portfolio among other such issues.

 Buyer having done the preliminary due diligence with respect to

current status of Intellectual Property portfolio should evaluate the
portfolio with respect to function strategy to work out:
 • Ownership strategy.
• Protection strategy.
• Exploitation strategy.
• Enforcement strategy
 Preliminary assessment
 Target company should make a preliminary assessment
of the current status of its intellectual property portfolio
and management including:
• Current holding and their status.
• Goals for the portfolio.
• Historical and prospective investment in Intellectual
Property
 acquisition, protection and exploitation.
This would also help the target company to define its
perspective. If the due diligence were being conducted
for internal purpose the goal would be quite different
than the due diligence for external reason.
 What an IP attorney ought to consider
 The most significant provisions of the agreement from the IP
attorney’s perspective are: (1) definitions of assets and IP; (2) the
scope of the transfer; and (3) representations and warranties.
 the representations and warranties, indemnification provisions, and
disclosure schedules
 Disclosure schedules are also critical because typically the seller is
not liable, unless the purchase agreement otherwise provides, for
any monetary damages resulting from disclosed events.
 Due diligence conducted at three levels-personal interviews,
document review ,and independent investigation
 Review of Agreements material to the company’s business that
may be affected by change of control
 DUE DILIGENCE:
What are some typical provisions that might raise a word of caution?
THE ANALYSIS

 Anti-assignment  Ambiguous or ineffectual

 Silence on assignment rights grants
 Non-exclusive rights  Termination
grants to or from your  Loss of rights
client  Indemnification (especially
 Covenants not to sue (any
covenant!) if not limited)
 Automatic  Sublicenses
reversion/transfer of rights  Assignments
 Government licenses  Non-compete
 Source code escrow
 Unusual jurisdiction
Important checklist-copyright
 Scope of Rights (exclusive, non-exclusive)
 Grants Effective
 Rights Transferable
 Assignments in Proper Order
 assignment where appropriate
 Registrations in Proper Order
 No Encumbrances/Liens
Significant Trademark Issues
 Scope of Rights (exclusive, non-exclusive)
 Grants Effective
 Rights Transferable
 Assignments in Proper Order
 assignment where appropriate
 Registrations in Proper Order
 No Encumbrances/Liens
Significant Trade Secret Issues:

 Confidentiality/security precautions and

procedures
 Proper markings/legends
 Employment agreements
 Non-disclosure agreements
Significant Domain Name Issues:

 Verification of record owners

 Assignments in proper order
 Status of registration and renewal
 Crucial Factors for IP due diligence
 Extent of statutory protection IPRs enjoy
 Value of each IPR
 Level of risk infringement of third party rights and infringement by others.
 With respect to the agreement involving the acquisition, it is critical that the
seller provides appropriate warranties such as warranty that it owns full title
in the intellectual property as well as representations regarding
controversies, litigations, claims of infringement, title disputes, and any
other specific matters that are important to the buyer and the transaction.
 Technology Valuation-important considerations
 Size: Whether there is market for the product of technology
 Scale: scale of operation of technology is appropriate to that market
 Maturity: Whether technology is market proven or new
 Obsolescence: whether it is about to be replaced by new developments
 Environment adaptability: whether technology can be satisfactorily operated
in transferee’s environments
 Appropriateness: Whether technology is appropriate for infrastructure-
available power, telecommunications, transport etc
 ISSUES THAT NEED EXAMINATION WITH RESPECT TO TRADE
AND SERVICE MARKS

• Definitionof Rights
• Registered marks
• Pending applications
• Trademarks exploited by Target Company but not subject of registration
• Ownership
• Marks created by Target Company employees
• Marks created by independent contractors
• Marks assigned to Target Company by third parties
• Liens and other mortgages
• Third Party Rights
• Concurrent use and consent agreements
• Licenses from third parties
• Freedom to use-• Protection/Registration
• Status and scope of registered marks
• Status and scope of pending applications
• Non-registered marks (marketing/registrability)
• Proper use of markings
• Exploitation
• Inventory of products/services on or in connection with which marks are used
• Licensing practices- general/misuse
• Inter-company licensing practices
• Internet use/licensing
• Nonuse
• Enforcement/Disputes
• Target Company threatened, pending actions against third parties
• Third party threatened, pending actions against Target Company
• Summary, Conclusions, General Comments
• Examine and evaluate opinion letter and cease and desist letters.
 LICENSING OF INTELLECTUAL
PROPERTY
 Every merger and acquisition poses a Question: whether merging
companies intellectual property license rights would remain intact
pursuant to merger.
 General principles of contract law provide that rights under
agreements are presumed to be assignable unless the statute, the
contract, or public policy provides otherwise or there exists a
material adverse consequences to the other party.
 Case example: General radio and appliances Co ltd v MA Khader
(1986) 60 com cas 1013-facts transferor company in amalgamation
was tenant ,rent agreement specifically prohibited subletting
without written consent of landlord . Landlord instituted eviction
proceedings against transferee. Court held transfer of tenancy
rights under scheme of amalgamation was bad in law being made
without consent of landlord.
 Similar position in law with respect to trademark and copyright
licenses.
 Challenges of Valuing IP Assets in
case of M&A
 Assets that may qualify as a company's IP may
be easily overlooked, like;
 information maintained in notebooks and/or stored on
a computer by any employee.
 a pending patent application assigned to the company
 an invention disclosure from an engineer to company
decision-makers for consideration as to whether to
pursue patent protection,
 proprietary software source code developed in-house.
 Challenges of Valuing IP Assets
 Valuing IP assets is often a difficult task because their true
value may not be readily apparent
 The value of an IP asset may not be recognized in income
received by the company. Indeed, the full value of an IP
asset is likely never recognized in income because much of
the asset's value resides in the negative right to prevent
others from doing something they would otherwise be
permitted to do
 Valuing an IP asset is further complicated because such value
is generally not stagnant. Rather, the value of an IP asset
often changes over time. Consequently, a company should
periodically (e.g., annually) re-assess the value of its IP
assets
 Challenges of Valuing IP Assets
Contd.
 The pending patent application is an asset representing
a potentially enforceable right that may be conferred to
the company in the future.
 If the company were to be acquired by another, some
value would certainly be attributed to its pending patent
applications as company "assets" in determining a fair
purchase price for acquiring the company.
 If the company were to be acquired, no value may be
attributed to the notebooks in determining a fair
purchase price for acquiring the company because the
notebook's content may be largely unknown.
Consequently, a company may possess a vast amount of
IP, some of which is readily identifiable and others of
which are difficult to identify
Reorganising and structuring deals
 If all or most of the IP owned by the corporate seller is
not assignable as a result of the contracts vesting
ownership in the seller, then a stock purchase, in which
the assignability of the assets is not important, may be
preferable to an asset purchase.
 In this case, both parties are protected: the seller is not
forced to make representations about assignability that
are impossible to meet, and the purchaser is not forced
to assume the risk of claims of infringement or the
inability to enforce IP rights arising from the ineffectual
transfer of rights.
 Due Diligence for valuation helps
build strategy
 • If
Intellectual Property asset is underplayed the plans for maximization
would be discussed.

 • If the Trademark has been maximized to the point that it has lost its
cachet in the market place, reclaiming may be considered.
 • If mark is undergoing generalization and is becoming generic, reclaiming
the mark from slipping to generic status would need to be considered.
 • Certain events can devalue an Intellectual Property Asset -events in
respect of IP could be adverse publicity or personal injury arising from a
product. An essential part of the due diligence and valuation process
accounts for the impact of product and company-related events on assets -
management can use risk information revealed in the due diligence.
 • Due diligence could highlight contingent risk which do not always arise
from Intellectual Property law itself but may be significantly affected by
product liability and contract law and other non Intellectual Property realms.
 Methods for valuation of Intellectual
Property
 The choice of approach will be
Valuation Methods
determined primarily by the
type of Intellectual Property
asset is to be valued, the
circumstances of the specific
transaction, the availability of
information and the level of
due diligence that the
corporate is willing to take on.
When multiple approaches are
applied a comparison and Cost approach Market approach Income Approach Others

reconciliation of resulting value

is possible.
 Principles of Valuation
 The cardinal rule of commercial valuation
is:
the value of something cannot be stated in the abstract;
 all that can be stated is the value of a thing in a particular place,
at a particular time and in particular circumstances.

Value of an asset or liability is the present value of future

economic benefits or losses that can be reasonably
anticipated to accrue to the owner of that asset or liability.
 Cost based approach
 Based on the principle of substitution, i.e., value of
an asset is estimated on the basis of cost to
construct a similar asset at current prices.
 Components of cost approach
 Cost of reproduction
 Cost of replacement
 Depreciation cost
 Original cost
 Book cost
 Cost approach
 Valuation Process
 Identify historical Costs of developing the intangible
asset, adjust for time value of money
 Add an appropriate rate of return to calculate
developer’s profit
 Disadvantage: it seeks to correlate cost with value.
Caution: NOT ALL DEVELOPMENTS BASED ON
INVENTIONS LEAD TO SUCCESSFUL PRODUCTS
 Market Based approach
 Estimates the value of an intangible asset based
on market prices of comparable intangible assets
that have been bought/sold or licensed between
independent parties.
 Also referred to as the Comparable Uncontrolled
Transaction (CUT) method, and is similar to the
Comparable Uncontrolled Price (CUP) method.
 Market Based
 Requisites
 An active, public market. assessment of fair market value
 An exchange of comparable products
 comparison with the sale value of similar assets
There are various elements of comparison, which should be given due
importance while analyzing and comparing the transactions such as, functional
characteristics of intellectual property, physical characteristics of intellectual
property, the size of industry in which the intellectual property is transferred,
the economic condition, the existence of any special term and the legal rights
that have been transferred .

 Limitations: In practice difficult to find sufficiently comparable

transactions-price information, sales or licensing statistics usually
confidential.
 Income based approach
 Estimates the value of an intangible asset
based on the expected income
attributable to the intangible asset during
its remaining economic life.
 Also known as “Discounted cash flow
analysis”
Income based approach
Contd..
Essential Elements

The amount of An assumption An assumption

the income as to the duration as to the costs
stream that can of the income and risks
be generated by stream associated with
the property the realization
of the
forecasted
income
 Income based approach
Contd..
Valuation Process

Forecast Compute Net Limitations

income and Present
costs Value of
associated future cash Estimating
with using flows (use income
the property appropriate Suitable Attributable
over the life discount rate where fair to intangibles,
Financial its
of the reflecting risk
projections economic
property of life,
can be made
investment) appropriate
Discount rate
 Other Approaches
 Other Internationally accepted
approaches include:
 Market Capitalization method
 Profit based methods
 Profit split method
 The Economic Benefit Approach
Table shows how big the economic contribution
made by brands to companies
 Instances of Brand Valuation in M&A
 In 1988, UK-based GrandMet
acquired the Pillsbury company.
 It was estimated that 88% of the Tangibl
e
price it paid consisted of Assets
12%
"goodwill" i.e., GrandMet paid
approximately $990 million
(L608m) to acquire the Pillsbury
Intangi
brand name and its other branded ble
Assets,
properties (Green Giant, Old El- 88%

Paso, Häagen-Dazs, etc.).

 Instances of Brand Valuation in M&A

 Volkswagen, bought the

assets of the Rolls-Royce $800
automobile corporation for $700
$780m against a net tangible
asset value of US$250 million $600
 But it somehow did not $500 Volkswa
include the brand in the $400 gen
deal...
$300 BMW
 The rights to use the Rolls-
Royce trademark were $200
subsequently purchased by
rival BMW for $65m and $100
many analysts believe that $0
BMW got the better deal. Assets
 Aligning the IP being acquired against the
business being acquired

The intellectual property to be acquired should be considered by reference
to what is actually being used or required to be used in conducting the
business to be acquired and not in a theoretical vacuum .

 For example, an extensive portfolio of granted patents may be of no or little

value to a business if none or very few of the products made or processes
used in the business are referrable to those patents, and worse still, if those
products or processes infringe third party rights

 The intellectual property to be acquired should be properly categorised by

substantive type—eg granted patent, patent application, registered trade
mark, common law trade mark etc; by its ownership; by third party
interests involved in that intellectual property and by disputes related to
that intellectual property.

 These factors will provide the foundation to identifying the necessary steps
to effect a proper transfer of title, the obstacles to such transfer that need
to be overcome, as well as the warranties that may be required.
 Aligning the IP being acquired against the
business being acquired
 IP your company is acquiring will allow it to benefit from the
transaction in the way it expects. For example, if your company is
buying a business to use its trade mark, the business may be less
valuable if the trade mark registration does not cover the
appropriate classes of goods or services.

 Similarly, a business with a number of patents may not be as

valuable as it appears if the key product manufactured by the
business is not covered by those patents, or if the key product
infringes another person’s patent. Lapsed patents and designs are
of no value either, so check that IP renewals are up to date.

 Search all relevant local and foreign patent, design and trade mark
registers to ensure that IP protection is available in all of the key
markets of the business.
Means of acquiring IP assets

Mergers &
Acquisitions Transfer
documents

Supplemental
Closing
Documents Asset Sale

Purchase
Agreement
Stock Sale
Share purchases & stock purchases
 Share purchases will transfer the entire rights in the
intellectual property by operation of law.
 If the acquisition is structured as a stock purchase,
documents transferring the assets generally are not
necessary, instead, documents which transfer the stock
will allow the buyer to indirectly become the owner of
the assets. In the context of intellectual property assets,
very often they will be separately transferred to a
holding company and either licensed back to the
operating company or become the subject of a
subsequent sale to the ultimate purchaser.
 Stock purchases
 In the context of a stock purchase acquisition,
ownership of trademarks and other intellectual
property still remains with the acquired
company. Purchase of shares will not affect
distinct property rights in intangible assets or
other intellectual property to be properly
transferred, although a separate agreement is
usually necessary to underscore the parties’
intentions.
 Asset Purchase
 If the transaction is structured as an asset purchase, the
intellectual property assets will be either specifically
mentioned in the acquisition agreement or become the
subject of a separate bill of sale. However, very often
intellectual property assets are the subject of a separate
agreement in light of the fact that they require recordal
of the new owner in the respective jurisdictions in which
they are validly owned and used. Furthermore, the
forms and requirements for valid transfers differ from
country to country and become a matter of public record
 Sale of assets
 If a business is sold as a going concern, the intent to
transfer trademarks and the goodwill associated
therewith is presumed, even though not expressly
provided for. An exception to this concept lies in the
context of transactions between parent corporations and
their wholly-owned subsidiaries. Asset-based purchases
in this context will not automatically include intellectual
property rights, rather, ownership of the intangible
assets will remain with the parent corporation unless the
underlying agreement expressly provides for transfer to
the subsidiary
 Transfer of Domain Names
Domain names perform the function of a trademark
if it denotes the source or origin of goods/services.
Domain names
Ownership of domain names can be transferred
in M&A

The transfer of ownership of a domain name should

consist of no less than three documents; the
Transfer of Acquisition Agreement, a document issued by the
ownership relevant domain name registry attesting to the
transfer (if such change is not done electronically) and
an assignment agreement.

The latter two documents may be set forth as exhibits to

Documents . the Acquisition Agreement or delivered as a post-closing
obligation.
 Transfer of domain names
 The Acquisition Agreement should make certain to address the
intersection to domain names and trademark law.
 In addition to stating the intentions of the parties and transferring
the domain name itself, all common law trademark, copyright and
other intellectual property rights related to the domain name should
be should be subject to the transfer as well.
 Representations and warranties to the effect that the seller is the
sole owner and that the subject domain name is not subject to any
claims of infringement or other claims or actions should be made,
together with indemnity provisions in favor of the buyer.
 The agreement should further prohibit the seller from registering or
using a similar or related domain name
 Transfer of domain names
 Specific reference to the domain name registrar
should be made with an affirmative obligation on
both the buyer and seller to execute any
documents it requires.
 In most instances, the buyer is responsible for
filing any required documents with the relevant
domain name registry and this should be
explicitly set forth in the Purchase Agreement.
Tax considerations governing the structure
of the deal

The structuring of an acquisition is frequently governed by tax
considerations. The lead IP lawyer must be alert to the
consequences arising from any particular structure jeopardising
intellectual property rights.

 For example, transferring all the intellectual property to a separate

IP holding company while transferring all tangible assets to a
separate operating company, will cause problems if common law
trade marks are involved, because common law trade marks cannot
be validly assigned separately from the goodwill attaching to the
business assets sold.
 Tax considerations…
 Depending upon the scope of the business activities of
the purchaser, it may choose not to simply obtain record
title to intellectual property assets received in a merger
or acquisition, rather, it may choose to sell its newly
acquired intangible assets to a third party (which it may
or may not own a substantial portion of the shares) and
receive a license to use same.
 Very often, this can be achieved in the most tax
efficient manner by placing ownership of the intangible
assets in a holding company which then licenses back
the assets for use by the operating company.
 Tax considerations
Entities which create or IPR were brought under the service
acquire IP assets tax law w.e.f. 10th September 2004.
has the ability to claim
a tax deduction
for their costs
IPR holders are required to get registered
with the appropriate authority under service
costs includes patent or
trademark registration fees,
tax rule for providing IP Services for
royalties, legal costs consideration of Royalty.
and salaries and
equipment costs
for R&D activities liable to pay service tax @ 12.24% (12%
service tax + educational cess @ of .24 % of
the service tax) on the gross amount charged
from the receiver
ss 10A 10B,
80IA, and 80IB
of the IT Act. Not available for the tax These incentives are
year in which amalgamation thereafter allowed to
/ demerger take place the amalgamating
/resulting company,
 Foreign laws impacting on IP

It is not uncommon in present day acquisitions for rights in intellectual property to
arise in various jurisdictions—eg foreign registered trade marks, granted patents etc
—or in the case of licences, for those to be governed by the laws of jurisdictions
outside India.
 In such a context, two factors are particularly important:
 first, to have access to a network of good quality intellectual property counsel to
address issues arising from such laws and
 second, to begin with the presumption that the laws in those jurisdictions will be
different to Indian law on intellectual property issues fundamental to the acquisition—
eg US law may treat the assignment of intellectual property licenses by licensees
differently to Indian law. Adopting such an approach means that issues are more
likely to be dealt with on their merits, and as a consequence, this lessens the risk
profile for the acquirer.
 The deal should not be viewed as complete until recordal of the transfer of title has
been effected
 WORLDWIDE RECORDAL OF INTELLECTUAL PROPERTY
RIGHTS.

 Necessity for Prompt Recordal : The intellectual

property rights of the acquired company need to be
transferred into the name of the new owner in each
jurisdiction where such rights exist.
 First, if a change of ownership is not promptly recorded,
a misconception can arise in the marketplace as to the
identity of the actual owner, leading to a possible loss of
rights where a trademark no longer functions as a true
indication of origin.
 Second, the new owner may not be able to prosecute
infringements, file oppositions or attend to renewals or
annuity payments.
Necessity for Prompt Recordal
 Third, fines and/or penalties may be assessed
for late recordal of a transfer.
 Fourth, the failure or delay in recording a
transfer of ownership may result in a possible
loss of royalties.
 Fifth, license recordals and registered user
entries will no longer be current and may affect
the validity of the use by a licensee and/or
governmental approval for foreign exchange
authorizations for remission of royalties.
Necessity for Prompt Recordal
 Finally, in the event an “equitable transfer”
occurs without the requisite official change of
“record ownership” at the relevant patent and
trademark offices throughout the world, the new
owner will encounter enormous difficulties when
confronted with the maintenance, sale,
enforcement, hypothecation, licensing and/or
use of the intellectual property rights.
THE FINAL WORD…

It is anticipated that intellectual property will be the

dominant force in future commercial transactions
comprising tomorrow’s mergers and acquisitions!