One of the most distinguishing factor of intellectual property is that, the knowledge once share cannot be retracted, no matter how brief the period of sharing is, therefore the decision of transfer of intellectual property needs to be thought about. In today’s evolving times and in the era of growing economy, mergers and acquisitions are an important tool of expansion for the business houses, depending on their requirements and capacity. Intellectual property and its valuation plays an indispensable role in assessing the value of a merger or acquisition transaction. It can also be termed as the driving force behind it which is why due diligence in such valuation is a key concern specifically in acquisition on part of both the acquirer and the transferor.
It is not disputed that IPRs are a business house’s greatest assets in the current days. It not only provides protection, but also gives a competitive edge to the holder in every sphere of the market. These IPs also shape the path of an agreement, and often lead to major decision takings in concern to mergers and/or acquisitions. Thus due diligence in establishing the fate of these rights is a necessary step.
The famous case of due-diligence which went wrong in an acquisition deal in respect to IPR was the deal between German carmaker Volkswagen and Rolls Royce and Bentley automobiles which was closed at $900 million. It was only after the closure of the deal that it was revealed the same did not include the right over trademark under the Intellectual assets of Rolls Royce, which meant that Volkswagen had the right to manufacture the cars but did not have the authority to use the brand name of Rolls Royce because the same belonged to their competitors BMW.[i]
Similar issue was raised by Viacom, on the purchase of YouTube by Google, when it was bought to light that YouTube infringed rights of Viacom which were not taken into consideration by Google, during its acquisition. [ii] Although the parties settled mutually, and not much harm was caused, the lack of sound due diligence on part of Google could have landed them in huge trouble.
The Insolvency and Bankruptcy Code, 2016 has initiated huge amounts of distressed Mergers and Acquisitions deals within two years of its implementation. According to the Kroll’s ‘Spotlight Asia’ report, the I&B Code impacted closure of M&A deals with ₹14.3 billion within 2 years of its implementation. [iii] 2018 was a prime year witnessing many such M&A deals, like that of the Vodafone and Idea merger, the Dena Bank with that of Bank of Baroda and Vijaya Bank, GSK and HUL deal it is this last deal among others which gave rise to the concern of the fate of intellectual property assets in the deal.
Immediately after the announcement of the merger deal by the two companies Hindustan Unilever (HUL) and GlaxoSmithKline (GSK), Steer Engineering moved the Delhi High Court seeking protection for their intellectual property that they had shared with GSK and feared that it might be transferred to HUL succeeding the merger between the two companies. They claimed that they had the right to protect their IP from being transferred to a third party, who could gain the right to use such technology for their gain, thereby succeeding their merger.[iv]
This shows that Intellectual Property rights hold extreme importance in Merger and Acquisition deals, however, it is pertinent to mention here that these IPRs are not only limited to Trademarks or Patents but go beyond that. To include simple exchange of technological knowhow as well. The case is still pending before the Court and shows that due diligence by the companies concerned are quintessential in any merger and acquisition deal in order to avoid the grave mistake as observed in 1998’s Volkswagen and Rolls Royce and Bentley automobiles’ deal.
It is important to note that due diligence not only includes obtaining the knowledge of the firm and valuation of its assets and liabilities inclusive of its risks and potential disputes, but also to ensure that the terms and conditions in the contract are achievable and do not come with a caveat or are not based on presumptions and assumptions. For example, just because a company owns an IPR, its transferability and assignability should be looked into, if any third party consent or confirmations are needed then they should be attained. At the same time, it should be ascertained that the selling or transferring company is expressly transferring or permitting the buyer or the transferee its IPRs and the right to use the same.
On the other hand, the transferor or the seller also needs to seek protection for itself. It is during the due diligence that all sensitive confidential documents not only related to its business but also its intellectual property is shared with the prospective buyer or transferee, which if becomes public knowledge can be plummeting for the former. Thus protection of these information is extremely vital. Therefore it is always advisable for the two parties to enter into a non-disclosure agreement, even before the process of due-diligence is conducted. However, it should be ensured by the former that the information protected should fulfils the criteria laid under the Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement.[v]
Further, the transfer of Trade Mark and domain name is another big factor to be looked into, since the transferee may wish to use its own trademarks or domain names, which will render the transferor’s trademarks of no use in case of acquisition. Further, in case of merger, such trademarks can cause a huge issue, since it may give rise to a requirement of a completely new trademark to be used as a combination.
Lastly, it should be kept in mind that, a merger and acquisition agreement should be in the interest of both parties, and the needs of both the parties should be looked into and catered to. Issues and clauses like arbitration and conciliation should be added to the agreement, to address any possible future disputes. Therefore, IP assets need to be given special attention during due diligence in such kinds of agreements to ensure a healthy and steady transfer. Mergers and Acquisition activities should be better strategized and IP planning should be done for maximum benefits.
It is anticipated that intellectual property will be the dominant force in future commercial transactions comprising tomorrow’s mergers and acquisitions! [vi]
Reference
[ii] Viacom Int’l, Inc. v. YouTube, No. 07 Civ. 2103, United States of America.
[iii] https://www.livemint.com/Companies/c17rNOlV4h5i1zTnlUfEVN/IBC-impact-MA-deals-worth-143-billion-signed-in-2-years.html
[v] Article 39, Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement, 1995.
[vi] Intellectual Property Assets in Mergers & Acquisitions, Lanning G. Bryer and Scott J. Lebson, Intellectual Property Assets in Mergers and Acquisitions, published in 2002 by John Wiley & Sons publication. https://www.wipo.int/export/sites/www/sme/en/documents/pdf/mergers.pdf
Prepared by-
Nikita Sultania (B.Com LL.B, Sem 7, ALSK)