Intangible assets typically make up more than 50% of the value of a modern business. In some sectors (for example, pharmaceuticals), that percentage is much higher. In general, IP forms the greater part of these assets; it is hardly surprising that purchasers of businesses and their assets should pay careful attention to the process of perfecting ownership of IP rights.
As with the transfer of ownership of real property, there is a significant difference between agreeing to transfer and the completion of formal change of ownership. The latter requires compliance with formal procedures across multiple jurisdictions and often with multiple authorities.
Advance preparation is crucial for any transfers of IP ownership. Yet, no matter how extensive IP due diligence has been, the recordal process rarely passes without hitch. Updating records is, in general, a time-consuming and often costly process, bound as it is by the cleanliness of the existing records and the vagaries of each jurisdiction’s recordal system. However, there are steps that companies can and should follow to smooth the process and minimise the demands on their internal resources. In the first of our in-depth looks at the recordal process, we set out the process that should be put in place before the sale is even completed.
Smoothing the completion process To ease the completion process, due diligence should include the following in relation to the IP assets being acquired:
- Exactly which entity is recorded as the owner of each right?
- What is the status?
- Are the rights in force?
- Are there licences in force and recorded against any rights?
- Are there charges or other interests recorded against any rights?
- Do the registered rights match those used in the business?
- Are there any unregistered rights?
Obtaining the answers to these questions in advance enables effective planning for the recording of changes of ownership.
Good housekeeping The extent to which companies are diligent in the registration and maintenance of IP and IP records varies. If the vendor has followed best practice, either as a matter of ongoing routine or in preparation for an asset sale, then this inevitably makes the recordal process easier to execute. When IP rights are in force, with a sensible ownership structure and up-to-date ownership details recorded, then this is very helpful.
If rights are not kept up-to-date then they are at risk in terms of validity and /or enforceability. This should come out during the due diligence process and may result in more complicated requirements for the post-completion recordals (as well as potentially impacting the sale process itself).
Obligations on the vendor It is usual for an agreement between parties to place an obligation on the vendor to assist the purchaser in taking all the necessary steps to record the change of ownership of IP rights. This generally includes a requirement to complete whatever documents are needed in order to meet the formal requirements of recording the change.
There should also be an obligation on the vendor to provide information relating to IP. This is particularly important when it comes to unregistered rights where creation and use are important factors in the ability to register or enforce rights post-completion.
The scope of the obligation on the vendor should be clear and broad enough to enable effective future protection of rights as well as enabling recordal of the change of ownership to happen without problem. Clearly, it is in the interests of the purchaser to have as long a duration of these obligations as possible. However, there will normally be a time limit and the purchaser needs to be mindful of this limit when planning the recordal process.
This is part 1 of our in-depth look at the IP assignment process. For further information, sign up to our bi-weekly IP newsletter.