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Role of Intellectual Property in an Acquisition or Merger

Intellectual property (herein referred to as IP) is an incorporeal property that is invented or created by human intellect. These properties are intangible in nature and possess right in rem' meaning a right against the whole world. It gives rights against the creativity and labour of the inventor or creator. There are different types of IP that exist, such as copyright, trademark, patents, etc. They are a central asset to the technology or biotechnology companies and form a greater part of their business strategies.

The product value, brand value, or the innovation portfolio of a company plays a pivotal role when it comes to the management of assets of the company. These assets are equally important and somewhere of more value when compared to other assets of the company.

They form a greater part of the strategic developments of a company in the domestic or international market. The IP are also one of the various reasons for which different companies go through the process of merger or acquisition as it strengthens their market share, promotes improved and efficient management.

The laws pertaining to creation, use, and also to prevent exploitation of such property are called intellectual property laws. In India, specific provisions are enacted in the patents Act 1970, The Copyrights Act 1976, The Trademarks Act 1999, The Designs Act 2000, etc. for the protection and management of such assets.

Merger and acquisition (commonly referred to as M&A) act as a tool for reconstruction of the companies to maximize their wealth for the stakeholders and also create a hold for themselves in the global market. A merger is nothing but consolidation of two firms into one firm which can work in a more efficient manner to maximize profits and achieve desired goals. On the other hand, acquisition is considered as takeover of one company by another company by purchasing its majority of ownership stake.

In general terms, such stake is or above 50 percent which gives them control of management to the acquiring company and giving the importance that intellectual property plays it requires due diligence in creation, management and transfer of such asset to avoid any kind of exploitation.

Benefits of IP in Acquisition or Merger

  • Value addition to the firm's portfolio:

    One of the major advantages of an IP asset acquisition or merger is that it adds value to the asset portfolio of a company. In order to attain consistent growth in the market it is necessary that companies should evaluate whether the current portfolio meets the requirements to fulfill their current business objectives. Innovating something new is not possible every time in this dynamic and inconstant market environment, therefore companies must look for new opportunities and offerings by way of acquiring existing innovation by other company for expansion of its product portfolio and lead in the market. This shall be done by implementing IP policies and solutions in order to identify novel innovations which can add up to the speculated growth of the company.
  • Acquiring unique capabilities:

    The companies have always wished to have a stronghold in the market. They always want to have a dominating position in the market against their competitors. One of the major tools used for this is the acquisition or merger of unique innovation or capabilities of their competitors to have an edge over others. It changes the whole outlook of the company and creating a unique and efficient business model for the new company.
  • Transfer of technology:

    Another fruitful benefit of Acquiring an IP asset is that it allows for the transfer of technology from one person to another in the marketplace due to which free flow of an IP asset maintained. This also leads to proper exploitation of the IP asset and it is utilized to its full extent.
  • Diversification:

    The acquisition or merger also helps in exploring and enhancing different zones in business. It facilitates entering into a different field of business. As it is more convenient to enter into a business through pre-established resources it reduces the cost of operation and creates a diversified asset portfolio for the company. It opens new doors for more deals, benefits, and acknowledgment in the market.
  • Growth:

    The very basic objective to implement any corporate strategy is to promote growth and development which further leads to maximization of profit to achieve its desired goals. The acquisition or merger of an IP asset contributes to the growth prospects of the company by acquiring new and competent technology. It makes sure that the product portfolio of the company is updated as per the current demand in the market, A company must evaluate its existing intellectual property asset portfolio to determine whether it meets the requirements and is in line with the business objectives.

Protection of IP asset portfolio
IP Policies on Acquisition, Exploitation, Monitoring, and Enforcement
The IP portfolio is a substantive part of a company's strategic policymaking, building a strong IP portfolio helps in protecting the vital asset of the company and churn out revenues in the long term. The main objective of the company is not merely to acquire intellectual property rights, but also to manage and safeguard it in such a manner that it is utilized to its full extent and is not misused by other competitors in the market.

In order to manage the IP assets of a company, a proper policy framework should be implemented in the organization structure of the company. In order for better management of the IP assets, companies should create separate policies on Acquisition, Exploitation, monitoring, and enforcement.

A policy on acquisition should contain the best package of protection for the IP assets and due caution and proper due diligence shall be exercised while acquiring any IP asset leaving behind no ambiguity in the ownership rights or any formal rights of the company. Next the company should make specific strategies to exploit the assets and utilize their capabilities to the full extent of their policy on exploitation.

This can be done in various ways such as commercialization of IP assets, sale of an IP asset or through any licensing and franchising agreement with the other companies. A policy of monitoring should also be in place to keep a check on and track the progress of technological developments or new technology that can be utilized for the benefit of the company. Also, it helps in monitoring infringement of the formal rights of an IP asset, if any.

Lastly, effective policy on enforcement should be made for the losses that may be incurred by the existence of counterfeited goods in the market and the high costs involved in some IP disputes and also for the compliance of the law.

Measures before acquiring an IP asset
Due Diligence
It is an exercise performed by the companies to assess the potential of their IP assets and also impart comprehensive knowledge of the actual value and further assess the risk of a company's intangible assets. As the organization structure of business is reorganized in any acquisition or merger it leads to a necessity of conducting such an assessment of risk and do a stress test of the IP assets. If the due diligence of IP assets is not conducted properly it can result in undervalue tor overvalue of the assets which can defeat the very purpose of acquisition of IP assets in the first place.

The due diligence is performed through various means and through the process of due diligence is tailor-made to the requirements of the business transaction however these are general checks which can be performed in every process:
  • Identification of IP assets: The IP portfolio consists of various intangible assets such as patents, copyright, trademarks, trade designs etc. These assets are to be identified and treated differently from other assets.
  • Verification of Ownership of IP: One of the crucial purpose for which the process of due diligence is so stressed upon is identifying the true owner of the asset, and whether the said is disputed or not. The true owner of the asset can be traced through series of questions, ownership or registration documents filed with the authorities. The ownership should be properly investigated so that easy transfer of assets can take place within the process of acquisition or merger.
  • Third-Party claims: The third-party claims should also be scrutinized while investigating the ownership of the asset as sometimes third person rights are accrued unknowingly, however proper disclosure of such right should be made by the owner of such an asset prior to the transfer.
  • Evaluate possible IP infringements: While carrying out the IP due diligence operations, it is important to check whether any third party is infringing IP right or there is any company that might infringe a third party's rights. In any of the case mentioned above, it may give rise to any dispute in the future.
  • Term and territory checks: Another important check which also has to be made while conducting due diligence is territory and terms of the IP asset. Some assets are strict to certain regions or contains some terms and conditions for the use of the asset. Such terms should be clearly defined and no ambiguity should be present.

Valuation of IP portfolio
The valuation of the IP asset in determining the monetary value of the asset. There are various factors that should be taken care of while evaluating a property of IP assets such as standard of value, the purpose of valuation, the method of valuation and also the nature/strength of IP asset.

In order to utilize the IP asset to its full extent, value determination of an asset is the first and foremost thing that should be undertaken. It helps to speculate the profits which can be earned if the asset is acquired and further facilitates the other processes such as financial reporting, licensing and franchising, optimizing taxation policies, making any investment in research and development etc. The two common methods used for the valuation of an asset are income method and market-based method, in which the price of a similar asset in the market is compared with asset and in the later one valuation is done on the basis of the amount of financial income that IP is expected to generate.

Intellectual property assets are the intangible assets of the company which plays a vital role in the growth of a company and adds up a great value to the asset portfolio. It is one of the reasons for which IP assets are acquired and companies go for the reconstruction process such as merger and acquisition. It helps to create a diversified asset portfolio, acquire new capabilities, explore more options in the market which speeds up the growth rate and further facilitates in achieving the desired corporate goals. For a successful acquisition of an IP asset, proper due diligence and valuation of IP asset should be conducted to avoid any uncertainties or defects.

Caliban Dark lock had said that:
"The only thing you really own is what you create, and the only thing you can create without needing someone else to give you raw materials first, is intellectual property".

It is a crucial asset for a company and they should be dealt with utmost caution in order to achieve maximum profits. They should be protected and monitored through the implementation of strict policies and should be utilized in such a manner that they satisfy the cost which is borne to acquire them.

Written By: Anmol Mishra - 6th semester, Amity Law School Noida

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