Buying or selling intellectual property
- John Deane
- Updated: Mon, 21st Nov 2016
When acting for buyers we ensure you buy what you expect. When acting for sellers we ensure a sale with unnecessary caveats. There is skill required in dealing with IP which we share to help improve the transaction.
Our IP transactions service includes:
Solving issues relating to buying or selling IP
An IP deal is about acquiring rights to use products and information. Some IP assets are visible such as registration of trade marks. However, some of the most valuable IP is invisible such as branding and identity. For some assets, such as software, there could be latent defects which are difficult to detect until a problem arises. Capturing both visible and invisible IP is where we add value in terms of pricing the IP deal and execution.
Based on our experience the answers we most frequently asked to provide revolve around:
- What due diligence do I need to undertake before acquiring IP from a seller?;
- How do I value the IP rights and fix a price for the transaction?;
- Can the risk of investment be hedged?;
- What happens if someone else claims ownership of my IP?
To assist, we have set out below an overview.
Due diligence into ownership for buyers of IP
Any transaction involving intellectual property requires specialist due diligence on the IP. The due diligence exercise breaks down into:
- Legal due diligence; and
- Financial due diligence; leading to
- Price negotiations.
Legal due diligence
Most of the value we provide centres around legal due diligence. We report on:
- What intellectual property rights exist;
- The potential value of those rights;
- Who owns the intellectual property rights;
- Are all the fees for intellectual property rights, maintenance and renewal current; and
- How those rights generate revenue.
Evaluation of IP for buyers
As part of the evaluation process we audit existing agreements. We will also in appropriate cases prompt disclosure on the history of IP claims. Our evaluation depends on the market and technology. Generally, we ascertain:
- The seller owns the rights. If not, why not;
- The geographical spread of the registered intellectual property rights;
- If appropriate, the patents owned by the company, the patent filing, maintenance and enforcement policy;
- Ownership of IP rights created by employees, consultants and contractors;
- If the seller is a licencee, can the vendor novate, assign or sub-licence the original licence agreement.
Financial due diligence
The bulk of the financial due diligence is usually undertaken by accountants. However, we do keep a watching eye and guide on areas where work may be needed.
Many IP businesses have claimed corporation tax relief under the regimes promoted by HMRC to help IP businesses. There are several regimes currently in operation as we explain: – 7 tax breaks for IP creators. Part of the financial due diligence should include a review of tax claims made to ensure that the company and the expenditure qualified. HMRC are vigilant and often claims against the company arise years after the expenditure was incurred.
Issues arising in IP transactions
We find solutions to successfully introduce existing IP into the acquirers business to maximise intellectual property rights fee generation.
The starting point for review of the issues comes at the heads of terms stage. Well thought out and well negotiated heads of terms in almost every case we deal with leads to a smoother process with reduced professional fees.
There are basic terms which are included in most sale and purchase agreements involving intellectual property. What we do is take the basics and turn them into a bespoke deal to reduce risk and enhance your position.
Issues for the buyer of IP
Here the likely focus is IP rights, including trade secrets and know-how, plus the people who create and manage these rights.
A buyer will want to ensure that the vendor has full title to intellectual property rights. Full title implies the:
- Vendor has the right to dispose of the intellectual property rights.
- Vendor will, at his own cost, do all that he reasonably can to give the buyer title to the relevant intellectual property rights.
- Intellectual property rights assigned are free from charges and third-party rights. In practice we advise a buyer to seek an indemnity to this effect as this forces the seller to disclose any problems. If the seller does not disclose issues covered by the indemnity the seller is on risk of a claim. The disclosure stage often leads to price adjustments we find.
- Confidential information is adequately secured from both employees, consultants and contractors.
Share sales of IP businesses
If the transaction is a share acquisition the buyer will want to know the identity of the shareholders. A buyer will be concerned to know that all of the sellers will agree to the sale. A review of the articles and shareholders’ agreement for provisions such as drag rights which force shareholders to enter into the transaction and therefore provide comfort to the buyer will be undertaken.
Asset sales of IP
The buyer will want to ensure that the company has the authority to sell assets in the form of IP. Again, there will be a review of the articles and shareholders’ agreement to ascertain what the authority required is. Relevant business contracts will also require review to check that rights of assignment to the buyer exist.
Issues for the sellers of IP
The seller may not want new owners to possess and manage IP that conflicts with the seller’s remaining business, e.g. brands. Restrictions on use after sale can only be secured via an express contractual commitment. Details would usually be included in the sale agreement.
Importance of the disclosure letter
The buyer will want indemnities to protect against risk. The seller will need to give sufficient details to enable the buyer to understand the issues and assess the impact. The seller will then seek to limit liability through the use of disclosure.
Usually, disclosure from the seller takes place under a disclosure letter. The disclosure letter is an important document we draft for sellers.
- Detailed disclosure is the best protection for a seller against a breach of warranty claim.
- The seller will usually have to consult with individuals within the business who have been involved with the creation of intellectual property, maintenance and/or revenue streams before giving disclosure so that disclosure covers all it should.
Special considerations for software sales
With software and mobile phone applications (Apps) special considerations apply over the use of escrow accounts and development of artificial intelligence.
Use of escrow accounts
If the asset you are selling is software, you need to consider the timing of the sale. Often in a software sale, an escrow company is designated in order to safeguard the buyer’s interests. The idea is that the buyer has a chance to test the software before buying. The seller is then able to disclose against the testing window offered via the escrow company and limit liability for matters such as bugs and software defects. Obviously, the process of testing can extend the period between exchange and completion of contracts. Often the use of escrow extends to cover security for the sale consideration which can be held in escrow pending satisfactory testing.
Development of artificial intelligence
With mobile phone applications (Apps), there are a number of IP rights involved. For example copyright, design and trade mark. With the advancement in technology and Artificial Intelligence (AI) there are opportunities to protect the interrelation of software and hardware as a patent. There could be difficulties if IP rights have not been fully secured by the buyer since the risk is of claims to the profits subsequently arising from ex-creators claiming a slice of the action. In cases of doubt, obtain written waivers of claims from the likely ex-creators who could come forward at a future date.
Unexpected claims to IP
In a surprisingly large number of cases we find ourselves dealing with ex-creators of IP who allege they are entitled to a share of the sale proceeds. Often issues only come to light when a sale is proposed. The problems arise where there is either no agreement that can be found between the seller and the creators of IP. We find many cases where what does exist is out of date or does not address full ownership rights.
Can a creator of intellectual property claim ownership?
Attuned to risk the buyer will want to inspect the employment documentation , framework agreements and business contracts to make sure that the creators of IP have assigned intellectual property they create to the business.
What happens if the paperwork is not complete?
Usually the issues can be solved by negotiation. Sometimes, if the intellectual property is being used in competition to the business who paid for it to be created litigation or threats of litigation can bring the parties to negotiate. Much depends upon the facts.
In practice, if a buyer becomes aware of the risks, the buyer will want to see specific assignments of IP to the seller before proceeding with the transaction to avoid wasted costs.
We tell you the effect determining these issues will have on the transaction and find solutions to address flaws.
Tax payable by the shareholders
Relevant issues we find we deal with for shareholders under a share sale include:
- Entrepreneurs relief – will the sellers of the IP business qualify for the 10% rate of capital gains tax or will they face a 20% capital gains tax bill. Often there is planning which if done with sufficient time before the sale can qualify the shareholder for the 10% rate of capital tax.
- EIS investment scheme – will the sale impact on qualification for investors who became shareholders under the EIS scheme. Similar considerations apply for investors who invested under the SEIS investment scheme although the rules are not identical.
- Qualification for investor relief?
Under some transactions the consideration is deferred pending earn out targets or paid in instalments. Deferred consideration can give rise to issues for shareholders hoping to claim entrepreneurs relief. We do advise on these aspects.
If the IP is sold under an asset sale the proceeds are paid to the company and a liability for corporation tax arises.
Our track record with IP based transactions
Recent cases involving the purchase and sale of intellectual property.
Mobile phone service provider
The intellectual property rights held by a mobile phone service provider became the key component in a corporate sale. We valued the provider’s IP rights against comparable competitors, to maximise our client’s valuation.
IP valuation for tech company
Our client, a computer technology company, was selling their business. We prepared a reasoned, justified valuation of our clients IP assets. Based on our valuation, we drafted a letter of disclosure, thus protecting our client from future claims.
IP due diligence
Our client, a high net-worth investor, was purchasing a majority stake in a publishing company. We ensured the publisher had adequate IP protections through copyright, trademarks, and confidentiality agreements.
Without specialist advice, businesses often get lost in the midst of intellectual property rights during a transaction, make sure that the value of intellectual property rights is not overlooked and use our skills to increase your negotiating strength.
We handle commercial transactions involving IP. Our expertise covers the entire transaction from due diligence, negotiation, tax, legal documentation to completion. Why not email or call me to arrange an informal discussion.