Intellectual property (IP) is like any other asset a company may own. Therefore, an IP portfolio review is crucial during Mergers and Acquisitions (M&A), the transactions in which the ownership of companies or the operating units belonging to them are consolidated with, or transferred to, other firms.
IP is an intangible, non-physical asset stemming from the human intellect and is often the most valuable asset that a firm can own. The various categories of IP, such as copyrights, trademarks, licenses, patents, or trade secrets, are protected by law from unauthorized use. IP plays a central role in the company’s growth and therefore accounts for a considerable portion of the value of a company’s existing asset portfolio.
This, in turn, makes IP management a central element during a merger or acquisition; it can be one of the main reasons M&As are undertaken at all. An acquired IP portfolio will add value to a company’s portfolio, promoting further growth and diversification. In addition, trade secrets, technology transfer, and other unique capacities may be added to the acquiring company’s portfolio.
At Rooney Nimmo, our international team of intellectual property lawyers can help you navigate complex M&A transactions with ease. Contact us today.
Intellectual Property Management and IP Portfolio Review During M&A
It is critical to make informed, strategic decisions regarding IP assets during an acquisition or merger before finalization, as failure to do so can result in potential audits, penalties, and legal action. M&As involve a high degree of risk in general, so it is crucial that IP portfolios are analyzed in the context of the company’s future growth strategy and that due diligence reviews are conducted.
The expansion of technology has made effective IP management even more critical, given that IP is defined as a non-physical asset. This means that software and emerging technologies fall under the category of IP and should be treated as such to avoid potential legal pitfalls and other risks.
Practical Implementation of an Effective IP Management Approach
In the due diligence phase of intellectual property management during M&A, the objective is to take inventory of a company’s IP assets and valuations to assess and quantify any potential risks. Documentation that traces each asset to its source to determine ownership and whether it is legally protected is required for accuracy. Records should be revised and updated at the appropriate registries.
Due diligence allows the merged-to-be company to evaluate transfer pricing and anticipate future roadblocks, such as whether the rights to IP ownership need to be transferred. It also helps the company ensure compliance with regulatory guidelines and assess whether its current ownership aligns with its objectives following the acquisition.
Managing the Intangibles
Where a merger or acquisition leads to legal ownership in multiple tax jurisdictions (if the company being sold hosts its IP legally in one country and the acquiring company in another), the operational structure of the newly upgraded company should be overhauled, and the IP consolidated in a single location to streamline the ownership structure. This also helps to firm up the new company’s strategies for developing IP.
Distinguishing between accounting valuations and transfer pricing valuations is crucial in the IP due diligence phase. Accounting valuations are used to determine the value of the IP asset during an acquisition or merger, while transfer pricing valuations are undertaken for tax purposes. The former is done on a post-tax basis at fair market value, while transfer pricing valuations are undertaken on a pre-tax basis.
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It is advisable to hire an external IP legal advisor to verify and analyze IP ownership issues and determine which valuation methods to use depending on the nature and phase of the merger or acquisition, as inaccurate ownership rights and incorrect asset valuation can lead to potential legal trouble.