Assessing and maximising the value of portfolios in M&A scenarios

Innovation and brand strength are key drivers in the modern economy and provide numerous strategic reasons for M&A-related activity. While brand value is created by a variety of factors – from a business’s reputation to its messaging, design and marketing and communication strategy – it is ultimately the legal system, which supports the ways in which a brand is built, captured and protected, that holds the key to unlocking this value, especially when it comes to M&A activity. Unfortunately, it is fairly common fora brand not to have trademark and design rights in place or up to date. As a result, it has arguably neither a brand to sell, nor value that a company can truly take over or own as part of its acquisition investment.

Keeping IP strategies up to speed with a business’s wider activity, management approach and global product strategies is a perennial challenge for IP professionals. A typical international company, for example, may have switched back and forth between centralised and localised approaches to IP registration and management – or it might have merged or acquired new portfolios, lapsed unused brand portfolios or sacrificed rights to cut costs or avoid disputes. The importance of updating records and registering new or existing assets in new iterations or geographies can frequently be overlooked in the rush of change. But what happens when a right that is important today was not looked after properly yesterday?

The first step in any sale or acquisition exercise should be to look in detail at what it is that a company owns, the strength of the registration and what it offers the business in terms of market share and future expansion. At the very basic level, this means ensuring that the IP portfolio is comprehensive, which means registering all relevant trademarks for correct goods and services and in all applicable jurisdictions before preparing to sell. In addition, the ownership information must be up to date and valid, with a secure chain of title, as this will make the transition much smoother for both parties.

Another factor that affects a portfolio’s price is how the IP rights have been utilised – if the business has a trademark but it is not being used, its value may diminish due to the risk of cancellation. Similarly, the seller should be conscious of and try to rectify any ongoing IP disputes; if this is not possible, it should keep track of any formal deadlines and communicate the change of ownership to the relevant parties and offices.

Companies should expect the unexpected when undertaking any IP due diligence or audit exercise. When an entity digs back through its portfolio, it is not unusual to come across a few hidden gems – unfortunately it is just as likely to unearth some problems. These might include:

• rights that are no longer active (eg, that were acquired for products that have been discontinued, renamed or redesigned, often during merger or acquisition);
• oversights, which leave the company vulnerable (eg, where IP acquisition has not kept up with business activity, core rights are isolated or left unmonitored, or rights that are simply out of date or incorrect); and
• potential hurdles relating to IP licensing, contracts or manufacturing/distribution agreements, among other things.

Assessing portfolios in advance means that these vulnerabilities can be identified and addressed, thereby shoring up the brand’s market value.

Avoid common pitfalls

Buying IP portfolios and transferring records will always be a complex and time- consuming process. However, if both buyers and sellers undertake their due diligence and conform to best practice, the process is more likely to be efficient and successful.

Inevitably there will be obstacles and challenges along the way, which can delay and increase the cost of the activity. The most common issues to be avoided include the following:

• Discrepancies in the schedule of rights – this is why the initial pre-transaction audit is key, as it investigates whether:
  • the records are held in the correct entity name;
  • the plc/ltd status is accurate; and
  • the rights have been registered for the intended purpose and free to use in the desired markets.
• Representatives are not empowered or available to sign – this is particularly relevant in situations such as bankruptcy. It is advisable to have both parties sign a general power/authorisation empowering an attorney to complete all documents needed for the transfer project, so that any documentary requirements after the sale can be met without having to track down both parties.
• Difficulty tracking deadlines – monitoring and communicating key renewal deadlines and status updates between all parties involved will help to ease the strain and keep everyone informed.

In any M&A scenario, no matter the timescale, a solid plan is vital. It saves time and money for both parties in the long term if there is a strategy in place to manage the process from the beginning. In this plan, buyers must consider any IP issues and obstacles that arise from the newly created business – while these will not be sufficient to halt the transaction, planning ahead and proposing solutions will make the road much less rocky.

Post-completion

Under pressure of pre-sale deadlines, IP due diligence can be a taxing process, but it is not until completion that the bulk of the work begins – and tight turnarounds apply here too.

It is vital that the transfer of all IP assets is handled quickly and efficiently, with records at the relevant registries updated promptly and accurately. If this does not happen, the new owner could find that its assets are not fully protected when it needs them most, especially if the seller ceases to exist once the transaction is complete. The longer the buyer waits, the harder it is to get those all-important signatures from the seller. Updating IP ownership records is no simple task, especially for international businesses, with every jurisdiction working on different timeframes, fees and processes. This has been even more the case during the covid-19 pandemic, given that many of the strict formalities that are enforced by the different patent and trademark offices have been subject to change, often at short notice. Brexit has also brought its own challenges.

Despite these difficulties, it is still advisable that the new owners update all titles in one go when possible. While it might seem like a mammoth task and a hit to the budget, this approach is generally more cost and time-effective in the long run. If this is not possible, the process can be phased out post-M&A, for example, by scheduling updates in line with the renewals schedule and/or the business’s plans for structuring its brand architecture (see boxout).

No matter which approach a company selects, managing the recordal project smoothly and efficiently is key to success. We recommend the following steps:

• Smooth the transfer – the purchasing company should receive a schedule of IP rights and pending applications, the selling company should communicate the transfer to its IP team, plus all external agents and advisers.
• Verify the data before it is imported – the purchasing company should confirm that the information with which they have been provided on IP assets is correct and accurate for every jurisdiction.
• Confirm the formalities – the requirements for each jurisdiction and each type of intellectual property need to be followed to the letter, taking advice or using local experts where required. Depending on the type of right, the process can be managed simply by letter or email to the registry, but in many instances will require strict formalities to be adhered to, including legalisation and notarisation.
• Keep track of alterations, especially if personnel or suppliers change – the speed at which the local authorities process applications varies greatly, so the new owner’s IP team must track the status of the applications and maintain accurate internal records.
• Double-check confirmations – the purchasing company must record which confirmations it has received, reviewing any errors or omissions as they arrive.

Maintaining IP rights is an iterative process. Where brands are transferred to new owners, it is not uncommon for them to make changes to a portfolio’s structure or strategy, which may necessitate further updates.

This is an abridged version of an article that was first published on the WTR platform on 15 April 2021