Why you should secure Intellectual Property
11 min read
17 December 2013
You can't kick it, see it or put it in a shop window but for some businesses Intellectual Property ("IP") is the most valuable asset that it has. It can be sold, stolen, transferred, used as security for loans and used to pay creditors on insolvency, like any other asset. Yet how many businesses take the time to ensure that this asset is secure, being kept in the right place and its value maximised?
IP comes in many shapes and sizes – patents, trademarks, copyright, designs and database rights. Depending on the type of IP right, it may not be registered anywhere. IP rights can arise when developing new products or manufacturing processes, through creative activities of a literary, artistic, musical or dramatic nature, or simply as a result of the day to day running of a company. Therefore, IP may exist without being recognised as existing and it can belong to a person or a business without any formal agreement to that effect
Ownership can be determined by contract in order to avoid uncertainly and disputes. It is important to deal with this prior to the creation of such rights. Otherwise, ownership of IP rights usually lies with the inventor, the designer, the author or the brand owner. Where IP has been created or developed by an employee acting in the course of employment, ownership of the arising IP rights will typically vest in the employer under UK legislation. However, the situation may not be as clear as this in practice. Where a consultant has been commissioned to create work, ownership of the IP (commissioner vs. consultant) depends on the type of IP right created.
With businesses having less tangible assets, many are looking to their intangibles to raise finance or to secure debts due to large creditors such as pensions schemes, to secure the future of the business. Whilst banks are used to having charges that cover “all assets” they do not recognise that they may have security over valuable IP, particularly where the business itself does not recognise the value of its assets. However, if IP is recognised as a valuable asset class and properly securitised, banks can be comfortable with existing or increased loan finance and find more opportunities for new lending to companies that it may not ordinarily lend to.
Before this can happen, banks and their customers need to understand who owns an organisation’s IP. They then need to understand its value.
It may be difficult for lenders to assess the value of IP before taking security over it given that it is an intangible asset. Industry specific IP may be highly valuable for the borrower, but may not be so valuable for a lender or charge holder. Most people would recognise the value in McDonald’s brand and Coke’s recipe, but it is harder to recognise let alone value IP in smaller business that may not be high street names. The IP may have indeterminate resale value, and a prudent lender should explore how it would exploit the IP if it was necessary to enforce its interest.
How separate or separable a company’s IP is from the business as a whole is an important factor in determining its value. Income generating IP (e.g. a music back catalogue) or registered IP rights that can be easily assigned or licensed (e.g. registered trademarks, patents or design rights) can be much more easily valued than integral rights.
A product may be protected by numerous types of IP rights operating simultaneously. For example, with a smartphone, the manufacturer name and logo and the smartphone name are likely to be trade mark protected, the shape of the phone may be protected by registered design rights, and the operating system source code may be protected by copyright. The value of the IP is likely to be in the bundle of rights as a whole and of much less value if separated. Ideally a charge holder would take security of the whole portfolio of rights, but problems arise if a particular right is also used for another product, or if some of the rights are licensed in from other companies.
Despite the various considerations, it is clear that IP rights are potentially very valuable and even a licence to use someone else’s IP, under the terms of a carefully drafted Licence Agreement can be of significant worth. When seeking to sell a company (as part of an asset or share sale), secure investment, release equity or obtain a loan, it is essential to have all IP used or owned by the company adequately documented. That way, by conducting due diligence on such of such information, the buyer, investor or lender has everything it needs in order to operate the company and/or value the company. The absence of such documentation may severely delay and possibly jeopardise even the process. Further, any attempt to effect any missing or inadequate documentation confirming IP ownership or valid licences may require significant additional cost to induce the relevant third party to review and execute the necessary documents after the event.
If a company goes into an insolvency process, any liquidator, administrator or other office holder will try to recover value for creditors from the trading or sale of the business. It is essential for the office holder to: identify any IP; establish who owns the IP; determine whether the company has granted security over its IP; protect the IP if necessary; and consider how to maximise the realisable value of the IP. It may be that IP is owned by a third party, for example a director or group company. In those circumstances it may not be possible for the office holder to continue to allow the company to use the IP in its ongoing trade without agreeing terms with the true owner.
Chris Laughton, Restructuring & Insolvency Partner at Mercer & Hole has first-hand experience of dealing with intellectual property in distressed situations. He said: “Our practical experience is that to maximise the realisable value of IP in a distressed business, swift action is necessary. Frequently, patent applications and trade mark registrations will not have been maintained as efforts have concentred on fire fighting. Focussed remedial work – often multi-jurisdictional – can however restore value to the IP rights portfolio. Failure to have an appreciation of the unique and complex issues involved could, on the other hand, result in a devastating impact on the prospects of rescuing the business.”
It may be that, on further enquiry, the office holder determines that the IP has been transferred away from the insolvent company ahead of its demise. This may well have been done with good intentions, perhaps the directors realised that ownership was vested in the wrong company. However, when assets are transferred away from a company , without market value being paid to the company, an office holder appointed at any time in the following two years (or longer in certain circumstances) will investigate the transaction and look to set it aside. Liability for directors may also flow from transactions such as this that were not I the interests of the company and its creditors.
An inter-group transfer can be set aside as a transfer to a third party can. The best interests of the group are not necessarily the same as the best interests of the transferor company and the finances of each group company have to be considered in isolation.
Where a company owns IP it may be possible to save a failing company through new lending, selling or licencing the IP to achieve value for creditors. This may make the business attractive for a share sale or new share issue to new investors, a sale of the business and assets through an administration, saving jobs and maximising returns to creditors or it may support a compromise arrangement with creditors to allow the business to continue to trade and pay creditors a proportion of sums owed and/or over an extended period of time, through a Company Voluntary Arrangement.
Laughton said: “a recent example is where we were able to secure additional funding for a period of nine months to enable us to trade a business whilst in administration. This allowed us to implement a rescue plan, whilst protecting the company’s perpetual software licences, which ultimately allowed us to preserve the business with a return to the unsecured creditors in full. Through the constructive use of insolvency procedures, we were able to rescue a company that had run out of cash.”
The value of intellectual property should not be ignored. It should be treated as any other asset as if it were premises or plant & machinery and protected in the same way from loss, disputes over ownership and deterioration in value.
Denise Fawcett, insolvency lawyer at Pitmans