Economic uncertainty of the kind the world is currently facing in light of the emergence and spread of COVID-19 often presents the opportunity – or need – for corporate restructuring. Transactions in this type of environment are often done under considerable pressure and time constraints.
Intellectual Property (IP) and Information Technology (IT) assets are an increasingly key aspect of many businesses. Yet they can also easily be overlooked, as demonstrated in several high-stakes disputes. When Kraft sold its peanut butter business to Bega in 2017, it retained the Kraft trade marks – without realising that the right to use the distinctive trade dress of its peanut butter jars had transferred to Bega along with the goodwill in the business1. Volkswagen, when buying the entity manufacturing Rolls Royce and Bentley for $900 million, failed to secure the right to use the Rolls Royce trade mark, which the target did not own. Looking forward, it is easy to envisage a similar disaster story – and costly dispute – for an acquirer which fails to document in detail the practical steps required to transfer something intangible like social media assets. Losing access to millions of Instagram followers, for example, could be a costly mistake.
If your business is considering divesting subsidiaries – or looking out for acquisition opportunities – consider this checklist of IP/IT considerations to help ensure a successful transaction.
IP audits
It is essential to confirm the details and validity of all IP assets held in the name of any entity to be divested (or acquired).
Steps should include:
- Search public registers of patents, trade marks, designs, and plant breeder’s rights as applicable (both in Australia and in key international territories);
- Search for unregistered trade marks and designs used by the business;
- Identify valuable copyright works and any associated ownership issues, which may include assets such as websites, software, photographs, reports or other publications, and technical drawings or manuals;
- Identify all IP licences granted to or by the entity;
- Identify all domain names, social media accounts and business names used by the entity;
- Consider what confidential information and trade secrets belong to the entity; and
- Review contracts for development of IP either as a service or as part of a joint development project.
Searches should also be conducted of the Personal Property Securities Register for any security interests registered against specific IP assets, and appropriate steps taken to ensure the IP assets are not encumbered on completion.
Dealing with registered rights and copyright works
Assignment of most registered IP rights and copyright works must be documented in writing and signed by the parties, and unless there is clear consideration, this should be done by way of deed.
Assignments also typically need to be registered. It is worth bearing in mind that many IP Offices will require you to submit the documentation confirming the assignment, so you may prefer to keep the assignment deed separate from other substantive transaction documents.
Domain names and social media
Domain names and social media assets can be amongst the most valuable marketing assets of a business, particularly those in consumer-facing industries.
All domain names should be transferred using the procedures of the relevant registrar. It is also imperative that the current registrant details are confirmed early on, to ensure that there will be no issues with transfer. It is common for the domain names of a business to actually be registered in the name of its IT manager or design/advertising agency. These registrations should be moved into the name of the appropriate business entity prior to any transaction.
Social media can present practical challenges. ‘Ownership’ of a social media account is dependent on control of the account, which in essence amounts to knowing the username and password. The password should be changed after completion. If the username is an email address, that may need to be changed in advance of completion, so that verification and password reset emails are accessible to the incoming owner.
If an entity is being sold but the trade marks and branding are to be retained by the group, arrangements may need to be made around phasing in new domain names and social media handles, including a period during which traffic is redirected from the prior brand.
A failure to document processes for transferring these assets in sufficient detail can easily lead to complex disputes around issues of contractual drafting, the parties’ intentions and technical requirements.
Business names
The process to transfer business names is relatively straightforward. However, in some cases there may be practical complications in transferring older business names and accessing the necessary ASIC Key, so it is worthwhile starting preparations as early as possible.
Goodwill and packaging ‘get up’
Any unregistered trade marks, including ‘get up’ or the look and feel of product packaging, is taken to be part of the ‘goodwill’ of a business. As Kraft discovered in the aftermath of selling its peanut butter business to Bega, it is not possible to transfer goodwill separately to a business. This means that if the group sells the business but retains the registered trade marks within the group, the group may not be able to use any distinctive packaging or other ‘get up’. To the extent possible, registrations should be sought for any marks that may be subject to this type of risk, and otherwise you should ensure these issues are clearly dealt with in the transaction documents.
IP and software licences
As with any contract or agreement, the express ability to assign or novate an IP or software licence will make a transaction more straightforward. However, most licensors will impose a right to terminate if the licensee seeks to transfer a licence without the consent of the licensor. In some cases, this may also apply in IP assignments, particularly where there is a requirement to assign IP back at the end of a specific period or on the occurrence of a particular event.
The incorporation of third party IP rights (including pre-existing IP contributed to joint development projects) and open source software should be clarified. The use of these rights will often be subject to specific terms of use.
Cloud software
Software-as-a-Service arrangements are often made available to the members of a corporate group for a set term.
If software licences or cloud arrangements are held in various entities in a corporate group, divesting one entity may affect the group’s systems. It is also worth considering whether there are early termination fees payable, and whether the group will continue to pay the same fees even if there is a reduction in usage.
If acquiring an entity, it is vital to check whether separate rights to use any core software will need to be obtained, and if so, at what cost. You should also confirm that any software the entity will bring with it is compatible with any systems with which it will interface, and if not, consider the potential associated costs.
HWL Ebsworth has extensive experience assisting businesses manage IP and IT assets in divestments and acquisitions. Please contact a member of our team for further information on how we can assist you.
This article was written by Luke Dale, Partner and Nikki Macor Heath, Senior Associate.
¹ See our article ‘A nutty case of trade dress‘ from 19 June 2019: https://hwlebsworth.com.au/a-nutty-case-of-trade-dress/
