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Transfer of Intellectual Property Assets in Purchase of Business – A Practical Consideration

More often than not, purchase of a target business would include the transfer from the seller to the purchaser of the relevant intellectual properties (“IPs”) which is used by the seller in respect of the target business. This article is prepared to highlight on some practical considerations, which the purchaser needs to give particular attention to, when purchasing a business involving the transfer of the relevant IPs.

Pre-contract stage: Conducting IP due diligence on the target business

It is important for the purchaser to engage qualified intellectual property lawyers to conduct intellectual property due diligence on the target business as it would assist the purchaser, amongst others:

(a) in identifying the IPs relevant to the target business, which should form part of the IP assets to be transferred to the purchaser pursuant to the purchase of the business (“the Relevant IPs”). The list of the Relevant IPs can be identified by circulating an IP due diligence checklist to the seller, interviewing the key management personnel and gathering/reviewing the relevant documents governing/relating to the Relevant IPs;

(b) in ascertaining the ownership of the Relevant IPs. Ownership of the Relevant IPs can be determined by perusing the existing agreements governing the same. In case where the Relevant IPs are registrable IPs, to conduct relevant IP searches on the same at the relevant IP office to ascertain their ownership. It is important that the seller is the owner of the Relevant IPs to ensure that upon successful transfer of the Relevant IPs from the seller to the purchaser, the purchaser will have the ‘freedom to operate’ the Relevant IPs without infringing any third party’s IP rights;

(c) in ascertaining the status of registration of the Relevant IPs. In case of:

(i) registrable IPs, and where the applications for the registration of the Relevant IPs have been filed with the relevant IP office, it is important to check the status of such applications i.e. whether registered, pending registration, abandoned, expired, withdrawn or removed from Register (for non-renewal, where renewal if allowed by the laws). It is important that the Relevant IPs (which are registrable) to be registered to ensure that the seller has the exclusive right over the same; and
(ii) registrable IPs, and where there is no application for the registration of the Relevant IPs have been filed with the relevant IP office, it is advisable to conduct the relevant searches on such Relevant IPs to ascertain the registrability of the same.

(d) in identifying whether there is any dealing on the Relevant IPs. Dealing on the Relevant IPs can be identified through existing licensing or assignment agreement involving the Relevant IPs. In case of licensing agreement, it is important to determine whether the said licensing arrangement is exclusive or non-exclusive. It is also important to look for clauses which may affect the purchase of the business;

(e) in identifying the liabilities attached to the Relevant IPs. To identify any existing litigation and/or infringement actions involving the Relevant IPs. Similarly, it is important to check whether there is any notice, cease and desist letter, complaint and the like in relation to the Relevant IPs by getting information/confirmation on the same from the solicitor of the seller or from the seller itself in case the seller does not have any solicitor attending to matters relating to the Relevant IPs;

(f) in identifying the IP-related obstacles in respect of the transaction. For example, in case where:

(i) the seller uses the Relevant IPs as collaterals in obtaining financing in which the consent of the financier is required before the same can be transferred from the seller to the purchaser; or
(ii) the Relevant IPs are jointlyowned by the seller with any other third party where the consent of such other third party (as the co-owner) is required before the seller may transfer the Relevant IPs (which are jointly-owned) to the purchaser.

Contract stage: Drafting and execution of the relevant agreements

It is important to determine the relevant agreements or document to be executed by the seller and the purchaser giving effect to the transfer of the Relevant IPs from the seller to the purchaser. In purchase of business transaction, it is advisable for the seller and the purchaser to execute the following separate agreements for the following purposes:

(a) Sale and Purchase of Business Agreement (“SPBA”) or any other agreement of the same effect (such as Business Transfer Agreement) – to regulate the terms and conditions relating to the sale and purchase of the target business. Normally, SPBA will state that the Relevant IPs will be assigned from the seller to the purchaser pursuant to the sale and purchase of the target business subject to the execution of the Deed of Assignment between both parties; and

(b) Deed of Assignment (“DoA”) – to regulate the terms and conditions relating to the assignment of the Relevant IPs from the seller to the purchaser pursuant to such sale and purchase of the target business,

rather than executing SPBA covering all the terms and conditions mentioned above. This is because, some countries require that any assignment of an intellectual property to be recorded with the relevant intellectual property office. The application to record such assignment (“Recordation of Assignment Application”) needs to be accompanied by the relevant supporting documentation.

The execution of two (2) separate agreements mentioned above by both the seller and the purchaser is purported to keep the details of the SPBA off publicly available registers since the submission of the DoA alone (having terms and conditions acceptable to the relevant intellectual property office) is sufficient to record such assignment.

Further, please note that different countries might have different laws, requirements and procedures to record the assignment of an intellectual property.

As such, in the event the purchase of business transaction involves the transfer of the Relevant IPs which are registered or applied for registration in various countries, it is highly advisable for the parties to execute a separate DoA for each country (for the transfer of the Relevant IPs in that country), each of which to be drafted in compliance with each country’s laws, requirements and procedures to facilitate the smooth approval of the Recordation of Assignment Application.

The agreement signed by the seller and the purchaser must attach a complete list of the Relevant IPs to be transferred from the seller to the purchaser pursuant to the purchase of the business together with the relevant information which is identifiable to such Relevant IPs (such as registration number, class(es) for registration, country(ies) in which they are being registered and etc).

Should the intellectual property due diligence report highlighted on the rectification action required to be made by the seller towards the Relevant IPs to enable the same to be transferred to the purchaser free from any encumbrance (“Rectification Action”), such Rectification Action should be made as a condition precedent in the agreement towards the completion of the purchase of the business.

The agreement also needs to clearly mention:

(i) on what is to be assigned /transferred from the seller to the purchaser. For this, it is highly advisable for the purchaser to insist, inter alia:

(aa) that the seller assigning/transferring “all the right, title and interest” in the Relevant IPs rather than merely assigning/transferring “all the seller’s right, title and interest”, for fear that the seller might not have such rights over the Relevant IPs;
(bb) that the seller assigning/transferring the right to sue for infringements that occurred before the date of the assignment/transfer and to retain any monies thereby generated;
(cc) that the seller assigning/transferring all the right, title and interest towards the Relevant IPs, which are registrable IPs but have yet to be registered as at the date of the assignment, once the same matures for registration; and
(dd) that the assignment/transfer of the Relevant IPs excludes any liability incurred prior to the date of the assignment/transfer.

(ii) on the restrictions imposed on the seller pursuant to the assignment/transfer of the Relevant IPs. These include the restrictions on the seller to deal with the Relevant IPs or any other IPs which are similar or derived from the Relevant IPs which have been assigned/transferred to the purchaser after the assignment/transfer date; and

(iii) the obligations of the seller to fully indemnify the purchaser for any liability incurred by the purchaser resulting from the use of the Relevant IPs pursuant to the assignment/transfer or in the event of breach by the seller of any representation and warranty given in respect of the Relevant IPs.

The agreement also must clearly state when the assignment/ transfer becomes effective. To protect the interest of the purchaser (based on the reason mentioned in the next heading below), it is highly advisable that the assignment/ transfer become effective upon the successful recordation of the assignment/transfer of the Relevant IPs with the relevant intellectual property office/ authority and the purchase consideration to be paid by the purchaser to the seller only after such successful recordation. In case where the agreement provides on the requirement to pay the purchase consideration upon the signing of the DoA, there must be a provision which requires the return of the paid purchase consideration from the seller to the purchaser should the assignment/transfer of the Relevant IPs fail to be recorded with the relevant intellectual property office/authority.

Post-contract stage: Recordation of the transfer/assignment.

Since the seller’s name is still on the relevant intellectual property office/authority’s record (as the owner of the Relevant IPs) on the signing date of the SPBA and the DoA, it is necessary for the purchaser:

(a) to file the Recordation of Assignment Application with the relevant intellectual property office/ authority.

Normally, Recordation of Assignment Application is filed on the day of the signing of the DoA or soonest possible after its signing. In the event the Relevant IPs are registered in various countries, there is a need to appoint local IP agent in each of such countries to attend to such recordation; and thereafter

(b) to ensure that the Recordation of Assignment Application is approved by the relevant intellectual property office/authority and the details of the purchaser (as the new owner of the Relevant IPs) have been reflected in the relevant intellectual property office/authority’s records. This is to ensure that the purchaser is properly vested with the rights, title, benefits, entitlements and interest over the Relevant IPs. Failure to record the transfer or assignment can have serious adverse effect on the purchaser (as the new owner of the Relevant IPs). For example, in Malaysia, Section 47(3) of the Trade Marks Act 1976 clearly states that a document or instrument in respect of which no entry has been made in the Register shall not, unless the Court otherwise direct, be admissible in evidence in Court to prove title to a registered trade mark. This may cause the difficulty to the purchaser to initiate any trade mark infringement against any alleged infringer. For this reason, it is not uncommon for the SPBA to provide that successful recordation of the assignment of the Relevant IPs as a pre-condition of the completion of the business transfer.

The above merely highlight on some of the practical considerations relating to the purchase of business involving the transfer of IP assets. Since every transaction has its own specific and peculiar issues, it is highly advisable for the purchaser to appoint qualified IP lawyers to assist them from the commencement until the completion of such transaction.

 

Prepared By:

Khairul Fazli (Partner) khairul.fazli@azmilaw.com

Azarith Sofia (Senior Associate) azarith.sofia@azmilaw.com