The acquisition of a business, whether via the purchase of either its shares or its assets, often involves the transfer of intellectual property. Generally, in the former scenario, the transfer of IP is by operation of law, whereas in the latter case, the specific intellectual property rights subject to the transfer are specifically detailed, usually in a schedule to the purchase agreement governing the deal. In either case, the careful attention must be paid to the IP during the diligence phase in order to effectively capitalize on the full value of the IP’s intangible rights.
Below is a non-exhaustive list of issues that ought to be considered in the context of the purchase or sale of IP:
- Determine whether proper vesting of title has occurred in the case of intellectual property created by employees or independent contractors of the business.
- Delineate the scope of intellectual property licenses that the target business has rights under.
- Understand the scope of the risk of acquisition of the intellectual property in light of any sources of potential intellectual property infringement.
- Understand the royalty obligations of the target business.
- Understand the tax implications that arise from obtaining title to the intellectual property as opposed to licensing such rights from a third party.
- Understand the tax implications that arise from any involvement in the rights acquired of jurisdictions where tax treaties have been concluded.
- Understand when the acquisition of intellectual property assets constitutes prohibited anti-competitive acts under sections 78 and 79 of the Competition Act. These sections aim to prevent acts that have or is likely to have the effect of preventing or lessening competition substantially in a market by a person with substantial or complete control of a class or species of business.
- Determine whether the acquisition of the intellectual property falls within the requirement for merger reporting of asset acquisitions under Part IX of the Competition Act. This Part provides for the reporting of asset acquisitions where amounts relating to the parties’ assets and revenues exceed specified thresholds.
- Identify the jurisdictions that the intellectual property rights pertain to and determine whether each jurisdiction requires a separate assignment of rights.
- Note the implications of the timely recording of the transfer of intellectual property rights in each jurisdiction, for example, implications on the continued ownership of the rights (for example, in the case of trademarks), the availability of infringement actions, and the receipt of other benefits that flow from the rights (for example, royalties).
The author would like to thank Larissa Leong, summer student, for her assistance in preparing this legal update.