Managing Intellectual Property Assets and meeting your director’s duties
Placing IP front and centre on the Board’s agenda maximises the potential for favourable commercial outcomes and helps to ensure company directors comply with their director duties. As a simple proposition, practising Good IP Governance* in relation to a company’s intellectual property assets (IP Assets) will ensure increased enterprise value.
The competitive advantage of nearly any Australian business can be tied to its IP Assets – be it their brands, goodwill, trade secrets, corporate knowledge, patented processes, software applications, copyrighted processes and systems or their product designs etc.
Boards must therefore take responsibility for incorporating IP management issues into their broader governance systems to ensure all key IP Assets are captured, protected and managed for the benefit of shareholders.
While companies may have traditionally focussed on leveraging tangible assets and achieving a return on financial capital, today’s innovation economy requires a different directors’ mindset, to leverage intellectual capital for sustainable profits.
Diligently care for your IP: after all, it’s your duty
Failing to manage IP assets and risks in accordance with principles of Good IP Governance may result in a breach of a director’s duty to discharge their duties with the requisite degree of care and diligence required by section 180 of the Corporations Act. Company officers can also be personally liable for IP infringement if they are held to have directed the company to commit certain infringing acts.
Just as directors cannot abdicate responsibility for financial matters, individual directors must inform themselves of matters relating to IP to ensure they can make an informed contribution to matters of risk and strategy.
Good IP Governance in practice
These common commercial scenarios will help contextualise the importance of Boards proactively managing their IP Assets. Risks and benefits of Good IP Governance will be readily identifiable from these scenarios.
IP Due Diligence and M&A activities
- Strong IP awareness at Board level enables directors to properly consider IP risks and opportunities associated with any prospective merger, acquisition or sale.
- IP savvy boards are empowered to ask the right questions and ascertain the level of IP sophistication of a prospective target rather than limiting their investigations to public registers.
- The strength or otherwise of a target’s IP position can helpfully guide negotiations on value and warranties.
- A strong portfolio of properly managed IP assets will inevitably lead to a greater enterprise value than would be the case if the company failed to protect its IP assets.
- Boards possessing a clear understanding of the strengths and weaknesses of their IP rights can strategically limit their disclosure of relevant assets to guard against the risks inherent in a prospective purchaser’s due diligence.
Investor & Market Disclosure
- Boards of private and public companies need to be mindful of IP assets when assessing obligations of disclosure.
- Overstating the value or status of a company’s IP assets or understating potential IP risks can, for example, have adverse consequences when seeking private investment, satisfying the general disclosure test for a prospectus’ content or otherwise managing a public company’s continuous disclosure obligations.
Aligning IP with commercial strategy
Whether it be the development of a new product, entry into a new market segment, exploring new commercialisation avenues or pursuing territorial expansion, IP issues, both positive and negative, intersect with each of these strategic scenarios.
- ‘Positive’ from the perspective of identifying and creating new IP rights and associated barriers to protect the company’s strategic investment.
- ‘Negative’ from the perspective of ensuring third party IP infringement risks are identified and appropriately mitigated.
Leveraging IP assets for commercial gain
- In furtherance of their duties directors need to demonstrate appropriate efforts to achieve the successful commercialisation of the company’s IP assets.
- Boards should always be considering commercialisation opportunities whether in the form of direct sales, third party licensing, joint-ventures, strategic alliances, the divestment of relevant IP assets or even the enforcement of their IP rights against infringers as a means to recover damages or an account of profits.
IP as a shield
- IP rights are legally recognised exclusive rights enabling their owners to create legal barriers to competition.
- A Board that fails to properly manage (e.g. protect and enforce) their company’s IP assets is jeopardising the company’s investment into its competitive advantage. This may in-turn adversely affect company value and shareholder returns.
IP as a sword
- A failure to proactively monitor and enforce IP rights can diminish a company’s competitive advantage and even jeopardise the very existence of its IP rights.
- A common scenario that Boards must guard against involves the situation where former employees, armed with a company’s know-how and trade secrets, emerge as effective but unauthorised competitors.
A template for managing your company’s Intellectual Property Assets
Putting theory into practice. What does Good IP Governance look like?
Below we have detailed our generic template strategy to guide directors and business owners to better leverage their IP Assets for growth. The template strategy includes a range of practical measures designed to empower Boards to set the ‘right tone’ for IP management and to add great value to the companies they serve.
A good starting point is to conduct an IP audit to precisely identify, and catalogue, the company’s IP assets (e.g. all of your significant IP rights including trade marks, patents, designs, copyright and trade secret assets). A professionally conducted audit will inevitably reveal opportunities to strengthen your position – e.g. by ensuring the company has all necessary ownership and/or licensed rights to its core IP assets necessary for the execution of its business plans.
IP Asset Register
Although companies typically maintain a register of tangible assets, they often ignore their intangibles. Rather surprising when you consider a company’s core value typically resides in their IP Assets. Once you’ve undertaken an IP Audit you’re well on the road to creating an IP Assets Register. Sharing the IP Assets Register with the Board will empower directors to make better-informed strategic decisions.
Given its direct linkages to commercial strategy, corporate value and operational risk, the responsibility for Good IP Governance ultimately resides with the Board.
IP Governance should then be a standing item on the Board’s Agenda to ensure the company’s officers regularly ‘turn their minds’ to IP opportunities and risks and to otherwise help foster a culture of Good IP Governance.
With IP now firmly on the agenda, the Board should develop a company-wide policy for the management of its IP Assets. This is an opportunity for the Board to set the tone and expectations for management and staff on all matters relating to the creation, protection, commercialisation and enforcement of the company’s IP rights and respect for third party IP rights.
With an assured understanding of the company’s Intellectual Property strengths and weaknesses, the Board can give strategic consideration to issues affecting both the defensive and offensive aspects of IP. Strategic decisions can (and should) be made to protect IP in-line with the company’s business and investment activities, both domestic and international.
When it comes to Board composition, ensure IP expertise and experience is included in your skills matrix. Although individual directors cannot abrogate their responsibility to remain informed about IP issues, many technology and IP-centric businesses should ensure the retention of specialist IP counsel.
Where a company has a significant IP related risk profile, Boards should consider assigning matters relating to IP protection and infringement to a specialist Board sub-committee, such as the risk committee.
Whilst the implications of director liability associated with poor IP governance may seem rather grim, directors should be encouraged by the opportunities associated with Good IP Governance and its direct correlation with the creation of sustainable competitive advantage.
* Good IP Governance refers to a framework for the effective management of a company’s intellectual assets to help ensure directors’ compliance with their legal and statutory duties. ‘Management’ being a reference to a company’s policies and processes for capturing, protecting, commercialising and enforcing its intellectual assets and, ensuring risks associated with the infringement of third party IP rights are safely navigated.