Brand & Trade Mark Considerations in Intellectual Property Due Diligence
Understanding the transaction
When performing an IP due diligence or audit as part of a transactional due diligence it is crucial to understand what the transaction is about. IP needs to be identified, verified, highlighted and surrounding issues conveyed to the interested parties in the context of the overall transaction.
There is a significant difference in approach depending on whether IP is important to the transaction (often it is but neither the buyer nor the seller is aware that it is), whether the transaction is a share or asset purchase, what the due diligence is required for and what the time constraints are. A thorough briefing is required to ensure that the exercise not only produces results that are valuable but they are done so efficiently, from both a time and cost point of view.
Categorising the issues
Categorising the issues that arise during a due diligence will help identify material problems which might be deal breakers. To assist in this process it is helpful to place those issues in the following categories:
It goes without saying that without a thorough understanding of the transaction it is impossible to categorise the issues.
High priority issues are those issues that cannot be adequately dealt with through indemnities and warranties or rectification measures or which may materially affect the purchase price or structure of the transaction. They may also be deal-breakers. For example, it would be high priority issue in an asset transaction where the brand is important, where the buyer cannot take transfer of the trade marks because:
- RSA is not a member of the Madrid Protocol; or
- the mark is unregistered and the goodwill is not being transferred; or
- exchange control cannot be obtained; or
- associated copyright in the logos is not owned by the target.
In some cases issues or problems may be overcome or solved. However, it may take too long and the deal may then not suit the buyer depending on their commercial interests.
Medium priority issues are those issues that can be dealt with through appropriate warranties and indemnities or rectification measures or would not otherwise materially affect the purchase price or structure of the transaction and are not deal breakers, but are important to highlight to the relevant party given their particular interest in acquiring the target. These issues could include those that create difficulties or cost once the IP has been acquired or is under the control of the buyer. These may be high level priority issues, which may require solutions and advice prior to the deal going through. Typical examples include confirmatory documents regarding prior IP transfers, details of ongoing litigation, catering for effects of change of control or assignment clauses in licence agreements as well as maintenance costs and information required post transfer for the effective management of the IP.
Low Priority issues are those issues that should be brought to the attention of the relevant party. However, they are neither high nor medium priority issues although they will require attention in future. These issues do not form part of the essential reason behind the transaction but they are important. Typical examples include the need for housekeeping on the IP portfolio, an adjustment of IP strategy, policy introduction, the design of IP processes within the business or the construction of an IP asset register.
It is very difficult for one to assess the relevant priority status of an issue if you do not know what the deal is about. Therefore it is important to know the reasons behind the transaction as this will dictate the priority level of certain issues and challenges that may be faced. This will also allow one to be more efficient in the process as you will not waste time on frivolous issues.
In order to properly undertake a due diligence, one requires time and therefore it is important to begin the process as early as possible as this allows one to be as thorough as possible. This will also require a good relationship with the buyer or their attorneys and, if possible, the seller. Knowing who to contact for various information will save you time.
With this in mind the practical sharing and acquiring of information on the target company or seller is important. How will the parties exchange information? Will this be done in a VDR (Virtual Data Room) and what are the rules of the data room? Depending on the way in which this is to be done, it is important to ensure that you and your team are correctly set up to receive or view information in the way it is shared with you. In highly sensitive transactions, you may only have a short time to view the data and there may be strict rules against copying or downloading, meaning that resource and planning become very important. Should you not identify a possible problem early on you will be behind from the onset on a project that in all likelihood will be time sensitive.
Who are you dealing with?
Know the buyer and the seller. As mentioned earlier in some cases the buyer may be a foreign entity interested in acquiring local IP or investing in the development of IP onshore. With strong exchange control currently in place in South Africa it may require a suspensive condition in the agreement relating to the approval of the Reserve Bank or you need to warn your client that they may have difficulty getting IP and/or royalty payments out of the country.
There may be key personnel with knowhow in the organisation that you need to retain or understand the risk if they leave post transaction. This must be bought to the attention of your client. Furthermore, you need to understand the level of co-operation required between the parties post transaction. This will have an effect on how the relevant IP is managed going forward. Depending on the nature of the transaction, co-operation post transaction may be difficult.
Identifying and verifying
One should compile an inventory of all IP held by the relevant party and review its validity and ownership. The assessment of the brand should go beyond the mere verification of the registered trade marks and should also include strength tests and an assessment of weak points. This may also entail devising or costing a strategy for the buyer post acquisition. Frequently, strength testing is not understood to be necessary but it may have a direct effect on purchase price. The ISO guide to brand valuation, for example, requires a legal analysis of the brand as a fundamental step in its valuation.
The purchaser should also be aware of prosecution deadlines and renewals of existing applications and registrations, and have a plan for these marks during the transition period. Will the buyer/seller attend to these marks and ensure that everything runs smoothly between signature and closing of the transaction, and who bears the risk and cost in this period? This will also include responses to official actions which may have been issued by various Registries, before and during this period.
When conducting the verification process, be aware of marks that may have possibly formed part of a previous assignment agreement. It is important to check the history of such marks and ensure that they are in order. This includes any changes of title, renewals, recording of assignment agreements, and highlighting the need for corrective assignments where necessary.
One should also check if there are any security interests recorded against any of the marks and what the implication of such an interest on the prospective transaction is?
In most countries, recording assignments is an administrative task and not determinate of ownership change. However, this is not always the case. Penalties may arise on late recordal of transactions and in some cases ownership may not pass until the assignment is recorded. Furthermore, the cost and difficulty of recording assignments is frequently overlooked. These factors need to be carefully considered.
New trade mark searches should be conducted for unregistered marks. This will allow one to gauge whether these marks are available for registration in the respective territories and, importantly, provide an indication of any infringement threats or considerations. It will also highlight where third parties have registered the mark (or similar marks) which will then allow the buyer to assess the risk of using those marks post transaction and structuring appropriate indemnities, reducing the price or taking out infringement insurance. It is important to understand first to use andfirst to file jurisdictions in order to assess what rights the target may have and risks the buyer may be exposed to. Once this process has been completed, it may be necessary to file trade mark applications in the relevant jurisdictions and those costs also need to be considered.
Domain names and Social Media
All domain names should be controlled by the seller. It is important to cross check and verify domain names with WHOIS databases. One should take note of possible infringing domain names and alert the buyer to them. These generally do not form part of the high level priority list. However, this depends on the transaction. For an online business, the gTLD, for example, may be one of the most important assets
As social media has become an integral aspect of the marketing and communication landscape, the ownership of Twitter, Facebook, YouTube, Linkedin identities on prominent social media platforms requires an analysis. It may be imperative that all use of the brand is controlled or monitored in the social media space.
What effect will the transaction have on any existing licenses? Licence, non assert and user agreements should be reviewed, especially the change of control, assignment, royalty and quality control obligations as they may impact the way in which the transaction is structured. A change of control may trigger an option to cancel, an assignment may require the agreement to be novated, royalty remittances may require exchange control and quality control obligations need to be understood. One should also note whether the marks may be licensed to the seller as frequently the difference between ownership and licensing is not fully understood by either party.
An assessment of the risk of contentious matters related to the brands of the target need to be taken into account. This includes oppositions, cancellations as well as passing off, copyright and trade mark litigation. One should highlight the exposure to the seller, the possible risk and the cost of these matters as well as any claims to costs and/or damages that the buyer may have if the transaction is concluded. Appropriate warranties and indemnities may need to be negotiated or other insurance obtained such as special risk cover. With this in mind, past litigious matters of consequence should also be considered e.g. where damages are due or payable for past infringements.
Importantly, all settlement, consents and co-existence agreements involving marks owned by the target should also be requested and reviewed as these may contain significant limitations on how one may conduct business under those trade marks. Furthermore, it is crucial that provision is made for access to all file content of IP files post transfer. If there is going to be a change of attorneys then handover considerations need to be understood and perhaps even negotiated.
As the world has progressively become a smaller place, it has become important to assess brand related risks in other countries especially where goods or services are sold online. Although mostly harmonised, trade mark rights are territorial by nature and different rules apply not only in relation to the transfer of IP rights but also the protection and enforcement of marks, especially in Africa. It is therefore important to consider the rules in the foreign jurisdictions. For example, in some countries it is not possible to transfer trade mark applications or trade marks registered using the Madrid System or there might be exposure to claims where the brand is not registered. The availability of a network of correspondents in relevant countries may be critical.
These considerations should assist you carry out a valuable due diligence exercise. Very often time constraints make due diligences very challenging. As a result one should highlight not only the exercise that has been undertaken but also what has not been considered or investigated to ensure that the scope of the audit is understood. Communication is critical on every aspect.