IP in M&A: Challenges to overcome when acquiring brand assets
When businesses merge with or acquire other businesses, the challenge for IP professionals doesn’t stop once the transaction is complete. For IP rights to be properly updated and maintained, the question of how to brand and structure the newly merged business first needs to be addressed.
When a business merges or acquires another, one of the important questions is: what should that newly merged business be called? Common approaches include ‘fusing’ the two business names to create a portmanteau term, 'assimilating' the two names into one single corporate brand, or simply allowing the merged entities to retain their existing branding and identity.
While all approaches can enable the newly formed business to retain the brand reputation of their previous entities, each does pose its own unique IP hurdles; in particular, when it comes to the ownership of trademark registrations protecting legacy brand names.
Pros and cons of retaining legacy IP ownership structures
It may be a business necessity to retain existing ownership structures for brands acquired as part of M&A activity. For example, if the pre-merger businesses continue to trade under their existing names, or if they plan to form brand-based operating divisions or product lines within the merged company. Retaining existing ownerships also has the added bonus of negating the need to execute assignment documents and record changes of ownership on trademark and other registers. On the other hand, if the merged business is to operate under a newly created brand name, there will be a conflict between the registered legacy brand names and the business's new name.
Merging brands: How to avoid naming pitfalls
As with most IP-related processes and strategies, overcoming such hurdles is all in the planning. At the very basic level, in-house legal and IP heads should treat the new company brand in the same way as they would the launch of a new brand. That includes, for example, carrying out all of the normal investigations, risk assessments and planning that you would carry out for any other major product launch. Existing consent and coexistence agreements will also need to be reviewed and possibly revised or renegotiated.
IP heads would also be well advised to flag potential issues early in order to ensure that they are involved in planning from the outset. This is likely to include:
- Registration pitfalls: Registering the company's new brand name may be hampered or prevented altogether by the existence of earlier rights owned by the pre-merger entities.
- Potential conflicts: Conflicts may exist between existing registrations and applications to register the new brand. The solution will require consent or a change of ownership in some or all of the legacy brands in order to secure robust registered rights in the new brand.
- Enforcement issues: Enforcement of old or new registered rights may be compromised by the differing ownership of registered and unregistered rights. This will increase the complexity and cost of enforcement and materially reduce the chances of success.
While such issues are not insurmountable, they can increase costs, cause inconvenience and, in extreme situations, affect a company’s ability to enforce its rights. Careful thought and planning are required in order to ensure that these rights do not get lost in the wash.
IP due diligence
As part of the pre-merger due diligence, there should ideally have been an audit of existing IP rights (For additional guidance here, download our white paper 'IP in M&A: Getting your rights in order'). The results of such an audit will inform and guide the planning in relation to the adoption of a new brand post-merger. In particular, where an audit has taken place, it should have revealed all the issues with existing brands (eg, infringement, conflicts and up-to-date chains of title), thereby also revealing many of the potential issues with the new merged or fused brand.
The same applies if in the case of partial merger or planned spin-off; for example, if the separated product line or company opts to extend its scope of operations to a conflicting line of business. These situations can be managed, but require careful thought and planning, as well as the execution of suitable agreements and partial assignments.
A good example is that of Kraft Foods Group and the spin-off of its confectionery business, which resulted in the creation of new corporate brand Mondelez. Here, the spin-off solved the potential problem of conflicting corporate branding by inventing a new brand for the confectionery business. While such an approach involves cost and risk, it is an established path for brand-oriented businesses – the hurdles and pitfalls are well known and thus more easily avoided.
The value of accurate data
It is often the case, of course, that IP due diligence doesn’t quite take place at the level required for such advance planning or at least not to the level that IP heads would like. The challenge then is in playing catch-up; in particular, to make sure that the ownership of IP rights is updated to the necessary timeframes.
If the vendor has followed best practice – either as a matter of ongoing routine or to prepare for an asset sale – then this inevitably makes the recordal process easier to execute. IP rights are more likely to be accurate, in force and have a sensible ownership structure with up-to-date ownership details recorded.
However, rights are not alway kept up to date in this way, putting them at risk in terms of validity and enforceability. If this is the case, it may result in more complicated requirements for the post-completion recordals (as well as potentially affecting the merger or sale process itself ). The workload and timescales are also more demanding where a business has been acquired at short notice (eg, as a result of a hostile takeover).
How to organise IP recordals
Updating IP ownership is rarely a simple procedure. Each jurisdiction has its own quirks, requirements and fees, whether in terms of the documents that need to be supplied or the timeframes in which companies need to act. Translation requirements may also need to be considered.
The most cost-effective and efficient approach to title updates is to do all of it in one hit. However, depending on the jurisdictions and rights in question, it is possible to phase the process of updating records post-merger or acquisition. As a general rule, companies should seek – at the very least – to ensure that their records have been verified and updated by the date by which the next renewal is due.
For trademarks where renewals are generally payable every 10 years, this can give rights holders a good window in which to plan their activity. For instance, they can decide to update their core rights promptly or prioritise those registered in key jurisdictions, but then to wait for the next renewal deadlines for lesser rights. They can then decide whether they even wish to maintain a right and, if so, update it at that time. For patent rights, time constraints are generally more pressing given that most renewals are payable annually. It’s also important not to overlook updates to design rights and any other registered, non-registered or recorded forms of IP, e.g. domain names, copyright assignments etc.
Always keep in mind that if you do not record the changes straightaway, obtaining signatures from the seller will become more difficult as time passes. If the seller is liquidated or dissolved, it can become impossible.
One way to avoid future problems here is to ask the seller to sign the documents on or as soon as possible after completion; although note that, in some countries, the documents become void or invalid with time so that does not always solve the problem. It is also worth noting that until the ownership is updated, it is not possible to enforce rights in most countries or situations. Buyers may also be unable to claim damages for any acts committed before the ownership change has been recorded on the relevant register.
Finally, companies are advised to look into time schedules in advance of formulating their updating strategy. Some jurisdictions have a six-to-eight month timeframe in which records need to be updated and companies that do not adhere to this will need to pay a local fine. Here, quick and easy access to the named signatory will also be crucial.
Prepare to succeed
It saves time and money over the longer term if a strategy is in place to manage all of this in advance of an acquisition or merger. IP lawyers and trademark attorneys are not always included in discussions from the word go. However, the earlier they are included and can be involved in the planning, risk assessment and risk mitigation, the better the results will be. Putting in place an executable plan which actively addresses the IP issues around the newly merged business will also make the whole process more straightforward.
For general advice on managing the safe transfer of an IP portfolio following M&A, please read our article 'IP in M&A: 5 steps to manage the recordal process' or download our IP in M&A white paper. For specific guidance on patent recordals, see 'More than an address change: Managing patent recordals'.
If you have any questions or would like any specific advice on the topics covered in this article, please speak to your Novagraaf attorney or contact us below.