Trademarks and brands: key considerations for M&A transactions
Trademarks and brands can be incredibly valuable. They help customers and clients distinguish goods or services of one company from another’s, so they can be critical assets in company and business acquisitions and disposals.
A brand will not necessarily be crucial in every transaction (and some acquisitions may involve plans to promptly re-brand post-completion), but, where it is, there are some key considerations to bear in mind.
Please note, for the purpose of this article, we have not distinguished between share/asset sales.
When deciding to purchase or sell a business, it is important to investigate and understand the assets owned by that business, including its brand.
The importance of effective due diligence cannot be underestimated. At a minimum, brand due diligence should cover:
- identifying the brand assets to be transferred;
- verifying ownership and title; and
- recognising any red flags.
Brand assets to consider include:
- registered trademarks;
- unregistered logos or brands;
- domain names;
- social media accounts;
- advertising materials; and
- brand content (eg, website content).
Companies usually have information on the registered trademarks that they own, but it is often difficult to accurately determine which other (unregistered) brand assets exist. Sellers can be reluctant to spend time and/or money identifying the brand assets they may own. It is therefore important to establish which brands are material/important to the target business, and which brands feed the buyer’s motivation to purchase said target company (ie, is a fundamental brand unregistered, or is there any key imagery?) and focus on identifying the rights associated with those brands.
Verifying ownership is crucial. Issues can arise even when acquiring a major brand. For example, in relation to the sale of Rolls-Royce in the 1990s, only after the deal closed was it discovered that the trademarks were not owned by the seller, and therefore, had not been transferred as part of the deal.
One should complete the following actions:
- registered trademarks – undertake searches of the relevant IP office/trademark office registers. A significant number of registered trademarks and/or territories may justify engaging specialists to run such searches;
- domain names – while there are online registries, the details of the registrant are often redacted for privacy purposes. You should therefore request evidence of ownership (eg, screenshots/invoices) from the seller; and
- unregistered rights – once the material/important brands are identified, you will need to trace and review ownership of the underlying rights. This involves understanding who created the asset; it may have been the seller or an employee (so likely owned by the seller) or created by a contractor or consultant. Any associated documents or assignments should also be reviewed.
The terms of any existing licences allowing the business to use third-party brand/trademarks should be closely reviewed.
The most common red flags for brand assets are:
- where the brand or trademark is the subject of threatened or ongoing litigation or registry proceedings; and
- where the seller or target neither owns the rights, nor has a licence to use them.
In addition, you should consider whether the seller wishes to use the brand in respect of any of its retained businesses and, if so, then a licensing or co-existence agreement will need to implemented to regulate this use and avoid disputes and/or customer confusion in the future.
Warranties and indemnities
As with other assets, the parties can look to apportion risk through warranties and indemnities.
Often, several warranty protections are sought:
- that the schedule of registered rights is complete and accurate (again, sellers are typically reluctant to list all unregistered rights);
- confirmation the seller or target owns the brand assets;
- that renewal and maintenance fees for registered rights have been paid and there have been no challenges, oppositions or attacks;
- establishing the brand does not infringe any third-party intellectual property; and
- that no third party is infringing the brand.
While some warranties may be qualified by the seller's awareness and information fairly declared in the disclosure letter, they can still offer meaningful protection. They can also lead to the divulgence of additional relevant information.
Areas of particular concern, such as if due diligence reveals a dispute, may justify additional indemnity protection.
Pre-completion tidying up
If the due diligence process identifies irregularities in IP ownership (eg, the trademark is owned by the wrong company or by an individual, or key images and/or logos were created by a contractor), the complications should be corrected prior to completion by way of assignment or transfer agreements and/or updating ownership details on registers. Likewise, if critical intellectual property is used under a licence, the licensor should seek any necessary consents to transfer the licence or to avoid termination for change of control pre-completion.
If required, these should be included in the sale agreement as pre-completion deliverables.
Drafting the agreement
When drafting the agreement, consider which document to put the operative wording that transfers the brand, particularly where there are registered trademarks. Registries may require disclosure of the assignment document, so it is often best practice to include a separate assignment of registered trademarks to avoid having to disclose the whole share purchase agreement/asset purchase agreement. Where a separate assignment is used, take care to avoid a duplicative assignment. Also ensure the assignment includes both the goodwill attached to the brand, and the right to sue for past infringements.
Recording the assignment
There may be consequences for failing to register the trademark assignment. For example, in the United Kingdom, if an assignment is not recorded within six months, then:
- the buyer is not entitled to damages or an account of profits in the event of an infringement; and
- the assignment is ineffective against a third party acquiring an interest in the intellectual property in good faith (eg, if the seller seeks to license it).
Similar consequences apply in Singapore – in fact, there is no six-month grace period.
However, in other territories, although there may not be a time limit and/or cost consequences for failing to register the assignment, any change of owner must be registered for the trademark to be enforceable against third parties. For example, in China, the buyer will only own the exclusive trademark right from the date of publication of the transfer, while n France, the transfer will only have effect against others if entered in the National Register of Marks. In Canada, it is the owner of the registered trademark that is recognised as having the exclusive right to use it.
It is, therefore, important to register the assignment as soon possible and certainly before taking steps to enforce the mark.
We recommend considering this early, and engaging specialists when drafting the assignment. Often, particular territories also impose certain requirements.
The buyer should also seek a further assurance clause placing assistance obligations on the seller. The extent of this clause can prove contentious and several points should be considered:
- whether the seller is obliged to procure the assistance of third parties and at whose cost;
- the extent of assistance (ie, whether this is solely for recordal, or if it extends further, to assistance with proving use in litigation, for example); and
- whether a power of attorney is required (though this is often resisted by the seller).
Other transfer formalities
You should also consider practical transfer formalities, including the following:
- transferring the domain name at the registrar;
- transferring email addresses (are automatic redirects required?);
- transferring social media accounts (and providing access details); and
- whether there are any key brand or advertising documents that should be handed over.
Using the brand within your group
Depending on the corporate structure, the buying entity or target may not be the only entity within the acquiring group that will need to use the brand going forward. If so, you need to consider your intra-group licensing arrangements.
The transaction may also be the perfect opportunity to review the group’s registered brand portfolio generally and consider whether it would benefit from any streamlining or extension.
This is an insight article whose content has not been commissioned or written by the IAM editorial team, but which has been proofed and edited to run in accordance with the IAM style guide.
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