Maybe it says something about the current state our economy that I’ve been spending an increasing amount of time over the past 12-18 months handling M&A projects – mostly by US or Asian-based acquirers of UK or European targets, and almost exclusively in the technology sector.
Pessimists might say that this increasing merger activity is a sign of just how low corporate values have fallen in the technology sector; although an optimist might point out that the scale of this acquisition activity must be a sign of impending or active recovery of our economy as values start to increase.
Whatever its meaning, one of the more practical implications that I’ve seen is just how poor many companies still are at implementing processes for tracking and recording the ownership of their key intellectual property rights.
Even for a non-tech-based business, being able to demonstrate a clear chain of ownership of rights in core systems and intellectual property is a key part of the value to be derived from an acquisition. It’s one of the main red flag areas that a potential investor looks for about a target business as to whether there is a clear chain of title to key intangible assets such as software or other types of ICT system. The absence of clear ownership rights then becomes a risk factor and, potentially, a reason to reduce the valuation attached to the target business.
But, in a technology business, the clear ownership of rights becomes potentially much more significant and can scupper a deal if not properly documented.
This issue ought not to be a surprise. It has been a key part of the law for many years that work created by employees will generally be deemed to have vested in the employer automatically – although any well-advised business will ensure that its terms and conditions of employment reinforce this position and ensure that all IPR and other intellectual creations by its employees clearly vest unequivocally in the employer.
By contrast, work undertaken by third-party consultants or external party will generally be legally owned – at least initially – by that third party rather than by the company itself. So it’s even more important to ensure that appropriate assignments of ownership are put in place with all consultants and external third parties engaged to work on a company’s behalf. It is particularly this area that often gets overlooked, which can have long-term implications on a company’s marketability and potential value.
It is true that, in a very recent case in the UK High Court, a company was successfully able to argue that it ought to be deemed to be the owner of commissioned software even where the contract with the software developer had not specified that to be the case. However, that occurred in a fairly specific set of circumstances, and it is unlikely to hold out much comfort to most businesses who use third parties to create software or other commissioned works on their behalf.
It continues to be essential to ensure that ownership and IPR title issues are clearly addressed up-front when bringing in an external third party rather than risk the absence of clear ownership being raised by a potential investor when it’s too late to do anything meaningful about it.