Patent or company?
Purchase of selected intellectual property rights and sale of a company/enterprise.
In transactions involving innovative assets, investors are increasingly considering moving away from the traditional model of acquiring an entire enterprise or company in favour of taking over only selected assets, in particular the patent itself, trademark, copyrights to works or know-how. Despite their intangible nature, they can lead to measurable benefits such as clientele, recognition or market advantage, the use of which, in turn, may translate into financial results.
However, the reasons for choosing a particular transaction structure may be different and are not necessarily determined by cost optimisation considerations or the prospect of achieving synergies. Each of these solutions offers a whole range of possibilities and tools, which in specific circumstances will determine the form of in which the aforementioned assets are acquired.
Acquisition of a patent or copyrights
In principle, intangible property rights are transferable (e.g. patent rights, trademark rights or copyrights to work(s)). Rights of an intangible nature may also be transferred through transformations of legal entities, i.e. mergers, divisions or acquisitions of companies.
On the other hand, rights to intangible property of a personal nature, i.e. the right to the authorship of an invention or to the integrity of a work (e.g. exercising the author’s supervision over the implementation of an architect’s design), are not transferable because they are closely related to the entitled person. Nevertheless, it is possible to regulate these issues contractually in such a way that the potential investor has an influence on limiting the scope of the author’s exercise of copyrights.
In the absence of specific regulations on rights to the intangible assets, the provisions on rights in rem, including various types of private law institutions (e.g. licensing) or Civil Code institutions (e.g. usufruct or pledge), apply accordingly.
The consequences of transferring the right to an intangible asset to a new owner are the same, regardless of whether it is acquired as an individual part of the company’s property or in a transaction involving the sale of an entire company/enterprise.
However, more and more often, especially in the era of dynamic development of e-commerce and high-tech industry, it is the selected rights to intangible assets that constitute the highest value of the company or the most attractive acquisition target. The investor does not necessarily have to be interested in the whole company or even part of it, but only in its strictly defined components, which may result from limited investment resources or the profile of the acquired company potentially deviating significantly from the potential buyer’s business model. At the same time, many innovative solutions that have radically changed the current market are not always created in the structures or laboratories of global companies, but rather in small or medium-sized enterprises, which want to commercialise their specific idea and continue to operate in another area while retaining their independence and selling only a specific work product.
- No need to conduct comprehensive legal due diligence of the company before its acquisition; this can be limited to selected components only.
- Limitation of the purchase to only those components/values which are of interest to the investor, and consequently reduction of related costs.
- Only strictly defined rights or values without human and technical resources (in particular the practical knowledge of the employees who created these resources) are acquired.
Other components/values which could potentially prove to be useful in the future are not acquired.
Acquisition of a company or enterprise (or an organised part thereof)
While the purchase of selected assets carrying a special value for the buyer may be an attractive, cheaper and simpler solution under certain circumstances, the acquisition of companies or their enterprises gives advantages in the form of: (a) ensuring the continuity of the acquired business; (b) reduction of possible legal, tax or market risks by maintaining a separate entity structure; (c) maintaining continuity of employment and know-how (by acquiring not only a specific asset but also employees, including managers); (d) acquiring a market reputation (if the acquired company has gained such a reputation before the sale); (e) reducing the costs related to integrating individual components into the structures of the acquirer.
If shares are acquired, the entire legal structure, under which the specific assets constituting the most important value of the transaction were developed, is taken over. Of course, the investor should carry out due diligence in advance, including legal, technical, financial and tax issues, as well as discount the identified risks in the sale price (such an analysis should, obviously, also take place in relation to the possible acquisition of individual assets). Nevertheless, with the acquisition of a company the buyer will agree, to the extent specified in the transaction documentation, to bear the risks relating to its history, but it will also gain the benefits generated by that company/enterprise.
The structure of the transaction will therefore be more complicated and will require greater expenditure and costs, but the investor will avoid the need to carry out possible post-closing activities related to incorporating the acquired assets into a specific entity within its structure, or other adaptation activities after their acquisition, which also require financial outlays.
It will be necessary to negotiate a number of appropriate contractual provisions for a transaction typical of the M&A market (including the regime and scope of liability for declarations and assurances made by the seller, the scope of the above-mentioned declarations and assurances, possible indemnification clauses). However, seen from a broader perspective, such a transaction, even if more expensive, may turn out to be a better solution in the context of either a possible merger of the acquired entity with the acquirer or another company from its group, or in a worst-case scenario its liquidation, but without the need to separate it from the buyer’s structures.
The acquisition of an enterprise or an organised part thereof is in principle carried out in a manner similar to the share/company purchase transaction. A significant difference may be the possibility of obtaining an exemption from liability for tax liabilities, provided that the transaction ensures that a relevant certificate of no tax arrears related to the target is obtained.
However, important technical aspects of such a transaction structure also have to be con-sidered, such as making appropriate notifications to employees (or also to trade unions, if any) about the transfer of the workplace, notifying contractors about the change of ownership of the enterprise, and thorough verification of whether all necessary decisions issued by public authorities are to be transferred to the buyer along with the enterprise or part of it, and if not, ensuring that appropriate decisions will be obtained, etc.
Also if the enterprise or part of it is acquired, the investor should be aware of certain risks regarding the past of the undertaking.
Provided that specified conditions are met, investors should additionally take into ac-count in such transactions the need to obtain permission from public administration authorities, in particular the consent of the President of the Office for Competition and Consumer Protection (whether in relation to a concentration of undertakings or as part of foreign direct investment control), lead to non-exercise of the pre-emptive/buyout right vested In The Agricultural Property Agency (if the acquired company or enterprise includes agricultural real estate), or carry out specific actions in connection with the status of a public company of the acquired entity (announcement of a tender offer for shares), etc.
- Ensuring continuity of business, employment and know-how.
- Reduction of costs related to integration of new business activities.
- Possibility of a more flexible approach after closing the transaction, limiting the risks only to the acquired structure, merging with an investor or other entity from their group, in the worst case liquidation without affecting other companies from the group.
- Higher expenses and costs at the stage of transaction execution, resulting, for example, from the need to conduct legal due diligence of the entire company/enterprise before its acquisition and from the inclusion of more extensive transaction documentation.
- Acquisition of all components, including liabilities of the company or enterprise, bearing the risk for historical events (to the extent specified in the transaction documentation).
There is no single ‘best’ model for the acquisition of intangible assets that fits every investment. The acquisition method should always be adjusted to specific business realities, and in particular to the investor's plans, both short-term and long-term.
Regardless of the above, strictly defined intangible assets of an enterprise will more and more often play a key role in making decisions on its acquisition, which is clearly shown in the reports on the M&A market not only in Poland, but also in Europe.
According to the Mergermarket report on the M&A market in the first half of 2020*, it is precisely the industries for which know-how is particularly important that have the greatest transactional activity, i.e. telecoms, media and technology, the industrial and chemical sectors and the pharmaceutical, medical and biotechnological industries .
This is particularly important for undertakings planning and carrying out a long-term expansion of their activities because the diversification of the legal tools used and their appropriate adjustment in practice leads to real savings, but above all also to an effective implementation of planned business operations.
*"The comprehensive review of mergers and acquisitons in the EMEA region: Deal Drivers EMEA HY 2020"