The difficult economic circumstances caused by COVID-19 have increased the likelihood of businesses entering insolvency proceedings. While this might give rise to opportunities for some to purchase businesses and assets at reduced costs, those considering buying intellectual property from a distressed business also need to be aware of the risks.
Pre-insolvency, buyers may have to pay more than they might otherwise have done in the case of an insolvency sale. However, businesses on the verge of distress might welcome a direct approach from a buyer and there may be advantages for both parties in acquiring the business or certain assets before the business is further damaged and goes into insolvency.
Purchasers should be aware of the risks of buying IP rights separately from the business pre-insolvency for a price that is lower than their true value. If the business later enters administration or is liquidated, one of the duties of the insolvency practitioner is to identify whether there has been a "transaction at undervalue". If there has, it has the right to apply to the court for such transactions to be reversed. If the purchaser was a creditor, this could also constitute a preference.
There have been some examples of a buyer purchasing valuable IP from a distressed business and then licensing it back in order for that business to continue trading. This is what happened with fashion brand Jaeger in 2017 following a number of failed attempts to sell the struggling business. The company's IP and debt were eventually sold to Edinburgh Woollen Mill (EWM) pre-insolvency, and EWM granted the company a licence back to use the Jaeger brand while it assessed its financial position and worked with directors to develop plans for the company. Such a strategy is not without risk. Jaeger fell into administration shortly afterwards and it is reported that its former suppliers considered taking legal action against the company for selling its trade marks prior to administration.
Purchasing a business or certain assets from a seller in formal insolvency proceedings is likely to be economically beneficial. However, this is offset by increased risks for the purchaser arising from a tight timetable and the absence of the usual representations and warranties in the sale agreement.
The purchaser will be at the mercy of the insolvency practitioner. In most instances, the insolvency practitioner will want to sell the business and assets of the company as a going concern because this is likely to generate a greater realisation than the sale of the assets on a piecemeal basis.
However, in some instances, a purchaser will be able to cherry pick the assets that it wants. For instance, if the purchaser just wants the IP in the business, it may be able to ring fence that and take it separately from the business. This is common in the retail and fashion sector where brands are extremely valuable and the trade mark portfolio is often sold separately. For example, in August 2019, Boohoo.com purchased the online business and IP of Karen Millen and Coast via a pre-pack administration. This has been followed very recently, again by Boohoo.com, which bought the online business and brands of Oasis and Warehouse after they went into administration following the COVID-19 outbreak.
A buyer will need to be satisfied that the company owns IP that is material to the business or that there are adequate licences-in of IP in place.
Identifying the company's registered IP should be relatively straightforward. The purchaser should be able to check with the company's attorneys (if applicable) and on IP registries and databases. Registered IP includes trade marks, patents and registered designs.
It will be more difficult to identify the company's unregistered IP. Such rights are difficult to audit and cannot be identified by any register. Unregistered IP includes copyright, unregistered design rights, trade secrets, confidential know-how and inventions, and goodwill.
There is an added layer of complexity where the IP owned by the insolvent company is subject to a licence-out. There are no specific provisions in English law which deal with IP licences in insolvency proceedings. Generally, an assignee of the underlying IP will be bound by any licence (whether non-exclusive, sole or exclusive) unless the assignee is a bona fide purchaser for value without notice of the licensee's interest. If the licence is registered at the relevant IP registry, this will constitute relevant notice and prevent the purchaser from taking the IP free of the licensee's interest. If it is not possible to register the licence at the relevant IP Registry, as is the case with licences over unregistered IP, the licensee should seek to put the purchaser (and insolvency practitioner) on express notice so that the purchaser takes the IP subject to the licence.
In the absence of any contractual provisions to the contrary, the licence-out will not automatically terminate on the insolvency of the licensor. There will be a number of considerations for the purchaser, including:
The company may also have rights by way of a licence-in from a third party licensor. The purchaser should consider whether the licence is critical to the company's ability to operate and, if so, whether the benefit of the licence can be assigned and whether the necessary consent will be granted by the licensor. This will be important where a company's entire business model is predicated on the continued right to use such licensed IP.
The purchaser's due diligence will be of critical importance to it, in order to address important questions and determine whether or not all ownership and licence rights are in place and are freely alienable. This is particularly so given the lack of usual representations and warranties – see below. However, in practice, comprehensive due diligence might be difficult given the speed with which deals in this space are usually expected to be completed.
While due diligence of registered IP can be quick and easy, the situation is more complex with unregistered IP and where there is a wide territorial scope that will involve instructing local counsel in multiple jurisdictions. The purchaser should carry out the searches possible in the timeframe and full copies of any licences-in and licences-out should be sought from the insolvency practitioner as part of the due diligence. Insolvency practitioners have a habit of providing extracts of such agreements but this should be resisted.
In practice, the price and the importance of IP will determine the level of due diligence required by the buyer and the risk it might be willing to take.
English law does not specifically provide for enhanced protection of IP rights in insolvency situations. IP rights are dealt with as assets of the insolvent company in accordance with general insolvency rules.
When purchasing a business or certain assets from a company in distress, there will typically be an absence of any of the usual representations or warranties as to title, quality, value, validity, infringement and any implied statutory warranties. The purchaser is at the mercy of the insolvency practitioner and the acquisition will always contain an element of risk. This in turn will typically lower the purchase price.
One way of managing the buyer's risk is to ensure that any sale agreement includes a broad further assurance obligation on the part of the insolvency practitioner and the company. This might include obligations on the insolvency practitioner to facilitate the transfer of any licence agreements, whether this is by novation or assignment. In practice whether insolvency practitioners agree to enter into further assurances provisions will depend on the negotiating strength of the buyer. The insolvency practitioner will want to wrap up the sale, wind-up the company and move on quickly. Any ongoing, indefinite obligations are likely to be resisted.
An investor in a distressed company that is rich in IP will need to consider the options to best protect its investment. If the company enters insolvency proceedings before the value in the IP has properly been commercialised, this could weaken or put the entire investment at risk. The investor might consider buying the IP or, alternatively, it could seek to take security over the IP that would trump any administration appointment by the company (see Taking security over IP).
In the UK, all assets (including IP) that are left behind in a dissolved company are considered bona vacantia (ownerless goods). They vest in the Crown and are governed by the Companies Act 2006.
If a buyer wishes to purchases IP in bona vacantia, there are two options. The buyer can petition the Crown through the Bona Vacantia Department. The Crown has no obligation to sell the asset, but if it does decide to then it has a duty to get the best market value for that asset. As a minimum, the Crown will require a fee to cover its own administrative costs. As part of the process, the buyer may be required to provide certain evidence, such as details of the IP and evidence that the dissolved company was the owner, as well as an explanation of its interest in the IP and its future intentions.
The alternative is for the buyer to seek to restore the dissolved company to the register. This option is only available where the company was dissolved by the Registrar of Companies within the last six years. However, reversing the dissolution does not automatically entitle the buyer to the assets. A formal transfer is still required from whoever is now entitled to act on behalf of the restored company. They may refuse or demand a high price.
Discussing the application of Belgian insolvency to IP rights and licensing.
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Considering the impact of insolvency on IP licences from the perspective of licensors and licensees, including tips for mitigating risk.
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The impact of licensor and licensee insolvency.
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What to do if a company you are dealing with is subject to or at risk of an insolvency process.
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A look at the potential impact of the Corporate Insolvency and Governance Act on IP licences.
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Considerations when taking security over IP.
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