At Metis Partners, we like to describe intellectual property holding companies (“IPCos”) to our clients as an “insurance policy”. It’s never too early to think about the strategic management of your IP and to “ring-fence” or separate these assets from the potential trading risks faced by your business.
An IPCo is a form of special purpose vehicle whose function is purely to hold and manage a business group’s IP portfolio. An IPCo does not directly use the IP, instead it licenses the IP rights to affiliated companies or, when relevant, to third parties.
A business group is typically recognised as being a group of legally distinct companies under common managerial control. It is easy to forget that the members of these groups, subsidiaries and parent companies, are separate legal entities in their own right, despite often sharing key management staff. This may not pose a problem in day-to-day business activities, however the presence of multiple entities could create future operational issues in relation to inter-company creation and use of IP assets. It is vital that IP assets are properly identified and shared via formally executed licensing agreements between different group companies to adequately protect the interests of the group and prevent any IP “leakage”.
Why is this necessary?
When critical IP, such as patents, trade secrets, or corporate and product brands, is being used across a number of separate legal entities within a group, there is the potential for “cross-contamination”. Subsidiaries may accrue rights to goodwill and/or rights to improvements of the core IP, or create new IP on the back of the originally shared IP, and could even file patents and trade marks on behalf of their parent companies. The absence of a licence that addresses these issues and sets out the terms of both the usage and accrual of specific IP rights, will result in confusion as to who actually owns the IP.
Companies looking either to exit the group or secure a loan on the back of critical IP assets, can find that they don’t actually own the IP assets on which the transaction is relying upon, often on the cusp of deal completion. We have observed these situations repeatedly during our due diligence process, where patents are registered in the names of multiple group entities, but are being offered as security for the transaction of one entity; or critical trade secrets and organisational knowledge are created by one entity but underpin a core product or service of another separate entity. The confusion over IP in a group is often the deal-breaker in a transaction, or at best results in either price-chipping or a notable delay in deal completion.
The absence of adequate licensing of IP rights between affiliated companies, creates not only an obvious risk to IP ownership, but an assumption that your business group is neither “IP savvy” or well-managed. Where the group structure is complex, producing a variety of inter-group licences might prove cumbersome. It may be more effective to set up an IPCo, which can offer the following advantages:
(1) Kick-start your Inventory
Setting up an IPCo necessitates performing an IP Audit to ensure all relevant IP is identified and captured. This initial step is incredibly useful – you will get a clear understanding of all IP you hold, and it can highlight any operational or managerial inefficiencies in current IP creation, protection and management policies.
(2) Centralise your IP Rights
Establishing an IPCo leaves little room for uncertainty regarding IP ownership – it creates one central entity that holds the IP, automatically accrues the IP rights generated by any affiliated companies, and which takes responsibility for IP filings, IP fundraising and IP securitisation.
(3) Ring-fence your IP
Creating an IPCo can ring-fence your IP assets and protect them from the trading risks of the group companies. If one of your trading businesses were to get into financial difficulty, be subject to a legal dispute or become insolvent, an insolvency practitioner would sell the IP assets in order to realize a better return for creditors. Holding your IP in a separate legal entity can shield it from the ramifications of a trading company’s insolvency, ensuring it is ring-fenced and protected.
(4) Gain Balance Sheet Recognition for IP at Market Value
An IPCo can help your company recognise its IP assets on the balance sheet at market value. Many internally generated IP assets are never reflected on the balance sheet, however, under a sale and leaseback arrangement, the value of the IP assets would be reflected on the IPCo’s balance sheet, as well as that of the trading company which initially created or registered the IP. Transparency around the revenue-generating assets of your business can help attract investors or secure additional funding.
(5) Create Efficient Tax Structures
An IPCo can create more efficient tax structures for the trading company. IP-related profits are accrued by the IPCo, which are taxed in its country of incorporation. Additionally, the costs associated with the royalty fees paid to the IPCo can be deducted from a trading company’s income tax base as operating costs. This can result in a tax structure that properly recognises and accounts for the presence of critical IP within a business.
We have helped a multitude of clients restructure their business groups and strengthen the position of the underlying IP, recognizing its true market value. If you think your business group could benefit from exploring an IPCo structure, please get in touch.