In the intricate landscape of mergers and acquisitions (M&A) where intellectual property (IP) is involved, post-closing strategies warrant careful consideration. The acquiring company must establish a robust, intra-corporate licensing structure to effectively utilize the newly acquired IP assets. Yet, this strategic integration can pose significant risks, primarily concerning tax liabilities and the enforceability of IP rights.
One notable consideration is the potential for increased tax risks, especially with cross-border licenses. Tax authorities worldwide have started to scrutinize these transactions, asserting that licensing structures might effectively “transfer” IP rights to foreign affiliates, triggering exit taxes. The regulatory focus often hinges on distinguishing between the legal owner of the IP and the economic owner, where the latter is determined based on Development, Enhancement, Maintenance, Protection, and Exploitation (DEMPE) criteria. This nuanced interpretation can influence the tax implications for the acquiring company.
Parallel to tax concerns, there are substantial IP risks associated with post-closing licensing structures. The enforcement of IP rights is contingent upon the licensing framework adopted post-acquisition. For instance, in patent-related transactions, affiliates must be granted exclusive patent rights to maintain standing in enforcement actions. This strategy ensures the ability to join lawsuits against infringers, a critical factor in recovering lost profits or seeking injunctions.
Moreover, when the acquired IP includes trade secrets, the owning company must ensure adequate protection and enforcement mechanisms. Only the owner of a trade secret holds the right to bring forward a civil action under specific legal frameworks like the Defend Trade Secrets Act, though common law actions for misappropriation remain a viable avenue for entities in lawful possession of the secrets. Thus, defining ownership and imposition of protective measures on licensees becomes crucial.
Trademarks and copyrights demand a similar level of diligent structuring. The registered owner, or in some cases, the exclusive licensee, holds standing to enforce these rights in various jurisdictions, underscoring the necessity of precise delineation of rights among affiliates.
Given these complexities, it is vital for companies engaging in M&A deals to conduct thorough pre-closing assessments of both tax and IP risks. Addressing these challenges proactively can reduce the transactional costs and legal exposures, ultimately safeguarding the strategic advantages intended from the acquisitions. For a deeper exploration of these issues, the detailed arguments and insights are available in the full article by James R. Ferguson of Mayer Brown.