Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Alejandro Castro Angulo discussed The Art of Deal Making: Using External Expertise Effectively as part of the IP chapter.
What is your best practice approach to IP due diligence as part of the deal making process? E.g. Schedule of IP and establishment of transferable ownership rights?
An essential element before starting an IP audit is entering into a confidentiality agreement that protects the interests of the parties by revealing sensitive information in the negotiation process. In this contract, both the receiving and the discloser party will try to define the elements involved under the concept of confidentiality, the protection mechanisms such as the penalties for breach of obligations, the possibility of applying to court to claim compensation for damages, and determine the term of the contract.
Likewise, if part of this confidential information is considered secret it will be governed by our Andean Community Intellectual Property Regime and National Law and taken as an industrial secret. In this case, in addition to the previously mentioned protection mechanisms, the holder shall have the right to file a complaint with the Commission for Repression of Unfair Competition.
On the other hand, the most relevant IP rights are distinctive signs, patents, copyrights, and industrial secrets. As part of the audit we identify the number of rights involved, the ownership, the validity, the existence of licenses; as well as the existence of contentious procedures and administrative burdens associated with each right.
In the case of distinctive signs and patents, a fundamental step is to verify the resolution granting exclusive rights. In particular, we focus on the description of the classes and the claims granted for distinctive signs and patents, respectively. In this way, we validate whether these rights are in fact in accordance with the terms and objectives of the negotiation.
Copyright and industrial secrets deserve particular attention. For the former, the identification of ownership and paternity will depend to a large extent on the assignment contracts and the physical or digital supports, including blockchain certificates, that allow verifying the creation date; as well as the registration certificates registered with the competent authority, which is optional in our jurisdiction.
Which methods of valuing patents, trademarks or trade secrets are most common in an M&A deal in your jurisdiction (e.g. cost, value or market approaches)? Any examples?
Of the 3 valuation methods, the most reliable is the one focused on the market. However, its execution basically depends on access to information or reliable data of similar transactions. Thus, identifying transactions on patents, trademarks or software that have characteristics that are very similar to the asset to be valued is complex in Peru because it is a jurisdiction where the number of transactions on intangible assets is minimal, and the majority of legal entities are closely held corporations.
Notwithstanding this, the most used valuation method in mergers and acquisitions in Peru is the discounted cashflow approach. In particular, to determine the income attributable to the brand, the royalty saving method is usually applied, for which it will have to take into consideration royalties from other similar brands under the same category of the relevant industry, using a national or international database.
However, in the case of patents and copyrights (software) it will be important to consider the term of validity of IP Rights:
- Patents: 10 years for utility models and 20 years for patents of invention. In both, the term of protection is counted from the filing date of the application.
- Copyright: life of the author plus 70 years after his/her death.
Because the licensing of patents and copyrights (software) is less common in the Peruvian market, it will be important to take into consideration other approaches such as the Monte Carlo method that allows generating a series of possible expected values in different probable scenarios, the Real Option Method or the Binomial tree model.
What warranties and indemnities do you recommend putting in place to ensure IP value is fully preserved?
In Peru, the value of Intellectual Property can be ensured by 2 means: administrative actions and legal actions to request compensation.
Thus, Intellectual Property in Peru is regulated at an administrative level making it possible to request precautionary measures, initiate actions for infringement and request corrective measures in the market. These administrative measures have the function of guaranteeing IP Rights. It is important to point out that the administrative authority does not have the power to order compensation. Therefore, it will be necessary to apply to the Judiciary once a consensual resolution is obtained at the administrative authority. Regarding this last aspect, it is important to point out that in order to calculate the compensation, whether under a contractual or extra contractual liability regime, it will be important to determine the consequential damage (economic losses on assets), loss of earnings (profits not received due to the damage) and moral damage (possible also for legal persons).
We emphasize that in the FTA concluded with the United States, Peru has specifically committed when it comes to copyright infringements, related rights and trademark counterfeiting. The infringer pays the right holder the profits obtained attributable to the infringement and when determining the amount of compensation, judicial authorities shall consider, inter alia, the value of the infringed-on good or service, according to the suggested retail price or other legitimate measure of value submitted by the right holder.
One of the outstanding points by the Peruvian State is to establish or maintain pre-established damages, which shall be available on the election of the right holder as an alternative to actual damages with respect to infringement concerning copyright or related rights and trademark counterfeiting.
Top Tips – To Accurately Establish IP Ownership Process
• It is important to consider the Andean Community market and analyse the IP Rights status in Colombia, Ecuador, and Bolivia. This will provide a deeper insight when facing any regional negotiations and the chance to identify any roadblocks that could impact the operation.
• For sales/acquisitions of Intellectual Property Assets among companies of the same business group, transfer pricing should be spotted right away. Peruvian Law is aligned with the OECD recommendations, making the complying process reasonable and predictable for companies, ensuring the value of the IP asset within the operation.
• It is relevant to analyse if there is any co-ownership. This fact could delay negotiations because to transfer an IP asset as a unit all co-owners must agree on it. Another related issue is that each owner is entitled to an “ideal quota” and can assign it to external parties without consent of the other co-owners, making it harder to negotiate.