Getting ready to float or sell?

When looking to float or sell a business, potential investors and purchasers should conduct due diligence.

Due diligence involves, in part, looking at the financial and all other records which relate to the assets and liabilities of the vendor.

Intellectual property is often an essential part of the transaction and if it is not in order this can lead to expensive problems.

For example, does the business own the intellectual property subsisting in its software or does somebody else own those rights. For licenced products is the licence transferable to a new owner?

To look at these issues a more closely, we need to examine the law.

Copyright is the most common form of intellectual property right and arises automatically when a work is created. Copyright, for example in computer programs and other literary works, is governed by the Copyright Act 1968 (Cth) and vests in the author of the copyright work.

The author of software source code is the copyright owner subject to two important exceptions:

• An employer owns the copyright in relation to computer programs written by an employee in the course of their employment; and
• Copyright may be assigned by the copyright owner to another party by notice in writing signed by or on behalf of the copyright owner.

Copyright ownership gives rise to the exclusive right to do all or any of the following acts in relation to the computer program:

• Reproduce;
• Publish;
• Perform;
• Broadcast;
• Transmit via a diffusion service; and
• Make an adaptation.

When conducting due diligence inquiries in relation to computer programs, the ownership and right to exploit the asset depends on issues such as:

• What is the computer program? When was it written? Who wrote it?
• The author(s):
  • Were they an employee when they wrote the computer program? Is there a written agreement?
  • Were they an independent contractor? Is there a written agreement signed by the contractor assigning the necessary rights? If not there has been no assignment! Is there a sub-contractor involved. Has the IP been assigned from that sub-contractor?
  • If the work has been modified, who created the modifications and how extensive was the modification? A work capable of separate copyright protection can be created if the modifications are extensive.
• Dealings in the Software
  • All the licenses to customers and other dealing such as distribution agreements need to be reviewed to ensure that no rights have been inadvertently assigned to another party.
• When the copyright work is used under licence:
  • Is the licence transferable?
  • Is the licence perpetual or for a fixed period?
  • Does the licence limit use to particular equipment and / or a particular site?
• Acquired Software
  • If the software was acquired from another business - were due diligence investigations conducted to ensure that all the necessary rights were obtained. If not, you cannot sell rights which you do not have.
  • Was your acquisition agreement sufficient to acquire the identified assets?

There are other forms of intellectual property rights such as trade marks, patents, designs and circuit layouts that should also be investigated. Similar enquiries should be made in relation to the ownership of those assets.

As Intangible assets are easily transferable and mistakes can sometimes be made appropriate warranties and indemnities should be sought when purchasing such assets, especially unregistered rights such as copyright.

If a warranty, for example in relation to intellectual property ownership, is breached, you have the right to claim compensation for all loss which was foreseeable. If loss or damage is suffered which is indemnified then you have the right to claim compensation for all loss or damage whether it was foreseeable or not..

Remember warranties and indemnities only have value if the parties offering the warranty and indemnity are able to pay any claim which may be brought. Wherever possible, such warranties and or indemnities should be supported by insurance or personal guarantees to improve your chances of recovering loss or damage suffered as a result of the transaction.

Intellectual property can constitute a large component of a business' asset portfolio and purchasers need to ensure that their investment is protected by the necessary written records, warranties and indemnities to avoid costly litigation either pursuing the vendor for recovery of the purchase price and / or as a defendant in an intellectual property infringement claim commenced against the purchaser by the true intellectual property owner.