IP in M&A: Fusing two businesses

When a business merges or acquires another business, one of the next questions is: what should that newly merged business be called? Opting to ‘fuse’ the two previous brand names does offer reputational benefits, but there are also a number of IP hurdles that need to be overcome.

As we covered in ‘IP in M&A: Merging corporate brands’, when businesses merge with or acquire other businesses, the challenge for IP professionals doesn’t stop once the deal has been completed. There is also the question of how to brand the newly merged business, and its products and services.

Of the possible approaches that can be taken at this point (assimilation, business as usual, and fusion), the fusion scenario is the most troublesome from the perspective of a trademark practitioner. In essence, a new piece of (usually hybrid) IP is created, utilising existing elements of branding from different legal entities, often including and mixing words and visual identities. 

These IP elements are owned by the different legal entities which form part of the merger and may include registered trademarks, registered designs, copyright, and rights acquired through use; for example, passing-off and allied rights in common law countries, as well as rights under unfair competition law.

Hurdles to navigate: registration

The ability of the newly merged business to register the new corporate brand risks being affected by the pre-existence of the legacy trademark registrations in the name of the (old owner) vendor company. For example:

• Company A trades under corporate brand A;
• Company B trades under corporate brand B;
• Company A acquires or merges with company B;
• The newly merged company trades under new corporate brand AB;
• Company AB leaves ownership of legacy brands A and B where they are;
• Applications to register AB as a trademark are held up by prior legacy registrations of A and B in the old company names (a real-life example of this was merged company GlaxoSmithKline).

Such a scenario will present a problem in any jurisdiction where registration of the new IP is sought and where the local registration procedures include objections raised in examination on comparative grounds. In other words, an earlier right owned by a legacy company will be raised as an objection against the application to register the new fusion brand.

Consider the options

Such issues are not insurmountable, but can increase costs, cause inconvenience and, in extreme situations, affect a company’s ability to enforce its rights. A good solution can be to create a target entity which owns IP rights in the newly formed business and to which legacy rights can be assigned – this will remove the issue of conflicting ownership. 

However, significant work is involved in recording a change of ownership for a global portfolio of trademark registrations. Such changes may also create conflicting fiscal issues around the transfer of assets. This is especially the case in global corporations where tax planning and internal transfer pricing are important.

In addition, it is not always straightforward to assign unregistered rights. In common law jurisdictions, rights acquired through use of a trademark are firmly associated with the entity which actually uses that mark. Those rights cannot normally be assigned unless this is part of the transfer of the whole business. Careful thought and planning are required in order to ensure that these rights do not get lost in the wash.

Consents and licences

Another option is to retain the existing (legacy) ownerships of IP assets and use consents in order to enable the new entity to register the new fusion brand. This works in many (but not all) jurisdictions. However, it can add to the complexity of rights enforcement (eg, in opposition or infringement actions) and create risk with regard to the rights holder’s ability to demonstrate genuine use of the various trademark registrations involved.

In order to ensure that the rights arising from use of the trademarks in the business inure to the benefit of the appropriate owner, licence agreements can also be executed.

Partial mergers and conflicting rights

In some cases, a merger does not involve the complete businesses, but only parts of them. This can create a situation where a legacy corporate brand remains owned and used by one entity, while a fusion brand is created for the newly merged business. 

For example, the owner of a brand used for cleaning products might sell off its industrial cleaning products division, while choosing to retain the domestic cleaning products division. While this may be entirely logical from a commercial perspective, it will create a challenging legal situation. If there is a single trademark registration covering cleaning products, who will now own it?

In such case, some kind of consent to registration will need to be agreed in advance and the risks associated with conflicting legacy rights evaluated and mitigated. However, such situations are not permitted in all jurisdictions – the only practical solution may be single ownership and a licensing arrangement.

A real-life example of this arose in the smartphone space, when high-profile corporations Sony and Ericsson formed a joint venture, which was originally branded Sony Ericsson. While the original joint venture was formed in 2001, trademark conflicts lingered until 2011, when Sony bought out Ericsson and rebranded the business Sony Mobile. (The Ericsson business continues in the telecoms infrastructure space.)

Spin-off and business separations can create the same issues (eg, where new companies are created which also need to use the legacy brands). While this may not be a problem in practice because the resulting businesses are not competing, issues may arise in terms of trademark registrations, as registered rights may need to be divided and cross-consents executed.

The focus of the next article in our 'IP in M&A' series will be on overcoming some of the challenges presented by retaining legacy ownership structures for IP assets. In the meantime, if you have any questions or would like any specific advice on the topics covered in this article, please speak to your Novagraaf attorney or contact us below.

For advice on managing the safe transfer of an IP portfolio following M&A, please read our article 'IP in M&A: 5 steps to manage the recordal process'.