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Published : January 15, 2011 | Author : shriyaj
Category : Company Law | Total Views : 7274 | Rating :

  
shriyaj
SHRIYA JAIN STUDENT, INSTITUTE OF LAW, NIRMA UNIVERSITY, AHMEDABAD
 

Mergers & Acquisitions & the IPR Issues Involved

Company is a group of people who get together to do a business and earn profits under a common name. Company is a separate legal entity and independent of the identity of its promoters and members. A company is governed by the Companies Act of 1956 and its acts are limited by the Memorandum of Association of the company. A company, throughout its journey passes through many phases like Mergers, Amalgamation, Acquisition, Take over etc. A company may acquire another company for its expansion.

There are 4 basic forms of acquiring another firm:
1. Merger or consolidation
2. Acquiring stocks
3. Acquiring assets
4. Acquiring firms in a Total Cash Deal.[1]

Merger

Merger is the one of the most common ways of acquiring another firm. A merger is the absorption of one company by another company, including all its assets and liability.[2] The firm which acquires retains its name and the firm which is acquired is no more a separate legal entity and is a part of the former firm. A merger takes place when the shareholders of both the firms agree to merge one with the other and to take the share of the surviving company in consideration of their shareholding in the merging company.

Need for Merger
There may be a number of reasons for a company to opt for merger, for example to access market, resources, finance, increase of the shareholders belt, productivity etc.

However, it is to be kept in mind that although mergers are generally beneficial to the shareholders, some of the mergers may not be so, i.e. they may not add to the earnings per share of the merged company. This may happen when the mergers are undertaken to expand the capitalization and customer base of the company as in the case of merger of Bank of Punjab with Centurion Bank.[3] However, by merging with major competitors, a company can be in a position to dominate the market they compete in, giving them a free hand with regard to pricing and buyer incentives[4].

Another type of popular merger, brings together two companies that make different, but complementary products. This may also involve purchasing a company which controls as asset a company utilizes somewhere in its supply chain.

Companies may also undertake a merger to combine a very profitable company with a less profitable/loss making company, in order to use the losses of the loss making company as a tax write off to offset their profits, while expanding the corporation as a whole.[5] For example the merger of Skipton Building Society with loss making Chesham. Skipton, which is Britain’s fourth largest building society, is regarded as one of the stronger building societies by the Financial Services Authority. The announcement comes as Skipton announced pre-tax profit for 2009 grew to £63.5 million, against £22.5 million in 2008.[6]

Acquisition

While merger is absorption of another firm, acquisition is the purchase of another firm. This means, a one firm purchases the other firm and a sale deed is executed. In acquisition only some or all of the assets and liabilities of other firm is purchased or assumed. It deals with the purchase of shares of another company.

Advantages of Mergers over Acquisitions
A company to acquire another company can go for various modes as discussed above. However there are various advantages of Mergers over Acquisitions, which will be discussed here:
1. A merger does not require cash.
2. A merger may be accomplished tax-free for both parties.
3. A merger allows the target company to realize the appreciation potential of the mergers entity.
4. A merger allows the shareholders of smaller entities to own a smaller piece of a larger pie, increasing their overall net worth.
5. A merger of a privately held company allows the target company shareholders to receive a public company’s stock.[7]

Kinds of Mergers
Mergers can be grouped into 3 categories depending upon the nature and characteristics of the merging companies.

1. Horizontal or Annexing Mergers
This denotes a merger of companies engaged in the same line of business, i.e., companies manufacturing, producing, rendering or engaged in same kind of products or services. For instance, companies engaged in similar line of business, merger together to consolidate the market share, and to ward off competition.

The merger between Exxon and Mobile allowed both the companies a larger share of the global oil and gas market. The merger of TOMCO with Hindustan Lever Limited leveraged TOMCO’s distribution network in favor of HLL.[8] Similarly, Kelvinator merged with the Electolux, and emerged as a market leader in washing machines and refrigerators.[9]


2. Vertical or Streaming
This denotes a merger of companies engaged in different stages of production in an industry, being complementary to each other. The merger could be either up-stream when the distributing company merges with a manufacturing company or down-stream when a manufacturer mergers with a distributor. The merger of Reliance Petrochemicals Ltd with Reliance Industries Ltd, a big ticket merger in India’s corporate history, is an example of a down-stream merger where a manufacturer merged with a supplier. Vertical mergers are often employed a way to gain a competitive advantage within the market place.

3. Diagonal or Conglomerate
In a diagonal merger there is a merger of companies engaged in different mill falls under this category. This type of merger is expected to bring about stability of income and profits and adverse fluctuations arising out of trade cycles. Conglomerates are usually used as a way to smooth out wide fluctuations in earnings and provide more consistency in long term growth. Typically, companies in mature industries with poor prospects for growth will seek to diversify their business through mergers and acquisitions. For instance, General Electric (GE) had diversified its business through mergers and acquisitions, allowing GE to get into a number of business activities from manufacturing jet engines to power generation, financial services to plastics, and medical imaging to news and information.[10]
These are the various ways in which mergers between companies can take place depending upon its nature and course of business.

Benefits of Merger for an Acquiring Firm[11]
When merger of 2 firms take place there are various benefit which they gain. Some of them will be discussed here:

1. Taxation Advantages
Mergers take place to have benefit of tax laws and company having accumulated losses may merge with profit earning company that will shield the income from taxation. Section 72A of the Income Tax Act provides this incentive.

When RIL absorbed erstwhile Reliance Petroleum to create a petrochemical and refining giant in the private sector, the motive was to use the extensive tax advantage available at that time to RPL.

2. An opportunity to grow faster with readymade market share
Cement and most capital intensive business often adopt this route. When the time required to set up a new plant is very large and if the company wants to exploit the current large demand for products, then this mode is the most beneficial.

3. To eliminate a competitor by buying it out
Mahindra & Mahindra recently bought Punjab Tractors. M&M had good presence in the tractor segment in the south and west, whereas Punjab Tractors were dominant in the north. By acquiring PTL, M&M not only eliminated competition but also got readymade market share.

4. To stop the company’s own takeover by a third party.
This is a ploy adopted by target companies who do not want to get merged with that group which is planning to acquire it. By doing this the target companies deter acquiring companies.

INTELLECTUAL PROPERTY ISSUES
In merger all the assets and liabilities of the acquired company gets transferred to the acquiring company (tangible as well as intangible). Where it is easy to value the assets it becomes equally difficult to value the intangible assets like copyright, trademark, patent and designs vest in the transferee company.

Valuation of Intellectual Property Rights.
As such there is no standard formula for the valuation of intellectual trademark, patent and copyright. However, various factors have to be taken into consideration before valuation of such property:

1. extent of statutory protection that the IPR enjoy;
2. Value of each IPR (when viewed as a whole and separately);
3. Level of risk related to the IPR such as, infringement od third party rights, or infringement of IPRs by others.
There are various approaches to valuation like cost approach, income approach, market approach etc.[12]


Transfer of Intellectual Property
When the intellectual property assets are owned by the transferor company, such assets are transferred to the transferee company under the scheme of merger. A relevant sample clause of the scheme transferring assets owned by the transferor company in favor of the transferee company including intellectual property assets would be generally worded as follows:

‘ Upon the coming into effect of this scheme and with effect from the Appointed Date, the transferor company shall stand amalgamated with the transferee company, as provided in the scheme, and, pursuant to the provisions of Section 391 and 394 and other applicable provisions of the act, all the assets and debts, outstandings, credits, liabilities, duties and obligation whatsoever concerning the Transferor Company, including the intellectual property assets but not limited to the entire undertaking of the transferor Company stand transferred to and vested in and/ or be deemed to and stand transferred to an vested in the Trnsferee Company as under’.

Transfer of Trademarks
Being a species of property, a right in a trademark is transferable as any other right in property. Thus, a trademark along with all the other assets of the transferor company are transferred under the scheme of merger framed under Section 394 of the Companies Act, 1956.

Transfer of Copyrights
When the transferor company holds copyright in respect of a work, the same along with other assets shall stand transferred to the transferee company under the scheme of the merger. Where the copyright in respect of the work is registered with the Registrar of Copyrights, the transferee company shall be required to make an application to the Registrar for registration of its title.

Transfer of Patents
The patents held by the transferor company along with the other assets shall be transferred to the transferee company under the scheme of merger. The transferee in such a case would be required to apply to the Controller of Patents, in writing, for the registration of its title.[13]
Thus, the transfer of IPR is transferable as any other property with certain formalities.

TRANSFER OF INTELLECTUAL PROPERTY IN ACQUISITION
Intellectual property owned by target company

in case of an acquisition, particularly a 100 percent acquisition by way of purchase of shares of the target company, the acquirer would generally have the right ot use the existing IPRs, such as trademarks or the corporate name etc since the trademarks are owned by the target company itself.[14]


Intellectual property owned by the selling shareholder

When the IPR is owned by the selling shareholder, it does not stand transferred automatically. It is only when the selling shareholder permits the use of such IPR under a license or transfers the same.

CONCLUSION
After discussing the concept of Mergers & Acquisitions in detail we come to a conclusion that in order to sustain in the industry it is not only essential to run a business efficiently but to merge and acquire with other businesses as well. It is the need of the hour today. Specially in India, where so many private industries are coming up post 1991, it is a challenge to sustain one’s business in the market. Here, Darwin’s theory of the survival of the fittest is absolutely applicable.
--------------------------------------------------------------------------------
[1] A. N. Sridhar, Strategic Financial Management for CA Final, (Shroff Publishers & Distributors pvt. Ltd.: Mumbai), Ed 4th, p 1100.
[2] A. N. Sridhar, Strategic Financial Management for CA Final, (Shroff Publishers & Distributors pvt. Ltd.: Mumbai), Ed 4th, p 1100.
[3] Available at http://atimes.com/atimes/South_Asia/GJ18Df01.html visited on September 21st, 2010.
[4] Seth Dua & Associates, Joint Ventures & Mergers and Acquisitions in India, (Lexis Nexis: New Delhi), 2006, p 222
[5] Seth Dua & Associates, Joint Ventures & Mergers and Acquisitions in India, (Lexis Nexis: New Delhi), 2006, p 222
[6] Available at http://www.financemarkets.co.uk/2010/02/24/skipton-bs-to-merge-with-loss-making-chesham/ visited on September 21st, 2010.
[7] A. N. Sridhar, Strategic Financial Management for CA Final, (Shroff Publishers & Distributors pvt. Ltd.: Mumbai), Ed 4th, p 1100.
[8] Hindustan Lever Employees Union v Hindustan Lever Ltd. AIR 1995 SC 470.
[9] Available at http://www.magindia.com/manarch/news/man1331.html
[10] Seth Dua & Associates, Joint Ventures & Mergers and Acquisitions in India, (Lexis Nexis: New Delhi), 2006, p 224
[11] Seth Dua & Associates, Joint Ventures & Mergers and Acquisitions in India, (Lexis Nexis: New Delhi), 2006, p 224
[12] Seth Dua & Associates, Joint Ventures & Mergers and Acquisitions in India, (Lexis Nexis: New Delhi), 2006, p 300.
[13] Seth Dua & Associates, Joint Ventures & Mergers and Acquisitions in India, (Lexis Nexis: New Delhi), 2006, p 304.
[14] Seth Dua & Associates, Joint Ventures & Mergers and Acquisitions in India, (Lexis Nexis: New Delhi), 2006, p 304

Authors contact info - articles The  author can be reached at: shriyaj@legalserviceindia.com




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