Introduction
Acquiring the assets, goodwill, and trade marks of recognised brands can be a game-changing strategy for growth and market expansion. However, this process is fraught with potential pitfalls that require careful consideration and thorough due diligence. The following overview highlights the challenges you may face, red flags to watch out for, and how to identify potential legal disputes during your acquisition. It is important for purchasers to understand the landscape and the potential issues when embarking on the journey of acquiring a recognised brand and its assets, and crucially to be aware of the various challenges that may arise.
- Uncertain Ownership and Title
Uncertainty about the ownership and title of brand assets is a major red flag. Always conduct thorough due diligence to verify ownership of all brand assets, including trade marks, designs, copyright, database rights, and patents.
- Trade mark and Intellectual Property Issues
Be wary if the brand or trade mark is the subject of threatened or ongoing litigation. This can indicate potential disputes over ownership, infringement, or other legal challenges that could affect the value and use of the brand. Therefore, carefully review the terms of any existing licenses allowing the business to use third-party brands or trade marks.
Hidden licensing agreements or unfavourable terms can lead to unexpected costs or limitations on the use of acquired assets. Asset purchases can sometimes come with unexpected liabilities that may not be immediately apparent. For instance, you might acquire software technology only to face patent infringement lawsuits from third-party patent holders who had licensing agreements with the previous owner.
It is therefore crucial to ensure that the asset purchase agreement clearly specifies which liabilities remain with the seller and which, if any, will be assumed by the buyer. This delineation should be as comprehensive and explicit as possible to avoid future disputes or unexpected financial burdens.
- Inconsistent Financial Records
Discrepancies or irregularities in financial statements related to brand performance can be a major red flag. Unexplained revenue fluctuations or irregular accounting practices might indicate financial instability or potential fraud.
- Brand Reputation and Goodwill Issues
Pay close attention to the brand’s current reputation in the market. A history of negative publicity, customer complaints, or declining brand loyalty can significantly impact the value of the acquired assets. Also look for signs of brand dilution, such as excessive licensing or expansion into unrelated product categories. This can weaken the brand’s distinctiveness and overall value.
Maintaining the goodwill associated with a well-known brand is both crucial and challenging. The trade mark’s goodwill reflects public perception and is vital for maintaining a positive brand image. However, after an acquisition, there’s a risk of damaging this goodwill through inconsistent quality, misaligned branding, or negative consumer experiences.
To preserve the brand’s goodwill, buyers must implement rigorous oversight and clear guidelines for brand management. This might involve:
- Maintaining consistent product or service quality.
- Ensuring brand messaging aligns with established values.
- Providing excellent customer service to uphold the brand’s reputation.
Managing a well-known brand across diverse markets while allowing for local adaptation is also a significant challenge. Rigid enforcement of global uniformity can hinder the ability to connect with local audiences, while too much variation can dilute the brand’s reputation.
Striking the right balance requires flexible yet firm guidelines that maintain core brand elements while permitting market-specific adaptations. This approach allows the brand to resonate with diverse audiences while maintaining its overall integrity and recognition.
- Cultural Misalignment
Significant differences in company culture between the acquiring company and the brand being purchased can hinder integration and affect employee morale and productivity. This misalignment can make it challenging to maintain the brand’s essence post-acquisition.
- Dependency on Key Personnel
If the brand’s success is heavily reliant on specific individuals, such as a charismatic founder or key creative personnel, their potential departure could pose a risk to the brand’s future performance.
- Market Position and Competitive Landscape Concerns
A brand experiencing a consistent decline in market share or losing ground to competitors may indicate underlying issues with the brand’s positioning or relevance. Similarly, beware of changing consumer preferences and brands that may be falling out of favour due to shifting consumer trends or preferences, as this could impact the long-term value of the acquisition.
- Associated Risks
Do not overlook associated risks that are related to asset purchases, such as data protection/GDPR issues in relation to customer databases; moral rights and IP ownership in relation to the seller’s employment contracts; third-party licenses and agreements; restrictions that may arise with exclusivity arrangements; hidden or undisclosed third-party dependencies; and both legal and beneficial ownership of social media accounts.
While each of these areas warrants care and preparation, three in particular stand out as requiring closer examination. These aspects can have a profound impact on the value, longevity, and effectiveness of brand assets, making it essential to assess them in greater detail.
By exploring these key considerations more thoroughly, businesses can make more informed decisions and mitigate potential risks:
Ownership and Title Verification
One of the most critical challenges in brand asset acquisition is verifying the ownership and title of the assets being purchased. This issue can be more complex than it initially appears, as sellers themselves may not always have a clear understanding of all the unregistered brand assets they own, and the true ownership of registered trade marks that a purchaser believes forms part of the deal. The following examples highlight the importance of thorough ownership verification:
- During the late 1990s the sale of Rolls-Royce Motors owned by Vickers plc caught the interest of both Volkswagen and BMW, and was ultimately acquired by Volkswagen. However, the sale did not include the “Rolls-Royce” name and logo, which were in fact owned by Rolls-Royce plc at the time. Whilst Volkswagen owned the car designs and manufacturing facilities, it did not have the rights to use the Rolls-Royce brand on the cars. As from 2003 BMW was able to produce Rolls-Royce branded cars as a result of BMW licensing the brands from Rolls-Royce plc due to pre-existing joint ventures between them. A sub-licensing deal was later arranged between Volkswagen and BMW.
- Between 2000 and 2001 Proview Technology, a Chinese electronics manufacturer, registered the trade mark “iPad” in a number of countries, including China. Apple introduced its iPad tablet in 2010 and sought to secure its global trade mark rights. As part of that strategy and via a UK-based subsidiary, presumably to avoid paying a potentially premium price, it acquired iPad trade mark rights from Proview’s Taiwanese affiliate for around £35,000 in 2009. However, it was successfully argued that these acquired rights did not in fact include the rights in mainland China. Following further legal proceedings, infringement claims against Apple, and disruptions to Apple’s supply and sale of its iPad products in China, the parties concluded a commercial deal resulting in Apple acquiring the rights in China at a cost of around £40 million in 2012.
- In the 2009 US case of Cincom Systems Inc. v. Novelis Corp. the court determined that following Novelis Corp’s internal merger it transferred a non-transferrable software licence from Cincom Systems, constituting an unauthorised transfer, breach of the licence agreement, and copyright infringement. Cincom’s licence agreement specified that the licensee may “not transfer its rights or obligations… without the prior written approval of Cincom…”, which Novelis had failed to obtain.
- A recent UK case Lunar Holdings Limited v. Lunar Automotive Limited (2020) assessed the effectiveness of an IP transfer. Lunar Caravans Limited sold its “Lunar” trade marks to its parent company, Lunar Holdings Limited in 2018 for less than £400. The following year Lunar Caravans entered into administration, and its assets were acquired by Lunar Automotive, who additionally entered into a licence agreement with Lunar Holdings to use the “Lunar” trade marks. However, due to Lunar Automotive ceasing to pay the licence fee and Lunar Holdings taking action against its licensee as a result, the court was required to consider the legitimacy of the assignment from Lunar Caravans to Lunar Holdings. Under the circumstances the court determined that the trade mark sale agreement was voidable because it was a potentially unlawful distribution under the Companies Act, and concerns were raised in connection with director’s duties and insolvency issues.
Hidden or Undisclosed Third-Party Dependencies
- Indirect software dependencies in IT systems may exist where a company acquires proprietary software as part of an asset purchase but later discovers that the software relies on third-party libraries or tools (eg: GStreamer codecs) that were not disclosed during due diligence. These dependencies may require additional licensing fees or pose compatibility issues.
- Supply chain dependencies may arise where a business acquires assets from another company but later learns that critical components are sourced from a single third-party supplier due to separate and/or multiple IP ownership issues not disclosed during negotiations. A purchaser may encounter disruptions, impacting production timelines and additional costs.
- Hidden licensing agreements may become disclosed post-acquisition and it is discovered that certain patents or technologies are licensed from third parties under restrictive terms. These undisclosed licenses may limit how the buyer can use or monetize the acquired IP.
- Transitive dependencies in open-source software may result in vulnerabilities thereby giving rise to cybersecurity risks, version conflicts, maintenance challenges, and even regulatory compliance violations.
- Embedded third-party services. An acquired customer database includes integrations with third-party analytics tools or payment processors, which were not disclosed during due diligence. These services may have separate contracts, fees, or compliance requirements that complicate operations post-acquisition.
Identifying Potential Legal Disputes During Due Diligence
An essential aspect of the due diligence process is identifying potential legal disputes that could affect the value and success of the brand asset acquisition:
- Review Litigation History
Examine court records and legal filings to uncover any past or ongoing litigation involving the target brand. This includes:
- Reviewing public records for liens, judgments, or regulatory violations.
- Analysing the nature and status of current lawsuits.
- Assessing the potential impact of unresolved litigation on the acquisition.
- Conduct Thorough Contract Analysis
Carefully review all contracts and agreements to identify potential sources of disputes:
- Examine commercial contracts, customer and supply agreements, and employee contracts.
- Look for change of control provisions that could be triggered by the acquisition.
- Identify any clauses that might lead to conflicts or terminations upon ownership change.
- Investigate Intellectual Property (IP) Issues
IP-related disputes are common in brand acquisitions. To identify potential problems:
- Verify ownership of all IP assets to be acquired.
- Check for any ongoing or threatened IP infringement claims.
- Review licensing agreements for potential conflicts or termination clauses.
- Assess Regulatory Compliance
Non-compliance with regulations can lead to legal disputes. During due diligence:
- Evaluate the target brand’s compliance with industry-specific regulations.
- Review any past regulatory violations or ongoing investigations.
- Assess the potential for future compliance issues based on current practices.
- Interview Key Personnel
Discussions with management and key employees can reveal potential legal issues:
- Ask about any known or anticipated legal challenges.
- Inquire about past disputes and how they were resolved.
- Seek information on any informal complaints or threats of legal action.
- Examine Employment Practices
Employment-related disputes can be significant and adversely affect brand value. To identify potential issues:
- Review employment contracts and policies.
- Assess compliance with employment laws and regulations.
- Investigate any history of employee complaints or disputes.
- Analyze Environmental Liabilities
Environmental issues can lead to costly legal disputes:
- Review environmental compliance records.
- Assess potential liabilities related to hazardous materials or contamination.
- Investigate any past or ongoing environmental disputes.
- Investigate whether the target brand has undertaken any green-washing.
- Scrutinize Financial Records
Financial irregularities can lead to legal disputes:
- Discrepancies in financial statements.
- Unusual accounting practices.
- Potential tax liabilities or disputes.
- Registration and Enforcement Issues
Post-acquisition, you may face challenges in registering the company’s new brand name, particularly if there are existing rights owned by pre-merger entities. Conflicts may arise between existing registrations and applications to register the new brand, potentially requiring consent or ownership changes in legacy brands, or even pre-acquisition limited or even non-use could risk third party revocation of an acquired registered trade mark, requiring a strategy of genuine use.
Enforcement of old or new registered rights may be complicated by differing ownership of registered and unregistered rights. This can increase the complexity and cost of enforcing trade mark rights and protecting the brand from infringement.
Conclusion: Navigating the Complexities with Confidence
Acquiring the assets, goodwill, and trade marks of a well-known brand is a complex process that requires careful consideration and thorough due diligence. By being aware of potential issues, recognizing red flags, and diligently identifying possible legal disputes, you can navigate this process with greater confidence and increase your chances of a successful acquisition.
Remember, the key to success lies in:
- Conducting comprehensive due diligence.
- Seeking expert legal and financial advice.
- Carefully reviewing all contracts and agreements.
- Assessing the brand’s market position and reputation.
- Understanding the cultural fit between your organization and the acquired brand.
- Planning for smooth integration and brand management post-acquisition.
By approaching brand asset acquisition with these considerations in mind, you’ll be better equipped to make informed decisions, mitigate risks, and maximize the value of your investment. While challenges may arise, a well-prepared and thorough approach can turn a complex acquisition into a transformative opportunity for your business.
And yes, you could simply rely on a well-crafted and drafted asset purchase agreement, full of warranties, indemnities, and carefully negotiated terms – but true success lies in fully understanding the strategic, legal, and commercial implications, and then use the ribbon and bow of the asset purchase agreement to wrap up the deal!
Jason Lysandrides
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