Is your simple company structure holding you back when it comes to protecting, commercialising and financially benefitting from your business' intellectual property?
You may not realise, but your intellectual property (IP) assets are not only inherently valuable (and may already be listed on your balance sheet), but they can also contribute to your business by way of establishing additional streams of revenue, and securing investment, among other things.
You may be operating your business by way of a company, i.e. a sole operating company. The IP assets created by the operating company will be (absent any other arrangements) ordinarily held by it, and in doing so, you could be closing your eyes to a dual company structure that enables you to capitalise on, better manage, and better protect your IP.
This article will briefly touch on:
- the operation of a dual company structure; and
- some of the advantages and disadvantages to utilising an IP holding company.
Dual company structure
Some of the world's largest companies will often structure their businesses by, in essence, utilising a dual company structure - which in its simplest form, consists of an operating or trading company and a holding company.
Typically, the operating or trading company will enter into the ordinary/day-to-day agreements with customers/clients and suppliers, whereas the holding company usually holds and controls any assets and capital, acting to limit liability. In such a case, the holding company will ordinarily sit above the operating company, i.e. as a 'parent company'/'ultimate holding company' by owning all of the shares in the subsidiary operating or trading company.
If a customer/client or supplier is looking to instigate legal
proceedings against you, they will ordinarily need to sue the
company that they have contracted with, which would usually be the
operating or trading company (provided your relevant contracts are
setup in that fashion); and in a dual company structure, an
operating company will usually hold fewer assets, and therefore
have somewhat less exposure.
Alternatively, a second company, owned by the same shareholders as the operating or trading company, is incorporated to hold any assets and capital, acting to limit liability, particularly exposure to trading risks which could jeopardise loss of these assets and capital.
How does this relate to IP?
Your IP holding company will often either sit above the operating or trading company (as a parent company as mentioned above), or otherwise sit separately as a standalone entity. There will also need to be a Licence Agreement between the IP holding company and the operating or trading company.
The licensing arrangement will usually operate such that the IP holding company (i.e. as licensor) controls and owns the IP assets (e.g. including trade marks, patents, copyright, designs, plant breeder's rights etc.), and licenses those IP assets to the operating or trading company (i.e. as licensee).
A by-product of such an arrangement is that the IP assets are essentially shielded from the commercial activities of the operating or trading company.
Advantages of an IP holding company
Further to the above, some of the advantages to utilising an IP holding company are as follows:
- protection of your IP assets from customers/clients, suppliers, creditors, and third parties
- structuring is in place so that your IP assets can be licensed to your operating or trading company, and thereafter sub-licensed to third parties so as to generate licensing fees/royalties;
- your IP assets may be more easily sold or made available as security;
- centralised ownership and management of your IP assets;
- attracting investment by having a well-managed and sophisticated structure in place (your structure is investor ready, because commonly this structure is preferred by investors); and
- tax effectiveness by delegating licensing fees/royalties generated from licensing your IP assets.
Disadvantages of an IP holding company
One of the disadvantages to operating an IP holding company in conjunction with your operating or trading company may be the establishment and ongoing costs of operating an additional company.
Further, in the context of patents, when utilising a dual company structure involving an IP holding company and an operating or trading company, it is important that the Licence Agreement between the two entities is properly drafted. Failing which, the IP holding company and/or operating or trading company may face difficulties in pursuing patent infringers.
Considerations when establishing an IP holding company
If you are considering utilising a dual company structure involving an IP holding company in conjunction with your operating or trading company, we would be happy to assist in identifying the important issues and steps to be taken, including for example:
- assigning the IP assets to your IP holding company by way of a Deed of Assignment;
- preparing an appropriate Licence Agreement between your IP holding company and the operating company;
- preparing an appropriate Sub-Licence Agreement between your operating company and third parties; and
- consideration as to the relevant licence fees/royalties to charge to the third parties for their licensed use of the IP assets.
Whilst large multinational corporations have always had the resources to structure their IP assets in the manner described above, the escalation of IP as a fundamental asset of many companies (regardless of their size or stage of development) has meant that such an approach to holding and exploiting IP is something that a growing number of companies can no longer afford to ignore.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.