INTELLECTUAL PROPERTY assets have always underwritten business success, but the tech revolution has put them centre stage. Aside from various IT behemoths slugging it out in seemingly endless patent disputes, we’ve witnessed a string of major IP-related acquisitions in recent months. For example, Google’s $12.5bn acquisition of Motorola’s 17,000 patent portfolio and 7,000 pending patents, the $4.5bn purchase of Nortel’s 6,000 patents, and Kodak’s $1bn sale of 10% of its portfolio.
In short, IP assets have never been more important to commercial strategy. Why then, with IP being so critical to corporate valuation, are finance directors still largely uninvolved in IP-related decision-making?
In our experience of advising major corporates on IP policy, FDs are conspicuous by their absence in these discussions: responsibility for the management of IP appears to rest with the legal department, marketing, the design team or the CTO. Our senior attorneys rarely meet with their clients’ FDs and on the few occasions they do meet, the discussion is confined to billing or payment issues. Given the increasing importance of IP to business, we think that FDs need to become more hands-on in fashioning their companies’ IP policy.
Clearly an FD has a role to play when a material amount is paid for an IP portfolio, either as a result of M&A activity or purchased outright on its own. Purchased IP will sit on the balance sheet (IAS and FRSME), so it imperative that the FD is sufficiently comfortable about what has been purchased and its status. For example, if any patents are being opposed in any jurisdiction or if the patents purchased are built on top of other patents, which may then require licence agreements or royalties to be paid to another party.
An FD will also need to consider the on-going costs of maintaining the portfolio to help assess the commercial and financial viability of retaining the entire portfolio. These types of costs would include assignments, renewals, validations, oppositions, etc. On-going costs can be quite significant, so it is imperative for a FD to be involved in controlling the annual spend on IP. The better the FD understands the organisation’s IP, the more value they can add to ensuring that it works for them in an efficient and cost effective way.
The recently introduced Patent Box incentive – the preferential tax regime for profits arising from patents – should also encourage FDs to participate more actively in developing IP strategy. They will need to gain greater understanding of where and how the IP sits within the business, so that they can take advantage of opportunities to reduce the company’s tax liability and ensure that all relevant income streams are captured within the Patent Box calculations. The FD also needs to have a good working knowledge of the Patent Box legislation in order to judge how and where IP is or should be held and how best to maximise the level of income that falls within the Patent Box tax rules.
The need for greater collaboration between the FD and the IP team is even more important when the company has a global footprint. Here, the key role of the FD is in structuring the international company so as to reduce the net overall income tax burden of the business. For businesses reliant on cross-border licensing of intellectual property, one major issue is how to minimise withholding tax on royalties. In some cases, it may also be desirable to structure the business in such a manner to take advantage of specific tax incentives or to ensure the availability of a viable tax efficient exit strategy for the disposal of valuable IP.
FDs active involvement in IP policy should also involve the following areas:
• Portfolio strategy linking to business strategy
• Investment (internal & external)
• Acquisition & thorough due diligence
• Licensing (in-out, royalties) & Disposal
• Competitive landscape
• Valuation & cost optimisation of IP portfolios
But although we believe that FDs ‘must be more pro-active’ with regard to their involvement in IP management, they can’t make a meaningful contribution without appropriate support. The onus is on IP advisers like us to form more collaborative relationships with FDs. We need to beef up the educative aspects of our service offering by making greater efforts to understand the FD’s agenda and to improve our communication with them on IP as it relates to their business mission.
From the FD’s perspective the IP portfolio is one area where business strategy and valuation come together, and provide an opportunity for growth, renewal, and competitive advantage. It cannot be left just to the talented technocrats among IP departments and external advisers, but must also be “translated” into understandable and actionable business goals.
Surbjit Gogna is the finance director at Avidity IP