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Acquisition refers to a specific process through which an organisation purchases a portion or all the assets (corporate) of another firm. The acquisition process may offer certain issues, which should be dealt through the use of effective measures and techniques. It is critical to seek legal advice, which may solve certain issues pertaining to the acquisition process. Enzymatic Limited is a UK company, which aims to acquire a French company “Normale-Huile” in order to boost profitability. Both the seller and buyer aims to transfer the IP rights to a new entity, namely Newco. This paper aims to discuss certain issues pertaining to the acquisition process, legal advice and solutions, types of business structures and issues related to Intellectual Property (IP) rights.
a) Acquisition Process
Reed, Lajoux, and Nesvold (2007) indicated that acquisition refers to the purchase of a portion or all of the assets of a company. The acquisition process aims to provide certain benefits to businesses, as it helps in maximising profitability. However, there can be certain issues faced during the acquisition process, which can eventually cause certain hurdles for the organisation. In the current scenario, Enzymatic, a UK based company, is focused on acquiring a French company, which is a biofuel manufacturer. It is critical to consider the issues, which may hamper the whole process.
Issues in Acquisitions Transactions
Gupta (2012) explored that transaction building involves 3 core procedures:
Stock Purchasing: In the current scenario, Enzymatic would buy shares in the acquired company.
Asset Purchasing: Enzymatic would buy all the assets of the acquired French company
There is a need to consider these issues. If Enzymatic fails to buy the shares and purchase the assets, then it would not be able to acquire the company. It would lead to legal issues, which may cause certain hurdles for Enzymatic.
Unless negotiated contractually to the contrary, upon a stock sale’s consummation, the liabilities of target tend to be transferred to acquirer by the law operation (Vazirani, 2012). Considering the case, during the asset sale, the liabilities, which have been determined as assumed liabilities would be assigned to Enzymatic (acquirer), while liabilities that are non-designated would be Normale-Huile’s obligations.
It is critical to consider that a pre-closing consent should be obtained, considering the degree to which the existing contracts of Normale-Huile have a prohibition against assignment. However, there is no requirement of consent for stock purchase, unless the contracts (relevant) comprise of particular prohibitions towards the assignment by operation of law (Vazirani, 2012). This issue must be regarded as a top-priority by Enzymatic Limited in order to avoid any failure and acquire the target company successfully. Consent is a core part of the acquisition and the process cannot be completed without taking the consent. Top-level management must hold meetings for discussing this topic pertaining to acquisition for the purpose of achieving the desired objectives and goals.
The board of directors of the French Company Normale-Huile may grant the asset sale approval at the corporate level without considering the approval of individual stakeholder. It is critical to consider that the selling stockholders must grant the approval as per the stock sale (Whalley 2007). In case if the unanimity is revealed to be unattainable within the context of a stock sale, then Enzymatic and the French Company would focus on negotiating a mutual stakeholder approval for consummating the deal. The approval of stakeholder is a vital element that must be considered by both the companies, as there can be certain issues regarding this aspect.
It is possible that a transaction may be tax-free or taxable relying on the structure (Whalley, 2007). Stock purchases and asset sales tend to possess immediate consequences of tax for both Enzymatic (acquirer) and Normale-Huile (target). Considering the perspective of Enzymatic Limited, the asset sale would be considered the most desirable, as ‘step up’ tends to occur such that the tax basis of the acquirer within the assets is considered equal to the price of purchase, which is generally the fair market value (FMV). It allows the acquirer to depreciate significantly the assets and enhance post-closing of profitability. In such circumstance, the French acquired Company would be considered liable for the corporate tax and the shareholders would also be required to pay tax on the subsequent dividends.
From the case, it can be understood that both the buyers and sellers may transfer all or some of the IP rights to Newco. In this case, Normale-Huile must prepare a list of all IP to show to the acquirer (Enzymatic Limited). There can be issues if Normale-Huile does not provide relevant information pertaining to all the patents. These items should be included in the schedule of disclosure, which accompanies the agreement of acquisition.
Acquisition of IP
Enzymatic would confirm that the value that it has placed on Normale-Huile, tends to be supported by the extent to which the organisation owns the IP, which is crucial to its anticipated and current business (Landes and Posner, 2009). There may be issues pertaining to the ownership of the IP. In such a case, the acquisition may not be successful and both the companies may have to face a significant loss.
Whalley (2007) pertinently pointed out that due diligence refers to a specific process in which 1 company performs checks on the other organisation. Considering the acquisitions, the due diligence process is immediately carried out after the agreement of a deal and signing of terms. Due diligence can be categorised into 3 aspects, including financial, legal and commercial. In the current scenario, the element of due diligence focuses on encompassing the specific information including strategies, financial status, legal issues, environment and taxes about the French acquired company. Due diligence is considered one of the most vital aspects of acquisitions, as it focuses on the prevention of legal or financial issues in the future.
The commercial issue may also arise during the acquisition process. Consider that in Enzymatic, there exist only a few expertise, which is beneficial for the business’ smooth running. If there is only 1 individual in the company have expertise regarding smooth running, then it may lead to certain risk problems for the buyer (Howson, 2017). The investment which is being made by Enzymatic would be dependent on one individual. Another critical issue can be related to the aging client base. The due diligence process may uncover that a significant proportion of clients are at retirement age. This aspect can eventually lead Enyzmatic Limited to failure, as the clients’ number would decrease significantly.
From the case, it is evident that Normale-Huile (French company) is owned by 3 entities, Ecole Normale, Rene Dubois and Leclerc (investment firm). If only one specific entity (let’s say Rene Dubois) is given the responsibility to manage accounts, then there may also be a problem. If only 1 member is allowed to manage financial functionality, then it may also lead to certain key issues. More than 2 shareholders may be allowed to handle the finances and other key aspects.
There can be certain legal issues pertaining to the acquisition, which can eventually cause problems for Enzymatic. One of the critical legal issues involves that there may be no contract between Normale-Huile and its suppliers/clients/staff. The due diligence process may indicate that whether the business is done through contract or trust basis (Howson, 2017). It should be considered by Enzymatic company in order to ensure transparency and to complete the acquisition process successfully.
One of the common financial issues that may arise involve that the business’ profitability is not that much high as described by the French Company. It may be possible that Normale-Huile does not indicate all the assets and how much profit is generated by its business truthfully. This can further create problems for Enzymatic Company, as the management would make strategies in accordance with the current profitability of the French Company business. Another critical issue pertaining to acquisition is that on the accounts, the stock may be overstated.
It is critical to consider that another issue may be related to the presence of aged inventory’s large proportion on the balance sheet (Morrison et al., 2008). If Enzymatic determines that a significant portion of the inventory (59%) tends to be aging and it has not been utilised, this may indicate that valuation of the effective balance sheet is reduced virtually. There is a need to consider the financial issues as a high priority, as this may hamper the whole acquisition process and can lead the whole company towards failure.
Warranties and Representations
It is critical to determine that Enzymatic Limited (acquirer) would expect that the definitive agreement involves detailed warranties and representations by Normale-Huile with respect to financial statements, intellectual property, capitalization, authority, employment, material contracts, ERISA and compliance with the law. Morrison et al., (2008) explored that it is significant for the target’s counsel and target to review and observe the representations in a careful way, as the breaches may result quickly in the claims of indemnification from the acquirer (Enzymatic). The schedules of disclosure (explaining exceptions to representations) must also be regarded as the Normale-Huile’s insurance policy and must be in detail.
“10b-5” representation is considered a debated representation, which involves that the target must make a statement that no warranty or rep comprises of the untrue statement or neglects to state a fact (material) necessary for making them not fabricated or misleading. Normale-Huile may become quite uncomfortable with this type of statement; however, without a representation, Enzymatic Limited may raise a question that whether the seller company tends to withhold specific information. These aspects are crucial to being considered during the whole acquisition process, as fabrication may lead to failure and certain problems may be generated.
b) Legal Advice
The legal advice can help the companies to complete the acquisition. With respect to the issues described in the previous section, the legal advice has been considered for the companies.
Legal Due Diligence
Considering the commercial issue, Enzymatic evaluate certain risks. If the problem is related to the fact that only 1 member has expertise in the seller company, Enzymatic must evaluate that the person has the contract in place with the acquired business. This can help in mitigating some of the legal risks associated with the acquisition. In the case of an aging client base issue, it is critical to evaluate the validity and reliability of the service/product to other marketing and markets (Lawrence, 2013). The legal advice involves that marketing of the existing products can be done in order to increase the number of customers. This may involve spending on website marketing and other sales strategies for the purpose of eliminating the risk of the aging client base. In this way, Enzymatic Limited may be able to secure the patents and increase profitability, while providing benefit to the key stakeholders.
Considering the legal issue, which indicates that there may have no contracts between the French company and its clients or staff. In such a scenario, Enzymatic Limited should request Normale-Huile to reach its clients and staff for contracts. The issue can be mitigated by considering the possibility that all negotiable contracts initiated by Normale-Huile should be inspected by the acquirer in order to assure that proper contracts are in place and there would be no legal issues while acquiring the company (Lawrence, 2013). Considering the financial aspect, if the declared profitability of Normale-Huie is revealed to be incorrect, then it would eventually create certain issues for Enzymatic Limited. The solution involves that the acquirer (Enzymatic) sets a valuation formula for evaluating the profitability. This aspect can assist the company to gain insight into the target company’s profitability successfully.
Intellectual Property Law
Normale-Huile must provide all the information related to its patents. It includes patent applications and patents, patent numbers, issue dates, jurisdiction, service marks, trademarks, databases and software, domain names, social media accounts and technology licenses. The patents which are owned by Normale-Huile must be provided to Enzymatic in order to ensure that the patents are genuinely owned.
If Enzymatic desires to own the patents of Normale-Huile, then it should consider the patent acquisition separately. The acquirer can consider the fact of acquiring the patents in case of using them (Kryzhna, 2013). Otherwise, the company must not violate the law and should not make use of the target company’s patents.
Section 10 of the Trade Marks Act 1994 indicates the violation of trademark (Kryzhna, 2013). This section highlights a third party (unauthorised) identical to a trademark and place on similar (like-for-like) services and goods. Enzymatic Company should consider the element of trademark infringement, which may eventually hamper the company’s reputation in the business market.
The legal advice pertaining to tax consequences must be considered by the buyers and sellers. Compromises may be possible, considering the ”h(10) election”. Considering this section, the parties can consummate a purchase of stock with the results being the same with the exception of tax purposes. The deal may be deemed as the asset deal and Enzymatic focuses on obtaining the step-up (basis) in the assets.
The tax-free reorganisation may be considered by the companies during the acquisition. Section 368 described in the Internal Revenue Code of 1986 suggests regarding the tax-free re-organisation. It would require Normale-Huile to take back the stock within the acquiring company. 40% is the minimum stock value, which may be considered by the seller company in the present scenario.
c) Business Structures for Newco
There seem to be different business structures that can be considered for the new company ‘Newco’ in the region of UK. Following structures can be considered:
The Newco Company can consider the structure of the general partnership. It is comprised of 2 or more individuals, who tend to agree to contribute skill, labour or money to the business. In such structure, the partners forming the Newco would share the losses and shares of the business (Zott, Amit and Massa, 2011). Each partner would equally and personally be liable for the partnership debts. The partnership’s formal terms tend to be contained generally within a written partnership agreement. The partnership structure can offer certain advantages. One of the evident benefits involves that the partners of Newco would be able to attract a number of investors since the limited partners would possess limited liability to the debts of the business.
This type of business structure can be quite complex for Newco. In case of forming a corporation, Newco would possess certain liabilities, privileges, and rights beyond those of a person. Zott et al., (2011) highlighted that if the shareholders perform business activities as a corporation, then it may produce financial or tax benefits, these may be offset by certain considerations, including decreased personal control or increased licensing fees. In case of adopting this structure, the Newco corporation would have to pay income tax on the profits. The corporate profits tend to be taxed 2 times. One of the aspects to consider is that if a shareholder of Newco leaves the business, then the corporation may be able to continue the business.
Limited Liability Partnership (LLP)
In this type of business structure, the partners would possess limited liabilities (Zott et al., 2011). One of the significant characteristics of this structure is that each partner of Newco would not be liable or responsible for the negligence or misconduct of another partner. One of the evident benefits of LLP for Newco is that any change in partners would not have an impact on its liabilities, rights or existence.
This type of structure is comprised of a single entity or person. This can be considered the most common form of structures (Zott et al., 2011). The advantages of Newco can be that it would pose fewer taxes and fewer legal controls. The disadvantage involves that the sole owner of the business would be liable personally for the incurred debts. This type of business structure is quite simple to operate and form. The management may enjoy a greater amount of flexibility as compared to other structures.
d) Intellectual Property Issues
There can be certain issues, which may arise pertaining to the failure of IP transfer. Both the companies, Enzymatic and Normale-Huile, should consider what problems may generate if IP rights are not transferred to Newco successfully.
Janis et al., (2016) argued that information is considered property under the English law and hence it is impossible to steal it. The case of Oxford v Moss  can be considered for considering the element of confidential information. The information confidentiality may be subjected to protection by the action of confidence breach, which relies on the equitable obligation’s enforcement instead of a property right. The confidential information would be subjected to breach in case the IP rights are not successfully transferred to the new company. The use of protected information by the competitors may further create certain issues and problems for Newco. The competitors can make use of the technology that genetically modifies algae and can lower the profitability of the organisation.
In case of unsuccessful transfer of IP rights to Newco, the confidential information may be leaked and it can be used by the competitor companies (Janis et al., 2016). The unethical use of IP may be considered a serious issue for both the buyers and the sellers. Patents may be used by other companies in order to create a unique and innovative product. It would eventually create issues for the new company and may result in failure. The aspect of confidential information is of utmost significance in the current scenario. There are certain patents of both Normale-Huile and Enzymatic, which may be revealed to the competitors. In such case of breach, the competitors may take sufficient advantage of the condition and can outperform Newco.
As per the Patent Rules 2007’s section 39 and 77, the patent’s registered proprietor would receive notices of proceedings and renewal notices (Mueller, 2009) In the case, it is highlighted that Normale-Huile owners jointly own patents for biodiesel development from algae. It may be possible that assignee (unregistered) of a patent may bring proceedings in own name. The technology contained in the patent may be used by a third party to transform the chemicals into biodiesel. Such issue may lead the new organisation towards failure. If the technology protected by the sellers is used by a third party, it would eventually force Newco to work on the technology again.
The patent issue is critical to be considered since the technology of the patent is of utmost significance. If an employee attempts to become the competitor and steal the technology due to the unsuccessful transfer of IP rights, then it may create certain issues for Newco. Both the sellers and buyers should focus on overcoming the issue for the purpose of avoiding any problem (Mueller, 2009). Further, the IP infringement must be considered by the newly formed company to eliminate possible threats. As indicated in the case study, the 4 patents owned by the owners of Enzymatic Limited, including Metabolic Medical Patent, Agri Patent and Cellulose and the Lignin Patents, may be utilised by a third-party for its own use.
In the region of United Kingdom, the patent infringement law tends to be covered by the UK Patents Act 1997’s section 60 (Mueller, 2009). It focuses on highlighting various types of infringement. It is critical for Newco to consider the issues that may result in failure to use the patent. One of the types is described in the Act as “Where the invention is a product, by the making, disposing of, offering to dispose of, using, importing or keeping a patented product”. This aspect must be considered by the organisation for resolving the issue pertaining to the patented product.
McCarthy (2009) explained that trademark infringement refers to exclusive rights’ violation attached to a particular trademark without the owner’s authorisation or any particular licenses. In the present case, due to the unsuccessful transfer of IP rights, infringement can occur. It tends to occur if the infringer makes use of a trademark, which tends to be confusingly similar or identical to the trademark owned by another party. In this way, both the sellers and buyers may face failure and lower profitability.
The case of Polaroid Corp. v. Polarad Elects provides an example of the trademark infringement. It indicated that a new mark may be observed as infringe on present trademark if that mark has many similarities to the original one. If it may confuse the consumers to purchase from the other company, then it may be called as trademark infringement (McCarthy, 2009). This aspect must be considered in the current scenario. Enzymatic Limited and Normale-Huile have their own trademarks. They may be subjected to infringement in case of unsuccessful transfer of IP rights to the new company.
Bently and Sherman (2014) indicated that copyright infringement refers to the use of other entity’s works protected by the copyright law without taking permission. Considering the scenario, it may involve infringing exclusive rights which are granted to the holder of the copyright, including the right to perform, display, distribute or reproduce the protected work. There are different methods, which can be utilised by the new company to resolve copyright infringements. These include litigation in civil court and direct negotiation.
Copyright infringement can be considered as theft in certain cases. However, the difference has been made by the courts regarding theft and infringement. Newco has to pay the price of unsuccessful transfer of IP rights. The new company may face a severe loss if other companies start making unethical use of its products and services. The oil companies may be directed to other companies for getting a similar product, which could have been delivered by Newco. The new company would have to deal with the issue that big giant scientific companies take over the market. It would significantly decrease the profitability of the company. This may eventually lead to failure and liabilities on the owners.
Quinto, Singer, and McCauley (2012) highlighted that trade secret refers to a particular practice, which is not known generally outside of the organisation. If the IP rights are not successfully transferred to Newco, then the competitors may get to know the technology utilised by Normale-Huile. The patented technology, which genetically modifies the algae for producing substance like biodiesel, would be used by the major competitors in the business market. If the competitors gain knowledge about genetic modification of algae, then they may hamper the profitability of Newco. This aspect must be considered a top priority, as the trade secret should remain secret in all terms.
The case of Bauer & Cie. v. O'Donnell can be considered for understanding the copyright infringement in depth. The unsuccessful transfer of IP rights would significantly affect the profitability of Newco. All the hard work which was done for creating the new technology would go in vain. There is a need to consider the fact the technology can be utilised by different organisations, which may further decrease the revenue of the company.
This paper focused on exploring certain issues and legal advice pertaining to the acquisition process. It discussed types of business structures, which can be adopted by Newco. The focus is also given to the IP rights’ issues that may arise for Newco. Considering the acquisition transactions, the issues are related to deal structure, intellectual property, due diligence, warranties, and representations. Considering the legal advice, it is concluded that Enzymatic must evaluate contracts of the target company. Enzymatic Limited should request Normale-Huile to reach its clients and staff for contracts. It would help in ensuring that proper contracts are followed by the company. Enzymatic Limited should further ensure that it does not violate the IP rights while acquiring the company. The types of business structures, which have been discussed are a sole proprietorship, general partnership, LLP and corporation. The issues pertaining to transfer failure of IP rights have also been explored in the paper. These include leaked confidential information, patent infringement, trademark infringement, and trade secret. Overall, the paper aims to highlight certain aspects of the acquisition process, business structures and different types of IP rights issues, which must be considered by both the seller and buyer.
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