«Research commissioned by the Intellectual Property Office, and carried out by: Martin Brassell, Kelvin King This is an independent report ...»
124 See Lexis/Olswang, 2012 176 The role of intellectual property and intangible assets in facilitating business finance
The situation with these unregistered rights is a little more complex, according to Davies:
Certain forms, including the most commonly used ones, include a short description field. The
Companies House online guidance127 states that where this applies:
You need to submit only a short description of any land, ship, aircraft or intellectual property which is registered (or required to be registered) in the UK subject to a charge (not a floating charge) or fixed security included in the instrument.
If there are a number of plots of land, aircraft and/or ships, you can simply describe some of them in the text field and add a statement along the lines of, “for more details please refer to the instrument”.
It is notable that this only applies to intellectual property which is registrable, and may in fact only apply to information which is actually already registered as the only ‘requirement’ for registration would be one imposed by the lender.
Companies House does not keep records in respect of the number or percentage of charges that have any reference to intellectual property. It does retain records on the total number of charges registered, which for the last three years has been 98,564 (2012/13), 101,339 (2011/12) and 98,920 (2010/11).
It will immediately be noted that these numbers are, on the face of it, surprisingly low when compared with the total number of finance agreements relating to SMEs referenced in Chapter 3 – over 700,000 were approved in 2011/12 which fell within the scope of the appeals process.
Even if the majority of these are unsecured, there appears on the face of it to be a significant level of under-registration.
The description also only applies to fixed charge items, though the principal form (as amended from 6 April 2013) also has a tick-box section to note the presence of a floating charge and whether this is expressed to cover ‘all the property and undertaking of the company’. There is also a tick-box section to indicate whether a negative pledge is included to ‘prohibit or restrict the chargor from creating any further security that will range equally with or ahead of the charge.’ The registration process: statutory IP registers and the Intellectual Property Office By contrast with Companies House procedures, it is clear that lenders are currently unaccustomed to registering charges against IP at the Intellectual Property Office (while the authors have not studied the frequency of registration at OHIM, it seems reasonable to assume it will if anything be lower).
The forms to be completed vary according to the IP right involved, and the information provided is processed using systems with different capabilities. For example, the TM10 trade mark system has been introduced in 2013, while the Patent Optix system can trace its origins back at least 30 years.
By definition, a company with registered rights will already have a ‘footprint’ on the register, and when a financier records an interest, a system identity is created to streamline the recording of information subsequently.
127 See www.companieshouse.gov.uk/InfoAndGuide/faq/companyCM.shtml 178 The role of intellectual property and intangible assets in facilitating business finance
At present the form has one general question (5) to provide “details of the transaction, instrument or event which affects the rights”. In the absence of classification provided by the party making the filing, the IPO determines which of a number of categories the interest falls into: assignment, probate, merger, mortgage, security agreement (charge, lien or pledge), memorandum, debenture, exclusive licence or non-exclusive licence). The authors note that Form 21 is currently the subject of a redesign which may include clarifying the meaning of different interests which might be shown on it.
Figures provided for this report show that the total volume of agreements processed in 2012 was 1,075, with a further 195 entries relating to licences or sub-licences. This is understood to relate to the number of patents which have been affected by an agreement rather than the number of Form 21s received, which is likely to be far lower – anecdotal evidence suggests that the schedules of patents sometimes provided can run into three figures.
In terms of historical data, 2011 records show 431 instances of patents having agreements recorded against them (plus 163 licences): in 2010, these figures were 1,080 (195); in 2009, 2,626 (200); and in 2008, 870 (216).
These schedules also have to be checked for accuracy and queries raised where the information supplied is incorrect. It is a labour-intensive process which is partly conducted on paper and partly electronic depending on the ages of the patents involved.
Recording interests against trade marks The system for recording interests against trademarks has recently been revised and there is now a separate form to record/amend security interests (TM24) from that used to cancel them (TM24c). There is also a separate form TM16 to record a change of ownership, TM16P used for partial assignments, and TM50 and TM51 used respectively to register a licensee and to amend/ remove the licence record.
On form TM24, there is a question relating to whether the charge is fixed and floating, fixed, or floating. There is also a separate question (5) to provide further details if the nature of the security is ‘something other than the right to take ownership of the trade mark in the event of default’, though this field is free-form.
As with patents, it is common practice to supply a schedule of marks affected by a charge or mortgage, all of which will be processed for one £50 fee. Since all paperwork is scanned on receipt, the usual method of processing is that a task is raised and the interest is reviewed using dual screens. Terms are keyed in and attached to the appropriate rights. However, as with patents, all originals have to be submitted by post or fax.
In 2012, the total number of TM24 forms (which would have included cancellations) was 335:
historical data stretching back for the four prior years suggests this figure is broadly typical, with totals ranging between 267 and 376. By contrast, the figure for TM16 change of ownership forms in 2012 was 3786 (historically varying between this figure and a peak of 4050). The number of licensing agreements is lower, at 212 in 2012 (including amendments and removals as well as additions).
No breakdown is available for the balance between the different types of charges applied.
Recording interests against registered designs Design registration interests are all supplied using Form 12a, which is also used to capture a change of ownership, record or cancel a licence or record a security interest. The system operates in much the same way as it does for patents and trade marks but is all done using paper files at present (there is an intention to move to electronic processing at some point).
The total number of design registration forms processed in 2012 was 173, which compares with ranges between 227 and 272 for 2011, 2010 and 2008 (2009 saw 698 forms processed and appears to be anomalous). Because of the nature of the data capture involved, no further breakdown on Form 12a is available.
180 The role of intellectual property and intangible assets in facilitating business finance
Since 1 April 2013, the Prudential Regulation Authority (PRA) has been the body responsible for the regulation and supervision of banks, building societies, credit unions, insurers and major investment firms. Its two statutory objectives, as laid down in the Financial Services Act 2012, are to promote the safety and soundness of these firms and, specifically for insurers, to contribute to the securing of an appropriate degree of protection for policyholders.
Discussion with the PRA confirms that the ‘standardised’ approach does not attribute security value in the case of IP and intangibles. The regulations do not provide for any account to be taken of these assets when arriving at a judgment of value for capital adequacy purposes.
evidence on the default and recovery rates experienced by a lender when dealing with these assets, with particular reference to net losses after assets have been liquidated independently of the business.
Moreover, the regulations explicitly state that when looking at a bank’s own balance sheet, any intangibles shown are to be subtracted for the purposes of calculating capital resources.
Implications of the regulatory position As more transparent markets for transacting IP are established, it will become easier to gather evidence on sales and disposals independently of companies, and to furnish the type of insights required by the regulator. At present, it would be very problematic for most (potentially all) lenders to provide such information, because they do not hold the data on instances when IP and intangibles have formed part of the security ‘envelope’, or how much has been realised for them in distress.
In the meantime, the essential first step in taking any form of security is for lenders to create accurate records of charged IP and intangibles. When recording this data, asset categorisation will also be important, as IP and intangibles consist of several different asset classes rather than one, and are likely to have different levels of recovery associated with them.
Whilst the PRA’s emphasis on evidence is wholly understandable, there is a more fundamental point at issue. There is an inherent bias in the current banking regulations which the PRA is tasked to enforce which mitigates against IP and intangibles (affecting old and new economy companies) in favour of conventional, tangible assets. This may appear especially incongruous in the light of the well-documented ‘chilling’ effect that ownership of such assets (particularly commercial property) has had for the last few years on banks’ ability to lend.
This, in turn, illustrates a disconnect between economic policy promoting innovation and the business finance infrastructure. Not only do regulations encourage banks to ‘ignore’ the assets knowledge-based businesses possess: they incentivise them to seek out commodities that add comparatively little to actual business value. Furthermore, if part of the purpose of taking security is to obtain the full attention of the company in the event of difficulties, it is at the very least questionable whether this focus on commodities rather than unique value-producing assets meets that requirement.
A further inconsistency is apparent on consideration of the practicalities. Even if a bank intends to focus purely on tangible fixed assets, it can be very difficult (and undesirable) to eliminate IP and intangibles from consideration when seeking to value them. Two examples illustrate this
• Valuations of franchise operations and occupational premises such as hotels, nursing homes, restaurants, pubs, casinos, shopping malls and similar often need to take into account the fact that for efficient operation, these properties have to be run by branded entities. These brands are themselves intangible assets which drive cash flows, and hence will influence a surveyor’s Red Book valuation 182 The role of intellectual property and intangible assets in facilitating business finance
Interviewed for this report, IP attorneys Marks & Clerk (and Marks & Clerk solicitors, its sister
firm specialising in IP litigation) provided insights into the main issues:
Once the IP is identified, the lender will need to verify that the company really does own it. Even if a borrower assumes that this is the case and has registered its ownership, investigation can
reveal that this is not actually the case. Marks and Clerk cite two common mistakes:
• Individual inventors founding a company but never assigning their rights in the original inventions to that company. Despite this, patent applications are then made in the company’s name. Filling this gap in the chain of title at a later date may be difficult, particularly if, for example, one of the inventors has left the company and cannot be located, or can be located but is reluctant to co-operate • The company hiring a consultant to do work for it and assuming that, because it has paid for that work, it will own the intellectual property contained in it. In fact, it won’t unless that IP is expressly assigned to it in the contract. Again, securing such an assignment after the event may not be easy Once registered rights have been identified and their ownership confirmed, and before thinking more generally about value-producing intangibles present in the business (such as trade secrets, proprietary processes or know-how that has been embodied in other ways), the next stage of enquiry is likely to involve consideration of copyright assets (in businesses that deal with software or handle databases, as well as those that are outwardly ‘creative’). Although copyright is unregistered, it is nevertheless recognised in law as being intellectual property, and there are (as referred to above) many instances in which copyright materials are a clear driver of business value. There are also specific steps that can be taken to safeguard a lender’s interests in copyright material that is digital, for example by placing it into escrow.
As Marks and Clerk observe, these assets can have considerable business value:
Copyright resides in software, films and publication. Recipes are a valuable trade secret. These assets may be as crucial and valuable as any patented technology or trade marked brand.
Determining the ownership of copyright materials is not always straightforward, however, as is
reflected by Kerrigan in identifying three main areas of due diligence enquiry: