News and Resources > Negotiating Shareholders Agreements – What About the IP?

Negotiating Shareholders Agreements – What About the IP?

Businesspeople will be familiar with the process of These agreements should be customised to ensure they are fit for purpose.

An often overlooked but important consideration for businesses relates to the intellectual property (IP) being created, including securing how the company owns it and having a strategy in place for how it is to be protected and commercialised.

The IP is often the most significant aspect of a company’s worth (think startups, brands, professional services, technology, product innovation, new ways of doing business).

1. Don’t talk without an NDA

When discussing the company’s plans, you may be disclosing confidential information.  To make sure it’s kept that way, put in place an appropriate confidentiality agreement (also commonly known as a non-disclosure agreement or NDA).

Without one, you risk relying on less certain protections at common law, or having no protection at all.  As the saying goes, there’s no property in an idea!

You’ll want to clearly define and capture the nature of the confidential information, and make sure you have appropriate carveouts to ensure the NDA is enforceable.

It should limit use to an express permitted purpose, and include provisions dealing with ownership of any concepts that flow from the discussions (like improvements to underlying IP).  When dealing internationally or in an M&A context, consider what is customary in terms of the length of obligations (which may differ from local experience or usual trading arrangements).

Never sign an NDA without appropriate legal advice.

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2. Assign the IP into the company

Many assume that if a director, shareholder or consultant creates IP, the company automatically owns it.  It does not.  For the company to own the IP, there needs to be a written assignment that clearly specifies the relevant IP and how it is assigned, including the correct entities.

Even where engaging an employee, common law won’t deal with IP created before they start, or that relates to the company’s products or services but is created on the employee’s own time or outside the scope of their duties.

For pre-existing IP, where a shareholder is being issued shares for what they bring to the table, it’s vital to have in place appropriate protections in case there’s a dispute down the track about ownership, or infringement of a third party’s rights.

3. Consider an IP holding company

Often a company creating or developing IP will be engaged in a range of activities that carry with them significant trading risk, including the risk of being sued.  This can present a threat to the continued existence of the enterprise and the valuable IP it builds up over time.

To mitigate this, founders often set-up a separate company to hold the IP, with each entity in the group continually assigning its IP into the holding company to be continually licensed back to the operating entities for their activities.  Tax and financial advice should be sought before entering into such arrangements.

4. Register the names and logos as trade marks

There is a common misconception that registering a company or busines name gives exclusive rights in the name.  It does not.  These are merely legal requirements that do not give any enforceable proprietary rights.

To have exclusive rights in a name or logo Australia-wide, you need to apply to register it as a trade mark.  This should be done in respect of the appropriate classes of goods and services intended to be offered and as early as possible to stop your competitors registering first.  Failure to do so may result in another business having better rights to use the name and may require you to undergo a complete re-branding.  Likewise, you should undertake searches to make sure that your new product name doesn’t step on the toes of an existing trade mark.

5. Get your contracts right from the start

In the race to get revenue in the door, companies might be tempted to make the mistake of signing their supplier or customer’s standard form of contract without appropriate review, amendment and negotiation.  These can be onerously one-sided or fail to deal with the arrangements in a way you’re comfortable with.

When dealing with suppliers, be careful to ensure they provide what they say they will, on time and on budget, and that you secure adequate IP rights in what you’re paying for, and in relation to products or services they’re supporting.

When dealing with customers, make sure you aren’t signing up to requirements you can’t meet or taking on a disproportionate level of risk if things go wrong.   You might be asked to effectively act as the customer’s insurer if they fail to achieve their desired commercial outcomes, even if it’s not your fault!

Even worse than failing to secure the IP, be careful not to inadvertently give away your IP in agreeing to overly broad or aggressively drafted IP clauses.  After all the work in nurturing and growing the company, the last thing you want to do is lose all the value.

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