Preparation is key!
Key intellectual property factors to consider when entering a stock exchange or marketplace
Over 60% of the companies currently admitted for trading at the multilateral trading facility Merkur Market have been listed this year. It is therefore safe to say that Merkur Market has experienced an enormous boom and an increase of attention at a time where the financial market still faces uncertain effects from the COVID-19 pandemic. As some of the latest listings assisted by Schjødt are IP-heavy companies, such as (i) clinical-stage biopharmaceutical company Vaccibody, who at the same time announced a multi-billion licensing transaction with Genentech, who is part of the Roche Group and (ii) marine ingredients company Aker BioMarine and (iii) the fast-growing technology pioneer AirThings, let us take a look at what a company, which value is mostly related to its intellectual capital, has to consider before listing it on a stock exchange or marketplace.
The value of a company is dependent on investors' expectations with regard to the size and possibility of future earnings from the company's current business. For some companies, such as technology companies the most important asset, and thus source of earnings, is its intellectual capital. Therefore, a company applying for admission to trade at a stock exchange or marketplace should make thorough legal and technical assessments of its intellectual properties and its market of operation in order to maximize its value potential.
Evaluating the company's intellectual capital gives better understanding of (i) how strong the protection of the information constituting the intellectual property is, and (ii) the level of freedom the company has to operate and exploit its intellectual property – consequently giving the company and its investors a better picture of the company's current business and potential for future earnings.
Protection of information
The first aspect to evaluate is the protection against third parties' use of the company's information which constitutes the intellectual capital, e.g. the technical description of a technology device. Protection of new information (inventions) can be achieved by patent or by trade secret. A patent is a publicly registered right for the inventor of an idea to exclude any other from exploiting such idea for a given period of time in a given country or jurisdiction. A trade secret on the other hand is information which economic value is derived from its secrecy, e.g. the formula of the Coca Cola drink or the search algorithm of Google. Each of them have their advantages, but also limits and downsides. In general, patents will give the strongest protection as trade secrets only protect against those who have knowledge of the trade secret, while patents will protect against any third party. Patents can be used either (i) to protect the company against a third party's use of the information and against lawsuits from third party's claiming the information or (ii) strategically by owning the right to information third parties depend their business on. On the other hand, patents are territorial rights which are limited in time, meaning they only protect against third parties´ use of the information in the given jurisdiction or country for a certain period of time, usually 20 years. In some sectors, like the pharma industry, the timeframe from when a patent first is taken out until the product enters the market might be rather long (in case of pharma due to clinical trials and comprehensive regulatory requirements), consequently shortening the window in which the company has market exclusivity for its idea. Trade secrets on the other hand are not limited in time and are therefore a safe option for certain types of information like methods of production, ingredients, recipes, formulas. Understanding the company's different types of information and the optimal individual protection needs is therefore an essential first step when preparing a business for listing. Read more about protection and enforcement of different types of IP rights in Norway here: https://www.legal500.com/guides/chapter/norway-intellectual-property/?export-pdf
Freedom to operate
Protecting the information is one side, being able to use it is another side. Freedom to operate (FTO) is the company's ability to make use of its information without liabilities towards third parties. An FTO analysis reviews two aspects: infringement and invalidity. Infringement relates to whether the use of information breaches third parties intellectual property, e.g. by commercializing a product which is already, or can only be used to make a product which is, claimed by a third party's patent. Invalidity on the other hand, relates to whether the information itself is not patentable by being already known or previously used or patented.
Accordingly, when conducting an FTO analysis the company should consider the following aspects:
- Origin of information: Is the company registered as the patent owner? Has the company filed the patent itself or has it been transferred to the company? In the latter case, is the chain of transfer verified?
- Limitations due to third party rights: Are there competitors with patents that may limit the full exploitation of the company's information? In what way has the company limited its freedom by giving third parties rights to its information, e.g. by outgoing license agreement(s)?
- Dependency on third party intellectual properties: In what way is the company's business dependent on intellectual property from third parties, e.g. by incoming license agreement(s)?
If the company has license agreement(s), whether incoming or outgoing, the agreement(s) themselves have to be thoroughly assessed as well, as they will either limit (outgoing agreements) or widen (incoming agreements) the company's FTO. The subject of such assessment must be (i) the item to which the license is granted, (ii) whether the grant is made exclusive, (iii) the grants material, timely and territorial limitations, (iv) the granting party's possibility to terminate such license and (v) whether any party is in breach of such agreement or any third party infringes the intellectual property which is subject of such license agreement. Further, when having several outgoing license agreements the company needs to make sure the licenses are not (i) conflicting with each other, making the company liable towards its licensees, and (ii) are not broader than necessary and therefore blocking a part of the company's FTO which otherwise could have been commercially exploited.
Contact our team of specialized lawyers within IP, IT and capital markets to find out more about how you can prepare your company for a successful listing at a stock exchange or marketplace. If you are interested in learning more about valuating technology companies, take a look at the article "Acquisition of technology companies" (in Norwegian).