Asia IP Profiles Survey Deadline Extended27 March 2020
Asia IP Profiles 2020 ranks IP firms across APAC.
30 September 2020
While tangible assets such as land, automobiles, machinery, and buildings serve as a security for the lender in the event that the borrower defaults on the loan repayment, these days, intangible assets can also be used as collateral. In particular, trademarks are now becoming a favourite asset because of their high values and opportunity for growth.
In New Zealand, a range of securitizations of leading publishing mastheads was recently implemented which effectively involved the transfer of the trademark and the use of that as security for advances. According to Christopher Young, a partner and head of intellectual property at Minter Ellison Rudd Watts in Auckland, who advises in relation to a range of security arrangements, local law in any country will impact whether trademarks, either as direct securitization or as collateral to other securities, is permissible, and both IP law and local security law needs to be taken into account.
“There are a range of approaches to take from transferring the IP asset to the lender with relevant contractual protections for the lender, given ownership of its asset has transferred, to more traditional security taking over the IP asset by the lender,” he says. “The nature of IP rights, though, means that there are a wide range of factors that need to be considered to try to ensure that the validity and enforceability of the underlying IP right is not adversely affected by the arrangements.”
Basic trademark concepts in New Zealand are important, including that the ownership of the trademark by the relevant entity is clearly established and that it is registered in an appropriate manner for relevant goods and services. Young adds that local law requirements both in relation to trademarks and securities law are very relevant and will often dictate structure. To the extent a trademark involves logos and stylizations, it is also important that any copyright subsisting in the mark is also owned by the same entity and that the scope of registrations of the trade mark cover relevant word and logo forms.
“Lenders will also expect comfort (usually obtained through contracts and warranties, and sometimes by independent due diligence assessments as well), that the use of the mark will not infringe third party rights so sufficient comfort needs to be available to them,” says Young. “Valuation of trademarks can be complex and there are a range of methodologies that can be employed to assess this. From a lender’s perspective, a key consideration is what the value of the mark is if it is separated from the underlying originating business. For example, if in a worst-case scenario, the mark needed to be sold to a third party without the incremental value attributable to it from that underlying business.”
He adds that during the Covid-19 crisis, regimes providing flexibility for borrowing money to assist in short-term cash flow issues are likely to be helpful to some businesses, but both from a lender and borrower perspective, careful thought needs to be given to the ongoing viability of the business.
Meanwhile the ability to use IP assets as collateral has long existed in Thailand. It was officially introduced in 2004 when the Department of Intellectual Property (DIP) created a programme aimed at converting IP to capital to promote the government’s policy of supporting the growth of IP securitization. At that time, the Small and Medium Enterprise Development Bank of Thailand (SME Bank) was the only financial organization to join the program. Since other banks viewed the valuation of IP assets as hard to quantify, they saw the program as a risk and decided not to join. The programme was terminated several years later.
The concept has been brought up again by the Business Security Act B.E. 2558 (2015), which allows IP assets to be used as collateral. The Department of Business Development (DBD) has been assigned to host and assist the utilization of this act. As part of its duties under the act, the DBD has enacted several secondary laws and established the Secured Transaction Registry Division, and an online registry for security agreements.
It is important to note that Section 8 of the Business Security Act states that the assets to be used as collateral include “Intellectual Property”. Thus, any type of IP asset eligible for protection under Thai IP laws can be used as collateral, including patents, copyrights and trade secrets.
“For companies who want to use their trademarks as collateral, a security agreement must be made in writing and registered with the registration officer, such as the Department of Business Development,” says Suebsiri Taweepon, a partner at Tilleke & Gibbins in Bangkok. “In practice, registered IP is preferable. Generally, the bank or security receivers would prefer obtaining a registration document (registration certificate issued by the DIP), to ensure that the IP is fully protected and recognized under Thai law. IP valuation is challenging in any jurisdiction and even more so here in Southeast Asia. Many lenders are reluctant to accept IP assets as collateral. A main concern of lenders is how to value IP assets which can be an expensive process of confirming workability, coverage and encumbrances on the portfolio.”
In the case of challenges, Taweepon says that since 2015, IP assets have been recognized as genuine assets for collateralization; however, in practice, many banks currently refuse to accept IP assets as collateral, and primarily look to a borrower’s tangible assets.
“This means that the act has not yet been fully utilized by IP owners due to their inability to successfully negotiate loans for their IP assets,” he says. “One of the lenders’ main concerns is how to value IP assets. Some lenders thus prefer to accept the whole “business” of a borrower as collateral in order to avoid valuing a single IP asset, since it is easier to value a company as a whole. IP valuation requires not only gathering substantial information about an IP asset, but also requires an in-depth understanding of the economies, industries, and specific businesses directly affecting the value of the IP, which most lenders, especially banks, are not currently familiar with in Southeast Asia. An IP owner should be prepared to provide such information to persuade lenders of the creditworthiness of their valuable IP assets.”
Will the world see many businesses in the future using intangible assets as collateral?
Alan Adcock, a partner at Tilleke & Gibbins, says it is important to talk about the need for an institutional change in understanding that IP assets are indeed tangible assets.
“For example, accounts receivable appearing on a balance sheet are considered tangible assets by lenders even though they are not ‘tangible’ in the traditional understanding of that term,” he says. “Asian lenders need to expand their understanding of IP to fall within the same realm of demonstrably calculable assets as physical assets. If so, then this enhanced understanding could expand to include unregistered IP like trade secrets, business methods, goodwill and negative know how.”
Asia IP Profiles 2020 ranks IP firms across APAC.
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