Consolidating the company’s IP assets in a holding company ensures it is ring-fenced and protected
Modern-day seed business is complex with companies having their businesses in more than one country. Establishing a parent company, a holding company and an operating company(ies) is becoming a model of modern-day seed business. Technology driven companies adopting crop improvement technologies have fuelled growth in intellectual property (IP) assets of seed companies, which include Plant Variety Protection (PVP) registrations, patents, and Trademark. To leverage their IP, seed companies have established different business models while operating in different geographies. Research, variety development, breeder seed production happens in one country, foundation seed production in a different country and finally sale in several countries! Protecting and managing IP in different countries can be a very complex process. The diverse crop portfolio further adds to the complexity. For a multinational company having business in different countries, the complexity increases as seed related regulations vary in each country. Hence, designing the right business structure is therefore important for protecting a company’s IP portfolio from theft, misuse, infringement. It is becoming important for seed companies to limit and protect their IP assets through strategic use of parent, holding and operating companies.
When critical IP, such as PVP, patents, trademarks, trade secrets are being created and used across different legal entities within a group, there is a possibility for “cross-contamination”. Operating companies / subsidiaries may accrue rights to goodwill and/or rights to improvements of the core IP or create new IP on the back of the originally shared IP. They could even file patents and trademarks on behalf of their parent companies. In the absence of any agreement that addresses these issues and sets out the terms of both the usage and accrual of specific IP rights, will result in confusion as to who owns the IP. Sometimes, the subsidiary or the operating company looking either to exit the group or secure a loan on the back of critical IP assets, may not own the IP assets on which the transaction is relying upon. The absence of acceptable licensing framework of IP rights between the group companies, creates an obvious risk to IP ownership.
An IP holding company is an entity created by the parent company that controls and owns the business group’s IP assets and an operating / subsidiary company handles the day-to-day business activities. This structure ensures that the valuable IP portfolio is protected from alleged plaintiffs and the parent company can use the holding company to license IP to their operating companies, subsidiaries or third parties. Consolidating the company’s IP assets creates efficiencies in management, simplifies licensing and may even attract potential investment. IP Holding companies can be used not only for IP asset protection but also for risk management, tax planning, and improving operational efficiency. The model becomes complex when parent companies, holding companies and operating / subsidiary companies are in different countries!!
IP Holding companies offer several advantages. They become a single and central entity that holds the IP, automatically accrues the IP rights generated by any affiliated /operating/ subsidiary companies leaves no uncertainty regarding IP ownership. Setting up an IP holding company requires performing an IP audit across all entities to ensure all relevant IP is identified and captured. This step will provide clear understanding of all IP the group holds, and it can highlight any operational or managerial inefficiencies in current IP creation, protection and management policies. Holding IP in a separate legal entity can shield it from the complications of an operating/subsidiary company’s insolvency, ensuring it is ring-fenced and protected. Subject to stipulations of applicable accounting standards, structured IP holding could potentially help the company recognise its IP assets on the balance sheet at market value. Even if accounting standards require disclosure at cost, fair market value of the aggregated bundle can be assessed with greater ease if there is aggregated holding and domicile of group IP. Such a transparency around the revenue-generating assets of the business can attract investors or secure additional funding. IP holding companies can have a tax structure that properly recognises and accounts for the presence of critical IP within a business. Royalty outflow and inflow both could have direct and direct tax implications specific to geography of domicile and tax treaties with international group entities. Hence, it is critical to ensure that the structure is also tax efficient and compliant with transfer pricing requirements while meeting strategic business and R&D goals. IP-related profits are accrued by the holding company, which are taxed in its country of incorporation. The costs associated with the royalty fees paid to the IP holding company can be deducted from company’s income tax base as operating costs.
Since Holding companies can be used not only for IP asset protection but also for risk management, tax planning, and improving operational efficiency it is important that a right jurisdiction is chosen for incorporating it. It needs to factor type of legal structures available, the underlying holdings and economic activities, taxation and tax treaties between jurisdictions as well as the needs and availability of financial services. A jurisdiction suitable for a holding used to raise funds and provide financing to underlying subsidiaries might not be the same as the one for holding and exploiting intellectual property rights. When it comes to structuring there is no ‘one-size-fits-all’. The most suitable jurisdiction for the IP holding structure will largely depend on the location of its subsidiaries and the parent entity, type of assets held and activities conducted. To sum up, strategic use of parent company, holding and operating companies is required to protect its IP.
Vice President – Life Science Advisory
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