A Perfect Storm: Insolvency, exits and intellectual property
At the beginning of Covid-19, it was suspected that many businesses, including startups, would not be able to survive the pandemic, and not for a lack of trying. See our article appearing in Intellectual Property Magazine (Durand, King, July 2020):
There are many sources of insolvency, ranging from a businesses’ inability to repay loan commitments, such as the Canada Emergency Business Account (CEBA), financial contagion (i.e., events leading to the collapse of the Silicon Valley Bank, SVB), poor financial management, cashflow issues, economic downturns and recessions, inflation, interest rates, and other risks which we do not know will emerge tomorrow (i.e., global interdependencies, war, geopolitical events, etc.), amongst others.
Though the consequences of SVB were felt around the world (Aharon et al., 2023, Yousaf et al., 2023, CSR, 2023), the National Bank of Canada stepped in to reaffirm its leadership in the technology banking space through acquisition of Silicon Valley Bank’s Canadian portfolio, thereby providing some relief to Canadian businesses that had worked with SVB prior.
Despite this, recently released insolvency statistics have presented a troubling story: business bankruptcies have soared. Writing in The Hub, University of Calgary professor of economics, Mr. Trevor Tombe, states: “the current figures are nearly double the average number of bankruptcies in the years preceding the pandemic. This translates to approximately a dozen businesses declaring bankruptcy every day. And corporate bankruptcies are at levels not seen since the 1990s.” The Canadian Broadcasting Corporation has also reported that “business insolvencies shot up by more than 41% last year, as pandemic debts mount”.
Moreover, National Crowdfunding and Fintech Association of Canada (NCFA) colleague Richard Remillard points to a growing body of research that shows that Canada is witnessing a serious decline in entrepreneurship (BDC Report, RBC Report). Hopefully, a new cohort of entrepreneurs will fill in this gap (see our blog titled From good to great: The construct of an entrepreneur).
On the auspice of a ‘perfect storm’
In the face of adversity and conditions that threaten their very existence, businesses, including their IP agents, lawyers, licensed insolvency trustees, consultants amongst others, must be able to understand and address the intricacies of intangible assets/intellectual property, such as:
the impact of insolvency events on IP rights, including licensing arrangements, and their disposal (i.e., sale, valuation, etc.). This means, in certain cases, honouring the license agreement, wherein “...the licensee has the continued right to use the IP and to assert rights of exclusivity, although the insolvent licensor may not have to perform certain additional obligations under the license. Upon the sale of IP assets in insolvency proceedings, buyers acquire IP licenses in accordance with their terms and must perform the accompanying obligations in the place of their original owner (except where the licenses are earlier disclaimed, in which case the licensee's rights are limited as noted)” (Baker McKenzie);
identify financing possibilities, including IP-backed financing, if available;
determine if their insurance policy (or policies) covers economic downturns and recessions as insurable events;
know what grant and incentive programs can be used to fund business activities and possibly extend their operations and inversely their survival;
identify and review the inventory of asset(s), including their: expiry dates, chain of title, etc, so as to determine which assets belong to which owner(s) and determine the value thereof;
obtain assessments as to the validity of their assets, and more particularly determine if they are subject to any particular challenges (eg, oppositions, protests, re-examinations, invalidity attacks) and evaluate the “chances of success” of such challenges through MVIP partners;
have agreements reviewed to determine whether any intangible assets/intellectual property were hypothecated, licensed, or assigned to any third parties, as well as determine the amount of revenue generated therefrom;
have employment, supplier agreements and/or commercial agreements reviewed to determine who retains ownership of the IP rights, as well as a review of applicable legislation to determine if, by operation of the law, the IP rights are automatically assigned in favour of the business; and
have personal property and intellectual property office registers verified in the applicable jurisdiction(s) so as to determine whether any security interests have been registered in favour of a third-party creditors, and which may need to be discharged or otherwise addressed prior to closing a transaction.
In today's economy, all of these considerations, amongst others, must be project managed so as to capture and maximize value, as well as avoid taking premature actions that could trigger an insolvency event.
Need more information on the above, contact us.