Michael D. Moberly April 4, 2012
In most every business transaction today, valuable and competitive advantage driving intangible assets, such as IP and proprietary know how, etc., will be in play. This makes it all-the-more essential that prospective buyers – recipients of those assets, i.e., those assuming fiduciary responsibility for the assets’ stewardship, oversight, management, and use, recognize the risks and challenges associated with achieving a favorable and uncontested transaction outcome.
Anecdotal experiences from victim companies coupled with numerous and prominent studies collectively find a significant percentage of (intangible) asset risks and challenges emanate from a global culture and industry that’s increasingly dependent on and engaged in information (intangible) asset theft, infringement, and misappropriation. Today, it’s quite proper for management and/or transaction management teams to demonstrate prudence by acknowledging and trying to prevent, or at least mitigate, such risks, particularly during negotiations, and certainly before finalizing any business transaction in which intangibles are in play and ultimately part of the transaction.
Seldom is it in the (reputational) interest of victim companies to go public with their inability to safeguard their most valuable assets unless so mandated by law. Consequently the value of intangible asset losses attributed to theft, infringement, misappropriation, counterfeiting, and/or product piracy, etc., still largely remain well intentioned estimates. That’s why it’s absolutely essential for transaction management, due diligence, and negotiation teams alert asset buyers – prospective asset recipients before finalizing a deal, that the deal’s projected value and benefits, particularly those evolving from intangibles, are highly dependent on conducting a thorough and effective due diligence. The level of due diligence I am referring to must, at minimum include a comprehensive assessment of the (intangible) assets’ status, i.e., stability, defensibility, and value in both pre and post transaction contexts.
Also, if the transaction is global in scope, the transaction management, due diligence, and negotiation teams need to fully factor into their respective roles, the reality that in numerous countries (e.g., USTR, Section 301 countries particularly) substantial percentages of their GDP, sources of employment, personal income, and manufacturing base are strongly linked to perpetuating the supply of products stolen, infringed, misappropriate, and/or pirated from their rightful owners.
It’s quite correct then for prospective buyers of transacted products and intangible assets to conclude that these adverse – illegal acts have moved well beyond the realm of merely being annoying probabilities of experiencing minimal (intangible asset) losses which companies have grown accustomed to be part of any business transaction, to becoming extraordinarily costly and potentially lethal inevitabilities if left unchecked or un-considered.
To further this point, prudent transaction negotiators must recognize there are few, and in many instances, no impediments for existing, would-be, or future (asset) infringers, thieves,, counterfeiters, and product pirates to stop engaging in such acts. In large part, that’s because…
- start-up costs are minimal for infringers and their manufacturing counterparts
- such illegal acts can be executed with increasing anonymity
- cyber-attacks are playing more consistent roles in the theft of intangible (IP) assets
- deterrents’, legal or enforcement, are generally lax and inconsistent which permits the potential for long periods of quick and substantial profiteering
- the extraordinary speed in which infringement, counterfeiting, and product piracy can materialize and adversely affect a company
The following are important questions intended to influence thoroughness and prudence when engaging in (negotiating) transactions in which intangible assets are integral components, i.e., what is the…
- company’s loss tolerance threshold or ‘tipping point’ insofar as economic, competitive advantage, market share, reputation, goodwill, consumer confidence, and/or project momentum stifling, etc…?
- probability that such losses and/or compromises when – if the occur, will be irreversible and permanent,,.?
- value of the victim company’s competitive advantages and reputation losses…?
- does the victim company have a recovery and/or remediation plan in place, how rapidly can it be implemented, how much will it cost to execute, and what’s the probability a favorable outcome will be achieved…?
- degree of global universality of the company’s products and/or services, and are there any (potential) dual-use components or applications embedded in those assets…?
- cultural (business, legal, government) receptivity to (climate for) infringement, counterfeiting, and product piracy in the host country-region where the transaction will be executed…?
The above represents only a few (but key) considerations company transaction, due diligence, and negotiation teams should consider. But, I especially urge companies to not dismiss these issues/questions solely for transaction expediency.
It’s especially important to recognize that asset hemorrhaging (caused by infringement, theft, misappropriation and/or product piracy and counterfeiting) can occur well before the ink dries on a transaction contract. Too, it’s an unfortunate reality that some transaction management – negotiation teams (still) assume they can consummate deals and create revenue streams from acquired – purchased (intangible) assets before those assets will succumb to any adverse or illegal acts.
In the ultra-competitive, aggressive, predatorial, and winner-take-all global business transaction environment, a management team’s dismissive attitude toward such probabilities, if not inevitabilities, in my view, could quite accurately be characterized as permissive neglect!
(Adapted by Michael D. Moberly and inspired by Pat Choate’s ‘Hot Property’, The Stealing of Ideas In An Age Of Globalization and the more current work of Dr. Joel Brenner in his book appropriately titled ‘America the Vulnerable: Inside the New Threat Matrix of Digital Espionage, Crime, and Warfare’.)