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From Know-How to Can-Do: Capitalising on IPR to Unlock Funds From Within a Pension Fund
By Christopher J Sherliker

At a time when fundraising for SMEs is intensely difficult and the clearing banks are potentially more concerned about rebuilding their balance sheets than helping businesses, Jonathan Silverman and Head of Pensions Jennie Kreser explain how a company’s IPR can be used as a means of raising money from another source – namely the company's own pension fund.

A company's Intellectual Property Rights (IPR) can, in many cases, be an unrecognised, but nevertheless valuable, asset. Whilst from a conventional perspective they have not been seen as the most obvious candidate to use as collateral or investment, this should certainly be reviewed in today's world.

Intellectual property refers to the bundle of legal rights covering copyright, patents, trademarks design rights, know-how contracts and client databases. Usefully, a number of these are registrable, which helps to establish their validity and enables exclusive rights to be granted for their commercial exploitation.

Whilst, at first, it may not appear apparent that a pension fund can be used to acquire IPR from one’s own company, this is in fact the case. Perhaps in recent years there has been considerable reluctance to do anything creative with pension funds after the fiasco created by the Maxwell fraud in the early 1990s and the legislation which followed, but things have moved on, and there is certainly an opportunity for employers to consider selling their intellectual property to their pension fund in certain circumstances.

In essence, pension funds can purchase intellectual property so long as that purchase is made at arm's-length and the scheme is empowered to make purchases of that nature.

In the UK, most occupational schemes are run under a trust, and sometimes the appointed trustees can be the directors. They must, of course, run the scheme for the benefit of the beneficiaries; however, they also have the ability to invest the scheme assets as if they owned them outright and the power of investment more often than not extends to intellectual property.

The key to achieving success is that the trustees have to satisfy themselves that the investment in intellectual property fulfils certain basic criteria.

The very first step has to be a thoroughly independent and sustainable valuation of the IPR (but, of course, only once all the IPR which is available to be transferred has been identified).

It is worth remembering that a company's brand is made up of a number of components, so, in the case of a fashion company, it may be their trademark, all copyrights and design rights associated with their product range, and even IPR protecting production capability and contracts. This total bundle of assets needs to be properly identified and valued as a whole before being offered to the pension fund in order to achieve the maximum value.

One factor in valuing the IPR is the terms of the proposed licence back from the pension fund to the company and, in that context, working out what the income streams will be. Fortunately payments are deductible for corporation tax purposes, which creates an added bonus in terms of the tax efficiency of this means of funding.

Another consideration is the calculation of the discounted cash flow value generated by the IPR over its useful life. There is benefit in comparing other transactions to establish values and to adjust accordingly, also taking into account such aspects as recreating the IPR and the amount initially invested in its creation.

Fortunately, the whole evaluation matter is now governed by the International Organisation for Standardisation, the International Accounting Standards Board and the International Valuations Standards Committee.

It is also helpful that the Pensions Regulator now accepts less traditional assets as being suitable for pension fund investment; within the last 12 months, we have seen PFI contracts, shares in a broadcasting subsidiary, a mixture of assets including trademarks, and, in one case, even barrels of whisky, so registered IPR generating an income stream should not in itself cause a problem.

However, it is important for trustees to not only follow precedent, but to also exercise their investment criteria in accordance with the Occupational Pension Schemes Investment Regulations 1995, which demand that trustees choose investments carefully to ensure their suitability.

Nevertheless, in the case of SMEs, there is one very useful exception from the scope of the requirements. As a result of Regulation 7, the investment requirement does not apply to schemes with less than 100 members. Consequently, most SMEs’ schemes will be sufficiently small to enable this exception to be taken advantage of quite effectively.

Small self-administered schemes (SASS) are ideal because they're flexible. SSASs are occupational pension schemes operating under a trust for the benefit of less than 12 members. They are usually established by and for a business owner and his key employees – just the sort of situation which one comes across regularly when funds are needed.

In addition, the trustees and the members of an SSAS are one and the same, so as long as the scheme is kept separate from the business, and it secures an asset at a fair value and at arm's length, then the obligations as a trustee will have been satisfied.

Both quoted and small companies have recently been involved in selling IPR to their pension schemes. One case involved valuing a patent, copyrights, know-how design rights and the trading reputation resulting from an engineering process. In that case, the patent was absolutely central to the business; in addition, the trustees could demonstrate that if the company was to fail, they would have a fairly good chance of licensing the rights to a third party. Therefore, the trustees were prudent when acquiring the rights, by doing so on a very conservative basis and, even then, taking a discount from the market value.

In another instance, a well-known and established supplier to the retail sector capitalised on their trademark, as well as their supply agreements and customer databases, as part of a package of rights which were then sold to the pension fund, thus dealing with a short-term cash crisis.

In summary, many companies have IPR rights. They need to recognise that these have a significant value and, when utilised to unlock the cash held within the pension fund, they could be a valuable resource to enable the business to move forward.

Added: 3rd February 2011

Christopher J Sherliker is a partner for Silverman Sherliker LLP who provide legal solutions across a spectrum of requirements.  Find out more about Silverman Sherliker LLP.

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