Intellectual property often forms an important part of a target’s assets, especially for start-ups and high-tech companies. It is important for both the purchaser and the vendor to understand the security registration and discharge process in intellectual property assets.
Registration
Pursuant to the provincial Personal Property Security Acts, Intellectual property is considered a type of intangible personal property, and as previously noted in order to perfect a security interest in such intangible property, a secured party must register its security interest at the appropriate personal property security registry in the jurisdiction where the debtor is located .
In addition, a creditor may “record” such security interest under the Trade-marks Act (Canada), the Patent Act (Canada) and the Copyright Act (Canada) with the Canadian Intellectual Property Office (“CIPO”) by filing a copy of the security agreement and paying the prescribed fee, if applicable. Once recorded, CIPO will place a note on its national register such as “Security Agreement Placed on File” to notify the public of the existence of such security interest attached to specific intellectual property. Secured parties usually file a separate short-form intellectual property security agreement or a redacted general security agreement to record their security interest with CIPO as such security agreement, once recorded, may be available to the public.
It should be noted that the legal interplay between federal and provincial laws of recording such security interests is uncertain in Canada. It is best practice to record such security interest in both the federal and provincial registries to obtain the maximum protection.
Discharge
A prospective purchaser should conduct due diligence searches on both CIPO and the applicable personal property security registries to determine if any security interest has been registered in favour of a third party creditor that need to be discharged or otherwise addressed prior to closing.
To discharge a provincially perfected security interest in intellectual property, a financing change statement must be filed with the appropriate personal property security registry and paying applicable fees. To discharge a “recording” with CIPO, a pay-off letter or release letter should be filed and applicable fees should be paid. Similar to security agreements, usually a separate release letter is filed with CIPO to avoid confidential or sensitive information being filed with a public registry.
In addition to discharging security interests, the purchaser should also register a transfer and assignment agreement with CIPO and pay the prescribed fee to reflect any change in ownership of certain types of intellectual property (i.e., patents and trademarks) upon the completion of the asset sale.
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