Corporate and business

Selling your Business (1)

 

Unless you happen to be the one person who answers a knock on the door to find someone so desperate to buy your business that they’ll pay whatever you want for it – and I’ve never dealt with one in my career – you will find that when you do want to sell your business, it isn’t easy. If you are to maximise the price you get, the business or company has to be “clean” (minimising the risk of the buyer price-chipping); you and your fellow shareholders need to know what you will accept and the taxation implications of that; and then you have to find a buyer. All in all, it isn’t easy: much more art, rather than science.

Market trends

Among the market trends just now are:

–           There are very few deals where the whole of the agreed price is paid on the date of sale. Many deals involve some element of deferred consideration or earn out – and they cause potential tax problems (when are you treated as receiving the cash, for tax purposes) and risk issues (will I get the deferred element?). It’s best to be briefed about these sort of things before going into any negotiations.

–           Capital Gains Tax relief. I know that I have already mentioned tax a couple of times, but Entrepreneur’s Relief (ER) from CGT is such a useful relief that many deals are shaped around it. It’s often said that ER results in the lowest tax rate many of us face, short of dying! Slightly more seriously, if the business and individuals qualify, the prospect of facing only a 10% tax “hit” has focussed minds on doing deals in order to lock-in the net-of-tax sum. That’s fine but don’t assume that you’ll get the relief: take advice.

Finding a purchaser

It is not uncommon but it is relatively rare for someone to buy a business in a sector they know nothing about. Those sort of deals are more likely to be financially, rather than commercially, driven. In most cases, the buyer will be someone in broadly the same line of work or someone already at the business – someone known to you, in many ways. So, if the prospective buyer is known to the seller, why do the majority of people engage an outsider to help with the sale?

Among the reasons for that are

–           It’s hard to sell businesses, and it follows that it is better to have someone who “knows the ropes”

–           This may be the biggest transaction that you will ever do. Would you trust your finances to someone who may never have done one of these before (i.e. you) or who might become too emotionally tied up in the deal (i.e. you)

–           External people are deniable. They can ask and say things that sellers often can’t, particularly if you have an existing business relationship with the buyer.

Selling your business is not the kind of thing that can be done on a Purple Bricks type of site, if in fact one exists: businesses are just too complex

To be continued…..

 

Please don’t hesitate to contact John Clarke or  Alison Marshall with any queries regarding your business

Gimme a break?

No break for Nestlé in trademark row

On 25 July 2018, the European Court of Justice (ECJ) dismissed Nestlé’s attempt to overturn a ruling that it had not done enough to prove KitKat’s shape deserved legal protection.

The case was about whether the brand had become distinctive enough to deserve its trademark, meaning that its shape alone was how people recognise the snack.

The ECJ declared that it’s not enough to prove that a product has become iconic in “a significant part” of the EU – it has to be recognised throughout all 28 countries of the EU i.e. proven across all the markets of the bloc and not just some.

The ECJ instructed the EU Intellectual Property Office to reconsider its decision to grant Nestlé a trademark in the first place.

The ECJ sided with the makers of Kvikk Lunsj, a Norwegian snack that is a long-time favourite of hikers and skiers – and is shaped almost exactly like a KitKat. The decision will allow Mondelez, the maker of Kvikk Lunsj, to market and sell the chocolate bar more widely throughout the bloc.

 

How did we get here?

For 16 years Nestlé has been trying to trademark its KitKat four-finger shape in the EU, arguing that it’s a distinctive feature which deserves protection.

The ECJ is the latest battleground in the feud between the chocolate bars, which began when the company Freia first introduced the Kvikk Lunsj – “Quick Lunch” in English – to Norwegians in 1937, two years after KitKat hit UK shelves.

For 65 years, KitKat and Kvikk Lunsj co-existed – until 2002 when Nestlé applied for a trademark in Europe for Kit Kat.

Their battle intensified in 2006 when Nestlé secured a trademark for KitKat’s shape, only to be challenged by Kvikk Lunsj maker Cadbury, now owned by Mondelez.

In 2016, a lower EU court decided that Nestlé had to prove a Kit Kat was recognisable in every EU country – and no evidence had been provided for Belgium, Ireland, Greece and Portugal.

Nestlé and the EU’s trademark office appealed against the 2016 decision. If proof of distinctiveness had to be shown for every single member state, they argued, no company could ever reach that high standard.

Mondelez, meanwhile, argued that it was wrong to conclude that KitKat had “distinctive character” anywhere – including countries like the UK, Germany and France.

The European court threw out all those objections.

 

What does this mean for Nestlé?

For now, KitKat is set to lose its EU trademark, but there is still a fight to be fought.

Rather than cancelling the trademark the ECJ decided that it should never have been awarded at all on the basis of the evidence. This means the decision heads back to the EU trademark office. Assuming the EU Intellectual Property Office does not have evidence that the shape is distinctive across the EU, the trademark will be removed from the register. It is open to Nestlé to apply again, and to put stronger evidence in.

Nestlé are determined to keep fighting as they believe the “distinctive shape” of their KitKat is deserving of protection.

 

What does this mean for us?

Courts wish to ensure that they are not giving a monopoly to a company for a shape that’s needed to make a product. For example, a circle for a cracker can’t be trademarked.

As discussed in our previous article, establishing distinctiveness of a 3D shape is still a high hurdle to overcome.

In order to get trademark approval, you need to be able to show that your shape is distinctive enough and that it’s not merely  functional. When proving distinctiveness, carefully consider the evidence you plan to document in your application. Where it is possible to gather evidence of comparability in similar markets, expressly refer to it in your application.

 

If you have any queries regarding trademarks, please get in touch with Alison Marshall and Sophie Graham in our corporate team.

Technology & Intellectual Property

Glen Buchenbach – German Whisky, Glens, and GIs – Are you confused?

The background to this case concerns an action made by the Scottish Whisky Association against the Waldhorn Distillery in Germany requesting an order that would prevent the German Distillery from the marketing the Whisky Glen Buchenbach. The German whisky described on the label as a “Swabian Single Malt Whisky” is distilled near Stuttgart in the Buchenbach Valley, is labelled as made in Germany and used the word Glen as a play on words.

 

The Scottish Whisky Association claimed that use of the term ‘Glen’ infringes the registered geographical indication “Scotch Whisky”, in so far as it constitutes both indirect commercial use and an evocation of the registered geographical indication, as well as being a false or misleading indication, prohibited under Article 16(a), (b) and (c) of Regulation No 110/2008. The argument being that the word “Glen” the Gaelic word for valley, would mislead consumers into thinking the whisky was Scottish.

 

The District Court of Hamburg referred the following questions to the ECJ:

  • Whether “indirect commercial use”, within the meaning of Article 16(a) or “evocation” referred to in Article 16(b) of that regulation, requires that the protected geographical indication be used in an identical or phonetically and/or visually similar form, or if it is sufficient that the disputed element evokes in the relevant public some kind of association with that indication.
  • Whether, if the mere association of ideas is sufficient, account should be taken, of the context in which the term used to designate the product at issue is embedded and, in particular, of the fact that it is also accompanied by an indication, on the label, of the true origin of the product.
  • Lastly, it asks whether, when determining whether there is any ‘other false or misleading indication’ within the meaning of Article 16(c) of that regulation, the context of the disputed term should be taken into account.

The ECJ found that:

  1. Indirect use” of a FI requires the disputed designation to be indentical, phonetically or visually similar to the indication and it is not sufficient to evoke some kind of association to the relevant GI.
  2. For the “Evocation” of a GI there is no requirement for there to be a phonetic and visual similarity between the disputed designation and the indication in question. It is not, however, sufficient that the disputed designation is liable to evoke in the relevant public some kind of association of ideas with the protected indication or the geographical area. It is necessary to account for conceptual proximity between the GI and the disputed designation.
  3. for the purposes of establishing the existence of a ‘false or misleading indication’ prohibited by that provision, it is not necessary to take account of additional information found alongside the sign at issue in the description, presentation or labelling of the product concerned, in particular with regard to its true origin.
  4. There was doubt as to whether there was sufficient conceptual proximity between the GI and the designation.
  5. It is not a decision for the ECJ to assess the nature of the evocation.
  6. It was referred back to the National Court to make a decision, to determine whether, if the average European consumer  would  associated the word ‘Glen’, with that of ‘Scotch Whisky’.  Even if the referring court were to find that consumers systematically associate the word ‘Glen’ with whisky, the required close connection to Scottish whisky, and thus the necessary proximity to the indication ‘Scotch Whisky’, may be lacking.

All in all it’s quite a high threshold for the National Court of Hamburg to determine, as consumers may associate a glen with Scotland or with whisky, but whether it could be associated particularly with Scottish Whisky is yet to be determined.

If you have any questions regarding Intellectual Property, please speak to Sophie Graham and Alison Marshall in our corporate team.

 

SCOTTISH LIMITED PARTNERSHIPS

Scottish Limited Partnerships – or SLPs – are strange entities in the eyes of many people. They must have at least one limited partner (whose risk is limited to the amount invested and who takes no part in the management of the SLP) and one general partner (who takes all the decisions and bears all the responsibility). Crucially, they also have their own separate legal personality – unlike Limited Partnerships in (for example) England and Wales.

The fact that SLPs have their own legal personality means that they can own assets; borrow money; grant security and so on. They are also transparent for tax purposes, so that the SLP will not have any liability to UK taxation in Scotland. Rather, the partners will be liable to taxation in their own jurisdictions.

Taken together SLPs are very useful for the investment industry since they allow give an entity in a law abiding jurisdiction, separate legal personality and tax transparency. But those useful attributes have also attracted criminals, who have been using them for money laundering and so on. If the limited partners are entities based in tax havens which require no identification of beneficial owners, the risk is that you end up with a legitimate-sounding entity owned (through several layers) by criminals in other countries. As an example, at the latest count more than 500 SLPs are registered to an address in social housing in a very poor part of Edinburgh!

Inevitably, the UK government is cracking down on the misuse. The first step is to require greater disclosure of who the beneficial owners are of the interests in the SLP, with the threat of UK “freezing and seizing” laws should anything untoward be found. It is to be hoped, therefore, that this crackdown will stop the crooks from operating – but not in a way that impacts on the legitimate use of SLPs.

SLPs have played, and will play, an important part in the structure of investment funds. We have used SLPs in a number of funds where we have been instructed, and they have performed their purpose well. So, the hope is that the steps taken by the UK government do not cause issues for the use of SLPs in the financial industry.

If you are interested in learning more about how SLPs could be used by your clients, please get in touch with us.

John Clarke or Alison Marshall

AVRIO

 

So – it’s that time of year again when we remember to remind you all about Avrio. Each year, in Spring and Autumn, Avrio members gather together for a conference. The May 2018 conference is in Brighton, with 51 representatives there from 25 countries.

I’ve been involved with Avrio since Autumn 1990 (annoyingly, just missing the Spring 1990 meeting in Berlin – not long after the wall fell). Despite what of my colleagues have inferred, this hasn’t just been nearly thirty years’ of travelling and meeting (and eating and drinking) at their expense…..

We, and I, have learnt a lot in these years. One of the big lessons I learnt early on (when everyone from northern Europe responded to a questionnaire on time, and no-one from southern Europe did) is that neither is right or wrong: it is the way that things are done by those people. Similarly, when a German colleague wanted a two day response time from everyone with a progress report on a litigation matter, a colleague from Portugal said he would get a proforma response prepared – because nothing would happen for years. Again, that’s just the way it is: neither right nor wrong. But it does seem something that the UK has ignored in relation to the tortuous Brexit negotiations.

What have we gained from membership of Avrio? Some overseas customers that we wouldn’t have but for Avrio. The ability to get help for our customers from trusted colleagues elsewhere. And the ability for those involved in Avrio to get all sorts of training: not to get hung up on whether something should be subject to Scots law (because lawyers really like these jurisdictional points); when I was in the chair, how do deal with lots of lawyers used to getting their own way (think of herding cats…); and really thinking about and discussing cross-border issues.

Avrio and its members and connections are there for CCW’s customers to use. Broadly speaking, if we don’t have a member in the country that concerns you or that member doesn’t do the sort of law you need, we’ll find the right person for you.

John Clarke, Partner

 

For further information on AVRIO please contact John Clarke

Does your contract refer to Europe?

There are endlessly longs list of things that might be required in order to prepare for Brexit for businesses. Because the type of arrangements to be put in place post-Brexit are not yet clear, many of the items of those lists are still uncertain.

 

However, one thing that can be done now, which will put firms in a more robust place post-Brexit, is to check their new and existing contracts that have implications in more than one EU member state. Quite often such contracts will define the EU or Europe as a territory – perhaps for a licence of rights or a restriction of some kind.

 

Look closely at how “EU” is defined. Is it “the EU as it is composed from time to time”? Is it “the EU as at the date of the agreement”? Is it just “the European Union”? The definition used may result in either the UK being excluded from it shortly, or remaining in it when it is not any longer a member state. Even worse, vague definitions might be unclear and result in dispute.

 

Whichever way it is drafted, there is a real risk of unintended consequences come 30 March 2019 (or possibly at the end of a transitional period).

 

In many cases, the parties are likely to come together and agree how things are to be dealt with going forward, and that will be much easier to do in advance of the withdrawal date. However, in less friendly relationships, there is a risk that a party tries to take advantage of such drafting. Either way, it makes sense to check your contracts and approach other parties sooner rather than later.

 

It goes without saying that the other step to be taken is to look at any new contracts being entered into – especially if you use standard template contracts. Think carefully about how you define a European territory – perhaps list the specific states, if appropriate. Consider inserting clauses to deal with Brexit-induced changes, which might trigger a right to terminate or renegotiate should certain repercussions of those changes adversely affect the efficacy of the contract.

 

Many businesses are currently feeling a bit helpless in relation to preparing from Brexit, but these are real, practical steps that can (and should) be taken right now.

 

To discuss this matter or to find out more information please contact Alison Marshall

No breaks for Nestlé – “4 Fingered” Kit Kat found not to be distinctive by CJEU Adviser

In light of the opinion delivered from Advocate General Melchior Wathelet, Nestlé is facing up to losing its EU trademark for Kit Kat due to lack of acquired distinctiveness across the EU.

Facts

  • This decision is the latest development of the legal battle between Nestlé and Cadbury and subsequently Cadbury’s new owner Mondelez.UK Holdings & Services Limited.
  • To recap, Nestlé applied in 2002 for European trademark protection of the three-dimensional shape of the “four fingered Kit Kat”, which was granted by the European Intellectual Property Office (EUIPO).
  • Cadbury filed an application seeking a declaration of validity, this was initially accepted by the cancellation division of the EUIPO, but on appeal their challenge was rejected by the second board of appeal of the EUIPO.
  • This was appealed before the EU General Court Registry in 2013 and the General Court annulled the EUIPO’s decision on the basis that the distinctive character through use in the European Union has only been proven for a part of the territory of the EU.
  • The EUIPO and Nestlé then appealed the decision on the basis that the General Court had infringed Regulation No 207/2009 by considering that the proprietor of an EU mark must show that the trademark has acquired a distinctive character through use in each member state separately.
  • The AG however found that Nestlé’s appeal should be dismissed

 

The reasoning behind the AG decision was as follows:

  1. Whilst Nestlé provided market research for the majority of the members states, it can be seen that the information provided for Greece, Belgium, Ireland and Portugal was not sufficient to establish that the relevant public in those countries identified Nestlé as the commercial origin of the four fingered Kit Kat,
  2. The General court did not examine whether, with regard to the product covered by the trademark at issue, the acquisition of a distinctive character through use in those 5 member states could be extrapolated on the basis of the evidence provided for the other national or regional markets and Nestlé had not included evidence in the file that the evidence from the other member states could be extrapolated to the other 5 member states and therefore prove the distinctive character.
  3. Nestlé had not established in respect of the product, the comparability of the Belgian, Irish, Greek, Luxembourg and Portuguese markets with some of the other national markets for which it had provided sufficient evidence, therefore the General Court had no option but to annul the decision of the EUIPO.

Lesson to be Learned

  • Establishing distinctiveness of a 3d shape is still a high hurdle to overcome
  • Carefully consider the evidence that you will provide in order to prove the distinctiveness
  • If it is possible to extrapolate evidence for comparability from similar markets, then this should be expressly referred to.

If you have any queries regarding trademarks, please get in touch with Alison Marshall and Sophie Graham in our corporate team.

Ken Dodd’s last laugh

You may (just) have read that Ken had the last laugh on HMRC, by marrying his long term fiancée just before his death. That way, his assets passed to her without Inheritance Tax being paid – whereas up to 40% would have helped the Treasury otherwise.

There are also rumours that some high-profile divorces had at least a hint of tax planning about them.

While I am not advocating marriage or divorce for tax planning purposes, they are important – if delicate – things to take into account when looking at the shares in (for example) family companies. Is there a risk of family wealth being “lost” on divorce? Or, in taxes, on death? So, as well as having up to date wills and Powers of Attorney (and you do have both – don’t you?), you do need to have a think some time about, well, what next?

What will happen to your interest in the company when you want to retire? And, what happens on divorce?

From our perspective at CCW our prime interest is in our client businesses. We don’t pretend to understand the niceties of (for example) divorce law: we have good professional colleagues who we can call on should advice be needed there. But, we can do things to protect family ownership in those unfortunate circumstances, even if we can’t do much about ring-fencing value.

But the purpose of this article isn’t to make you think about the stability of, for example, your children’s relationships. No, it is to make you think. What will happen to the business should the worst happen? Just as you’ll probably have life insurance, you should think of this as “business insurance” and take the steps you can to protect the business.

If you would like to discuss any of the points mentioned above, please get in touch with John Clarke in our Corporate Team

 

TAYLOR SHAKES OFF THE HATERS

Copyright claim again Taylor Swift has been dismissed

The Court of California has granted Taylor Swift’s motion to dismiss the copyright claim originally brought by Sean Hall and Nathan Butler against her, which claimed that Swift had copied the lyrics “Playas gonna play… and haters they gonna hate” in her 2014 hit “Shake it off” from their song “Playas gon’ play”, which was released back in 2003 by the US girl band 3LW

First, let’s do a quick refresh on what copyright is. You are entitled to automatic protection under copyright law when you create:

  • original literary, dramatic, musical and artistic work, including illustration and photography
  • original non-literary written work, such as software, web content and databases
  • sound and music recordings
  • film and television recordings
  • broadcasts
  • the layout of published editions of written, dramatic and musical works

In the Taylor Swift case, the whole argument was reliant upon whether the combination of the lyrics was in fact original and creative. The phrases in question were popularly used from the 2000s onwards, therefore neither phrase was found to be original or creative. While it is true that a combination of unprotected words may qualify for protection, it is not true that any combination of words will qualify for protection.

The court held that “the allegedly infringed lyrics are short phrases that lack the modicum of originality and creativity required for copyright protection. Accordingly, if there was copying, it was only of unprotected elements of Playas Gon’ Play.”

Sean Hall and Nathan Butler were given leave to amend by 26 February but have failed to file an amendment before the deadline.

If you require advice on an intellectual property issue, please get in touch with Alison Marshall and Sophie Graham from our corporate team.

 

Data Protection Update: Morrisons Supermarket Responsible for Data Breach Caused by an Employee

The High Court in England and Wales has issued its long-awaited judgement on the Morrison’s data breach, an action that was brought by 5,518 employees. The judgement provides employers with plenty of food for thought as the court found Morrisons vicariously liable for the act of its rogue employee, despite the Court finding that Morrisons had not failed in its duties.

The Facts

In 2014 Morrisons became aware that a file relating to 99,998 employees’ personal data had been shared on online by a senior online IT auditor who had been harbouring a grudge due to a previous disciplinary. The file (which had also been sent to several national and local newspapers) contained employee names and addresses, dates of birth, bank account details. Morrison’s was alerted to the web page by one of the local newspapers and had the link taken down within a few hours.

The employee was subsequently arrested and convicted to 8 years imprisonment for offences under the Computer Misuse Act 1990 and the Data Protection Act 1998 (DPA).

A claim was then brought against Morrison by its employees which alleged:

  • claim compensation both for breach of statutory duty (under Section 4(4) of the DPA) and at common law (the tort of misuse of private information, and equitable claim for breach of confidence).
  • The claims are put on the basis that Morrisons has both primary liability for their own acts or omissions, and secondary (vicarious) liability for the actions of one of their employees harming his fellow workers.
  • In respect of the DPA, primary liability is said to be absolute or strict, rather than a qualified liability only arising if Morrisons failed to observe appropriate standards: but in the circumstances that the DPA does not impose liability, it is asserted that in any event Morrisons failed to observe those standards and is liable on that alternative basis

 The main queries dealt with by the Court were:

  • whether an employer is liable, directly or vicariously, for the criminal actions of a rogue employee in disclosing personal information of co-employees on the web,
  • whether under the DPA 1998, an action for breach of confidence, or in an action for misuse of private information.

 Conclusion:

It was held that:

  • The DPA does not impose primary liability upon Morrisons.
  • Morrisons are not at fault by breaking any DPA principles, apart from one:
    • Morrison fell short of their duty of principle 7 of the DPA in respect of not having an organised system for data deletion for guarding against unlawful disclosures/ data loss – but this neither caused nor contributed to the data breach.
  • Morrisons were vicariously liable, as they were responsible for the actions of their employee during the course of his employment.

Implications for Employers

This English decision could leave the door wide open for claims brought by employees that have been victims of data breaches. However, there was a tone of reluctance from Mr Justice Langstaff to find Morrisons liable, and he gave Morrisons leave to appeal, so watch this space.

In any event, employers will have to think about how they balance employee surveillance with the right to privacy. We will be updating you on the General Data Protection Regulation which comes into force on 25 May 2018.

In the meantime, if you need any assistance regarding Data Protection you can get in touch with Sophie Graham and Emma Arcari.