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Reviewing an Investment - a legal view.
WHAT DO INVESTORS WANT?
Introduction
Private equity transactions cover a variety of arrangements including:
• funding for businesses starting from scratch (start ups),
• the injection of funding into existing businesses to help them expand (development capital); and
• the funding of purchases of businesses by management teams (buyouts).
In this article we will consider some common issues for Investors when providing funding for start-ups and for existing businesses looking to expand.
Business Plan
A key document that any Investor will want to see is a detailed business plan. The business plan acts as an insight for the Investor into the major objectives and key strategies of the business and it helps the Investor understand the business’ strengths, weaknesses, opportunities and threats.
The business plan should be concise and contain a description of the industry in which the business operates, possible new markets, the products, the management team, the key customers and suppliers, the amount of funding required, forecasts of future performance, possible returns for Investors and possible exit routes for Investors.
Management Expertise
The abilities and track record of the management team is vital. Where the team is inadequate it should be restructured or have additional team members added at an early stage of the transaction.
Length of Investment
The time period for any investment will depend upon the requirements of the Investor. The rate of return is influenced by the rate at which money can be invested and realised. As a general rule, the longer the investment is held the more difficult it is to achieve a good return, so typically Investors will want an “exit” within 5 years.
Due Diligence
On any transaction, the Investor will need to obtain sufficient information about the target company to enable him to decide whether the proposed transaction represents a sound commercial investment.
A review of all material contracts of the business will be needed to determine whether there are any change of control provisions in these contracts. If there are change of control provisions then the Investor may insist that the consent of the other contractual party to the change of control of the business is obtained prior to the completion of their investment.
The Investor will also ensure that the company has good title to all material assets including all intellectual property. All title documentation should be reviewed to ensure that the company has full legal and beneficial ownership.
Articles of Association
The articles of association of a company are the regulations governing the relationships between the shareholders and directors of the company and they typically cover the issuing of shares and the different voting and dividend rights attached to different classes of share.
The Investor will generally seek to take equity in the form of preferred ordinary shares in return for their investment. The preferred ordinary shares will rank ahead of the existing ordinary shareholders so that in the event of an insolvency situation the Investor is repaid ahead of the ordinary shareholders. In addition the Investor will seek to further protect its position by ensuring that in the event that the company underperforms, the voting rights attached to the ordinary shares are suspended so that the Investor can then take full control of the company.
The articles may also contain the terms of a ratchet. The effect of a ratchet is to incentivise the management and employees by rewarding them if certain performance targets are reached. By providing them with an incentive the Investor has a greater chance of achieving a higher return on investment.
The Investor will ensure that the articles contain adequate provisions in relation to leavers. When a director or employee (who is a shareholder) leaves the company the Investor will generally require that they offer their shares for sale in a prescribed manner and at a prescribed price.
Investment Agreement
The investment agreement governs the relationship between management, the company and the Investor and will contain the following key provisions:
A. restrictions on what management can and cannot do with the business without the Investor's consent;
B. rights for the Investor to appoint directors;
C. restrictive covenants which seek to prevent management from engaging in competing businesses or soliciting customers, suppliers or staff for a period of time following completion of the investment and/or them ceasing to be an employee of, or shareholder in the company;
D. restrictions on the ability of shareholders to transfer their shares freely to third parties;
E. warranties to be given by management to the Investor about the company, it’s business, staff and customers; and
F. possibly provisions under which the Investor takes control of the company if financial targets are not being met or the investment documents are not being complied with.
How can legal advisors help?
Experienced legal advisors who can identify and deal with the issues in a proposed equity transaction in a concise and pragmatic way, leaving their clients the time to deal with the commercial aspects of the equity investment and equally important the running of the business!
This article was provided by Matthew Crosse of Tollers
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Employee Share Option Schemes
This article was kindly provided by Debra Martin of Geldards.
Introduction
The purpose of this note is to consider the use of share options as a method of incentivising employees by providing employees with an equity interest in the employer company. The note also sets out a summary of each relevant share option scheme and considers the impact of institutional guidelines on the operation of share option schemes together with Stock Exchange rules that would affect a company seeking admission to trading of its shares on the London Stock Exchange or the Alternative Investment Market (“AIM”). The note also considers the use of share options as a method of incentivising consultants and the problems that can arise.
What is an option?
A share option granted to an employee is a contractual entitlement of that employee to buy shares in the company at a future date and at a price established when the option was granted. The option may be granted over a fixed number of shares or over a variable number of shares depending upon the satisfaction of performance conditions based on either individual employee performance or company wide performance over a fixed period of time. On the basis that the value of the shares increases over time the employee should, at the time of exercise of the share option, be able to realise a paper profit on exercise of the share option. Full realisation of the paper profit would depend upon the ability of the employee to sell the shares in a market.
In the absence of any tax reliefs provided by share option schemes approved by HM Revenue & Customs (“HMRC”) the increase in value between the price paid for the shares and the market value of the shares at the time of exercise would be subject to income tax. In certain circumstances the income tax liability may be collected under PAYE and a National Insurance contributions liability for both the employer and employee (depending upon salary levels) will arise. The tax liability follows the general principal that any benefit or discount provided to an employee by an employer is subject to tax. The tax reliefs granted by share option schemes approved by HMRC can be substantial and consequently many companies operate a basket of HMRC approved and unapproved share option schemes depending upon the circumstances of both the company and the employee.
Why adopt a share option scheme?
Companies may have a number of reasons for the adopting of a share option scheme and will consider the benefits of both the employees and the employer.
The benefits to the employee can include:-
1. Obtain a financial interest in the employer company.
2. Enjoyment of the increase in share price prior to an exit event either on a flotation or a trade sale.
3. Tax advantages and tax savings on the grant and exercise of options under HMRC approved schemes.
4. Encouraging employees to feel part of the Company.
The benefits to the employer of establishing a share option scheme can include:-
1. Aid the recruitment of staff by differentiating the company from its competitors.
2. Motivation of existing staff by an increase in share price or an ability to obtain additional shares through the satisfaction of performance targets.
3. Increase productivity and performance by the use of performance conditions and general willingness of staff to work harder to obtain a financial reward from their efforts.
4. Encourage staff retention which will reduce staff turnover, training costs and recruitment costs over the long term.
5. Share options can form part of the overall remuneration package involving little cash outlay from the company. The issue of shares on exercise of share options will involve the dilution of existing shareholders’ interests and this can be particularly important for private family owned companies. The issue of a substantial number of shares on exercise of options can be relevant for quoted companies although institutional guidelines will limit the extent of shareholder dilution.
6. Encourage the adoption of a team environment and business culture.
7. Increased growth and profitability of the company through the use of performance targets and benchmarking against competitors.
8. Obtaining a corporation tax deduction on the issue of shares to employees.
Types of share option scheme
Share option schemes can be divided into two main types, discretionary share option schemes where the company has a choice as to whom options are granted and all employee share option schemes where the availability of options has to be offered to all qualifying employees. This note will examine three discretionary share option schemes, namely:
1. HMRC approved company share option plan or scheme (“CSOP”).
2. Unapproved share option scheme.
3. HMRC Enterprise Management Incentives Scheme (“EMI”).
And two all employee share option schemes, namely:
4. Save As You Earn or Share Save Scheme (“SAYE”).
5. Share Incentive Plan (“SIP”).
1. CSOP
A CSOP is a selective scheme generally used for the benefit of key employees and senior executives. Approval of HMRC is required of the rules of the scheme together with certain ancillary documentation and of the exercise price of share options (which must not be less than market value). The CSOP is subject to a £30,000 limit for each individual employee based on a value of shares under option valued at the date of grant of the option.
The ability to exercise share options may be subject to performance conditions provided the conditions are objective and can be measured by reference to financial measures. Individuals who hold more than 25% of the issued share capital of the company would be excluded from participating in a CSOP.
The gain made on exercise of options under the CSOP is free of income tax and National Insurance contributions and is only subject to capital gains tax on the ultimate disposal of the shares. Exercise of options free of income tax may only be made at least three years after the grant of the option. The income tax charge within three years of the date of grant may be relevant if the option holder is entitled to exercise the option early before the expiry of the three year period. An exemption from the income tax charge applies if the option holder leaves due to injury, disability, redundancy or retirement and exercises the option within six months of cessation of employment. Capital gains tax will be payable on a sale of the shares at 18% on the difference between the sale proceeds and the exercise price.
The consent of HMRC will be required for any amendments to the key features of the share option scheme rules. HMRC need not be notified of each grant of an option under the CSOP although an annual return setting out the grant and exercise of options is required at the expiry of each tax year.
2. Unapproved Share Option Scheme
Unapproved share option schemes are similar to CSOPs in that they are discretionary. However, an unapproved scheme is not subject to approval by HMRC or to the £30,000 limit on the value of options.
The terms of the unapproved share option scheme can be very flexible, although in practice it is common to mirror many of the provisions of the CSOP both for ease of administration and to comply with institutional guidelines concerning the operation of share option schemes. The main advantage of an unapproved scheme is the ability to exceed the £30,000 limit on the value of options per individual employee. Exercise of options under an unapproved scheme may be made subject to performance conditions.
The exercise of share options will give rise to an income tax liability on the individual employee. In the case of a company whose shares are listed on the London Stock Exchange or admitted to trading on AIM or any other share exchange the shares will be treated as “readily convertible assets” due to the existence of a market for the trading of the shares. Following changes in the Finance Act 2003 other shares will be deemed to be readily convertible assets where a corporation tax deduction on issue of the shares is denied. Consequently the income tax liability arising on exercise of the option will be collected under PAYE by the employer company. In addition National Insurance contributions will also be payable on exercise based on the increase in value between the exercise price and the market value of the shares at the date of exercise. In many cases there will be the additional 1% employee’s National Insurance contributions due to most option holders receiving unapproved share options being over the upper threshold for National Insurance contributions. The employer’s National Insurance contributions will be due at the rate of 12.8% for the current tax year.
The company operating the share option scheme is entitled to enter into an agreement with the employee for reimbursement of the employer’s National Insurance contributions by the employee on exercise of the option. Under these arrangements the liability to HMRC remains with the employer company although the company has a right of reimbursement against the employee and generally will not allot the shares to the employee until the National Insurance contributions (and income tax) liability has been paid by the employee. The employee is entitled to income tax relief on reimbursement of the employer’s National Insurance contributions and the effective rate of tax for a higher rate tax payer for the National Insurance contributions is 7.68%. Consequently an employee exercising an unapproved option will have an effective rate of tax on any increase in the value between the option price and the market value at the date of exercise of 48.68%.
An alternative arrangement for payment of the National Insurance contributions involves a formal agreement between the company, the employee and HMRC whereby liability for the employer’s National Insurance contributions is passed to the employee. The formal agreement is required to protect the interests of HMRC and requires the prior approval of HMRC. In our experience the majority of companies adopt the right of reimbursement route in order to protect their position, rather than entering into formal agreements with HMRC.
Unapproved share option schemes also include schemes established for senior executives of quoted companies which may be known as long term incentive plans (“LTIPs”) and executive equity participation plans. These types of scheme may require the executive to leave a proportion of the shares on exercise in trust and the shares may not be withdrawn until satisfaction of a further qualifying period of employment at which time the company may award additional shares to match the existing share option entitlement. These types of schemes can be extremely complicated to operate and further examination of the scheme is outside the scope of this note. Any benefits obtained under these types of scheme are subject to income tax on receipt of the benefits.
3. EMI Scheme
The EMI is aimed at smaller, trading companies and is designed to attract and retain senior management and staff to such companies. The scheme does not require the prior approval of HMRC so can be implemented within a short period of time. There is a limit on the total value of shares under EMI options of £3 million. Employees who are selected to benefit from the scheme are limited to the grant of options worth up to £120,000 per participant based on the market value of the shares at the time of grant of the option. Options granted under a CSOP will count towards the £120,000 limit. Exercise of options under an EMI scheme may be made subject to performance conditions.
There are qualifying requirements for both the operating company and the employee in order to obtain an award of options under the EMI. The company must have gross assets of less than £30 million and be carrying on a qualifying trade wholly or mainly in the UK. The gross asset test is based upon the value of all the assets of the company on its balance sheet immediately prior to the grant of options. Any liabilities are ignored. For example, a company with assets worth £31 million and with liabilities of £29 million will be excluded from operating the EMI scheme despite the fact that it has net assets of £2 million. A company must have less than 250 full time equivalent employees at the time of the grant of the options.
A key requirement for the operating company is that it must be either carrying on a qualifying trade or acts as a holding company of a group carrying on a qualifying trade wholly or mainly in the UK. A number of trading activities are excluded and these include dealing in land or in shares, securities or other financial instruments, banking and other financial services, leasing, property development, woodland management, hotel or nursing home operations, shipbuilding, coal production and steel production. All the companies within a group must satisfy the test on a collective basis. All subsidiaries must be owned to at least 51% by the parent company. HMRC operate a method of obtaining advance assurance that the company satisfies the qualifying trade test.
Employees benefiting from the EMI must work full time for the company or a member of its group. “Full time” is defined as at least 25 hours per week or at least 75% of the employee’s working time. Individuals who hold more than 30% of the share capital of the company, together with their associates are excluded from benefiting under the EMI scheme.
The EMI is not subject to prior approval of HMRC. However, HMRC must be notified of the grant of any option under EMI within 92 days of the grant. HMRC is also required to agree the valuation of shares before each grant of options under the EMI. Options under the EMI do not have to be granted at market value at the time of exercise. However, the grant of options at a discount will give rise to an income tax charge on exercise of the option based on the discounted element at the time of grant of the option only. Any increase in value between the market value of the shares at the time of grant of the option and market value at the time of exercise will be free of income tax provided the qualifying requirements for the EMI legislation are satisfied throughout the period of retention of the option. There is no minimum time period between the grant of the option and exercise to obtain this tax treatment.
On a disposal of the shares the employee would be subject to capital gains tax on the increase in value between the market value at the time of grant and the disposal proceeds at a rate of 18%. However, the employee will obtain the benefit of any unused capital gains tax annual exemption in the tax year of disposal.
4. SAYE Share Option Scheme
SAYE Share Option Schemes are subject to HMRC approval. The scheme must be open to all employees in the company on similar terms subject to a qualifying period of employment. It is possible to vary the terms of participation according to the levels of remuneration, length of service or other similar factors. An individual and their associates who hold more than 25% of the issued share capital are excluded from participation in the SAYE scheme. The acquisition of the shares is funded by the proceeds of a savings contract entered into by the employees with a bank or building society.
Monthly contributions are made to the savings contract at a rate chosen by the individual subject to a maximum contribution of £250 per month. A minimum monthly contribution (above £10) can be set by the company or the bank or building society. However, the minimum contribution limit must not exceed £10 per month. The savings contract will generally run for either three or five years with a tax-free bonus being paid on the conclusion of the savings contract. In the case of a five-year savings contract the contributions may be left in the savings account for a further two-year period in order to obtain a larger bonus. At the end of the three, five or seven year period the employee can either exercise the option in full or, if the share price has fallen or the employee does not wish to exercise the option, withdraw the proceeds of the savings contract plus the tax free bonus in cash. The decision as to whether to operate a three, five or seven year savings contract will generally be made by the company at the outset of the scheme, although in some circumstances the company may permit the participant to make the choice. It is standard for the company to make the choice as to the length of the scheme and in many cases a three-year savings contract is chosen.
Options over shares are granted at the outset calculated on the basis of the expected proceeds of the savings contract together with the tax-free bonus. A discount of up to 20% of the market value of the shares is permitted. The market value of the shares will be agreed in advance of the grant of the option with HMRC Share and Assets Valuation (in the case of unquoted companies). Options granted under an SAYE scheme do not count towards the £30,000 limit applying to CSOPs or the £120,000 limit applying to EMI schemes.
Income tax is not payable on exercise of the option provided all the qualifying conditions have been met during the operation of the SAYE scheme. Capital gains tax will be payable on the ultimate disposal of the shares based on the increase in value from the option price to the disposal proceeds.
A SAYE share option scheme is perceived as a “win-win” situation for the employee as the employee is saving a fixed amount per month which is protected and can be withdrawn in cash at the end of the savings period if the shares have not increased in value. The employee also obtains a tax-free bonus provided the contributions are maintained up to the expiry of the savings contract period. The exercise of options under a SAYE scheme may not be made subject to performance conditions.
5. SIP
The SIP must be open to participation by all employees subject to a qualifying period of employment and it may be operated in addition to the SAYE scheme. Participation in this scheme must be on similar terms although an entitlement to “free shares” may be varied by reference to remuneration, length of service or hours worked.
Participation in a SIP will entitle the employee to acquire ordinary shares in the company through up to four different methods of acquiring shares. Employees can be provided with “free shares” with a value of up to £3,000 per employee per year. Employees can allocate up to £1,500 of their pre-tax salary per year to acquire “partnership shares” to which the company can allocate additional “matching shares” with a value of up to £3,000 per year per employee via a ratio of up to two matching shares for every one partnership share. The issue of matching shares effectively allows the company to issue the partnership shares at a discount to the market value. Employees can acquire shares worth at least £7,500 each year using the SIP. The company will obtain a saving of the National Insurance contributions on the amount used by employees to buy partnership shares. The entitlement to free shares only may be linked to the satisfaction of performance conditions.
The shares allocated to employees must be retained by a trustee under the SIP for a period of five years in order to obtain the full tax benefits of the scheme. If the shares allocated to the employee are retained in the trust for the five-year period there is no income tax payable on the initial value of the shares or the increase in value prior to the withdrawal of the shares from the trust. Capital gains tax is only payable on any increase in value between the date of withdrawal from the trust and the disposal of the shares.
In the event of the shares being withdrawn from the trust between three and five years from the date of initial allocation to the employee, the employee is subject to income tax on the value of the shares on the initial date of allocation or, if lower, the market value at the date of withdrawal from the trust. If the shares are withdrawn from the trust before the third anniversary of the date of allocation the employee is subject to income tax on the market value of the shares at the date of withdrawal from the trust. Certain exemptions from income tax apply on withdrawal of the shares from the trust, for example, on cessation of employment due to death, redundancy, injury or disability. In each case if the shares are treated as “readily convertible assets” National Insurance contributions will be due on the amount chargeable to income tax. National Insurance contributions will also be payable on the amount of the salary used to buy partnership shares withdrawn early from the trust.
Dividends payable on shares held by the trustees during the trust period may be paid out in cash to the employee in the normal way as if the employee was a shareholder in the company. Alternatively the shares may be reinvested in acquiring “dividend shares” in the company. Any dividend shares must be retained within the trust for a period of time linked to the shares on which the dividend was paid in order to avoid an income tax liability on the value of the dividends.
The SIP is generally attractive to large companies with an existing suite of share option schemes who wish to provide their employees with a wide range of share option schemes. The SIP can be expensive to establish due to the complexity of the scheme and the ongoing administration costs of operating the scheme can be substantial particularly if full use is made of the variations available within the SIP. However the SIP can be used by smaller companies on a cost-effective basis if the Free Share version only of the SIP is used to reduce the administrative burden of running the SIP. In a number of cases, smaller companies have introduced a SIP as an alternative to a pay increase due to the potential long term rewards available under the SIP.
Institutional guidelines
Guidelines have been published by representative bodies of institutional investors to control the grant of share options by quoted companies. The most widely known guidelines are published by the Association of British Insurers (“ABI”). Many companies whose shares are listed on the London Stock Exchange or admitted to trading on AIM seek to comply as far as possible with the ABI guidelines, although it is accepted that for smaller quoted companies compliance with the ABI guidelines may be impractical when considering the nature of the company and its need to grant extensive share options to attract and retain key members of staff. Companies whose shares are listed on the London Stock Exchange have to comply with the provisions of the Combined Code in addition to institutional guidelines.
The ABI guidelines seek to control the overall number of shares over which options are granted together with the value of options granted to individual employees. The ABI apply an overall limit of 10% of the issued share capital for all share options with 5% of the issued share capital for discretionary share options where options are satisfied by the issue of new shares. These limits may be increased to 15% and 10% respectively for smaller, fast growing companies. The ABI also seek to control the grant of share options over a period of time in order that all the options are not granted immediately through the use of flow limits. Where a company does not operate an all employee share scheme a limit of 3% of the issued share capital over a rolling three-year period would be expected. For companies operating all employee share schemes a limit of 5% of the issued share capital over a rolling five-year period would be expected.
As regards the entitlement of individual employees the ABI recommend that for companies granting options on an annual basis, the value of options granted in a 12 month period based on the market value at the date of grant should not exceed one times annual remuneration.
The ABI also expect to see the satisfaction of the performance conditions before options become exercisable. The ABI suggest a minimum performance criteria of an increase in earnings per share of the increase in the RPI plus 2%. Other performance measures (for example, total shareholder return) can be used as appropriate for the type of company including performance related to companies in a similar field. Performance conditions should run for at least three years.
The ABI discourage the grant of options to non-executive directors on the basis that it taints their independence. Options are expected to be granted at market value except in the case of SAYE schemes and SIPs. The ABI encourage full disclosure to shareholders of the rationale for the implementation of a share option scheme together with the anticipated cost of operating the scheme (including the dilutive effect on shareholders).
London Stock Exchange and AIM guidelines
Companies whose shares are listed on the London Stock Exchange or admitted to trading on AIM will be subject to a model code regulating share dealings, including the grant and exercise of share options. Companies on AIM will not be subject to the provisions of the Combined Code which only applies to listed companies, although due consideration of the provisions of the Combined Code may be required if a move to the full list is considered or the directors of the company consider that compliance with the provisions of the Combined Code would be beneficial. The Combined Code requires transparency regarding the grant of share options and approval by the shareholders of any new share options schemes. However, a company implementing a suite of share option schemes in anticipation of flotation would not require shareholder approval of the schemes.
Options and consultants
Options are normally only granted to employees or executive directors of a company and the ABI discourage the grant of options to directors or employees who do not devote substantially the whole of their working time to the business of the company. However, there may be circumstances where it may be appropriate to grant options to consultants. Options would be granted under a stand alone unapproved share option scheme separate from any scheme drafted for employees. The terms of the scheme can be bespoke and exercise of options may be made subject to the satisfaction of performance conditions.
A self-employed consultant will be taxed under general principles (Schedule D Case I or II) on the grant of options. If the consultant is required to pay full value for the shares there should be no tax to pay. However, HMRC could apply a “hope” value to the option, particularly if the value of the shares is large, and seek a tax liability at the time of grant of the option. There should be no tax on exercise of the option and capital gains tax will be due on the ultimate disposal of the shares.
A number of regulatory issues arise where exemptions automatically apply for employee share schemes. Under company law specific authority must be obtained for the directors to allot the shares and for the waiver of the pre-emption rights of existing shareholders on the issue of shares following the exercise of options.
The share option agreement would constitute an investment advertisement under the Financial Services and Markets Act 2000. The agreement must either be approved in each individual case or fall within an exemption. In the case of consultants acting in a professional capacity it could be assumed that they are sufficiently expert to understand the risks involved depending upon their role. The position of other consultants would have to be considered on an individual basis.
Conclusion
This note sets out a summary of the main terms of relevant share option schemes for most companies. Further discussions would be required regarding the benefits of each individual scheme before making a decision as to which schemes were most appropriate for individual companies. As part of the discussion process the submission of an application for advance assurance regarding the EMI scheme would be beneficial considering the tax efficient status of options granted under an EMI scheme compared to other HMRC approve share option schemes. It should also be borne in mind that HMRC approved schemes (other than the EMI scheme) require HMRC approval of the rules and all share option schemes require HMRC agreement to the share valuation used for the grant of share options at market value. The approval of a share option scheme by HMRC can take up to 10 weeks to which must be added a period of time to agree the share valuation with HMRC Shares and Assets Valuation. Consequently this timescale should be factored into any timetable for the implementation of a share option scheme.
This note does not consider the application of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) and in particular the tax treatment of restricted share legislation on employee related securities. The impact of ITEPA is limited by the use of HMRC approved schemes although all companies granting options and issuing shares to employees will have to consider the application of the provisions including the additional reporting requirements to HMRC.
This article was kindly provided by Debra Martin of Geldards.
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Use of trademarks as keywords, metatags and adwords on internet search engines?
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So we ask, is the use of a competitor’s trademarks as keywords, metatags or adwords on internet search engines, such as Google permissible?
If you are the owner of a registered trademark, you would not be pleased if a competitor was using your trademark as a keyword, metatag or an adword to generate sponsored links to its own website. In any other context, use of a trademark for a similar business or activity would be regarded as trademark infringement. However, the use of trademarks in a search term context is far from clear. Search engines argue that they are a mere conduit, and have no general obligation to monitor illegal activity by internet users.
Trademark owners dispute the use of trademarks as keywords, metatags or adwords by anyone willing to pay the asking price. Popular trademarks can command some considerably high sums. The most recent example being the use of ‘Interflora’ by UK retailer Marks & Spencer to link to its own online mail order flower service. It has been reported that in the days before Valentine's Day the price per click rose dramatically, as M&S, Interflora and Flowers Direct all attempted to outbid each other. It is reported that the estimated value of lost business to Interflora for Valentine’s Day was in the region of £350,000.
The UK courts decided in this case, as well as others that since the matter is based on EC law the matter should be referred to the European Court of Justice, and we expect that it will be some time before we have a decision on the legitimacy of this issue. Therefore, until such time a decision is made by the ECJ the position is unclear. This does not mean that a competitors trademarks can be used for search engine advantages. Infringers can be held liable for actions such as passing off and trademark infringement.
What should you do in the meantime?
Until such time the ECJ makes a ruling on the subject, all trademark owners should be on guard and regularly check search engines by entering their trademarks into search engines to check which competitors or products are being displayed as sponsored links, or in the search results generally.
If your trademark is being used as a keyword, metatag or adword, then a complaint can be made to the search engine. As the trademark owner, you should also investigate, collate and document how the competitor’s use of your trademark is affecting your business.
How SFS Legal can help?
Our specialist IP solicitor, Sandip Sohal, can advise you on how to proceed. It is possible that any claims brought by you or against you can include damages that are back dated to when the infringement first took place. It is important to build a portfolio of evidence.
Feel free to contact Sandip for a no obligation consultation to discuss any legal concerns that you may have concerning a competitor using your trademarks, or if you are under the impression that you are using a competitors trademarks and require advice.
Sandip is a specialist IP and IT solicitor, and has had vast experience in contentions and non contentions IP and IT matters.