Intellectual property rights (IPRs) are valuable assets of businesses, possibly among the most important asset a business possess. Especially for trademarks, they have significant value in themselves which can also be monetized and commercialized in many ways. In Thailand, since July 2016, IPRs have been allowed to serve as collateral under the Business Collateral Act B.E. 2558 (A.D. 2015). Among various types of intellectual property, trademark is of interest to the investors and the financial institutions to be used as collateral in the security agreement. However, as an intangible asset, it is neither easy nor simple to assess the value of a trademark precisely and the issues with regard to the valuation of trademarks have been one of concern. There are various steps to be taken for a trademark to be used as collateral under a collateral agreement. One of the most important procedures is valuation of the trademarks concerned, which may include a variety of approaches and principles. Using trademarks as collateral is quite new to Thailand and has not been fully developed, but it is undeniable that it has brought more business opportunities to the economy and also enhanced value of trademark protection.
Nowadays, it cannot be denied that trademarks are valuable and important assets of every business, even small businesses. They can have significant financial value than all the tangible assets that a company may have. Trademarks are not only words or symbols but the embodiment of the company's product, culture and ideology. CEOs of big companies are readily defending their corporate name and image. Trademarks are not only valuable assets in themselves but they can also be monetized and commercialized in many ways, e.g. trademark licensing, franchising, trademark assignment and using trademarks as collateral for loans.
Collateral is a specified asset that provides a security interest and serves as a protection or a guarantee against a debtor’s default to a creditor. In the old days, the creditor only trusted any tangible assets that can be collateralized to secure a loan. They especially preferred mortgage of the real estates and did not pay much attention to intangible assets for any kind of financing agreement.
The statements above are no longer valid in this goodwill-based business era. Many foreign countries have been using intellectual property rights as collateral for several years and trademarks are one of the most used types of intellectual property served as collateral for loan. For instance, the USPTO Trademark Assignment Dataset reported that in 2012 around 79,000 trademarks were used as collateral and the number has been continuously increasing.
Thailand has also been aware of the need and benefits for allowing use of IPRs as collateral like other countries and it finally enacted a new law to introduce a new method of loan security, namely “Business Collateral Act B.E. 2558 (A.D. 2015)”.
II. Business Collateral Act of Thailand
In Thailand, the Business Collateral Act B.E. 2558 (A.D. 2015) (“BCA”) was enacted on 5 November 2015, and it became effective since 2 July 2016. BCA provides various new and additional means for creditors to take collateral or security in order to secure primary obligations, such as amounts due under a loan agreement.
Before BCA was passed into law, a few major forms of assets that can be collateralized under the Civil and Commercial Code (“CCC”) are a movable property by pledge; and a land registered, a building or certain types of moveable property by mortgage. For pledges, CCC requires a pledger to deliver the pledged property into the pledgee’s possession in order to constitute a pledge while the pledger needs to keep and use the pledged property for business operation. This makes pledges not very practical.
Under the BCA, a collateral can be a business, a right of claim, moveable property of the security provider used in operating businesses such as machinery, inventories or raw materials, real property, intellectual property or any other assets as specified in the ministerial regulation.
A business security agreement is an agreement whereby a contracting party called “security provider” has placed a property with the other contracting party called “security receiver” as a security to secure a payment or other performance of obligation, where the security provider are not required to give up possession over the said property to the security receiver.
Under the BCA, a security provider can either be an individual or a legal entity, while the security receivers must be a financial institution or any person specified in the Ministerial Regulations, e.g., a special purpose juristic person for securitization, trustee under law of trust for capital market transactions, securities companies, debenture holders, derivative companies, asset management companies, factoring companies, foreign banks (specifically in the case of granting loans jointly with Thai financial institutions) and the Office of the Permanent Secretary for Industry, specifically in the case of SME Development Fund under Civil State Guidelines.
A collateral agreement must be made as a written contact and it be registered with the Business Collateral Registration Office (“BCRO”) at the Ministry of Commerce. The registered collateral details will be made available for public search. Once the business collateral is registered, the collateral receiver becomes the secured creditor under the bankruptcy law.
With regard to collateral enforcement, BCA establishes new enforcement procedures, conditions for foreclosure, priority of payment, etc. For enforcement of property collateral, the collateral receiver may foreclose the collateral property or sell it at a public auction, whereas enforcement of business collateral must be carried out by a security enforcer licensed under the BCA.
III. Using Trademarks as Collateral
Among various types of intellectual property, trademark is of interest to the investors and the financial institutions to be used as collateral in the security agreement. Although it is difficult to appraise the monetary value of trademarks precisely and such value may fluctuate, use of trademarks as collateral in lending is one of the remarkable choices for the investors from both big companies and small companies to expand the scope of exploitation of their trademark rights. Since the value of trademarks is rapidly rising in recent years, they become so important to the business world.
BCA does not provide a definition and/or specific parameters of a trademark that can be used as collateral. In other words, both registered and unregistered trademarks may be used as collateral. A trademark under a pending application is also not expressly prohibited to serve as collateral for loan under the BCA, provided that it is acceptable by a security receiver.
During the security term, the security provider or the borrower can retain the right to use the trademarks under collateral unless both parties agree otherwise.
Although security receivers or lenders might feel uncertain to provide a loan for trademark as it is difficult to appraise the monetary value precisely and such value may fluctuate, use of trademarks as collateral in lending can be one of the remarkable choices for the trademark’s owners to expand the scope of exploitation of their trademarks. The following chart shows the procedure of requesting for credit approval by using a trademark as collateral.
However, if the loans are not properly settled according to the credit agreement, a financial institution can enforce the collateral, which it can sell by public auction or foreclose the trademark if the value of collateral is lower than the outstanding debt.
IV. Trademark Valuation Approaches
As an intangible asset, it is neither easy nor simple to assess the value of a trademark precisely and the issues with regard to the valuation of trademarks have been one of concern. Although using trademarks as collateral has just been introduced in Thailand, valuation of trademarks is in fact not a new issue. It has been one of the vital processes in various types of trademark commercialization transactions, e.g. licensing, franchising, assignment, purchase deal or M&A. Valuation is also significant for enforcement of trademarks, e.g. valuation of damages for infringement claims. For these purposes, the valuation experts, such as “The Valuers Association of Thailand” and “Thai Valuers Association” have played quite an important role and they have been quite supportive.
The monetary value of a trademark relies on its goodwill, scope of protection of the trademark and/or a reputation of the business, which can fluctuate. There are several approaches to assess the trademark value, each of which depends significantly on a variety of factors and assumptions used to reflect the most actual value of trademarks. Nevertheless, the financial institutions or the trademark valuation agencies normally take the following four main approaches to assess the monetary value of trademarks:
The Cost Approach: It is the most common approach which estimates the monetary value of trademarks from the costs which the company has spent since the first step of brand establishment, such as the costs of creating, use/advertise and registrations of trademarks.
The Market Approach: This approach takes a comparative method in surveying the prices which the consumers have spent for comparable brands in the same/similar market. This approach is rather complicate and complex in examine the monetary value of the trademark because of the difference of each brand in the market. Also, the information relating to brands/trademarks is normally difficult to discover as most of the trademark owners treats it as confidential. This approach, thus, gains less popularity to be used to evaluate a trademark.
The Income Approach: It is the most popular approach which has been globally adopted as a trademark valuation method, particularly in the US. The valuation is determined by the probability to generate incomes and profits in each period of use/advertise of such trademark as well as the financial flows in the future. The valuation in this approach may not concern with the trademark value alone, but involves also with the economic growth, the industrial development, the market share of the products/services under such trademark.
V. The Appraised Trademark in Thailand
In practice, based on the information publicly available at present, there are only 2 companies in Thailand who have utilised trademarks as collateral. One of them is KCG Corporation, a large manufacturer and distributor of butters and cheeses who owns the high-valuable trademarks, “Allowrie”. Its trademarks have been appraised at 1,955 million baht. This can prove that the BCA brings practical benefits to companies who own valuable trademarks. To assist companies in expanding the scope of exploitation of trademark rights in lending transactions, IP lawyers can serve with strategic advice and comments relevant to such transactions allowing companies to exploit their trademark rights to the fullest extent.
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