Dutch Make Claim on MG

Daily Telegraph (UK), Sec. City, p 003

Valuation Consulting Appointed as Brand Valuation Experts to assist the MG Administrator.

A Chinese car maker's attempt to revive the MG brand could be frustrated amid claims that it does not own the rights to famous car marque on most of mainland Europe.

Last July, Nanjing Automotive paid £53m for a series of brands, including MG, and the equipment to make the cars at its Longbridge car plant.

However, the rights to sell the cars in 15 countries, including Belgium, Holland, France, Italy, Germany, Switzerland and Russia, are claimed by a separate entity, MG Rover Nederland. 

Georg van Daal, MG Rover Nederland's administrator, said he discovered he controlled the rights to between 15 and 20 brands, including MG and Knightsbridge, shortly after taking over the administration last year.

He said: "Nanjing contacted me and demanded that I sign them over for free.  Its solicitor said, 'We have bought the rights from the English administrator'.  I said, 'That may be the case but can you show it to me'.  We are still at zero base and we have not yet got to first base."

Mr Van Daal said that he had hired experts to work out the value of the MG brand in the 15 countries.  Until then, he had no idea how much the rights were worth.

Nanjing is being advised in its bid to receive the brand by MG Rover's former parent company Phoenix Venture Holdings.

It was likely that Phoenix used its Dutch subsidiary to control the rights to the MG brand because of a different tax treatment on royalties in Holland.

MG Rover Nederland creditors have submitted claims for up to 10m Euros (£ 6.97m).

Mr Van Daal, who has hired City law firm Addleshaw Goddard to advise him, added that he could not hang on to the brands for too long - he has already had inquiries from five different parties.

He said if he did not receive any acceptable offers "the logical thing to do is auction them off after the appraisal".

Nanjing could not be reached for comment.

A spokesman for Phoenix, which ran MG Rover before it collapsed a year ago under debts of £1.4bn, said: "The directors have been lending assistance to Nanjing - on an unpaid basis - to help them set up dealer networks in some European countrise.

"There are some licensing issues which are being dealt with through the adminstrator and the dealer bodies concerned.

"These are ongoing and we are optimistic of a satisfactory outcome."

Brand ownership.

MG Rover Nederland claims the rights to the MG car marque in Belgium, Holland, Luxembourg, Austria, France, Germany, Italy, Switzerland, Bulgaria, the Czech Republic, Hungary, Russia, Poland, Slovakia and Morocco.

By Christopher Hope

Commercial Agencies.

The Court of Appeal has recently handed down an important decision in Lonsdale v Howard & Hallam on the quantification of claims for compensation under The Commercial Agents Regulations 1993.

The Regulations derive from an EC directive and provide that compensation is payable to Commercial Agents on termination of their agency with their Principals.  The Regulations provide no real guidance as to how this compensation is to be calculated.  We have worked in this sector for some years and from experience the Courts have struggled with calculating the compensation since the Regulations came into force.

In this latest case, the Court of Appeal has reviewed the relevant authorities and decided that the correct approach to calculate compensation under the Regulations is to compensate the agent for the value of the agency of which he had been deprived, calculated as at the date of termination.  In our terms the valuation of the lost business opportunity.

The Judge at First Instance struggled to decide upon a valuation of the goodwill of the agency as there was no Expert valuation of the business before it.

The Court of Appeal said:

"In most cases the Court is likely to benefit from having the assistance of an expert witness (ideally a single joint expert) who can give evidence about the appropriate way of valuing a business of this kind..."

Whilst the Court of Appeal recognised that not all Commercial Agents cases would require expert valuation evidence due to issues of proportionality, there have been a number of high profile and high value claims by agents where expert evidence would undoubtedly be proportionate and necessary.

Valuation Consulting were pleased to be able to help Barclays settle its brand tagline dispute.

As reported in the financial press:

“Barclays and East Midlands accountancy firm Cooper Parry have ended their spat over the bank's advertising strapline,'“Now there's a thought'. The two have reached an out-of-court settlement.

When news of Barclays' multimillion-pound-campaign broke last month, Cooper Parry claimed it had been using the slogan for five years and sought a High Court injunction.

Its attempt to halt the campaign was unsuccessful, but the court agreed these was a case to answer and a hearing was set for early December.

Following the settlement, Barclays can continue to use the strapline in its ads created by Bartle Bogle Hegarty, in what is marketing chief Jim Hytner's first campaign since joining the bank.

Cooper Parry is considering future use of the slogan”.

Tax Effective Exploitation of Intangibles

The intangible fixed assets regime found in Finance Act 2002, Sch. 29 deals with the corporation tax treatment of assets such as patents, trade marks, design rights and goodwill.

The purpose of s. 41 was to make changes in a number of areas where the HM Revenue & Customs felt that amendment was needed in order to prevent unintended tax relief being given.

Generally, relief is available for intangible fixed assets created on or after 1 April 2002 or for intangible fixed assets created before 1 April 2002 are transferred between unrelated parties in which case relief is given on the price paid for the asset.

Transfer of intangible fixed assets between related parties are deemed to take place at market value rather than at the price agreed between the parties. This applies for all purposes of ‘the Taxes Acts' with regard to both the transferor and the transferee. The purpose of this rule was to prevent related parties gaining a tax advantage by agreeing an artificially high or low price for an intangible fixed asset.

Valuation for Self Assessed Tax Returns

The Revenue can open an enquiry into a return to check that the self assessment returns the right amount of tax. If it is incorrect the self assessment can be corrected.

The Court of Appeal judgment in the recent Valtema case was concerned with how much information the taxpayer needs to provide to remove the possibility of the Inspector making a further assessment, known as a discovery assessment. The Revenue has provided guidance on what taxpayers can do to reduce or remove the risk of a discovery assessment in some fairly common circumstances.

Some entries on tax returns depend on a valuation.

Most taxpayers will have stated in the Additional Information space at the end of the Return that a valuation has been used, by whom it has been carried out, and that it was carried out by a named independent and suitably qualified valuer. If that was the case, on the appropriate basis you will be able, for all practical purposes, to rely on protection from any later discovery assessment, provided those statements are true.

New Ethical Standards with regard to Valuation Services

The Auditing Practices Board has issued new Ethical Standards to be effective for audits for periods beginning on or after 15 December 2004. We are happy with most aspects.

ES 5 concerns non-audit services provided to audit clients. It states that the audit firm should not undertake an engagement to provide a valuation to an audit client where the valuation would both:

a) involve a significant degree of subjective judgment; and

b) have a material effect on the financial statements.

The main threats to the auditors’ objectivity and independence arising from the provision of valuation services are the self-review threat and the management threat. The self-review threat is considered too high to allow the provision of valuation services which involve the valuation of assets with a significant degree of subjectivity that may have a material effect on the financial statements.

This restriction does not apply in circumstances where the auditors are by legislation or regulation eligible to carry out a valuation (for example, Section 103 of the Company Act 1985 requires a public company to obtain a report on the value of assets to be received in payment for shares to be allotted from independent accountants who are either the auditors or qualified to act as auditors, of the allotting company). In such circumstances, the audit engagement partner applies relevant safeguards.

It is usual for the auditors to provide management with accounting advice in relation to valuation matters that have come to their attention during the course of the audit. Such matters might typically include:

a) comments on valuation assumptions and their appropriateness;

b) errors identified in a valuation calculation and suggestions for correcting them;

c) advice on accounting policies and any valuation methodologies used in their application.

Where auditors are engaged to collect and verify the accuracy of data to be used in a valuation to be performed by others, such engagements do not constitute valuation services under this Standard.

In the case of a group the non-audit services include those provided:

a) to the parent company, or any affiliate;

b) by a network firm to the audit client or any significant affiliate;

c) by the audit firm of a significant affiliate to the parent company.

International Financial Reporting Standards

International Financial Reporting Standards (IFRS) will compel listed companies to put a value on intangibles bought by a part of a business or company acquisition after 31 March 2004.

IFRS3 and Purchase Price Allocation

Recent analysis for US markets shows that intangibles and goodwill constitute 74% of the average purchase price of acquired companies in 2003 with intangibles representing 22% and residual goodwill 52%. That is encouraging. IFRS3 puts intangibles on the map as a core management issue by imposing mandatory reporting requirements on all companies reporting under IFRS.

We are moving more to fair value and the changes concerning accounting for business combinations are significant for intangibles. Standard 3 represents the shift to transparency. All EU companies on listed Exchanges will be required to report under IFRS from 2005.

Generally Standard 3 requires that intangibles are recognised separately on the balance sheet as part of purchase price allocation. Before the Standard the difference between price and book value was goodwill. Intangibles were swept up in this ‘junk’ phrase. Now assets need to be identified, valued, and separately included on the balance sheet. The list under the Standard is extensive, including: trademarks and brands, non-compete agreements, customer related, artistic related, contract based (e.g. licensing, drilling contracts, employment contracts etc.) and technology led (patents, software, databases, secrets).

Under FASB 141 and 142 the SEC can, and does call (in our experience) for the working papers supporting a company’s purchase price allocation and valuations and has the ability to ask for the work to be re-performed. A good reason for appointing an expert at the outset.

In process R&D, Valuation and Accounting. FAS141 and 142 make the purchase method of accounting mandatory in acquisition reporting.

Valuation of ‘In Process R&D' (“IPR&D”) is critical in purchase price allocation and goodwill impairment testing.

FAS2 is the standard for reporting R&D.

Consistently the SEC has expressed concern about IPR&D write-offs. It has identified what are considered flaws in the way fair value is applied to estimate IPR&D. For example projects are not separated from other acquired assets, stages of development are not recognised sufficiently and the investment value concept, rather than fair value, is applied.

Amongst other things helpfully the SEC has stated that IPR&D is nothing to do with residual goodwill and you should undertake a proper IP acquisition audit. The income approach is acceptable. And the not so obvious: understand R&D milestones (n.b. standard technology and development life cycles and a valuer's hurdle rates when choosing discount rates), acknowledge and identify supporting intangibles. Relief from royalty using average industry rates is not appropriate (which begs the question, when was that ever appropriate).

Identification

FAS2 at paragraph 10 provides some help as to what should and should not be considered IPR&D. One of the first important steps is to distinguish assets used in R&D activity from those resulting from the activity.

How Long

As with all IPR valuation appraisal the valuer's models will be expected to incorporate scenario analysis associated with economic, legal and particularly technology life cycles again which analysis forms an important ingredient in the choice of discount rates.

Valuation Consulting's valuations in the public domain currently.

"Return to Sender: Google forced by UK minnow to drop ‘gmail' brand

Google, the giant internet search engine, has been forced to drop its “Gmail” brand for new users in the UK by a minnow company that claims first rights to the name.

The US internet group said that after a year-long legal battle with Independent International Investment Research (IIIR) new UK users of its free e-mail service would receive an address ending in ‘googlemail.com” instead of “gmail.com”.

The change is an embarrassment for Google, which has a market value of $85billion (£48billion). AIM-listed IIIR is worth only £3.3million.

Pronet, a subsidiary of IIIR, had been operating its Gmail service for two years when Google's founders launched their e-mail service in April last year, amid much fanfare. Pronet uses the name to brand e-mails containing financial analysis for its clients – which then send the e-mails to their own clients in the UK, America and Asia.

The service has a total audience of about ten million people, Pronet said. Google refused to reveal the number of users of Gmail but said that “millions” of people had signed up to the service worldwide.

Neither IIIR nor Google have secured the registered Gmail trademark from the European Union. But IIIR said that it had applied to register the trademark in the US in April last year – about ten days before Google.

IIIR said that the EU regarded the trademark application in the US as a crucial date when considering ownership.

Google had already agreed to stop using the Gmail brand in Germany after legal action.

The company said yesterday that it had opted to drop the Gmail name to new users in the UK because it was “the most simple solution” to its dispute with IIIR. Google said that it wanted to ensure there was no uncertainty for new UK customers signing up to its e-mail service.

The parties first discussed a financial settlement to the dispute but Google said yesterday that the amount sought by IIIR was exorbitant. IIIR said an independent assessor had told it that the rights to the name were worth at least $43million. IIIR said it hoped that Google would return to the negotiating table and agree a settlement for handing over rights to the Gmail name.

Google said that it would continue to pursue its trademark applications. It emphasised that existing Gmail users in the UK could keep their current e-mail addresses".

The Times 20 October 2005