Spin city.

01.01.06

Spin city.

Universities in the UK are generating more and more spin-off companies steming from successful research and development.

Here we explore the Scottish success story and the legal and management issues surrounding the management and creation of spin-off companies.

Spin-off companies get knowledge and ideas out of the research and development laboratories of our universities, and put them to work in industry.

A spin-off company will usually be set up to develop a particular product or concept, and to exploit the results commercially. The intellectual property rights which underpin the research and development and the product are key, and are most likely to be shared in some way between the new company and the university by a combination of ownership and licensing rights. The university is also likely to take a role in the new company, perhaps by taking shares or having a seat on the board, and will sit alongside the other stakeholders in the spin-off, including those actually developing the products and any external investors.

22% increase in spin-off company creations

The Higher Education Business Interaction Survey is carried out on an annual basis, and seeks to measure the collaboration between academia and industry. The results for academic year 2000/01 have recently been published, and show that in the UK a total of 248 new spin-off firms were set up in the period. Year on year, this represents growth of 22%. Spin-off companies need to protect their ideas, and so applications for patents are another indicator of activity in the sector. Here, the results show that more than 900 patents were filed by higher education institutions in the period and showing growth of 26%.

Growth in this sector is obviously good news. The products and ideas which the spin-off companies produce are beneficial to industry and, especially for developments which relate to medicine and health, directly to the population as a whole. The activities help to encourage growth in the wider economy. As far as the education sector is concerned, successful spin-offs can in the longer term provide a revenue source for the originating university. The number of jobs created should not be overlooked. The survey reports that nearly 5000 people were employed by spin-offs in the period - up 25% on the previous figures.

This view is shared by government. In relation to the survey, Patricia Hewitt said that the vision was to see "more products invented in Britain, developed in Britain and made in Britain", and that the results show that this is being achieved.

Scottish Universities Punch Above Their Weight

A further trend which comes out of the figures is that Scottish universities are doing particularly well in this area. In 2000/01, Scottish universities generated 14 per cent of all UK spin-out companies, and filed 11 per cent of patents. These figures can be considered against the statistics that Scotland has just over 8.5 per cent of the UK population, and that of the 158 UK institutions that participated in the survey, 11 per cent were located in Scotland. The Enterprise and Lifelong Learning Minister Iain Gray welcomed the fact that Scotlands Universities "continue to punch above their weight" when it comes to producing new ideas and products. He also made clear that other parts of the UK are "catching up", and revealed a number of measures designed to ensure that Scotland maintains its position at the head of the pack.

Managing the Legal Issues

The creation of a spin-off company creates a number of legal issues, and Brodies are well placed to help the various stakeholders in a spin-off to get to the right position. It is important to do this from the outset, but we can also advise on changes which may be appropriate as the spin-off develops, perhaps outgrowing its original set up and format. With the stakeholder relationships sorted out, and the legal documentation in place, the spin-off can get on with its real work, with the stakeholders all knowing where they stand, preventing any nasty surprises in the future when the spin-off has the value it will be striving for.

Ownership

One key point is the ownership of the company - and balancing three key factors from the perspective of the stakeholders. The first factor is a right to share in the income the company generates. The second is the right to share in the benefit if the company is sold on, or goes public. The third is the right (or need) for the different stakeholders to be involved in the day to day running and activities of the spin-off. Different stakeholders will have different priorities, but the important thing is to make sure that everyone knows where they stand, and that whatever is agreed is properly documented. We can help in setting out various options, explaining the consequence of a particular solution which has been arrived at, and documenting the agreement in a clear and unambiguous way.

Intellectual Property

Another key issue is the way in which the intellectual property rights are dealt with. It needs to be considered very carefully who will own the rights, whether there will be joint ownership, and what licensing arrangements (rights to use or exploit the rights without owning them) will be put in place.

In many cases, it will be the intellectual property rights (IPRs) which have all the value, and so to link this back to the ownership point, there may be no point in a stakeholder relying on having shares in the company, if in fact the company does not own the IPRs!

There are a myriad of other legal issues which have to be considered by a spin-off, some peculiar to R&D companies, and some which face all new businesses such as employment law issues and protecting the new company with appropriate terms and conditions under which to sell its products.

For further information, please contact:

Grant Campbell 0131 656 0115
email:grant.campbell@brodies.com