Brands and trademarks are usually very valuable assets
a M&A or other commercial transaction. As many products sold in SA find their way, through informal channels, into neighbouring African countries for sale there, it is not unusual to find that third parties who import goods into Africa informally register the trademarks used on those goods, in the relevant countries, in their own names.
IP litigation is expensive in Africa so where a due diligence discloses a third party has registered or applied for a trademark wrongfully in one or more African jurisdictions the likely costs of taking action to secure the withdrawal, cancellation or transfer of any relevant trademark applications or registrations should be taken into account when negotiating the purchase price.
In addition to covering registrable IP, the due diligence exercise should also cover other forms of nonregistrable IP such as know-how, trade secrets and other confidential information that is proprietary to the target entity, as it is often this type of IP that gives a business or company an edge over its competitors.
From a South African perspective, copyright would also fall into this category as the current copyright legislation does not make provision for the registration of copyright, except in the case of cinematographic films.
Where a transaction will result in an entity, or its assets, being acquired by another entity (or person), it is vital to ensure that the transfer of ownership of any relevant IP is effected properly and in the case of registered IP, formally recorded on all relevant national IP registers. In the past there were serious difficulties surrounding the transfer of IP from a South African resident, offshore, to a nonresident. These difficulties were as a result of conflicting views and court decisions regarding the interpretation of regulation 10(1)(c) of the South African exchange control regulations and whether approval from the South African exchange control authorities was required for such a transfer and what the effect of such a transfer was if approval was not obtained. Until recently, the prevailing view was that exchange-control approval was required for such transactions in terms of regulation 10(1)(c) and that failure to obtain approval would result in the transaction, in so far as the transfer of the IP was concerned, being null and void. The situation was complicated further in that the exchangecontrol authorities had placed a moratorium on the transfer of IP offshore.
In the recent case of Oilwell (Pty) Ltd v Protec International Ltd & Others, the South African Supreme Court of Appeal ruled on these issues and found that:
A trademark does not qualify as “capital” or “a right to capital” and therefore that regulation 10(1)(c) should not be interpreted to apply to the assignment of a trademark;
A trademark, like other IP rights, is territorial in nature and can therefore not be “exported”; and
Even if a trademark does qualify as “capital” or a “right to capital”, a failure to obtain exchange control approval in terms of regulation 10(1)(c) does not result in the assignment being null and void.
This effect of this decision is that IP can now be transferred freely out of SA. There may, however, be advantageous or detrimental tax and tax-related consequences attaching to such transfers and these need to be considered upfront. It also bears mentioning that there is an opinion held by many South African IP and tax analysts that the exchange-control regulations will be amended in the future to make prior exchange-control approval for assignments of IP out of SA a clear requirement.
Lastly, when it comes to financing of M&A and other commercial transactions it should be noted that South African legislation provides for the hypothecation of patents and registered trademarks by deeds of security, and such IP can therefore be used and pledged as security for a loan or other debt. Once a trademark or patent has been hypothecated, its ownership cannot be transferred or assigned without the consent of the party in whose favour the patent or trademark has been hypothecated.
This is often useful in providing comfort to financing parties in an M&A or other commercial transaction.