Brands and trade­marks are usu­ally very valu­able as­sets

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW -

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.

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