Intangible assets of issuers owning ‘time-honoured brands’

By Liu Lu, Grandway Law Offices
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Most issuers owning a “China time-honoured brand”, a title granted by the Ministry of Commerce to enterprises existing before 1956, are manufacturers and merchants of consumer goods with trademarks and trade names embodying their core brand value entrenched over the years.

As technologies, patented or otherwise, continued setting an issuer’s products apart from those of other brands in terms of performance and craftsmanship, these are undoubtedly among their vital or even core assets.

In this article, the author analyses the intangible assets of China’s time-honoured brand owners based on current regulations, providing referential value to these reputed brands.

SOURCES AND OWNERSHIP

Liu Lu Grandway Law Offices
Liu Lu
Paralegal
Grandway Law Offices

Due to their lengthy histories, China time-honoured brands have been passed down through several generations, many splitting into multiple branches. In addition, early owners’ awareness of protecting such intellectual property rights as trademarks, trade names and patents was generally weak. As a result, ownership of these intangible assets frequently fell victim to long-term disputes.

In Certain Questions and Answers on IPO Business (II), the China Securities Regulatory Commission (CSRC) notes that “major disputes or lawsuits over trademarks, patents, know-hows, franchise rights and other important assets or technologies that have a material impact on the issuer’s business operation or revenue realisation, which have had or will have a material impact on the issuer’s financial status or operating results in the future” are important situations that affect the issuer’s capacity as a going concern.

Therefore, regulators will first pay attention to the sources of intangible assets, specifically: (1) explanation on the sources and historical development of existing trademarks, trade names, patents and other intellectual property rights, whether the acquisition is legal and compliant and, in the case of change and transfer of ownership, the historical record of asset transfer, and whether the consideration is fair and reasonable; (2) explanation on the differences between homologous trade names or similar trademarks through comparison on their sources and historical development; and (3) whether there is a material ownership dispute over intellectual property rights, and whether it adversely affects the issuer.

If there is a dispute between the issuer and others over ownership of intangible assets, it is necessary to explain whether there is, or has been, any authorisation or licensing relationship in the case, and whether the issuer is an infringer.

If a case is settled by the issuer’s withdrawal of lawsuit, rejection of the issuer’s claims, conciliation and mediation, it is also necessary to explain the background and whether the lawsuit involved has a material adverse impact on the issuer.

It is worth noting that most owners of China time-honoured brands used to be collectively owned, or owned by the whole people, in the early days. But with the development and changes of domestic commercial laws, they gradually morphed into modern limited liability companies or joint stock companies.

Therefore, if state-owned assets are involved, the transfer of intangible assets during the process of restructuring is also the focus of attention of regulators. They will consider whether such companies have fully fulfilled the regulatory approval procedures for transfer of state-owned assets, whether they have obtained consent of the competent department of state-owned assets, and whether there was loss of state-owned or collective-owned assets.

ACTUAL USE

The impact of China time-honoured brands on consumers can be subtle yet incomparable. Given their high value and complicated historical development, it is no surprise that various problems plague their actual use.

Apart from requiring issuers to list specific products concerning the trade names, trademarks and other intellectual property rights under its name, regulators usually pay attention to the following issues.

If there are homologous trademark or trade names, and the trademarks and trade names of all parties have been approved by the competent authorities, it is necessary to explain whether there is any confusion as set out under the Anti-Unfair Competition Law and other laws and regulations, and whether it will mislead consumers in confusing the issuer’s products with those of other brands.

If, when using trademarks, trade names, patents or other intellectual property rights, the issuer has authorised others to use the intellectual property rights, it is necessary to explain the specific authorisation arrangement (validity period, rights, responsibilities and obligations), and the arrangement after expiration. It is also necessary to explain the licensee’s product quality control measures, and whether it constitutes direct market competition for the issuer and licensee to use the same trademark to produce similar products.

PROTECTION MEASURES

Given the considerable value of China time-honoured brands and frequent occurrence of ownership disputes or infringements, regulators often require issuers to explain measures taken to protect such intangible assets as intellectual property rights. These include, but are not limited to: preventive measures for trademark infringement; follow-up rights protection measures; and protective measures for non-patented technologies, as well as their effectiveness. Owners of China time-honoured brands should likewise focus on these aspects.

KEY TAKEAWAY

In recent years, a growing number of owners of China time-honoured brands – such as iconic baijiu Kweichow Moutai, heritage duck restaurant Quanjude, imperial Chinese medicine Beijing Tongrentang, historical scissor manufacturer Zhang Xiaoquan and time-honoured zongzi dumpling brand WuFangZhai – aspire to harness the power of capital markets to sustain or rejuvenate their proud trajectories.

However, intellectual property rights, if improperly handled, can seriously hinder the process. Owners of China time-honoured brands are therefore advised to make preemptive plans for intellectual property rights, clarify ownership issues, crack down on infringement, strictly enforce their use, and fully prepare for regulatory and market inspection.

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