IP considerations in commercial transactions in Africa

By Vicky Stilwell, Edward Nathan Sonnenbergs
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There is a growing amount of mergers and acquisitions and other commercial activity taking place in Africa, with South Africa increasingly acting as the base for such activity.

Intellectual property (IP) is, more often than not, one of the last legal issues to be considered in any M&A or other commercial transaction. This is surprising given that every company or business has at least one trademark and that IP, particularly brands and trademarks, are often a company’s most valuable assets.

Companies need to ensure, in any M&A or other commercial transaction, that their IP is properly identified, that its validity and enforceability is investigated and verified, and that it is dealt with in an appropriate manner in the agreements drafted to effect the transaction.

First step

Vicky Stilwell, Edward Nathan Sonnenbergs
Vicky Stilwell
Director
Edward Nathan Sonnenbergs

The first step in this process should be to undertake a proper IP due diligence investigation in which appropriate questions are directed to the target entity; detailed and meaningful responses to those questions are elicited; and any agreements with IP implications are fully analysed. Independent searches should also be conducted to verify the existence and status of any statutorily registrable IP such as patents, trademarks, registered designs and plant breeders’ rights. In South Africa this is, generally speaking, a fairly straightforward process. Although not all of the South African Company and IP Commission’s records are electronic, manual searches are possible, and the records are fairly easily accessible and up to date.

As far as patents are concerned, South Africa has a deposit patent registration system. Provided that the required forms are properly completed and the requisite fees are paid, a patent applied for will be granted in South Africa. There is no substantive examination as to the novelty or inventiveness of the subject matter of an invention and, as a result, the fact that a patent is registered in South Africa does not necessarily mean that it is valid and enforceable in the country. It is, therefore, vitally important that a proper assessment of the novelty of an invention and the validity and enforceability of any South African patents for such an invention be carried out, in light of the existing prior art, as part of an IP due diligence investigation.

The rest of Africa

Although searches for registered IP can be done fairly easily in South Africa, this is unfortunately not the case in the rest of Africa. In most other African countries, IP registries do not have electronic or computerized records, and the manual, paper records are often not up to date. This is particularly the case as far as renewals, changes of proprietor or applicant name, licensees and transfers of ownership are concerned. It can therefore be difficult to identify registered IP, and difficult to verify the status of such IP with any certainty. As a result, IP due diligence investigations in these countries are often expensive and time-consuming – but this should not detract from their importance.

Another detail that should be borne in mind is that in many African countries it is mandatory for licensees to be recorded on an official register. A failure to do so can result in the goodwill flowing from the use of the trademark accruing to the licensee and not to the registered proprietor which, in turn, can result in the proprietor being unable to enforce its trademark rights.

Due to the difficulty of conducting meaningful IP due diligence investigations into registrable and registered IP in African countries, strong and comprehensive warranties should be obtained from the proprietors of any relevant African IP. This is particularly important because many products sold in South Africa find their way, through informal channels, into neighbouring African countries for sale there. It is common to find that informal importers register the trademarks used on those goods, in these countries, in their own names. IP litigation is, furthermore, notoriously costly in Africa. Where due diligence reveals that a third party has wrongfully registered or applied for a trademark in one or more African jurisdictions, the likely costs of associated legal action should be taken into account when negotiating the purchase price in any transaction.

In addition to covering registrable IP, the due diligence exercise should also cover other forms of non-registrable IP such as know-how, trade secrets and other confidential information that is proprietary to the target entity. From a South African perspective, copyright would also fall into this category as current South African copyright legislation does not make provision for the registration of copyright, except in the case of cinematographic films.

Transfers of IP offshore

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 properly effected and, in the case of registered IP, formally recorded on all relevant national IP registers. There were, in the past, serious difficulties surrounding the transfer of IP from a South African resident, offshore, to a non-resident. These difficulties resulted from differing interpretations of regulation 10(1)(c) of the South African Exchange Control Regulations, which states that “No person shall, except with permission granted by the Treasury …. enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic”. Until very recently, the prevailing view was that failure to obtain exchange control approval would result in the transaction for the transfer of the IP being null and void, ab initio.

In the recent case of Oilwell (Pty) Ltd v Protec International Ltd & Others, the South African Supreme Court of Appeal finally ruled on these issues and found, essentially, 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. Even if a trademark did qualify as “capital” or a “right to capital”, a failure to obtain exchange control approval under regulation 10(1)(c) would not result in the assignment being null and void, ab initio.

The effect of this decision is that IP can now be transferred freely out of South Africa. There may, however, be tax-related consequences attaching to such transfers, which need to be properly investigated and considered. It is important to note, though, that the prevailing view among tax lawyers is that the relevant regulations will be amended to make exchange control a clear requirement.

Vicky Stilwell is a director at Edward Nathan Sonnenbergs

Do the homework before your company merger in South Africa

Johannesburg

150 West Street

Sandton

Johannesburg

South Africa

2196

Tel: +27 11 269 7600

Fax: +27 11 269 7899

E-mail: info@ens.co.za

www.ens.co.za

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