It is a well-known fact that there is a growing amount of mergers and acquisitions (M&A) and other commercial activity taking place in Africa with South Africa being increasingly recognized as the gateway into Africa and, as a result, frequently forming 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, if it is, in fact, substantively considered at all. This is surprising given that every company or business has at least one trade mark and that IP, particularly brands and trade marks, are often a company‟s most valuable assets. Companies need to ensure, in any M&A or other commercial transaction, that relevant 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.
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 agreements with IP implications are fully analysed. In addition, independent searches should be conducted to verify the existence and status of any statutory registrable IP such as patents, trade marks, registered designs and plant breeders‟ rights. In South Africa this is, generally speaking, a fairly straight-forward process as currently, although not all of the South African Company and IP Commission‟s (CIPC) records are electronic, manual searches are possible, if required, and the records are fairly easily accessible and up to date.
The validity and enforceability of all relevant registered IP must also be properly assessed. In this regard, as far as patents are concerned, it is important to bear in mind that South Africa has a deposit patent registration system. Therefore, provided that the relevant forms are properly completed and the requisite fees are paid, the patent 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 this 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 invention be carried out, in light of the existing prior art, as part of an IP due diligence investigation.
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 the majority of other African countries, IP registries do not have electronic or computerized records and the manual, paper records are often not up to date, particularly as far as renewals, changes of proprietor / applicant name, licensees and transfers of ownership are concerned. This means, firstly, that it is difficult to identify registered IP, secondly, that it is difficult to verify the status of such IP with any certainty and, thirdly, that IP due diligence investigations in these countries are often expensive and time-consuming. Although these factors are often a deterrent to buyers, they should not detract from the importance of obtaining as much information as possible on registered IP in African jurisdictions.
Another detail that should be borne in mind when it comes to trade marks in Africa and, in particular, use of trade marks by licensees, is that in many African countries it is mandatory for licensees to be recorded on the relevant official register. A failure to do so can result in the goodwill flowing from the use of the trade mark accruing to the licensee and not to the registered proprietor which, in turn, can result in the proprietor being unable to enforce its trade mark rights. This is yet another reason why it is important to conduct proper IP due diligence investigations in African jurisdictions.
Due to the challenges faced in conducting meaningful IP due diligence investigations into registrable / registered IP in African countries it is important, at least, that strong and comprehensive warranties be obtained from the proprietor(s) of any relevant African IP in an M&A or other commercial transaction. This is also of particular importance in light of the fact that many products sold in South Africa find their way, through informal channels, into neighboring African countries for sale there and it is not uncommon to find that third parties who informally import goods into Africa register the trade marks used on those goods, in the relevant countries, in their own names. IP litigation is, furthermore, notoriously costly in Africa so where a due diligence reveals that a third party has wrongfully registered or applied for a trade mark in one or more African jurisdictions, the likely costs associated with taking action against such third party to secure the withdrawal, cancellation or transfer of any relevant trade mark applications or registrations, 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, 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 current South African 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 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 were primarily as a result of conflicting views and court decisions regarding the interpretation of regulation 10(1)(c)1 of the South African Exchange Control Regulations and, in particular, whether the effect of that regulation was that 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 very 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, insofar as the transfer of the IP was concerned, being null and void, ab initio. The situation was further complicated by the fact that the exchange control authorities had, effectively, placed a moratorium on the transfer of IP offshore.
In the recent decision in the case of Oilwell (Pty) Ltd v Protec International Ltd & Others2, the South African Supreme Court of Appeal finally ruled on these issues and found, essentially, that:
- a trade mark 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 trade mark;
- a trade mark, like other IP rights, is territorial in nature and can therefore not be „exported‟; and
- even if a trade mark 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, ab initio.
This effect of this decision is that IP can now be transferred freely out of South Africa. There may, however, be advantageous or detrimental tax and tax-related consequences attaching to such transfers and these also need to be properly investigated and considered upfront. It also bears mentioning that there is an opinion held by many South African IP and tax specialists that the Exchange Control Regulations will be amended in the future to make prior exchange control approval for assignments of IP out of South Africa, a clear requirement.
Lastly, when it comes to financing of M&A and other commercial transactions, it is worthwhile to note that South African legislation provides for the hypothecation of patents and registered trade marks by deeds of security, and such IP can therefore be used and pledged as security for a loan or other debt. The important point to note is that once a trade mark or patent has been hypothecated, its ownership cannot be transferred or assigned without the consent of the party in whose favor the patent or trade mark has been hypothecated. This is often useful in providing comfort to financing parties in an M&A or other commercial transaction.
In conclusion, IP is often among the most valuable assets of a company or business and it should be afforded a commensurate measure of attention in commercial transactions. Furthermore, with South Africa being recognized increasingly as the gateway into Africa, it should be treated as a priority in multi-jurisdictional commercial transactions, and qualified local IP counsel should be enlisted at an early stage to provide advice and assistance in any due diligence exercise or commercial transaction.