IP, exchange control and 'capital' in South Africa

Note: this post has also been posted on the Afro-IP weblog but, because of its subject-matter and given that very few IP Finance readers also follow Afro-IP, it seemed appropriate to repost it here.

Back in February 2010 a South African High Court ruled that a trade mark assignment entered into without prior exchange control approval from the South African Treasury did not contravene the South African Exchange Control Regulations. The South African Reserve Bank had previously required treasury approval from any South African entity wishing to transfer intellectual property offshore.Without approval the transfer of rights was null and void.

In Oilwell (Pty) Ltd v Protech International Limited (noted by Afro-IP here) the Supreme Court of Appeal (SCA) confirmed that foreign exchange approval was no longer required for an assignment of trade marks. The court based its decision on an interpretation of the term 'capital' in the Exchange Control Regulations, which provide that any transaction whereby capital is exported from the republic requires exchange control approval. The SCA held that a trade mark does not constitute 'capital' as envisaged in Regulation 10(1)(c) and that, accordingly, foreign exchange approval was not required to transfer trade marks offshore.

In response to this, the exchange control authorities have now amended the regulations specifically to state that 'capital' does include an IP right, whether registered or not, and that “exported from the republic” includes the transfer of an IP right to a person who is not resident in the Republic of South Africa. This means that it is again necessary for exchange control approval to be obtained when any intellectual property is assigned to an offshore entity.

Source: "Exchange Control Regulations amended in response to Oilwell decision" by Megan Reimers (Spoor & Fisher, Pretoria), Trademark Law Review, 30 July 2012

RSA Govt has turned down the music - Excon Approval

 Protecting the pot at end

The South African government has reacted to last year's Oilwell decision which had the effective of declaring that IP transfers did not require exchange control approval. In that case an attempt to void a trade mark assignment for lack of exchange control went all the way to the Supreme Court of Appeal - this blog carries the news here together with comment that celebration, for those who advocate a less restrictive environment, ought to have been nervous. And correct that turned out to be.

The government, without any consultative process, has unilaterally amended the exchange control regulations to include "intellectual property" within the definition of "capital" which has the effect of requiring all IP transfers to seek exchange control approval from the government. See Afro-IP report here.

The difficulty is that IP has not been defined and drafted to specifically include both registered and unregistered IP. This widens the scope of the regulations to possibly include amoebic concepts such as reputation, know-how and personality rights. This could mean, for instance, that a local talented footballer would need exchange control to move to join Manchester United because image rights are being "exported". There is also the question of whether IP can in fact be transferred in the sense of being moved from one country to another in the same way that other "capital" envisaged by the regulations ie money, can. The Oilwell judgement considered this at length.

The upshot is that this latest move is unlikely to be the end of the tussle. For those doing deals or creating IP in RSA, if you need to get IP out of the country, this requires the extra step of getting excon approval which, by the way, will be granted if the government is satisfied that value for value has been exchanged ie the price is fair.

Exchange Control and IP - Nervous Celebration

There are a number of differences between working in IP in the United Kingdom and doing the same in South Africa (RSA). One of the biggest is the frequent need to understand the concept of exchange control and how it interfaces with IP (see my earlier post here, for example).

As most readers and any foreign national to RSA who has bought and sold assets in RSA will know, the requirement to obtain exchange control approval from the RSA Treasury is likely to find itself as a condition precedent/suspensive condition to that transaction. It is also trite that IP is an asset in the broad sense with the propensity, directly or indirectly, to create royalty streams. But it can be a real brain twister trying to reconcile legislation designed to control the flow of money first promulgated in 1961, the protectionist mindset of the local Treasury, the more liberal views of those dealing with IP and the nature of IP as an asset in all its registered and unregistered forms, in 2011. The latest RSA Supreme Court of Appeal judgement (Oilwell (Pty) Ltd v Protec International Ltd) illustrates this well enough.

Oilwell had attempted to reverse a trade mark assignment for failure to obtain exchange control. The leading IP judge in RSA (with the support of a full bench) dismisses the appeal. By doing so, he effectively challenges the Treasury to find another way of restricting the flow of IP from RSA. The case, summarised with comments on Afro-IP here, is seen as a victory for those who advocate freedom of exchange and a relief to advisors who had not, as a practice, advised clients to seek exchange control for IP assignments. However, before you get on the dance floor be warned ... there is a strong feeling that the Treasury may turn down the music.

Posted by Darren Olivier to IP Finance

Exchange Control - South Africa

One of the issues I have busy with recently is the structuring of licensing relationships so that they comply with the fairly tight and controversial exchange control regulations imposed by the South African Reserve Bank. As usual there is the law, the practice and the people that require intense consideration - my experience is that each element needs to be considered carefully. For the benefit of readers:

The South African Exchange Control Regulations stipulate that the payment of royalties by a licensee residing in South Africa under an IP licence agreement to a non resident licensor requires exchange control approval from the South African Reserve Bank (SARB). If the terms of the IP licence provide that goods may be manufactured in RSA the SARB will look to the Department of Trade and Industry (DTI) for advice in assessing such approval. In reality this means that a typical licensee resident in RSA must submit an application to the DTI for its consideration. If the DTI approves the agreement, a Certificate of Approval will be issued to the licensee that will enable them to approach their banker directly and instruct the transfer of the royalties. Such a requirement may also be necessary where a licence covers RSA even though the licensee is based elsewhere eg the UK. Beware, licenses without exchange control approval may not be recognized by the RSA courts.

Minimum Payments

Where the licence agreement also contains clauses that stipulate down payments (eg Signature Fees), minimum payments (eg Minimum Guaranteed Royalties) and once off payments or to the extent the manufacture of products may take place offshore (to RSA), the DTI will make a recommendation to the SARB who would then consider whether or not to approve the payment(s). In practice though approval for agreements with these sorts of payments is often very difficult to obtain because the very nature of the clause may mean that it is possible for a situation to occur in which the flow of capital (in this case the royalty or down payment) out of RSA is greater than the value of the IP licensed into RSA. The very purpose of exchange control is therefore defeated. For similar reasons agreements that include Minimum Sales Targets or excessively high royalty rates (see below) are also often rejected.

Structuring to seek as few approvals as possible

In the event that approval is not granted reasons are provided by the DTI/SARB and one then has an opportunity to re-submit the application with the suggested amendments or otherwise contest the decision. If approval is granted such approval is for a maximum period of five years at a time whereupon the extension requests (up to a further five year period) would need to be made. It is obvious therefore that one should structure a licensing regime to as seek as few approvals as possible especially where multiple licensees are contemplated. Often this requires the establishment of a local business who acts as a master licensor who collects royalties and then makes one application to remit the payment or, where possible, pays out a dividend.

In all instances where a resident licensee enters into a new or a substitute agreement or the extension of an existing agreement with a non resident licensor they must submit an application. Applications are in the form of a completed questionnaire/explanation submitted in duplicate together with four copies of the draft/signed agreement and amendments/addendum, if applicable.

• Changes in the name of the licensee and/or licensor (submit the relevant "Certificate of change of name of company issued by the Registrar of Companies"); and

• Changes in the local bankers or branch with whom the SARB may communicate regarding the transfer of payments under the agreement.

Royalty rates

The guidelines for the SARB/DTI application state that royalty rates for trade marks of up to 4% on consumer goods will be approved. This often means that is necessary to structure the royalty clause so that each of the different types of IP is separate eg for a logo trade mark one may need to carve out the royalty for the copyright in the artistic work and that pertaining to the trade mark to ensure that one comes under the threshold. In addition threshold royalty calculations for subsidiary licensees create lower thresholds on the basis of this calculation: R = A(115-.5B)/100. For a 100% wholly owned subsidiary (B) charged a 5% royalty (A) the adjusted royalty rate (R) is calculated as = 5(115 - 50)/100 ie 3.25%. For a 50% subsidiary licensee (B) charged a 5% royalty (A) the adjusted royalty rate (R) is calculated as = 5(115 - 25)/100 ie 4.5%.

Time delays

The rationale behind exchange control is frequently the subject of heated debate and adding to the arguments for those that favour less/the abolition of control will be the time it takes to get approval. Despite the DTI promise of an assessment of the exchange control application within 10-14 days, most experience a two month waiting time for feedback from the SARB. In the context of the fast moving commercial world such a waiting time is ridiculously long. Take for instance a simple transaction involving the assignment of a trade mark to a non RSA resident – one needs to get a valuation (and incur the cost) and then wait for two months before approval is/is not granted. I have sat in meetings where local RSA IP advisors have simply said “do not transfer your IP assets to RSA because it is such a schlep if you ever want to get them back out” – a subject for another article perhaps!

South Africa: Anne Pratt - latest decision on exchange control

The initial Anne Pratt case (Anne Pratt v First Rand Bank Limited [2004] 4 All SA 306 (T)) caused quite a stir amongst IP professionals in RSA dealing with the transfer and licensing of RSA IP assets with foreign based companies. The decision appeared to support an earlier decision in Couve (Couve and Another v Reddot International (Pty) Ltd and others 2004 (6) SA 425 (W)) that the transfer of assets (including IP assets - albeit that the subject matter of the Anne Pratt case was not IP) to a non-resident without the approval by the Exchange Control Department of the Reserve Bank was void. The Couve decision appeared to conflict with a 1981 decision (Barclays National Bank v Brownlee 1981 (3) SA 579 (D)) which concluded that a contravention would not result in a nullity. In the initial Anne Pratt case though the court held that exchange control had been granted. Anne appealed and, on 12 September, failed.

The decision goes into some depth on exchange control rulings and the practices relating to them in respect of the sale of securities. Of relevance to this blog appears to be the observation on "onus" which the court felt rests on the plaintiff ie to adduce and prove that exchange control approval was not obtained. Proving a negative is never easy and this may provide some comfort to those involved in IP transactions (perhaps even a simple trade mark assignment) where exchange control was not been obtained and who may fear the transaction void. Nonetheless, there now seems to be a SCA (Supreme Court of Appeal) decision in RSA which does not disapprove of the earlier Pratt cases (endorsing Couve) even though the SCA was not specifically asked, it appears, to adjudicate on the ramification of a failure to obtain exchange control approval.

South African: IP Tax/Exchange control issues

The SA Treasury has embarked on a project to:

- ensure legitimate IP transactions are not unnecessarily complicated by tax
- ensure that tax consequences flowing from common IP transactions are logical and expected
- gauge the impact of our Exchange Control Regulations on IP transactions
- identify “negative” IP tax practices and existing / potential loopholes

In doing so they have called for comments on the legislation, more fully described on Afro-IP here.

The blogger is looking to compile a list of countries that have onerous exchange control provisions relating to IP and would welcome additions from readers.