Guarantee Your Business Legacy: Why You Need to Build Up a Trade Mark Portfolio

Guarantee Your Business Legacy: Why You Need to Build Up a Trade Mark Portfolio

Legacies are created by those who are willing to take action, and in this case by those who are smart enough to build up their trade mark portfolios.

Many have a false belief that the registration of a company, and the resulting automatic registration of a company name, results in sufficient protection of a company’s branding. Sooner rather than later, this misguided faith will come crashing down and unfortunately, when it comes to branding, the damage might not be reversible. What this article aims to do is to elaborate on the commercial justifications behind registering trade marks and if anything, should make you realise that a trade mark portfolio is not only an insurance policy, but also an investment – but with way less uncertainty and way more upside. 

First off, it is important to understand that the incorporation of your company and the check by the CIPC of whether your company name is available, does not protect your company name or brand. A company name and the following ‘(Pty) Ltd’ abbreviation merely represents the legal character of your business. It does not distinguish your business, products or services from those of another. That’s the job of your trade marks. In this regard, it is possible for you to register trade marks for your business name, products and services, which can be in the form of word marks, device marks or even slogans. 

In general, trade marks are product and service identifiers. For registration purposes, a trade mark must be able to distinguish the products or services of your business from those of others. This criterion is satisfied if, at the date of application, your trade mark is capable of distinguishing your goods or services, either inherently or due to prior use. 

If you meet these requirements, a trade mark provides you with protection for an infinite amount of time (provided you renew your trade mark every 10 years); it secures exclusive use of the mark for you; and allows you to prevent others from using the same or even confusingly similar marks in the marketplace.  Why is this important you may ask? You will find a recurring pattern in the marketplace unfortunately, made up of copycats using similar or even the same branding as yours, to ride the wave of your success. This can be achieved by creating competitive products or services, either in competition or just as a subpar version of your offering. This results in clientele being funnelled away from your doors and into the hands of a copycat. What is important to note is that you are not just losing customers, it could tarnish your brand if customers start confusing a subpar offering with your branding. How do you prevent this? Registering a trade mark allows you to prohibit anyone from using the same or even confusingly similar marks in the marketplace.

The above are all excellent reasons for registering trade marks, but if you need a little more of a push, then consider the following compelling commercial reasons. We now know that trade marks help consumers identify the source of goods or services. Psychologically, human beings are more inclined to place their trust in what they believe are reputable products. Branding and marketing strategies are based on the understanding that consumers value brand names more than no name or generic brands. This is because consumers align themselves with trade marks and their accompanying set of qualities. Further to this, consumers are usually willing to pay more for a brand name, because they know where the product or service comes from and as a result, places their trust in that brand. 

The above is referred to in the industry as goodwill – the ability to attract and establish clientele. This goodwill is seen as an asset and can either be sold or licensed via its attachment to a trade mark. This means that your trade mark itself is an asset, based on the fact that it has accompanying goodwill attached to it. The more goodwill, the higher the value and the more important protection is. This is in contrast to Jon and Jane Doe who opted not to register a trade mark – any goodwill built up will form part of their business and now cannot be separated like with a trade mark. This means that the only way to sell their goodwill is to sell the business as a going concern, which also makes the commercialisation of their goodwill that much harder. 

This is excellent news for trade mark proprietors and forms the basis of franchise arrangements in general. When a company develops a product or service, the initial aim in registering a trade mark is defensive (the ability to prevent others from entering the market with the same or similar marks for the same or similar good, i.e. your insurance policy). However, when we consider trade marks further, an entire new revenue model opens up. Inevitably, the use of a trade mark (and the attached goodwill) can be licensed out to third parties on exclusive or non-exclusive terms for a royalty fee. See these royalties as guaranteed dividend pay outs. For franchise arrangements, a main asset that is licensed and forms the basis of a franchise relationship is the franchisee’s ability to use the franchisor’s trade mark and thereby draw the clientele (via goodwill) attracted to that trade mark within their pre-defined territory. This principle of goodwill sounds odd – I know it did to me the first time – but when considered from a commercial perspective, this ability to garner goodwill is considered an asset and a really rewarding one for that matter.

Trade marks are seen as intangible assets. What this means is that your trade mark develops an intrinsic value as your product or service becomes more successful. Further to this, the stronger your trade mark, the more valuable it is. Strength of a trade mark turns on its distinctives, which is made up of its uniqueness and physical appearance, as well as the trade mark register and the number of similar marks on the register. One way of ensuring that the register does not become overpopulated with similar marks is to get your registration on the register as soon as possible, thereby stopping the register from becoming overpopulated with marks similar to yours for similar categories of products or services.

When you are in the process of doing an equity funding round, you will immediately pinpoint the intellectual property section on your due diligence checklist. At this stage, you do not want to be fumbling around trying to get your trade mark registrations in order as it may well be too late, either because of a total block on the register or because of a deal’s time sensitivity. In most cases, an investor will want to see the registration certificates for your trade mark portfolio, failing which, they will have to conduct a search of what currently is on the trade mark register and analyse the risk of investing in a company that has failed to secure this form of protection. At this point you would have invested significant time, money and the building up of goodwill in a particular brand. It will for that reason be all the more devastating if a search indicates that your trade mark cannot be registered due to an existing mark on the register, or if the mark turns out to be weak due to the register being overpopulated with similar marks.

Trade marks can even be pledged as security to secure loan facilities, similar to the manner in which immovable property can form the subject of a bond. 

A trade mark offers you so much more than just security and if you play your cards right it can provide you with a lucrative platform for commercialising what can be seen as one of your most important company assets. Talk about the ultimate side hustle. It is undeniable that building your trade mark portfolio is an extremely easy process and carries endless benefits. The sooner you get started the easier it is. Just keep in mind that the trade mark register can be an unforgiving place as well and if you drag your feet, you could find yourself having to either rebrand down the line, possibly losing some goodwill that you worked so hard for, or spend unnecessary costs battling it out with a clowder of copycats that already made it to the register before you. Be smart about your intellectual property strategy from the beginning. If you need any advice, we are here to help you draw up your battleplan.

COSEC SERIES: CAN A DIRECTOR BE REMOVED BY THE SHAREHOLDERS WITHOUT GIVING PROPER REASONS?

COSEC SERIES: CAN A DIRECTOR BE REMOVED BY THE SHAREHOLDERS WITHOUT GIVING PROPER REASONS?

INTRODUCTION:

A central theme coming out of the Companies Act 71 of 2008 (“the Companies Act“) is the clear separation of powers between the shareholders of a company on the one hand, and the directors of such company on the other. In a number of our previous articles exploring the Companies Act, we touched on the idea that directors are given the statutory power to take responsibility of the effective management of a company and occupy a fiduciary position in this regard. Shareholders, on the other hand, are not legally obliged to observe any duties as their main aim is to ensure that the company is able to secure a profit from their investment. Since the Companies Act lays out a clear distinction between ‘management’ and ‘control’, shareholders sometimes elect their own directors to protect their interests and the interests of the company alike. Having said that, we are often asked what recourse is available if that relationship of trust subsequently breaks down and the director concerned is no longer able to carry out his/her duties in a manner that would best serve the interest of the company or shareholders. Can such director then be removed by the appointing shareholder or do all shareholders have to consent; what is the process; and do reasons need to be given for such removal? For the purposes of this article, we will focus specifically on the process of removing a director by the shareholders. The right of the board itself to remove a director will be discussed in our next article. 

REMOVAL OF DIRECTORS IN TERMS OF SECTION 71(1) AND (2) OF THE COMPANIES ACT:

Section 71(1) of the Companies Act states the following: 

Despite anything to the contrary in a company’s Memorandum of Incorporation or rules, or any agreement between a company and a director, or between any shareholders and a director, a director may be removed by an ordinary resolution adopted at a shareholders meeting by the persons entitled to exercise voting rights in an election of that director, subject to subsection (2).

Section 71(2) further reads:

Before the shareholders of a company may consider a resolution contemplated in subsection (1) –

(a) the director concerned must be given notice of the meeting and the resolution, at least equivalent to that which a shareholder is entitled to receive, irrespective of whether or not the director is a shareholder of the company; and

(b) the director must be afforded a reasonable opportunity to make a presentation, in person or through a representative, to the meeting, before the resolution is put to a vote.

Following from the above, it can be seen that a director can be removed as long as the majority of the shareholders entitled to exercise voting rights in the election of that director agree by ordinary resolution (i.e. 50% plus 1) provided that a duly constituted shareholders meeting is held (you can refer to some of our previous articles for the legal requirements for calling a shareholders’ meeting) and the director concerned is afforded a reasonable opportunity to make a presentation. Based on our interpretation of section 71(2) no particular grounds for removal need to be provided, but in practice, the notice of meeting itself will put forward a number of reasons which the director will then be able to answer to when making the presentation. 

PRACTICAL STEPS THAT NEED TO TAKE PLACE:

It is a statutory right of shareholders to remove a director, but since the potential impact can be quite drastic, the Companies and Intellectual Property Commission (“the CIPC“) has prepared a guidance note (see Notice No. 42 of 2019) setting out the process requirements that need to be adhered to before it will amend the status of a director in this manner and remove him/her from the CIPC records, despite internal requirements of the company having been met. In order for the notice of removal of directors to meet the processing requirements of the CIPC, the following documents must be filed:

  • Notice regarding the meeting and the resolution, as well as proof that the director to be removed was awarded the opportunity to make a presentation; 
  • Statement setting out the reasons for removal; minutes of meeting or copy of the resolution by the shareholders; 
  • Proof that a quorum was reached at the meeting (i.e., attendance register); 
  • Proof of shareholding (certified copy of share register and share certificates); and
  • Notice of Change of Company Directors (i.e., CoR 39) reflecting the correct status change (i.e., removal).

In our experience, it is not enough to simply meet the legislative requirements for the removal of a director, since failure to meet the CIPC requirements can lead to a number of unnecessary queries and ultimately result in the application to be rejected. Practically, the CIPC requirements will need to be met in addition to what is prescribed by legislation.

CONCLUSION: 

The removal of directors is a seemingly simple process and even though the Companies Act does not prescribe that any reasons need to be provided, it is advisable that sufficient reasons are provided in advance so as to allow the director concerned to be afforded a “reasonable opportunity” to make a presentation.

So, you created some IP, now what?

So, you created some IP, now what?

Irrespective of whether you support the overzealous protection of intellectual property (“IP“) or believe in a more open-source world, one thing is certain in the world of technology and IP – the greatest economic value of IP stems from its use in licensing arrangements. Whether for commercial or development reasons, the concepts remain the same. The registration of IP is only your first step in a long and complex dance with any entrepreneur, service provider or developer who you wish to collaborate with.

The unique thing about IP is that it is subject to constant development. This means that new stand-alone IP can develop from base IP, thereby attracting unique and new avenues to attract its own separate IP.

This starts to blur the lines of ownership when more than one party is involved and the failure to properly regulate these relationships can mean the death of innovation; as the once exciting venture is distilled down to a playground battle with the participants’ crying over sand in their eyes.

This blog post serves to touch on the basic legal concepts which form part of standard commercial agreements involving IP. It also highlights what you need to start thinking about to ensure that the boundaries of ownership and use are clearly set out from the get-go.

In most licensing agreements there is a distinction between ‘Background IP’ and ‘Foreground IP’. Background IP is the term used to define that IP which the respective parties own prior to performing under an agreement, or IP that is developed or conceived independently of the agreement. ‘Foreground IP’, on the other hand, is usually used to define new IP developed in terms, and during the subsistence, of an agreement. An important element of these distinctions is that not only does Background IP lead to the creation of Foreground IP, but Background IP is often linked to Foreground IP and the ability to exercise it.

These concepts exist to protect and regulate one of our most basic human tendencies derived from those even our most primary of conquerors practiced, think “Veni, Vidi, vici”. Basically, what’s mine is mine and in some cases (especially where you fail to regulate your IP properly) what’s yours is mine too.

So to avoid being the subject of someone’s Odyssey, standard agreements usually start off with a definition of these two terms, thereby creating a split between each party’s IP prior to entering the agreement and the IP created from the agreement. This allows for the protection of each party’s previously developed IP and ensuring that any new IP is regulated by the terms of the agreement.

Regarding ownership of Foreground IP, different models will be appropriate in different sets of circumstances. For example, where an agreement opts for Foreground IP to be jointly owned, administration becomes a problem as every party must be consulted and agree on any further use, development or commercial exploitation of such IP. Further frustration can be present where an agreement doesn’t regulate a breakdown, as this could in effect mean that one party could potentially hold ransom the further exploitation and commercialisation of the IP.

Another ownership option could be that such IP is rather outrightly owned by one of the parties (by means of assigning the IP rights over to one party) and for that party to grant access to the other, which may include terms of use, extent of exploitation, as well as compensation. For the more seasoned entrepreneur, the possibility exists that this model could be used to strategically transfer IP into a new entity, by means of building and developing Foreground IP in a newly established entity, based on a Background IP licencing agreement with an older entity. This, however, is a topic for another day.

This second aspect in the above examples highlights the use component of IP licensing. Irrespective of whether you are licensing your Background IP to a partner or joint venture so as to create the Foreground IP, or whether you agree that one of the parties owns the Foreground IP so as to licence it to the other, the extent of a party’s use or participation in the particular IP is regulated by a use license.

The most renowned types of licenses which you should start to become familiar with include exclusive and non-exclusive licenses. From a high level, a non-exclusive licence will potentially grant a licensor the unfettered freedom to exploit the IP without giving the other party any say, as well as the ability to allow other licensees to exploit the same IP. Whereas an exclusive licence could potentially limit both licensor and licensee from exploiting the IP.

It is crucial to understand that your unique circumstances will guide which licence is the best option for you and the onus will be on you to ensure that you are aware of the effects of such a license. Inevitably, you will have to ensure that the licence reflects what was in fact agreed to and that you are not the recipient of a very attractively constructed Trojan Horse.

This blog post was only intended to open your mind to concepts tied to the complex nature of IP. It also provided some insight into how various commercial and licensing arrangements can impact on both ownership and use of your own Background IP, as well as any Foreground IP, which you may have had a hand in creating. A competent practitioner who can truly understand your offering and your vision for the future can make this process a breeze. With years of academic and practical experience in both IP and commercial law, our team here at Dommisse Attorneys is well placed to assist you with developing your IP strategy and to translate this into a clear and succinct agreement, thereby avoiding the exchange of any unruly phrases like “Et Tu, Brute?”.

2017 Budget Speech implications for the externalisation of intellectual property (IP)

2017 Budget Speech implications for the externalisation of intellectual property (IP)

Relaxing the South African (SA) Exchange Control Regulations, in relation to IP in particular, is crucial for many of our start up clients (especially those operating in the software development and technology space). Up to now, SA resident companies could not export their IP to a non-resident, unless the approval of the Financial Surveillance Department (FSD) of the South African Reserve Bank (SARB) was obtained. This proved to be an insurmountable hurdle for many companies trying to externalise their businesses by moving them “offshore” for any reason, including that of attracting foreign capital investments.

The Exchange Control Regulations provide that when a SA resident (natural or juristic person) enters any transaction in terms of which capital, or any right to capital, is directly or indirectly exported (i.e. transferred by way of cession, assignment, sale transfer or any other means) from South Africa to a non-resident (natural or juristic person) such transaction falls in the ambit of the Exchange Control Regulations.

The export of “capital” specifically includes any IP right (whether registered or unregistered), which means the Exchange Control Regulations must be considered when dealing with an externalisation of IP.

The reasoning behind this regulation is that the offshoring of assets / capital belonging to SA residents amounts to an exportation of assets / capital and therefore erodes the asset base of the SA resident by way of a transfer of ownership from a SA resident to a non-resident. While this reasoning may have seemed sound, the application of the Exchange Control Regulations to the export of IP has led to many negative and unintended consequences for SA companies, and start ups in particular.

In the 2017 National Budget review the Government proposed that SA residents would no longer need the SARB’s approval for “standard IP transactions”. It was also proposed that the “loop structure” restriction for all IP transactions be lifted, provided they are at arms-length and at a fair market price. “Loop structure” restrictions prevent SA residents from holding any SA asset indirectly through a non-resident entity.

The SARB has started the process of relaxing the Exchange Control Regulations by issuing two circulars relating to IP. These latest amendments to the Currency and Exchanges Manual for Authorised Dealers mean that, under certain circumstances, approval for the exportation of IP can now be sought from Authorised Dealers (banks appointed by the Minister of Finance for exchange control purposes), as opposed to the FSD. This is good news for clients looking to restructure and offshore their IP, as the approval process should now be less administratively intense, less expensive and with faster turnaround times.

Approval can now be sought through an Authorised Dealer for:

  • a sale, transfer and assignment of IP;
  • by a SA resident;
  • to unrelated non-resident parties;
  • at an arm’s length and fair and market related price.

The Authorised Dealer will need to be presented with: (i) the sale / transfer / assignment agreement; and (ii) an auditor’s letter or intellectual property valuation certificate confirming the basis for calculating the sale price ((iii) together with any additional internal requirements).

For the approval of the licensing of IP by a SA resident to non-resident parties at an arm’s length and fair and market related price, the Authorised Dealer will need to be presented with: (i) the licensing agreement in question; and (ii) an auditor’s letter confirming the basis for calculating the royalty or licence fee ((iii) together with any additional internal requirements).

The second set of amendments provide that private (unlisted) technology (among others) companies in South Africa may now establish companies offshore without the requirement to primary list offshore in order to raise foreign funding for their operations. This effectively means that “loop structures” can now be created to raise loans and capital offshore, and these companies may hold investments in South Africa. Note that there are still certain requirements that must be met, for example, registration with the FSD.

Our commercial team has experience in making the necessary applications for exchange control approval. Feel free to get in touch if this is something on the horizon for your business.