Commercial aspects of trade mark law

Trade marks as security

The Act makes specific provision for the hypothecation of a registered trade mark by a deed of security. A registered trade mark may, therefore, be offered as security or be attached in execution to found or confirm jurisdiction in the High Court in South Africa.

“Hypothecation” means the encumbering or burdening of an asset by way of pledge or mortgage.

“A deed of security” is a written instrument signed by the proprietor of the registered trade mark hypothecating it.

The deed of security is lodged with the Registrar, who is obliged to endorse the register to that effect. The endorsement of the deed of security must record the name and address of the person in whose favour the deed of security has been granted and its nature and duration. Once the deed of security has been endorsed in this manner, it shall have the effect of a pledge of the trade mark.

No assignment of a registered trade mark will be registered by the Registrar where there is an endorsement of a deed of security unless there is written consent from the person in whose favour the deed of security has been granted.

Assignment

Registered trade marks may be assigned or transmitted for some or all of the goods or services for which they are registered, with or without the goodwill of the business concerned, subject to the following limitations:

• trade marks may not be assigned in a manner which would result in exclusive rights being vested in more than one person, such that the use of the marks by different persons would be likely to deceive or cause confusion;
• no assignment of a registered trade mark shall be of any force unless it is in writing and signed by or on behalf of the assignor;
• an assignment of a registered trade mark is subject to any deed of security hypothecating it.

Trade mark licensing and franchising

Owners of intellectual property (including trade marks) can often exploit the commercial value of the intellectual property by licensing other people to use their intellectual property in a controlled manner. Allowing someone to use your intellectual property under licence would typically ensure a regular royalty stream as well as enhancing the awareness of your brand through, inter alia, the marketing and activities of the licensee.

In recent years, franchising (a very specialised and unique form of licensing) has become an increasingly popular way of doing business. One of the explanations for doing this is that franchising combines the strength of their corporations with those of small businesses. It is a relatively low-risk way for people to get into business themselves and offer people the freedom to earn, manage and to direct their own business, while having the support of an established business. As the same time it also provides a means for companies to expand effectively without incurring the high overheads and management difficulties usually associated with the establishment of a branch network.

Licensing often has significant advantages from a company structure perspective (allowing, for example, an intellectual property holding company to be established which licenses the intellectual property of the company to the various operating companies). These structures can assist a business enterprise in a number of ways, including protecting the intellectual property from the trading risk which the operating entities are exposed to. In certain cases, there may also be tax and other financial structuring advantages to be obtained through licensing.

Trade mark valuations

• The capital of a successful business enterprise is generally composed of working capital, fixed assets and intellectual capital.
• Working capital and fixed assets are generally commodity-type assets that all businesses possess and exploit. However, a company that possesses and exploits only these assets will enjoy limited success and modest earnings because of the competitive nature of business and because other businesses have access to the same asset categories. A business that sets its sights on a generation of superior earnings must have something else – something that sets it apart from other businesses, ie the asset referred to as intellectual capital.
• The intellectual capital of a business includes its intellectual property. This often constitutes a significant component of its total asset base and in many cases the value of intellectual property exceeds the value of fixed assets of the business or its working capital.
• The strategic value of intellectual capital is evident if it is understood as knowledge that can be converted to value or profit. However, to place a monetary value on intellectual property is not so easy.
• Placing a monetary value on intellectual capital of business involves three essential steps:

– A full audit is required. This involves compiling a comprehensive and accurate inventory of all the components of the intellectual property to be found within a business.
– A due diligence investigation is then conducted into aspect of validity and ownership of those components.
– Finally a valuation is made, by determining a fair value for those components by recognised valuation process.
• Apart from the advantage of having a reliable value representing the intangible assets of the business, the auditing and due diligence procedures entail several other benefits including identifying and categorising the various intellectual property items, clarifying ownership and reviewing and enhancing the validity of intellectual property rights.
• Although an intellectual property audit and due diligence investigation are always useful as part of a “stock-taking procedure”, these procedures are particularly valuable and in fact essential when a business intends embarking on commercial transactions involving the following:

– Mergers and acquisitions
– Joint ventures
– Privatisation
– Stock exchange listing
– Financing
– Valuation of assets
– In anticipation of capital gains tax

For further information, please contact us or download our Audits, Due Diligence and Valuations brochure on these matters.