With the implementation of the newly amended Company Law of the People’s Republic of China (hereinafter the “Company Law”), the capital contribution obligations of shareholders of limited liability companies have been more clearly regulated, providing more operable legal guidance for corporate capital operations. Against this backdrop, capital contribution in the form of intellectual property, as an important method of contributing intangible assets, has attracted great attention from enterprises. Accordingly, this article focuses on sorting out the key points of legal practice concerning capital contribution in the form of intellectual property, so as to help relevant enterprises better understand the applicable regulations.
With respect to actual capital contribution in the form of intellectual property, corporate due diligence, and the management and utilization of such contributions, we have selected the following three popular Q&A items from Chapter IV: “Legal Practice of Capital Contribution in the Form of Intellectual Property under the New Company Law” of the Frontier Hot Topics in Intellectual Property: Practical Q&A Handbook, jointly compiled by us and our strategic partners Wolters Kluwer China, Lusheng, and Rouse International, to share with you.
Selected Practical Q&A
Q1
[Actual Capital Contribution] Through what methods can actual capital contribution in the form of intellectual property be completed?
The basic procedures for actual capital contribution in the form of intellectual property are as follows:
(1) For a company in preparation, the shareholders shall specify in the articles of association the concrete matters concerning capital contribution in the form of intellectual property. The main contents include the type, quantity, value, contribution ratio, ownership of rights, mode of use, etc. of the intellectual property. For an existing company, the shareholders shall, in accordance with the relevant laws and the articles of association, adopt a resolution agreeing on a capital increase and correspondingly amend the articles of association.
(2) The contributor shall conduct a valuation on its own or engage a professional intellectual property appraisal institution to conduct a valuation.
(3) On the basis of the issued asset appraisal report, a verification of the capital contribution to the registered capital shall be conducted, and a capital verification report shall be issued.
(4) The rights in the intellectual property proposed to be contributed shall be changed accordingly.
(5) Changes in registration with the administration for market regulation, tax authorities and other authorities shall be handled, and the change registration and filing of the paid-in registered capital shall be completed.
Article 49 of the new Company Law provides that “where capital contribution is made in the form of non-monetary property, the procedures for the transfer of the property rights therein shall be handled in accordance with the law.” Based on the foregoing legal provision, capital contribution in the form of intellectual property shall satisfy the statutory requirements for handling the transfer of property rights.
In addition, Article 10 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of the Company Law of the People’s Republic of China (III), as amended in 2020, provides that “where a contributor makes capital contribution in the form of real property, land use rights or intellectual property that is required to be registered for ownership and other property, and such property has been delivered to the company for use but the procedures for change of ownership registration have not been handled, and the company, other shareholders or the company’s creditors claim that the contributor has not performed its capital contribution obligations, the people’s court shall order the parties to handle the procedures for change of ownership registration within a reasonably specified period; where the procedures for change of ownership registration are handled within the aforesaid period, the people’s court shall determine that the contributor has performed its capital contribution obligations; where the contributor claims that it has enjoyed the corresponding shareholder rights from the time when it actually delivered the property for the company’s use, the people’s court shall uphold such claim.”
Therefore, in determining whether a contributor has performed its capital contribution obligations, both the handling of the procedures for change of ownership registration and the actual delivery for use shall be taken into account. Actual delivery of the intellectual property to the company is particularly important, as it affects the time when the contributor begins to enjoy shareholder rights.
In practice, the contributor and the company shall strictly comply with laws, regulations and relevant provisions to ensure the legality, validity and security of capital contribution in the form of intellectual property. Meanwhile, both parties shall also communicate and coordinate in a timely manner to resolve potential issues and jointly advance the process of capital contribution in the form of intellectual property.
Q2
[Due Diligence] What matters should a company focus on before accepting capital contribution in the form of intellectual property?
Before accepting capital contribution in the form of intellectual property, the company shall conduct a comprehensive review of the ownership, validity, stability, and any possible defects or restrictions on rights in the intellectual property. This includes examining the lawful right holder of the intellectual property, whether it has been registered, whether there are any legal disputes, whether the term of validity is sufficiently long, and whether there are exclusive licenses of implementation, etc. Only after confirming the validity of the intellectual property can the company’s lawful rights and interests be ensured against impairment.
The market value of the intellectual property is an important basis for the company to determine whether the contribution is in its interests. Therefore, prior to accepting the contribution, the company needs to assess the market value of the intellectual property. Assessment methods may include referring to the market prices and license fees of similar intellectual property, taking into account the market potential, life cycle, technological level and market demand of the intellectual property, and engaging professional institutions to conduct the valuation.
In the process of capital contribution in the form of intellectual property, the reasonableness of the contractual or articles of association provisions is of critical importance. The shareholders shall clearly specify in the contract or in the company’s articles of association the ownership of rights, scope of use, term, liability for breach of contract and other matters relating to the intellectual property, so as to safeguard the interests of the relevant parties. In addition, the contract and the articles of association shall also include details such as the specific amount of capital contribution in the form of intellectual property, the method of contribution, and the time of contribution, so as to facilitate the exercise of rights and performance of obligations by all parties.
For due diligence prior to capital contribution in the form of intellectual property, the company and other shareholders may proceed from the following aspects:
(1) Review relevant documents and materials
Review the registration certificates, letters of authorization, assignment agreements and other relevant documents and materials of the intellectual property to verify its authenticity and legality. At the same time, attention shall also be paid to the updates of the intellectual property, such as renewals, changes, licenses, pledges, etc. Where necessary, official search reports, evaluation reports and the like may also be requested from the competent intellectual property authorities.
(2) Examine the legal status of the intellectual property
The company shall ascertain whether the intellectual property is involved in litigation, arbitration, administrative reconsideration and other proceedings, so as to determine whether there are potential risks. In addition, attention shall also be paid to whether the intellectual property is subject to infringement allegations by others, so as to avoid potential legal disputes in the future.
(3) Analyze the technical level and market prospects of the intellectual property
The company shall assess the technical content, technical maturity, technological level, brand awareness, originality of works and other aspects of the intellectual property, so as to determine its practicality. At the same time, the company shall also examine the market conditions, competitive landscape, development trends and other factors of the industry in which the intellectual property is located, so as to forecast its market potential.
(4) Consult professionals
In the course of due diligence, the company may consult professionals in the field of intellectual property to obtain more comprehensive, in-depth and accurate opinions and advice. Such professionals include lawyers, patent attorneys, etc., who can provide professional perspectives and experience to assist the company in making informed decisions.
Q3
[Management and Utilization] How can the effective utilization of capital contribution in the form of intellectual property be ensured?
The definition of intellectual property, exclusive rights, scope of use, term, territorial restrictions and types of license (exclusive, sole, etc.) shall be clearly defined in the contract or the company’s articles of association, so as to ensure that the company and other shareholders clearly understand how to use these assets lawfully and efficiently. Clarifying in the articles of association and shareholders’ agreements the scope of rights and conditions of use of capital contribution in the form of intellectual property helps avoid or reduce the risk of future legal disputes and ensures a clear delineation of the rights and interests of all parties.
On this basis, the intellectual property shall then be integrated with the company’s operational strategy. To integrate intellectual property with the company’s operational strategy, a comprehensive intellectual property audit shall be conducted to assess its value, potential, relevance to the company’s business and its role in the company’s operations, to formulate an intellectual property strategic plan, to establish and improve an intellectual property management system, to closely integrate the intellectual property strategy with the R&D process, to use trademarks and brand-related intellectual property to enhance market recognition, to use patents, copyrights and other intellectual property to enhance business advantages, to establish an intellectual property risk early-warning mechanism, to monitor potential infringements in the market, and at the same time to ensure that the company’s operational activities comply with relevant laws and regulations and avoid infringing upon others’ intellectual property.
The company may formulate intellectual property policies, establish an intellectual property management team, set up systems for registration, monitoring and tracking of intellectual property, regularly assess the market value of intellectual property, formulate contingency plans for risks such as intellectual property litigation, invalidation and infringement, establish risk assessment procedures to identify potential infringements and legal challenges, ensure that all intellectual property activities comply with relevant laws and regulations, establish cooperation with external legal counsel to handle complex legal issues, and regularly provide employees with training on innovation in intellectual property, awareness of protection and compliance. By these means, a comprehensive intellectual property management framework can be established to effectively integrate capital contribution in the form of intellectual property, promote innovation, protect corporate assets and enhance competitiveness. This not only requires support from senior management, but also cross-departmental collaboration and continuous resource investment.
To encourage innovation and effective utilization, incentive mechanisms linked to intellectual property achievements may be established. The Patent Law of the People’s Republic of China and its Implementing Regulations provide for rewards and remuneration for service inventions. Generally, the entity granted the patent right may agree with the inventor or designer on the methods and amounts of rewards and remuneration for service inventions, and such agreement shall prevail; the agreed standards may be higher or lower than the statutory standards, provided that where they are lower, they shall remain within a reasonable range. However, if the entity granted the patent right has neither agreed with the inventor or designer nor specified in its lawfully formulated rules and regulations the methods and amounts of rewards, it shall, within three months from the date of announcement of the grant of the patent right, award the inventor or designer a bonus. The minimum bonus for an invention patent shall not be less than RMB 4,000; the minimum bonus for a utility model patent or design patent shall not be less than RMB 1,500. Where an invention or creation is completed by adopting the suggestions of the inventor or designer’s employing entity and a patent right is granted to such entity, the entity shall award the bonus on a preferential basis. Although the Copyright Law also contains provisions on rewards for service works, it does not specify reference amounts, but only classifies ownership according to the type of work and provides that, within two years from the completion of a service work, upon the consent of the entity, the author may license a third party to use the work in the same manner as the entity uses it, and the remuneration obtained shall be distributed between the author and the entity in accordance with their agreement; the two-year period from completion of the work shall be calculated from the date on which the author delivers the work to the entity. For service works such as product design drawings and computer software, the author enjoys the right of authorship, while the other copyright rights are enjoyed by the entity, and the entity may grant rewards to the author.
Other Excellent Q&A Covered in This Chapter:
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[Types of Contribution] What types of intellectual property can be used for capital contribution?
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[Contribution Ratio] What are the restrictions on the proportion of capital contribution in the form of intellectual property?
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[Instalment Contribution] May capital contribution in the form of intellectual property be made in instalments?
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[Insufficient Contribution] What legal consequences will arise if the actual value of the intellectual property is significantly lower than the subscribed capital contribution amount?
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[Depreciation after Contribution] If the value of the intellectual property depreciates after being contributed as capital, is the contributor required to make up the shortfall?
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[Set-off of Debts] May capital contribution in the form of intellectual property be used to set off debts?
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[Disposal of Assets upon Liquidation] How should capital contribution in the form of intellectual property be disposed of upon the company’s liquidation?
Authors of This Chapter
Su Yanhong Head of Digital Law and Commercial Law Practice
Lusheng Law Firm Beijing
Email: ssu@lushenglawyers.com
Lin Huaqiu Consultant
Lusheng Law Firm Shanghai
Email: ilin@lushenglawyers.com
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About the Report:
Frontier Hot Topics in Intellectual Property: Practical Q&A Handbook is jointly and meticulously authored by Wolters Kluwer China, Lusheng Law Firm and its strategic partner Rouse International, and was officially released online in November 2024. The handbook is compiled by more than 30 senior intellectual property experts, selects 108 intellectual property questions, and is divided into 11 chapters, bringing together 100,000 Chinese characters of detailed analysis. It focuses on the most cutting-edge issues currently of greatest concern in the industry, comprehensively covering key areas such as patents, trademarks, copyrights, trade secrets, unfair competition on the internet, capital contribution in the form of intellectual property, and punitive damages for intellectual property infringement. In a “Q&A” format, it distills the hot topics of concern to intellectual property practitioners and provides readers with the latest legal interpretations, case analyses and practical operational guidance.
Upon its release, the report immediately attracted wide attention and high praise from the industry. In order to better share its excellent content, we will continue to select a number of key Q&A items from each chapter and publish them in the form of a series of articles.
