Intellectual property transfers in M&A transactions – Capital controls

• South Africa

• Intellectual property - Guides

01-12-2020

Despite a tough year because of the COVID-19 pandemic and general pre-existing economic distress, South Africa remains fertile ground for mergers and acquisitions. South Africa continues to produce quality businesses which are valued at near-historic low multiples. That coupled with a robust legal system and rule of law makes South Africa attractive for well-timed acquisitions.

However, South Africa has strict capital controls which apply to transactions involving the transfer or assignment of intellectual property to foreign non-resident entities (which includes licensing arrangements). These capital controls are enforced by the South African Reserve Bank with limited delegation to commercial banks.

As a result, the provisions of the Exchange Control Regulations, 1961 are key considerations in any deal that involves intellectual property.

In terms of Regulation 10(1)(c) of the Exchange Control Regulations, 1961:

“No person shall, except with permission granted by the Treasury and in accordance with such conditions as the Treasury may impose … enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic.”

For the purposes of sub-regulation (1)(c) –

(a) “capital” shall include, without derogating from the generality of that term, any intellectual property right, whether registered or unregistered; and

(b) “exported from the Republic” shall include, without derogating from the generality of that term, the cession of, the creation of a hypothec or other form of security over, or the assignment or transfer of any intellectual property right, to or in favour of a person who is not resident in the Republic.

A failure to obtain exchange control approval before closing a transaction that has the effect of exporting intellectual property ‘housed’ in South African to a non-resident may result in the transaction being rendered void down the line. For that reason, where there is uncertainty as to whether or not a transaction is subject to exchange control approval, it is prudent, in the very least, that the non-resident party to the transaction secures comfort through suitable warranties and indemnities that speak to the required regulatory approval.

The Reserve Bank’s general approach in the granting of exchange control approval in outright intellectual property asset sales is indicated below: