South Africa: South African Treasury Approval Not Required For The Assignment Of Intellectual Property To Foreigners

1. Introduction:

Until recently, "capital" as contemplated regulation 10(1)(c) of the South African Exchange Control Regulations, issued in terms of the Currency and Exchanges Act, No 9 of 1933 (the "Regulations), has been interpreted broadly so as to include intellectual property, as a result, chiefly, of the judgment in Couve and another v Reddot International (Pty) Ltd 2004 (6) SA 425 (W) ("Couve"). As a consequence, the practice was to seek the prior approval of the National Treasury whenever a South African resident assigned ownership (or granted rights) in respect of intellectual property (i.e. "expatriated") to foreign residents. Failure to obtain such approval was presumed, by authority of Couve, to result in the transaction, effecting the expatriation of the intellectual property, being void ab initio. After a judgement in the course of 2010 that conflicted with the position in Couve, the Supreme Court of Appeal (the "SCA"), in the matter of Oilwell (Pty) Limited v Protec International Limited and others 2011 (4) SA 394 (SCA) ("Oilwell"), clarified, firstly, that intellectual property does not constitute "capital" as contemplated in regulation 10(1)(c) of the Regulations and, secondly, that it could not therefore form the subject of "export" of capital as contemplated therein. Accordingly, the legal position as it applies is that intellectual property transfers, internationally by South African residents do not require the approval of the National Treasury. The article below outlines some of the aspects considered by the SCA in making its findings.

2. Regulation 10(1)(c) of the Exchange Control Regulations and Couve v Reddot International (Pty) Ltd 2004 (6) SA 425 (W):

Regulation 10(1)(c), under the heading "restriction on export of capital", provides as follows:

In the earlier Couve judgment, which concerned inter alia the validity of an agreement to assign rights to patent applications by a South African entity to a foreign company, entered into without the prior consent of the SA Reserve Bank (the agent of the National Treasury in regard to exchange control issues); the court held that within the meaning of regulation 10(1)(c) of the Regulations patent applications and patents are 'capital' and as such that the assignment thereof would constitute 'export' of capital. The court further held that a transaction that is in contravention of regulation 10(1)(c) would be ab anitio void. This interpretation was held, generally, to be correct in a subsequent case, Pratt v Firstrand Bank Ltd [2004] 4 All SA 306 (T) ("Pratt").

Subsequent to Couve and Prat, the exchange control department of the SA Reserve Bank (now called the Financial Surveillance Department and hereinafter "Excon"), in practice, adopted an approach corresponding to the court's findings in Couve and, in many guidelines, circulars and rulings, prescribed that all transactions pertaining to the expatriation of intellectual property by South African residents, to non-residents, required its prior written approval, otherwise such transactions would fall foul of regulation 10(1)(c) and be rendered void ab initio, in addition to being criminal sanctions contained in regulation 22 of the Regulations. Accordingly, participants in cross-border transactions involving the expatriation of intellectual property would ordinarily, prior to the consummation of such transactions, seek the approval of the Excon through the intercession of authorised dealers (typically the major commercial banks). This led, in many instances, to drawn out transactions, entailing various rounds of negotiations and amendments to agreements so as to comply with the diktats of the Excon, to the detriment, in some instances of the transactions.

3. Oilwell (Pty) Limited v protec International Limited and others 2011 (4) SA 394 (SCA) ("Oilwell"):

The judgment of the "SCA" in Oilwell related to an appeal of an earlier judgment of the North Gauteng High Court, Pretoria (Oil Well (Pty) Limited v Protec International Limited and Others (44835/08) [2010] ZAGPPHC 7 (17 February 2010)). The court a quo had come to the the conclusion that Couve was wrongly decided inter alia because intellectual property rights were not 'capital' within the meaning of the term as used in the Regulations; accordingly, regulation 10(1)(c) could not act to preclude the expatriation of the subject intellectual property (trade marks). The judgment however left the possibility that its finding might not apply to other categories of intellectual property.

4. "Capital" and the" Export" thereof:

The SCA in Oilwell largely confined itself to consideration of two aspects: firstly, whether the subject transaction fell within the ambit of regulation 10(1)(c) and, secondly, the effect if the expatriation of intellectual property properly fell, properly, within the ambit of regulation 10(1)(c).

The SCA considered the general scheme of the the legislation in terms of which the Regulations were issued as well as the Regulations themselves, in order to establish whether trade marks (and by parity of reasoning, patents, designs and copyright) fell under rubric of 'capital' as contemplated in the Regulations. The SCA reiterated that the significance of a word in any particular case depended on the context of its use; and that the word "capital" in the context of the Regulations could only be used in the financial sense because the Regulations were, in terms of their empowering statute, supposed to deal with matters relating to currency (banking and exchange rates). Therefore, in this context capital could only conceivably have a meaning concerning "cash for investment or money that could be used to produce further wealth". The SCA also considered, in adopting this restrictive interpreation of the term "capital", that the Regulations provided for administrative and criminal penalties in regulation 22.

Importantly, in regard to trade marks and other intellectual property, the SCA emphasised the territorial nature thereof and, therefore, the similarity of these rights to immovable property, and the corresponding anomaly of these rights being capable of "export", within the meaning of the Regulations.

The SCA accordingly concluded that the court a quo had been correct in finding that trade marks were not capital, nor could they form the subject matter of "export", as contempleted in the Regulations.

5. Effect of contravening Regulation 10(1):

After making the above finding the SCA proceeded to consider the effect of the failure to obtain the prior approval of Excon to an underlying agreement governing a transaction; in the light of the finding in "Couve" that such a failure would result in the agreement and underlying transaction being void ab initio.

The SCA determined, after citing various judicial decisions, that the Regulations were promulgated in the public interest and not to protect any private interests, by for instance, providing an unwilling debtor with a ready instrument for evading liability through means of the invalidity of the underlying transaction. The purpose of the Regulations were determined by the SCA to simply enable the National Treasury to exercise proper control over transactions affecting foreign currency, in order to protect South Africa's foreign reserves; hence the inclusion of the criminal sanction in regulation 22, which enables National Treasury to enforce compliance with the Regulations. The fact that the Regulations elsewhere provide for the attachcment by the National Treasury of monies and goods in respect of which a contravention has been committed was found, by the SCA, to be indicatory of the excessiveness which could result were the underlying transaction, additionally, to be invalidated by a contravention of a peremptory provision in the nature of regulation 10(1)(c).

The court found that this did not mean that in the absence of the National Treasury's consent the transaction would be enforceable. Parties to a contract are obliged, under the circumstances, to take the necessary steps to obtain such approval. Further, such National Treasury approval could ex post facto be obtained in respect of any transction (a point of particular significance in the context of contraventions of regulation 3(1)(c), in regard to the prior approval of royalty outflows resulting from in-licence arrangements in respect of intellectual property owned by foreign residents). A transaction concluded without the approval of the National Tresaury is therefore not void at the behest or election of one of the parties, although a party could rely on this ground where the National Treasury has refused to grant ex post facto approval. Under the aforementioned circumstances, none of the parties to the transction would be entitled to restitution, as it would ordinarily be possible, however, the National Treasury could rely on the provisions of the Regulations (namely regulations 22A, 22B and 22C) to undo the effect or proposed effect of a transaction condluded without its prior approval.

6. Implications of Oilwell Judgement to the Expatriation of intellectual property and rights thereto:

The judgment of the SCA has had far reaching implications in regard to the expatriation of intellectual property by South African residents to foreign residents, in the following regard:

• Intellectual property and the rights thereto do not consitute "capital" as contemplated in the Regulations nor are they capable of "export", within the meaning of the Regulations; consequently, the expatriation of intellectual property or the rights thereto by South African residents to foreign residents does not require the prior approval of the National Treasury;
• The flow, overseas, of royalties and licence fees in respect of intellectual property in-licence arrangements still requires the prior approval of the National Treasury (and the Department of Trade and Industry, in regard inter alia to the quantum of royalties and licence fees) in terms of regulation 3(1)(c) of the Regulations, which approval can be obtained ex post facto after conclusion of the underlying transaction;
• The failure to obtain the prior approval of National Treasury does not invalidate ab initio a transaction; nonetheless, National Treasury could invoke regulations 22A, 22B and 22C to undo the effect of a transaction concluded without its prior approval; and
• In the event of the National Treasury invoking regulations 22A, 22B and 22C, the parties to the transaction might not be able claim restitution on the basis inter alia of the par delictum rule.

It is worth noting, in addition to the above, that the expatriation of intellectual property by South African residents to foreign residents, could still have implications in terms of other regulatory instruments. This is particularly so in regard to South African income tax as it applies to inter alia:

• The tax on capital gains in respect of the disposal of the intellectual property;
• Taxable recoupments which could arise as a result of the disposal of intellectual property;
• The application of the deeming provisions in respect of donations tax, where the intellectual property is disposed for inadequate consideration;
• The need to assess the benefits derived from the expatriation of intellectual property from South Africa relative to the benefits derived from South Africa remaining the situs of research and development as a result of the tax incentives provided by section 11D of South Africa's Income Tax Act, No. 58 of 1962;
• The need to assess the benefits derived from the expatriation of intellectual property from South Africa relative to the prohibition or limitation, in terms of section 23I, of certain deductions in respect of intellectual property, where such intellectual propert is created in South Africa, expatriated to a foreign locale, and is then licensed back to the initial proprietor for consideration in the form of a royalty;
• The need to assess the benefits derived from the expatriation of intellectual property from South Africa relative to the likelyhood of the application of the withholding tax on royalties, where the former resident proprietor, commercialises the intellectual property, subsequent to its expatriation, in terms of a licence agreement with the foreign proprietor; and
• Transfer pricing provisions in regard to the cross-border transfer of intellectual property between connected parties and the related consideration therefor.

Further pertinent aspects to consider, regarding the expatriation of intellectual property by South African residents to foreign residents include:

• The on-going suggestions in industry circles that National Treasury may be considering regulating the expatriation of intellectual property either through the amendment of the Regulations or through a separate legal instrument (conduct which could itself fall foul of our treaty obligations in regard to Article 4 of the Agreement on Trade-related Aspects of Intellectual Property Rights);
• Regulation 17 of the regulations issued in terms of Intellectual Property Rights from Publicly Financed Research and Development Act, No. 51 of 2008 ("IPR Act"), which purportedly bars the expatriation of intellectual property emanating from publicly financed research and development, without the prior approval of the National Intellectual Property Management Office (by invalidating the underlying transaction in terms of which such intellectual property is expatriated), and which itself appears to be ultra vires in terms of the IPR Act; and
• The implications of expatriating intellectual property to foreign resident entities in regard to a beneficial owners title and/or entitlement to litigate independently of the foreign resident proprietor and in regard, in such circumstances, the proper quantification of infringement damages where title is segregated from the beneficial owner of the intellectual property.

Lastly, the authors deem it outside the scope of this article to criticise the Oilwell judgment or to assess the extent to which the judgment should or could be interpreted as limited to South African intellectual property rights or statutory intellectual property only, based on arguments raised by the SCA, such as territoriality.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.