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Summary
- Each company in a group remains a separate legal entity under the Companies Act 1993, so a licence between them needs the same documentation as any commercial arrangement.
- Without a written licence, the licensee cannot prove its right to use the intellectual property if an entity sells, a shareholder dispute starts, or a liquidator takes over.
- Where one entity sits outside New Zealand, transfer pricing rules require the royalty to reflect what unrelated parties would agree, and Inland Revenue puts the onus on the taxpayer.
- This guide explains licensing agreements between related businesses for company directors and business owners in New Zealand.
- LegalVision’s commercial contracts lawyers advise groups on setting termination and change of control triggers, sublicensing rights between entities, and confidentiality where the licence covers a proprietary process.
Tips for Businesses
Write a quality control clause into any trade mark licence, and actually monitor how the licensee uses the mark. State that improvements the licensee develops belong to the licensor, or ownership drifts across the group. Record an effective date covering the use that has already happened, rather than backdating the signature. Speak to a commercial contracts lawyer at LegalVision about documenting an intra-group licence already in use.
A licensing agreement lets one business use intellectual property another business owns, without transferring ownership. Companies in the same group in New Zealand often share a brand or a system with nothing in writing. Each company remains a separate legal entity under the Companies Act 1993, regardless of who owns the shares. An undocumented arrangement gives the user no right it can prove and no right it can defend. That gap shows up when a shareholder falls out, an entity sells, or a liquidator arrives. A written licence also matters for tax, because a royalty crossing the New Zealand border must sit at arm’s length. This article explains what a licensing agreement between related businesses covers in New Zealand, why an informal arrangement fails when circumstances change, which terms to include, and how transfer pricing affects the royalty where one entity sits offshore.
What Is a Licensing Agreement?
A licensing agreement is a contract in which one party (the licensor) grants another party (the licensee) the right to use something it owns – typically intellectual property such as:
- trademark;
- brand name;
- software; or
- confidential business process.
In return, the licensee usually pays a fee. Related businesses commonly use licensing agreements to centralise intellectual property ownership in one entity. These businesses may include a parent company and subsidiary, or companies owned by the same shareholders. The agreement then allows other group members to use the intellectual property commercially.
Tayler Berridge-SmithSenior Associate, LegalVision“The groups that get caught are never the ones expecting trouble. It is the family company where the brand sits in one entity, the trading happens in another, nobody ever wrote it down, and then two shareholders stop speaking. At that point the entity using the brand has no licence, no royalty history and no argument.”
Why Formalise the Arrangement?
Even where businesses are closely related, a formal written agreement is important for several reasons.
From a legal standpoint, each company is a separate legal entity. Without a written licence, the licensee has no documented right to use the intellectual property, which creates vulnerability if the relationship between the businesses changes.
For instance, if one entity is sold, enters receivership, or if a dispute arises between shareholders. The agreement also protects the licensor by making it clear they retain ownership of the intellectual property that they are allowing the licensee to use.
There are also practical benefits. A written agreement sets clear expectations about how the intellectual property can be used, what quality standards must be maintained, and what happens if either party breaches the arrangement. This protects the value of the intellectual property and reduces the risk of disputes arising from misunderstandings that could otherwise have been avoided with clear documentation from the outset.
The same people usually sit on both boards, which the Companies Act 1993 treats as a conflict to manage. A director counts as interested where they hold a material financial interest in another party to the transaction. A director who signs a licence for both the licensor and the licensee sits squarely inside that definition.
Disclose the interest as soon as the director becomes aware of it. Record the nature and value in the company’s interests register. An interested director may still vote, so disclosure costs the group nothing. Skipping it costs a great deal more.
Where a director was interested, the company can avoid the transaction within three months of the shareholders learning about it. Receiving fair value under the transaction closes off that risk. A royalty set at a defensible commercial rate is therefore doing two jobs at once. It supports the tax position, and it establishes fair value under company law. A nominal royalty, or none at all, undermines both. Minute the board approval on each side, and keep the interests register current. Understand why a holding company might own the group’s trade marks before you set the structure.
Key Terms to Include
A licensing agreement between related businesses should cover the same essential ground as any commercial licence, even if the terms are less arms-length than they would be between unrelated parties.
The following terms are particularly important:
- Scope of the licence: Defines exactly what is being licensed and how it can be used. This includes whether the licence is exclusive or non-exclusive, the geographic territory it covers, and whether the licensee can sublicense the rights to others.
- Royalty and payment terms: Terms should specify the amount payable, how it is calculated (for example, as a percentage of revenue or a fixed fee), and when payments are due.
- Term and termination: This should set out how long the agreement lasts and the circumstances in which either party can bring it to an end. This might include termination for breach, insolvency, or a change of control in one of the businesses.
- Intellectual property ownership: This should make clear that the licence does not transfer ownership of the intellectual property. The licensor retains ownership at all times, and any improvements or developments made by the licensee will be owned by the licensor.
- Confidentiality clauses: These protect any sensitive business information shared in connection with the licence, which is especially relevant where the licensed material includes proprietary processes or trade secrets.
What Happens Without a Written Agreement?
The absence of a formal licence does not mean the arrangement does not exist. It simply means the terms are unclear and therefore harder to enforce. Once a dispute arises, neither party has a reliable document to point to. If one business is sold or restructured, the new owners may have no obligation to honour an informal arrangement. If the intellectual property owner becomes insolvent, the liquidator may have no reason to recognise the other entity’s right to keep using the IP.
In short, the informality that feels convenient in a close business relationship becomes a significant liability when circumstances change. A clear, written licence protects the intellectual property, defines each party’s rights, and ensures the arrangement holds up if circumstances change.
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Frequently Asked Questions
What should be covered in a licensing agreement?
A licensing agreement between related businesses will typically cover the scope of the licence, royalty and payment terms, the term and termination rights, intellectual property ownership, quality control obligations, and confidentiality.
Does a licensing agreement between related businesses need to be in writing?
Licensing arrangements can exist without a written contract, but a written agreement is strongly advisable. It provides clear evidence of the terms and protects both parties if the relationship changes or a dispute arises.
Do related companies have to charge a royalty?
Not where both companies sit in New Zealand, since transfer pricing rules cover cross-border dealings only. Once one entity sits offshore, the royalty must reflect what unrelated parties would agree. Inland Revenue puts the onus on the taxpayer to show the rate holds up.
Should a holding company own the group’s intellectual property?
Often yes, because separating the assets from the trading entity shields them if the operating company fails. Centralising also makes the portfolio easier to monitor and renew. The holding company must then licence the marks out, with real quality control over how each entity uses them.
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.
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