Impact of new working measures on external IP transfers of cross-border deals

By Charles Feng, East & Concord Partners
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Rising international competition in the high-technology sector has been driving many countries to adopt tighter protective measures for their crucial technologies. On 18 March 2018, China’s State Council issued Measures for Work Concerning External Transfer of Intellectual Properties (the “Measures”). The Measures, which set forth rules for cross-border transfers of IP, are the first that the Chinese government has promulgated with the primary legislative goal of improving its national security. The potential implications of the Measures on cross-border mergers and acquisitions, involving technology transfers, deserve our close attention.

Charles Feng Partner, Co-head of IP Department East & Concord Partners
Charles Feng
Partner, Co-head of
IP Department
East & Concord Partners

Relevant parties. It is specified in the Measures that the examination procedure thereunder shall be applicable to PRC-based IP transfers from any Chinese entities or individuals to foreign enterprises or individuals or any other foreign organizations, excluding transfers of PRC-based IPs by foreign parties. Given the nationality standard adopted, this stipulation may be easily circumvented by multinational corporations having their IPs registered under the name of their foreign parent companies, a common practice among most multinationals, as IP transfers by their foreign parents as registered IP holders to other foreign transferees are not regulated by the Measures. Unlike the Measures, Article 20 of the Patent Law regulates all IP accomplished in the PRC, which provides that any entity or individual intending to apply for a patent in a foreign country for an invention or utility model accomplished in the PRC shall go through confidentiality examination procedure under this Article 20, which reflects the difference worth our attention in practice.

Subject Matter. According to the Measures, four categories of IP are subject to the examination procedure thereunder, including patents, integrated circuit layout designs, computer software copyrights, and new plant varieties. Measures also include other potential subject matters in its scope of application by using words to the effect of “etcetera”. Compared with Regulations for the Administration of Import and Export of Technologies (the “Regulations”) in effect for nearly 20 years, the Measures explicitly expand the scope of application to include IC layout designs, computer software copyrights, etc., signalling the trend that the examination procedure will apply to a broader range of IP. At the same time, the Measures do not explicitly include technical secrets as the subject matters that should follow the examination procedure thereunder, adding to the industry’s concerns about how and whether technical secrets will be examined and how the Measures will be aligned with the Regulations. Besides, whether any IP other than trademarks and software copyrights are subject to the examination procedure has not yet been clarified.

Act of Transfer. The Measures regulate three categories of cross-border transfers, namely change of titleholders, change of actual IP controllers, and granting of exclusive IP licences. The Measures do not regulate any transfers, other than these three categories, such as general or exclusive licences. It is worth noting that general or exclusive licences are still subject to the Regulations. For these licences, an application shall be submitted in accordance with the Regulations to the foreign trade and economic cooperation department of the State Council for the examination jointly with the technology-management department. However, the Measures do not provide for technical outflows other than the technology transactions previously described, such as equipment transfer or technology demonstration.

Contents. The Measures outline two categories of examined contents, such as the impact on national security and the impact on the capabilities to innovate and develop critical technologies in key areas. Following the publication of the Measures, many local governments introduced implementation rules for their own provinces. Local regulations issued by Jiangsu, Anhui and other provinces highlight the following categories of contents:

  1. Examination on the capabilities to innovate and develop technologies, including general examination on validity and duration of the IP and relevance of technology exports, and examination to confirm specific issues, for example, whether the IP involved is considered a critical technology in a key area, how national IP plans for critical technologies in key areas of major industries may be affected, whether the transaction is in line with China’s policy for its software industry, whether the transaction is able to drive cooperation in the production of large complete sets of equipment considered high-tech products, and whether any grossly unfair situation is involved.
  2. Examination on the impact on national security, including the impact on national, economic and information security, as well as review and
    assessment from the perspective of public interests.

In general, addressing a wide range of issues without precisely targeted rules, the local regulations raise concerns about ambiguity and generality in application that may provide regulators responsible for the examination procedures with ample discretion to enforce them. It is especially worth noting that for deals, involving foreign companies’ takeovers of Chinese high-tech companies, such risks may increase drastically.

Risk Avoidance. To minimize or avoid the risks of relevant transfers and associated M&As, multinational companies may consider taking the following possible countermeasures:

  1. Prior self-review. Companies should conduct reviews, before transactions, on whether their technologies involve national, economic or information security or any crucial technologies with reference to the Catalogue of Technologies Restricted from Export and the Catalogue of Technologies Prohibited from Export. It is also important to understand fully and assess the risks of IP transfers to foreign parties, the role and significance of
    such transfers in M&A deals, and the necessity of the transactions. Finally, companies should determine transferred contents reasonably.
  2. Steps and timetable. For necessary IP transfers to foreign parties, transferors must fully understand the review steps for the same and prepare early for the application. According to the published local regulations, the relevant examination procedure takes appropriately up to 30 days. Therefore, parties to a transfer should ensure their timetable allows sufficient time for the procedure, as well as good alignment with the overall M&A deal.

Charles Feng is a partner and co-head of IP department at East & Concord Partners

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