Intellectual Property
Technology and trademarks used by group companies: designing post-reorganization use and future separation
When establishing a holding company structure or reorganizing a group, consider both which company should hold technology and trademarks and how each company may use them. This includes continued use by the company transferring the rights and by companies remaining in the group. Focusing on the combination of ownership, transfers, and licenses, this article addresses improvements, future separation, coordination with tax considerations, and the provision of technology overseas.
Reviewed by Keishi Yoshikawa, Attorney at Law and Patent Attorney (Dai-Ichi Tokyo Bar Association)
Contents
1 What each company needs to use after reorganization
First identify the businesses each company will continue after the reorganization and the uses they require. In addition to manufacturing and sales, check whether the company needs to improve the technology, outsource manufacturing, or license another company. Then connect the current right holder and actual user companies with the contracts and agreements supporting use and the way the technology is actually used. Keep unresolved ownership or license-scope issues on the list of matters to verify before choosing an ownership structure. Share the purpose of the reorganization and the businesses concerned with accounting and tax advisers, and consider ownership arrangements and tax treatment in parallel. Do not decide at the outset to centralize everything in the parent; examine the position of both companies affected by a change.
Checks for each proposed change
For each ownership or contractual arrangement, identify the uses to be secured on both sides and the matters to agree.
| Proposed change | Uses to secure on both sides | Matters to agree in advance |
|---|---|---|
| Centralizing common technology and brands in the parent | Management by the parent and manufacturing, sales, and improvements by operating companies. | Rights to transfer, each company's license scope, responsibility for maintenance, the method of adding new companies, and when each company's permitted use begins after transfer. |
| Separating a business into another company | Use by the transferred business and use by the business remaining in the original company. | Rights and contracts to transfer, licenses for the remaining company, the need for third-party consent, and delivery of materials and information. |
| Changing ownership interests or control of a subsidiary | Continued use by the company concerned and companies remaining in the group. | Review triggers, duration and consideration for use, brand changes, limits on use of information already obtained, and access to improvements. |
| Providing technology to an overseas subsidiary | Use by the local business and the provider's control of information and onward provision. | Countries, users, purposes, sharing methods, license scope, responsibility for regulatory checks, and conditions for starting the provision of technology. |
Each row provides examples of matters to consider. It does not mean that rights or use conditions automatically change merely because the event occurs. Check the procedures and legal effect according to the rights concerned, the method of reorganization, existing contracts, and other relevant circumstances.
2 Combining ownership arrangements with each company's use
Suppose Company B uses manufacturing technology belonging to Company A in the same group. Check current ownership and use agreements for A's patents, materials recording manufacturing conditions, and software operating the equipment. Do not equate the company holding the documents with the right holder. Identify restrictions arising from third-party licenses as well.
One option is to transfer the patents to Parent P and have P license A and B. Another is to leave the rights with A and put B's license on an appropriate footing. For the first option, consider whether P can manage maintenance and licensing and the conditions of each company's use. For the second, consider the extent to which B's business depends on A's decisions and the terms securing continued use. Another possible arrangement is for P to hold trademarks for a common brand while A retains technology specific to its business. Check the treatment of existing licenses and secure continued use by the company transferring the rights. Choose the arrangement by considering each company's necessary uses, future sales, tax consequences of transfer, and third-party consent requirements, as well as ease of administration.
Transferring a patent does not necessarily transfer sufficient manufacturing know-how. Agree which materials and information will be provided to whom and how far their use and disclosure are permitted. Similarly, possession of control software code does not authorize unrestricted modification or provision to other companies. Align the authority required for the intended uses with the code and materials actually to be delivered.
A non-exclusive license under a Japanese patent may be asserted, without registration, against a person acquiring the patent after the license arises. A non-exclusive trademark license, if registered, may also be asserted against a person acquiring the trademark right after registration. Registration is not a condition for the license to be established between the contracting parties. Consider an agreement with the intended transferee on continued licensing separately from whether registration is needed to assert continued use against future third parties. Also check changes in user companies, contractual termination conditions, and succession to obligations such as technical support, and ensure there is no gap between transfer of the rights and each company's permitted use.
Related article: When software use rights are called into question after an acquisition (checking authority to use software already acquired).
3 Each company's use terms and provisions for future changes
Identify the companies permitted to use the rights and establish how newly formed or acquired companies can be added. Define group companies, the person authorized to approve additions, and the businesses and territories covered. Decide whether a new company joins as a contracting party or uses the rights under a sublicense or another arrangement, and verify the authority to grant sublicenses. The parent cannot expand the scope of a third-party license by its own decision alone.
For improvements, verify the rights arrangements with developers and contractors and agree on ownership and each company's use. For regulation of unfair trade practices, Japan Fair Trade Commission guidelines generally treat transactions between a parent and a wholly owned subsidiary, or between wholly owned sister companies, as equivalent in substance to conduct within a single enterprise and therefore outside the scope of that regulation in principle. A subsidiary that is less than wholly owned may receive similar treatment depending on the shareholding ratio, appointment of officers, involvement in financial and business policies, and transactional relationships. This is not a group-wide exemption from the Antimonopoly Act and does not extend to conduct restricting third parties' business activities. If the same restriction is imposed on external business partners, it will normally be regarded as having been imposed on the subsidiary as a business partner as well and will, in principle, be subject to regulation. For technology licenses subject to that regulation, an obligation to assign rights in improvements developed by the licensee to the licensor or others, or to grant the licensor an exclusive license under which even the developer cannot use the improvement, generally constitutes an unfair trade practice. Check circumstances that may support an exception, including the relationship with the original technology and consideration, and review obligations intended to continue for improvements made after a company leaves the group.
For a common brand, establish the goods and services covered, how the brand is displayed, and procedures for quality checks and corrective action. In Japan, a trademark registration may be canceled in a cancellation trial if a licensee uses the registered trademark or a similar mark for designated goods or services or similar ones in a way that misleads as to quality or causes confusion with goods or services connected with another person's business. An exception applies where the trademark holder was unaware of the conduct and exercised due care. Put the checking and correction procedures into operation rather than merely including them in the contract.
For changes in ownership interests or control, define the events triggering a review. For use after departure from the group, consider the technology and products covered, duration, consideration, and access to improvements separately, and allow a period for changing brand displays. Deal separately with stopping new access to information, the extent of restrictions on use of information already obtained, confidentiality, and the return or deletion of materials.
4 Coordinating assumptions for consideration and tax review
When assessing consideration, distinguish transfers of rights from licenses and share the subject matter, scope, duration, exclusivity, and allocation of development and maintenance burdens with tax advisers. Even transactions between domestic group companies at no charge or below value require tax review, including whether they constitute donations for tax purposes. Clarify the reasons for the pricing and the substance of the transaction, verify the tax treatment, and then settle the terms. Legal advisers clarify the rights each company obtains and the obligations it assumes; tax advisers consider valuation and tax treatment in light of the reorganization method, ownership relationships, and transaction substance. Align their assumptions when adjusting consideration and contract terms, revisit them if the subject matter or scope of use changes, and record the analysis. Separately consider transfer pricing and other relevant tax rules for transactions with foreign related parties.
5 Providing technology overseas and checking how it is shared
Providing technology to an overseas subsidiary is not exempt from regulation merely because of the shareholding relationship. First identify the drawings, programs, and technical assistance to be provided. When granting access to shared folders, identify who can obtain and use what. Technical and export-control personnel should assess whether the technology and transaction are regulated by examining technical specifications, the location and residence status of recipients and users and their relationships with foreign corporations or others, intended uses, and the method of provision. In addition to list-based controls, consider controls based on end use and other factors and the conditions for exemptions when deciding whether a license is required. Legal advisers should reflect the result in license scope, conditions on onward provision, and conditions for delivery of materials or commencement of access. Include pre-contract sharing in the review and ensure that controlled technology is not provided before necessary permission is obtained. Record the technology, recipients, and basis of the decision, and review the assessment when technology or users are added.
Decisions about which company holds the rights and how each company uses them need to address improvements, future reorganizations or departures, and overseas provision together. We advise on ownership arrangements and licensing terms for group companies, contracts governing improvements and departure from the group, and agreements and checks concerning technology provided to overseas subsidiaries.
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