China Law Insight : China Law Insight: China Commercial and Intellectual Property Lawyers and Attorneys, Full Service Law Firm: King & Wood

Within the legal framework, core IP issues are addressed in the Measures of the Administration of Initial Public Offering and Listing of Stocks, the Interim Measures for the Administration of Initial Public Offerings and Listings on the Second Board, and the Opinions on Auditing the Stock Issuance by the Examination and Verification Committee of the China Securities Regulatory Commission.

II. IP Issues Arising from A Share IPOs

In practice, the Examination and Verification Committee audits IP issues in the following aspects:

A. Independence

There are three situations relating to IP independence:

a. Incomplete assets due to lack of key IP rights

For example, in relation to a manufacturer of laser organic photo conductor drums , four design patents used in most of the company's products and one utility model patent used in over 50% of the company's products were found to be terminated (the "OPC Drums Case").

b. Dependency issues for key IP rights

Sometimes enterprises do not directly own but rather only possess the rights to use certain key IP, and this will create a dependence on related parties. Take one pharmaceutical company as an example, where ownership of the trademark for the company's second leading product belonged to another enterprise sharing a common shareholder with the pharmaceutical company. Therefore, the right to use trademarks on the issuer's important products was dependent on the continued cooperation by that common shareholder.

c. Uncertainties in key IP rights

Although the above situation is primarily a dependency concern, such dependence also creates crucial uncertainties in the future viability of such IP rights. For example, one manufacturer of magnetic switches and other related products signed a joint licensing agreement with another enterprise in which the manufacturer was authorized to use an important trademark. However, the licensing agreement did not clearly stipulate renewal rights upon expiry of the term of the agreement or exclusivity rights between the parties.

In addition, when universities or research institutions establish a business or become core technical staff in a company about to go public, the Examination and Verification Committee will be concerned about whether the issuer's related IP rights are service inventions. One example involves a professional enterprise in the business of researching, developing, producing and selling security video surveillance & transmission technology that applied for six patents. The Examination and Verification Committee saw cause for concern because the actual controller of the applied patents was a regular teacher in a university in Zhejiang Province.

B. Sustainable Profitability

In practice, the Examination and Verification Committee often pays particular attention to whether there have been material adverse changes in the issuer's acquisition and use of important IP rights. Such changes may lead to uncertainties in auditing A share initial public offerings and listings, just as in the OPC Drums Case. Furthermore, the upcoming expiry of important IP rights would also have a major impact on an issuer's ability to maintain profitability.

C. Significant Pending Litigation

Unlike general litigation, litigation involving an issuer's key IP rights, regardless of the litigation amount, will attract the scrutiny of Examination and Verification Committee. In A Stock IPOs, pending litigation may seriously affect an issuer's potential listing. One such example is a glass deep-processing equipment enterprise that put off its IPO twice due to pending litigation and has gone public only recently. Similar difficulties have faced an intaglio press enterprise, a silicon wafer processing enterprise and a laser cutting industry application solution provider.

D. Information Disclosure

In addition, the above-mentioned issues with an issuer's key IP rights will often cause information disclosure problems such as incompleteness, inaccuracies, and inconsistencies between information disclosed and information presented on an issuer's website. On April 20th, 2010, the Examination and Verification Committee of the China Securities Regulatory Commission released the Circular Implementing Sponsorship Requirements, Regulating and Improving the Quality of Sponsors' Due Diligence (Fa Xing Jian Guan Han [2010] No.121) ("Circular"). The Circular requires a full review of applications handled before May 1st, 2010. The verifications will cover patents, trademarks, litigation and arbitration, related parties, prospectuses and other important information.

III. Analysis of Relevant Projects and Recommendations

A. Special Inspections of Issuer's IP During Due Diligence

Potential issuers and their professional advisors should consider performing special inspections in the following aspects: (1) issuer's acquired IP rights and legal status of such rights; (2) whether the issuer has sole ownership; (3) the legal status of assigned IP rights, exclusive nature, duration, and relevant renewal terms (if any); (4) maintenance and updates since IP application; and (5) IP ownership disputes and potential disputes.

B. Active Defensive and Strategic Protection

Issuers should protect their key IP rights using a defensive and proactive strategy. For instance, issuers should consider:

a. applying for registered trademarks in advance of prospective products and services,

b. retaining professionals to conduct regular maintenance of its intellectual property portfolio (application, renewal or extension, alteration, etc),

c. instructing internal staff to track information on a regular basis,

d. maintaining consistency between information disclosure and the legal status of the IP rights.

However, defensive and strategic protection may sometimes spark IP ownership disputes or potential disputes that the issuer should try to avoid.

C. Management Principles and Schemes for Existing IP Issues

After specialized due diligence is conducted on an issuer's IP rights, the issues that are revealed must be dealt with using tailored solutions. Management principles should focus on eliminating the Examination and Verification Committee's concerns about independence of the issuer's IP rights, profit sustainability, significant pending litigation and information disclosure issues that may potentially have a negative influence the value of the company or its ability to be publicly listed.

In IPO practice, management schemes for IP issues are as follows:

a. In order to optimize protection of an issuer's IP and minimize legal risks such as dependency, inaccuracies or incomplete IP ownership, the company should seek to acquire original registrations. For example, one prospective public issuer applied for a private trademark, accompanied with a brand operation strategy, to eliminate dependency issues. For IP rights that are about to expire, original acquisition is a useful way to apply for alternative or updated IP registrations (such as patents, copyright, etc).

b. If the issuer can afford the cost, another option is to obtain relevant IP rights through acquisition transactions. This approach requires the original IP owners to confirm the issuer's right to use the IP rights as a trading condition, represent that they do not object with the issuer's past use of the IP, and finally, the IP owner should release its rights to file suit in the future. However, the full scope of IP covered by the transaction should be confirmed; the original IP owner may conduct reverse infringement by continuing to use the transferred IP rights after the transaction.

c. Another option is to engage in strategic cooperation with the IP owner, who may become a shareholder in the issuer's enterprise in exchange for fully transferring the IP to the issuer. The IP ownership holder could either make equity contributions with related IP rights or transfer related IP rights at fair price (or free) and become a shareholder.

d. For those situations where directly obtain IP ownership is not possible, the issuer should review the IP licensing agreement and ensure that it has the right to use the IP in the foreseeable future. The issuer should then verify the legal status and the right of disposition of the related IP rights, adopt exclusive licensing and long-term agreements in which license fees and renewals are clearly stipulated. In addition, the IP licensing agreement should be filed with the relevant authorities according to laws and regulations.

e. Where obtaining long term solutions for protecting key IP rights is not possible, the issuer should seek to mitigate potential losses by reducing the influence of related products on the enterprise's operation and performance. If the products related to the IP rights are not core products for the issuer, the issue may consider upgrading the IP related products, changing product structure, or decreasing sales/profits proportion to reduce the potentially negative influence of such products. When necessary, the issuer may even call off the related products entirely and abandon the related business.

f. When issuers apply for a trademark review or file a petition for invalidity, these administrative means or litigation could impact related IP ownership. If the issuer cannot obtain ownership or the right to use the IP and the related IP products are core products for the issuer, the issuer should try to testify that the original IP ownership was obtained against the law, otherwise these would be real legal obstacles for an initial public offering.

In addition, for significant IP litigation that has already begun, other than the above-mentioned schemes such as acquisition, strategic cooperation, mitigation, and active defense, the issuer should set aside capital in preparation for liability as well and demand complete information disclosure.

二、A股IPO视野下的IP问题

A股IPO实践中，审核部门通常会从以下几个视角关注发行人的IP问题：

1、独立性

发行人IP引发的独立性问题，通常表现在三个方面：

（1）资产不完整，缺少重要IP。如某激光有机光导鼓生产企业，其大部分产品上使用的4项外观设计专利已经被终止，50%的产品上使用的某项实用新型专利也被终止。

（2）重要IP存在依赖。通常表现为仅有使用权，且多依赖于关联方。如某医药企业，其第二大主导产品上使用的商标所有权属于其股东间接控股的另一企业，发行人的重要产品的商标使用权与股东存在关联关系和依赖关系。

（3）重要IP存在不确定性。该类情形，虽然也存在依赖，但其依赖本身亦存在不确定性。通常表现为通过协议方式从非关联方获得授权使用的重要IP存在不确定性。如某永磁开关及相关产品生产企业，与另一企业签定了共同品牌许可协议，获许使用某一重要商标。该协议中未对该商标使用的排他性作出明确约定，协议到期后的续签事宜也不明确。

职务发明问题。此外，对于高校或科研机构的人员创办企业，或成为发行人核心技术人员的项目，发行人的相关IP是否为职务成果也会成为审核部门的关注要点。如某研发及生产销售安防视频监控传输技术及产品企业，因其六项专利申请时，实际控制人尚为浙江某一大学在编教师而被审核部门关注。

2、持续盈利

IPO实践中，审核部门对于发行人的重要IP的取得或者使用是否存在重大不利变化较为关注。一旦发生该等情形，可能会导致IPO审核和发行上市的进程、结果的不确定性。如上述某激光有机光导鼓生产企业案例，即属该等情形。此外，重要IP的有效期即将届满，也会对发行人的持续盈利能力产生重要影响。

3、重大未决诉讼

与一般诉讼不同，一旦发行人因其重要IP出现了诉讼，无论诉讼金额大小，都会受到审核部门的特别关注。IPO实践中，因重要IP引发纠纷，并直接影响审核和发行上市的进程、结果的案例并不鲜见。如某玻璃深加工设备和技术研发企业，两度过会但均因重要IP诉讼拖延上市进程，直至最近才得以上市交易。再如某凹版印刷机及生产及销售企业、某晶硅片切割刃料生产及销售企业、某中小功率激光切割行业应用解决方案提供商等，均因IP诉讼被取消审核或暂缓上市。

4、信息披露

此外，IPO实践中，发行人的上述IP问题常常还会“伴生”信息披露方面的问题，即IP信息披露不真实、准确、完整，与官网披露信息不一致。2010年4月20日，证监会发行监管部向保荐机构下发《关于切实落实保荐制度各项要求，勤勉尽责，提高尽职调查工作质量的通知》(发行监管函[2010]121号)，要求对2010年5月1日前上报的在审项目全部核查。核查内容包括专利、商标、诉讼和仲裁、关联方及招股说明书等文件中披露的其他重要事项。

三、相关建议及方案分析

1、尽职调查过程中加强对发行人的IP专项核查

可以考虑从下述方面进行IP专项核查：（1）发行人已获得的IP及其法律状态；（2）发行人正在使用的IP与已获得的IP的一致性，是否涉及侵权；（3）拟受让IP的状态、排他性、期限、期限届满后的约定；（4）拟申请的IP，申请后的定期维护、更新；（5）IP纠纷和潜在纠纷等。

2、主动进行防御性、战略性保护

对于发行人生产经营过程中的重要IP，应进行防御性地、战略性地保护。如为发行人未来业务可能涉及的相关商品/服务项目申请注册商标、委托专业机构定期维护(申请、续费或延展、变更等)、企业内部专人定期跟踪等，保持相关IP的披露信息与法律状态一致。但需要提示的是，在IPO过程中，应特别注意避免因防御性、战略性保护而产生IP纠纷或潜在纠纷。

3、对于已经存在的IP问题的处理原则和方案

经过IP专项尽职调查，了解了发行人IP存在的相关问题后，需要进行区分处理。个人理解，处理方案的核心原则应为：消除审核部门对因IP问题而引发的独立性、持续盈利能力、重大诉讼和信息披露等四大方面的担忧，消除或减少IP问题对审核和发行上市的进程、结果的影响。

IPO实践中，具体的处理方案有：

（1）通过申请，原始取得相关IP，以替代存在独立性、不确定性和可能引发诉讼的IP。该方案适用于对IPO时间进度要求不高，且相关IP可以被替代的项目。如由拟上市企业申请自有商标，并辅以品牌运作，以消除独立性问题。对于部分即将到期的IP，也可以考虑通过原始取得的方式，申请替代性的、更新的IP(如专利、版权等)。

（2）通过交易的方式，继受取得相关IP。该方案适用交易代价较小或发行人能够承受交易代价的情形。交易过程中，一般建议发行人要求标的IP所有权人确认对发行人交易前使用标的IP的行为无异议，同意放弃相关追诉权，并以此为交易条件。此外，还需关注标的IP权属的完整性；交易后，原所有权人是否存在反向侵权的行为等。

（3）通过标的IP所有权人入股发行人的方式，进行战略合作。需要提醒的是，本方案项下，根据项目的实际情况，需要确定采用“标的IP直接出资”或“标的IP转让+标的IP所有权人入股”的模式。标的IP转让，需要根据项目实际情况，选择按照公允价格或无偿转让。

（4）规范IP授权使用协议，保证标的IP的使用权在未来可预见的期限内是稳定的、确定的。对于无法直接取得标的IP所有权的项目，建议通过授权使用协议的方式获得使用权。建议事先对标的IP的法律状态、处分权等重要事项进行核查，并建议采用排他性许可和中长期 (视IPO进度确定合理的时间) 许可的模式。协议中应对许可费用、到期后处理等事项进行明确约定，以保证标的IP的使用权的稳定性、确定性。此外，还需关注IP授权使用协议是否按照法律法规的要求，履行了相关备案手续。

（5）降低相关IP所涉产品对经营和业绩的影响。对于确实无法获得相关IP的所有权或使用权，而相关IP所涉产品并非发行人核心产品的情形，发行人可以考虑对相关产品进行更新换代、转变产品结构，不断降低该等产品占发行人销售和利润的比例，以降低因IP纠纷而对发行人生产经营产生的影响。当然，商业上具备可行性的前提下，彻底停止生产和剥离相关业务也不失为一种可以讨论的方案。

（6）通过商标复议、申请专利无效等行政手段，以及诉讼的方式，影响相关IP的所有权。对于确实无法获得相关IP的所有权或使用权，而相关IP所涉产品系发行人的主要产品的情形，若该企业仍计划IPO，则应考虑相关IP的所有权人是否存在违反相关法律、法规的规定而取得相关IP的情形。否则，相关IP问题，将有可能构成该项目IPO的实质性法律障碍。

此外，对于已经发生的重大IP诉讼，除了考虑采取上述继受取得、战略合作、降低涉案产品的影响外、积极应诉等方案外，还应进行合理的坏账计提、充分的信息披露等工作。

Venture Capital
A strong venture capital presence to provide follow-on financing for post-angel companies is important to the development and growth of angel financing. In this light, Hong Kong is blessed as a key VC hub in Asia, with 294 venture capital firms operating in the territory as of first half of 2008. It has a strong lead in raising funds, raising US$16 billion in 2007 and about US$8 billion in the first half of 2008.

Before the 1990s, Hong Kong did not have much of a venture capital industry. Financing of new businesses relied largely on one's own savings or pooling of resources from the immediate family members or close friends. In the late 1980s, the first venture capital companies began to emerge in Hong Kong. This marked the first time when newly established companies without self-funding resources were able to seek equity financing from unrelated third parties.

The Internet boom in the late 1990s and the China factor attracted even more foreign venture capital firms to Hong Kong and also spurred the growth of some home-grown VC funds. Today, Hong Kong probably remains the largest VC hub in Asia, having weathered ebbs and flows, including the blow from the dotcom bust and an increasing trend for those VCs focusing on mainland China to locate their operational bases to Beijing or Shanghai.

In terms of size and depth, Hong Kong's venture capital industry pales compared to Silicon Valley. The industry also has perhaps paid too much attention to later stage companies to the neglect of early stage companies. With more quality angel financed companies coming on scene in Hong Kong, a shift of emphasis hopefully will gradually occur to catch up to the needs of early stage companies.

Capital Markets
For years, Hong Kong has been a significant world-class investment banking center servicing IPOs of local and PRC companies both on its own stock exchange and overseas bourses including the NASDAQ. Since the mid-1990s, we have witnessed a spate of listings on the NASDAQ or the Hong Kong Stock Exchange of PRC focused Internet or technology companies, many of which were managed primarily out of Hong Kong.

The first wave from mid- to late-1990s included the listing of Sina.com, Sohu, and Netease on the NASDAQ, followed in more recent years by Baidu, C-Trip, Tencent (operator of QQ) and Alibaba, etc. on the NASDAQ or in Hong Kong. These listings provided the ultimate exit for their founders and investors and a road map and prized goal for countless other striving startups and entrepreneurs.