Practical Q&A | Understand IP Capital Contributions Under New PRC Company Law – Patent

With the implementation of the newly revised Company Law of the
People’s Republic of China, shareholder capital contribution
obligations for limited liability companies are now more clearly
defined—providing businesses with more actionable legal
guidance in capital operations. Against this backdrop, intellectual
property (IP) contributions, as a form of intangible asset
investment, have attracted significant corporate attention.

This chapter highlights the key legal considerations for IP
capital contributions to help businesses better understand and
apply the relevant legal framework.

Focusing on practical issues such as IP capital contributions,
corporate due diligence, and post-investment asset management, we
have selected three essential Q&As from Chapter 4: Legal
Practice of Intellectual Property Contribution in the Context of
the New Company Law of the Practical Q&A Guide to
Cutting-Edge Intellectual Property Issues, co-authored by
Wolters Kluwer, Lusheng Law Firm, and its strategic partner
Rouse.

Selected Practical Q&As

【Fulfilling Capital Contribution】What are
the ways to fulfil the capital contribution of intellectual
property?

The basic process for fulfilling an intellectual property
capital contribution is as follows:

1. Incorporation or capital increase – For
   a company in formation, shareholders must specify the details of
   the intellectual property contribution in the articles of
   association, including the type, quantity, value, investment ratio,
   ownership and usage rights. For established companies, shareholders
   must pass a resolution approving the capital increase in accordance
   with relevant laws and the articles of association, and amend the
   articles accordingly.




2. Valuation – The investor must conduct a
   valuation independently or engage a professional intellectual
   property valuation agency.




3. Capital verification – Based on the
   issued asset valuation report, the registered capital contribution
   must be verified, and a capital verification report issued.




4. Ownership transfer – The investor must
   complete the transfer of ownership for the contributed intellectual
   property.




5. Regulatory filings – The company must
   handle the record-filing of paid-in capital with the Market
   Supervision Administration, Tax Bureau and other relevant
   authorities.

Article 49 of the new Company Law
stipulates that: “A person who makes a capital
contribution with non-monetary property shall complete the transfer
of the property rights in accordance with the law.”
Accordingly, capital contributions involving intellectual property
must meet statutory requirements for property rights transfer.

Additionally, Article 10 of the Provisions of
the Supreme People’s Court on Several Issues Concerning the
Application of the Company Law of the People’s Republic of
China (III), as amended in 2020, stipulates that:
“Where the investor makes a capital contribution with
property such as buildings, land use rights, or intellectual
property rights that need the completion of registration
of ownership, and has already handed over the property to the
company for use but has not completed the formalities for changing
the ownership, and the company, other shareholders or creditors of
the company claim that the investor has not fulfilled the
obligation to make capital contributions, the people’s court
shall order the party to complete the formalities for changing the
ownership within a specified reasonable period of time; If the
formalities for changing ownership have been completed within the
aforementioned period, the people’s court shall determine that
it has fulfilled its obligation to make capital contributions;
Where the investor claims that it enjoys the corresponding
shareholder rights when it actually delivers the property to the
company for use, the people’s court shall uphold
it.”

Thus, determining whether an investor has met their capital
contribution obligations depends on both the formal ownership
transfer and the actual delivery and use of the intellectual
property. The timing of shareholder rights may be influenced by
when the company receives and begins using the intellectual
property.

In practice, investors and companies must strictly comply with
applicable laws and regulations to ensure the legality, validity
and security of intellectual property capital contributions. Timely
communication and coordination between parties are also essential
to resolve potential issues and facilitate a smooth contribution
process.

【Due Diligence】What matters should a
company consider before accepting an intellectual property capital
contribution?

Before accepting an intellectual property capital contribution,
a company should conduct a comprehensive review of the intellectual
property’s ownership, validity, stability, and any potential
defects or restrictions. This includes verifying legal ownership,
registration status, any ongoing legal disputes, the validity
period, and whether the intellectual property is subject to
exclusive licensing or other encumbrances. Ensuring the validity of
intellectual property rights is essential to protecting the
company’s legitimate interests.

The market value of the intellectual property is a crucial
factor in determining whether the capital contribution aligns with
the company’s interests. The valuation process may involve:

• Comparing the market price of similar intellectual property or
  license fees




• Assessing market potential, life cycle, technical maturity, and
  demand




• Engaging a professional valuation firm for an objective
  appraisal

The contract terms and articles of association play a critical
role in structuring the intellectual property capital contribution.
These should clearly define:

• Ownership rights, usage scope, and duration




• Liabilities for breach of contract




• The specific amount, form, and timeline of the capital
  contribution

To ensure a thorough due diligence process, the company and
shareholders should consider the following key areas:

1. Review relevant documentsExamine registration certificates, authorization letters,
   assignment agreements, and other supporting documents to verify the
   legitimacy of intellectual property rights. Additionally, monitor
   any updates, such as renewals, changes, licenses, or pledges. If
   needed, request an official inquiry or evaluation report from the
   relevant intellectual property authority.




2. Check the legal status of the intellectual
   propertyIdentify any ongoing litigation, arbitration, or
   administrative proceedings related to the intellectual property.
   Determine whether third parties have raised infringement claims, as
   unresolved disputes could pose future legal risks.




3. Analyze technical value and market potentialAssess the technical content, maturity, originality, and
   brand recognition of the intellectual property. Additionally,
   evaluate industry trends, market competition and future demand to
   determine its commercial viability.




4. Consult professionalsSeek expert advice from intellectual property lawyers,
   patent attorneys, and valuation specialists. Their insights can
   provide a more comprehensive and objective evaluation, ensuring the
   company makes well-informed decisions.

By conducting thorough due diligence and structuring agreements
carefully, a company can minimize risks and maximize the strategic
value of an intellectual property capital contribution.

【Management and Utilization】How can one
ensure the effective use of intellectual property capital
contributions?

Clearly define the definition, exclusive rights, scope of use,
duration, geographical restrictions, and type of license (e.g.,
exclusive license, sole license) in the contract or articles of
association. This ensures that the company and shareholders fully
understand how to use these assets legally and efficiently.
Clarifying these details in the articles of association and
shareholder agreements helps prevent legal disputes and ensures
that the rights and interests of all parties are well-defined.

To align intellectual property with
business strategy, companies should:

• Conduct a comprehensive intellectual property audit to assess
  its value, relevance, and role in the business




• Develop a strategic intellectual property plan that integrates
  with R&D




• Use trademarks and brand-related intellectual property to
  strengthen market recognition




• Leverage patents and copyrights to gain a competitive edge




• Establish an early warning system to monitor potential
  infringements and risks




• Ensure compliance with intellectual property laws to avoid
  infringing on third-party rights

Companies should also set up an intellectual property
management system,

which includes:

• An intellectual property team to oversee registration,
  monitoring, and enforcement




• Regular market value assessments of intellectual property
  assets




• A risk management framework to handle disputes, litigation, and
  invalidation risks




• Cooperation with external legal counsel for complex legal
  matters




• Regular employee training on intellectual property protection
  and compliance




• Successfully integrating intellectual property capital
  contributions requires not only senior management support but also
  cross-departmental collaboration and continuous investment in
  resources.

To encourage innovation and effective use of intellectual
property, companies can implement incentive mechanisms linked to
intellectual property outcomes.

The Patent Law of the People’s Republic of
China and its Implementing Rules
stipulate that entities must reward inventors for service
inventions: “Under normal circumstances, the
entity to which the patent right has been granted may agree with
the inventor or designer on the method and amount of the reward and
remuneration, and such agreement takes precedence and can exceed
statutory standards or, within a reasonable range, fall below them.
However, if no such agreements are made or no provisions are
outlined in the entity’s regulations, the entity shall pay the
inventor or designer a reward within three months from the date of
the announcement of the grant of the patent right.”

The law further specifies minimum rewards:

• CNY 4,000 for an invention patent




• CNY 1,500 for a utility model or design patent

If an invention is based on an employee’s proposal that is
adopted by the company, “the entity shall pay a
reward to the inventor or designer as generously as
possible.”

Although the Copyright Law also includes
provisions for rewarding work made for hire, it does not specify
minimum amounts. Instead, it classifies ownership based on the type
of work. For example, “Within two years after the
completion of a work made for hire, with the entity’s consent,
the author may license a third party to use the work in the same
way as the entity. The proceeds obtained from this use shall be
shared by the author and the entity according to the agreed ratio.
The two-year period begins upon the delivery of the work to the
entity.”

The author retains the right of authorship for works such as
product design drawings and software, while other copyright rights
belong to the entity, which may compensate the author
accordingly.

Other Notable Q&As from This Chapter

• 【Types of Capital Contributions】What types of
  intellectual property can be used for capital contribution?




• 【Ratio of Capital Contribution】What is the limit
  on the ratio of intellectual property as capital contribution?




• 【Instalment Contribution】Can intellectual
  property capital contributions be made in instalments?




• 【Insufficient Capital Contribution】What are the
  legal consequences of the actual value of intellectual property
  being significantly lower than the subscribed capital
  contribution?




• 【Depreciation After Capital Contribution】If the
  value of intellectual property is depreciated after capital
  contribution, does the investor need to make up the shortfall?




• 【Debt Settlement】Can intellectual property
  capital contributions be used to settle debts?




• 【Disposal of Assets in Liquidation】How should the
  intellectual property capital contribution be disposed of in the
  liquidation of the company?

Request a Full Copy

In collaboration with our strategic partner Lusheng in China and
Wolters Kluwer, Rouse has developed a valuable resource for
rightsholders: “The Practical Q&A Guide to
Cutting-Edge Intellectual Property Issues in
China“. This guide, compiled by over 30
senior China IP experts from the two leading IP firms,
addresses the key concerns of businesses by providing insights on
patents, trade marks, copyright, trade secrets, internet unfair
competition, intellectual property investment, and punitive damages
in an accessible Q&A format. It offers readers the latest legal
interpretations, case studies, and practical guidance applicable to
their operations.

To view the full article, click here.

Chapter Contributors

Sunny Su, China Head of Digital &
Commercial, Lusheng Law Firm, [email protected]

Irene Lin,  Consultant, Lusheng Law
Firm, [email protected]

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.