• Intellectual Property Rights as Capital in Kind
  • December 11, 2015
  • Law Firm: Erdem Erdem Law Office - Istanbul Office
  • Introduction

    Shareholders may contribute capital to their companies in cash or in kind. Capital in cash can be subscribed and paid in Turkish Liras, whereas capital in kind can be formed from different items. Any appraisable and transferrable assets that are not subject to encumbrances, attachments or measures can be contributed as capital in kind.

    Types of Capital in Kind

    Article 127 of the Turkish Commercial Code[1] (“TCC”) specifies the assets that can be contributed as capital as follows:

    (i) Cash, receivables, negotiable instruments and shares belonging to commercial companies[2],

    (ii) Intellectual property rights,

    (iii) Movables and any type of immovable,

    (iv) Usufruct rights pertaining to movable and immovable properties,

    (v) Personal effort,

    (vi) Commercial reputation,

    (vii) Commercial enterprises,

    (viii) Transferable and rightfully used assets, such as electronic media, domains, names and signs,

    (ix) Mining licenses and other rights having such economic value,

    (x) Any kind of asset that is transferable and appraisable.

    The TCC does not limit these rights numerus clausus. Any other rights that are transferable and appraisable may be subject to capital in kind. Notwithstanding the above, articles 342 and 581 bring restrictions with respect to joint stock and limited liability companies: service performances, personal effort, commercial reputation and undue receivables cannot be contributed as capital to such companies.

    Intellectual Property Rights as Capital in Kind

    Articles 342 and 581 of the TCC regulating capital in cash contribution in joint stock and limited liability companies specifically set forth that transferable and appraisable assets that are not subject to encumbrances, attachments or measures, including intellectual property rights and electronic media can be contributed as capital. This also creates the understanding that electronic assets are deemed as property rights[3]. However, the TCC does not clarify whether or not rights of use pertaining to such electronic assets are also eligible for capital in kind subscription, yet does not set forth any restrictive provision in this regard[4].

    The preamble of the TCC clarifies that the former scope of the law that was limited to patent rights only has been replaced by the term “intellectual property,” which is also preferred by TRIPS and WIPO, as it covers a wide range of rights, including rights related to intellectual and artistic works, trademarks, designs, utility models, plant types (i.e. plant breeders’ rights), etc. However, it is further stated that some intellectual property rights, especially related rights, such as record producers’ rights may not be proper as contributions in kind, or there might be problems in evaluation and valuation thereof. This is one of the reasons why experts appointed by the court are required to comment on the acceptability of the assets as capital in kind.

    It is also important to note that in order for contribution of intellectual property rights to be considered as capital in kind, it is mandatory that they are already registered. Even if an intellectual property right is protected, e.g. in accordance with unfair competition regulations, it cannot be contributed as capital in kind if it is not registered[5].

    Valuation

    Valuation is an important step of contributions in kind, since the monetary value of the contribution in Turkish Liras must be stated in the articles of association of the subject company.

    An expert appointed by the commercial court of first instance located in the district of the company headquarters is the competent authority to determine the monetary value of the contribution in kind. This regulation is an extension of the principle of maintenance of capital, as it provides safety with respect to the monetary value of the contributed capital[6]. The value determined by the expert must be exactly stated under the articles of association of the subject company.

    In the expert’s valuation report, it must be stated that the applicable valuation method is the fairest and the most appropriate choice for everyone, and that the reality, validity and conformity with Article 342 of the TCC of the receivables to be contributed in cash have been determined. The report must further specify the collectability and the exact value of the subject assets, the amount of shares that should be allocated for each asset that is contributed in kind, and its equivalent in Turkish Liras. The report must be based on satisfactory grounds and conform to the principle of accountability. Founders and beneficiaries are entitled to object to the report.

    Valuation of intellectual property rights is complex and unique in each case. Over the past few years, this has become an area of increasing interest to related experts. The European Commission formed an expert group on intellectual property valuation, who, in their final report, explained the reasons for complexity being the fact that no two intellectual property assets are the same[7]. According to the said report, “the uniqueness of intellectual property makes comparisons with other intellectual property difficult, thereby limiting the usefulness of comparison based pricing. As a result, valuations are often based on assumptions about the intellectual property asset’s future use, what important milestones will be met and what management decisions will be taken.” Accordingly, the valuation of intellectual property rights must be made by its related experts and be specific to each case.

    Registration

    Another step to be taken for contribution of capital in kind is the annotation of the same with the relevant registry, if any. More specifically, the TCC requires that the subject intellectual property right contributed as capital in kind is annotated within the record of such right with the value determined by the expert. With respect to this procedure, Article 4/6 of the Communiqué on the Cooperation between Registries for Structure Changes in Companies and Contribution of Capital in Kind[8] provides that upon a transfer or restriction of the assets and rights that have been contributed as capital in kind to or by third parties until their registration, despite their annotation with the relevant registry as capital in kind, the relevant registry shall inform the trade registry, and the trade registry shall reject the request for the registration of the capital, due to such transfer or restriction.

    After the registration of the company and/or the capital, the relevant trade registry is ex officio required to inform the registry of the subject intellectual property right immediately to provide its registration in the name of the company. Therefore, the intellectual property right is acquired only after its registration in the name of the company by the relevant registry upon being informed. Registration is constitutive[9].

    Another procedural step to be completed upon capital in kind contribution is to provide the necessary details in relation thereto in the founders’ declaration. In such declaration, the founders are required to provide precise, justified and documented explanations as to the appropriateness of the consideration of the capital in kind, and on the necessity and advantages of capital in kind contribution.

    Conclusion

    It is possible to contribute any appraisable and transferrable assets that are not subject to encumbrances, attachments or measures as capital in kind, including intellectual property rights and electronic media, provided that they are registered. Registration of the company and/or the capital does not provide the transfer of the right in the name of the company alone; intellectual property right becomes the property of the company only after the registration of the same upon immediate notification of the relevant trade registry. Valuation is the core of contribution of intellectual property rights, as it is complex and unique in respect of each intellectual property.



    [1] Turkish Commercial Code No. 6012 was published in the Official Gazette dated February 14, 2011 and numbered 27846, and entered into force on July 1, 2012.

    [2] Please see previous Newsletter article on receivables as capital: The Contribution of Receivables as Capital in Commercial Companies, http://www.erdem-erdem.av.tr/en/articles/the-contribution-of-receivables-as-capital-in-commercial-companies/; Tuna Çolgar (accessed on 19 October 2015).

    [3] Ünal Tekinalp, Sermaye Ortakliklarinin Yeni Hukuku, 3. Basi, Istanbul 2013, p. 156.

    [4] Tekinalp, p. 156.

    [5] Tekinalp, p. 157.

    [6] Preamble of Article 343 of the TCC.

    [7] European Commission Final Report from the Expert Group on Intellectual Property Valuation dated 29 November 2013, p. 5, https://ec.europa.eu/research/innovation-union/pdf/Expert&under;Group&under;Report&under;on&under;Intellectual&under;Property&under;Valuation&under;IP&under;web&under;2.pdf (accessed on 19 October 2015).

     This report reviews intellectual property valuation approaches, methods and standards and includes recommendations for possible policy actions.

    [8] Communiqué on the Cooperation between Registries for Structure Changes in Companies and Contribution of Capital in Kind was published in the Official Gazette dated October 31, 2012 and numbered 28453, and entered into force on the same date.

    [9] Hasan Pulasli, Yeni Sirketler Hukuku Genel Esaslar, Ankara 2012, p. 800.