Wednesday, 28 April 2010

Digesting Zim's Indigenisation Policy

Zimbabwe, once the bread basket of Africa, has been treated with trepidation when it comes to investment due to reasons that have been well documented over the last decade. There is evidence though that some investors are now seeing the country as an exceptional investment opportunity but is this new gained status ephemeral? Recent news reports about the Indigenous and Economic Empowerment Act & Regulations are likely to force the optimists to reconsider, or adopt a licensing model to achieve their objective.

Indigenous and Economic Empowerment Act and Regulations - background and some uncertainty

News of Zimbabwe's legislation that all foreign owned companies (with an asset value over a stipulated threshold) are required to show how they intend to sell at least 51% of their companies to indigenous Zimbabweans (see here and here) has had at least two immediate effects: it has chased off potential investors (as reported, for example here) and it has caused those with current direct investments to scratch their heads and review business plans to meet government objectives (see report here). Despite the regulations and the confusion described in the various reports, not all foreign investors have run away - Angloplat, for example, has publicly backed indigenisation policies (see AllAfrica here) citing its experiences with the Black Economic Empowerment legislation in South Africa as comforting, although cynics will be quick to point out that Angloplat had already invested in $300 million in their Zimbabwe venture.

Will there be a shift in focus to licensing?

Most likely, yes. Reading though the Indigenous and Economic Empowerment Act and Regulations, 2010 published here (possibly suspended see here) and here, it is noteworthy that there is no mention of intellectual property. The legislation, which will be enforced under the eye of Saviour Kasukuwere pictured alongside, focuses on company control and ownership transformation. This should mean that if IP is owned by a foreign company its ownership is not affected. The result is that (assuming no new legislation is passed changing the position and notwithstanding clever structures from corporate lawyers) foreign IP and the terms of its licence into the Zimbabwe now become a very important consideration to the foreign investor who needs to use his position effectively, in the absence of board control.

Take for example a brand business - there is likely to be a greater emphasis by the foreign IP owner on terms and conditions governing the use of the brand (such as quality control, minimum sales and revenue targets, exclusivity, auditing etc) to ensure that his return on investment is maximised and to minimise possible damage to the brand, in the absence of control at board level. Furthermore there will be greater attention paid to the ownership of foreground IP (IP developed during a licence by the licensee) so that, from a foreign owner's point of view, his IP does not become a launch pad to progress at local level which may in future make the foreign owner redundant if that IP is owned locally. Investors will need to carefully consider not only local IP and contractual laws but also speed and reliability, if there is ever a need to enforce them. The recordal of licenses at the local registry could also protect the foreign IP owner from any future claims that IP is owned by the national company.

The new laws, which will be sector specific, are also likely to increase the need for trade mark and patent filings by investors because those filings function as title deeds to their property and therefore are a critical comfort. There is likely to be a need for foreign brand owners to file defensively in Zimbabwe because locals may see these new laws as an opportunity to squat or use reputable foreign brands without consent, as happened to Mcdonalds and a host of others, when sanctions were applied against South Africa in the 80s. Furthermore, because a change of control caused by the indigenisation policy may lead to termination of existing licences (as this type of provision frequently ends up in termination clauses) current licenses may well need to be reviewed as part of any indigenisation plan. This review is likely to lead to re-negotiations of existing licences for the reasons given above.

Other IP considerations

It is worth also mentioning that:
- the definition of a "controlling interest" in relation to a business other than a company under the Act "means any interest which enable the holder thereof to exercise, directly or indirectly, any control whatsoever over the activities or assets of the business". An IP licence arguably enables the licensor to have an element of control over activities of a licensee business eg through quality control which may raise concerns for foreign rights holders in this position; and
- one of the objectives (2(f)) of the National Indigenous and Economic Empowerment Charter attached as a schedule to the Act is to promote technology transfer and in the current Regulations one of the mitigating factors which could relax/delay the implementation of the Regulations is the extent to which it can be shown that new technology is transferred to Zimbabwe "by the business in question".

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