The concept of “know-how”, of Anglo-Saxon origin, has been shaped over time, going from being a blurred notion of unpatented knowledge that contributes to productive activity, to becoming a real asset.
A resolution issued by the General Directorate of Registries and Notaries (GDRN) of 4th December 2019 confirms this evolution, upon admitting that know-how may be the object of a capital contribution of a limited liability company.
The case examined by the GDRN referred to the incorporation of a limited liability company regarding which the registrar of the commercial registry rejected the registration of the incorporation deed on the understanding that the contribution of the partner was “a contribution of work or services, which cannot be object of contribution”. The know-how brought in was defined as follows:
“The knowledge of the service, marketing and market research industry. Likewise, the contribution is demonstrated in the specialised knowledge in terms of entrepreneurship, business development, leadership and team management, which is necessary for fulfilling the objectives of the company, given that its mission is to generate a high impact and participation in the market, for which the contributed knowledge is necessary. For his part, Mr. (…) contributes broad knowledge in the innovation and technology sector.”
The Registrar based his decision on the fact that such contribution breached article 58 of the Spanish Companies Act (SCA), inasmuch as the second paragraph prohibits the contribution of work or services.
The incorporated company had the following corporate object:
The management and creation of virtual work spaces and projects. Management of financial and human resources. Management of tasks. Data centre. Virtual assistant service. Promotional, marketing, advertising, and business consultancy services. Financial services. Software development services. Database management.
The company justified the suitability of the know-how contribution for the following reasons:
* it fulfils all of the requirements and conditions pointed out by the Law and doctrine in order to be deemed a contribution to companies by means of a non-monetary contribution:
i) It has the nature of an asset
ii) Its contribution to the Company will substantially increase the profits of the Company.
iii) It is susceptible to being registered on the balance sheet.
iv) It may be financially valued in accordance with objective criteria.
v) It can be sold or negotiated.
vi) It may be the object of an exchange contract.
vii) It is susceptible to ownership, and, in consequence, to being converted into money and fit for producing a profit.
The Supreme Court has defined know-how as a set of secret industrial knowledge that must have certain characteristics:
1) they must be related to the activity of the company.
2) they must be of financial and business interest, and in some cases, they may be indispensable.
3) they must be secret, identifiable and provide financial profit.
In this case, the contribution in kind from the partners consisted of technical, secret, identifiable knowledge from which financial gain could be derived and which were essential for the company activity.
In order to define know-how, the GDRN turns to EU Regulation 4087/88 regarding franchise agreements, as well as Royal Decree 2017/2010 of 26th February, and finally Supreme Court judgment of 21st October 2005. In the latter, the original concept of know-how stands out, which refers to secret knowledge of an industrial order, and over time it was also identified with the concepts applied indistinctly to the industrial or commercial field, broadening the scope of the concept. The current concept of know-how connects experience to the qualification of the specialist with a lesser degree of confidentiality than it had in its origin. The Court defines know-how as “knowledge or a set of technical knowledge, which is not in the public domain, and which is necessary for the manufacture or marketing of a product, for the rendering of a service or for the organisation of a business unit”, thus providing an advantage over the competitors and that the company therefore endeavours to maintain confidential. Likewise, article 13 of EU Regulation 4087/88 refers to know-how as an “unpatented set of practical knowledge, derived from the experience of the franchiser”, which is “secret, substantial and identified”.
The minor case law of the Provincial Courts has also identified know-how with “working methodology”, “operational techniques” or “already tested commercial techniques”, which leads us to identify know-how with the experience acquired by a specialist in a certain field, which is orderly and systematised so that it produces a competitive advantage.
In accordance with article 58.1 of the SCA only “assets or economic rights susceptible to financial valuation” may be the object of contribution. It is clear that a certain know-how may be financially valued in spite of its immateriality, and that in any case, it is not a duty to do a job or render a service, which are things that cannot be object of contribution and are expressly excluded by the SCA. The description of the knowledge and the experience of the partners applied to the corporate object of the company are not work or services in themselves, but the repertory of data, experience and expertise (know-how) of the partners, which have an exclusive and secret nature, which do not only serve to differentiate their business, but furthermore, they are inherent thereto and necessary for its functioning.
Ultimately, the GDRN revoked the Registrar’s decision and allowed the registration of the public deed of incorporation of the company.
Regarding the case at hand, the know-how at issue does not have an industrial application, thus its effective projection over a tangible object, such as a product, may not be verified. On the contrary, know-how refers to the way of organising and rendering the service of collaborative work, marketing, advertising, etc. The lack of specification poses the problem of whether it is possible to understand this type of know-how as an appropriable asset and whether it actually fulfils the function of share capital as a guarantee to creditors. Just as with franchises, the franchisers book guarantees the existence of orderly knowledge, the mere assertion that certain partners value data and business experiences that contribute to the share capital is not beyond question and, perhaps, the partner bringing the know-how should be required to consign a document before a notary public, which states the details of the knowledge, and therefore, that it is subject to appropriation, and, also seizure on the part of creditors, as the case may be, as otherwise, we could be faced with an elusive or non-existent share capital, to the obvious detriment of the company creditors’ interests.
Eduardo Vilá
Vilá Abogados
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6th March 2020
