On contributing know-how in capital of Russian company

Artem Sirota, partner at law firm Sirota & Mosgo, talks on what trade secret (know-how) is under Russian law and how contribute it in the share capital of a Russian company

Artem Sirota
Partner

Sirota & Mosgo Law Firm
+7 495 234 18 75
artem.sirota@sirotamosgo.ru

Though there is no universal definition of the term “know-how”, many jurisdictions (like, for example, Russia) adopted own statutory definitions. Under Russian law “know-how” is information which:

  • is not generally known to the public and public does not have legitimate access to this information;
  • confers economic value on its holder;
  • is subject to measures of maintaining secrecy.

In order to trigger state protection the measures of maintaining secrecy must meet the minimum requirements set by the Russian law on trade secrets. The owner must define the scope of trade secret, mark the media sources, implement access and utilization procedures, and maintain control over the persons received the access to this information.

Before contributing the knowhow in the charter (share) capital of a company, the investor must make sure that the information constituting the knowhow satisfies the requirements set by the Russian legislation. Otherwise, such contribution can be later challenged by the company. In the famous case JugraNeft v. Norex Petroleum the plaintiff (a Russian company) demanded more than $8 million paid as dividends to be returned, contending that the know-how did not conform to the main requirement – being not known to the third parties.

Contribution procedure

There are two ways to contribute know-how in the charter (share) capital: to alienate the rights to the third party (which is a rare case for obvious reasons) or to grant the rights of use (license). Below I will discuss only the second option.

The parties of the license agreement are free to choose the law applicable to their rights and responsibilities under the agreement. Yet, their choice will affect neither the operation of the civil law provisions defining the know-how itself nor the minimum secrecy requirements.

License agreement for know-how is not subject to registration with Russian state authorities, therefore there will be no double - check by the authorities.

In order to invest the rights for the know-how in the charter (share) capital of a company the rights for the knowhow must be appraised (this procedure is compulsory for all in-kind contributions). Foreign appraisers can be engaged to avoid the risk of secret leak.

Protection

Foreign investors must carefully negotiate provisions setting a duty of licensee to maintain secrecy of the knowhow by (a) limiting the number of employees having access to the information (b) splitting the information among employees (c) non-compete and non-disclosure agreements made with employees.

At the same time, even a carefully drafted agreement does not guarantee confidentiality in trade secret utilization by the licensee’s employees. Often, foreign investors dealing in Russia face low standard of ethics and responsibility adhered by Russian contractors and employees. Russian labor law is not flexible enough to ensure effective protection which foreign investors may expect. The remedies for trade secret infringement are limited to direct, real damages incurred as the result of the trade secret infringement. Lost profit cannot be recovered.

The burden of proof of trade secret protectability and unlawfulness of the infringer’s actions rests upon the plaintiff (licensor). It may present a problem since often the evidence presented by the plaintiff considered insufficient without disclosure of the trade secret information. In such situation the plaintiff may prefer to lose an action than to disclose the trade secret.

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