Recessive Risks of Patent Use Rights and Capital Contribution with

Tacit IP and Regulatory Measures

Siyu Li

School of Law, Wuhan College, Wuhan, Hubei, 430200, China

Keywords: Supervision, Invention Patent Use Rights, Capital Authenticity.

Abstract: Currently, PRC laws have not clarified whether capital contribution with tacit IP or patent use rights. To

clarify the positioning of the two types of IP is of great significance for the development of a company. This

article mainly summarizes the risks and regulatory measures of these two types of intellectual property rights

This is not only an inevitable requirement for improving the IP capital contribution procedure, but also may

attract more different kinds of IP as capital contribution, so as to promote high-quality development of

companies. The main problem faced by China is that appraisal agencies have relatively big defects, and the

later supervision of the regulatory authorities is insufficient, so that the interests of the parties are damaged,

and the market environment is destroyed. At the stage of incorporation and establishment of a company,

domestic appraisal agencies and regulatory authorities should communicate with each other, constantly update

the progress of capital contribution, regularly examine the content of capital contribution, and appropriately

study relevant US and Japanese laws to solve procedural problems. The current Company Law should be

supplemented and improved through judicial interpretation and other methods.

1 INTRODUCTION

With the promulgation and implementation of the

New Company Law, it specifies that shareholders

may make capital contributions in cash, in kind, with

intellectual property rights, land use rights, equities,

claims and other non-monetary properties that can be

evaluated on the basis of currency and transferred in

accordance with the law (Law of the People's

Republic of China, 2023). Under this background,

intellectual property, as a very important non-

monetary property, has attracted extensive attention

in the form of capital contribution. Many scholars

have gradually realized the risks and disadvantages of

making capital contribution with intellectual property

rights. In particular, with the rapid development and

wide application of AI technology, innovative

breakthroughs have appeared in the content of

intellectual property rights. AI-assisted creation has

injected new vitality into intellectual property rights.

Many people use AI to help them create intellectual

property rights, and make capital contribution as

assets. This has further intensified the discussion on

the legitimacy and feasibility of intellectual property

Corresponding author

rights making capital contribution. However, there is

no relevant judicial interpretation or unified

legislation, which leads to many issues arising from

the practice of intellectual property rights making

capital contribution have not been properly resolved.

For example, Professor Xiaojuan Zhu and Professor

Yong Zhao raised the issue of burden sharing caused

by the stability of patent rights in the process of

capital contribution and Professor Jianxiang Jiang

and Professor Nannan Fan raised the issue of

legitimacy of capital contribution of patent rights

(Zhu & Zhao, 2020 & Jiang & Fan, 2023). The

complexity and diversity of issues related to

intellectual property capital contribution still make

the research still face many challenges. In this paper,

based on a systematic sorting out and comprehensive

review of relevant literature, the author aim to

comprehensively understand the current situation and

progress of patent use rights and tacit IP on capital

contribution, and to further explore the risks of patent

use rights and tacit IP on capital contribution, and

conduct comprehensive and systematic analysis on

the legitimacy, eligibility, the assessment and

procedure of Patent Use. Through this research, the

528

Li, S.

Recessive Risks of Patent Use Rights and Capital Contribution with Tacit IP and Regulatory Measures.

DOI: 10.5220/0014389200004859

Paper published under CC license (CC BY-NC-ND 4.0)

In Proceedings of the 1st International Conference on Politics, Law, and Social Science (ICPLSS 2025), pages 528-533

ISBN: 978-989-758-785-6

author strive to integrate the viewpoints of the

academic Circle on capital Contribution of patent

Right.

2 THE CURRENT DOMESTIC

RESEARCH STATUS

The capital contribution process for intellectual

property rights is mainly divided into five parts: the

first is to confirm the eligibility of intellectual

property rights and make sure that intellectual

property rights are free of any ownership defects; the

second is to assess and price the intellectual property

rights and seek a qualified asset appraisal institution

to issue an Asset Appraisal Report; the third is to sign

a capital contribution agreement and write the same

into the articles of association; the fourth is to go

through the ownership transfer formalities to transfer

the ownership of intellectual property rights to the

name of the company; and the last is to complete

capital verification and industrial and commercial

registration. Based on this procedure, it can be seen

that the non-monetary assets used for capital

contribution need to have appraisability, legitimacy

and transferability (Kong, 2024). This is a necessary

condition for intellectual property rights to be used as

capital contribution. However, in the implementation

process, many intellectual property rights may give

rise to sharp risks on capital contribution due to the

dispute on a certain characteristic of the intellectual

property rights. While there are numerous types of IP,

this article focuses on two types of IP capital

contribution: tacit IP and rights to use patents.

2.1 Latent Intellectual Property

Capital Contributions

Capital contribution of tacit intellectual property shall

mean that after the shareholder has fulfilled its

obligation of capital contribution in cash, the

company uses the funds received as capital

contribution to purchase the intellectual property of

the shareholder. Under this circumstance, the

shareholder makes capital contribution not in cash,

but in intellectual property, which is a kind of tacit

capital contribution of intellectual property. There are

three types of reasons for capital contribution of tacit

intellectual property. First, get rid of the restriction

imposed by the company registration and

administration department on the form of capital

contribution made in intellectual property. IP rights

include patent right, trademark right, copyright and

know-how. not all IP rights can be used as capital

contribution. According to Article 13 of the

Administrative Regulations of the People's Republic

of China Governing the Registration of Market

Entities, the methods of capital contribution shall

comply with the provisions of laws and

administrative regulations. Shareholders of

companies, investors of non-corporate legal persons,

and members of farmers' cooperatives (cooperatives)

shall not make capital contribution in the form of

labor services, credit, name of a natural person,

goodwill, franchise, or properties to which any

guarantee has been made (PKULAW.COM, 2021).

Second, avoiding the normal assessment procedure

prescribed by the IP Right Laws. With the tacit IP

Right Capital Contribution, the shareholder can

transfer the IP Right to the company at a relatively

high price without any liability to guarantee the value

of the IP Right Capital Contribution. From the

appearance of the IP Right Capital Contribution, the

risk of the shareholder's capital contribution is greatly

reduced when the tacit IP Right Capital Contribution

is completely replaced by cash. If the actual value of

the follow-up IP Right is significantly lower than the

actual value of the IP Right Capital Contribution, the

shareholder need not be obliged to make up the

difference. Third, the need to protect trade secrets.

Based on the principle of transaction security, some

IP Rights used as capital contribution will be

disclosed to the public through the information

disclosure system. However, some technical

information among them may involve trade secrets.

Therefore, capital contribution with tacit IP Rights

may avoid the disclosure of trade secrets.

There are a series of problems concerning the

contribution of tacit IP Rights. First of all, there are

obvious shortcomings in regulation of the appraisal of

tacit IP Rights in China. At the time of the

establishment of a company, the shareholder and the

company sign an agreement agreeing that the

contribution of tacit IP Rights shall be made in cash

at the establishment stage and the company will

purchase the IP Rights of such shareholder after the

establishment. However, the shareholder with a larger

share of capital contribution has the right to decide

the price of the IP Rights on its own, thus the

appraisability of IP Rights will be greatly

compromised. As a result, the interests of the

company are greatly impacted, it could have

purchased the IP Rights at a lower price, but it wastes

a lot of money on investing in tacit IP Rights. The

shareholders only take their own interests into

consideration and implement any acts detrimental to

the long-term development of the company, which

Recessive Risks of Patent Use Rights and Capital Contribution with Tacit IP and Regulatory Measures

529

also violate the arm's length principle. Secondly, the

Company Law explicitly stipulates that the non-

monetary property used as capital contribution shall

be appraised and verified, and shall not be overvalued

or undervalued. Where there are provisions on

appraisal and pricing in laws or administrative

regulations, such provisions shall prevail (Law of the

People's Republic of China, 2023). However, there is

a risk that the value of tacit IP Rights cannot be

appraised properly, and the shareholders will bid up

the price of the object of the transaction to seek more

interests, which may result in capital flight and

damage the legitimate rights and interests of other

shareholders if the case is serious. Finally, the

conversion of a capital contribution in cash into a

capital contribution in intellectual property may

undermine the principle of authenticity and reliability

of capital. If there is a lack of total capital, which is

hard to be discovered by the creditors in the course of

the development of the company, as a result of which,

it is believed that each shareholder has fully

performed its obligation of capital contribution, the

rights and interests of creditors virtually will be

impaired. Tacit IP Rights are more likely to be used

for fraud, weakening the protection of the interests of

the company's creditors.

Currently, there are no explicit provisions on the

capital contribution of tacit IP Rights in domestic laws

and regulations, but many cases have appeared in

practice on tacit IP Rights. For example, in the civil

judgments of the second instance held by Yao Yurong,

Wu Boji et al., Party B (Wu Boji and other four

persons) made capital contribution in intellectual

property, but in consideration of the complexity of

appraisal of intellectual property, the parties made

capital contribution in cash; Wang Juan holds that

most of the capital contributions in tacit IP Rights

constitute an act of circumventing the statutory capital

contribution procedures and responsibilities, which

often has a double-edged sword effect (Yao & Wu et

al, 2021 & Wang, 2016). Although the capital

contribution of tacit IP Rights brings with it some

risks, it is not without advantages. It can protect part

of trade secrets from disclosure. However, since the

existing laws, regulations and judicial interpretations

are vague and general regarding capital contribution

of intellectual property, most of the interpretations

adopt a liberal approach and choose tacit IP Rights

solely for the purpose of avoiding disclosure of trade

secrets, without considering other legal risks it may

cause, the disadvantages obviously outweigh the

advantages. However, if laws cannot provide judicial

protection to trade secrets alone, we can only further

regulate capital contribution of intellectual property

Rights. Not only do author need the state to enact

corresponding legal interpretations to regulate the

procedure of capital contribution of tacit IP Rights, but

also the enterprise and its investors as well as their

shareholders shall consciously fulfill the requirements

of capital contribution. The Company Law provides

that shareholders shall make their respective capital

contributions in full and on schedule according to the

articles of association of the company. In the case of

capital contribution of non-monetary assets, the

shareholders shall go through the procedures for the

transfer of property rights in accordance with the law.

When a limited liability company is established, if

shareholders fail to make actual capital contribution in

accordance with the provisions of the articles of

association of the company or the actual value of

actual capital contribution of non-monetary assets is

significantly lower than the amount of capital

contribution subscribed for, other shareholders at the

time of establishment shall bear joint and several

liability with such shareholders to the extent of the

insufficient capital contribution (Law of the People's

Republic of China, 2023). This also reflects the

importance of the appraisal procedures in the non-

monetary capital contribution such as intellectual

property rights. Appraisal institutions shall abide by

the principles of fairness, impartiality and openness,

handle business in accordance with the laws and

regulations, and shall not accept bribes and shall make

judgments at their own discretion. At the same time,

the appraisal system should be carried out and

implemented throughout the entire development

process of the company. Appraisal is required for

establishment, establishment, purchase of major

assets, bankruptcy settlement and liquidation of the

company. However, the regulatory framework of

intellectual property assessment is immature, the

fairness of the assessed value is still in doubt, and there

is no unified and credible supervision and assessment

institution or system. Many enterprises reject

assessment very much because of the complexity of

the procedures and long time period. Secondly, it is

difficult to objectively measure whether the assessed

value is fair or not, and the necessity thereof is

doubtful. Therefore, assessment institutions need to

highlight the assessment of intellectual property rights

on the value of enterprises through a series of case

studies, raise awareness, focus on the benefits of the

valuation business, and conduct publicity based on the

specific case studies (Shen & Zhang, 2019).

Assessment is not an optional step, but a necessary

process for capital contribution of non-monetary

assets. For tacit intellectual property, if hedging of

capital contribution of intellectual property rights is

ICPLSS 2025 - International Conference on Politics, Law, and Social Science

530

discovered in a timely manner after the signing of the

tacit intellectual property rights contribution

agreement, the assessment institution shall timely

consider whether the consideration fund is in line with

the market price and whether complement is needed.

The registration department shall carefully examine

the materials necessary for the establishment of the

company. If such situation is discovered in the course

of the company's normal operation, other shareholders

and creditors shall inform the regulatory authorities of

the specific situation to protect their legitimate rights

and interests. At the same time, the regulatory

authorities shall regularly examine the changes in the

shares of statutory capital contribution of the

company. Companies shall establish stricter review

and avoidance system for affiliated transactions. The

articles of association or the rules of procedure of the

shareholders' meeting shall specify the corresponding

approval authority and procedures for affiliated

transactions with different target amounts, and require

affiliated shareholders to avoid voting for relevant

matters.

2.2 Capital Contribution of Patent Use

Rights

Patent use rights refer to the right of a patentee to

authorize other persons to use the patent, in part or in

whole, in accordance with the law. The right to use a

patent is usually obtained in the form of a patent

license agreement. Depending on the difference

between the scope of the rights granted in a license

for patent implementation and the scope of the

licensee, a license for patent implementation may be

divided into three types: exclusive license, exclusive

license and general license.

There is no clear provision on patent use rights in

domestic laws and administrative regulations, which

is consistent with tacit intellectual property rights. It

shows that there are many loopholes in the refinement

of intellectual property rights in China, and the

relevant local regulations and the judge's discretion

are followed more in the cases. In China, there are

different opinions on whether to allow capital

contribution of patent use rights. In Li Fulin v.

Ningbo Comelon Medical Equipment Co., Ltd., the

Ningbo Administration for Industry and Commerce

Cixi Branch made it clear that patent use rights were

not allowed to make capital contribution. In Hisense

Kelon Electrical Appliance Co., Ltd. and Wuhan

Wanxin Machinery Co., Ltd. , the defendant Hisense

Kelon agreed to invest with the right to use a patent,

but the attribute of the right to use a patent caused the

defendant not to complete the relevant approval and

registration formalities for the transfer of the patent

(Zhe Yong Shang Zhong Zi No. 62., 2011 & Wu Min

Shang Zhong Zi No. 1355., 2009). The court of first

instance held that the contribution of Hisense Kelon

to the defendant Xi'an Kelon was not true.

Some regions have carried out pilot projects for

capital contribution of patent use rights. Several

Regulations of Hunan Provincial Department of

Science and Technology, Administration for Industry

and Commerce of Hunan Province, and Intellectual

Property Office of Hunan Province on Supporting the

Registration of Companies as Capital Contribution of

Patent Use Rights (Trial Implementation) (Xiang Ke

Zheng Zi [2014] No. 144) and Notice of the Leading

Group for Systematically Promoting the Pilot

Program of Comprehensive Innovation and Reform

of Anhui Province and Building China into an

Innovative Province on Issuing the Pilot Program for

Systematically Promoting the Pilot Program of

Comprehensive Innovation and Reform of Advanced

Technology Research Institute of University of

Science & Technology of China (Wan Quan Chuang

Gai [2016] No. 12) have clearly expressed their

support for the capital contribution of patent use

rights. Therefore, the issue whether patent use rights

can be used as capital contribution has aroused many

discussions in the academic world. There are mainly

three types of arguments, the argument of limitation,

the argument of denial and the argument of approval.

The problems that perplex capital contribution of

patent use rights mainly focus on whether all patent

use rights are transferable, the capital contribution

procedure is excessively and complicated, and the

transfer may require the consent of other parties,

which slows down the efficiency.

According to the argument of limitation, only the

exclusive license of an invention patent is allowed as

a type of capital contribution of patent use rights,

except that the patentee uses the patent right to make

a capital contribution. Patent use rights in China are

divided into three categories, namely invention patent

use rights, utility model practicality rights and design

patent use rights. The right to use licenses is further

divided into two categories: exclusive license and

general license (Zhang, 2020). Firstly, from the

perspective of types of patent rights, considering the

fact that without substantive examination, utility

model patent and design patents may easily lead to a

lot of disputes, their use rights are not suitable as non-

monetary capital contribution. Compared with the

other two patents, the invention patent has been

developing for a long time and is more stable, and the

application procedure is more rigorous, so it is

suitable to be used as a non-monetary capital

Recessive Risks of Patent Use Rights and Capital Contribution with Tacit IP and Regulatory Measures

531

contribution. Secondly, from the perspective of types

of license to use rights, general license is unable to

control the sub-license of the licensee, the right to use

patent may be transferred for many times, increasing

the risks, the indeed value may be unstable, and the

technology advantages of the company may be

passively diluted. Risks related to exclusive license

may be easier to control. However, the horizontal

competition between the patentee and other users of

the exclusive license shall be considered (Wang, 2020

& Zhang & Wang, 2015). The purchaser of the right

to use the patent certainly buys the patent for a

purpose, but cannot guarantee whether the

specialization is the same as that of the patentee. If

two persons work for competing companies and use

the same patent right, there will be no advantage to

speak of. Therefore, the assessed value of the right to

use the patent will be reduced.

With the promulgation and implementation of the

new Company Law, the distribution of shareholders'

rights and obligations, intellectual property rights as

capital contribution and corporate social

responsibility have all made a series of adjustments.

With the progress of the times, the law needs to be

adjusted gradually. In the process of legal adjustment,

the positioning of the right to use a patent, whether it

is allowed as an object of capital contribution, and

whether there are judicial interpretations to specify

the provisions should be made. This is the place

where the intellectual property section of domestic

law should be improved. Second, patent use rights,

like tacit intellectual property rights, should go

through a series of procedures, including the need for

all parties to sign a contract for capital contribution to

the right to use a patent, and to record the license for

use. At the same time, the above information should

also be reported to the administration for industry and

commerce for reference, and finally the

corresponding business registration (Li, 2017). Jiang

Jianxiang and Fan Nannan put forward the

establishment of a special assessment, guidance and

supervision organization, a system of assessment

indicators for patent economic value, an introduction

of an assessment accountability mechanism and a

mechanism of assessment and supervision of the right

to use a patent.

3 CURRENT RESEARCH

ABROAD

In foreign countries, many countries have made

provisions on tacit intellectual property rights as

capital contribution. The provisions on the right to use

a patent as capital contribution in the United States

are more relaxed, and there are no strict restrictions.

But the fiduciary duty system restricts the behavior of

shareholders, requiring the controlling shareholders

to perform the duty of loyalty when involving the

company's assets, to prevent the transfer of the

company's assets through tacit capital contribution. In

order to prevent tacit capital contribution, the role of

directors is emphasized in the United States. In China,

the board of directors is only the executive body of

shareholders' meeting, but in the United States,

directors owe fiduciary duty to the company and the

shareholders, which means that if a shareholder

makes a contribution of tacit intellectual property, the

directors shall truthfully report the contribution and

shall also be liable for assisting the concealment. In

Japan, tacit intellectual property rights agreements

provide that if the contribution of capital contribution

in the process of the establishment of the company is

paid in cash at first, and the intellectual property

rights are replaced with cash after the establishment

of the company, the benefits of the agreement shall

vest in the company. In accordance with Articles 28,

30 and 33 of the Japanese Company Law, the name,

amount of value and the name of the assignor of the

intellectual property rights shall be first recorded in

the articles of association of the company. The

articles of association of the company shall be

notarized by a notary public. The promoter shall

promptly apply to the court for the selecting of an

inspector to investigate the matter. The inspector shall

provide the court with a report of their findings, and

the court will further review the findings, and if the

contribution is determined to be improper, the articles

of association of the company will be amended

compulsorily. However, if the price of the acquired

intellectual property is not more than 5,000,000

Japanese yen, or the acquired intellectual property has

been certified by a lawyer, certified public

accountant, a legal person in charge of the inspection

or a tax accountant to be appropriate, there is no need

for the inspector investigation and court review

procedures. For the right to use a patent, there are

fewer provisions abroad. Article 15 of the Limited

Liability Company Law of the Russian Federation

stipulates that the non-monetary capital contributions

of shareholders of a company and the property of a

third party accepted by the company as the registered

capital of the company shall be approved by a

resolution of the shareholders' meeting (Wang, 2008).

It also reflects the need for multi-party approval to

contribute capital, and the procedure is more

complicated.

ICPLSS 2025 - International Conference on Politics, Law, and Social Science

532

4 CONCLUSION

In general, there are many gaps in the law on both

tacit intellectual property rights and patent rights as

capital contribution. On the one hand, the legislature

should constantly improve the laws and judicial

interpretations on these two types of intellectual

property rights as capital contribution, so that there

are laws to follow, rather than following different

standards in practice. On the other hand, the author

should learn more from foreign laws and practical

experience. In the face of tacit intellectual property

rights capital contribution, it is suggested that

companies should establish a more stringent review

and avoidance system for related transactions of

different target amounts, specify in the articles of

association or the rules of procedure of the

shareholders' meeting the corresponding approval

authority and procedures for related transactions of

different target amounts, and require related

shareholders to withdraw from the voting on related

matters. The procedure of non-monetary property

capital contribution can also be further standardized

and refined. Faced with the right to use patent rights,

the academic community has different views, but, in

the era of the knowledge economy, allowing the right

to use patent rights as capital contribution is a

necessary requirement to achieve diversification and

high efficiency of capital contribution of intangible

assets. The first task is to clarify which type of right

to use can be used as capital contribution, and then

formulate the corresponding capital contribution

procedures according to its characteristics. In this

article, the author advocates that registration should

be carried out in accordance with the law on the basis

of a signed agreement to avoid the confusion between

ownership and right to use, and that in the course of

use, the records should be reported to the

shareholders' meeting on a regular basis, and the

third-party supervision should be introduced.

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