In recent years, China has placed significant emphasis on the transformation of scientific and technological achievements, the term for transforming practical research of higher education institutions and research institutes (transformation institutions) into innovative enterprises for commercialisation and industrialisation.
This process has been actively promoted through enacting a series of regulations and policies driving transformation achievements and national technological innovation.
Consequently, various higher-education institutions and research institutes have also introduced their own rules to enhance mechanisms for transforming their innovative scientific and technological achievements.
Drawing on the author’s experience in handling multiple projects involving the transformation of scientific and technological achievements, this article outlines key legal issues in the process, providing essential reference for transformation institutions, researchers and innovative enterprises.
Due diligence
(1) Transformation institutions
Managing Partner, Member of the Management Committee
Hengtai Law Offices
Tel: +86 136 1169 2666
E-mail:
angelaliu@hengtai-law.com
A key aspect of due diligence for transformation institutions is comprehensively assessing the financial capacity and technical expertise of the prospective innovative enterprise to ensure it is capable of implementing the transformation of scientific and technological achievements. Can it succeed?
(2) Innovative enterprises
Technical due diligence and industrial research. Innovative enterprises must conduct thorough technical due diligence and industrial research on the intended achievements to fully understand their technical level, complexity, advancement and maturity.
Additionally, analysis and evaluation is also required to assess market potential for commercialisation, industrialisation prospects and expected returns. This comprehensive approach ensures the selection of high-value scientific and technological achievements.
Legal due diligence. Necessary legal due diligence should also be conducted on the intended achievements. This includes thoroughly understanding their legality, the status of intellectual property rights and protection level, and identifying potential legal issues and risks. Any legal problems or risks discovered during due diligence should be resolved before the transaction, or addressed in the transaction documents with agreed-on corrective measures.
This ensures that the transformed achievements are free from major legal disputes or risks. Neglecting legal due diligence could result in significant legal risks during commercialisation, and pose major legal obstacles for future financing and listing.
Transaction compliance
(1) Types of transformation
Pursuant to relevant laws and regulations, both transformation institutions and innovative enterprises may negotiate and decide on the specific type of transformation they adopt for the intended scientific and technological achievements. These options include transfer, licensing, equity investment and co-operative implementation. Specific requirements and restrictions on the types of transformation as prescribed in the internal policies of the transformation institution, if any, should also be observed.
(2) Pricing
Transformation institutions and innovative enterprises may determine pricing through negotiated agreements, listings on technology trading markets or auctions. Agreement-based pricing should adhere to the arm’s length principle, with particular attention to related-party transactions and compliance with any special procedures required by the transformation institution’s internal policies, such as procedures for evaluation, public disclosure or filing.
(3) Process compliance
Asset appraisal of intended achievements. Pursuant to relevant laws and regulations, when a transformation institution transfers, licenses or invests in scientific and technological achievements to a wholly state-owned enterprise, the asset appraisal is not a must. However, in the case of transfers, licensing or investments to other types of enterprises, the transformation institution may choose whether to conduct an asset appraisal.
If internal policies of the transformation institution stipulate otherwise, those requirements must be followed. When the scientific and technological achievements are handled as capital contributions for equity investment, the asset appraisal is mandatory under the Company Law.
Additionally, to prevent low-price disposal of state-owned assets through collusion or rigging operations, the transformation institution and its responsible person might be held liable. To avoid such allegation, an asset appraisal arranged by the transformation institution is recommended to mitigate decision risks in the pricing and transaction.
Internal approval processes. To ensure the compliance and effectiveness of a transaction involving the transformation of scientific and technological achievements, the internal approval processes of the transformation institution must be strictly observed.
Compliance in related-party transactions. Transactions involving the transformation of scientific and technological achievements tend to include related-party dealings. In such cases, the achievements typically need to be appraised and priced based on the internal policies of the transformation institution. Additionally, the transaction plan must go through the transformation institution’s approval process for related-party transactions.
Implementation compliance
(1) Researcher roles.
Once the transformation process goes ahead, researchers from the transformation institution are often required to continue their involvement in the implementation. It is crucial to ensure that part-time roles and equity holdings (including equity incentives) of researchers comply with relevant laws and the institution’s policies. Approval or record-filing from the institution is also required. Additionally, the innovative enterprise should avert suspicion or risks of improper benefit transfer when providing equity incentives to researchers.
(2) Intellectual property rights.
During the transaction and subsequent implementation of scientific and technological achievements, it is essential to handle any necessary changes to the patent holder or applicant in a prompt manner.
For exclusive or sole licences, timely application and completion of licence registration are required to ensure legal protection against third parties. In ongoing collaborations between the innovative enterprise and transformation institution – such as horizontal research projects and commissioned or co-operative development – the rights to the collaborative achievement, commercialisation and profit distribution must be clearly defined.
(3) Independence requirements.
When researchers need to use the material and technical resources of the transformation institution while working part-time at the innovative enterprise, the innovative enterprise should duly pay the transformation institution for using such resources.
Additionally, to avoid ownership disputes over related scientific and technological achievements, the innovative enterprise should refrain from listing part-time researchers as inventors when applying for patents.
