Shareholders parting ways and intellectual property: who keeps the brand, the software and the business name

When shareholders part ways, the negotiation is usually about the price of the ownership interest. The value of the company, however, often lies not in the assets on the balance sheet but in the brand, the domain, the software and the name under which customers know it. If nobody took care at the outset over whose name those assets stand in and who holds rights to them, the separation widens into a dispute over who in fact owns them. This article goes through the Slovak rules on trademarks, software and business names, and for software the Czech rules as well.

A trademark: the register decides

The legal person or natural person entered as proprietor in the register is regarded as the proprietor of the trademark, unless a court decides otherwise.

— Section 7a of Act No. 506/2009 Coll. (unofficial English translation)

If one of the shareholders applied for the company’s brand in his own name in the early days, he is its proprietor, not the company. The company uses it only with his consent, express or tacit, and after the separation it faces being prohibited from using its own sign. A transfer of the trademark to the company requires a written contract, failing which it is invalid, and it takes effect against third parties only on entry in the register (Section 17(1) and (2)).

Where a shareholder applied for the trademark without the others’ knowledge and the company had used the sign earlier, an application to declare the trademark invalid may come into play, for example on the basis of an earlier unregistered sign of more than mere local significance, or of an application not filed in good faith (Section 35(3) in conjunction with Section 7(f) and (j)). Where the application was not filed in good faith, even five years of knowing acquiescence in the use of the trademark does not bar a declaration of invalidity (Section 35a(1)). Those proceedings are, however, more demanding than a transfer agreement, which can be combined with the settlement on departure.

Software and other works: the relationship in which they were created decides

The author is always a human being, and a company exercises economic rights in a work only in the cases determined by statute. A work created by an employee in the performance of employment duties is an employee work, and the economic rights in it are exercised by the employer, unless otherwise agreed (Section 90(1) and (4) of the Copyright Act, Act No. 185/2015 Coll.). For shareholders, the second paragraph is the important one:

An employee work is also a work created by an author who is a member of the managing, supervisory or controlling bodies of a legal person, or the statutory body of a legal person, or a member of the statutory body of a legal person, in the performance of duties arising from membership of that body of that legal person, which in such a case is regarded as the employer.

— Section 90(2) of Act No. 185/2015 Coll. (unofficial English translation)

The decisive words are “in the performance of duties arising from membership of that body”. With a managing director who writes code, it need not be obvious that writing code is a duty of the office, so it is better to state this expressly in the service contract. Where the work is an employee work, termination of the employment relationship or of the office changes nothing in the company’s rights (Section 90(8)).

The greatest risk is the shareholder who is neither a managing director nor an employee and wrote the program “for the company” without any contract at all. The employee-work regime also applies to a computer program where it was created to order, that is, under a contract for work (Section 91(1) and (4)). If there is no such contract, however, the economic rights are exercised by the author, and the company can rely at most on a consent to use that it would have to prove. The same problem affects code written by a founder before the company came into existence; it is addressed in the question on a founder’s prototype created before the company was set up. The Czech Copyright Act contains comparable rules: a work created by a member of a statutory body in the performance of duties owed to the legal person is treated as an employee work (Section 58(10) of Act No. 121/2000 Sb.), and computer programs created to order are likewise regarded as employee works (Section 58(7)).

A business name containing a shareholder’s name

Where the company’s business name contains the surname of a departing shareholder, the law gives him a strong position:

Where the business name of a legal person contains the name of a shareholder or member who has ceased to be its shareholder or member, the legal person may continue to use that name only with that person’s consent.

— Section 11(5) of Act No. 513/1991 Coll. (unofficial English translation)

On the death of a shareholder, the heir’s consent is required. Consent to continued use of the name, and any price for it, therefore belongs in the departure agreement. Without it, the company may have to change its business name and all its customer communications precisely when it is dealing with a shareholder’s departure.

The domain, know-how and competition after departure

With a domain, check who is recorded in the register as its holder; if it is the shareholder personally, a transfer to the company must be expressly agreed. How a domain dispute proceeds when agreement fails is examined in the article A dispute over a .sk, .cz or .eu domain. The law protects know-how as a trade secret only where the company genuinely keeps it secret; the details are in the article Trade secrets in Slovakia and Czechia. Whether a departing shareholder may compete with the company depends above all on the memorandum of association, as explained in the question on a shareholder’s non-compete obligation.

What to agree on separation

• a schedule of trademarks, domains, accounts, repositories and other assets, and of whose name they stand in,
• transfer of the trademark to the company by written contract and filing of the application to register the transfer, and, for the domain, a change of holder with the registrar,
• an exclusive licence to software created by the shareholder outside employment and office, with the right to modify it further,
• consent to continued use of the shareholder’s name in the business name,
• confidentiality and, where appropriate, a non-compete obligation,
• linking these undertakings to payment of the price of the ownership interest or of the settlement share.

We prepare and negotiate a separation between shareholders, including the intellectual property arrangements, within our shareholder disputes service. If the departing shareholder is already using the brand or the software on his own account, we pursue the claims within our intellectual property disputes service. The cheapest prevention is a trademark registered in the company’s name from the outset.