2012 02 May

Capital Contributions In-Kind

#Cambodia #Corporate and Commercial #Legal

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Under the Law on Commercial Enterprises (“LCE”), capital contributions may be in the form of money, in-kind, or past services (LCE Article 146).  This article further provides that: “Payment in-kind, may include trademarks, copyrights, patents, and the right to use any intangible property or trademark license.” (unofficial translation).  Read broadly, this provision of Article 146 appears to encompass all forms of intellectual property, as well as rights and licenses to such property, and other intangible property.

A reasonable extension of intangible property may theoretically include trade secrets, proprietary know-how or marketing strategies. However, in the absence of case precedents, a prudent approach would be to limit the in-kind contributions of intellectual property rights to those rights that are explicitly defined and regulated by laws and regulations in Cambodia, such as trademarks, patents or trademark licenses.

Another provision of Article 146 of the LCE states that: “The directors determine the value of the payment in-kind or past services and their decision shall be final and conclusive, if there is no actual fraud involved.”  Taken in isolation, and at face value, this provision seems to grant company directors broad discretion in determining the value of in-kind capital contributions, so long as fraud is not involved.  However, that provision must be taken in conjunction with Article 140 of the LCE, which provides, in part: “The directors who vote for or consent to a resolution authorizing the issuance of a share for a consideration other than money are jointly and severally liable to the company for the amount by which the consideration received is less than the fair equivalent of the money that the company would have received if the share had been issued for money on the date of the resolution.” (unofficial translation).  This provision appears to impose a more stringent duty on directors to accurately valuate in-kind capital contributions than the “fraud” provision of Article 146 implies.  In fact, based on this provision, if the directors of a company were to overvalue an in-kind capital contribution, essentially issuing stock at a discount from a proper valuation of the stock, such directors can be held personally liable to compensate the company for the amount of overvaluation.  A legal action for such compensation may be brought against the directors at any time up to two years from the date of the resolution authorizing the share issuance.

Adding to the obligations for proper valuations discussed above is the further provision of Article 146, providing: “A share shall not be issued until the payment for the share is fully paid in money, in kind, or past services.” (unofficial translation).  This provision appears to conflict with the provision discussed above stating that in-kind contributions may include the right to use intangible property.  These provisions beg the question: how can a right to use some intangible property in the future be fully paid at the time such right is granted, assuming that the shares are issued at the time the right is granted?  The provisions of law discussed herein appear to contemplate the idea that the right to use some intangible property in the future has a monetary value that can be accurately determined prior to usage of the intangible property.

In determining the value of in-kind capital contributions, company directors must weigh carefully the apparent broad discretion granted to them under Article 146 of the LCE against the potentially catastrophic personal liability imposed on each director under Article 140 for failing to ensure that the in-kind contribution accurately reflected the value of the shares issued.  If, for example, directors were to authorize the issuance of shares in exchange for the right to use a patent for the next five years, and that patent were made obsolete by another patent granted just one year after the share issuance, questions would arise as to whether the value placed on the right to use the patent for five years, as an in-kind contribution, was accurate.  Stakeholders in the company may argue that the right to use the patent was over-valued, given that beneficial usage was limited to one year rather than five.  The directors would be placed in a position of arguing that they acted in good faith and in the best interests of the company, and that they exercised the requisite level of care and due diligence in determining the value of the right to use the patent.

Great care should be taken in valuating in-kind capital contributions.  This is particularly true where such in-kind contributions consist of rights to use licenses, intellectual property, or other intangibles in this future.  Accurately determining the present value of a right to use such property in the future is a risky proposition, and is something that should often be left to an independent third-party, with the appropriate expertise to make such a valuation.

If you have any questions about this Legal Update, please send us an email to: cambodia@dfdl.com

3 May 2012