Global Business Basics Emerging Markets? Where? Presented by : Klint Alexander 211 Commerce Street Suite 800 Nashville, TN 37201 615.726.5698 [email protected].

Global Business BasicsEmerging Markets? Where?

Presented by :

Klint Alexander211 Commerce StreetSuite 800Nashville, TN [email protected]

mailto:[email protected]

2www.bakerdonelson.com© 2014 Baker, Donelson, Bearman, Caldwell & Berkowitz, PC

21st Century World

• Every Business today should embrace globalization by having a basic understanding of the transnational aspects of law doing business abroad

• Why? − Globalization and change are inevitable− The world is opening up to expanded trade, investment and

economic opportunity− Other Businesses are going global− Competition is fierce


Transnational Sales

• Vienna Convention on Contracts for the International Sale of Goods (CISG)− Note: parties who fail to include a choice of law clause in their contract may

discover that their rights and obligations are governed by the CISG − sets forth substantive law rules governing the formation of contracts for the sale

of goods between parties whose places of business are in different states The parties’ respective States must be contracting parties to the CISG

− It does not deal with fraud, duress, incapacity, mistake or unconscionability, which are governed by national law (see UCC)

− Parties may exclude the application of the CISG in their contract If the parties wish to opt out of the CISG they should do so explicitly

− CISG v. UCC CISG applies the “mirror image rule” for the battle of forms No statute of frauds or parole evidence rule in the CISG No “perfect tender rule” in CISG


The Contract of Affreightment

• The Carriage of Goods by Sea Act (COGSA)− Governs the liability of ocean carriers for damage or loss to

cargofrom “tackle-to-tackle” to or from U.S. ports Limit liability to $500 per package or “customary freight unit” COGSA does not apply to inland carriage or to any party not

considered to be an ocean carrier unless:1. Bill of lading contains a Himalaya Clause

o Extends COGSA protection to third parties

2. Bill of lading contains a Responsibility Clauseo Explicit statement extending COGSA inland

Carrier is not liable for:1. Losses caused by perils of the seas, and

2. Losses caused by negligent navigation of the ship


Transnational Sales

Letters of Credit• Function

− Serves a verification function rather than as a guarantee Bank’s involvement verifies to the seller that the buyer is creditworthy

• Why use a letter of credit?− Greater risks involved in doing transnational business− Provides Seller with an assured means of payment

Seller might have to seek remedies in a foreign country

− Protection for Buyer against Non-delivery by the Seller Buyer: provides the buyer assurance that payment will not be made until the

seller has delivered the goods to the carrier

− Provides the Buyer with financing flexibility


Goods: Customs and Tariff Law

Three Issues to Consider• Classification (WCO Harmonized Tariff System)• Valuation (WTO Valuation Agreement)• Origin of the Goods (WTO Agreement on Rules of Origin)

− At present, rules of origin are determined mainly by domestic law


Transnational Sales

Forms and Drafting• Incoterms 2010

− Defined trade terms that parties can incorporate by reference in their contracts

− Governs issues such as cost of shipment and risk of loss− The parties should specify that their contract is governed by the Incoterms− Be sure to use the correct Incoterm

Different for water transport, land transport and air transport

− In the bulk of modern commercial transactions (FOB, CFA, C&F & CIF), the seller satisfies its delivery obligations when the goods have been properly loaded on board the carrier (“when the goods pass the ship’s rail”)


Export Controls

Economic Sanctions• OFAC administers a number of different sanctions programs. The

sanctions can be either comprehensive or selective, using the blocking of assets and trade restrictions to accomplish foreign policy and national security goals.

Multilateral Sanctions• Arab Boycott of Israel • U.N.-imposed boycott of South Africa

− To protest apartheid

• U.N.-imposed limited sanctions against Iran• WTO-authorized sanctions


Economic Sanctions

Unilateral Sanctions• United States

− Ban arms-related exports − Controls over dual-use exports − Restrictions on economic assistance − Financial restrictions

Oppose loans by the World Bank to listed countries Tax credits denied for income earned in listed countries Duty-free goods exemption suspended for imports from listed countries Prohibit U.S. citizens from engaging in financial transactions with the listed

government without a license Prohibit Defense Department contracts above $100,000 with companies

controlled by listed countries


Economic Sanctions

Other Unilateral Sanctions• United States

− Countries: Iran, since 1979 Burma (Myanmar), since 1997 North Korea, since 1950 Sudan Syria China, no arms-related exports, since 1989 Côte d'Ivoire/Ivory Coast Yemen Zimbabwe


U.S. Export Controls

Export Control Licensing• DOC Bureau of Industry and Security (BIS)

− Primary licensing agency for dual-use exports− A small percentage of exports require license

• DOS Office of Defense Trade Controls− Licenses exports of defense articles/services

• Nuclear Regulatory Commission− Licenses certain nuclear materials/equipment



Export Control Licensing• “Sensitive Products” to “Sensitive Places”

− Presumption: “No license required” − See Commerce Control List (CCL)− See Country Chart (15 CFR 738.3)


When is a license required?

• Five Ws− What? (export item’s technical characteristics)− Where? (country)− Who? (end-user)− What? (end-use)− What other activities are they involved in?

• Commerce Control List (CCL)


Summary of Steps to Take to Process Your Export

• Ensure that your export is under U.S. Department of Commerce jurisdiction.

• Classify your item by reviewing the Commerce Control List.

• If your item is classified by an Export Control Classification Number (ECCN), identify the Reasons for Control on the Commerce Control List.

• Cross-reference the ECCN Controls against the Commerce Country Chart to see if a license is required. If yes, determine if a License Exception is available before applying for a license.

• Ensure that no proscribed end-users or end-uses are involved with your export transaction. If proscribed end-users or end-uses are involved, determine if you can proceed with the transaction or must apply for a license.

• Export your item using the correct ECCN and the appropriate symbol (e.g., NLR, license exception, or license number and expiration date) on your export documentation (e.g., Shipper’s Export Declaration).



Exporter’s Duties• Be Proactive

Concealment of information is prohibited No duty to look beyond the customer’s representations Duty to Inquire (triggered by Red Flags)

▫ What red flags?



Exporter’s Duties • Red Flags

Product capabilities do not fit buyer’s business Item ordered is incompatible w/ State’s technical expertise level Delivery dates vague or planned for out-of-the-way destinations Packaging is inconsistent with the stated method of shipment Customer’s address is same as party found on DOC’s List of

“Denied Persons” Customer has little or no business background Customer prefers to pay in cash Customer is reluctant to offer information about end-use

[RULE: Do Not Put On Blinders!]


ENFORCEMENT & PENALTIES

• BIS Office of Export Enforcement• Export Enforcement Program

− Prevent illegal export of dual-use items− Investigate/assist prosecuting violators of EAR− Inform/educate exporters, freight-forwarders

• Penalties− Civil

Corporation (up to $1,000,000) Individual (up to $250,000)

− Criminal− Loss of export privileges



Other Export Considerations• “Deemed Export” Rule

− Release of technology to a foreign national in the U.S. is considered a “deemed export” to the home country of the foreign national


Regulating FDI & MNC Activity

Home State Concerns• Impediments to FDI & MNCs

− Nationalization (exprop. w/out compensation)− Performance Requirements

Local content requirements Export performance requirements

− Capital controls− Discrimination (No MFN/National Treatment)


NAFTA Chapter 11

• National Treatment (Article 1102)• MFN treatment (Art. 1103)• Minimum standard of treatment that must be “fair and equitable”

with “full protection and security” (Art. 1105)• Protection against performance requirements (Art. 1106)

− Exceptions for legitimate regulatory and police purposes of the host state (Art. 1106(2))

• Freedom to appoint senior management without respect to nationality (Art. 1107)

• Freedom to transfer profits and proceeds (Art. 1109)• Protection against expropriation (Art. 1110)


Joint Ventures

Types• Equity Joint Ventures

− Involves creation of corporation owned by JV partners Contractual joint ventures

− Parties do not establish another corporation but simply specify their rights and obligations by contract

Why a joint venture?− Local law may require it− Local partners can provide valuable knowledge of the local

markets and bureaucracy


China - Joint Ventures

Chinese Regulation of Foreign Investment• China regulates FDI at the point of entry • Equity Joint Venture Law

− Art. 2: provides limited protection against expropriation− Art. 4: provides for minimum amount of foreign equity in JV – 25%− Art. 43: regulates technology transfer agreements:

Requires a fair and reasonable royalty Allows continued use of the technology after the expiration of contract Provides for reciprocal exchange of information on improvements Permits the licensee to purchase materials from sources they deem

suitable (i.e., avoids tying arrangements)• Art. 43 also requires JVs to be submitted to the govt. for approval


Brazilian Regulation of FDI

• No law regulating joint ventures• Brazil regulates FDI at the point of exit• Repatriation of profits is the big issue for Brazil• Profits Remittance Law

− Capital and profits should be registered with theCentral Bank

− All Brazilian taxes must be paid first− All patents & trademarks must be registered with the National Department

of Industrial Property in order to repatriate royalty payments• Limited Liability Company (preferred form)

− Managers do not have to be Brazilian residents − Does not allow for public participation through stock ownership

• Stock Corporation− Board of Directors must be Brazilian residents− Public participation in the form of stock permitted to raise capital


Agency & Distributorship Agreements

Basic Distinctions• Agents

− Manufacturers exercise greater control i.e., may determine the price to the customer

− Arrange sales for manufacturer, but don’t take title to goods Buyer usually pays seller directly

− Paid by commission on sales they arrange− Manufacturer bears the risk of nonpayment by customer− Actions of the agent may be attributable to seller (tort)− Agents can be given authority to enter into contracts with

customers on behalf of the manufacturer− Anti-bribery and FCPA concerns



Basic Distinctions• Distributors

− Usually a larger company with more resources− More independent/less vulnerable to manufacturers’ whims

Manufacturers have less control

− Buy goods from manufacturer, take title, & resell goods− Make a profit when they resell the goods to customers at a price

higher than what the manufacturer charged− The risk of customer nonpayment rests with the distributor− More likely to raise antitrust concerns

E.g., agreement between manufacturer and distributor concerning the price to the customer may violate U.S. or foreign antitrust law

− Anti-bribery and FCPA concerns



Protecting Agents and Distributors• U.S. law

− Does not provide special legal protection− Automobile Dealers Act of 1956 is an exception

• Other Countries (EU, Latin America, Middle East)− Legislation to protect agents (i.e., compensation, termination, restraints

on competition)− Agent/distributor may have extensive rights against seller

• Can parties opt out of legislation protecting agents through a choice-of-law clause/choice of forum clause?



EC Council Directive 86/653• Governs contracts btw commercial agents/principals (not distributors)

− Requires compensation of agent for termination without cause Up to one year’s average remuneration (Art. 17)

− Sets minimum periods of notice for termination of an agreement with an indefinite term (Art. 15)

− Limits non-compete obligations after termination to 2 years (Art. 20)

• EC Directive 86/653 was implemented in the U.K. by the Commercial Agents (Council Directive) Regulations 1993

Ingmar GB Ltd. v. Eaton Leonard Technologies Inc.

European Court of Justice (2000)



Taxation• Two Tax Issues with These Types of Agreements

1) Whether the use of a foreign representative subjects the manufacturer to foreign taxes?

Answer: Depends on whether the representative constitutes a “permanent establishment”▫ Agents who have authority to bind the principal (see US-German tax treaty)

◦ Must deny agent authority in the agreement“All orders are subject to manufacturer’s approval”

▫ Using a German distributor will not create a permanent establishment and subject the American manufacturer to German tax



Taxation• Two Tax Issues with These Types of Agreements

2) Application of the Value Added Tax (VAT) Payable upon each sale in the chain of distribution but with a deduction for VAT

paid on previous sales▫ Any VAT paid with respect to the sale from the manufacturer to the distributor should be

deductible from the VAT owed on the sale from the distributor to the customer


Licensing

General Points• Involves the production of goods abroad where labor and materials

may be cheaper• Advantages:

− Production in the consumer’s country may save tariffs and transportation costs

− The licensor need not acquire the same knowledge of local conditions and markets that would be necessary for it to run the manufacturing and sales operation itself

− The risks of foreign expropriation are lower than FDI• Risks:

− Loss of control over licensee (i.e., marketing of goods)− Loss of control over technology


Licensing

Developing Country Technology Transfer Laws• Some developing countries have enacted technology transfer laws

that attempt to level the playing field between foreign IP owners and local licensees in licensing agreements

• Andean Commission Decision 291− Bolivia, Colombia, Ecuador and Peru− Requires licensing agreements to be approved and

registered with a national authority in order to be valid

• Disfavored Contract Provisionsa. Tying

b. Price-fixing

c. Restraints on production

d. Non-compete obligations

e. Grant backs

f. Minimum royalties

g. Territorial restrictions

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International Commercial Arbitration

Advantages of Arbitration• Neutrality of the forum• Streamlined proceedings (faster) • Cheaper than litigating in court (really?)• Less formal• More confidential • Non-appealable

Disadvantages of Arbitration• Arbitrators have no power to compel discovery• Arbitrators can only award damages (not injunctions)• Arbitrators are paid by the parties themselves

− Can be expensive− Can incentive settlement


What is the FCPA?

The FCPA prohibits U.S. companies and their agents from:

• Using a payment or the promise of a payment of anything of value to a foreign official, foreign political party or candidate, directly or indirectly

• To influence his or her official actions in violation of his or her duty• Or to secure improper advantage or to induce the person to use his

influence to affect official action


Enforcement Trends

• 200% increase in cases from 2005 to 2008• More specialized government investigative units• More targeted and proactive investigations• More trials• Much higher penalties• Sector investigations by the SEC and the DOJ• Increased individual fines• Increased jail time• Individual prosecutions years after corporate settlement

FCPA IS A HOT TOPIC with the highest level of government attention.


Foreign Corrupt Practices Act (FCPA)

Elements:• Any U.S. person/corporation or foreign person or corporation acting in U.S. • Corrupt intent (evil motive)• Corrupt intent: purpose of wrongfully directing business to the payor or to

wrongfully obtain favorable legislation or regulations• Proscribed payments: any act in furtherance of a payment

− Exceptions: Grease payments (to secure the performance of a routine government function) Bona fide expenditures (travel, lodging, meals incurred by a foreign government official

for the purpose of promoting the payor’s products or services) Payments lawful under the existing written laws of the foreign state Expenses related to the execution of a contract

• Persons to whom payments are made (foreign officials, foreign political parties or candidates for foreign office)

• Business purpose test: to obtain/retain business


Examples of Improper “Travel and Entertainment” Expenses

• Examples of improper “travel and entertainment” expenses, which could trigger an FCPA investigation, include:− A $12,000 birthday trip for a government decision-maker from

Mexico that included visits to wineries and dinners;− $10,000 spent on dinners, drinks, and entertainment for a

government official;− A trip to Italy for eight Iraqi government officials that consisted

primarily of sightseeing and included $1,000 in “pocket money” for each official; and

− A trip to Paris for a government official and his wife that consisted primarily of touring activities via a chauffeur-driven vehicle.


Affirmative Defenses

It is not a corrupt action to provide:• “Business hospitality,” such as bona fide expenses for travel and

lodging, if:− The hospitality is directly related to the promotion, demonstration or

explanation of a product/service − Or the performance of a contract with a government entity

• Payment, if it is permitted under the country’s law:− Must be very specific− Must be in writing in the law/regulations itself− Very limited applicability


FCPA Recordkeeping Requirements

Best Practices• Keep books, records and accounts with details that accurately and

fairly reflect transactions and dispositions of assets and financial statements in accordance with GAAP

• Have a system of internal accounting controls • Be able to show that transactions are executed in accordance with

management's authorization • Be able to show authorizations required for access to assets • Do timely audits to compare books/records to accounts

Note: Financial results of foreign subsidiaries/agents that are incorporated into the parent’s records must not conceal illicit payments.


Types of Records/Actions that May Fail to Include Appropriate Detail

• Political contributions• Commercial bribes or kickbacks• Income tax violations• Customs violations• Payments to foreign government officials• Gifts/Travel/Entertainment

Note: A person or entity may be criminally liable if he or she knowingly circumvents or knowingly fails to implement an internal control system.

Note: Both DOJ and the SEC will enforce recordkeeping requirements.


Successor Liability

• Liability of an acquiring or merged company for the acts of a predecessor

• An acquiring company should:− Immediately integrate an acquired company into its compliance and

training scheme− Conduct an FCPA-specific audit of the new company as soon as

possible− Disclose all of the acquired company’s violations and cause them to

cease immediately


FCPA Penalties and Enforcement

Corporate Penalties • Up to $25 million criminal fine per violation

or 2 times the gain• $10,000 civil penalty per violation the company or

the gross gain• Disgorgement of profits• Appointment of compliance monitor

Individual Penalties• Up to 20 years in prison• Up to $5 million criminal fine per violation or 2 times the gain• $10,000 civil penalty per violation• The fine shall not be paid directly or indirectly by the company


Compliance Program Pointers:

• Adopt written code of conduct and anticorruption policy with a clear message from the top

• Appoint a compliance officer • Train employees and agents/contractors/consultants• Undertake and document due diligence • Use questionnaires to evaluate third parties• Establish a mechanism for reporting behavior

“IT TAKES THEWHOLE COMPANY”


Best Practices

• Interact with lower level bureaucrats• Do not ask or allow a government official to make business

arrangements• Use local language and incorporate ethical local customs• Use technology to educate, train, and monitor• Be careful with email/voicemail!• Engage all levels of the corporation• Pay attention to concerned employees because most

whistleblowers tried internal reporting first• “New York Times Rule”: would the conduct imply corruption if

reported in a newspaper?

Global Business Basics Emerging Markets? Where? Presented by : Klint Alexander 211 Commerce Street Suite 800 Nashville, TN 37201 615.726.5698 [email protected].

Documents

cisg slide

ucc cisg

caldwell berkowitz

pc goods

seller buyer

transnational business

ucc parties

tariff law