Expanding Abroad III: Legal Issues
Andrew J. Sherman, Partner, Dickstein Shapiro Morin and Oshinsky LLP
Once the decision has been made to do business abroad, the form of your overseas operation will be determined by your business objectives, available resources and other tax and legal considerations. Keep in mind, however, that no single form may satisfy all of your company's needs. To select the arrangement that is most compatible with your objectives, become familiar with the advantages and disadvantages of the principal forms of doing business overseas and the major legal issues arising from each one.
- Advantages: Lower costs and few new resources required. Complete control of operations by parent. Allows for a trial period. Less exposure to liability, except for product liability. Generally not subject to foreign tax, unless it is a permanent establishment.
Disadvantages: Distance from the market and less responsive to customer's needs. Less timely service, since no one is on the scene. Less visible commitment to the market, and no local warehouse from which to meet customer emergencies.
- Advantages: Local presence helps foreigner learn the market and avoid mistakes due to ignorance of culture. Lower investment costs than forming a company.
Disadvantages: Less control, and other party may have different agenda. Not a long-term presence, and less control of technology. Must share profits.
Distributor or Sales Representative
Advantages: Greater presence in market. Local party has greater stake and more commitment to success of business. Local inventory from which to ship goods. Less cost and delay than foreign company establishing distribution network for the first time.
Disadvantages: Share profits with another party. Potential liability for various issues. Less control of distribution of one's products.
Advantages: Local presence with people loyal to parent company. More control over distribution network. Better commitment and faster access to market developments.
Disadvantages: Higher costs of establishing a new office and hiring personnel. More exposure to liability due to actions of employees. Parent company is more susceptible to foreign jurisdiction in lawsuits.
Advantages: Share risks, costs and financing. Knowledgeable local partner and a more established presence in the market. Local partner may have complementary strengths. Allows for the establishment of business culture with an exchange of ideas.
Disadvantages: Share profit, control, and know-how. Effort and image may be hurt by weakness of local partner.
Wholly Owned Corporation
Advantages: Complete control of profits, operations, and management. Can unilaterally withdraw if business does not succeed.
Disadvantages: No local partner to advise on customs and culture. Greater costs and liability than acting through an agent or with a partner. Potential start-up delays from establishing an operation in a new market.
Standards of Behavior and Performance
Now that you've found a suitable partner, distributor or franchisee and decided on the corporate structure your company will use in the country or countries into which you're expanding, you're ready to climb the mountain of paperwork involved in setting up contractual obligations. In drawing up the actual documents, carefully consider the structure of the relationship, the terms of the agreement and the scope and length of non-disclosure and non-compete clauses. These provisions and their enforceability will take on increased importance when complicated by distance and differences in legal systems.
Labor agreements should be reviewed for acceptability in both cultures. A traditional practice in one country may be discriminatory in another. Make sure you won't get into trouble overseas by imposing U.S. standards on local employees. But, also beware of allowing practices in your overseas branch, franchise or partner's office that would be considered unfair or illegal in the United States.
Establish and communicate your standards for international business activities. One way to do that is to establish a code of conduct based on the company's values and objectives. This code should be distributed to all company employees, agents, and business partners. You can also print a pamphlet or an employee handbook, which provides more details and identifies instances when employees should seek further guidance from company lawyers, compliance officials or supervisory personnel. Compliance materials should be carefully written to take into account the company's specific operations, practices, personnel, corporate culture and history.
Generally, trademark laws and rights are based on actual (or bona fide intent to) use in a given country. Unlike international copyright, your properly-registered domestic trademark does not automatically confer any trademark rights in other countries. Take steps to ensure the availability and registration of your trademarks in all targeted markets.
Also, make sure your trademark translates effectively in the targeted country and native language. Many growing businesses have had to modify their names, designs or slogans because of translation or pirating problems in new markets. For example, many U.S. automotive services franchisors had to retool trademarked brands that over-emphasized speed, because automobile owners overseas valued attentive, quality service over fast service.
Many U.S. and foreign laws regulate the international business activities of U.S. companies. If your company does or plans to do business overseas, put an updated compliance program in place to address the legal issues that arise from such activities.
Two categories of laws govern the international business activities of U.S. companies. The first consists of laws that can also be applied in a domestic context, such as antitrust, employment and economic-espionage laws. The second category includes laws targeted more specifically to international business. One example is the U.S. Foreign Corrupt Practices Act (FCPA), which prohibits bribery of foreign government officials and officials of public international organizations. Under the FCPA, a U.S. company can be held liable for the activities of its consultants, joint venture partners, or a recently acquired subsidiary.
Imports and exports are subject to customs laws and regulations. The U.S. government has also imposed export and import controls as sanctions against certain countries. Be aware of these laws and restrictions as they relate to your business, and make sure your company's practices comply with them.
Try to establish an environment in which employees and agents recognize that the company is serious about compliance. Hire competent and honest personnel to start with, then be able and willing to conduct an internal investigation if any violations are suspected.
The adverse consequences arising from an unlawful transaction can be substantial, including revocation or suspension of export or import privileges, debarment from government contracts, negative publicity, plus the expense and disruption of responding to a government investigation. Paying attention to compliance is a necessary step toward the success of your global expansion.