LEGAL
For the past several centuries, companies wishing to do business internationally were faced with two major problems: distance and time. Fortunately, with the emergence of virtually instantaneous communication methods, including telephones, computers, videoconferences, and mobile communications devices, and the ability to be in almost any other part of the world within 24 hours, distance and time are no longer major concerns for operating on a global playing field. In fact, today all businesses, from start up firms to large mature companies, must operate and compete in a rapidly changing international environment that includes both opportunities and challenges. Companies, both large and small, consider “going global” for a variety of different reasons. Some of the more tangible benefits include opportunities to reduce costs and risks, secure additional access to necessary supplies, improve customer service and relations, and, of course, gain access to new markets for the company’s goods and services.
While there are numerous exceptions, in general, the evolutionary cycle by which most businesses become international traders is reminiscent of the cautious swimmer who eases into the water (i.e., toes first, then the ankles, the knees, the waist, the chest, and finally total immersion). In the beginning, a U.S. company may receive an order or two from overseas customers. Such orders might have been met, but by means designed to carefully protect the U.S. party – probably FOB (“free on board”) against confirmed irrevocable letters of credit. This stage may continue indefinitely; however, the company should use the interest of foreign customers as an opportunity to consider one or more of the alternative methods that might be used to actively locate and encourage business with other foreign customers or expand trading with some of the initial customers by providing favorable terms of sale, including credit.
Once the threshold decision to expand globally has been made, the company might decide to cautiously move overseas by an indirect investment, one of the alternative methods mentioned above that requires little or no direct involvement by the company in the foreign market. Rather, the company engages an individual or company in the foreign market to assist the U.S. firm in exporting its products into that market, typically relying on a local agent such as a sales representative or distributor. Proper selection and management of indirect investment partners should lead to greater foreign sales and a higher level of comfort with the operational activities necessary in order for products to be prepared for shipment to foreign markets. Moreover, the U.S. company will begin to liberalize its shipment terms to something like C&F (“cost and freight”) or CIF (“cost, insurance and freight”), port of entry, shipping documents D/A (documents against acceptance), 90 or 120 days sight. As the company builds up its reserves, and its confidence, it may decide to extend the terms of sale and provide credit terms to its distributors and selected customers identified through its network of foreign sales representatives.
Successful indirect investment will often be followed by some form of direct investment, which means that the company elects to participate directly in the production or sale of goods in the foreign market. There are essentially two means – participation and involvement. Participation is through an economic interest owned wholly or in part by the company. The economic interest can be a permanent establishment, central enterprise, or joint venture. A permanent establishment is a part of a company. It can be anything from a department such as a financial office to a single plant. A central enterprise is a complete entity. It includes corporations, partnerships, and the limited liability company. The third type of participation is a joint venture agreement between two independent parties whereby the two parties agree to join together to achieve a common purpose. To acquire an economic interest for participation in a foreign market, the company might establish a new interest, purchase the assets or stock of an existing one, or merge two existing interests. The extent of participation can be complete ownership (subsidiary), a majority interest less than 100%, or a minority interest.
The other method of direct investment is involvement by agreement or contract. By this we mean the company is involved in foreign manufacturing, and marketing by providing technology, technicians or managers. There are a wide range of strategies that might be used in this type of approach, including licensing agreements, industrial cooperation arrangements, turnkey agreements, and employment contracts. Under a licensing agreement, the company permits a foreign company to use its technology in return for a royalty fee. In an industrial cooperation agreement, the company licenses its technology and is paid off by being entitled to a percentage of the products manufactured under the license. A turnkey agreement means that the company agrees to build an entire plant in a foreign country in return for a fee. Under an employment contract, the company provides a foreign enterprise with technicians (i.e., a technical assistance agreement) or managers (i.e., a management contract) in exchange for fees and, in most cases, royalties based on output of products by the foreign enterprise realized through the support that has been provided by the company.
The optimal strategy for entering a new foreign market or maintaining a presence in the market following entry depends on a variety of factors, including the nature of the goods and competitive conditions in the target foreign market. Companies may use a single export strategy or two or more strategies in combination, and different strategies may be used in each of the foreign countries that are of interest to the company. Many U.S. companies adopt fairly aggressive direct sales strategies in Canada and Mexico while relying on intermediaries to prospect more distant markets until the company is ready to focus on, and invest greater resources in, pursuing market opportunities outside of North America. Changes in strategy are also common as the company learns more about a particular foreign market. For example, initial sales may be pursued through intermediaries, which can provide the company with an opportunity to get its goods known in foreign markets with minimal risk and learn more about how to operate an export business. In fact, commentators have advised that companies entering a foreign market for the first time should test the field through intermediaries and other indirect sales efforts for at least two years. However, as the volume of business grows and the company develops its own relationships with major customers, consideration may be given to funding the investment necessary to launch a local branch or subsidiary that would engage in direct sales activities.
Identifying applicable laws and regulations relating to the conduct of a particular business and establishing policies and procedures to ensure compliance with those laws and regulations is an important and challenging objective for any company, even when it is operating in just one jurisdiction. However, since commencement of activities in at least one foreign market has now become a natural milestone for almost all growing businesses in the U.S., regardless of their size in terms of employees, products, or revenues, compliance has become an even more complex activity as companies must learn how to cope with “international law” and the compliance standards and business ethics expectations of many countries. Unfortunately, this is no easy task since there are a number of U.S. laws and regulations that must be taken into account, and the variety of laws and customs found around the world often make generalizations very difficult in this area. Any company venturing into cross-border business activities must be prepared to invest the time and resources necessary to establish and maintain an effective global law and compliance program that fits the company’s specific cross-border business activities, such as exporting or importing products, licensing software or technology to or from foreign parties, and/or operating foreign subsidiaries, branches and joint ventures.
International commercial transactions create significant challenges for the parties and their counsel that extend beyond the normal domestic transaction in which both parties are from the same country and performance is to occur within shared borders. Cross-border arrangements involve performance in more than one jurisdiction by parties from two or more nationalities. In the event a dispute arises, it may be necessary for courts from more than one country to exercise jurisdiction or for international arbitration panels to assume responsibility for adjudicating the rights of the parties. It is obvious, therefore, that the parties run the risk that their affairs may be governed by unfamiliar laws and regulations that would not otherwise apply when contracting with a partner in the same country. In order to assist companies in identifying the legal framework that is likely to apply to a particular transaction, as well as the strategies that may be used to establish the most advantageous ground rules, counsel must be aware of the following:
In addition, many types of international commercial agreements will incorporate special rules that have been developed by widely recognized non-governmental international organizations, such as the International Chamber of Commerce (e.g., INCOTERMS). These rules are based on careful study and consideration of customary international practice and can be used as a means for clarifying the intent of the parties and establishing a common framework for interpreting and administering cross-border contractual relationships.
Any company venturing into cross-border business activities must be prepared to invest the time and resources necessary to establish and maintain an effective global law and compliance program that fits the company’s specific cross-border business activities, such as exporting or importing products, licensing technology to or from foreign parties, and/or operating foreign subsidiaries, branches, and joint ventures.
While some companies build global compliance procedures into their business operations from the very beginning, the more common situation is that the decision to implement a formal global compliance program is not made until the company already has some level of international activities. At that point, the first action that should be taken is to conduct a comprehensive audit of the company’s international operations to identify the business and legal risks that will arise in connection with existing and proposed cross-border activities and transactions. The goal of the audit process is to ensure that the company establishes adequate policies and procedures for complying with domestic and foreign laws, including U.S. export control, anti-boycott, and foreign corrupt practices laws. In addition, the audit of international business activities can be used to determine whether the company has adequate resources dedicated to global compliance issues. Once the initial audit has been performed, plans should be made to revisit the questions and issues on a regular basis to determine whether there have been any significant changes in the challenges that may be confronting the company in its international operations.
In general, a compliance program can be understood to be an internal management system that educates the officers and employees of an organization about laws and regulations relevant to the activities of the organization, and establishes processes and procedures to guide and monitor the behavior of those persons. There are no legally mandated standards for compliance programs; however, numerous attempts have been made to identify and define the essential elements of an effective compliance program. Each global compliance program should be tailored to the unique circumstances of the company, including the size of the firm, the foreign countries in which it operates, the level of regulation applicable to the firm’s business activities, and its past compliance history. In any case, however, the program should be broad in its scope of application and extend beyond all officers and employees of the company and its subsidiaries and branches to include outside consultants, advisors, independent contractors, and foreign business partners such as distributors, agents, sales representatives, licensees, and joint venture partners.
There is no recognized standard template for an effective global compliance program; however, the programs should include each of the following elements:
In addition, attention should be paid to establishing and maintaining a formal compliance organizational structure, including a senior compliance officer overseeing an independent staff. Global compliance programs should also include communications with foreign governments and foreign counsel relationships.
With respect to international compliance areas, the scope of the programs to be implemented by a specific company will generally be determined by the particular international laws that are most relevant in its industry as well as the specific foreign countries in which the company has material business activities. For most companies, this means that formal global compliance should begin with programs covering Export Administration Regulations, including export controls and licenses and anti-boycott regulations; the Foreign Corrupt Practices Act; sanctions programs approved by Congressional action and resolutions of the United Nations and administered by the Office of Foreign Assets Control; and import laws under Customs statutes and regulations. Beyond that, regional and local compliance units should be established to deal with the local laws of each relevant foreign jurisdiction. As the company’s global activities continue to expand, the law and compliance function can implement procedures and allocate specific resources for other risk areas, including employment and labor laws, protection of intellectual property rights, and compliance with foreign laws regulating inbound investment.
Alan Gutterman is a regular contributor to Corporate Counsel Connect. He is the Founding Director of the Business Counselor Institute and the International Center for Growth-Oriented Sustainable Entrepreneurship. His publications on governance counseling and other matters are available on Westlaw at the “Business Counselor” page.
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