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Doing Business Internationally: Implications for Corporate Counsel


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Martijn Steger, Vinita Bahri-Mehra and Martin G. Hu (Boss & Young) presented "Doing Business Internationally: Implications for Corporate Counsel" on February 23, 2006, for the Association of Corporate Counsel.

The presentation focused on the methods of conducting business internationally, special considerations in international agreements and recent legal developments in different global markets.

Published in: Law
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Doing Business Internationally: Implications for Corporate Counsel

  1. 1. Doing Business Internationally: Implications for Corporate Counsel S. Martijn Steger Vinita Bahri Mehra Martin G. Hu (Boss & Young) 23 February 2006
  2. 2. I. METHODS OF DOING BUSINESS INTERNATIONALLY • One-Shot/Occasional Sales Orders • Agent or Distributor • Contract Manufacturing • Off-shoring/Outsourcing • Joint Ventures • Acquisitions / Wholly-Owned Entities
  3. 3. A. One-Shot / Occasional Sales Orders • Test potential agent or distributor • Gain market information • Can be costly to manage customer who buys only sporadically
  4. 4. B. Agency • Authority to conclude contracts in the name of the principal? • Define amount of agent’s freedom to act and speak for your company and monitor it • Normally does not take title to goods • Local law might be more protective of agents than distributors • Exclusivity: Key factor in indemnity
  5. 5. C. Distributorship • Has roles as debtor and reseller • Control over customer information • Possibly more IP risk • Increasing protection of distributors under local laws
  6. 6. D. Contract Manufacturing • Heightened IP risks • Business practices and contractual terms are key to IP protection • Can minimize other risks by diversifying manufacturing globally
  7. 7. E. Off-shoring / Outsourcing • Factor in all Costs: Training, Time to Market, Customer Satisfaction, etc. • Roles of Contracts and Local Presence • Major political issue in certain sectors: » Health Care » Insurance » Banking
  8. 8. F. Types of Joint Ventures • Legal Entity owned by two or more persons for the purpose of a particular task or the operation of a long-term business • Contractual JV: Work together to accomplish particular project; e.g., certain R&D ventures • Equity JV: Two investors share P & L • Concentrative JV: Term in EU for JV that serves as separate economic entity • Clearance by competition authorities
  9. 9. G. Technology Licensing Agreements • Does US law prohibit the export of the technology to the JV entity / partner? • Does the other country require the transfer of the technology? • Who owns jointly developed IP / trade secrets? • Liabilities arising post-termination?
  10. 10. H. Marketing Alliances • Who controls the marketing decisions? • Who owns the customer information? • Antitrust issues?
  11. 11. I. Alliances in Service Sectors • Service companies are increasingly using joint ventures internationally » Expand quickly into unfamiliar markets » Utilize local knowledge » Acquire established distribution channels » Minimize costs and some risks
  12. 12. J. Role of Strategic Planning • Define all objectives • Prioritize those objectives • Identify opportunities and risk factors • Establish budgets by market • Establish the team responsible for global strategy and implementation
  13. 13. K. Process of Strategic Planning • Establishing a process is critical for making sure your company can manage the following: » Responsibilities of each team member, including local managers » Identify local market research needed » Adapt the strategy for each market » Establish an acceptable balance of risk, control and cost
  14. 14. II. SPECIAL CONSIDERATIONS IN INTERNATIONAL AGREEMENTS • Choice-of-Law Clauses • Choice-of-Forum Clauses • Modes of Dispute Resolution
  15. 15. A. Choice-of-Law Clauses • Should Ohio law govern? • Can Ohio law govern? • Apply more than one body of law? • Will a judgment or award rendered under Ohio law be enforced? • Drafting imperatives: » Exception for choice-of-law rules; » Exception for CISG?
  16. 16. B. Choice-of-Forum Clauses • Should Ohio be the forum? • Can Ohio be the forum? • Neutral forum? • Will a judgment or award rendered in Ohio be enforced? • Drafting imperative: » Be clear that all parties submit to the jurisdiction and venue of the chosen forum
  17. 17. C. Modes of Dispute Resolution • Mediation • Other ADR • Arbitration » 1958 NY Convention • Litigation » Enforcement of judgment?
  18. 18. III. RECENT LEGAL DEVELOPMENTS IN SELECTED MARKETS • India • China • Two Major Markets • Diverse Legal Systems
  19. 19. A. India I. INTRODUCTION • Businesses in the U.S. continue to shift a portion of their » manufacturing, » product development, and » customer support offshore to countries such as India • Lower cost structure and a qualified labor pool
  20. 20. 1. Hot Sectors for Investment in India • Foreign Direct Investment Permitted: • Information Technology Enabled Services (“ITES”) » Business Process Outsourcing (BPO); » Knowledge Process Outsourcing (KPO); » Call-Centers; and » Software development
  21. 21. Hot Sectors for Investment in India • Manufacturing Services, includes hardware components and software components. • Infrastructure Sector includes: » Roads and highways; » Ports; » Electricity Generation and Transmission
  22. 22. Hot Sectors for Investment in India • Drugs and Pharmaceuticals • Trading • Film Industry and Advertising
  23. 23. 2. Sectors Where FDI is Absolutely Prohibited • Retail Trading, except as discussed later • Atomic Energy • Lottery Business • Gambling and Betting Sector • Housing and real-estate business, except development of integrated township • Agriculture
  24. 24. 3. ENTRY STRATEGIES FOR FOREIGN INVESTORS • A foreign company planning to set up business operations in India has a number of options, as follows:
  25. 25. A. As an Indian Company • A foreign company can commence operations in India by incorporating a company under the Indian Companies Act, 1956, through: (1) Joint Ventures; or (2) Wholly-Owned Subsidiaries
  26. 26. As an Indian Company • Foreign equity can be up to 100% depending upon » the requirements of the investor » equity caps for certain areas of activity under the Foreign Direct Investment Policy
  27. 27. B. As a Foreign Company • Foreign companies can set up their operations in India through: • (1) Liaison / Representative Office • (2) Project Office • (3) Branch Office • Each can undertake only specified activities
  28. 28. As a Foreign Company • Liaison Office: Acts as a channel of communication between the principal place of business or head office and entities in India. • Liaison office can not undertake any commercial activity, directly or indirectly • Thus, can not earn any income in India
  29. 29. As a Foreign Company • Project Office: Companies planning to execute special/specific project in India can set up project/site offices in India • Designed to be temporary
  30. 30. As a Foreign Company • Branch Office: Foreign companies engaged in manufacturing and trade activities abroad are allowed to set up Branch Offices in India for certain purposes • Examples: Export/import; rendering professional services or consulting services; rendering services in IT, such as development of software in India
  31. 31. C. Build – Operate – Transfer (“BOT”) • Another structure used by some foreign companies is the BOT. This is mostly true for investments in the Call-Center Sector. • The BOT can be done within the structure of a JV or a wholly-owned subsidiary » Depending on any limits in FDI regulations
  32. 32. Build – Operate – Transfer (“BOT”) • In a BOT, the foreign company will have an option built into the agreement with a third- party service provider, by which it can elect to purchase the business unit • Concept: The unit is solely dedicated to business needs of the foreign company
  33. 33. D. Third-Party Outsourcing • The foreign company enters into an independent business relationship with a BPO or development company in India • Recommended for companies intending to outsource their non-core activities and for mid- sized companies, where setting up a unit in India may not be commercially viable
  34. 34. 4. WHAT TO LOOK OUT FOR – THE GOOD AND THE BAD • Taxation • IPR • Choice of Forum • New Developments
  35. 35. A. Taxation in India • India is moving towards reforming its tax policies and systems so as to facilitate globalization of economic activities. • Corporate tax rate for foreign companies is 40%. For domestic companies, 35.7%. • Tax holidays are available under schemes like Special Economic Zones; Software Technology Park Units; etc.
  36. 36. B. Intellectual Property Rights • A foreign company should be careful to maintain control over its IPR » Including with a BPO entity • Contractual provisions • Business practices
  37. 37. B. Intellectual Property Rights • Indian IP Laws do not provide for automatic assignments • So, critical to address “assignment of rights” issues in contracts, such as for Outsourcing
  38. 38. C. Choice of Forum • Enforcement of foreign judgments and awards • Issues related to injunction actions
  39. 39. D. New Developments • India recently opened its door for FDI in “Retail Trading.” FDI is now permitted up to 51% for companies dealing in “Single Brands” • India is reforming and lowering its custom and import tariffs to be at par with other ASEAN countries.
  40. 40. B. China The Foreign Investment Guidance contains four categories: • Encouraged Industries • Restricted Industries • Prohibited Industries • Permitted Industries
  41. 41. Exemption of Import Duty and VAT • Foreign invested enterprises (“FIEs”) under the “Encouraged Industries”, foreign invested R&D centers, FIEs with advanced technologies, and export-oriented FIEs • Equipment for use or technological improvement by FIE itself • Supervised by customs for 5 years
  42. 42. Forms of Foreign Investment • Processing Trade • Equity Joint Venture (“EJV”) • Cooperative joint Venture (“CJV”) • Wholly-owned Foreign Enterprise (“WOFE”) • Representative Office • BOT • Foreign Investment Fund • Sales Vehicles • Trading Company • Procurement Center • Foreign Invested Commercial Company • Holding Company • Merger and Acquisition
  43. 43. Processing Trade • Contractual arrangement with Chinese manufacturer • Processing trade agreement needs approval • Can import bonded raw material and equipment without ownership transfer • Can export processed products without duty and VAT • Can sell to domestic market through agent after payment of duty and VAT (subject to approval)
  44. 44. EJV • Independent legal entity with limited liability • Foreign Investment no less than 25% of registered capital • Capital contribution in the form of cash, technology, equipment, land use right or other assets. • To share profit and risk in proportion to investor’s share in the registered capital • Can sell self-manufactured products to domestic and overseas markets
  45. 45. CJV • May or may not be independent legal entity with limited liability depending on the election of investors • Foreign investment no less than 25% of the registered capital • Foreign investor may recover his/her investment in advance during the operation term, subject to approval of governmental authority
  46. 46. CJV • Can sell self-manufactured products to domestic and overseas markets • Share profit and risk in accordance with mutual agreement in CJV Contract • Other requirements similar to EJV
  47. 47. WOFE • Registered capital: Generally no less than USD 200,000 • Sell self-manufactured products to domestic and overseas markets
  48. 48. Representative Office • No registered capital requirement • No tax holidays; income tax levied on expenses • Not allowed to conduct direct sale but can conduct business liaison and market investigation and research
  49. 49. BOT • Build – Operate -Transfer (BOT) for infrastructure construction • May establish EJV, CJV or WOFE as BOT Project Company • Project Proposal and Feasibility Study Report should be approved by the National Development and Reform Commission
  50. 50. Foreign Investment Fund • Fund investment can be divided into two categories: securities investment fund and industrial investment fund • Foreign investment securities investment fund: • Minimum registered capital: RMB 100 million • Joint Venture; • Foreign shareholder: (1) no more than 49% shares in the fund; (2) its own paid-in capital no less than the amount equal to RMB 300 million
  51. 51. Foreign Investment Fund • Foreign investment fund shall invest (1) publicly listed stocks and bonds; (2) other kinds of securities approved by CSRC • Industrial investment fund: new laws in this area are currently under review and yet to be promulgated
  52. 52. Main Tax Preferential Treatment Main tax preferential treatment for a manufacturing legal entity is: • Can enjoy tax holiday in the first 2 profitable years and half income tax rate for the next 3 profitable years for a manufacturing legal entity with a business term of no less than 10 years • FIEs may obtain additional tax preferential polices/treatment through negotiation with local governments on a case-by-case basis
  53. 53. Sales Vehicles • Allowed to establish a trading company in the form of WOFE in Shanghai Wai Gao Qiao Free Trade Zone • Can conduct international trade, entrepot trade, internal trade within the Free Trade Zone, and domestic trade via qualified agent • Can enjoy income tax holidays in the first profitable year and 7.5% income tax rate for the next two profitable years for a trading company with a business term of no less than 10 years
  54. 54. Sales Vehicles Procurement Center • Registered capital: RMB 30,000,000 • Can conduct • procuring domestic goods for export, and providing warehousing, information consulting and technical services related to export • Importing raw and auxiliary materials and entrusting other enterprise to carry out processing and re-export • Importing and procuring samples which are essential in export • Can enjoy VAT tax-refund for export
  55. 55. Sales Vehicles Foreign Invested Commercial Company • Registered capital: no less than RMB 300,000 for companies providing retail services; no less than RMB 500,000 for companies providing wholesale services • Since Dec.11, 2004, foreign invested commercial company in the form of WOFE is permissible
  56. 56. Sales Vehicles Foreign Invested Commercial Company • Services Scope • Commission services • Wholesale services • Retail services • Franchising services • Approval Process • One month and a half for the preliminary approval at the provincial level; three months for the final approval by the Ministry of Commerce
  57. 57. Sales Vehicles Holding Company • Registered capital: USD 30,000,000 • Can assist invested enterprise in purchasing raw materials and equipment • Can sell invested enterprises’ products to domestic and overseas markets, and provide after-sale service
  58. 58. Sales Vehicles Holding Company • Can be qualified as Regional Headquarters if the holding company meets the requirement of registered capital of USD100,000,000 and other regulatory requirements • Regional Headquarters can conduct: import and sale of multinational company’s products
  59. 59. Close Economic Partnership Arrangement (“CEPA”) • Between Mainland China & Hong Kong Special Administrative Region • Background • Effective on January 1st, 2004 • Scope: Trade, Place of Origin, Service Industries (including retail & wholesale), Finance Industries & Investment
  60. 60. Comparison between CEPA & Foreign Invested Commercial Company Regulations CEPA Foreign Invested Commercial Company Regulations Effective Date 2004/01/01 2004/12/11* (2004/6/1) Registered Capital Retail: RMB 10 million (RMB 600,000) Wholesale: RMB 50 million (RMB 30 million) Retail: RMB 300,000 Wholesale: RMB 500,000 Parent Company Qualification • Qualified HK Service provider status • Economic Qualifications Retail: Average sales in the past 3 years: USD 10 million Asset of the previous year: USD10 million Wholesale: Average sales in the past 3 years: USD30 million (USD 20 million) Asset of the previous year: USD10 million Approval Route No Implemental rules yet. ① Provincial level ② MOC Approval Timeline Discretionary ① 1½ months at the provincial level ② 3 months at the MOC level
  61. 61. Merger & Acquisition of Domestic Enterprise Forms of M&A (1) Share Acquisition • To acquire the shares of domestic enterprise • To acquire increased registered capital of domestic enterprise
  62. 62. Merger & Acquisition of Domestic Enterprise Forms of M&A (2) Asset Acquisition • To acquire assets of domestic enterprise and then to use such acquired assets as capital contribution for the establishment of a FIE • To establish a FIE and to acquire the assets of domestic enterprise through such FIE
  63. 63. Merger & Acquisition of Domestic Enterprise • Acquisition prices shall not be obviously lower than the appraised price of the shares or assets to be acquired • Acquisition price shall be fully paid within 3 months after the issuance of the business license
  64. 64. Investment Shareholding Restriction • Many industrial sectors allow establishment of WOFEs after China’s entry into WTO • Insurance, Accounting, Telecommunication, Civil Airport, Education, Media and others still require the establishment of joint venture with Chinese partners
  65. 65. Nominal Shareholding Arrangement • Sign nominal shareholding agreement in a form of loan agreement or other acceptable agreements; • Legal or illegal: gray area; nominal shareholding agreement might be enforced as a commercial contract; • Difficult to remit profit abroad under strict foreign exchange control; • Ways to control the company under the nominal shareholding arrangement: • Control business license; • Control corporate chops; • Control bank accounts;
  66. 66. Legal Advice • This presentation is designed to provide an overview of a number of legal principles and considerations • As each legal issue is fact dependent, this presentation should not be used or viewed as legal advice, and your legal counsel should be consulted on the application of your particular factual situation to the current law • Copyright: 2006 Kegler, Brown, Hill & Ritter and Boss & Young for China portion
  67. 67. Thank You S. Martijn Steger Vinita Bahri Mehra Kegler, Brown Hill & Ritter Co., L.P.A. Ste. 1800, 65 E. State St. Columbus, OH 43215 Direct Dial: 614 462 5495 Fax: 614 464 2634 Email:;
  68. 68. Thanks to Martin Hu • Martin G. Hu • Managing Partner • BOSS & YOUNG • Attorneys at Law • 11th Floor, China Merchants Tower • 161 Lujiazui Road East • Shanghai 200120, P.R.China • Tel: 86-21-6886 9666 • Fax: 86-21-6886 9333 • E-mail: •