International business law report

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International business law report

  1. 1. Rennes International School of Business ESC RENNES Executive Master of Business Administration EMBA COHORT 1 (2003 - 2004) International Business Law Conducted by: Sylviane BAKERThe legal elements analysis for (GPTC) project LIBYA By Magdy A. Sattar April, 2004 Cairo, Egypt
  2. 2. EXECUTEVE SUMMARY .................................................................................................................. II1- REPORT OBJECTIVE. ............................................................................................................... 12- LEGAL ENTITY OF MENATEL. .............................................................................................. 13- CURRENT CASE STUDY (GPTC). ........................................................................................... 24- QUESTIONS NEED TO BE ANSWERED. ............................................................................... 45- LEGAL ELEMENTS IDENTIFIED. .......................................................................................... 56- SOLUTIONS ................................................................................................................................. 77- CONCLUSION ............................................................................................................................. 98- RECOMMENDATION ................................................................................................................ 99- REFERENCES .............................................................................................................................. 9EMBA CairoRennes International School of Business I
  3. 3. EXECUTEVE SUMMARYThis report is the second phase of an analysis to be added to the first phase which wasInternational Business analysis to have a clear and effective overall analysis. This report is tocover the legal elements analysis and a discussion of the General Post andTelecommunication Company (GPTC) case. As Menatel intention is to study the opportunityof providing a prepaid payphone network in Libya through the domestic provider of telephonelines GPTC.I will start with identifying the objective of this report, briefing Menatel legal entity and whatkind of a company is Menatel, who are Menatel share holders and their shares. By wearingthe hat of a Menatel executive I will start the analysis by explaining the (GPTC) case natureand circumstances, and what is (GPTC)? What facts need to be considered? A brief aboutthe legal system in Libya, What are the questions that need to be answered by the Menatel’slegal consultant, and all the legal questions that need discussion, through which I will identifythe main legal elements that need solutions such as protecting Menatel property in Libya,ensuring a good competition environment, see how to make sure that any contract with theLibyan part is executed and how to enforce all its articles in addition to discussing if there is adispute case what will be the solution?, finally how will Menatel protect its revenue and beable to transfer its profits with no risk of any kind of losing part of them for whatever reasons.Some of the solutions will be suggested and discussed before my final conclusion andrecommendations.EMBA CairoRennes International School of Business II
  4. 4. 1- REPORT OBJECTIVE.The purposes of this report is to analyse and discuss the (GPTC) case using the legal skillsacquired during the international business law module, and to show my understanding of thesubjects that have been discussed during the course. Also using what I have been taught in apractical way that will benefit me and my company. The objective is to write this report in aform of a draft memo or a business report to Menatel Company’s legal consultant for his legalsolutions to the (GPTC) case. Illustrating the General Post and Telecommunication Company(GPTC) case history and circumstances, what are the questions lighting in our mind, what arethe legal elements that need to be covered, our conclusions and feedback of the case andfinally a proposed recommendation of our side. 1 2- LEGAL ENTITY OF MENATEL. 2 2-1 Menatel in briefLate in 1998 Mena Communication Company (Menatel) was born as a joint stock company,under investment law number 8/1997 registered in 1998 under number 314030. Menatel isgranted a ten years; renewable license, to install, operate, and manage a telecommunicationnetwork of at least 30,000 public payphone. Egyptian shares are 53 % and foreign shares are47 %. By the end of 2003 Menatel has been operating a payphone network with near to30,000 payphones in operation, and work force of more than 400 employees. Menatel is inthe prepaid cards business, Menatel products are calls (minutes), local calls, national calls,mobile calls, and international calls. Menatel is selling its products through a payphonenetwork that covers all Egypt and managed by a payphone management system. These callscategory are Menatel profit contribution. With a centralized management style Menatelstructured into five main divisions headed by corresponding Director and five Branchesallocated all over Egypt, to form simple flat functional organizational structure. 2-2 Menatel objectives “The design, set up, installation, operation and provision of a national public payphone network in Egypt in accordance with the applicable laws and regulations”. “The manufacture of telecommunication equipment and related components”. “The company may establish other projects or change its objects within the scope of the investment incentives and guarantees law No. 8 of 1997. It may also subscribe to or participate in any manner in ancillary1 Company’s contract of incorporation Feb.19992 Menatel annual report 1999EMBA CairoRennes International School of Business 1
  5. 5. projects outside the scope of the mentioned law provided it benefits from the incentives and guarantees stated in that law only within the limits of its activities which conform with the fields determined in that law”. 2-3 Ownership and Equity DistributionEgyptian shares are 53% and foreign shares are 47%. The companys Shareholders are asfollows:The National bank of Egypt Egyptian 18%Telecom Egypt Egyptian 2%ADCOM Egyptian 9%EGYTEL Egyptian 20%France Telecom (FCR) French 47%CIIC Egyptian 2%ADI Egyptian 2% 3- CURRENT CASE STUDY (GPTC).What is the (GPTC)? What is the nature of this case? What are the circumstances of thiscase? To answer those questions a brief historical background about the case will help tounderstand it better. 3-1 Menatel sideAt the beginning of the year 2003 Menatel was faced by the drop of the economical situationin Egypt due to the Egyptian pound floating policy and the shortage of the hard currencywhich affected strongly the exchange-rate consequently Menatel revenue and of courseMenatel profitability. It was decided to take advantage of all Menatel resources andexperience to generate additional revenue to fulfil this gap. One of the projects was to analysethe opportunity of transferring Menatel highly skilled employees and the Know-how abroad.Providing a prepaid payphones network in Libya, our neighbour country, was one of theopportunities that needed to be analyzed. We did so, from business perspectives, and toEMBA CairoRennes International School of Business 2
  6. 6. complete our analysis we need to cover the legal issues for this project, this is where thisreport fit. 3-2 Libya side for Telecommunication sector (GPTC)For telecommunication sector in Libya, it lags behind in telecommunication development, and 3the figures prove so: State-owned sole provider (GPTC) for fixed telephone line. 605,000 fixed telephone lines. Penetration rate of just 11 %. State-owned sole provider (Al Madar) for mobile telecom. 50,000 mobile lines in 2002. Penetration rate of just 1 %. 4 3-3 Libya side for legal environmentsReference to the World Bank information data the below table shows some indicators that canbe helpful in understanding the legal system environment in Libya that affects any FDI. Governance Percentile Rank (0-100)Indicators (2002) Libya Egypt UAE USA UK Sweden Netherlands France Australia Voice & 4.5 22.2 35.9 90.9 93.9 99.0 98.0 88.4 94.4 accountability Political stability 31.9 34.1 80.5 56.2 73.5 96.2 95.7 70.8 89.7 Government 18.0 46.9 78.9 91.2 97.9 93.3 99.0 90.7 92.8 effectivenessRegulatory quality 4.6 38.1 78.4 91.2 77.9 96.9 99.0 85.6 94.8 Rule of law 18.0 57.7 80.4 91.8 94.3 96.9 94.8 87.6 95.4 Control of 24.7 47.9 84.0 92.3 94.3 97.7 96.4 89.2 93.8 corruptionThe table simply illustrates six indicators that affect the legal system environment in Libya andother countries divided into four categories; Menatel home base, Egypt The No. one attractive country for foreign investments in ME, UAE (Dubai) Some of the strong economies in the world, USA, UK, France Some countries with lost corruption indicator, Australia, Sweden, NetherlandsThe Libyan indicators compared to the above named categories are considered poor ones,for example if we compare the Libyan regulatory quality to the above, it’s the worst. Thecorruption control indicator is even worst than Egypt, this shows that the legal systemenvironment as a whole is incorrigible.3 Libya country profile (EIU 2003)4 World Bank information data (2002)EMBA CairoRennes International School of Business 3
  7. 7. 3-4 Libya side for Legal systemBefore identifying the legal system we need to know that the political system (which hasstrong effect over the Legal system as a source of jurisdiction), is a poor one, as theJamahiriya is theoretically governed by the people through local council, the General People’sCongress (GPC), but practically it’s governed by Colonel Qadhafi, as for the legal systemitself is based on the Italian civil law system and Islamic law, a mixed system of both sources,which is obviously approved by the Colonel, is characterized by separate religious courts, and 5no constitutional provision for judicial review of legislative acts.In addition to this brief history some general facts need to be considered: General Post and Telecommunication Company (GPTC), is the state- owned sole provider for the fixed telephone lines. (Network of 605,000 fixed 6 line) . It is a monopoly market. The Libyan legal system is based on the Italian civil law system and 7 Islamic law. Libyan political system is based on colonel Qadhafi’s vision; it’s a mix of Socialism and Islamic theories, which he calls the third international 8 theory. 9 Libyan exchange-rate system is poor. Libya is not a member of WTO or Vienna Sale Convention or any other conventions of this kind. The legal system environment is not trusted as the international 10 indicators approve . 4- QUESTIONS NEED TO BE ANSWERED.As a conclusion of the business analysis report we were faced by some questions related tolegal issues, such as: What are the custom dues and the taxes regulation? The monopoly status is it expected to have an end? What if not? Telecommunication and information laws do they exist? And if they do, are they enforced? Is the legal system strong or weak?5 CIA world fact book Dec.2003.6 Libya country profile (EIU 2003).7 CIA world fact book Dec.2003.8 CIA world fact book Dec.2003.9 Libya country profile (EIU 2003).10 World Bank information data (2002).EMBA CairoRennes International School of Business 4
  8. 8. What are the distribution channels conditions and characteristics? What about competition laws? The monitory policy and transfer of profit in hard currency ($)? Tax privilege for foreign (Egypt) investment? How can we protect Menatel property? To what extend the sovereign rights affect the investments and foreign property? To what extend the political system affect the legal system? What about corruption? What if the Libyan part infringes the contract? What about the Libyan labour law for expatriates? Are the international conventions (WTO) rules enforced in Libya? What if there is a dispute case?All the above questions can be combined to four main legal questions: What protects Menatel properties? What protects Menatel competition environments? What protects Menatel contract and how to enforce this contract? What protects Menatel revenue transfer? 5- LEGAL ELEMENTS IDENTIFIED. 5-1 Menatel Property RightsWhat guaranties do Menatel need to protect its properties rights against any private(individuals or groups), or public (individuals or groups) infringes. If menatel decides to investin the public payphones business in Libya in the form of a joint venture with the Libyan localsole provider for telephone lines (GPTC), does this contract protect Menatel intellectualproperty or is it better to have an exclusive license to build, operate, and transfer a publicpayphone network, or a combination of both as in the case of France Telecom (FCR) withTelecom Egypt (T/E) in Menatel case. Another point is to just transfer the technology, theKnow-how in a form of management contract. I think to answer this we need to know is(GPTC) independent enough to enforce a signed contract by her side and not as a follower ofthe general political trends of the Libyan government. Is (GPTC) capable of supportingMenatel against any public infringes and corruptions as in Egyptian case (Menatel faces thelocal governorates and districts corruption), T/E has no role or part in supporting Menatelagainst what we face of corruption, blackmailing and briberies in every single request ordealing with the local districts authority (we postpone the investments in some governoratedue to things like that). Another important question here is what if the Libyan governmentEMBA CairoRennes International School of Business 5
  9. 9. (Colonel Qadhafi) decides to expropriates Menatel property? Also does the domestic lawprotect intellectual properties or does the legal system in Libya enforce such law, I don’t thinkthat even such law exists, we still see goods soled in the “free” market her in Egypt especiallyin Marsa Matroh (a city near the Libyan border) with false logos (the famous one is Quaruneslogo stamped over all Philips merchandises pretending that it’s a Libyan product). So I thinkthe contract to be signed with the Libyan part need to cover these risks. 5-2 Menatel Competition environmentsAs there is only one sole provider for telephone lines (GPTC) the competition environment isan unhealthy one in this monopoly condition. Actually the telecommunication market is still adeveloped market and controlled by public entities (the political system have a strong impactover it) with a poor management. In this kind of environment it is obvious that there is nocompetition law to protect and ensure fair competition among the companies in the field oftelecommunications. So the question is what regulates the competition among all the marketplayers, the mobile, the normal in-door telephone, the public out-door payphones, and thehome prepaid telephone cards. What law controls the tariff policy? And actually is there adomestic law for telecommunication and information sector? So we are faced with thisunhealthy competition telecommunication market, and we also need to cover this risk in thecontract articles. 5-3 Menatel contract & Dispute SettlementWhatever the shape or the nature of the contract Menatel will singe (in case if the finaldecision is to invest in Libya), Menatel needs to insure the enforcement of the contractarticles, and to know what kind of law will be handling this contract, the Libyan domestic law,the Egyptian law, or the international law that is based on the international rules andregulations approved and agreed upon nations and states through international treatiesand/or through international organisational conventions. Also in any dispute case between thetwo parties, Menatel and the Libyan side, what will be the solution? Who will solve thisdispute? And what law will handle this? Knowing that Libya is no part of any internationaltreaty or convention for dispute settlement, this leaves us with the only law we can implementhere to enforce the contract articles and to have fair settlements in case of any dispute, whichis the domestic law. The roots of this domestic law are, the Italian civil law and the Islamic law(El shareaa), which in some ways have the same nature of the Egyptian law, also based onthe French civil law and the Islamic law (El shareaa). In this case the contract should bewritten by the domestic law and the Libyan courts will be responsible for any disputesettlement, which is risky.EMBA CairoRennes International School of Business 6
  10. 10. 5-4 Menatel Revenue & Profit TransferThe most important question is Menatel profit, what about both end of the profit equationMenatel expenditure and Menatel revenue? In this business, the prepaid cards payphonebusiness, the operator main expenditures are the prepaid cards and the network spare partswhich are provided by hard currency (Dollars or Euros), on the other hand the revenues are inlocal currency (the Libyan Dinar in this case). For Menatel side, we need to convert the profitto Menatel preferred currency (Dollars, Euros, or Egyptian pounds). Knowing that theexchange-rate system is a poor one in Libya, this introduces the importance of a kind offinancial contract or article along with the normal business contract, this financial contract canbe signed by a third party (an international bank for example) to share the risk of profittransfer. Another question related to Menatel profit is what about the custom dues and taxesregulations, the contract should cover this part of risk or benefit.But we do not want to forget that all the above discussed legal elements are stronglydependant on the legal system environment, regulations and rule of the law, corruption,government interference, and political system. 6- SOLUTIONSThere are four solutions (theoretical solutions), as to ensure them we need reliable legalsystem. A joint venture agreement with GPTC. A license for build, operates, and transfers by GPTC. A combination between both contracts. A consultant contract.The first three of the above points will have in away some common articles that can becombined to the following parts: Part one in which the company identification is illustrated: the company name, address, objects, duration, what laws and regulations control it, and its legal activities conforming with the fields determined by laws and regulation. Part two that illustrate the capital of the company: the authorized capital, the issued capital, number of shares, the share par value, the way the payment will be, and how this capital will be financially managed. Part three that illustrate the company management policy, how the company will be managed? Who have the right of management and decision? Who have the authorized signatures?EMBA CairoRennes International School of Business 7
  11. 11. Part four that illustrates the financial policy of the company: the company financial year, inventories, final accounts, reserves, distribution of profits, and the external auditor identification. Part five that illustrates solutions of any conflicts among the shareholders or the contract parties Part six that covers the dissolution and liquidation of the company in case of loses below determined and approved percentage of the company capital. Part seven in which the legal consultant is named and identified, also illustrating the laws and regulations that handle this kind of business and activities. Part eight which regulates the domestic tariff for calls by category and also type of provider that is to be clear and fair.In addition to the above general articles any other parts that provide legal insurance for thehigh risks illustrated by the previous discussions of the GPTC case might be added, which willbe: A part to protect Menatel properties against any nationalization or confiscation or expropriation risks by adding an insurance article to the contract that covers Menatel loss, or the company should be registered for a free zone, where the domestic authority have no power. A part to cover the risk of unfair competition environment in case Menatel suffers any loss a force majeure article is to be added to the contract in case these loses exceed certain percentage of the revenues. A part to cover the transfer of profit of Menatel by a financial agreement with an international bank to ensure the profit transfer through a financial cycle out side the domestic currency-exchange cycle and to ensure that all the accounts and the transactions are done through banks not related to the domestic monitory policy. A part also to cover the risk of the poor exchange-rate by adding a termination article to the contract in case the exchange-rate affects the profit by a certain percentage.But even with this, the first three solutions will not ensure minimizing the risk, which is why aconsultant contract could be the less risky solution. Menatel can send over one of its staff asexpatriate in the field of technical, commercial, or even financial, and sign a consultantcontract with the (GPTC) part that includes the following, in addition to the normal articles ofany consultant contract, the working hours, the working days, the introduction article, thecontract duration, the termination article, and so on, the most important article is the financialpart in which it should be clear that:EMBA CairoRennes International School of Business 8
  12. 12. The payment should be in advance and in hard currency. It should be transferred directly to Menatel account in Egypt. All expenses to be covered by the Libyan side. Monthly petty cash to cover local expenses with local currency. In case of contract termination, a three month salary should be paid to Menatel. 7- CONCLUSIONThe history of nations or states concerning international business and trading with other is areliable indicator of how well this nation respects and enforces its commitments andobligations towards the other party, and in our case (GPTC) Libya, the history of the Libyangovernment is not promising one. It is highly risky to have a long term business contract withLibyan parties, as the economical and the legal system is much related and affected by thepolitical system (which in our case is quite clear). Also all the legal system environmentindicators, political stability, government effectiveness, regulatory quality, rule of law, andcontrol of corruption indicating an unhealthy ruined legal system environment. 8- RECOMMENDATIONI strongly recommend not doing business with Libyan part, and if necessary, a very desperatesituation for Menatel, a consultant contract could be the minimum risky solution. Menatelcould make use of its strength in its skilled, highly trained, and efficient employees, and exportone or at maximum two of its staff for one year management contract with the Libyan party. 9- REFERENCES  Menatel internal data, Annual report 1999  Menatel regulation of the organization of the board activities  August RAY, International Business Law, Fourth Edition 2002  World Bank information data 2002, internet site.  CIA, world fact book Dec.2003, internet site.  EIU, Economist Intelligent Unit, Libya country profile 2003  Pre-reading materials & slides, Sylviane BAKER 2004EMBA CairoRennes International School of Business 9

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