International Business Law Advisor : Miami International Business Lawyer & Attorney : Santiago Cueto Law Firm : Florida and Global Business Litigation

The New York Times published an interesting article this past Sunday on the growing displeasure in Britain over use of the name “British Petroleum” by top federal officials in the United States in referring to the company responsible for the gulf oil spill.

It will be interesting to see whether President Obama will use the name "British Petroleum" tonight in his State of the Spill Speech.

If he does, it will be sure to stoke the embers of discontent into a firestorm of controversy among our friends in the United Kingdom.

The British will have good reason to be upset. And not just because the company did, in fact, formally change its name to BP several years ago.  

A large segment of the media has failed to highlight BP’s deeply intertwined financial interests with powerful forces in the United States.  

As the NY Times noted, 39 percent of the company is owned by American shareholders and six Americans – half the total – sit on its board of directors.

Here’s a partial list of America’s largest shareholders (courtesy of the NY Times):

The company’s single largest shareholder is the sprawling asset management firm BlackRock, based in New York City, which owned the equivalent of more than one billion shares of BP stock just two weeks before the Deepwater Horizon blowout, according to the financial analysis firm Capital IQ. (Bank of America owns a 34.1 percent stake in BlackRock.)

The second-largest American owner, and third largest over all, is State Street Global Advisors, based in Boston, with 307 million shares. After them are the mutual fund firm Capital Research and Management Company of Los Angeles, with 247 million shares, and the Vanguard Group, based in Malvern, Pa., with 140 million shares. Rounding out the top five is Franklin Resources of San Mateo, Calif., another publicly owned asset management firm, with 131 million shares.

More familiar names crop up further down the list, like Fidelity Investments, with 124 million shares; T. Rowe Price Group, with 93 million shares; and State Farm Insurance, with 79 million shares.

Then there are the banks: as of March 31, JPMorgan Chase held a respectable 76 million shares; Bank of America, 69 million shares; and Goldman Sachs, 42 million shares.

The Bill & Melinda Gates Foundation is another a major investor, with nearly 43 million shares

So to those watching President Obama's speech tonight thinking that BP is as an alien corporation stealthily invading United States waters and funneling the profits overseas, I say-- not exactly.

        -Santiago

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Ipsen , a global biotechnology company headquartered in Paris, and Rhythm Pharmaceuticals, a Boston-based biotechnology company that is developing peptide therapeutics for metabolic diseases, announced recently that they entered into a license agreement for Ipsen’s proprietary processes . Under the terms of the agreement, Ipsen granted Rhythm an exclusive worldwide license for research, development, and commercialization of its therapeutics program.

International license deals like the one forged between Ipsen and Rhythm happen every day and are a great way to maximize market penetration in foreign territory.

What is a Licensing Agreement?

So what exactly is a licensing agreement anyway? In basic terms, a licensing agreement is a contractual right that gives someone permission to do a certain activity or to use certain property owned by someone else. Increasingly, these agreements are being reached between companies located in different parts of the world.

An international license agreement doesn't have to be long or complicated. It can be straightforward and enforceable. However, many issues come up when drafting a license agreement. Laws relating to intellectual property can be extremely complicated. An attorney can provide invaluable help with drafting your agreement and enforcing it.

What Does a Licensing Agreement Look Like?

To give you some guidance on what a well-drafted International License Agreement looks like, I have embedded a sample Agreement below (solely for illustrative purposes):

International License Agreement

 Exclusive Property Rights

Preliminarily, before you start negotiating a license agreement, make sure you have exclusive property rights. While the law often changes in this area, the best way to lock in your rights is to register for any or all of the following that apply to your situation:

• Copyrights - original works of authorship fixed in any tangible expression form 
• Patents - inventions
• Trademarks - words, names or symbols identifying goods made or sold, distinguishing them from others

The application process can be rigorous, and you may have to disclose your ideas publicly. So you may also want to further protect your intellectual property by relying on laws.  Generally, these laws protect internally guarded ideas, formulas, codes or other information giving a business competitive advantage. A good example is source code to software.

6 key provisions

Now that you're sure you have exclusive property rights, you're ready to start drafting the licensing agreement. To give you some guidance, I've selected 6 key provisions that should be included in your foreign license agreements:

1.  Approval of licensed goods. When major U.S. manufacturers license products to companies abroad, they often arrange periodic inspections of the manufacturing facilities to ensure the quality of the goods (and also to monitor whether the licensee is siphoning off products or engaging in illegal labor practices). This offers you some assurance of consistency and quality for your work.

2.  Royalties and accounting. Payment of royalties from a foreign licensee can get tricky, especially when you consider issues like:

• currency conversion rates (probably best to always insist on payment in U.S. currency)
• how the money will be paid (best to use wire transfers), and
• what taxes may be applied against your sales or royalties (before signing the license, inquire into national or local tariffs or taxes that may apply).  Also, it's wise to include an audit provision (which allows you to inspect the foreign licensee's books).

3.  Jurisdiction. Sometimes referred to as personal jurisdiction, jurisdiction is the power of a court to bind the parties by its decision. Unless the company does substantial business in the states, the only way to get a foreign licensee into a U.S. court is to include a provision in the license agreement that requires the licensee to consent to U.S. jurisdiction.

4.   Choice of law. Every country (and every state) has laws as to how contracts are interpreted. The licensee will want the disputes to be resolved under the laws of its country. Try to include in your agreement that disputes will be resolved under U.S. law for copyright purposes and the laws of your state when it comes to contract issues.

5.  Arbitration. In arbitration, instead of filing a lawsuit, the parties hire a neutral arbitrator to evaluate the dispute and make a determination. You'll almost always benefit by agreeing to have disputes arbitrated and inserting this in your agreement. If possible, your agreement should award attorneys' fees to the prevailing party in the arbitration.
Try to get the licensee to agree to arbitrate the matter in the United States. If the licensee does not agree, there are three popular spots for international arbitration:
• London (The London Court of International Arbitration)
• Paris (The International Court of Arbitration of the International Chamber of Commerce), and
• Stockholm (The Arbitration Institute of the Stockholm Chamber of Commerce).

6.  Foreign registrations. If your works are protected by U.S. intellectual property laws like copyright or design patent law, you should determine whether it's worth your while to obtain foreign copyright or patent registration in the countries where your work is being manufactured or distributed (this will be the subject of a future post).You may be able to require that the licensee handle these administrative tasks

Include these provisions in your international licensing agreement and you'll be well on your way to international business success.

   -Santiago

P.S. Don't miss these previous posts on drafting international agreements, How to Structure an International Distribution Agreement. and How to Draft an LLC Operating Agreement for Your International Business Venture.

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I just arrived back from Lima, Peru, where our firm has an office. I last visited about a year ago and I’m incredibly pleased with the level of development that has taken place since then. It seems everywhere you look, there is another building going up. We’re not talking a property bubble here folks. The growth taking place in Peru is real and it’s sustainable.   

Peru's economy will likely expand by 6.3 percent this year--making it the fastest-growing economy in Latin America according to the Latin Business Chronicle.

The promising economic outlook comes on the heels of the U.S.-Peru Free Trade Agreement, which entered into force in 2009.  The agreement further enhances the overall commercial and investment climate by eliminating tariffs on many goods, accelerating the customs clearance process for U.S. imports, and strengthening the protection on intellectual property rights.

There are great things happening in Peru. If you haven’t’ already, you may want to consider expanding your international business operations to this prosperous Andean country. To guide you along, I’ve embedded the World Bank’s Doing Business Peru Report below, which is full of helpful  information: 

Doing Business in Peru

Additional Resources

Be sure to also check out these resources for additional information on setting up your business in Peru:

U.S. Department of Commerce

American Chamber of Commerce in Peru

Embassy of the United States in Lima, Peru

If you have any questions on how to set up your international business operations in Peru, please do not hesitate to contact me.

   -Santiago

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 The recent eruption of the Eyjafjallajoekull volcano in Iceland sent shock waves across the  global supply chain as the vital networks that move people, goods, and services around the globe were either incapacitated or severely disrupted.

Corporate in-house counsel and risk analysts were left to question whether the collapse of the air-freight segment of the global supply chain would allow a supplier or customer to claim relief from performance on the grounds of "force majeure."

 Nissan, for example,  had to temporarily cease production of cars in Japan (because it was unable to ship crucial components from a supplier in the Republic of Ireland), and BMW had to slow production in Germany and the USA.  And Lufthansa cancelled fuel orders. All cited "force majeure."

Given the crippling effect of volcanic eruptions and other disruptive events, it’s essential that you make your global supply agreement ironclad and volcano-proof with a well-drafted force majeure clause.

Here’s how to do it:

1. Understand It.

Force majeure means literally "superior force" event.  The purpose of a force majeure clause is two-fold: it allocates risk and puts the parties on notice of events that may suspend or excuse service.

The essential requirement of force majeure is that the invoking party's performance of a contractual obligation must be prevented by a supervening event that is unforeseen and not within the control of either party. Typical force majeure events include Acts of God, superseding governmental authority, civil strife, and labor disputes.

However, there is no standard set of events that constitute force majeure. Rather, force majeure remains a flexible concept that permits the parties to formulate an agreement that corresponds to their unique course of dealings and industry nuances. Moreover, recent events have increased the necessity to include additional, unthinkable events, such as terrorism and the threat of biological and chemical warfare. And now Volcanoes.

2. Negotiate It.

Don’t let the other party get one over one you in the negotiation stage of a force majeure clause. Be sure to scrutinize the events and allocation of risk to assure that the clause is not one-sided or unenforceable. You should also review the legal effect of enumerating an event in a force majeure clause. For example, a commonly invoked force majeure event is market fluctuation that renders a contract economically unfeasible. However, a majority of courts refuse to excuse performance on the theory that a contract is no longer profitable.

3. Draft It.

A well-drafted force majeure clause specifically enumerates the events (e.g. volcanic eruption) that will prevent performance and entitle a party to suspend or excuse an obligation such as the example below.

Neither party shall lose any rights hereunder or be liable to the other party for damages or losses, except for payment obligations, on account of failure of performance by the defaulting party if the failure is the result of an Act of God (e.g., volcanic eruption, fire, flood, inclement weather, epidemic, or earthquake); war or act of terrorism, including chemical or biological warfare; labor dispute, lockout, strike, embargo; governmental acts, orders, or restrictions; failure of suppliers or third persons; or any other reason where failure to perform is beyond the reasonable control, and is not caused by the negligence, intentional conduct or misconduct of the defaulting party, and the defaulting party has exercised all reasonable efforts to avoid or remedy such force majeure. The defaulting party must provide written notice of the force majeure event to the remaining parties within two (2) business days of such event."

4. Invoke It.

A party may invoke a force majeure clause if an enumerated event occurs that is out of the party's control and prevents performance of a contractual obligation. The burden of proof is on the party seeking to invoke the force majeure clause. The force majeure event may either suspend or excuse a party's performance. It is imperative that the party invoking a force majeure clause provide written notice to the other party. This permits the party that is not in default to mitigate against the effects of a force majeure event.

5. Plan for It

The affected party may mitigate against the effect of a force majeure event at the onset of the contract. For example, a party should consult an insurance broker to determine whether insurance is available to cover financial losses stemming from a force majeure event. If the stakes are high, then insuring performance may limit or prevent adverse consequences associated with nonperformance.

 Also, develop a "B" plan to mitigate the cost of a party's nonperformance. For business, investing in redundancy is a form of insurance. For example, if the contract involves services or supplies, find an alternative source in advance to avoid a single point of failure.

Follow the points I described above, and you’ll be well on your way to drafting a Volcano-proof  global supply contract.

    -Santiago

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In its latest World Economic Outlook, the IMF  indicated that the global economy will grow faster than expected-- at 4.2% this year. China’s growth is forecast at 10% 2010, with India also at a rapid 8.8 %.

Sub-Saharan Africa has weathered the crisis well and its recovery is expected to be stronger than in previous global downturns. In the depth of the crisis last year, world economic activity contracted by 0.6 % as world trade slumped and credit froze up.

Among the advanced economies, the United States is off to a better start than Europe and Japan.Among emerging and developing economies, emerging Asia is leading the recovery, while many emerging European and some Commonwealth of Independent States economies are lagging behind.

The Report is embedded in its entirety below.  Be sure to take a look at the graph on page 20 of the viewer. 

IMF World Economic Outlook 2010

China

 The IMF's upward revision of its forecast for China's 2011 gross domestic product growth shows it doesn't expect the pace of China's economic expansion to slow much from the 10% it is predicting for this year. It comes as overheating risks are rising in the world's third-largest economy even as Beijing has begun to gradually wind down the extraordinary stimulus program introduced in late 2008. 

Europe

In contrast to the fast economic pace of China and India, the IMF cut its growth forecast for the 16-member euro zone in 2011, and now expects its gross domestic product to grow 1.5%, having previously expected it to grow 1.6%. It left its 2010 growth forecast unchanged at 1.0%.

Europe’s economy will recover at a slower pace than other parts of the world, and could lag even further behind if concerns about the Greek government’s ability to repay its debt become more general.

The news is better for Poland and Turkey, which the IMF expects to be the fastest growing economies in emerging Europe, expanding 2.7% and 5.2%, respectively, in 2010 and 3.4% and 3.2%, respectively, in 2011.

Trend to Watch: As the World Economy Kicks Back into High Gear, Look for an Unprecedented Level of International Business Activity to Sweep the World in Mid-2011.

     -Santiago

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At its annual World Economic Outlook press conference recently, the International Monetary Fund announced that global economic growth was expected to increase for the first time in several years. This great news has sparked a flurry of activity in the launching of new international business ventures.

Perhaps the most common form of new business that I'm seeing is the Limit Liability Company (LLC).  While it's a great choice for many, I'm getting lots of questions about the Operating Agreement--the blueprint of an LLC..

Operating Agreement

While the term “Operating Agreement” is familiar to many entrepreneurs, it is rarely understood. In its purest form, it is a partnership agreement that can be specifically tailored to suit the needs of a wide variety of partnership structures. And because no two situations are alike, the Operating agreement provides a high level of flexibility in structuring a workable management framework.    

To give you some guidance on what a well-drafted Operating Agreement looks like, I have embedded a sample Operating Agreement below (solely for illustrative purposes):

LLC Operating Agreement

The sample Operating Agreement is just one of many ways that an Operating Agreement can be structured.  Please note that many States require that members enter into an Operating Agreement before an LLC is legally valid.

Although an operating agreement may be  either oral or in writing in many states, I suggest you have a written operating agreement. If you don't create a written operating agreement, the LLC laws of your state will govern your LLC.

Key Provisions

An effective LLC operating agreement addresses the following points:

• Purpose. Most startups have broad statements as to the LLC’s purpose. Usually, an Operating Agreement states that the LLC can engage in any “lawful” purpose. However, there are times when specificity is called for. For example, if the LLC is being used as a fundraising vehicle for the development of one real estate property, that may be specified in the Operating Agreement. Hence, in particular cases, it may make sense to limit the activities in which the LLC is permitted to engage.
• Capital Contributions.  Describes the capital contributions that the members have made in the LLC.  Most LLCs accomplish this by including an “Exhibit” at the end of the Operating Agreement. The Exhibit breaks down the member names, the initial amount of capital they invested into the LLC, and the percentage interest each member actually owns in the LLC. Unlike a corporation that often has share certificates evidencing ownership, LLC’s can and often do rely on the schedule in the Operating Agreement to set forth the relative interests of the members.
• Allocation and Distributions of Profits and Losses. Unlike a corporation, the equity a member has in the LLC and the amount of profits or losses that member is entitled to receive can be different. In contrast, in a corporation, a 50% shareholder would usually receive 50% of the profits of the corporation automatically. However, in an LLC, a member with a 50% Membership Interest could be configured to receive only 10% of the LLC’s profits/losses, which is something that can be specified and agreed to in the Operating Agreement.
• Admission of New Members; Transfer of Membership. One of the core functions of an Operating Agreement is to set out the mechanics and restrictions for the transfer of equity members ownership interests. One of the common approaches is the so called “right of first refusal” which grants the LLC and other members the opportunity to match any offer obtained from any third party by a member wishing to sell his or her.
• Dissolution of the LLC. Few want to address the possibility of having to “dissolve”. However, relying on State law alone can be disastrous. Rather, the partners should make sure the Operating Agreement sets forth the scenarios in which the LLC can or should be dissolved and the timing and mechanism to do so. Often the two major triggers are the unanimous consent of the Members or by application to a court for a judicial decree. However, many ventures have unique needs that may demand a different approach, which should also be dictated in the Operating Agreement.

Conclusion

An Operating Agreement is an essential LLC component. In the short term, developing one will assist the partners in identifying and articulating their particular concerns. In the long term, an Operating Agreement will be the reference guide for many if not all of the scenarios that may impact the partners’ relationship.  

If you have any questions, I’d be delighted to answer them.

          -Santiago

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The Financial Times recently reported that Royal Dutch Shell, one of Europe’s largest energy groups, signed a memorandum of understanding to form a $12 Billion joint venture with Cosan, a large Brazilian sugar cane processor. 

What if the parties had signed a letter of intent? Does it make a difference?

Probably not. It would generally mean that only one of the parties signed what is fundamentally an “agreement to agree.”  The main difference between a Memorandum of Understanding and Letter of Intent is the nature of the signatories. Otherwise they are largely the same.

• Number of Signatories Differ

In a Memorandum of Understanding, more than two parties may be involved but for a letter of intent only two parties are involved. Memorandums of understanding imply that all the parties involved have to be signatories, while a letter of intent needs only the party which proposes the agreement to be a signatory.

• Both Define Intent of the Parties

Like a Memorandum of Understanding, a Letter of intent is a document which describes an intention to take some action. From the business point of view, it is defined as an agreement between two parties before the agreement is finalized. It is basically a compilation of key points of an agreement between the two parties who intend to conduct a business transaction.

When announcing a joint venture like the recent Royal Dutch Shell-Cosan deal, memorandum of understanding and letters of intent are signed for the purpose of declaring that the various parties involved are negotiating a contract. They are something that parties fall back on if the negotiation between the parties is sabotaged. Simply put, it is the agreement signed prior to the final agreement.

• Both Can Be Binding

Both Memorandums of understanding and letters of intent can resemble a written contract but usually not binding on the parties in their entirety. Many of these agreements, however, contain provisions that are binding, such as non-disclosure and non-compete agreements. Be careful, as these agreements may also be interpreted as binding in their entirety to the parties if they too closely resemble a contract.

To give you some guidance on how they can be used, I have embedded some sample agreements below (solely for illustrative purposes):

 Memorandum and Letter of Intent

While both agreements are nonbinding, note that a section of the letter of intent is binding but only as to confidentiality. This is just one of many ways that you can draft either of the agreements to suit your needs.

If you have any specific questions, I'll be delighted to answer them.

     -Santiago

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 Foreign mergers account for the majority of worldwide M&A activity. With the global economy on the rebound, cross-border M&A activity is expected to reach record levels.  The numbers of cross-border deals currently in the works include:

• Indian personal care products maker Godrej Consumer Products Ltd is in talks with Argentina-based hair color products firm, Issue Group Co, for a possible buyout;
• German rail and logistics operator Deutsche Bahn plans to offer 2.7 billion euros including debt for British train and bus operator Arriva;
• Astellas Pharma, Japan's No.2 drugmaker has placed a bid on U.S. company OSI Pharmaceuticals;
• U.S. power group AES has lodged a bid for the $481 million Ballylumford power station in Northern Ireland which is being sold by Britain's BG Group; and
• Norway's Telenor said it was very close to closing a deal with Russia's Alfa Group to merge their Russian and Ukrainian mobile operators.

I always find it interesting how foreign business groups are able to negotiate and close these mega-deals with so many cultural issues to overcome. A ground-breaking research paper published last month by the University of Michigan’s Ross School of Business takes a close look at this fascinating dynamic.

The study is a must read for anyone wanting to gain an advantage for their clients in negotiating international deals. The paper, Lost in Translation: The  Effect of Cultural Values on Mergers Around the World, examines the role of national cultural values on the incidence, gains, and bargaining process in both domestic and cross-border mergers.

In a comprehensive sample of 116,513 worldwide mergers over 1991 to 2008 the authors conclude that culture has a significant and economically meaningful effect on the volume of mergers. For ease of reference the paper is embedded in its entirety below:

The Effect of Cultural Values on Mergers Around the World

Among the paper’s findings is that, in cross-border deals, the volume and gains from mergers are smaller when countries are more culturally distant. While I think this point might be obvious to some,  it's important to highlight that cultural distance can be minimized with a greater appreciation and understanding of  the others' culture. Doing so will build trust and capture a larger share of combined gains.

Trend to Watch: While Cross-border M&A Activity Will Increase Globally, Look for Emerging  Markets to Take the Lead.

    -Santiago

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Brazil will lead mergers and acquisitions in Latin America

I’m seeing a lot of M&A activity taking place in Latin America these days.  According to Bloomberg New and Latina American Advisor, takeovers are at their strongest pace in a decade as the economy recovers and credit markets continue to improve.

While most have the activity is taking place in Brazil and Mexico, Colombia, Chile and Peru are also getting into the action.

There are also a lot of companies pursuing IPOs, trying to follow the steps of Banco Santander Brazil's success. Be sure to see my previous posts on the subject,  Emerging Market IPOs: 6 Risk Factors to Consider and Structuring IPO Deals in a Rebounding Global Economy.

Trend to Watch:  Look for Small to Medium-Sized Players in the Following Sectors to Take the Lead in M&A Activity:  Beverage and Bottling,  Real Estate Development,  Consumer Goods and Commodities.

      -Santiago

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 Oil and Steel Industries to Benefit

This is the third in a series of posts dedicated to the BRIC countries. While the late John Hughes would have appreciated the titular tribute to his Breakfast Club classic, the series is meant to stimulate a robust discussion among those interested in the subject.

For the uninitiated, BRIC is an acronym coined by Goldman Sachs to refer to the red-hot economies of Brazil, Russia, India and China. According to the investment group’s projections, the BRIC countries could become among the four most dominant economies by the year 2050.

Part I of this series centered on Brazil with the post Hey Brazil--Take Your Time With Those BITs, I Can Get Them Somewhere Else! Part II of the series focused on India with the article India Needs Massive Investment in Physical Infrastructure to Catch China Growth.  

Let's move on to Part III  with some brief yet interesting news concerning China and Brazil.

Steel and Oil Deal

The two countries signed a series of trade and investment agreements today at the BRIC summit taking place in Brazil. The deals are aimed at boosting trade and energy cooperation between the these emerging giants. Expect to see more of these deals in the near future.

The biggest deal announced was China's pledge to build a steel plant at a Brazilian port.  The steel plant would be China's biggest investment ever in the Latin American country. Under the agreement, China's Wuhan Iron and Steel will build a plant in a port in Rio de Janeiro state with Brazilian logistics firm LLX Logistica.

Another major announcement was the strategic development deal reached between China's Sinopec and  Brazil's state-run oil giant Petrobras.

The agreements reached in the steel and oil industries are not surprising.

Among other things, Brazil's recent discovery of vast offshore oil reserves has opened a new area of potential cooperation with resource-hungry China, which last year agreed to lend $10 billion to Petrobras in return for guaranteed oil supply over the next decade.

Trend to Watch: Look for Stronger Ties to be Forged Between China and Brazil in the Next 18 Months

      -Santiago

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The folks over at BusinessInsider were kind enough to post  the presentation from Nomura Chief Economist Richard Koo's speech to George Soros' Institute for New Economic Thinking this weekend. The presentation lays out in clear detail how the U.S. and Europe are in the midst of a balance sheet recession.

Koo draws comparisons between the Japanese example, exhibited from 1990-2005, and what the U.S. and Europe are about to experience.

This presentation is required reading if you want to get an ideas of where we are headed based on Japan’s 15-year economic slumber. Or maybe not.

Gary Haubold does a great job of casting doubt on Koo’s analysis in his post A Rebuttal To Richard Koo: Why The US Is Not Inevitably The Next Japan.

NOMURA Research Presentation

Are we headed down the same path as Japan? What do you think?

   -Santiago

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Demand for Carbon Credit Trading is Expected to Skyrocket

The Tokyo Metropolitan Government recently launched Asia's first mandatory program to cut carbon emissions. The program will cover approximately 1,400 industries, commercial buildings and large office buildings within Tokyo. According to the Sustainability and Climate Change Reporter, “the Tokyo program is being touted as a potential model that could spread throughout Japan and other cities in Asia.”     

The program is also noteworthy because it's the world’s first urban cap and trade program to cover office buildings as emissions reduction targets.  

Tokyo’s ground-breaking initiative echoes Arnold Schwarzenegger’s efforts as governor of California to push carbon emissions cuts on a state basis ahead of national US action.

The program will be rolled-out in two phases. In the fiscal 2010-2014 first phase of the scheme, the targeted entities will be required to cut carbon dioxide emissions by either 6 percent or 8 percent from base-year levels that are calculated from average emissions over a period of three consecutive years between fiscal 2002 and 2007.

In the fiscal 2015-2019 second phase, they will be required to slash emissions by 17 percent from their base-year levels.

To meet the emissions-cut targets, offices and factories in the capital can either make efforts on their own, such as updating to energy-saving equipment, or purchase carbon emissions credits from other entities that have reduced carbon emissions.

Actual trading under the mandatory system in Tokyo is set to begin in fiscal 2011 after data on reduction efforts in fiscal 2010 are finalized.

Tokyo Cap and Trade Program

Interestingly, Tokyo's CO2 trading scheme was launched just as Japan's Sony Corporation announced its Road to Zero global environmental plan. The plan is a long-term goal of achieving a zero environmental footprint by 2050.

Zero by 2050? Now that's a worthy goal.  I'm not aware of any company in the U.S. having established a similar program. Does anyone out there know of one?

I'd hate to see another country take the lead on this.

  -Santiago

P.S.  My interest in international cap and trade systems stems from an innovative program my firm launched to accept carbon offset credits as partial payment for legal fees. Our firm’s program was the subject of a Wall Street Journal article, which you can read about here.

Be sure to read my two previous posts on the subject:

• Are Carbon Credits the New Global Currency?
• The International Business Law Advsior Goes to Washington to Lobby for Global Warming Legislation

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The World Bank Group's Doing Business Project recently released the 2010 edition of its Paying Taxes Report. The report is unique in that it measures the ease of paying taxes across 183 economies, by assessing the time required for companies to prepare and file tax returns and pay taxes, and also the company’s total tax liability as a percentage of commercial profits.

The report measures three separate aspects of paying taxes. Two of these relate to the tax compliance burden and one to the cost of the tax burden.

Take a look at the report below:

Paying Taxes 2010 Global Report (via World Bank)

According to the report, more economies reformed their tax regimes than in any previous year of the study. A few economies such as Russia and Korea reduced corporate income tax rates or accelerated previously planned reform programs as part of economic stimulus packages.

In several economies small and medium sized businesses benefitted from other crisis response measures. Australia, for example, sought to encourage investments in assets by increasing capital allowance Twelve other economies introduced similar measures, including the Czech Republic Korea and Lebanon. Five economies reduced property tax rates: Denmark, the Netherlands, Niger, Portugal and Singapore.

Because there's a lot to digest, here's a quick snapshot of some of the Report's more interesting facts:

• The five easiest countries in which to pay corporate taxes are Maldives, Qatar, Hong Kong, UAE and Singapore:
• The top reformer was Timor-Leste, which introduced a new tax law, streamlined the business tax regime, and simplified tax administration.
• Between June 2008 and May 2009, 45 economies made it easier to pay taxes as measured by Doing Business, almost 25% more than in the previous year.
• Eastern Europe and Central Asia had the most reforms for the third year in a row, with 10 economies reforming.
• Around the world on average, the case study company faces a total tax rate (percentage of profit paid out in taxes) of 48.3% and spends 286 hours a year, and makes 31 tax payments, to comply with tax laws.
• The time to comply with tax requirements ranges from 212 hours a year on average in OECD high-income economies to 638 in Latin America.
• The number of payments also varies widely. The company makes the most payments in Eastern Europe and Central Asia, 53 a year on average. It makes the fewest in OECD high-income economies, just 14 on average.
• Survey respondents identified the way tax audits are dealt with and the approach of the tax authorities as the elements of the tax system most in need of improvement.
• Five European Union economies implemented tax reforms in 2008/09: Belgium, the Czech Republic, Finland, Poland, and Spain.
• In the EU the average total tax rate for the case study company fell from 46% to 44.5%. This reflects in part cuts in the corporate income tax rate implemented in 2007/08 in Germany and Italy.
• The average time required to comply with taxes in the EU is 232 hours, down from the previous year’s 257, with labor taxes requiring the most time (117 hours). The fall reflects continued efforts in implementing and enhancing electronic filing and payment systems and in streamlining regulations and improving tax returns to simplify compliance.
• While VAT stems from a common legal framework in the EU, the time required to comply with domestic legislation varies. VAT compliance takes 30 hours in Ireland, for example, and 178 in the Czech Republic.
• The number of taxes levied on the company averages 9.5 globally. The average for the EU is almost 11.

    -Santiago

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Swiss Parliament Must Still Approve Amended Protocol

The CBS news magazine 60 Minutes featured a story on January 3, 2010 concerning the tax controversy between Switzerland and the United States over Switzerland's secretive banking industry. At the time, it appeared there would be no end in sight to the impasse.

60 Minutes: A Crack in the Swiss Vault

Yesterday, however, the United States and Switzerland signed a landmark agreement to allow the Swiss government to provide information to the IRS on U.S. account holders of Swiss bank UBS. The agreement reached in Washington D.C. amends the income tax treaty between the two countries.

Watershed Moment for Swiss Banking

The agreement marks a watershed moment in the history of Swiss banking and its secrecy laws, which make the disclosure of client names a crime under Swiss law. With the Swiss government now on board, only Parliament’s approval is necessary to proceed with the disclosure.

In August 2009, the U.S. and Switzerland reached an agreement, under which the Swiss government was to hand over to the IRS for investigation information on approximately 4,450 UBS account holders.

In January, a ruling by the Swiss Federal Administrative Court threatened to torpedo the US-Swiss agreement. The court found shortcomings in the deal which the amended protocol now addresses.

Status as Bilateral Tax Treaty

The new protocol to the U.S.-Switzerland treaty establishes the necessary legal basis to allow the Swiss government to fulfill its obligations under the August 2009 agreement to provide information on UBS account holders to the IRS.

The protocol is designed to ensure the legality of the information release by raising the August 2009 agreement to the level of a bilateral tax treaty. According to the Swiss government, “the UBS Agreement now takes precedence over the older and more general convention, and permits Switzerland to provide treaty assistance in cases not only of tax fraud, but also of continued and serious tax evasion.”

However, the August 2009 agreement, having been raised to the level of a treaty, now must be ratified by the Swiss parliament. The Swiss government will not hand over any names until that ratification occurs, except in cases of persons who consent to the transfer or who have reported themselves to the IRS under last year’s voluntary disclosure program.  A non-conformed copy of the new protocol is below:

Amended Protocol Between the U.S. and Switzerland Amending August 2009 Agreement

Agreement Marks a Shift in Swiss Tax Law

Swiss law considers tax evasion — which it defines as the underreporting of income or filing incorrect returns — as a civil violation, different from tax fraud, which it views as a serious crime involving ill-gotten gains and the use of elaborate sham entities to hide assets. The I.R.S. views both tax evasion and tax fraud as criminal offenses.

The new protocol is significant because it shows that the Swiss government now effectively agrees with the American view that tax fraud and tax evasion are similar criminal offenses.

Switzerland to Remain International Banking Capital

Despite the changes, there are a number of reasons that Switzerland will continue to serve as a safe banking haven.  Apart from the controversy over its secrecy laws, Switzerland still has its advantages in safeguarding funds against such uncertainties as coup de main, coup d’etat, revolution and hyperinflation.

Moreover, a host of multinational corporations have recently moved their European headquarters to the Swiss power centers of Zurich, Geneva and Zug because of the rock-bottom tax rates these Cantons offer. I wrote about these tax advantages in an earlier post-- Why Relocating to Switzerland May be the Best Corporate Strategy

The current surge in the Swiss franc further serves to highlight Switzerland's appeal to international banking.  And the skiing is not too bad either.  

Swiss banking is here to stay. What do you think?

    -Santiago 

*This post follows-up on two previous articles I have writton the UBS tax controversy,  UBS Strikes Deal in U.S. Tax Case: The End of Switzerland's Bank Secrecy Rules a Boon to Singapore Banking? and Swiss Banks Shutting Out U.S. Clients Due to Unprecedented Banking Oversight.

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India Needs Massive Investment in Physical Infrastructure to Catch China Growth

This is the second in a series of posts dedicated to the BRIC countries. While the late John Hughes would have appreciated the titular tribute to his Breakfast Club classic, the series is meant to stimulate a robust discussion among those interested in the subject.

For the uninitiated, BRIC is an acronym coined by Goldman Sachs to refer to the red-hot economies of Brazil, Russia, India and China. According to the investment group’s projections, the BRIC countries could become among the four most dominant economies by the year 2050.

Part I of this series centered on Brazil with the post Hey Brazil--Take Your Time With Those BITs, I Can Get Them Somewhere Else! Let’s pick things up with India.

Of all the emerging markets, India is the one for international business interests to watch. As the U.S., Europe and Japan struggle to recover from the worst recession in 60 years, India’s stock market index has soared over the last 12 months and its economy may grow 8.2 percent in the year starting April 1, the fastest in two years according to India’s finance ministry.

The video below does a great job of capturing India's ebullient optimism in its race to become the emerging market leader:

At what may come as a surprise to some, India's economy looks to be rebounding from the downturn in better condition than China's. India doesn't appear to be facing the same degree of potential dangers and downside risks as China, which means policymakers in New Delhi might have a much easier task in maintaining the economy's momentum than their Chinese counterparts.

According to Nouriel Roubini, the economist who predicated the financial crisis,

“China might be facing a greater challenge in maintaining its double-digit growth rate than India is facing in achieving a double-digit growth.”

Roubini added that he favors the “more balanced economy of India” over China.

What India needs most, Roubini cautioned is “physical capital in the form of infrastructure that can be provided by both by public and private investments or private-public partnerships.”

I agree with Roubini’s assessment concerning India’s urgent and primary need for investment in physical infrastructure. On my visit to India recently, I was stunned at the level of underdevelopment of the country’s ports and interior roadways compared to the economic centers of China.

Unless massive investments are made in these areas, India’s competitiveness among emerging markets will be sure to suffer.

If, however, India manages to make the proper investments and stay the course, it will give its BRIC brethren lots to worry about--just take a look at the graph below: 

India's upward trajectory is hard to ignore. If you're interested in learning more about investing in or doing business in India, be sure to visit the Embassy of India Washington D.C. website. There you'll find a host of resources to set you on the right path. Of course, you can contact me directly and I'd be delighted to point you in the right direction.

What do you think? Is India poised to take the lead among emerging markets?

Trend to Watch: Although not the most likely scenario, it is possible that Indian growth could overtake China's within the next few years should China slow and India maintain its current pace.

-Santiago

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 The World Trade Organization (WTO) forecasts a significant increase in global trade this year as international commerce continues its rapid recovery. Emerging market exports will lead the recovery with a rise of 11% compared to with 7.5% for developed  economies.

This comes as great news after the unprecedented speed of the collapse in world trade volumes in late 2008 and early 2009.

How to take advantage of the surge of international trade volume in 2010? Why not start by going through some of these recent posts:

• How to Set Up a Business in Japan (And Other Business Wisdom)
• How to Get an Export License in 7 Steps
• From Startup to Global Domination in 60 Snuggies or Less (or What the Snuggie Can Teach You About Going Global)
• Setting Up Your Internet Global Sales Empire 

       -Santiago

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Countries will soon be able to apply for internet addresses using characters from their national languages.

The first Internet addresses containing non-Latin characters from start to finish will soon be online. In January, the Internet Corporation for Assigned Names and Numbers, known as ICANN, paved the way for an entire domain name to appear in Cyrillic for Russia and Arabic for Egypt, Saudi Arabia and the United Arab Emirates.

 Added to the list this week are suffixes in Chinese for Hong Kong; Sinhalese and Tamil for Sri Lanka; Thai for Thailand and Arabic for Qatar, Tunisia and the Palestinian territories

Since their creation in the 1980s, Internet domain names such as those that end in ".com" have been limited to 37 characters: the 10 numerals, the hyphen and the 26 letters in the Latin alphabet used in English. Technical tricks have been used to allow portions of the Internet address to use other scripts, but until now, the suffix had to use those 37 characters.

With the addition of non-Latin suffixes, Internet users with little or no knowledge of English would no longer have to type Latin characters to access Web pages targeting Chinese, Arabic and other speakers.

Under ICANN's Fast Track Process, nations and territories can now apply apply for Internet extensions reflecting their name – and made up of characters from their national language. If the applications meet criteria that includes government and community support and a stability evaluation, the applicants will be approved to start accepting registrations.

The coming introduction of non-Latin characters represents the biggest technical change to the Internet since it was created four decades ago," said ICANN chairman Peter Dengate Thrush. "Right now Internet address endings are limited to Latin characters – A to Z. But the Fast Track Process is the first step in bringing the 100,000 characters of the languages of the world online for domain names."

This latest development in the globalization of the internet will have a dramatic effect on international business, as billions of more people will have the ability to access internet sites in their native language. The opportunities for business people everywhere are enormous.

For more information on the ICANN Fast Track program please visit: http://www.icann.org/en/topics/idn/fast-track/ 

Trend to Watch: Look for Internet Use to Explode as Non-Latin Domain Names Open the Web to the First of Billions of People Who Are Unfamiliar with Latin Characters.

     -Santiago

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                  Fall Seven Times, Stand Up Eight.

                                 -- Old Japanese Proverb

Remember Japan? Well, Michael Shuman of Time magazine does. He’s written a compelling article appearing in next week’s issue. While the focus of the article, Turning Japanese,  is on Japan’s recent economic and political paralysis, Michael correctly points out that, given the current state of the global economy, Japan’s economic stability is enviable:

While much of [Asia] is still hurtling along the path of development — a blinding whirl of frenetic construction and perpetual change — Japan is a vision of stability, a nation that has everything others in Asia want, and has already had it all for decades. Money. Technology. Global brands. A seat at the table with the powerful countries of the industrialized world.

Japan Offers Better Investment Climate Than in Years Past

Despite the fiscal bumps and bruises it has suffered in the past several decades, Japan is on the brink of a renaissance.  The historic victory of Prime Minister Yukio Hatoyama in last year’s election ushered in a renewed sense of optimism in the hopes of hanging on to Japan’s standing as the world’s third largest economy (behind the U.S. and China).

Under the slogan "Invest Japan," Japan is now working to establish a better and more effective investment environment for foreign investors.  The Japan External Trade Organization (JETRO)  published a comprehensive ebook to help foreigners understand the  Laws & Regulations On Setting Up a Business in Japan.

The ebook provides information on laws, regulations and procedures on registration of incorporation, visas, taxes, human resource management, and trademark and design protection systems.

Laws and Regulations for Setting Up a Business in Japan

For business owners looking to expand abroad, there’s never been a better time in the last two decades to set up shop in Japan.

Business Entities: Four Options

There are four primary types of legal entities for a business. Tax matters aside, operation of the four different types of business entities is fairly similar. You can open a bank account, hire, rent office space, lease equipment, enter into contracts, and potentially sponsor a visa with any of these four primary legal entities.

When starting a new business in Japan your four options are:

• Branch office for your pre-existing (i.e. foreign) corporate entity. Opening one means that corporate headquarters will still be responsible (i.e. have unlimited liability) for the branch office.
• Corporate subsidiary. This is known in Japan as a kabushiki kaisha or KK. A KK is analogous to Delaware-incorporated subsidiary (a “C-corporation”) one might set up, if doing business in the U.S. With a KK, a shareholder’s liability is generally limited to the extent of his or her capital contribution. In some cases, the shareholder may be personally liable for certain actions taken, through the subsidiary.
• Japanese Limited Liability Corporation (LLC), or what is known as a godo kaisha or GK.
• Liaison office. While it has limited liability, the activities the business is permitted to engage in are also limited. These are restricted to primarily nonprofit activities, such as market research, information gathering or preliminary advertising.

If you already have an established connection or business relationship with someone in Japan whom you are coming to work for specifically, a branch office is often adequate.

Setting up a liaison office might be beneficial in the early stages of developing your business. It will allow you to get more information about opportunities and your potential customer base as well as what legal structure will best serve your needs.

Representation in Japan

In the initial setup stages you need to know whether or not your business will have representation in Japan, in the form of a director. In some cases you will want one. In others, you will be required to. For example, pre-incorporation, you might not need one with a branch office. On the other hand, you will definitely need one for a KK corporation. Your director must be a resident of Japan, though not necessarily a national.

One thing to keep in mind is how much trust you place in this person. As a director, he or she will be able to enter into contracts and create potential legal obligations for your new entity. Depending on how you feel about this, your level of comfort with potential liability may dictate which direction you want to go with your business entity. For example, you may want limited liability as a KK instead of a branch office.

Additional Resources

Be sure to check additional resources such as the Doing Business Japan website, Doing Business 2010 Data. With Japan generating unprecedented international interest, you won't want to miss out on all the opportunities.

Trend to Watch: Look for Japan to Offer an Increasing Amount of Incentives to Attract Foreign Direct Investment

    -Santiago

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 There’s never been a better time to expand your business internationally. Opening up revenue streams from other parts of the word is one of the best way to send your sales soaring to new heights. The good news is that most products can be exported without having to obtain a U.S. export license.  

However, if you are exporting anything on the U.S. Department of Commerce Control List (especially technology and chemicals), chances are you are going to need an export license for these items.

This is simply an administrative measure--you can sell abroad, even complex products like medical devices and computer software, if you make sure first to obtain the proper export license.

Does Your Product Require an Export License?

While the majority of U.S. exports do not need a license, understanding exactly what is regulated is a matter of classifying your product and identifying the target market. An excellent overview of the export license process can be found at the Department of Commerce export controls site, which includes a breakdown on licensing.

Also be sure to check out the Export Administration Regulations. The regulations identify and explain what goods fall under the law and which countries are off limits. They also set forth  your responsibilities under the law.

The Export License Application

Applying for your license is really just a matter of following the steps below:

1.   Check to see that your export is under U.S. Department of Commerce jurisdiction.

2.   Classify your item by reviewing the Commerce Control List.

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

4.    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.

5.    Check  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.

6.    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).

7.  Apply for the License

The final step, applying for an export license, can be done online on the government's Simplified Network Application Process Redesign, known as SNAP-R.

You'll need to apply for a personal identification number and, among other things, meet the government's record-keeping requirements to use.

While the process for getting an export license is not as simple as ordering a book online, it’s much easier than in years past.

Happy Exporting! 

    -Santiago

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In a trend that could spread to other jurisdictions, Liechtenstein is asking wealthy UK investors who have assets hidden abroad to take advantage of its “unique and attractive” amnesty program.

The agreement reached between the UK and Liechtenstein combines generous terms with a promise by the principality to close the accounts of customers who could not prove they were tax-compliant. The disclosure facility offers minimal penalties, a guarantee of no prosecution in non-criminal cases and an exemption from the threat of “naming and shaming”.

You can read about the program in the Financial Times article Liechtenstein woos investors with tax amnesty.

While I think the deal comes close to striking a balance between banking confidentiality and tax transparency, it comes at the expense of rewarding the users of the most secretive jurisdictions.

Trend to Watch: Look for Similar Deals to Be Forged with Monaco, Singapore, Hong Kong and Gibraltar

      -Santiago

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  I recently represented an overseas client who sued a U.S. party based on a transaction that took place overseas.  The transaction centered on several key affidavits, powers of attorney and attestations that we would need to use in U.S. litigation.  

Traditionally, for such documents to be made admissible in U.S. courts, the documents must have been authenticated or “legalized’ by the U.S. embassy or consulate in the country in which the documents originated.  And before authentication is possible, the document must have been certified by the foreign ministry of the country of origin. 

Folks, the red tape involved can be a real headache and extremely time consuming.  This is not what your clients want to hear.

Hague Convention Gives VIP Status to  Documents to Be Used Abroad

 Fortunately, there’s the Hague Legalization Convention to streamline the authentication of documents for use abroad. The Convention is a multilateral treaty designed to cut through the traditional certification process by relying solely on the convention “apostille.”

The apostille gives any public document VIP status for acceptance into any country that is a party to the Convention. Currently, 98 countries have signed on to the Convention.  As one commenter, correctly pointed out--be sure to verify that the target country (ies) are signatories to the Convention before assuming otherwise. You can check here.

U.S. Origin Documents for Use Abroad

In the U.S., all states have authorized their respective Secretaries of State to sign Hague Convention apostilles. Also, the clerk of each federal court has been empowered to issue apostilles for documents originating in that court or contained in the records of cases before that court.  Documents originating in state courts are subject to certification by the court clerk and issuance of a convention apostille by the secretary of state.

When you request the apostille, be sure to specify in which country the document is to be used.  Once the apostille is issued, it’s ready to be used abroad.

Foreign Documents for Use in the U.S.

To be admissible in the U.S., documents from other countries that are parties to the Convention and the prior certifications of those documents need only be covered by a completed apostille issued by the official of the country of origin. That’s all that is generally required.

The documents certified by apostille do not require legalization by the U.S. embassy or a U.S. consulate in the country  where the country originated.

It’s that easy!

What has been your experience with authenticating documents under the Convention?

         -Santiago

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Define. Scrutinize. Monitor.

About 11 years ago my firm was retained by a large computer company to file a claim against an Original Equipment Manufacturer (OEM) based in Taiwan for theft of trade secrets.  Our client had retained the OEM to manufacture what was then the first “all-in-one” motherboard. I’ll spare you the technical details but this technology was revolutionary.

The OEM was no dummy—it quickly identified the potential market for the technology. It subsequently went behind my client’s back and began selling the computers into other distribution channels under its own private label.

The OEM simply affixed its own label, “Brand X,” on top of my client’s equipment and passed it off as its own. The theft was ultimately uncovered at a trade show in Las Vegas several months later.  One of my client’s engineers happened to stop by a booth displaying some interesting technology-- a very familiar looking motherboard..

Upon closer inspection of the circuitry, it was discovered that the motherboard was exactly the same one that the engineer had designed 10 months earlier and outsourced to the shady OEM.

Upon learning of the trade theft, we immediately filed suit in federal court.  An extensive 5-year international legal battle ensued culminating in a  2 month long federal trial in which we ultimately prevailed.

I tell you this story as a cautionary tale on how important it is to make sure all details of your clients’ outsourcing endeavors are closely  defined, scrutinized and monitored.

The incomparable China Law Blog has a “not-to-be-missed” post on outsourcing appropriately titled China Outsourcing 101. The Legal Basics. While the post deals exclusively with China, I think it’s applicable when dealing with any OEM.  My friend Dan Harris lists five outsourcing basics including the need for trademark registration and non disclosure agreements:

1. Create and properly register your intellectual property rights in the United States or whatever country or countries in which you sell the bulk of your products. If you do not have a firm basis for your IP rights under U.S. law, you will have nothing to protect in China. Before you go to China, be sure your intellectual property is protected under U.S. law or the laws of whatever country or countries in which you sell your products. Protect your brand identity by creating and registering your trademark, slogan and/or logo. Register your important copyrights. Carefully identify and protect your trade secrets, proprietary information and know how. Patent what you can.

Doing the above will mean that no matter what happens in China, you will at least be able to protect your product to the fullest extent possible in the country or countries in which you sell your products.

2. Register your trademarks in China. Registration can protect your future access to the Chinese market, prevent the export of counterfeit goods from China, and prevent a competitor from registering your mark in China, which would prohibit you from exporting your own product from China. For more on the necessity of registering your trademark in China, check out, "WHEN To Register Your China Trademark" and "China Trademarks -- Do You Feel Lucky? Do You?"

3. Use a written agreement to protect your know how and trade secrets in China. Small and medium sized companies usually do not have an extensive portfolio of patents. Their most valuable intangible assets typically are their know-how and their trade secrets, which cannot be protected by formal registration. Chinese law, however, permits companies to contractually protect their know how and trade secrets by contract. Such agreements may (and in most cases should) also address issues such as non-competition and confidentiality. Without such a written agreement, no such protection is available. For more on using non disclosure agreements (NDA) in China, check out, "China Non Disclosure Agreements (NDA). A Really Good Thing."

4. Product Quality and Payment Terms. The rule here is simple. Do not make final payment to your Chinese manufacturer until you are confident you will be getting an on time shipment of the correct items and quantities at the quality standards you require. This usually means you must incur inspection costs in China and provide for a clear procedure for dealing with these problems as they arise. You must take the lead on this. You cannot depend on the OEM manufacturer to do this for you.

5. Use comprehensive OEM Agreements with each manufacturer. Small and medium sized businesses often enter into OEM manufacturing transactions with a simple purchase order. This is a mistake. The purchase order will not protect you. Your protection depends on your securing a signed written OEM manufacturing agreement with each Chinese manufacturer with which you deal. The ideal OEM agreement will address all of the issues discussed above while also addressing other basic legal issues such as jurisdiction and dispute resolution. This agreement should be in both Chinese and English, since the Chinese language version will control in China. For more on this, check out, "China OEM Agreements. Why Ours Are In Chinese. Flat Out."

I agree with all these points but would add where applicable drafting specifically tailored Technology Transfer Agreements where the OEM is also granted a license to market and sell the product within predefined parameters.

These agreements set forth exactly what a licensee is free to do under the patent rights. Depending on the claims in the patents, the licensee can be given the right to manufacture, have manufactured, use and/or sell the subject matter of the license. The agreements often set forth terms of exclusivity depending on the territorial rights granted.

The agreement should also state that the licensor owns the subject technology of the license (patents, patent applications, know-how trade secrets, trade marks and / or copyrights ), that it has the right to grant the license and that it has not granted a previous conflicting license.

What other precautions would you take when dealing with OEMs?

      -Santiago

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The International Law Prof Blog has passed along details about an upcoming teleconference, “Doing Business with Japan,” sponsored by the American Bar Association Section of International Law.

The conference could not come at a better time. Businessweek’s Daniel Kruger reported this week that Japan has overtaken China as the largest foreign holder of U.S. Treasury securities. The number is staggering--Japan is now holding $768.8 Billion in U.S. T-Bills.

Folks, the conference is a great first step towards bridging the trade gap and getting back some of those T-Bills.

Here are the details:

90-Minute ABA Teleconference on Doing Business with Japan

Are you interested in getting a better understanding of the legal system in Japan?  Or in the advantages (and dangers) of selecting Japanese law or Japan as a place to arbitrate?  Or other issues relating to doing business with (and in) Asia? 

There's a teleconference on "Doing Business with Japan" on Wednesday, February 24, 2010 from noon to 1:30 p.m. Eastern US Time.  The program is organized by the Asia/Pacific Committee of the American Bar Association Section of International Law.  Click here for the program description, speaker bios, and registration form.  Download Japan.  There is an extremely modest fee to call in ($15 for section members and $25 for non-members).  Register by Monday, February 22, 2010.

Looks like an excellent program. Will you be attending?

    -Santiago

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And Why Relocating to Switzerland May be the Best Corporate Strategy

There’s nothing more annoying than finding hidden fees buried deep inside obtuse and mangled contract language. The only thing worse than finding hidden fees is learning about these punishing provisions from someone else—after you’ve signed the agreement. 

If you thought hidden fees provisions were the exclusive craft of credit card and cable companies, I’ve got bad news. The biggest offender just might be the drafters of the proposed federal budget making its way through Congress.

International Tax Increase Buried in Proposed Bill

Thanks to the keen eyes of the Wall Street Journal’s Matthew Slaughter, U.S. based Multinationals have a chance to lobby against what may be the largest hidden fee--an obscure tax provision--ever levied against them. Matthew writes in the article “How to Destroy American Jobs:”

Deep in the president's budget released Monday—in Table S-8 on page 161—appear a set of proposals headed "Reform U.S. International Tax System." If these proposals are enacted, U.S.-based multinational firms will face $122.2 billion in tax increases over the next decade. This is a natural follow-up to President Obama's sweeping plan announced last May entitled "Leveling the Playing Field: Curbing Tax Havens and Removing Tax Incentives for Shifting Jobs Overseas."

A proposed $122 Billion international tax burden? Placed on pg. 161? On a chart? Apart from the obvious lesson to carefully scrutinize the details of everything, and I do mean e.v.e.r.y.t.h.i.n.g., that comes across your desk, the substantive point of the article is absolutely correct—the proposed tax hike on U.S. based MNCs will bankrupt those that earn a significant amount of their revenue overseas.

Proposed Tax Will Force US-based MNCs to Relocate Overseas

As one commenter noted, it is the fiduciary responsibility of the board of a company to protect the investors in that company, and to provide them with the maximum safe return on their investment. In the new tax and regulatory environment the U.S. is in the process of imposing, any company that earns a large percentage of their revenues outside of the US simply cannot remain U.S. based.

Under the proposed tax hike on U.S. based MNCs, what incentive is there for Coca-Cola to remain a US based multinational? Why not move the corporation to Switzerland, where the favorable corporate tax structure has long been lured the operations of large MNCs such as Johnson & Johnson and Burger King Holdings Inc.

Switzerland Offers Optimal Tax Environment for MNCs

The timing could not be better for companies looking to relocate their operations overseas-- and to Switzerland in particular.  The Wall Street Journal recently reported on an emerging trend among Swiss cantons to compete for the business of MNCs by lowering their corporate tax rates. In the article Switzerland’s States Compete on Tax Cuts, the cantons of Zug, Schaffhausen (just north of Zurich) and Lucerne have all cut their tax rates in a heated battle to lure more MNCs.

For U.S.-based MNC’s looking to dodge the proposed international tax bullet, Switzerland provides the most favorable corporate tax environment in which to relocate U.S. based operations.

Conclusion

According to KPMG’s Corporate and Indirect Tax Survey 2009, the current effective U.S. Corporate tax rate is 40%, while in Switzerland the effective tax rate is 21.2%--and considerably less in some cantons. Under the proposed bill, the tax gulf will only grow wider.

It will be interesting to see what happens with the proposed tax. Until then, MNCs should take a look at Switzerland.

Trend to Watch: If the Proposed International Tax is Enacted Look for an Exodus of U.S.-based MNCs to Switzerland and to Other Favorable Tax Climates.

       --Santiago

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As an international business attorney, a focal point of my practice involves advising clients how to best handle cross-border disputes.  The most effective mechanism by far in resolving international dispute is international arbitration. Why?  International arbitration levels the playing field by taking away the home court advantage of parties on either side of a transaction.  

But the most attractive aspect of arbitration is that the awards issued by an international arbitration tribunal will receive worldwide recognition by countries that are members of one of the international conventions on the enforcement of tribunal awards.

Given the superior advantages arbitration has over litigation in resolving international disputes, it’s essential that you make the international arbitration agreement ironclad and bullet proof.  

Here’s how to do it:

             1.  Be Unambiguous.  

Unequivocally state that any dispute will be resolved through arbitration e.g. “Any dispute or difference arising out of or relating to this agreement shall be finally resolved by arbitration …”

              2.  Be Clear

Define whether arbitration is to be preceded by negotiation or mediation and designate a timeframe e.g. “If no agreement has been reached within __ days of the delivery of  written notice of the existence of a dispute, either party may serve a request for arbitration …”.

3.      Be Specific

Specify the administering institution and the rules to be applied e.g. “The arbitration shall be administered by the International Center for Dispute Resolution in accordance with its International Arbitration Rules

4.      Be Careful

Carefully select the site of the arbitration taking into consideration the quality of its arbitration jurisprudence and the respect of its courts for the arbitral process. e.g. China, no. Hong Kong, yes.

5.      Be Meticulous

 Meticulously set forth the number of arbitrators on the panel and how they will be      selected. Choose an arbitrator who demonstrates communicative proficiency, a firm appreciation of the rules of evidence and an acknowledged expertise in the industry in which the dispute arose or about the issues in dispute.

6.      Be Heard.

Designate the language of the proceeding. It is unsettling how many times parties overlook this provision and are forced to rely on a foreign translator to communicate every word of the proceeding.

7.      Be Final

 In order to prevent further review and appeals of an arbitral award once it is rendered, you must include a statement in the arbitration agreement that clearly states that the award is final e.g. “The arbitral award is binding, final, not subject to review, and not subject to appeal  by the courts in any jurisdiction." This provision is  particularly essential in jurisdictions where the laws allow parties to appeal an  award issued  in that country.

Follow the points I described above, and you’ll be well on your way to drafting a bullet proof international arbitration agreement. 

     -Santiago

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Only 2 weeks into 2010 and I’m seeing a lot of positive movement on the street. The international markets are roaring back to life. Deal makers are picking up the phone again. And lawyers are being hired to put these deals together.  Based on this snapshot view, I expect to see international transactions skyrocket as investor confidence and flexible credit terms return. While some may perceive this forecast as abundantly rosy, it is not without its thorns.

As the number of international transactions skyrocket, so do foreign parties' attempts to escape from their arbitration agreements and to force disputes into foreign courts. All too often, a party that thought it would be arbitrating international disputes - and that may have commenced arbitration in the agreed forum - may nevertheless find itself the target of foreign litigation.

A recent federal court decision reinforces strong public policies in favor of arbitration and against improper collateral  litigation.  In Telenor Mobile Communications v. Storm LLC, the United States Court of Appeals for the Second Circuit affirmed the district court’s granting of an anti-suit injunction against Ukraine litigation in aid of an UNCITRAL arbitration. You can read the decision here.

As the case illustrates, U.S. federal courts are increasingly resistant to efforts to use foreign litigation to interfere with pending international arbitration, and are increasingly willing to brandish their injunctive powers to prevent such interference.

The Telenor decision should cause parties to arbitration agreements to think twice before staging "friendly litigation" in an effort to avoid their contractual obligations, as Judge Robert D. Sack wrote for the court:

Our view, in light of the findings of the arbitration panel and the district court, is that it is Storm's improper collateral litigation, not the arbitral award that is contrary to public policy, viz., the well-established federal public policy in favor of arbitration. "Through the FAA, Congress has declared a strong federal policy favoring arbitration as an alternative means of dispute resolution." (Internal quotation marks omitted)). Collateral and unilateral litigation of arbitrability – or any other issue pertinent to arbitration, for that matter --undertaken in a foreign forum by a party to that arbitration in an attempt to protect itself from an adverse arbitral award would, if indulged, tend seriously to undermine the underlying scheme of the FAA and the New York Convention.

It's reassuring to see that U.S. federal courts are increasingly protecting the integrity of awards rendered in international arbitration and that collateral litigation commenced by a foreign party to avoid an arbitral award will not be tolerated. 

Trend to Watch:  Look for More U.S. federal courts to hold international parties to their arbitration agreements, and to prevent them from seeking refuge in litigation abroad.

      -Santiago 

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The  Snuggie was a huge hit in England over Christmas. The product, which was conceived and developed by New York-based Allstar Products Group, LLC, has also been a huge hit in Canada and Australia. For those unfamiliar with the product, the Snuggie is essentially a backwards robe that one wears to keep warm.

By leveraging its success in these markets, this latest American export is quickly building momentum in Asian markets--a natural fit, so to speak, considering it’s manufactured in China.

The Snuggie? Global Domination? How---Why?

 Elegant Simplicity

Lucky for us, the playbook Snuggie used to dominate world markets is shockingly straight forward and easy to follow. Indeed, the genius of the Snuggie’s global game plan was its elegant simplicity.

A Global Domination Campaign has Several Moving Parts

How did a product that was launched in 2008 become a worldwide phenomenon by 2009? It achieved global dominance with careful attention to the legal landscape underpinning its expansion strategy. It knew exactly what U.S. export regulations covered its product. And more crucially, it knew exactly how to comply with the import laws in each of the foreign markets it entered. This was the Snuggie’s masterstroke and what allowed it to crush world markets in record time.

Your product’s tipping point can come early in the launch stage if you institute a global domination campaign from the outset. This entails ironing out the legal details in both domestic and global markets contemporaneously. While the two-pronged attack requires additional legwork to comply with trade laws in selected international markets, the extra work will pay huge dividends when orders start pouring in from all over the globe.

The 3 Step Formula for a Successful Global Product Launch 

Going global has never been easier and should be part of every company’s initial launch strategy. Here are some key points to speed your way to global dominance in your industry:

Step 1: Select your Global Domination Targets.

Review the law in every country that you intend to crush and dominate. Look for foreign customers who resemble your domestic clients and customers. They may not be as difficult to find as you expect. The Snuggie pulled this strategy off flawlessly by first penetrating the UK and Australia, whose consumers have similar tastes to those in the U.S.

Step 2: Penetrate to Dominate

The absolute best way to quickly penetrate a foreign market is to contact your country's consulate or embassy in the foreign market that you're trying to enter. Government Trade Officials are placed in those foreign countries specifically to assist enterprises like yours export products there. These officials collect market data and have access to directories of potential buyers for specific industries. Follow this step and it will be like having your own international consulting firm at your beck and call.

Step 3:  Master the Supply Chain.

This requires professional management of the logistics of delivering your product from A to B at just-in-time speeds as your product rapidly reaches critical mass. Unexpected perils such as currency fluctuations, transportation break-down and catastrophic infrastructure damage can all derail the best laid plans. Be sure to have back-up suppliers to keep your empire growing at breakneck speed.

 
High Octane Resources to Supercharge Your Global Domination Strategy

To supercharge your global domination plans, do not hesitate to utilize the vast arsenal of resources provided by the federal government—they are unparalleled in their scope, depth and breadth. While there is an infinite amount of “how to go global” literature online, there is no better source of information than the U.S. Government—and it’s free.  The resources below are among the very best:

Export.Gov

The most important step in going global is understating the legal requirements and regulations associated with you product. Export.gov offers a vast array of helpful guides and resources to help you get started.  

Export.gov's Export Program’s Guide is a great resource and offers and overview of industry and country specific counseling and trade leads.

U.S. Department of Commerce

Be sure to visit the United States of Commerce’sBuyUSA division to find an export assistance center near you. The professionals staffing the assistance centers will counsel you all the way through the export process.

Business.gov'sGet Started in Exporting guide provides a comprehensive list of resources and services to help small business start up their exporting operation, including information on required licenses.

U.S. Department of State

The U.S. Department of State has a business sector with international market resources such as trade policies and restrictions, country commercial guides, and operational guides to help Americans before doing business overseas.

Export-Import Bank

The Export-Import Bank of the United States has a small business division helping exporters get started.  The excellent export guide provides information for businesses that are trying to establish themselves in the export market.

While these resources are not comprehensive, they are the cream of the crop for anyone wanting expert help with their global domination strategy.

What do you think?

    -Santiago

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For any business with global reach, collecting payment from overseas customers can be a real headache. Laura Delany offers sound advice on the Small Business Trends Blog on how to get paid on international transactions.  While the article also deals with advance payment and payment online, I’ll focus on the letters of credit portion here because that’s what my clients typically use.  

 Collecting money from your overseas customers with letters of credit can be a breeze if you follow the guidelines below.  Using letters of credit with the help of a solid international banker will allow you to confidently secure payments from customers all over the world. Then sit back and watch your global business empire grow.

   -Santiago

Letters of Credit — Security with Flexibility

After payment in advance or payment online, securing payment with a letter of credit is the next best option to collect money from overseas customers. We will take a detailed look at how letters of credit work, who participates in the transaction, and what variations and modifications are available to help the parties negotiate mutually acceptable terms.

THE FOUR KEY PLAYERS IN THE LETTER OF CREDIT PROCESS

There are four participants in a letter of credit transaction — two businesspeople and two banks:

1. The buyer.  That’s your customer.

2. The opening bank.  This bank normally issues the letter of credit, so it is sometimes referred to as the “issuing bank.”  They assume responsibility for the payment on behalf of the buyer.

3. The paying bank.  This is the bank under which the drafts or bills of exchange are drawn under the credit.  A paying bank in an L/C transaction might also act as the negotiating bank, advising bank or confirming bank, depending upon what responsibilities it accepts.

4. The seller.  That’s you.

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 Nothing is more interesting than the intersection of international business law and sports. Add Charlize Theron into the mix and things get, well, even more interesting. Over the weekend, Ms. Theron, representing the host country South Africa, announced the draw for World Cup 2010, the biggest sporting event on the planet.

If you haven’t already, you can read all about the draw in the Wall Street Journal article The Envelopes, Please and in the Financial Times article English hopes rise after World Cup draw. Also be sure to check out the Fédération Internationale de Football Association (FIFA) website, the go-to site for World Cup information.

EU Sports Are Big Business

Because of the massive revenue the World Cup generates for each participating nation, soccer  has become big business to which the rules on competitive and anti-competitive behavior apply. How these rules are applied often determine which teams ultimately qualify for the world’s greatest sporting event.

No region has more at stake than the EU, which is sending many of its members to South Africa. With so much on the table, it is unsurprising that the business decisions of EU football clubs are often contested under anti-trust laws. This is particularly true in the areas of M&A, salary caps and media rights.  

EU Anti-Competition Law Increasingly Applied to Sports

England, Spain, Germany, France and Portugal are considered the European Union’s top contenders to win the World Cup in 2010. And all of them are subject to the same EU Anti-Trust laws, which are contained in Articles 81 and 82 of the EEC, which state:

Agreements, decisions and concerted practices between undertakings which have as their object or effect the prevention, restriction or distortion of competition are prohibited by art. 81 (1) of the Treaty of Rome if and in so far as they may affect trade between EC member states.”

The following is an overview of the areas and issues where EU Anti-trust laws are frequently invoked to contest the business decisions made by EU football clubs.

• M&A Activity: At present, no two or more clubs participating in a UEFA club competition may be directly or indirectly controlled by the same entity or managed by the same person. However, one might question how legitimate this rule is given the broad definition of 'control' that is typically adopted in the context of mergers. Should an investment fund be prevented from buying more than one club, if it is just a financial holding company with no right to influence the club's management?
• Salary Caps: Salary caps have an inherent potential to breach EC competition rules. They may constitute an anti-competitive agreement or concerted practice between national or international sporting associations and either clubs or players' unions under article 81(1) EC. Equally, there is a potential for violation of article 82 EC, given that sporting associations can be dominant in the market for the competitions they control. Need I mention the Yankees?
• Media Rights: The restricted structure of the broadcasting market has frequently raised issues under articles 81(1) and 82 EC. Team owners in the industry show a clear willingness to seek redress under EC law when their commercial interests are threatened, and may be even more likely to do so as bottom lines are squeezed in the current recession. As the largest revenue stream in sport, media rights will continue to be the focus of disputes across the EC and beyond. The next major battlegrounds are likely to include access to content on the internet and territorial broadcasting restrictions

As these issues illustrate, competition law remains at the heart of EU sports law disputes and often impact how each national team fills its roster. Ultimately, this plays a central role in which teams qualify for the World Cup.

Trend to Watch: Look for EU Anti-Competition Law to Be Increasingly Applied to Sports …And Look for Spain to Take the World Cup in 2010.

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I received several calls today from clients doing business in the EU about the Lisbon Treaty and what it means for their European business operations. In the short term—absolutely nothing. The Lisbon Treaty is essentially just a clarification and simplification of previous European treaties into one single document.

In the long term, however, the Treaty is a boon for business. Why? Because it will galvanize and embolden the EU to rise again as a major global player in an arena currently dominated by China, India and Brazil.  Until now, Europe has been largely stagnant in comparison to these economic juggernauts. In fact, Gross domestic product in the EU is expected to rise by only about 0.7 percent in 2010 and official data show unemployment is expected to rise above 10 percent next year.

You can read more about the Lisbon Treaty's international debut in the BBC article EU Lisbon Treaty Comes into Force and in the Irish Times article Lisbon Treaty Comes into full force in the EU.

The immediate aim for the Lisbon Treaty is to streamline EU decision-making, which had become increasingly unwieldy as it took on an additional 10 countries in the past five years.  The long term aim of the Treaty is to lay the foundations for the EU's efforts to wield more economic influence in today’s globalized environment.   

Fredrik Reinfeldt, the Swedish prime minister who is currently steering the EU presidency said earlier today:

A new era of European co-operation begins today. With the Treaty of Lisbon, EU citizens get a union that can meet the demands of the 27 member states for transparency, democracy and efficiency; a union that can better meet the challenges of globalization."

These are great words, but it will take more than a speech to bring the EU in line with the rest of the world's competitive prowess.

From a judicial standpoint, the Treaty makes some minor changes. The Court of Justice has published this very useful short guide to the changes that the Lisbon Treaty makes to the Court of Justice itself, the General Court, as the Court of First Instance is now known, their jurisdiction and their procedures.

Overall, the Lisbon Treaty is simply a matter of form over substance for the time being and it will have marginal effect on business in the upcoming year.

Trend to Watch: Look for Europe to Wield More Economic Force in Late 2010 and Early 2011.

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 Dan Harris of the China Law Blog posted an excellent article, Setting up your worldwide Internet empire (China too), on the complex legal issues that a company must consider before it sells products worldwide over the internet.  As Dan highlights below, setting up a global internet business is not as simple as setting up a web page and waiting for the orders to roll in:

1. What type of legal entity(ies) are you going to want? Where will you want them? These two questions must be answered in tandem.

2. From what countries will you accept purchases? Are you going to accept purchases from every country or are you going to limit yourself? Selling into multiple jurisdictions means you are going to be subject to multiple tax regimes. Who is going to figure out your taxes in each country? Are you going to use a third-party merchant of record to do this for you?

3. Selling into multiple jurisdictions means you are going to be subject to the privacy and consumer protection laws of multiple jurisdictions. We need to know the jurisdictions in which you will be selling to know what laws will apply to your company. Many countries have very strict shipping date and return requirements.

4. Is your product legal in all of the countries to which you intend to sell it? Is it legal for foreign companies to sell that particular product into all of the countries in which you intend to sell it? Is it legal in your home country to export your products into all of the various countries in which you intend to sell?

5. It would be nice if we could set you up with one law applying everywhere in the world, but most countries do not allow this when it comes to the sale of consumer goods. So we are going to have to discuss where you will be focusing your efforts.

6. Are you going to sell your products in local currencies or in just the major ones or in just dollars? Are you aware that some countries forbid its citizens from using foreign currencies?

7. Are the electronic contracts you propose using enforceable in all of the countries in which you will be selling?

8. Let's talk about dispute resolution. Arbitration? Where? Will all of the countries in which you are selling enforce this? Many will not enforce an online provision requiring their consumers to arbitrate in a foreign country.

Number 8 is of particular interest to me given that a significant part of my practice involves international litigation and arbitration. I wrote an earlier post, Online Litigation and Foreign Jurisdiction, suggesting ways a company can minimize its exposure in international contract disputes.

Thanks Dan for the great post. These are extremely important issues that must be addressed before a company sells its products internationally over the internet.

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