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

The U.S. Supreme Court ruled yesterday that America’s main law against securities fraud does not apply to investment deals that occur outside of this country, even if they have some domestic impact or effect. 

 In the opinion, the Court declared that U.S. securities fraud law cannot be used in American courts to challenge a “transnational” securities deal involving a company whose stock is not traded in the U.S., and when the trade does not occur inside the U.S.  The Court finally took on the issue, after years of declining to review it in a series of so-called “F-Cubed” securities cases. 

The Opinion is embedded in its entirety below:

Morrison v. National Australia Bank Supreme Court Opinion June 24, 2010

The case under review involved an Australian bank and Australian investors, whose only link to the U.S. was faulty financial information generated in Florida. The investors took their case to the Supreme Court after having it dismissed in lower courts for having an insufficient link to the U.S.

The Court held that Section 10-b of the Securities Exchange Act of 1934, the law at issue, does not “focus…upon the place where the deception originated, but upon purchases and sales of securities in the United States.” 

Always one top speak his mind, Justice Scalia penned a scathing opinion critical of the Second Circuit Court, which had started in 1968 a trend that eventually spread to all of the other Circuit Courts, to develop an interpretation of Section 10-b that gave it — in at least some cases — a reach beyond the United States’ own territory.  

 The decades-old trend started by the Second Circuit was premised on the view that courts could determine what Congress would have intended, in allowing private investors’ fraud claims to go forward in U.S. courts based on transnational deals, if it had thought about the particular transaction. 

Yesterday, however, the Court concluded that the trend was misguided, and that the controlling issue was a long-standing “presumption” that U.S. laws did not apply beyond this country unless Congress had expressly said they did.  There is no such indication in Section 10-b, the Court concluded.

The Court got this one right. While I’m all for seeking redress on behalf of investors, if the transaction in question was not traded in the U.S. and the trade does not occur in the U.S., then investors will have to seek relief in foreign courts. I’ll discuss that in a future post.

What do you think?

  -Santiago

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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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Although I enjoy the day-today challenges of international litigation, I’m often called upon to structure international business deals. These are fun too, as I get an inside look at the business side of many different kinds of industries.

Lately, I’ve seen a considerable increase in the number of distribution deals being forged. Distribution agreements are simply contracts to distribute a product made by Company X to the dealers and remarketers of the product.

The distributor assures Company X that it has the facilities, personnel, and technical expertise necessary to market the specified product in a given territory.

At minimum, an international distribution agreement should contain the following terms:

• Term: This clause sets the duration of the agreement and should specify whether it’s automatically renewed after the term expires or whether the parties intend to re-negotiate terms after the term expires. Duration can vary widely depending on your industry.
• Products: You should specifically describe and identify the product developed or owned by a company along with all options to the products; all future versions of the products; and all enhancements, revisions, or modifications made to the products by company.
• Territory: Be sure to always indicate the specific geographic areas where the product(s) will be distributed. Also be sure to include terms of exclusivity to keep your channel clear of competitors.
• End-User: Identify all persons or entities that will obtain the product(s).
• Intellectual Property Rights: This provision is immensely important. Always identify the intangible legal rights or interests that cover any idea, design, concept, technique, invention, discovery, or improvement. This extends to any work of authorship and any other similar rights. I’ll be covering international intellectual property protection in a future post.
• Quota: Be sure to specify minimum quantities of the products. The quota will consist of an initial purchase order and a continual minimum monthly volume commitment.
• Termination: All good things come to an end. Be sure to carefully articulate the terminating conditions of the agreement. The more thorough you make it, the better off you’ll be.

To guide you along, I’ve embedded a sample international distribution agreement below: (solely for illustrative purposes):

International Distribution

The agreement above should give you a pretty good idea of what an international distribution agreement should look like. Of course, every situation is different. Be sure to contact an attorney to structure a distribution agreement that satisfies your particular needs.

     -Santiago

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I’m a huge soccer fan thanks to Brazilian great Pele, who introduced me to the game. So with the 2010 World Cup only a few months away, I was happy to read today that Brazil moved into the top spot in the FIFA World rankings .

This puts Brazil in pole position to go into the 2010 World Cup in South Africa as the world's top-ranked team.

But Brazil’s world dominance isn’t limited to the soccer field. Brazil is also home to one of the world’s top-ranked economies. 

Some of Brazil's economic speed gauges are reaching near red lines.The economy grew at least 10% in the first quarter of 2010 and is forecast expand by 5.5% this year—though some economists expect the growth rate to reach 7%, its fastest pace in decades.

We’re talking about a country that 9 months ago lent the International Monetary Fund $10 billion dollars to help improve the availability of credit in developing countries. It’s the first time that South America's biggest economy has ever made a loan of this kind.

 In the past Brazil was more accustomed to seeking help from the International Monetary Fund and the fact that it is now able to offer a loan instead is a striking indication of how its position has changed.

The news about Brazil's booming economy is dominated by big business, foreign investment, a huge consumer appetite, and the prospects of oil. But Brazil has also blazed forward as an entrepreneurial leader and represents a growing market for businesses wishing to expand their goods and services.

The World Bank and International Finance Corporation just released their latest report, Doing Business in Brazil and is an excellent guidepost for anyone thinking about doing business in Brazil.

The Report is embedded in its entirety below:

Doing Business Brazil

Also be sure to read these additional resources.

• BuyUSA.gov
• Embassy of the United States in Brazil
• Brazil U.S. Business Council
• Brazilian-American Chamber of Commerce

    -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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 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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 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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As an international business attorney, I’ve got to stay on top of global markets to provide my clients with the best possible service. But with things moving so fast these days, it can be hard to keep up.  

Thanks to a highly insightful presentation authored by Byron Wien, Senior Managing Director at The Blackstone Group, staying on top of things just got a little easier. The presentation centers on Wein’s Top 10 Global Economic Surprises for 2010.

Wein's predictions are summarized below (courtesy of Marketfolly):

1. The US economy grows at a 5% real rate and unemployment drops below 9%.
2. The Federal Reserve hikes the fed funds rate to 2% by year-end.
3. Ten year treasury yields rise above 5.5%.
4. The US dollar rallies against the yen and the euro.
5. The S&P rallies to 1300 in the first half of the year, declines to 1000, then settles around 1115.
6. Japan becomes the best performing market.
7. President Obama endorses nuclear power development.
8. The Obama administration becomes energized via US economic improvement.
9. Financial service legislation will be passed (but in a softer form than originally feared).
10. Civil unrest in Iran peaks.
     

While some of the predictions are already playing out like he predicted (the S&P marches higher and treasury yields picking up), I'm thrilled to see Japan pegged as the word's best performing market. Coincidentally (presciently?), Japan was the focus of my recent post, How to Set Up a Business in Japan (And Other Business Wisdom).  

Wein's presentation is embedded in its entirety below:

Top 10 Global Economic Surprises 2010

Be sure to check out Marketfolly, which has posted additional 2010 predictions including Doug Kass' 2010 predictions and the top 10 investment themes for 2010.

    -Santiago

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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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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 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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Hey Brazil--Take Your Time With Those BITs, I Can Get Them Somewhere Else!

Today we’re launching the first in a series of posts on the BRIC countries in a fast, quick read format. 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.  Let’s get things started with Brazil.

Our first topic picks up on an article I wrote Hey Brazil: It's Time to Ratify Those Bilateral Investment Agreements. The article centered on Brazil’s reluctance to enter into any Bilateral Investment Treaties (BITs). I promised I’d follow-up with a post on how to do business with Brazil and still enjoy the benefits of a BIT.

But Brazil does not have a BIT, you say?

Fortunately, Brazilian investors do not have to wait for changes in government policy to get the benefit of BITs. Investors can seek to structure their Brazilian investments to take advantage of the protection of BITs between other states.

Here’s how:

Establish a subsidiary in another Country. In many cases, a Brazilian investor can establish a subsidiary in a country that has a BIT with the host state through which to channel investments. Some BITs require only that the investor be established or incorporated in the home jurisdiction in order to acquire the protection of the BIT.

Here’s an Example:

Nationalization of Bolivian Energy Industry. When Bolivia took steps to nationalize the energy industry, Brazilian gas company Petrobras considered bringing investment claims against Bolivia for treaty violations by invoking the rights of its subsidiaries in Argentina and the Netherlands. Unlike Brazil, both Argentina and the Netherlands have BITs with Bolivia.

Conclusion

Brazil is increasingly emerging as a global leader and expanding its investment abroad. Brazilian Investors should take full advantage of BITs by establishing a subsidiary in another country. Doing so will ensure that their investments are protected.
 

Trend to Watch: A Surge in Investment Activity in Brazil Will Ultimately Lead to the Adoption of International Investment Agreements

     -Santiago

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The Wall Street Journal and the Heritage Foundation released its annual 2010 Index of Economic Freedom.   Of the world's 20 largest economies, Hong Kong ranked first while the U.S. came in at number eight.  

According to the Wall Street Journal article, The U.S. is Not as Free as It Used to Be,  a number of factors contributed to the United States’ ranking lower than in previous years. The federal government's heavy-handed intervention in the financial and economic crises of the last two years was cited as the main factor.

There is another factor not mentioned in the article that I believe contributed to the US’ lower ranking--the lack of confidence in our nation’s dispute resolution regime.

Businesses are unwilling to wade into a pool of uncertainty to either prosecute or defend valid claims given the exorbitant cost of litigation. While inroads were made in the past decade towards the arbitration of business disputes, the trend has reversed itself under mounting pressure from special interest groups.

While I have no empirical proof, I have a feeling that the top 7 nations have made great strides in their dispute resolution regimes. It's no surprise Hong Kong is number one given its focus on arbitration, which I wrote about in an earlier post.

Check out the rankings below--what do you think? 

   -Santiago

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Recession? What recession? Business in India is booming. Forbes is reporting that India's Billionaire Club nearly doubled in the past year. According to the Forbes special report, India's 100 Richest, the nation is now home to 52 Billionaires, up from 27 last year. According to the report:

The combined fortune of India's 100 richest is $276 billion, almost one-fourth the country's GDP. That is well below the total worth of $775 billion for the 100 richest Americans, but well ahead of the equivalent sum for China's top 100. Although China has more billionaires--79 vs. India's 52--India's wealthiest are worth over $100 billion more than the $170 billion total net worth of their Chinese counterparts.

You can read more about India's good fortune in the Financial Times in the article India Billionaires Outstrip US Counterparts.

Proposed Business Laws May Undercut India’s Recent Performance

While India’s robust economy continues to outpace much of the world, proposed legislation may undercut its recent performance. Starting next month, the Indian Parliament is set to consider a major overhaul of the nation’s business laws. There are three legislative proposals in particular that will fundamentally change the way business is conducted in India. These proposals are the Goods and Services Act, the Companies Bill and the Direct Taxes Code.

1. The Goods and Services Act: Slated to take effect in April, 2010, the Goods and Services Tax (GST) will abolish the 'central sales tax' and include services under 'value added tax' (VAT).  For the first time, state governments will be able to tax services. The GST will have a uniform tax rate structure throughout the country and will create a common market within India for the first time.
2. The Companies Bill: Currently being examined by a parliamentary committee, the new bill seeks to overhaul several issues such as insider trading, independent directors, class action suits, public deposits, fair valuation, consolidation of financial statements, mergers & acquisitions and special courts.
3. The Direct Taxes Code: India’s Income Tax Code is set for a major overhaul with the introduction of the Direct Taxes Code proposed to be launched by April, 2011.  In its current form, the Code proposes lower tax rates on the basis that lower rates improve compliance. However there are significant disagreement concerning income from salaries and capital gains; taxation of charitable organisations, minimum alternate tax based on assets and international taxation.

The Proposals Are Silent on Key Issues

While I welcome any change that will eliminate red tape, reduce tax liability and allow businesses to operate more efficiently, these proposed laws are silent on key issues. For example, how will state tax revenue be allocated to overhaul India’s impossibly overburdened infrastructure--considered among the worst in the developed world?

Also, does the introduction of the Direct Taxes Code translate into higher taxes on capital gains, assets and international taxation?  Finally, how will an overhaul of the securities laws impact the robust  pace of mergers and acquisitions—one of the primary mechanisms for business expansion and wealth accumulation?

Conclusion

The increase in the number of India's Billionaires is a sure sign of the nation's economic strength. However, the proposed business laws are silent on key issues that may affect the vitality of India's economy.  It remains to be seen whether the proposed changes will have an immediate impact on the growth of business in India.

 Trend to Watch: India will continue on its current path unless the proposals burden the business sector with higher taxes and increase restrictions in the securities markets.

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Brazil is on a roll.  Yesterday’s Financial Times included a special 10-page section devoted to Brazil. One of the articles, Olympic Accolade Sets Seal on Progress, written by Jonathan Wheatly, succinctly describes the “exuberant optimism” that has gripped the country since it was awarded the 2016 Olympic Games.  And the Wall Street Journal recently reported on the Brazilian stock exchange making spectacular gains in the article Brazilian Stock Scores Spectacular Gains on US GDP Growth.  This is following last month’s IPO of Banco Santander’s Brazilian unit, the world’s largest IPO so far this year, as reported in the New York Times article, Banco Santander's Brazil Unit Raises $8 Billion in I.P.O.

While these events are certain to fund rapid expansion in Brazil’s capital sector, the exuberance is tempered by a look at the long road ahead. Yet it is impossible not to be blinded by the bright future that seemed out of reach not long ago.  Antonio Quintella, country manager at Credit Suisse Sao Paulo put it succinctly:

Nothing is guaranteed. But it is reasonable to assume that [Brazil] won’t repeat the mistakes of the past…it is very difficult not to be bullish”

Brazil Should Ratify Bilateral Investment Agreements

Brazil has emerged from the global recession as the darling of international investors; this has created a wealth of investment opportunities.  However, it lags behind all other Latin American countries in one important respect: it has yet to ratify any bilateral investment agreements (BITs).  These agreements protect international investors when disputes arise in host countries. In light of Brazil’s recent good fortune, the time has come for Brazil to rethink its approach to BITs and implement measures to protect foreign investors.

Bilateral Invest Agreements Provide Important Safeguards

BITs obligate host countries to provide safeguards for foreign investment. If host governments fail to heed these safeguards, investors maybe awarded money damages. The following safeguards are among those afforded by BITs:

1. host countries are prohibited from expropriating foreign investment without compensation.
2. The agreements often include national treatment provisions, which require a government to treat foreign investors no less favorably than they treat domestic investors. They also often include most favored nation provisions, which extent the same protections afforded to foreign investors from one country to foreign investors from other countries.
3. foreign investors have the right to transfer funds into and out of the host country without delay.
4.  In addition to substantive protections, BITs provide powerful dispute resolution mechanisms. Under these mechanisms, Foreign investors may choose to resolve disputes in binding international arbitration such as in the International Center for Settlement of Investment Disputes (ICSID) and arbitral tribunals organized under the United Nations Commission of International Trade Law (UNCITRAL).

These agreements provide important safeguards against government mistreatment, mitigating some of the political risks associated with making investments in foreign countries.

Conclusion

Although Brazil’s reluctance to ratify BITs may help to protect it against claims by foreign investors, the recent surge in outbound Brazilian investment should cause Brazil to reconsider its position against international investment agreements. 

While Brazil is busy contemplating this proposition, there is a way investors can structure their investments to take advantage of BITs between other states. Stay tuned, and I’ll let you know how in a follow-up post.

Trend to Watch: A Surge in Investment Activity in Brazil Will Lead to the Adoption of International Investment Agreements

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While my posts are usually technical discussions centered on international business law, I'm going off topic today to write about a concept quickly gaining traction as a viable alternative to private banks in providing capital to impoverished entrepreneurs across the globe.

On a recent trip to India, I caught a glimpse of the future as I walked down Connaught Circle in downtown New Delhi. Entrepreneurs seemed to be everywhere providing an endless array of goods and services. This is the world imagined by Nobel Laureate Muhammad Yunus, founder of Bangladesh-based Grameen Bank, a microfinance organization that makes small loans to impoverished entrepreneurs without requiring collateral. 

My recent experience was echoed in an article in today’s Wall Street Journal. According to the article, Microlending in India Continues Macro Growth, Microlenders recorded a 60% increase in clients in India, to 22.6 million up from 14.1 million the previous year. In sharp contrast, the formal banking system in India recorded only 15% growth over the same period in the number of clients it serves.

As reported in the article, the surge in microloans has been fueled by a brisk flow of funds in the third quarter of this year, with about $130 million in global private-equity funds funneled into Indian microfinance institutions.

"In the middle of last year, we thought for a while the meltdown would strike this sector, but we've seen that it's been largely unscathed," said Vipin Sharma, chief executive of Access Development Services. "Growth is as frenetic as it was before."

Mainstream banks, in both the private and public sectors, are increasingly considering channeling funds into microfinance banks rather than directly to India's poor. Four public-sector banks and three private-sector banks entered microfinance this year, making for a total of roughly 30 banks invested in Indian microfinance. Total bank funding for microlenders nearly doubled to $2.526 billion from $1.281 billion in the year ended March 31 from the previous year.

As reported in Forbes, in the article, Microfinance Rides Out Turbulence, microfinance institutions have emerged as more stable than other comparable assets during financial crises. This is partly because their clients are not integrated into mainstream banking and currency markets and are therefore insulated from wild market swings.

Microlending may enjoy enormous success in India, but in other parts of the world, it has yet to flourish. In China, for example, the microlending concept has yet to take root, as reported in the article Microfinancing China in the Wall Street Journal. Let's hope that will soon change.

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As Forbes reported today in the article Dainippon completes tender offer for Sepracor, Dainippon Sumitomo Pharma Co. of Japan agreed to buy Sepracor, based in Marlborough, Mass., for about $2.6 billion, or $23 per Sepracor share. Sepracor makes drugs for respiratory and nervous system disorders. It reported $1.29 billion in revenue in 2008, with almost half of that total coming from sales of its sleep aid Lunesta.

The Dainippon/Sepracor deal is the latest example of the resurgence of tender offers as a vehicle for growth. An insightful article entitled The Peculiarities of Tender Offers appears in today’s New York Times’ DealBook section. According to the article, 26.15 percent of acquisitions so far this year were structured as tender offers, compared with 16.28 percent in 2007 and 23.34 percent in 2008.

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As recently reported in the Wall Street Journal in the article The Last Hurdle for the Lisbon Treaty, Ireland’s Oct. 3 approval of the Lisbon Treaty strengthened the odds for the European Union to gain global clout on issues from the economy and climate change to war and peace. An excellent overview on the Treaty is provided by BBC in its article Q&A: The Lisbon Treaty.

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 As reported by the Wall Street Journal's Lynn Cowan today, China has taken the global lead in initial public offering activity for 2009.

As Ms. Cowan reported, should  the pace continue, China will come out on top of "every other country, and even entire regions such as Europe and North America, for all of 2009." 

Global IPO Dominance

China's global monopoly of the year’s IPOs hardly comes as a shock given the sheer magnitude of the market and the Chinese government's mandate to privatize more companies, according to Thomas B. Fox Jr., head of global capital markets for the Americas at UBS AG. 

"So many areas are still government-held -- natural resources, telecommunications, banks, transportation -- it's hard to imagine a  country having an economy the size of China's with virtually none of the companies being public," he said.

The figures compiled by research authority Dealogic, as reported in this article in Forbes Magazine, illustrate that 38 companies have raised a total of $15.4 billion in their IPOs in China so far in 2009, making China the world's largest IPO market this year.

Although U.S.-based deals were nowhere near the levels seen before 2008, when there were on occasion more than 50 deals in a quarter, it will take some time for more U.S deals to come into the market given the SEC's  three to fourth month processing period. As a result of the lag time, there will be a more significant flow in IPO activity next year, as the companies registering now start to launch.

SEC Application Process to Blame for Poor U.S. Showing?

In light of the SEC's delay in processing new offerings, an argument can be made that the bloated bureaucracy encumbering the pace of applications has made the U.S. less competitive in the global landscape when it comes to raising publicly-sourced funds for flourishing companies.  A quick look at the chart illustrates the glaring divide:  the U.S. can lay claim to only one IPO while China can boast eight (Chart via Wall Street Journal via Dealogic)

Trend to Watch: China Will Boast IPO Dominance Into the 2nd Quarter of 2010

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The economic landscape in emerging markets such as Brazil, China and India are beginning to show signs of life. These “greenshoots” are taking the form of IPOs, which are a leading historical  indication that world markets are springing back to life.

Emerging Market IPOs on the Rise

As reported in the Financial Times in the article Santander Launches Brazilian IPO, the Spanish bank, launched an initial public offering of its highly-successful Brazilian outpost making it one of the world’s largest initial public offerings of the year.

In addition, the Wall Street Journal reported in its article, Sinopharm plans $1.2 Billion IPO, that Sinopharm Group Co., China's largest pharmaceutical company, will attempt to raise up to $1.12 billion in an initial public offering in Hong Kong.

Not to be outdone by Brazil and China, India plans as many as 40 initial public offerings on the Bombay stock exchange in the next few months according to this article in Businessweek.

Risk Factors

In reading about these recent deals, I was reminded that, as a corporate lawyer, I am primarily in the risk management business. When a client seeks my advice on the complex legal issues surrounding an emerging market transaction, I always stress temperance over exuberance.  While  it is easy for one to get carried away with an opportunity to participate in a major securities deal,  counsel must advise a client of all the major risk associated with the listing.  As I wrote in an earlier post, due diligence is an integral part of the process. This is particularly true of emerging markets since government oversight can fall short of the standards set by developed markets. Based on experience, market research and analysis, I’ve identified 6 risk factors which can undermine the IPO process in emerging markets:

1. Potential conflicts of interest arising from the involvement of the candidates’ senior management in other competing but not openly disclosed businesses
2.  Litigation history of IPO candidate and key principals being omitted or insufficiently described in the prospectus;
3. Inaccurate statements of academic qualifications and technical expertise when describing senior management background and experience;
4. Undisclosed tax liabilities – a significant problem;
5. Undisclosed environmental problems or fines; and
6. Undisclosed industrial labor disputes in outlying areas

Conclusion

The main objective in this risk analysis framework is to ensure that public information including offering documents contain all material information about the issuer and its financial condition, and that no important information is omitted or understated. Careful analysis of these 6 key risk factors will minimize the likelihood of one succumbing to misplaced exuberance.

Trend to Watch: As the pace of emerging market IPOs picks up, look for more investors to be misled by omission or understatement of material information

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The Financial Times reported in this article that Europe continues to trail behind world markets in IPOs, particularly those in Asia and the United States.  While this may be the current trend, all markets—including—Europe--can expect a significant uptick in IPO activity as the economy begins to rebound. Illustratively, Kohlberg Kravis Roberts is planning at least one major deal in Europe for Danish telecom giant TDC.  As reported in New York Time’s DealBook, Dole Food Company Inc., is also planning a deal in the United States.  According to Craig Coben, head of equity capital markets origination at Bank of America-Merrill Lynch:

If the Market is open for European capital raisings to finance new investment then the market should also be open to IPOs for strong Companies”

Three Key Areas of Focus

As  global competition for IPO activity begins to heat up, those structuring an initial public offering would best serve their clients by focusing on three crucial components of the pre-IPO process: due diligence, valuation and capital structure.

1.       Due diligence:  During this phase, a company, its underwriters, and their attorneys must focus on the registration statement.  An exhaustive auditing of the company’s finances is a crucial step towards substantiating the registration statement and maximizing the likelihood of long-term success for any IPO.  The experience of executives and the integrity of financial forecastsmust  also be painstakingly scrutinized.

2.       Valuation: Because private firms do not have past stock prices, risk estimation must be based on an approach that does not consider past price parameters.  The Relative Valuation Approach is best suited for this purpose because the comparables of similar publicly traded firms are considered. Under this approach, prices are more accurately estimated as a correlation between the revenues or operating incomes of the comparable firm and the firm being valued. If it is positive, then the firms are comparable. 

3.       Capital Structure: The number and class of shares that will be issued play an integral role in the valuation and appeal of an offering.  It is important that the IPO team possess knowledge of and experience in the industry of the issuing company or at least in a related industry to determine how the offering will be structured. If the issuer is a company based outside the US, the team should also know the customs and business practices of the issuer's home country.  

Conclusion

Undertaking an IPO is a monumental and exciting event for a new company. A well received IPO means that the company will have funds to fuel its development and growth. Following these key points will serve as important guideposts for any company planning to go public.

Trend to Watch: The Market for IPOs will Continue to Strengthen. Europe, in particular, Will Post Sizeable Gains Vis à Vis Primary World Markets.

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