In-House Counsel Summit
Successor Liability:
Export & Import Considerations
April 25, 2013
Elsa Manzanares, Partner
www.BraumillerSchulz.com
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Definition and Introduction
Successor liability means the potential liability of the acquiring
company for violations committed by the acquired company.
• Typically triggered via a merger or acquisition.
– Certain exceptions where an asset sale could generate the same successor
liability as a merger or acquisition.
 i.e., a de facto merger or a continuation of the business.
•Not codified in customs and export laws.
•Authority extrapolated from federal court or common law, and
from rules of constitutional construction.
Liability includes:
-Audits -Investigations -Disclosures -Liquidated damages
-Penalties -Additional duties, taxes, fees.
2
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Seminal Cases
Export:
• Sigma-Aldrich, 2002
• Hughes Electronics/Hughes Aircraft and
Boeing, 2003
Import:
• Shields Rubber Co., 1989
• Ataka America, 1993
3
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Hypothetical Transaction #1
Giant Corporation (Giant) is in the process of acquiring
Little Corporation (Little).
Little sells in the domestic market and for export.
Little’s products and technology are subject to US
export controls.
After acquisition, Little will be merged into Giant as an
operating division.
Does Giant have any concerns?
What should Giant do to mitigate those concerns?
4
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Export Controls
More than 20 different US Government agencies
have regulations controlling exports.
The primary agencies are the Directorate of Defense
Trade Controls (DDTC) of the Department of State
and the Bureau of Industry & Security (BIS) in the
Department of Commerce.
DDTC administers the International Traffic in Arms
Regulations (ITAR) in 22 CFR 120-130 governing
export of defense articles and technical data.
5
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Export Controls (cont’d)
BIS administers the Export Administration
Regulations (EAR) in 15 CFR 730-774, governing
export of commercial and dual-use articles and
technology.
Both agencies have a strict policy of enforcement.
Both agencies also have procedures for voluntary
disclosures.
6
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Basic Compliance Issues
Some situations that can result in export
compliance liability. For example:
•Failure to obtain and use appropriate export licenses,
•Failure to properly declare export transactions,
•Incorrect license jurisdiction,
•Deemed exports – foreign national employees, visitors,
contractors, and
•Failure to maintain records
And of course, intentional or fraudulent conduct.
7
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Successor Liability In An Export Situation
The basic rule: By acquiring the company, you are
acquiring their export compliance liabilities.
• If the acquired company is found to have export compliance
liabilities, the acquiring company will be held responsible for them.
• This can occur after the acquisition is complete.
• This rule has been upheld in the courts.
The basic strategy: Conduct full due diligence prior to
acquisition and voluntarily disclose any compliance
issues.
Sometimes disclosure does not occur until after closing.
8
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Due Diligence and Disclosure
Examples of due diligence that should be
performed:
•Export policies, procedures and internal structure
•Review past 5 years of export records and licenses
•Obtain a report from Census containing export data
•Export violations, disclosures penalties
•Export compliance training given and received
Anything discovered needs to be disclosed.
9
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Hypothetical Transaction #2
Acme Corporation (Acme) is acquiring ABC
Company (ABC), a US importer and distributor.
ABC has been importing for several years and takes
advantage of free trade agreements.
After acquisition, ABC’s business and assets will be
incorporated into Acme and ABC itself will be
dissolved.
Does Acme have any concerns?
What should Acme do to mitigate those concerns?
10
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Customs & Import Controls
US Customs & Border Protection (CBP) enforces
the Tariff Act of 1930 (Title 19 USC), the Customs
Regulations (19 CFR), and the Harmonized Tariff
Schedule of the US.
CBP has broad authority to examine goods, review
transactions, conduct audits, and investigate
violations.
CBP can also assess penalties and liquidated
damages for violations.
11
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Basic Compliance Issues
Some import and Customs compliance issues:
•Undeclared assists,
•Tariff classification errors,
•Use of free trade agreements,
•Dumping and countervailing duties,
•Use of duty free exemptions, and
•Recordkeeping errors.
And of course, deliberate or fraudulent activity.
12
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Successor Liability In An Import Situation
If the acquiring company maintains the acquired
company as a separately incorporated subsidiary,
the liability remains with the subsidiary.
If the acquired company is merged into the acquiring
company and is dissolved as a separate corporation,
the liability is typically dissolved - but there are
exceptions.
There are many other things that may need to be
done or fixed – but that is another discussion.
13
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Latest Update
Decision of the US Court of International Trade (USCIT) in
United States v. Adaptive Microsystems LLC, Slip Op. 1350, Apr. 10, 2013
Adaptive Microsystems’ predecessor company had
alleged Customs violations.
Adaptive Microsystems went into receivership, then was
acquired.
• New company also named Adaptive Microsystems.
• A corporate officer of new company was also officer of predecessor
company.
• A substantial number of employees were transferred to new
company.
14
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Latest Update (cont’d)
A Wisconsin court had authorized the acquisition and
said that the new company would not assume any of
the predecessor’s liabilities.
The USCIT did not agree with the Wisconsin court.
•The USCIT cited Wisconsin law on continuation of liability
and that the Court may not have been aware of the
Customs liability.
•The USCIT cited the continuation of officer and
employees, the use of a very similar name, and Adaptive
Microsystems’ own representations that it was the same
company.
15
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Latest Update (cont.)
Based on this, the new Adaptive Microsystems
was responsible for the liabilities of the
predecessor company.
This ruling may be subject to appeal to the Court
of Appeals for the Federal Circuit, so may be
subject to change.
16
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Due Diligence and Disclosure
Import and Customs compliance issues to review in
an acquisition:
•Compliance policies and procedures,
•ITRAC report covering 5 years of imports,
•Use of free trade agreements and duty free exemptions,
•Last 5 years of import records – if they exist,
•Tariff classification database,
•Purchasing records for assists and separate payments, and
•Products subject to dumping and countervailing duty.
File a prior disclosure for any issues discovered.
17
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Takeaways
This is a subject frequently overlooked in an acquisition
but may be dangerous.
The regulating agencies may be vigilant in
enforcement, but also have generous prior disclosure
procedures.
Find and fix the problems before the acquisition is final.
Due diligence and voluntary disclosures will help to
prevent successor liability issues.
Get expert assistance if you don’t have it in-house.
18
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.
Contact Information
Elsa Manzanares
Partner
Braumiller Schulz LLP
International Trade Law
5220 Spring Valley Rd Suite 200
Dallas, TX 75254
214-348-9306
Elsa@BraumillerSchulz.com
www.BraumillerSchulz.com
19
© 2013 Braumiller Schulz LLP
Any copying or distribution is prohibited.