Global Business Basics
Emerging Markets? Where?
Presented by :
Klint Alexander
211 Commerce Street
Suite 800
Nashville, TN 37201
615.726.5698
kalexander@bakerdonelson.com
21st Century World
•
Every Business today should embrace globalization by having a
basic understanding of the transnational aspects of law doing
business abroad
• Why?
− Globalization and change are inevitable
− The world is opening up to expanded trade, investment and
economic opportunity
− Other Businesses are going global
− Competition is fierce
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Transnational Sales
•
Vienna Convention on Contracts for the International Sale of Goods
(CISG)
− Note: parties who fail to include a choice of law clause in their contract may
discover that their rights and obligations are governed by the CISG
− sets forth substantive law rules governing the formation of contracts for the sale
of goods between parties whose places of business are in different states

The parties’ respective States must be contracting parties to the CISG
− It does not deal with fraud, duress, incapacity, mistake or unconscionability, which
are governed by national law (see UCC)
− Parties may exclude the application of the CISG in their contract
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If the parties wish to opt out of the CISG they should do so explicitly
− CISG v. UCC
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CISG applies the “mirror image rule” for the battle of forms
No statute of frauds or parole evidence rule in the CISG
No “perfect tender rule” in CISG
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The Contract of Affreightment
• The Carriage of Goods by Sea Act (COGSA)
− Governs the liability of ocean carriers for damage or loss to cargo
from “tackle-to-tackle” to or from U.S. ports
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Limit liability to $500 per package or “customary freight unit”
COGSA does not apply to inland carriage or to any party not
considered to be an ocean carrier unless:
1.
Bill of lading contains a Himalaya Clause
o
2.
Bill of lading contains a Responsibility Clause
o

Extends COGSA protection to third parties
Explicit statement extending COGSA inland
Carrier is not liable for:
1.
2.
Losses caused by perils of the seas, and
Losses caused by negligent navigation of the ship
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Transnational Sales
Letters of Credit
• Function
− Serves a verification function rather than as a guarantee

Bank’s involvement verifies to the seller that the buyer is creditworthy
• Why use a letter of credit?
− Greater risks involved in doing transnational business
− Provides Seller with an assured means of payment

Seller might have to seek remedies in a foreign country
− Protection for Buyer against Non-delivery by the Seller

Buyer: provides the buyer assurance that payment will not be made until the
seller has delivered the goods to the carrier
− Provides the Buyer with financing flexibility
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Goods: Customs and Tariff Law
Three Issues to Consider
• Classification (WCO Harmonized Tariff System)
• Valuation (WTO Valuation Agreement)
• Origin of the Goods (WTO Agreement on Rules of Origin)
− At present, rules of origin are determined mainly by domestic law
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Transnational Sales
Forms and Drafting
• Incoterms 2010
− Defined trade terms that parties can incorporate by reference in their
contracts
− Governs issues such as cost of shipment and risk of loss
− The parties should specify that their contract is governed by the Incoterms
− Be sure to use the correct Incoterm

Different for water transport, land transport and air transport
− In the bulk of modern commercial transactions (FOB, CFA, C&F & CIF), the
seller satisfies its delivery obligations when the goods have been properly
loaded on board the carrier (“when the goods pass the ship’s rail”)
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Export Controls
Economic Sanctions
• OFAC administers a number of different sanctions programs. The
sanctions can be either comprehensive or selective, using the
blocking of assets and trade restrictions to accomplish foreign policy
and national security goals.
Multilateral Sanctions
• Arab Boycott of Israel
• U.N.-imposed boycott of South Africa
− To protest apartheid
• U.N.-imposed limited sanctions against Iran
• WTO-authorized sanctions
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Economic Sanctions
Unilateral Sanctions
• United States
− Ban arms-related exports
− Controls over dual-use exports
− Restrictions on economic assistance
− Financial restrictions
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Oppose loans by the World Bank to listed countries
Tax credits denied for income earned in listed countries
Duty-free goods exemption suspended for imports from listed countries
Prohibit U.S. citizens from engaging in financial transactions with the listed
government without a license
Prohibit Defense Department contracts above $100,000 with companies
controlled by listed countries
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Economic Sanctions
Other Unilateral Sanctions
• United States
− Countries:
 Iran, since 1979
 Burma (Myanmar), since 1997
 North Korea, since 1950
 Sudan
 Syria
 China, no arms-related exports, since 1989
 Côte d'Ivoire/Ivory Coast
 Yemen
 Zimbabwe
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U.S. Export Controls
Export Control Licensing
• DOC Bureau of Industry and Security (BIS)
− Primary licensing agency for dual-use exports
− A small percentage of exports require license
•
DOS Office of Defense Trade Controls
− Licenses exports of defense articles/services
• Nuclear Regulatory Commission
− Licenses certain nuclear materials/equipment
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U.S. Export Controls
Export Control Licensing
• “Sensitive Products” to “Sensitive Places”
− Presumption: “No license required”
− See Commerce Control List (CCL)
− See Country Chart (15 CFR 738.3)
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When is a license required?
• Five Ws
− What? (export item’s technical characteristics)
− Where? (country)
− Who? (end-user)
− What? (end-use)
− What other activities are they involved in?
• Commerce Control List (CCL)
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Summary of Steps to Take to Process Your Export
•
Ensure that your export is under U.S. Department of Commerce jurisdiction.
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Classify your item by reviewing the Commerce Control List.
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If your item is classified by an Export Control Classification Number (ECCN), identify
the Reasons for Control on the Commerce Control List.
•
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.
•
Ensure 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.
•
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).
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U.S. Export Controls
Exporter’s Duties
• Be Proactive
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Concealment of information is prohibited
No duty to look beyond the customer’s representations
Duty to Inquire (triggered by Red Flags)
▫
What red flags?
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U.S. Export Controls
Exporter’s Duties
• Red Flags
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Product capabilities do not fit buyer’s business
Item ordered is incompatible w/ State’s technical expertise level
Delivery dates vague or planned for out-of-the-way destinations
Packaging is inconsistent with the stated method of shipment
Customer’s address is same as party found on DOC’s List of
“Denied Persons”
Customer has little or no business background
Customer prefers to pay in cash
Customer is reluctant to offer information about end-use
[RULE: Do Not Put On Blinders!]
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ENFORCEMENT & PENALTIES
• BIS Office of Export Enforcement
• Export Enforcement Program
− Prevent illegal export of dual-use items
− Investigate/assist prosecuting violators of EAR
− Inform/educate exporters, freight-forwarders
• Penalties
− Civil
 Corporation (up to $1,000,000)
 Individual (up to $250,000)
− Criminal
− Loss of export privileges
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U.S. Export Controls
Other Export Considerations
• “Deemed Export” Rule
− Release of technology to a foreign national in the U.S. is considered a
“deemed export” to the home country of the foreign national
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Regulating FDI & MNC Activity
Home State Concerns
• Impediments to FDI & MNCs
− Nationalization (exprop. w/out compensation)
− Performance Requirements
 Local content requirements
 Export performance requirements
− Capital controls
− Discrimination (No MFN/National Treatment)
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NAFTA Chapter 11
• National Treatment (Article 1102)
• MFN treatment (Art. 1103)
• Minimum standard of treatment that must be “fair and equitable” with
“full protection and security” (Art. 1105)
• Protection against performance requirements (Art. 1106)
− Exceptions for legitimate regulatory and police purposes of the host
state (Art. 1106(2))
• Freedom to appoint senior management without respect to
nationality (Art. 1107)
• Freedom to transfer profits and proceeds (Art. 1109)
• Protection against expropriation (Art. 1110)
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Joint Ventures
Types
• Equity Joint Ventures
− Involves creation of corporation owned by JV partners
Contractual joint ventures
− Parties do not establish another corporation but simply specify
their rights and obligations by contract
Why a joint venture?
− Local law may require it
− Local partners can provide valuable knowledge of the local
markets and bureaucracy
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China - Joint Ventures
Chinese Regulation of Foreign Investment
• China regulates FDI at the point of entry
• Equity Joint Venture Law
− Art. 2: provides limited protection against expropriation
− Art. 4: provides for minimum amount of foreign equity in JV – 25%
− Art. 43: regulates technology transfer agreements:
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Requires a fair and reasonable royalty
Allows continued use of the technology after the expiration of contract
Provides for reciprocal exchange of information on improvements
Permits the licensee to purchase materials from sources they deem
suitable (i.e., avoids tying arrangements)
• Art. 43 also requires JVs to be submitted to the govt. for approval
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Brazilian Regulation of FDI
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No law regulating joint ventures
Brazil regulates FDI at the point of exit
Repatriation of profits is the big issue for Brazil
Profits Remittance Law
− Capital and profits should be registered with the
Central Bank
− All Brazilian taxes must be paid first
− All patents & trademarks must be registered with the National Department
of Industrial Property in order to repatriate royalty payments
•
Limited Liability Company (preferred form)
− Managers do not have to be Brazilian residents
− Does not allow for public participation through stock ownership
•
Stock Corporation
− Board of Directors must be Brazilian residents
− Public participation in the form of stock permitted to raise capital
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Agency & Distributorship Agreements
Basic Distinctions
• Agents
− Manufacturers exercise greater control

i.e., may determine the price to the customer
− Arrange sales for manufacturer, but don’t take title to goods

Buyer usually pays seller directly
−
−
−
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Paid by commission on sales they arrange
Manufacturer bears the risk of nonpayment by customer
Actions of the agent may be attributable to seller (tort)
Agents can be given authority to enter into contracts with
customers on behalf of the manufacturer
− Anti-bribery and FCPA concerns
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Agency & Distributorship Agreements
Basic Distinctions
• Distributors
− Usually a larger company with more resources
− More independent/less vulnerable to manufacturers’ whims

Manufacturers have less control
− Buy goods from manufacturer, take title, & resell goods
− Make a profit when they resell the goods to customers at a price
higher than what the manufacturer charged
− The risk of customer nonpayment rests with the distributor
− More likely to raise antitrust concerns

E.g., agreement between manufacturer and distributor concerning the price to
the customer may violate U.S. or foreign antitrust law
− Anti-bribery and FCPA concerns
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Agency & Distributorship Agreements
Protecting Agents and Distributors
• U.S. law
− Does not provide special legal protection
− Automobile Dealers Act of 1956 is an exception
• Other Countries (EU, Latin America, Middle East)
− Legislation to protect agents (i.e., compensation, termination, restraints
on competition)
− Agent/distributor may have extensive rights against seller
• Can parties opt out of legislation protecting agents through a choiceof-law clause/choice of forum clause?
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Agency & Distributorship Agreements
EC Council Directive 86/653
• Governs contracts btw commercial agents/principals (not distributors)
− Requires compensation of agent for termination without cause
 Up to one year’s average remuneration (Art. 17)
− Sets minimum periods of notice for termination of an agreement with
an indefinite term (Art. 15)
− Limits non-compete obligations after termination to 2 years (Art. 20)
• EC Directive 86/653 was implemented in the U.K. by the Commercial
Agents (Council Directive) Regulations 1993
Ingmar GB Ltd. v. Eaton Leonard Technologies Inc.
European Court of Justice (2000)
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Agency & Distributorship Agreements
Taxation
• Two Tax Issues with These Types of Agreements
1)
Whether the use of a foreign representative subjects the manufacturer
to foreign taxes?

Answer: Depends on whether the representative constitutes a “permanent
establishment”
▫
Agents who have authority to bind the principal (see US-German tax treaty)
◦
Must deny agent authority in the agreement
“All orders are subject to manufacturer’s approval”
▫
Using a German distributor will not create a permanent establishment and subject
the American manufacturer to German tax
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Agency & Distributorship Agreements
Taxation
• Two Tax Issues with These Types of Agreements
2)
Application of the Value Added Tax (VAT)

Payable upon each sale in the chain of distribution but with a deduction for VAT
paid on previous sales
▫
Any VAT paid with respect to the sale from the manufacturer to the distributor should be
deductible from the VAT owed on the sale from the distributor to the customer
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Licensing
General Points
• Involves the production of goods abroad where labor and materials
may be cheaper
• Advantages:
− Production in the consumer’s country may save tariffs and transportation
costs
− The licensor need not acquire the same knowledge of local conditions
and markets that would be necessary for it to run the manufacturing and
sales operation itself
− The risks of foreign expropriation are lower than FDI
• Risks:
− Loss of control over licensee (i.e., marketing of goods)
− Loss of control over technology
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Licensing
Developing Country Technology Transfer Laws
• Some developing countries have enacted technology transfer laws
that attempt to level the playing field between foreign IP owners and
local licensees in licensing agreements
• Andean Commission Decision 291
− Bolivia, Colombia, Ecuador and Peru
− Requires licensing agreements to be approved and
registered with a national authority in order to be valid
• Disfavored Contract Provisions
a.
b.
c.
d.
e.
f.
g.
Tying
Price-fixing
Restraints on production
Non-compete obligations
Grant backs
Minimum royalties
Territorial restrictions
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International Commercial Arbitration
Advantages of Arbitration
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Neutrality of the forum
Streamlined proceedings (faster)
Cheaper than litigating in court (really?)
Less formal
More confidential
Non-appealable
Disadvantages of Arbitration
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Arbitrators have no power to compel discovery
Arbitrators can only award damages (not injunctions)
Arbitrators are paid by the parties themselves
− Can be expensive
− Can incentive settlement
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What is the FCPA?
The FCPA prohibits U.S. companies and their agents from:
• Using a payment or the promise of a payment of anything of value to
a foreign official, foreign political party or candidate, directly or
indirectly
• To influence his or her official actions in violation of his or her duty
• Or to secure improper advantage or to induce the person to use his
influence to affect official action
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Enforcement Trends
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200% increase in cases from 2005 to 2008
More specialized government investigative units
More targeted and proactive investigations
More trials
Much higher penalties
Sector investigations by the SEC and the DOJ
Increased individual fines
Increased jail time
Individual prosecutions years after corporate settlement
FCPA IS A HOT TOPIC with the highest level of government attention.
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Foreign Corrupt Practices Act (FCPA)
Elements:
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Any U.S. person/corporation or foreign person or corporation acting in U.S.
Corrupt intent (evil motive)
Corrupt intent: purpose of wrongfully directing business to the payor or to
wrongfully obtain favorable legislation or regulations
Proscribed payments: any act in furtherance of a payment
− Exceptions:
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•
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Grease payments (to secure the performance of a routine government function)
Bona fide expenditures (travel, lodging, meals incurred by a foreign government official
for the purpose of promoting the payor’s products or services)
Payments lawful under the existing written laws of the foreign state
Expenses related to the execution of a contract
Persons to whom payments are made (foreign officials, foreign political
parties or candidates for foreign office)
Business purpose test: to obtain/retain business
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Examples of Improper “Travel
and Entertainment” Expenses
• Examples of improper “travel and entertainment” expenses, which
could trigger an FCPA investigation, include:
− A $12,000 birthday trip for a government decision-maker from
Mexico that included visits to wineries and dinners;
− $10,000 spent on dinners, drinks, and entertainment for a
government official;
− A trip to Italy for eight Iraqi government officials that consisted
primarily of sightseeing and included $1,000 in “pocket money”
for each official; and
− A trip to Paris for a government official and his wife that consisted
primarily of touring activities via a chauffeur-driven vehicle.
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Affirmative Defenses
It is not a corrupt action to provide:
• “Business hospitality,” such as bona fide expenses for travel and
lodging, if:
− The hospitality is directly related to the promotion, demonstration or
explanation of a product/service
− Or the performance of a contract with a government entity
• Payment, if it is permitted under the country’s law:
− Must be very specific
− Must be in writing in the law/regulations itself
− Very limited applicability
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FCPA Recordkeeping Requirements
Best Practices
• Keep books, records and accounts with details that accurately and
fairly reflect transactions and dispositions of assets and financial
statements in accordance with GAAP
• Have a system of internal accounting controls
• Be able to show that transactions are executed in accordance with
management's authorization
• Be able to show authorizations required for access to assets
• Do timely audits to compare books/records to accounts
Note: Financial results of foreign subsidiaries/agents that are incorporated into
the parent’s records must not conceal illicit payments.
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Types of Records/Actions that May Fail to
Include Appropriate Detail
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Political contributions
Commercial bribes or kickbacks
Income tax violations
Customs violations
Payments to foreign government officials
Gifts/Travel/Entertainment
Note: A person or entity may be criminally liable if he or she knowingly
circumvents or knowingly fails to implement an internal control system.
Note: Both DOJ and the SEC will enforce recordkeeping requirements.
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Successor Liability
• Liability of an acquiring or merged company for the acts of a
predecessor
• An acquiring company should:
− Immediately integrate an acquired company into its compliance and
training scheme
− Conduct an FCPA-specific audit of the new company as soon as
possible
− Disclose all of the acquired company’s violations and cause them to
cease immediately
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FCPA Penalties and Enforcement
Corporate Penalties
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Up to $25 million criminal fine per violation
or 2 times the gain
$10,000 civil penalty per violation
company or the gross gain
Disgorgement of profits
Appointment of compliance monitor
the
Individual Penalties
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Up to 20 years in prison
Up to $5 million criminal fine per violation or 2 times the gain
$10,000 civil penalty per violation
The fine shall not be paid directly or indirectly by the company
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Compliance Program Pointers:
• Adopt written code of conduct and anticorruption policy with a clear
message from the top
• Appoint a compliance officer
• Train employees and agents/contractors/consultants
• Undertake and document due diligence
• Use questionnaires to evaluate third parties
• Establish a mechanism for reporting behavior
“IT TAKES THE
WHOLE COMPANY”
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Best Practices
• Interact with lower level bureaucrats
• Do not ask or allow a government official to make business
arrangements
• Use local language and incorporate ethical local customs
• Use technology to educate, train, and monitor
• Be careful with email/voicemail!
• Engage all levels of the corporation
• Pay attention to concerned employees because most whistleblowers
tried internal reporting first
• “New York Times Rule”: would the conduct imply corruption if
reported in a newspaper?
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