Doing Business Internationally: Implications for Corporate

CounselS. Martijn Steger

Vinita Bahri MehraMartin G. Hu (Boss & Young)

23 February 2006

I. METHODS OF DOING BUSINESS INTERNATIONALLY

• One-Shot/Occasional Sales Orders• Agent or Distributor• Contract Manufacturing• Off-shoring/Outsourcing• Joint Ventures• Acquisitions / Wholly-Owned Entities

A. One-Shot / Occasional Sales Orders

• Test potential agent or distributor• Gain market information• Can be costly to manage customer who buys

only sporadically

B. Agency

• Authority to conclude contracts in the name of the principal?

• Define amount of agent’s freedom to act and speak for your company and monitor it

• Normally does not take title to goods• Local law might be more protective of agents

than distributors• Exclusivity: Key factor in indemnity

C. Distributorship

• Has roles as debtor and reseller• Control over customer information• Possibly more IP risk• Increasing protection of distributors under local

laws

D. Contract Manufacturing

• Heightened IP risks• Business practices and contractual terms are

key to IP protection• Can minimize other risks by diversifying

manufacturing globally

E. Off-shoring / Outsourcing

• Factor in all Costs: Training, Time to Market, Customer Satisfaction, etc.

• Roles of Contracts and Local Presence• Major political issue in certain sectors:

» Health Care» Insurance» Banking

F. Types of Joint Ventures

• Legal Entity owned by two or more persons for the purpose of a particular task or the operation of a long-term business

• Contractual JV: Work together to accomplish particular project; e.g., certain R&D ventures

• Equity JV: Two investors share P & L• Concentrative JV: Term in EU for JV that

serves as separate economic entity• Clearance by competition authorities

G. Technology Licensing Agreements

• Does US law prohibit the export of the technology to the JV entity / partner?

• Does the other country require the transfer of the technology?

• Who owns jointly developed IP / trade secrets?• Liabilities arising post-termination?

H. Marketing Alliances

• Who controls the marketing decisions?• Who owns the customer information?• Antitrust issues?

I. Alliances in Service Sectors

• Service companies are increasingly using joint ventures internationally» Expand quickly into unfamiliar markets» Utilize local knowledge» Acquire established distribution channels» Minimize costs and some risks

J. Role of Strategic Planning

• Define all objectives• Prioritize those objectives• Identify opportunities and risk factors• Establish budgets by market• Establish the team responsible for global

strategy and implementation

K. Process of Strategic Planning

• Establishing a process is critical for making sure your company can manage the following:» Responsibilities of each team member, including

local managers» Identify local market research needed» Adapt the strategy for each market» Establish an acceptable balance of risk, control and

cost

II. SPECIAL CONSIDERATIONS IN INTERNATIONAL AGREEMENTS

• Choice-of-Law Clauses• Choice-of-Forum Clauses• Modes of Dispute Resolution

A. Choice-of-Law Clauses

• Should Ohio law govern?• Can Ohio law govern?• Apply more than one body of law?• Will a judgment or award rendered under Ohio

law be enforced?• Drafting imperatives:

» Exception for choice-of-law rules;» Exception for CISG?

B. Choice-of-Forum Clauses

• Should Ohio be the forum?• Can Ohio be the forum?• Neutral forum?• Will a judgment or award rendered in Ohio be

enforced?• Drafting imperative:

» Be clear that all parties submit to the jurisdiction and venue of the chosen forum

C. Modes of Dispute Resolution

• Mediation • Other ADR• Arbitration

» 1958 NY Convention• Litigation

» Enforcement of judgment?

III. RECENT LEGAL DEVELOPMENTS IN SELECTED MARKETS

• India• China• Two Major Markets • Diverse Legal Systems

A. India

I. INTRODUCTION

• Businesses in the U.S. continue to shift a portion of their» manufacturing, » product development, and» customer supportoffshore to countries such as India

• Lower cost structure and a qualified labor pool

1. Hot Sectors for Investment in India

• Foreign Direct Investment Permitted:• Information Technology Enabled Services

(“ITES”)» Business Process Outsourcing (BPO);» Knowledge Process Outsourcing (KPO);» Call-Centers; and» Software development

Hot Sectors for Investment in India

• Manufacturing Services, includes hardware components and software components.

• Infrastructure Sector includes:» Roads and highways;» Ports;» Electricity Generation and Transmission

Hot Sectors for Investment in India

• Drugs and Pharmaceuticals• Trading• Film Industry and Advertising

2. Sectors Where FDI is Absolutely Prohibited

• Retail Trading, except as discussed later• Atomic Energy• Lottery Business• Gambling and Betting Sector• Housing and real-estate business, except

development of integrated township• Agriculture

3. ENTRY STRATEGIES FOR FOREIGN INVESTORS

• A foreign company planning to set up business operations in India has a number of options, as follows:

A. As an Indian Company

• A foreign company can commence operations in India by incorporating a company under the Indian Companies Act, 1956, through:

(1) Joint Ventures; or(2) Wholly-Owned Subsidiaries

As an Indian Company

• Foreign equity can be up to 100% depending upon » the requirements of the investor» equity caps for certain areas of activity under the

Foreign Direct Investment Policy

B. As a Foreign Company

• Foreign companies can set up their operations in India through:

• (1) Liaison / Representative Office• (2) Project Office• (3) Branch Office• Each can undertake only specified activities

As a Foreign Company

• Liaison Office: Acts as a channel of communication between the principal place of business or head office and entities in India.

• Liaison office can not undertake any commercial activity, directly or indirectly

• Thus, can not earn any income in India

As a Foreign Company

• Project Office: Companies planning to execute special/specific project in India can set up project/site offices in India

• Designed to be temporary

As a Foreign Company

• Branch Office: Foreign companies engaged in manufacturing and trade activities abroad are allowed to set up Branch Offices in India for certain purposes

• Examples: Export/import; rendering professional services or consulting services; rendering services in IT, such as development of software in India

C. Build – Operate – Transfer (“BOT”)

• Another structure used by some foreign companies is the BOT. This is mostly true for investments in the Call-Center Sector.

• The BOT can be done within the structure of a JV or a wholly-owned subsidiary» Depending on any limits in FDI regulations

Build – Operate – Transfer (“BOT”)

• In a BOT, the foreign company will have an option built into the agreement with a third-party service provider, by which it can elect to purchase the business unit

• Concept: The unit is solely dedicated to business needs of the foreign company

D. Third-Party Outsourcing

• The foreign company enters into an independent business relationship with a BPO or development company in India

• Recommended for companies intending to outsource their non-core activities and for mid-sized companies, where setting up a unit in India may not be commercially viable

4. WHAT TO LOOK OUT FOR – THE GOOD AND THE BAD

• Taxation• IPR• Choice of Forum• New Developments

A. Taxation in India

• India is moving towards reforming its tax policies and systems so as to facilitate globalization of economic activities.

• Corporate tax rate for foreign companies is 40%. For domestic companies, 35.7%.

• Tax holidays are available under schemes like Special Economic Zones; Software Technology Park Units; etc.

B. Intellectual Property Rights

• A foreign company should be careful to maintain control over its IPR» Including with a BPO entity

• Contractual provisions• Business practices

B. Intellectual Property Rights

• Indian IP Laws do not provide for automatic assignments

• So, critical to address “assignment of rights” issues in contracts, such as for Outsourcing

C. Choice of Forum

• Enforcement of foreign judgments and awards• Issues related to injunction actions

D. New Developments

• India recently opened its door for FDI in “Retail Trading.” FDI is now permitted up to 51% for companies dealing in “Single Brands”

• India is reforming and lowering its custom and import tariffs to be at par with other ASEAN countries.

B. China

The Foreign Investment Guidance contains four categories:• Encouraged Industries

• Restricted Industries

• Prohibited Industries

• Permitted Industries

Exemption of Import Duty and VAT

• Foreign invested enterprises (“FIEs”) under the “Encouraged Industries”, foreign invested R&D centers, FIEs with advanced technologies, and export-oriented FIEs

• Equipment for use or technological improvement by FIE itself

• Supervised by customs for 5 years

Forms of Foreign Investment

• Processing Trade• Equity Joint Venture (“EJV”)• Cooperative joint Venture (“CJV”)• Wholly-owned Foreign Enterprise (“WOFE”)• Representative Office• BOT• Foreign Investment Fund• Sales Vehicles

• Trading Company• Procurement Center• Foreign Invested Commercial Company• Holding Company

• Merger and Acquisition

Processing Trade

• Contractual arrangement with Chinese manufacturer• Processing trade agreement needs approval• Can import bonded raw material and equipment

without ownership transfer• Can export processed products without duty and VAT• Can sell to domestic market through agent after

payment of duty and VAT (subject to approval)

EJV

• Independent legal entity with limited liability• Foreign Investment no less than 25% of registered

capital• Capital contribution in the form of cash, technology,

equipment, land use right or other assets.• To share profit and risk in proportion to investor’s share

in the registered capital• Can sell self-manufactured products to domestic and

overseas markets

CJV

• May or may not be independent legal entity with limited liability depending on the election of investors

• Foreign investment no less than 25% of the registered capital

• Foreign investor may recover his/her investment in advance during the operation term, subject to approval of governmental authority

CJV

• Can sell self-manufactured products to domestic and overseas markets

• Share profit and risk in accordance with mutual agreement in CJV Contract

• Other requirements similar to EJV

WOFE

• Registered capital: Generally no less than USD 200,000

• Sell self-manufactured products to domestic and overseas markets

Representative Office

• No registered capital requirement

• No tax holidays; income tax levied on expenses

• Not allowed to conduct direct sale but can conduct business liaison and market investigation and research

BOT

• Build – Operate -Transfer (BOT) for infrastructure construction

• May establish EJV, CJV or WOFE as BOT Project Company

• Project Proposal and Feasibility Study Report should be approved by the National Development and Reform Commission

Foreign Investment Fund

• Fund investment can be divided into two categories: securities investment fund and industrial investment fund

• Foreign investment securities investment fund: • Minimum registered capital: RMB 100 million

• Joint Venture;

• Foreign shareholder: (1) no more than 49% shares in the fund; (2) its own paid-in capital no less than the amount equal to RMB 300 million

Foreign Investment Fund

• Foreign investment fund shall invest (1) publicly listed stocks and bonds; (2) other kinds of securities approved by CSRC

• Industrial investment fund: new laws in this area are currently under review and yet to be promulgated

Main Tax Preferential Treatment

Main tax preferential treatment for a manufacturing legal entity is:• Can enjoy tax holiday in the first 2 profitable years

and half income tax rate for the next 3 profitable years for a manufacturing legal entity with a business term of no less than 10 years

• FIEs may obtain additional tax preferential polices/treatment through negotiation with local governments on a case-by-case basis

Sales Vehicles

• Allowed to establish a trading company in the form of WOFE in Shanghai Wai Gao Qiao Free Trade Zone

• Can conduct international trade, entrepot trade, internal trade within the Free Trade Zone, and domestic trade via qualified agent

• Can enjoy income tax holidays in the first profitable year and 7.5% income tax rate for the next two profitable years for a trading company with a business term of no less than 10 years

Sales Vehicles

Procurement Center• Registered capital: RMB 30,000,000 • Can conduct

• procuring domestic goods for export, and providing warehousing, information consulting and technical services related to export

• Importing raw and auxiliary materials and entrusting other enterprise to carry out processing and re-export

• Importing and procuring samples which are essential in export

• Can enjoy VAT tax-refund for export

Sales Vehicles

Foreign Invested Commercial Company• Registered capital: no less than RMB 300,000 for

companies providing retail services; no less than RMB 500,000 for companies providing wholesale services

• Since Dec.11, 2004, foreign invested commercial company in the form of WOFE is permissible

Sales Vehicles

Foreign Invested Commercial Company• Services Scope

• Commission services• Wholesale services• Retail services• Franchising services

• Approval Process• One month and a half for the preliminary approval at the

provincial level; three months for the final approval by the Ministry of Commerce

Sales Vehicles

Holding Company• Registered capital: USD 30,000,000

• Can assist invested enterprise in purchasing raw materials and equipment

• Can sell invested enterprises’ products to domestic and overseas markets, and provide after-sale service

Sales Vehicles

Holding Company• Can be qualified as Regional Headquarters if the

holding company meets the requirement of registered capital of USD100,000,000 and other regulatory requirements

• Regional Headquarters can conduct: import and sale of multinational company’s products

Close Economic Partnership Arrangement (“CEPA”)

• Between Mainland China & Hong Kong Special Administrative Region

• Background

• Effective on January 1st, 2004

• Scope: Trade, Place of Origin, Service Industries (including retail & wholesale), Finance Industries & Investment

Comparison between CEPA & Foreign Invested Commercial Company Regulations

CEPA Foreign Invested Commercial Company

RegulationsEffective Date 2004/01/01 2004/12/11* (2004/6/1)

Registered Capital

Retail: RMB 10 million (RMB 600,000)Wholesale: RMB 50 million (RMB 30 million)

Retail: RMB 300,000Wholesale: RMB 500,000

Parent Company Qualification

• Qualified HK Service provider status• Economic Qualifications

Retail: Average sales in the past 3 years: USD 10 millionAsset of the previous year: USD10 million

Wholesale: Average sales in the past 3 years: USD30 million (USD 20 million)Asset of the previous year: USD10 million

Approval Route No Implemental rules yet. ① Provincial level② MOC

Approval Timeline

Discretionary ① 1½ months at the provincial level

② 3 months at the MOC level

Merger & Acquisition of Domestic Enterprise

Forms of M&A

(1) Share Acquisition• To acquire the shares of domestic enterprise

• To acquire increased registered capital of domestic enterprise

Merger & Acquisition of Domestic Enterprise

Forms of M&A(2) Asset Acquisition

• To acquire assets of domestic enterprise and then to use such acquired assets as capital contribution for the establishment of a FIE

• To establish a FIE and to acquire the assets of domestic enterprise through such FIE

Merger & Acquisition of Domestic Enterprise

• Acquisition prices shall not be obviously lower than the appraised price of the shares or assets to be acquired

• Acquisition price shall be fully paid within 3 months after the issuance of the business license

Investment Shareholding Restriction

• Many industrial sectors allow establishment of WOFEs after China’s entry into WTO

• Insurance, Accounting, Telecommunication, Civil Airport, Education, Media and others still require the establishment of joint venture with Chinese partners

Nominal Shareholding Arrangement

• Sign nominal shareholding agreement in a form of loan agreement or other acceptable agreements;

• Legal or illegal: gray area; nominal shareholding agreement might be enforced as a commercial contract;

• Difficult to remit profit abroad under strict foreign exchange control;

• Ways to control the company under the nominal shareholding arrangement:• Control business license;• Control corporate chops;• Control bank accounts;

Legal Advice

• This presentation is designed to provide an overview of a number of legal principles and considerations

• As each legal issue is fact dependent, this presentation should not be used or viewed as legal advice, and your legal counsel should be consulted on the application of your particular factual situation to the current law

• Copyright: 2006 Kegler, Brown, Hill & Ritter and Boss & Young for China portion

Thank You

S. Martijn StegerVinita Bahri MehraKegler, Brown Hill & Ritter Co., L.P.A.Ste. 1800, 65 E. State St.Columbus, OH 43215Direct Dial: 614 462 5495Fax: 614 464 2634Email: msteger@keglerbrown.com;vmehra@keglerbrown.comwww.keglerbrown.com

Thanks to Martin Hu

• Martin G. Hu • Managing Partner • BOSS & YOUNG• Attorneys at Law • 11th Floor, China Merchants Tower• 161 Lujiazui Road East• Shanghai 200120, P.R.China• Tel: 86-21-6886 9666• Fax: 86-21-6886 9333• E-mail: martinhu@boss-young.com• http://www.boss-young.com