We may live in a global economy, but businesses are still required to follow certain national and local laws.
This can make cross-border deals quite complicated. For example, if a U.S. company decides to form a subsidiary in Germany, what are the legal and tax implications for both businesses? This is where working with an international business attorney who specializes in cross-border transactions is essential.
A cross-border transaction is basically any transfer of property, goods or services between individuals or business entities who reside in different jurisdictions. The transaction itself may be something as simple as buying widgets over the internet from China or as complex as multi-tier joint venture investment structures in another country with complex service and distribution agreements.
Cross-Border Deals Examples
The following includes other types of cross-border transactions from my own practice:
A U.S. and German company form a joint venture.
A U.S. distributor of devices entered into a joint venture with a German manufacturer. The joint venture became the exclusive distributor for the manufacturer’s products in the U.S. We structured the joint venture as a corporation and I worked closely with German tax counsel to structure the deal so no tax problems would come up down the road. The shareholder and the distribution agreement required careful drafting regarding control rights product description, territory, and non-compete.
German individuals transfer intellectual property to a U.S. company in return for shares.
Two German software engineers transferred IP rights to an algorithm to their U.S. startup company. The company was formed in Delaware and the parties chose Delaware law as governing law and agreed on binding arbitration in Hamburg, Germany.
A U.S. company negotiates a distribution agreement with a German manufacturer.
The U.S. company had distributed world leading products of a German manufacturer for years without a written distribution agreement. Now the U.S. distributor was to be acquired by a large U.S. company which wanted to see a written distribution agreement. The U.S. distributor turned to me to negotiate a written distribution agreement with the German manufacturer. Unfortunately, we found out that the U.S. distributor had no distribution rights at all, merely a right to sell as an authorized dealer. The German manufacturer did not want to enter into a binding distribution agreement and the deal fell through.
A German company seeks to acquire or buyout a U.S. company.
A German manufacturer of special devices wanted to buy its U.S. distributor. The U.S. distributor owed the German manufacturer a considerable amount of money for ordered products. The German manufacturer asked for help and we tried to turn debt into equity and acquire the U.S. distributor. I drafted a letter of intent and share purchase agreement and conducted the preliminary due diligence. Unfortunately, the U.S. distributor filed for chapter 11 and we had to register the claims in the following bankruptcy proceeding.
A U.S. company buys real estate in Germany.
A U.S. real estate developer company buys a large property in Germany. I was called to assist in the deal together with U.S. and German co-counsel to avoid tax traps and to ensure a smooth transition of the project and the sale of the property once the project is finished.
What Makes Cross Border Transactions Tricky?
Any of these types of cross border deals can raise a host of legal issues on both sides.
First and foremost, there are tax considerations. This requires not only consideration of the tax laws of the individual countries involved, but also any tax-related treaties between the two governments.
Next, the cross-border transaction may face broader regulatory scrutiny. In the case of a merger or acquisition, antitrust authorities in both the United States and the European Union may need to review the deal. This can lead to a situation where one regulator approves the transaction while the other may require certain conditions, or even oppose the deal outright via a legal proceeding.
And even in simpler, non-merger transactions, there are still legal and cultural differences. Particularly in the United States, where each state (and even each municipality) has its own laws that may affect a particular business deal, it is imperative to work with experienced counsel who can help the parties navigate unfamiliar terrain.
One of the most critical decisions that the parties to a cross-border transaction will make is the choice of governing law applicable to the deal. Most courts in most countries will respect the parties’ right to decide which country’s law to apply. But the choice itself will depend on a number of factors. And again, within the United States the choice of law will often come down to a particular state, as that is where most contract and business law matters are handled.
Get Help with Your Cross-Border Transaction
If you are contemplating a cross-border transaction, it is in your best interest to contact a qualified international business attorney sooner rather than later.
Call me today to schedule an initial consultation.