Martijn Steger, Vinita Bahri-Mehra and Martin G. Hu (Boss & Young) presented "Doing Business Internationally: Implications for Corporate Counsel" on February 23, 2006, for the Association of Corporate Counsel. The presentation focused on the methods of conducting business internationally, special considerations in international agreements and recent legal developments in different global markets.

1. Doing Business Internationally:
Implications for Corporate
Counsel
S. Martijn Steger
Vinita Bahri Mehra
Martin G. Hu (Boss & Young)
23 February 2006

2. 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

3. A. One-Shot / Occasional Sales Orders
• Test potential agent or distributor
• Gain market information
• Can be costly to manage customer who buys
only sporadically

4. 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

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

6. D. Contract Manufacturing
• Heightened IP risks
• Business practices and contractual terms are
key to IP protection
• Can minimize other risks by diversifying
manufacturing globally

7. 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

8. 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

9. 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?

10. H. Marketing Alliances
• Who controls the marketing decisions?
• Who owns the customer information?
• Antitrust issues?

11. 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

12. 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

13. 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

14. II. SPECIAL CONSIDERATIONS IN
INTERNATIONAL AGREEMENTS
• Choice-of-Law Clauses
• Choice-of-Forum Clauses
• Modes of Dispute Resolution

15. 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?

16. 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

17. C. Modes of Dispute Resolution
• Mediation
• Other ADR
• Arbitration
» 1958 NY Convention
• Litigation
» Enforcement of judgment?

18. III. RECENT LEGAL DEVELOPMENTS
IN SELECTED MARKETS
• India
• China
• Two Major Markets
• Diverse Legal Systems

19. A. India
I. INTRODUCTION
• Businesses in the U.S. continue to shift a
portion of their
» manufacturing,
» product development, and
» customer support
offshore to countries such as India
• Lower cost structure and a qualified labor pool

20. 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

21. 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

22. Hot Sectors for Investment in India
• Drugs and Pharmaceuticals
• Trading
• Film Industry and Advertising

23. 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

24. 3. ENTRY STRATEGIES FOR
FOREIGN INVESTORS
• A foreign company planning to set up business
operations in India has a number of options, as
follows:

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 4. WHAT TO LOOK OUT FOR – THE
GOOD AND THE BAD
• Taxation
• IPR
• Choice of Forum
• New Developments

35. 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.

36. 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

37. 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

38. C. Choice of Forum
• Enforcement of foreign judgments and awards
• Issues related to injunction actions

39. 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.

40. B. China
The Foreign Investment Guidance contains
four categories:
• Encouraged Industries
• Restricted Industries
• Prohibited Industries
• Permitted Industries

41. 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

42. 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

43. 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)

44. 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

45. 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

46. 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

47. WOFE
• Registered capital: Generally no less than
USD 200,000
• Sell self-manufactured products to domestic
and overseas markets

48. 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

49. 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

50. 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

51. 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

52. 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

53. 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

54. 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

55. 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

56. 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

57. 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

58. 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

59. 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

60. Comparison between CEPA & Foreign
Invested Commercial Company Regulations
CEPA Foreign Invested
Commercial Company
Regulations
Effective 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 300,000
Wholesale: RMB 500,000
Parent
Company
Qualification
• Qualified HK Service provider status
• Economic Qualifications
Retail: Average sales in the past 3 years:
USD 10 million
Asset 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 level
② MOC
Approval
Timeline
Discretionary ① 1½ months at the provincial
level
② 3 months at the MOC level

61. 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

62. 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

63. 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

64. 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

65. 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;

66. 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

67. Thank You
S. Martijn Steger
Vinita Bahri Mehra
Kegler, Brown Hill & Ritter Co., L.P.A.
Ste. 1800, 65 E. State St.
Columbus, OH 43215
Direct Dial: 614 462 5495
Fax: 614 464 2634
Email: msteger@keglerbrown.com;
vmehra@keglerbrown.com
www.keglerbrown.com

68. 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