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The Challenges of doing business abroad

Steve H. LevinRobert S. Vineberg

February 15, 2011

ACADACADÉÉMIE DAVIESMIE DAVIES – pour la formation juridique continueDAVIES ACADEMYDAVIES ACADEMY – for continuing legal education

Faire affaires à l’étranger :Les défis

What it’s like out there – the broad differences in culture towards doing business deals and how lawyers enable them in countries other than Canada and the United States

3

What it’s like out there

• Understanding how decisions are made

• Misperceptions and fear of the unfamiliar

• Perhaps the most important rule is : dondon’’t assume anything !t assume anything !

• Be sensitive to the fact – even if the non-Canadian parties are speaking English or French, the words that they use may have a very different meaning from your undersanding

• Try to be very clear with your client as to how you expect things will proceed – it’s often useful to have written timetables

4

THE JOYS AND CHALLENGES OF RETAINING LOCAL COUNSEL

5

HOW TO USE LOCAL COUNSEL EFFECTIVELY AND EFFICIENTLY

6

CONSIDER THE RISKS UNDER LOCAL LAW

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IF YOU THOUGHT TAX ISSUES WERE IMPORTANT

IN DOMESTIC DEALS -They often become much more important in

international transactionsand can, in many cases, effectively dominate the deal

8

REPATRIATION ISSUES -Be aware of potential problems in accessing your

client’s money in foreign countries

9

GOVERNMENTAL APPROVALS ARE LIKELY MUCH MORE OF AN ISSUE WHEN ONE OF THE

PARTIES IS A NON-RESIDENT -This may include governmental approvals from the

foreign jurisdiction, as well as Canada

10

EMPLOYMENT LAWS ARE VERY DIFFERENT IN FOREIGN JURISDICTIONS

11

THE CHOICE OF LAW AND DISPUTE RESOLUTION MECHANISM

DISCUSSIONS ARE OFTEN RATHER INTERESTING

12

THE FORM OF AGREEMENT IN USE LOCALLY MAY LOOK VERY DIFFERENT FROM THE FORM

WHICH WE WOULDNORMALLY USE IN NORTH AMERICA

13

BE AWARE THAT THE DEAL STRUCTURES MAY DIFFER –

The Locked Box closing and Vendor Due Diligence

14

IS THE AGREEMENT ENFORCEABLE? –How can you assess whether the various elements of

the agreementcan be enforced against the foreign party?

Merci / Thank You

Steven H. [email protected]

Robert S. [email protected]

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Investing in U.S. Real Estate: Cross-Border Tax Issues

Brian Bloom Marc G. Darmo

Nathan BoidmanPeter A. Glicklich

February 15, 2011


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Introduction

• Tax perspective in focus

• Cross-border dimension adds complexity as well as opportunity

• Tradeoffs in accessing lower income tax, exposure to U.S. estate tax

• Repatriation planning, avoiding premature inclusions, foreign tax credits, taking advantage of exclusions

Investing in U.S. Real Estate

18

Integrating Tax in Canada from Investments Abroad

• Canadian Resident taxation general–Canadian tax rates on real estate income and gain (passive income, capital gains or

operating income).

–Foreign tax credit rules

–Treaty benefits• Tax rates on interest, dividends• Business profit threshold

–Anti-deferral regimes

Canadian Taxation of Real Estate Generally

19

Investing in U.S. Real EstateIntroductory Comments

International Tax Planning

● DOUBLE TAX?● In principle: No

● See foreign tax credits

● SINGLE TAX?

● Obverse of first point

● NO TAX?

● The alluring prospect

● Seams in zone defense

● See Kingson – 1980 – on coherence

● Then West, 1997 and 2007 Protocol

20

The Allure in International Tax Planning

A picture is worth a thousand words

U.S.

US Real Estate

U.S. Pay the taxman

American

US Real Estate

Tax home run?Canadian

CAN.

Pay the taxmanCanadian

Canadian Real Estate

CAN.


21

The door closes over timeMaybe a “single” left

● 1980 - “FIRPTA” (US CODE §.897)● 1985 - “NEW” 1980 CANADA-US TREATY

– ART. XIII● 1986 - US TAX REFORM AND REPEAL OF

“GENERAL UTILITES”● 1994 - “INVESTMENT BUSINESS”

ADD-ON TO “FAPI”● 2011 - WHAT’S LEFT? – SEE MARC & PETER

RE: “US DOMESTICALLY CONTROLLED REITS”


22

Three Fields

TAX ON RENTS TAX ON GAINS ON DISPOSITIONS

● Never could and cannot avoid ● See Abovesubstantial tax, as between ● Once Upon a Time the two countries ● Grand slam available

● But Earnings Stripping ● Today Slim Pickings● See Marc and Peter ● See following segments

Tax at death● Conflicting Systems at Death

● Article XXIX B● Conflicting Strategies

● For Tax on Gains● For Tax at Death

● See Brian and Peter

ROLE OF LLC’S, ULC’S, TREATY (ART. IV(6) AND (7)) ???


23

Portfolio Investment Normally Bears Little or No U.S. Tax–Any applicable taxes are collected by withholding at the source ("WHT")

–Interest normally bears no WHT:• An exception applies to contingent interest• Interest paid to a related party (a 10% or greater shareholder, for example) will attract up to a 30% WHT, though an exemption is now available under the U.S.-Canada Treaty to residents of Canada

–Dividends typically bear a 15% WHT, under U.S.-Canada Treaty, though the rate is 30% absent the Treaty and 5% on inter-corporate dividends

–Dividends paid by a U.S. real estate investment trust (a "REIT") may qualify for 15% WHT under the U.S.-Canada Treaty, but only if:

• Paid to an individual holding up to 10% of the REIT• Paid on publicly traded units to a holder of up to 5% of the REIT• Paid by a "diversified" REIT to a holder of up to 10% of the REIT

U.S. Taxation of Private Foreign Investment

24

• Capital gains are generally exempt from U.S. tax:

–Exceptions apply to gain from disposition of a U.S. business (the IRS also claims that the sale of an interest in a flow-through entity conducting a U.S. business is also taxable, but this position is controversial)

–The U.S. taxes gain from a direct or indirect disposition of an interest in U.S. real estate or resource property under "FIRPTA" (described below)

–Non-residents who spend 183 days in the U.S. may be taxed on their capital gains


25

U.S. Taxation of Business Profits–U.S. operating businesses pay taxes, whether owned by U.S. or foreign investors

–U.S. corporations pay Federal, State and Local taxes, on net business income• Combined corporate rates range up to 35% (the maximum Federal rate) to over 50% (in high tax States, though State taxes are deductible for Federal tax purposes)

–Non-resident individuals who conduct business in the U.S. through a permanent establishment will pay tax on their business profits on a net basis at similar rates

–Non-resident individuals and corporations doing business in the U.S. have to file U.S. income tax returns in the U.S. in order to be taxed on a net basis

• Those returns must be filed "timely"


26

Rental Real Estate (and FIRPTA)–Operating income is taxed at 30% of gross unless a "net election" is made, or an

operating business is being conducted in the U.S.

–Gain from the disposition of an interest is U.S. real estate (or other U.S. resource property) is subject to tax under FIRPTA

• FIRPTA: The "Foreign Investment in Real Property Tax Act"• FIRPTA provides for the taxation of interests in U.S. real property that are held:

–Directly–Through a partnership–Stock in a U.S. corporation, where the corporation has or has held predominantly U.S. real estate


27

• FIRPTA does not apply to:–Stock of a publicly traded U.S. corporation, if the ownership is less than 5%

–Units in a REIT that is "domestically controlled"

–Stock in a non-U.S. corporation (but that corporation can be subject to FIRPTA)

–Debt instruments, unless they are convertible or otherwise participating in FIRPTA assets:

• Yet, interest and principal paid on participating debt are not subject to FIRPTA if the debt instrument is simply repaid at maturity (participating interest will not be fully exempt from U.S. tax)


28

Mechanisms Used to Reduce U.S. Tax on Operating Profit and Gain on Disposition

–Leverage – Interest deductions on debt instruments may be capitalized or deducted• Limits on so-called "earnings stripping" may apply on interest paid to a related foreign lender (or debt guaranteed by a foreign shareholder)

• U.S. tax issues also include assuring debt (rather than equity) characterization, transfer pricing issues on debt terms

• Re-po and other hybrid securities can be used to improve the tax results in Canada• Third country treaties can be used for tax arbitrage in Canada• Double-dip financing structures may also be useful

–Other payments made to related parties (e.g., management and other service fees) are subject to economic substance and transfer pricing limitations


29

• REITs may provide lower effective U.S. tax rates but complex and difficult to administer:

–Can't be "closely held"

–"100 Shareholders"

–Income and asset tests


30

Taxation of Individuals Holding FIRPTA Assets:– Where FIRPTA applies to gain from property disposition, the U.S. income tax rate

is lower for individuals and trusts than for corporations

– Individuals and trusts currently pay maximum Federal rates of 15% (though recapture of allowable depreciation deductions is taxed at 25%), while corporations pay maximum of 35%


31

Gift & Estate Taxes –However, individuals may be subject to the U.S. estate tax (at rates up to 35%) at

death if they hold an interest in U.S. real estate, stock in any U.S. corporation, or debt instruments in companies in which they are 10% shareholders

–The U.S. gift tax applies to direct transfers of interests in U.S. real property:• Not to the transfer of an interest in a partnership

–Trusts can also be used to avoid the U.S. gift and estate tax, and provide access to reduced Federal income tax rates (see example below)


32

CanadianLimited Partnership

"The Fund"

U.S. Real Estate

The fund is often a flow-through entity forCanadian & U.S. tax purposes to synchronize timing of income recognition and thereby optimize use of foreign tax credits

However, possible exposure to U.S. estate tax for individual investors

Limited liability

Structure?

Structure?

Canadian Investors

The Anatomy of a "Structure"

33

The Fund

Delaware Limited Partnership

U.S. Real Estate

99.9%LPU.S.Co.

GP 0.1%

U.S. corporation as GP Facilitates dealings

with U.S. FIs Helps avoid any

non-refundable GSTon management fees

100%

Delaware LP Also treated as a flow-

through entity forCanadian & U.S. taxpurposes

Limited liability

Canadian Investors


34

To access low 15% UScapital gains tax rate while avoiding USestate tax

Must be irrevocable

Contributor should not have authority to decidewho will receivedistributions

Contributor should notbe a beneficiary

All income should becurrently distributable

Consider lending fundsto the trust

Canadian beneficiaries to file U.S. tax returns on any "ECI" further to election to pay U.S. tax on net rent rather than pay a 30% withholding tax on gross rent

Canadian Trust

The Fund

100%

U.S.Co.

GP 0.1%

LP 99.9%

Delaware LP

U.S. Real Estate

LP


35

Considerations & benefits similar to Canadian resident trust; however trust may accumulate income, in which case trust pays U.S. tax on a net basis and Canadian beneficiaries do not need to file U.S. tax returns

Could be deemed a resident of Canada under NRT rules

U.S. Trust

The Fund

100%

U.S.Co.

GP 0.1%

LP 99.9%

Delaware LP

U.S. Real Estate

LP


36

Capital gains taxed in U.S. at 35% federally (rather than 15%)

Subject to U.S. branch tax (5% under tax treaty)

U.S. state tax typically applies

Income not fully "integrated" and thus subject to double-tax in Canada

Consider debt financing to provide some integration

Need to respect particular U.S. earnings stripping rules

Use single purpose company

However, protects investor from U.S. estate tax

Capital dividends available

Canco

The Fund

100%

U.S.Co.

GP 0.1%

LP 99.9%

Delaware LP

U.S. Real Estate

LP


37

Capital gains taxed in U.S. at 35% federally

Controlled foreign affiliate

FAPI taxed on current basis to Canadian shareholders

Burdensome reporting requirements

Capital dividends not available

U.S.Co

The Fund

U.S.Co.

GP 0.1%

LP 99.9%

Delaware LP

U.S. Real Estate

LP

100%


38

GP of the Fund is a limited partnership so that the carried interestcan benefit from low U.S. tax rate on capital gains

Canadian Limited Partnership

.01%GP

GPCo.

Individual/Trust

LP 99.99%

Individual/Trust

GP Carried Interest

The Fund

100%

U.S.Co.

GP .01%

LP 99.99%

Delaware LP

U.S. Real Estate


39

Basic Canadian Parameters• Overview

–FAPI–Income from property–Income from investment business:

• Business the principal purpose of which is to derive income from property which includes rents

• Business the principal purpose of which is to derive profits from the disposition of "investment property" which includes real estate

–Does not include a business which:• employs more than five full-time employees, • is not conducted principally with non-arm’s length persons, • and is in the nature of the development of real estate for sale or the leasing property

• Avoiding "investment business" characterization

U.S. Real Estate Investments By a Canadian Corporation Through a U.S. Subco

40

Financing Strategies• Leveraging to reduce U.S. tax on operating profits

–Limits on so-called "earnings stripping" may apply on interest paid to a related foreign lender (or debt guaranteed by a foreign shareholder)

–U.S. tax issues also include debt (rather than equity) characterization, transfer pricing issues on debt terms and anti-conduit rules

• "Double-dip" financing: adding an interest deduction in Canada without any offsetting income inclusion

–Common structures:• Third country financing intermediary (see diagram)• Hybrid instrument (debt for U.S. tax purposes and equity for Canadian tax purposes)

• Hybrid entity based structure (e.g. tower structure)


41

Third Country Financing Double-Dip

Canco

Third-countryFincoU.S.Co.

U.S. Real Estate

Debt

Debt


42

• Exit–Disposition of shares of U.S. Subco by Canco

• If gain on the disposition, gain will be a capital gain subject to tax• Election to deem some or all of the proceeds of disposition to be dividend paid by U.S. Subco

–Disposition of shares of U.S. Subco by foreign subsidiary of Canco• Tax consequences will depend on whether shares of U.S. Subco are excluded property

• Shares will be excluded property where all or substantially all of the property of U.S. Subco is excluded property

• Property of U.S. Subco will be excluded property if used or held principally for the purpose of gaining or producing income from an active business


43

• Exit–If shares of U.S. Subco are not excluded property:

• Half of the gain would be FAPI• Half of the gain included in "taxable surplus", other half included in "exempt surplus"

–If shares of U.S. Subco are excluded property:• No FAPI and no immediate Canadian tax liability at the time of sale• Same surplus result as if not excluded property


44

Other Investment Structures:

• U. S. REITs

• Canadian REITs (U.S. Subsidiaries)

• Master Limited Partnerships (SIFT Rules)

• Publicly Traded Development Companies

• Infrastructure Funds

• Publicly Traded Fund Sponsors


45

Circular 230 NoticeTo comply with the requirements of Circular 230, which provides regulations governing certain conduct of U.S. tax lawyers giving written advice with respect to U.S. tax matters, please be aware that any U.S. federal tax advice contained in this communication (including any attachments) is not intended to be used and cannot be used by you or any other person for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein.

Merci / Thank You

Brian [email protected]

Marc G. [email protected]




Peter [email protected] York

Nathan [email protected]

La réglementation anti-corruption -Information essentielle pour les conseillers juridiques d'entreprise

Anti-Corruption Regulations - Essential Information for In-House Counsel

Stéphane Eljarrat

Peter Dent

February 15, 2011


4848

In many countries, corruption is a way of life. It is degrading, exploitative and,

depressingly, expected. It enriches the wealthy and powerful, and weakens the

impoverished majority. It is well understood through academic research that the

fight against corruption and the fight against poverty are linked. However, Canada

continues to lag in the fight against the perpetuation of the cycle of global

corruption, doing little more than talking about the evils of corruption..…

A bit of history

5050

Anti-Corruption in Canada

Before 1997 the Canadian legislation was primarily focused on the corruption of domestic public officials (Criminal Code provisions)

In December 1997, Canada signed the Convention on Combating Bribery of Foreign Officials in International Business Transaction (the OECD Convention)

In 1999, Canada enacted the CFPOA (Corruption of Foreign Public Officials Act )

In May 2009, the Canadian Parliament introduced the Bill C-31, An Act to amend the Criminal Code, the Corruption of Foreign Public Officials Act and the Identification of Criminals Act

Shortly after (June 2009), the Transparency International’s Progress Report of the Enforcement if the OECD Convention on Combating Bribery of Foreign Public Officials in International Transactions criticized Canada and stated that Canada was one of the 21 countries making little efforts to enforce its anti-corruption law.

Last month, Transparency International Canada Inc., a non for profit charity launched in November 1996, announced its Anti-Corruption Compliance Checklist.

Legislation

5252

Legislation

There are three statutes that may apply to (or affect) Canadian Companies :

• CFPOA (Corruption of Foreign Public Officials Act ), S.C. 1998, c. 34

• FCPA (Corruption of Foreign Practices Act)

• UK Bribery Act

CFPOA & FCPAAnalogies and differences

5454

CFPOA

Anti-Bribery Provisions• Every person (namely individuals and corporations but also public bodies) commits an

offence who, in order to obtain or retain an improper advantage in the course of business, directly or indirectly gives, offers or agrees to give or offer a loan, reward, advantage or benefit of any kind to a foreign public official or to any person for the benefit of a foreign public official(a) as consideration for an act or omission by the official in connection with the

performance of the official’s duties or functions; or(b) to induce the official to use his or her position to influence any acts or decisions of the

foreign state or public international organization for which the official performs duties or functions.

Books, records and internal control provisions• The CFPOA does not address accounting issues. Canadian corporate laws and financial

rules can provide guidance on this topic.

5555

FCPA

Anti-Bribery Provisions• The FCPA prohibits anyone, subject to U.S. jurisdiction, to do some act in furtherance

of an offer, payment, promise, gift or authorization of the giving of anything of value, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official, foreign political party, or candidate for political office, for the purpose of influencing any act of that foreign official in violation his duty of that official, or to secure any improper business advantage in order to obtain or retain business.

Anything of value includes but is not limited to:• Cash• Impermissible travel or entertainment payments• Overpayments for shares• Loans (at very favourable interest rates)• Scholarship to a relative of an official • Payments to charity of official’s personal choice

5656

FCPA

Anti-Bribery Provisions• The FCPA prohibits payments or giving things of value to foreign officials through third

parties or agents (directly or indirectly) .

• Agents can include but is not limited to: – Subsidiaries– Joint ventures partners– Consultants– Distributors– Lawyers;– Any other intermediaries

5757

FCPA

Notion of corrupt intent

• With evil motive or purpose;• With intent to wrongly influence recipient; • Expecting a quid pro quo;• May be evidenced by secrets payments;

• NOTE: Conscious disregard, wilful blindness or deliberate ignorance is not a defence.

5858

FCPA

Books, records and internal control provisions• The FCPA’s Books and Records and Internal Control provisions require that

U.S. issuers:– (i) Make and keep books, records and accounts are kept in reasonable detail to

accurately and fairly reflect transactions and dispositions of the assets of the issuer, and

– (ii) Implement and maintain a system of internal accounting controls devised - (a) to provide reasonable assurances that transactions are executed in accordance with

management's authorization; - (b) to ensure that assets are recorded as necessary to permit preparation of financial

statements and to maintain accountability for assets; - (c) to limit access to assets to management's authorization; and- (d) to make certain that recorded accountability for assets is compared with the existing assets

at reasonable intervals and appropriate action is taken with respect to any differences.

Does this apply to all payments made to foreign government officials?

6060

CFPOA vs FCPA - Defences

• Both pieces of legislation allow payments (loan, reward, advantage or benefit) that are lawful under the laws and regulations of the foreign state or public international organization where they are received, however:

– FCPA requires that the payment be lawful under written law or regulation of the foreign nation;

– Under CFPOA, the defence applies when the payment was either permitted or required under the laws of the foreign nation or public international organization;

• Both piece of legislation allow reasonable expenses made in good faith and directly to develop business relationship (to promote, demonstrate or explain a product or to execute or perform a contract ), this may not include entertainment or other, softer expenses.

6161

CFPOA vs FCPA - Defenses

• Under both pieces of legislation, small facilitation payments are not a matter of practical concern.- Section 3(4) of the CFPOA provides that payments is not a loan, reward,

advantage or benefit to obtain or retain advantage in the course of business, if it is made to expedite or secure the performance by a foreign public official or any act of a routine nature that is part of the foreign public official’s duties or functions, including:• The issuance of a permit or licence;• The processing of official documents (visas and work permits)• Services normally offered to the public (mail pick up and delivery,

telecommunication, power)• Services normally provided as required (police protection, loading and unloading

cargo)

• NOTE: “An act of routine” does not include a decision to award new business or to continue business with a particular party.

Do these pieces of legislation apply to my organization?

6363

CFPOA vs FCPA - Jurisdiction

CFPOA : “real and substantial” link to Canada

• The Canadian jurisdictional test is based on case law which rely on the “real and substantive link to Canada” concept.

• A significant portion of the activities constituting an offence must have been committed must take place in Canada or have a real impact on Canadians.

• See Libman v. The Queen [1985] 2 S.C.R. 178

6464


CFPOA : Corporate liability

• An organization can be found guilty for the acts of a “senior officer”being a representative who plays an important role in establishment of its policies or is responsible for managing an important aspect of the organization's activities and, in the case of a corporation, includes a director, its CEO and CFO.

• Representatives in respect of an organization means a director, partner, employee, member, agent or contactor of the organization.

• Corporate criminal liability can be triggered namely by the omission by a senior officer to take all reasonable measures to stop a representative from being a party to the offense.

6565


FCPA:• Nationality Principle

– U.S. Citizens and nationals– Businesses organized in the U.S. (including overseas branches)– Officer directors employees, agents and stockholders acting on behalf of these

businesses• Territoriality Principle (Persons using “instrumentalities of US commerce”)

– U.S. Residents– Businesses organized outside the U.S. with principal place of business in the U.S. – Non-U.S. Issuers of U.S. securities– Officers, directors, employees, agents and stockholders of issuers, acting on their

behalf– Any other individual or foreign company while in the U.S. or causing an act to be

done in the U.S.

6666


FCPA – Instrumentalities of U.S. Commerce, examples• Facsimile transmissions• Telephones calls• E-mails• Wire Transfers• U.S. Mail or other carriers• Interstate or international travel

Successor liability

6868

Successor liability

• The US DOJ expects that an acquiring company conduct FCPA due diligence and voluntarily disclose corrupt activity uncovered, the whole in order to avoid liability.

• See the Halliburton case.

FCPA – What are the sanctions and penalties?

7070

Penalties – Civil actions and criminal charges

CFPOA Penalties – Criminal charges only (contrary to the US)

– Indictable offense punishable by up to 5 years imprisonment for individuals who can be extradited;

– Indictable offense punishable by criminal fine for organizations. The quantum is at the discretion of the judge with no set maximum (s. 735 C.Cr.)

7171


FCPA PenaltiesSecurities and Exchange Commission (SEC) is charged with enforcing violations of the accounting provisions while the Department of Justice (DOJ) is responsible for enforcing the anti-bribery provisions. Both agencies can institute civil actions, but only the DOJ is authorized to file criminal charges.

• Penalties for individuals: Anti-bribery provisions– Civil penalty up to $10,000 – Criminal fine up to $250,000 and or imprisonment up to five years – Under the Alternative Fines Act, the fine may be increased to twice the gross

financial gain or loss resulting from the corrupt payment. – A criminal fine imposed on an individual cannot be paid directly or indirectly by the

company on whose behalf the person acted.

7272


Penalties for entities: Anti-bribery provisions• Civil penalty up to $10,000 • Criminal fine up to $2 million • The Alternative Fines Act may increase the criminal fine to twice the gain or

loss resulting from the corrupt payment.

Penalties for individuals: Accounting provisions• Civil penalty up to $100,000 • Criminal fine up to $5 million or twice the gain or loss caused by the violation,

and or imprisonment up to 20 years • Fines cannot be paid directly or indirectly by the company on whose behalf

the person acted.

Penalties for entities: Accounting provisions• Civil penalty up to $500,000 • Criminal fine up to $25 million or twice the gain or loss caused by the violation

7474

FCPA

SEC Whistleblower program

The right to remain silent and the right against self incrimination

7676

The right to remain silent and the right against self incrimination

It is important to know the distinctions between the rights that can be raised during the course of an

investigation depending on whether the investigation is being conducted by Canadian vs.

US authorities.

Corporate compliance measures

7878

Control measures and compliance program – Ongoing operations

Clearly articulated and communicated policy

Compliance Chief , with knowledge of and experience with anti-corruption issues, reports to Compliance/Audit Committee

Training and annual certification

System of internal controls and accurate books and records

Reporting system and helpline

Clearly articulated and communicated policy

Standards on business relationships with reputable partners

Standards and procedures apply to all parties

Independent audits to ensure compliance

Agreements with agents and partners include right to audit clauses

Consistently applied disciplinary process for violations

Due diligence oversight

7979

Control measures and compliance program – Acquisitions

Conduct anti-corruption due diligence pre-closing and establish post merger timeline

Retain experienced external counsel and third-party consultants, including forensic accountants, to conduct the anti-corruption due diligence

Where information provided indicates that bribery, corruption or related internal control and accounting issues exist or are present at Target, consider whether disclosure to authorities and regulators is required

Extend new contracts with anti-corruption provisions for all agents and business partners with whom acquirer will continue relations

Implement Code of Conduct and other policies and procedures at Target

Adhere to the proposed timeline

8080

Control measures and compliance program – Divestitures or Business Exit

Conduct Pre-divestiture due diligence

Conduct a review of compliance program and implement required improvements thereto

Where procedures indicate that bribery, corruption or related internal control and accounting issues exist or are present, consider whether disclosure to authorities and regulators is required

8181

Control measures and compliance program – Growth

Create and maintain due diligence files on third parties

Contract terms include compliance with laws and right to audit clauses

Compliance education as part of integration plan

Red flags in conclusion

Merci / Thank You

Stéphane [email protected] 514.841.6439

Peter [email protected]

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International Private Business Transactions

Rita Lc de SantisFranziska Ruf

Le 15 février 2011


86

Introduction

1. International Business Transactions are business transactions that cross international borders at any stage of the transaction

i. tradeii. licensing of intellectual propertyiii. foreign direct investments

87

Introduction

2. Advice to attorneys generally

i. understand client’s businessii. understand reasons and objectives for the transaction

88

Introduction

3. There are many similarities between purely domestic and international business transactions but there are alsodifferences.

89

Introduction

4. Risk

i. financial risk (payment or credit risk, inadequate or incorrect goods received, foreign exchange fluctuations, currency controls)

ii. political risk (risk of war, terrorism, political instability, embargoes, etc.)

iii. legal risk (difficulties in obtaining effective civil remedies)iv. privacy risks (server locations are crucial when it comes to the legal

compliant transfer of data during the due diligence process)v. corruption (how to ensure compliance with US Foreign Corrupt

Practices Act or Canadian Corruption of Foreign Public Officials Act)vi. delivery risk

90

Errors and Omission Insurance

5. “We are solicitors qualified to practice law in the Province of Québec and we express no opinion as to the laws of any jurisdiction or as to any matters governed by the laws of any jurisdiction, other than the laws of the Province of Québec and the laws of Canada applicable therein in effect as of the date hereof.”

91


6. Quebec Bar professional liability insurance “Professional services (means)

a) When the named Insured is entered on the Roll without holding a special permit and is not admitted as a Sollicitor:

All services which have or should have been rendered by the Named Insured, directly or indirectly, solely in his capacity as a lawyer and as a member in good standing of the Barreau du Québec, while he was not exempt from the obligation to subscribe to the Fondsd’assurance.”

b) When the named Insured is entered on the Roll while holding a special permit or is admitted as a Sollicitor and is not exempt from the obligation to subscribe to the Fonds d’assurance.

Only services authorized in accordance with the permit or as such, which have or should have been rendered in Québec by the named Insured.

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7. Quebec Bar professional liability insurance(ctd.)The Insurer agrees:“to pay on behalf of the Insured any amount which the latter is legally obligated to pay to third parties as Damages under a judgement rendered or a settlement made in order to avoid a suit or a judgement, and arising from any Claim Made during the Period of Insurance and resulting from Professional Services.”

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8. When providing advice to a client who is going to engage in an international business transaction that is subject to the laws of a jurisdiction other than Québec, at the very least, local counsel should be retained to review the agreement for enforceability and to provide any enforceability opinion that may be required.

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9. Factors examined in discussions of referring lawyer’sresponsibility for negligence of recipient lawyer1

i. the due diligence of the referring lawyer in selecting the recipient lawyer including investigating the background of the receiving lawyer

ii. the fee arrangement, if any, in place for the referring lawyer iii. whether the referring lawyer maintained a joint responsibility with the

recipient lawyer such that the referring lawyer was in a generalcounsel or supervisory role

iv. whether an indemnity agreement was in place v. whether there were any conflicts of interest arising because of some

relationship between the referring lawyer with the recipient lawyer

1 Jennifer Ip, Cross-border selection of lawyers, LawPro, volume 9, issue 4, December 2010, p. 8

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Negotiations

10. Eight steps in the process of analysis for StrategicNegotiations1

i. define the issues ii. assemble the issues and define the agenda – prioritizeiii. analyse the other partyiv. define the underlying interestv. consult with othersvi. set goals for the process of the outcomevii. identify your own limitsviii. develop supporting arguments

1 Roy J. Lewicki, Alexander Hiam and Karen Wise Olander et al in Think before you Speak: A Complete Guide to Strategic Negotiation

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Negotiations

11. Culture profoundly affects how people think, communicate, behave … negotiate

Misunderstandings:i. languageii. actions

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Negotiations

12. Ten Ways that Culture Affects Negotiating Style2

i. negotiating goals (contract or relationship?);ii. attitudes to the negotiating process (win/win or win/lose?);iii. personal styles (formal or informal?);iv. styles of communication (direct or indirect?);v. time sensitivity (high or low?);vi. emotionalism (high or low?);vii. agreement form (specific or general?);viii. agreement building process (bottom up or top down?);ix. negotiating team organization (one leader or consensus);x. risk taking (high or low?)

2 Jeswald W. Salacuse, Negotiation Journal, July 1998

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Acquisitions

13. Preliminary Agreements

i. letter of intent (also referred to as “heads of agreement”)ii. memorandum of understanding, term sheet or protocoliii. confidentiality agreementiv. the lock-out agreement (also known as the exclusivity agreement)

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Acquisitions

14. Confidentiality Agreements

Protect:i. the fact that negotiations are taking placeii. the existence and the terms and conditions of any agreementiii. the detailed commercial information made available to the prospective

buyer

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Acquisitions

15. Letter of Intent

Checklist:i. the parties ii. clearly state whether the letter or specific clauses are intended to be

legally binding iii. description of target (shares or assets)iv. indicative price or price formula (and statement of what this is subject

to, for example, due diligence and/or adjustment, for example, by reference to closing accounts)

v. time frame and scope of due diligence and other actions

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Acquisitions

15. Letter of Intent – Checklist (Cont’d):

vi. conditions precedent which may include regulatory approval, shareholder approval, liabilities of target company not exceeding a stated amount at closing, no material adverse change and buyer financing

vii. standard warranties to be taken, this may not amount to more than a non-conclusive statement to the effect that typical warranties for atransaction of this type would be given

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Acquisitions

15. Letter of Intent – Checklist (Cont’d):

viii. exclusivityix. break feex. confidentialityxi. non-compete / non-sollicitationxii. termination date of any obligations that survive terminationxiii. costs and expensesxiv. choice of law and jurisdiction

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Acquisitions

16. Letter of Intent

i. legally binding provisionsii. non-legally binding provisionsiii. unambiguous terms to be used to ensure non-binding terms do not

create contractual obligations

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Initial Stages

Decide on structure of deal Identify material legal issues (including tax issues) associated

with acquisition

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Due Diligence

17. The investigation into the business, legal and financial affairs of a target carried out by investors, lawyers, accountants, underwriters and other consultants: the buyer needs to satisfy itself that what it has assumed or has been told about the target is correct.

18. Vendor Due Diligence

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The Purchase Agreement –Know when to Involve Local Counsel

19. Given that the considerations which inform the negotiations of a major portion of acquisition agreements are primarily commercial, the utility of a lawyer acting as “consigliere” to his/her client is driven more by the lawyer's experience than the knowledge of the particularities of the local law. What is important is that the Québec counsel remain sensitive to those contractual provisions more likely to require the inputof local counsel.

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20. A lawyer shall not “handle a legal matter which the lawyer knows or should know that he or she is incompetent to handle, without associating with a lawyer who is competent to handle it.”


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21. Structure the Deal

i. purchase of assets vs. purchase of sharesii. identity and structure of purchaseriii. cross-border debt financingiv. tax-deferred rollover


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22. Real Estate

i. description of, and title to, owned real propertyii. foreign ownership restrictionsiii. zoning and municipal land use and other regulationsiv. formalities applicable to transfer of ownershipv. lease agreements and assignmentsvi. transfer taxes (even if transfer of shares)vii. encumbrances


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23. Regulatory Approvals

i. anti-trust / competitionii. foreign investmentiii. regulated industries (telecommunications, national security,

transportation, broadcasting …)iv. securities laws


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24. Employment Law and Benefits

i. automatic transfer of target employees vs. termination and re-hiring of target employees

ii. successor liabilityiii. notices to workers’ councilsiv. termination/severance (employment “at will” vs. reasonable notice)v. duty to mitigate damagesvi. unionized vs. non-unionized employees


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24. Employment Law and Benefits (cont’d)

vii. deficit or surplus position of pension plansviii. pension entitlements of former employeesix. comparable conditions of employmentx. minimum standards/labour standardsxi. occupational health and safety and workers’ compensation


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25. To ensure that local intellectual property regimes are respected

i. recognition and protection of intellectual property rightsii. title to intellectual propertyiii. registration of intellectual propertyiv. employees’ and consultants’ rightsv. distinctions between “economic rights” and “moral rights”vi. enforcement of intellectual property lawsvii. transfer of technology legislation


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26. To ensure that local regulatory environmental regimes are respected

i. existing and proposed environmental regulatory environmentii. permitsiii. operating liabilityiv. statutory directors’ and officers’ liability


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27. Other Matters for consideration with local counsel

i. transferability of shares and other securitiesii. accounting principlesiii. real economic cost of transactioniv. bulk salesv. income, withholding, sales and transfer taxesvi. encumbrancesvii. financial Assistanceviii. required permits, licenses …and approvals to carry on business


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Dispute Settlement Clauses

Choice of law Choice of forum Arbitration

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Choice of Law

28. Reason for choice of law clause(electio juris)

i. provides predictability of positive choiceii. allows one or more laws considered unacceptable by either party to be

excludediii. authorizes the parties to choose a law convenient to the proposed

transactioniv. often interpreted as applying to procedural issues (pleading

requirements, discovery, joinder of parties, etc.)v. issues related to prescription, the burden of proof, costs and interest

are sometimes considered part of substantive law and sometimes as procedure

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Choice of Law

29. Which law to choose?

i. a law which is well-established, stable and suitable for complex corporate, commercial and contract law issues

ii. a law with which the parties are familiar or the content of which can be determined reasonably easily

iii. a law for which the legislative acts, judgements and comments are published

iv. a law which is not incompatible with the domestic law which applies to the local aspects of a transaction real estate, corporate restructuring, security

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Choice of Law

29. Which law to choose? (ctd.)

v. a law which is favourable to the parties vi. a law which will be compatible with the dispute settlement provisionsvii. don’t forget costs

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Choice of Forum Clauses

30. Role of choice of forum clauses

i. allow the parties to choose the jurisdiction the most favourable to the settlement of disputes which may arise

ii. can at least prevent disputes in a clearly unfavourable jurisdiction iii. can prevent a dispute from giving rise to parallel or multiple disputes in

several jurisdictionsiv. make the contractual relationship between the parties more predictable

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30. Role of choice of forum clauses (ctd.)

v. a contractual dispute settlement method that can be adapted to the specific needs of the parties

vi. a contractual dispute settlement method that can reduce the difficulty of enforcing abroad judgements that are rendered by national courts (minimizes the risk of jurisdiction being contested)

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31. Choosing between a choice of forum clause and an arbitration clause

i. characteristics and interests of the partiesii. types of disputes which may ariseiii. need to have dispute settlement agreement and any resulting

judgement applied abroad iv. importance of confidentialityv. importance of procedural flexibility

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31. Choosing between a choice of forum clause and an arbitration clause (ctd.)

vi. appeal of a “Salomon” compromise as compared to an “all or nothing”decision

vii. importance of finding solutions which satisfy several partiesviii. value of review in appeal

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Arbitration

32. The advantages of arbitration

i. confidentialityii. judge of no State, no partyiii. technical knowledge of arbitratorsiv. less procedural formalismv. the language chosen may be common to both partiesvi. the arbitration procedure may blur the boundaries between different

legal cultures

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Arbitration

33. Points to be considered in arbitration agreements involving disputes in an international business context

i. binding arbitration agreementii. scope of arbitration agreementiii. choice of situs for arbitration [where arbitration will take place]iv. use of an arbitration institution and its rulesv. number of arbitrators, their appointment and skillsvi. language of arbitration

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Arbitration

33. Points to be considered in arbitration agreements involving disputes in an international business context (ctd.)

vii. formalities, capacity and validityviii. costsix. choice of applicable law clause

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Conclusion

Whether the business transaction is domestic or international, its successful conclusion is more likely to be assured if at the outset one has a clear understanding of the client's expectations and objectives; a plan is established; a team whose responsibilities are clearly defined is recruited; and there is close communication and collaboration with the client so as to ensure that the work is carried out efficiently and cost-effectively.

Whether the process is long or short, one cannot lose sight of the client's objectives and of the need to deal with problems asthey arise in a (calm) creative and flexible manner.

Merci / Thank You / Ciao!

Rita Lc de [email protected]

Franziska [email protected]




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