International Business Law - Research Proposal Example

of Topic: International Business Law - Part I Memorandum: To the Board of Directors of Hampstead Motors, Ltd. As per your instruction for me to make a recommendation on whether we will establish a manufacturing or assembly plant or set up a wholly-owned subsidiary in either Mexico, Canada and the United States, may I present to you other options which you might consider before the Honorable board of directors makes it decision. As per my study, I have found that a firm, like ours, which seeks to enter into or increase business transactions that bridge international borders, must consider different means of entering such markets. Some of the most common means under the present state of international business law are as follows: 1. Direct foreign sales - This is the present strategy of Hampstead, which is to sell directly to a foreign buyer (exportation). This option may not be applicable because our Company seems to have decided to set up a plant outside UK. 2. Licenses and franchises - This is typically accomplished by a licensing agreement. A license permits the licensee to exploit the subject matter of the license for a specified purpose and for a specified time. This option may not be applicable to our company the facts fails to indicate possibility. 3. Distributorships - In here, there is an agreement to market our company's products through the sales efforts of a foreign-based distributor. Under this arrangement, a distributor is free to develop the target market in any manner in which it sees fit; i.e., it is free to buy and sell for its own account, maintain inventories, and sell at prices it sets. In addition, foreign distributors sometimes receive added protection under local law. Another advantage is that a distributor may limit the supplier's (Hampstead, in this case) exposure to local tax and labor laws. The option seems to be one of our options with our plan in transporting the cars from UK to Mexico and just have a company based in Mexico to distribute our products. 4. Direct foreign investment - A domestic company may conduct international business through a subsidiary located in the foreign country. We know for a fact that a subsidiary corporation, typically, is one whose shares (typically, a majority of the voting shares, i.e., >50%) representing control of the corporation are owned by another corporation (the parent)." This option is also one that is currently considered by board. Hence, I like to point out that there is suggestion for having a wholly owned subsidiary to be controlled by our U.K. head office. Hence, this option may not allow it. However, we have the next option. 5. Branches - A branch is not a separate entity but is an extension of the domestic (e.g., U.S.) enterprise (e.g., corporation) in a host (i.e., foreign) country. It is also a practice that the enterprise might establish an operational spot in a host country, which requires direct investment in, for example, the following: 1) A research and experimental facility 2) A manufacturing plant for local sales and/or export 3) An operation that establishes a market and sales for its products and/or those of other enterprises It also mentioned the following relevant factors to operating in a host country using a branch: 1) A branch allows unqualified control as compared to operations by a subsidiary. 2) The form of a separate legal entity is not present to limit contractual or tort liability. 3) Risks of loss due to changes in host country governments are like as those associated with direct investment. This option seems to be applicable, if our Company will desire to have a 100-percent control of the decision-making. However, I have still a last option in the next. 6. A joint venture - Although a joint venture is usually thought of as a partnership, it may be engaged in by means of a corporation or other organizational form. With all due respect, may I be allowed to present to you the above options' Now if you will just allow me to stay with the two original options at the start, I submit that we will have to choose setting a branch because that would allow the company 100% control. Moreover, this decision is not very much different from what our Asian and European competitors have done in the US are revealed in the case facts. As to the issue on the tariff rates, I believe it will not be very material any more because of existing free trade between UK and Mexico and the NAFTA, which is also a free trade agreement. If we want our cars coming from U.K. to enter US and Canada markets, we just to transport them to Mexico and since Mexico has this NAFTA with US and Canada, it appears that our products could actually enter U.S. and Canada markets without our company having to pay any tariff. Hence, if tariff is the major consideration of reducing transport cost of cars, then by all means, let us go for this option. However, as to how decisions will me made in our would-be-Mexico-based company, it appears that it would just be a distributorship agreement as explained above and hence our UK, Head office may not have the full control. In addition, there is an advantage of having an assembly plant in Mexico under section 9802 of the Harmonized Tariff Schedule of the United States ("HTSUS"). Under said rule, our company could enjoy exemption from custom's duties, since Subheading 9802.00.80 of the HTSUS provides duty-free treatment as quoted below: "Articles . . . assembled abroad in whole or in part of fabricated components, the product of the United States, which (a) were exported in condition ready for assembly without further fabrication, (b) have not lost their physical, identity in such articles by change in form, shape or otherwise, and (c) have not been advanced in value or improved in condition abroad except by being assembled and except by operations incidental to the assembly process such as cleaning, lubricating and painting." < http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl'court=Fed&navby=case&no=031192> (Quoted verbatim) As decided n the case of Daimler Chrysler Corporation V. United States, 03-1192 in March 18, 2004, the court upheld the right the of Daimler to be exempted from duty for just doing painting on its products. The court in said case liberalized the interpretation of section 9802 HTSUS. This development in the interpretation of HTS would favor car assemblers of which we are interested. Since I do not have the necessary information on what will the board prefer, i.e., whether fully owned or not fully owned subsidiary, I suppose a distributorship agreement may not suffice. If the decision is to have full control, then the only option left to set up a branch. In view of lack of financial information for which we could determine the financial effect of our generated options, I am deferring my conclusion on which is the best option until I am given said financial information. For the meantime, please accept the preliminary result of my analysis under the given case facts. Part 2 - Question Hampstead Motors, Ltd. has decided to open a wholly owned subsidiary just outside St. Paul, Minnesota. In addition to overseeing North American operations, the board is considering having the U.S. subsidiary take on the responsibility of processing North American and European payrolls and for conducting marketing research on customer preferences. What are the potential legal issues, if any' How do you recommend the company proceed' Answer: I will recommend setting up a branch because it is the only option which allows a 100%-control of management, processing of North American and European payrolls and conduct of marketing research on customer preferences which are part Hampstead's plans. However, there are other business and legal considerations in setting up a wholly owned branch in the US. One consideration is the uncertainty and risk of loss. Risk of dispute, which is inherently legal in any business transaction, causes uncertainty and risk of loss. Let me just quote some variables and techniques, which I have discovered in my research. A. Choice of Law/Forum Each party to a dispute, whether foreign or domestic, desires to have the dispute resolved as quickly, predictably, and inexpensively as possible. Many factors affect the outcome of a dispute, but certain factors are controllable at the outset. For our company to ensure that a dispute is resolved in a manner consistent with its intent, we can expressly stipulate in our written agreement which specific body of law is to be applied in the event of a dispute. For example, we can put in the agreement: "This agreement shall be governed by, and construed in all respects in accordance with, U.K. law." B. Arbitration Arbitration can provide limited predictability on international business transactions. Our company can enhance its ability to ensure the benefits of its bargains and to reduce overall transaction costs via the following: 1. Agreement. When entering into international transactions, the parties frequently also agree to subject any disputes to arbitration and to be bound by the outcome. In such case, our company might stipulate with the other party such elements as a. Identity and/or qualifications of the arbitrator(s) or a (third) party or organization to appoint the arbitrator(s) b. The law to be applied in interpreting the underlying rights and obligations of the parties c. The location where the arbitration will be heard d. Procedural rules for initiating the arbitration process and conducting the hearings e. Any particular limits constraining the discretion of the arbitrator 2. The United Nations Commission on International Trade Law UNCITRAL) rules - These may be part of our agreement. The familiarization of these rules is necessary for us to take advantage of their adoption. C. Barriers to Legal Remedies Our company must also realize that various doctrines, principles, and legal bases sometimes, hinder legal remedies available to parties to international transactions. Defenses commonly invoked by both parties are the Act of the State Doctrine and the Doctrine of Sovereign Immunity. Again, our familiarity of these variables could save us the headache in the future. In conclusion, I also recommend a further study of these US rules of action by a separate legal group to come us with the probabilities of us having to face these business realities in comparison to what we experience in UK involving legal problems. Although there is already a decision by the board, a review of the financial analysis deserves a special and determined action as well. Reference: 1. Daimler Chrysler Corporation V. United States, Lawrence M. Friedman, Barnes, United States Court of Appeals for the Federal Circuit, 03-1192, March 18, 2004. Read More