Analysis of International Business Transactions Cases - Case Study Example

Case Analysis: International Business Transactions [Name] [Professor Name] [Course] [Date] Abstract: Since major differences exist between the ways various jurisdictions treat similar business transactions, it is vital to take special care in structuring international business transactions. Hence, it is important to recognize that legal perspectives and civil code jurisdictions differ significantly in the way they operate in form and substance. This essay discusses a case analysis of two scenarios. In the first scenario, several alternative ways to structure the transactions in international trade for common law countries such as the United States are examined. The option selected is the use of agents and distributors overseas. Under this option, goods are either exported or imported directly through intermediaries. The second scenarios involve a situation where KitchenMaid (KM), which is a U.S.-based manufacturer of dishwashers, wishes to end its contract with Gepetto & Sons (GS). Its first alternative is use DK and NCF become KM’s as agents who will have exclusive authority from KM to represent it or act on its behalf as well as legally bind it with relations to third parties. The second alternative involves acquiring DK. Key Concepts: international business transactions, acquisition agreement, international business structures, intermediaries. Case Scenario 1 In the first case scenario, Michael Matson looks to purchase 5,000 metric tons of #41 steel ingots from a Brazilian company called Salazar Steel. The steel could be loaded for shipping to the United States on September 1 to arrive in New York on nine days later. SS, which banks with the Bank of South Paulo, expects to receive the payment by September 8. Matson meets with Bashford, the CEO of Bilder Bay Shipbuilder, who agrees to buy the steel from Matson for $11 million by September 25 (Folsom et al 2012). Matson wants to act as the middle-man with the view of making about 1 million dollars on the deal. However, he only has $100,000, while the cost of shipping and insuring the steel from Sao Paulo to New York would need an estimated $50,000 and about $30,000 from New York to Halifax. Other considerations include the fact that the US government would on September 9 impose countervailing duty of up to 50 percent on Brazilian steel (Folsom et al 2012). Considering all the factors faced by Matson (as illustrated), there are several alternative ways to structure the transactions to be favorable to his situation. U.S.-based entrepreneurs or businesses will normally select from among five structures in planning international business transactions (Pennsylvania Bar Institute 2012). The first option comprises direct foreign sales with no intermediary. Under this option, the legal counsel is often sought when a U.S.-based entrepreneur or company seeks advice on issues that could arise during the negotiation of a contract with a foreign buyer who requests whether American made products can be shipped outside the United States (Pennsylvania Bar Institute 2012). The second option involves use of agents and distributors overseas. Under this option, goods are either exported or imported directly through intermediaries. Through this approach, companies looking to export, engage the services of a middleman who can find foreign markets or buyers for its commodities (Pennsylvania Bar Institute 2012). It is critical to observe that the U.S.-based companies appoint agents and distributors abroad on a regular basis to represent their interests. However, before considering this option of appointing distributors or agents outside the United States, it is vital to identify the inherent risks. A most significant risk is termination of the foreign distributors or agents that can be very costly due to the complex foreign laws (such as Brazilian laws) that are intent to protect the distributors and agents. This is specifically so even in situations where the reason for termination is poor performance (Pennsylvania Bar Institute 2012). The third option is the international licensing and transfer of technology. Under this option, there are several points to consider concerning international licensing contracts that are unique. This may include local statutes that are concerned with foreign license agreement which can influence how the parties to a contract deal with each other (Pennsylvania Bar Institute 2012). The fourth option involves the international joint venture or strategic alliance. Joint ventures are universal structure to be considered when dealing in international transactions. Forms of strategic alliances are the common joint structures used by U.S.-based businesses and entrepreneurs who seek alliances with foreign business partners. Indeed, in countries such as Brazil and China, joint ventures with local partners comprise the only realistic methods of engaging in business transactions (Pennsylvania Bar Institute 2012). The fifth option comprises the wholly-owned foreign subsidiary. Since U.S.-based companies looking to do business abroad often emphasize on having total control over their operation, they choose to establish a wholly-owned subsidiary. However, the cost of operating the wholly-owned subsidiary can be very expensive making this option prohibitive (Pennsylvania Bar Institute 2012). The Best way to structure the transaction With reference to the case scenario, since Matson would be involved in two transactions (purchasing the steel and shipping it from Sao Paulo to New York and selling the steel to be shipped to Halifax in Canada), there some options would best favor his situation. However, since Matson only has $100,000, while the cost of shipping and insurance the steel from Sao Paulo to New York would need an estimated $50,000 and about $30,000 from New York to Halifax, the best option would be exporting indirectly through intermediaries. Under this structure, Matson can either export or import directly through intermediaries. Through this approach, Salazar Steel can engage the services of Matson who has found a foreign buyer (Bilder Bay Shipbuilders) for its commodities. Description of the set of arrangements contemplated, the contract involved, and the basic terms of the contract There are two basic issues Matson should consider in seeking an import/export transaction. These include business structure and business contracts. Under business structure of using agents and distributors, Matson is viewed as the middleman between Salazar Steel and Bilder Bay Shipbuilders. Salazar steel thus exports indirectly through an intermediary (Matson) (Folsom et al 2012). The business structure selected is significantly determined by Matson’s role in importing and exporting of the steel (from Brazil to Canada). As a player in the international transactions, Matson comes up as an import/export merchant. Alternatively, Matson also serves as an import/export management company (IEMC) (OECD 2009). Under this second alternative, Matson serves as the middleman in the transactions between importers and exporters. He may therefore serve as an import management company (IMC) through arranging the deals between the Brazilian steel manufacturer Salazar Steel (SS) and the Bilder Bay Shipbuilders in Canada. He may however serve as an import/export management company (IEMC) by setting up deals in both directions (importing and exporting). Of the four arrangements, IEMC is the most ideal arrangement for Matson’s situation since he seeks to act as a middleman between Salazar Steel and Bilder Bay shipbuilders and since he only has $100,000. IEMC offers the best alternative as it is particularly offer an advantage to individual players or small businesses since there is it doesn’t require huge capital expenditure to purchase the merchandise first and then consolidate more capital to sell the merchandise. Indeed, IEMC serves exclusively as the middleman in structuring negotiations and profits only once the deal is closed (Hendershott & Zhang 2006). With reference to this, Matson must be made aware of the trade, the transactional issues, regulatory issues and litigation issues. This can be explained by the idea that international business transactions comprise complex dealings involving the identification and coordination of issues such as taxation, regulatory requirements, antitrust and corporate in different multinational jurisdictions or countries (OECD 2009). Transactional issues to be taken into account involve those concerned with distributorship or agency, international contracts, letters of credit, sales of goods and services custom law, foreign investment structure and project financing. Towards this end, the basic consideration is establishing business contacts. The four major contacts Matson should establish include the customs broker, the freight forwarder, a commercial bank and manufacturer’s representative. The customs broker helps in providing knowledge about the regulations and tariff schedules (Hendershott & Zhang 2006). The freight forwarder is contact with an independent shipper who will ensure that the goods are delivered intact. The commercial bank will provide the letter of credit. Lastly, the manufacturer’s representative represents domestic manufacturers (in this case Salazar Steel). The three main features of contracts involved in the import/export contract include, explanation of the deal, payment mechanism of the deal and legal enforcement provisions. Selecting and ensuring legal enforcement of the contracts would be the primary function of the lawyer (Leagle consulting 2008). Import/export contracts comprise of agreements that apply exclusively to the international supply and sale of commodities. The two main types export contracts include cost, insurance and freight (CIF) and free on board (FOB). The two have variations on each other as indicated in the diagram (Reynolds 2006). Contracts involved Cost, insurance and freight (CIF) Under this contract, the cost accrued to the manufacturer includes that of the commodities, the cost of loading them to the ship and the cost of insuring the goods on transit. In this contract, Matson will have to name the port of destination (Leagle consulting 2008). For instance, if the CIF contract states CIF New York, then the steel on shipment will be shipped straight to New York. This means that Salazar Steel will incur all the cost of shipping and insurance up to New York. EXW (Ex-Works) Under this contract, the steel will be transferred to Matson’s possession at the doorstep of Salazar Steel. This means that Matson will take away the responsibilities of the steel manufacturer from the manufacturing site in Brazil. Here, the buyer of the goods is both exporter and the importer (International Trade Centre 2010). However, where an export order is placed, under the contractual terms, Salazar Steel would still take the liability of freight in packing and forwarding through the proper carrier (Leagle consulting 2008). This is however at the risk and additional cost of Matson, who is the intermediary. Free on board (FOB) Under this contract, the manufacturer clears the merchandise for export and delivers them to the specified port of shipment, from where the goods will be shipped by a vessel. Additional costs such as transportation and insurance incurred from the point of shipment are borne by the buyer (Matson) (Malfielt 2010). Free alongside ship (FAS) Under this contract, the seller incurs all the costs of transportation and risks of transporting the goods. Salazar Steel will therefore make necessary arrangements for appropriate insurance from the point of freight. In addition, the company will have to clear the goods for transport through the shipping company to the point of loading. The expenses of loading from the specified point and additional costs of risk of loading and insurance accrue to the Matson (the buyer) (International Trade Centre 2010). Letters of Credit Since the import/export management company (IEMC) is the selected arrangement for the transaction, Matson should be advised to apply for letters of credit to finance the import and export. In addition, he should apply for the letter of credit since Matson has inadequate funds to finance the importation and exportation from steel. Letters of credit function as substitutes to the bank credit to an applicant (the bank’s customer) to the beneficiary, on condition that the beneficiary fulfills his obligations. More particularly, it is a written statement issues to an applicant stating that the payments for transactions will be made on behalf of the applicants. Typically, a letter of credit involves three parties, including the bank, the customer and the person to whom payments is made. In the present scenario, a letter of credit will involve Matson’s bank, Matson and Salazar Steel. Within this arrangement, once the bank agrees to issue a letter of credit to Matson, the bank will be entitled to reimbursement from Matson for any payments the bank makes. The bank will issue the letter of credit within the line of credit that Matson has with it. The letter of credit will constitute the bank’s irrevocable obligation to pay the Salazar Steel. Technically, the documents include shipping documents that will enable Matson to deliver the export the items from the manufacturer and deliver them to the shipbuilder in Halifax, near Canada (Reynolds 2006). In conclusion, Michael Matson looks to purchase 5,000 metric tons of #41 steel ingots from a Brazilian company called Salazar Steel. Considering all the factors faced by Matson (as illustrated), there are several alternative ways to structure the transactions to be favorable to his situation. However, the best alternative is functioning as an intermediary between Salaazar Steel and Bilder Bay Shipbuilders. The best contract would be EXW (Ex-Works). He should as well apply for letters of credit to be able to finance the transactions. Case Scenario 2 In the second case scenario, KitchenMaid (KM), which a U.S.-based manufacturer if dishwashers, wishes to end its contract with Gepetto & Sons (GS). GS has been selling KM’s dishwasher in Europe for over seven years. KM contemplates a new arrangement with its major competitors in the European Market. These are DeutschlandKitchenland (DK) and Nouvelle Cuisine de France (NCF) (Folsom et al 2012). Given the large commission payments made to GS and the high EU tariff, KM plans a new arrangement. Plan No. 1 The plans aim to see both DK and NCF become KM’s agents who will have exclusive authority from KM to represent it or act on its behalf as well as legally bind it with relations to third parties. In exchange for creating and maintaining market for KM (the principal), DK and NCF would be remunerated in terms of commissions based on the values of sales achieved in the specified frontiers (Folsom et al 2012). GS would cease to be KM’s agent. There are however some concerns with the new arrangement. The first agreement has some pitfalls, which would need to be improved to avoid possible disputes that may arise with regard to the deficiencies of the agency agreements. The first plan comprises license productions and sales to DK and NCF. Under this arrangement, KM plans to license the production of its dishwashers to DK and NCF. KM would also license DK to sell the KM dishwashers produced by DK only in the 13 northern-most EU member states. KM would also license NCF to sell the dishwasher NCF produces in most EU member states and some Mediterranean countries. The agreement would however forbid NCF and DK from selling their brands in the EU and the Mediterranean. However, DK should draw up an agreement while taking account of the relevant laws in the respective countries that the agents are expected to venture into. The agreement should be formulated in such a way that clearly outlines the extent of DK and KM’s authorities – whether implied or actual – as this will affect the provisions of the agreement. In addition, the provision of the information and support that the principal had to give should be specified since this can impact the performance of the agent. The plans should also indicate the obligations of NCF and DK to KM (who is the principle) in performance of the agreement (Fleming & Fleming 2005). In addition to detailing the products that the agents will deal with, the agreement should clearly specify the territories that the agreement covers (Fleming & Fleming 2005). The plans should also specify the roles of the agents with regard to payment of monies that are due to KM from third parties. The plans should also specify the payment and payment conditions by the principal to the agents and how taxations issues that arise should be contained. The issue of payment of expenses met by the agents while undertaking the activities concerning the marketing and selling of the dishwashers should as well be specified (Fleming & Fleming 2005). The agreement should also specify the DK and NCF’s powers to engage sub-agents and whether Km should be informed of the development. In any case, it should specify whether the agent will be responsible for the activities of the sub-agents that DK and NCF engage in dealing with the KM’s products in the territories. Concerning exclusivity, it is critical that the agreement should outline whether KM (the principal) will be able to grant other companies the right to sell the products in the territories that NCF and DK shall be operating during the lifespan of the agreement. This means that in case KM can whenever necessary directly engage other companies to deal with customers situated in the territories, and whether such sales that arise from the new engagements shall be entitled to some form of commission (Arora 2007). In the first plan the agreement specifies KM shall be paid 25 percent of gross sales of the dishwashers and $25 per chip during the period of the agreement to customers residing in the named territories. However, it should as well specify the commission rate for cases where DK and NCF deal with customers who reside in outside of the territories make orders that result in contracts of sale. The plan should also detail out how the principle will undertake as well as comply with the relevant laws that relate to the selling of products in the identified territories. This is because in jurisdictions that are outside the United States where KM is based, certain laws specify that local companies should have majority management ownership (Fleming & Fleming 2005). The plans should also contain the period the agreements will operate, information on termination notice as well as procedures and compensations levels that should be payable. The law governing the agreement should also be specified. In addition, it should specify how any dispute that arises from the relationship shall be settled and under which laws it shall be settled. Since KM is a U.S.-based company and DK and NCF will operate in new European and Asian territories, it is possible that disputes may arise due to misinterpretation, breach or termination of the agency agreement. This is because multicultural settings are prone to conflicting cultures and modes of practice. In any case, the institution to settle the disputes should be named, the number of arbitrators, place of arbitration and the language of arbitration (Arora 2007). The plans should also specify how to notify of any possible amendment to the agreement and how amendments should be undertaken. The plans should also have confidential and non-disclosure clauses. Hence, concerning privacy issues, the agreement should indicate that both parties acknowledge and understand that by virtue of their relationship, they may receive confidential information belonging to the other party. Regulations regarding the way this information should be treated should be specified as this is a potential area of conflict (Falvey & Foster 2006). Plan No.2 Plan No. 2 is to acquire DK. There are a number of concerns about Plan No. 2. Under this plan, after KM acquires DK, it will stop manufacturing some of the dishwashers manufactured by DK as KM product line would be produced in DK factories. A new subsidiary to be named KMD would be established that will sell DK’s products under the DK trademarks and KM products under the KM trademarks. Indeed, most US companies looking to do business oversees seek the business structure that comprised using wholly-owned subsidiaries so as to have total control over their operations. It is critical to note that mergers and acquisitions are often undertaken with the objective of the acquirer’s expectation to obtain the intellectual property rights of the acquired company (Arora 2007). Although KM’s agreement has taken care of this, the acquisition agreement should be prepared with the express objective of outlining the terms and conditions under which the stock will be sold, the method of payment, the purchase price, date of closing or any other condition the seller or buyer will meter before the closing date (Ladas & Parry LLP 2013). Additionally, the agreement should ask DK within the context of intellectual property to makes certain representations and warranties in relation to the intangible assets to be sold. Conversely, the agreement should specify that share purchases will transfer the total rights in the intellectual property rights (Arora 2007; Falvey & Foster 2006). Even though the acquisition purchase agreements describes the business that is being purchased (in this case DK), the transactions or deals between MK and DK, it should indicate the time line and path for closing, specify the conditions for closing and assign risks in the deal between KM and DK (Bryer & Lebson 2003). Typically, since the acquired company will often seek to relieve itself of responsibility for items that it has offered to the acquirer, DK (who is the prospective acquirer) should indicate in the agreement that it takes no responsibility for any issue that took place before closing the deal (Bryer & Lebson 2003). Therefore it should state in the agreement that it disclaims such liability. In any case, if the disclosed item is substantial, then DK should specify whether it shall negotiate the responsibility with DK (Ladas & Parry LLP 2013). From the perspective of KM, the non-competition agreement is critically important. Even though the company has elaborated that “KMD would use intellectual property law to stop the re-sale of these lower priced products in northern Europe and the United States,” this is not enough. KM has the rightful expectation that DK will not engage in competitive business in the same territory (Arora 2007; World Trade Law 2009). Therefore, it should specify that subsidiary, to be called KitchenMaid Deutschland (KMD), should not sell the DK product line under the DK trademarks in the same territory that KM targets. This will forbid DK from engaging in activities that will compete with the business acquired in distinct territories for a specific period of time. In addition, the agreement should specify the need for DK to acknowledge that it will not solicit the customers of the business. This forbids DK from taking away or engaging in business with the acquired company’s previous customers for a specified period of time (EquiCap 2013). Further, the agreement should prohibit DK from inducing any licensor, licensee, suppliers or businesses from cutting relationship with the acquirer (KM). The agreement should also obligate DK to acknowledge that it will not entice away the employees of the acquired company for a specified period of time. There is also a need to structure the agreement to make DK acknowledge that it shall treat any confidential information with confidentiality any information that pertains to the acquired business (Bryer & Lebson 2003). It is also critical that DK established an escrow fund through an escrow agreement. This should be specified in the agreement. Typically, escrow agreements are used in acquisition agreements. Under escrow agreement, the acquired company and the acquirer establish an escrow fund with a bank. A section of the purchase price is place in an escrow account to protect the acquirer. This fund is significant as it will help pay any of the acquired company’s indemnification obligations or any purchase price adjustments (Bhagat Klasa & Litov 2013). Towards this end, it is critical to note that KM should not ignore any antitrust concerns within the context of obtaining any intellectual property assets (U.S. Department of Justice 2013). In various jurisdictions such as the United States and parts of Europe, the Justice Department and the European Commission have actively been involved in increasing interests in the acquisition of intellectual property rights (IPR) based on an antitrust perspective (EquiCap 2013). Concerning tax implications, KD should coordinate its operational activities from the tax standpoint. Since intercompany pricing is complex, it should be examined critically before the subsidiary is set. In all, it is clear that no considerations on tax obligations have been mentioned in the agreement. Depending on the scope of the business activities that KD may choose to undertake through the subsidiary (KMD), KD should indicate that it seek to obtain record title to intellectual property assets it assumes in the acquisition. Alternatively, it may choose to sell its newly acquired intangible assets under the brand-name KMD to a third party as a result receive a license to use the name. This can be achieved in a tax-efficient way by placing the ownership of the intangible assets to hold the business that licenses back the assets to be used by the operating company (Ladas & Parry LLP 2013). 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