If US States Were Countries - By GDP

Take a look at this map of the United States as you may have never seen it - the US state names have been replaced by countries with a similar level of GDP.

I credit this to Professor Christian Broda of the University of Chicago.

Investment in India - Further Evidence of Liberalization

As further evidence of India's quick market liberalization pace for acquisitions and overall foreign investment - a point made in our India articles noted elsewhere in this blog - the March 28 edition of India's The Economic Times reported that foreign investors in Indian real estate may soon be allowed expanded exit opportunities.

Though up to a 100% foreign equity interest is currently permitted in real estate as well as hotels and tourism, foreign investors are now subject to a three-year lock-in during which the investor cannot sell the equity stake without the approval of India's Foreign Investment Promotion Board (FIPB). Indian authorities have proposed a waiver of this three-year lock-in as well as the lifting of a minimum investment requirement of US$5 million for joint ventures or $10 million for wholly-owned ventures.

Get ready to pick-up your dream apartment overlooking the ocean on Marine Drive in Mumbai along with that land for your manufacturing facilities.

Midddle Market Growth in Uncertain World Markets - A Fine Conference

I had the pleasure of co-chairing a fine international conference yesterday –sponsored by the Association for Corporate Growth’s Chicago chapter– a group that brings together our very active community of private equity firms, investment banks, accountants, lawyers and other dealmakers. Many in this 1,000-member organization share a growing passion for international opportunities, and about 200 proved to be active enough to register for our event.

The focus was on mid-market companies expanding internationally in uncertain times. The overall message from our several panels of speakers: yes, capital and debt markets in the coming months will present some major challenges, but expanding companies and dealmakers that are not relying on high levels of debt are likely to find an excellent hedge against the US economy in growth markets elsewhere (as well as from non-US investors attracted by a weak dollar and more reasonable US valuations). You all know the markets – whether India or other BRIC countries, Central Europe, Dubai, Vietnam and elsewhere.

Our feedback was strongly positive, fueled by an excellent keynote presentation by Robert Reich (who happens to have a great sense of humor, including on a personal level around the lunch table), a breakfast keynote moderated by Fortune Magazine’s Global Editor, Stephanie Mehta (a rising journalism star of South Asian decent who happens to be from Chicago), and 5 panels of speakers from companies such as Boeing, Abbott Laboratories, Zebra and Littlefuse, private equity firms such as The Jordan Company, Baird, 3i and Audax, investment banks such as Brown Gibbons Lang, consultants such as A. T. Kearney and Visthar and other publications such as Business Week.

Can you guess InternationalCounsel’s professional interest in contributing to such an event? Our longstanding focus has been on internationally-expanding mid-market companies attracted by our cost-effective international legal team model - just the sort of audience who found their way to the Sheraton for yesterday’s event.

Acquisitions of Indian Companies - Our Recent Article

Prior to my recent India trip, the General Counsel of a Chicago-area company and I published an article on acquisitions of Indian companies by US companies.

As part of our cross-border legal advisory services, we work with US companies investing and doing business in India (and also with Indian companies doing business in the US).

Here is a copy of the article, as a follow up to my February, 2007 update on foreign equity investment in Indian companies - published in the Association for Corporate Growth's Cross-Border Transactions Bulletin.

We are active with the international activities of this mid-market-focused dealmakers' association, and I am co-chairing our 2008 international conference on March 18. Click on the images below to enlarge.

India Updates

I have just returned from Mumbai, Bangalore and Delhi (with stops in Pune and Mysore). We are seeing a good deal of acquisition and other activity with India. Stay tuned for updates.

The photo is of Marine Drive, Mumbai, otherwise known as the great city of Bombay - photo credit to Rakesh Krishna Kumar.

Looking for Greater Export Profits? Consider "Onshore" Options in Your Search for an "Offshore" Strategy

Can the formation of "offshore" companies offer tax benefits to an internationalizing US business, and are many companies overlooking the benefits of structures using US "onshore" entities?

The business press has left some of our clients with the sense that they are missing-out on great benefits though "tax haven" structures. Yet, clients often assume that such structures are used mainly by the likes of Tyco and Enron, are complex and risky, and may not be a good way to win friends at the IRS.

Offshore entities can be useful in some situations that have little to do with US tax savings. For example, companies investing in China or India can benefit by holding their local investment through an intermediate company established in Hong Kong (for China) or Mauritius (especially for India but also for China) or some other low-tax jurisdiction. The Hong Kong or Mauritius entity can more easily be sold -- local law restrictions on transfer of ownership may not apply since only the ownership of the "offshore" entity is transferred. The shares of the local Chinese or Indian company do not change hands. Even if the shares of the local company are later sold, the local withholding tax on capital gains may be reduced for a payment made to a jurisdiction like Mauritius than for a payment made directly to the US.

If a US company is not investing or forming an entity in another country but is exporting, licensing or otherwise selling to other countries, offshore entities offer at least the potential of deferring the impact of US tax. It would be difficult to reduce US taxes simply by routing payments though a third jurisdiction such as the Cayman Islands, no matter how attractive its tax laws. This is mainly since the US taxes a US company's or individual's income on a worldwide basis, even if the income source has nothing to do with US activities (this is not true for tax systems of most other countries). Parking income in low-tax country may be possible, though this defers but does not reduce the US tax burden (and will still require current US tax payments on many types of passive "subpart F/controlled foreign corporation" income, even if funds are not actually distributed back to the US).

Too great a focus on "offshore" structures can also cause US companies to overlook the benefits of US "onshore" structures. This can be as simple as the use of a US limited liability company for exporting US goods. Net income would then be taxable to owners of the LLC but would not be subject to the added US corporate tax that would apply to a corporate entity.

US exporters can also continue to achieve significant US tax savings through the formation of a separate US international sales corporation under special IRS rules. This technique is available to certain partnerships, S corporations and LLCs, which establish an export sales corporation and then pay it a commission of up to 50% of the export net income. The commission is deductible by the company paying the commission and is not taxable to the export corporation. The accumulated income in the export corporation is subject to a 15% dividend tax when distributed to the payer of the commission. Though there are a few other wrinkles, a savings of 10% or more off US taxes can easily be achieved so long as a company's exports are of US origin.

Better yet, the set-up costs are modest, and your family and friends won't likely be reading about your IRS troubles in the local business press!


CIRCULAR 230 DISCLOSURE: ANY STATEMENTS REGARDING TAX MATTERS MADE HEREIN CANNOT BE RELIED UPON BY ANY PERSON TO AVOID TAX PENALTIES AND ARE NOT INTENDED TO BE USED OR REFERRED TO IN ANY MARKETING OR PROMOTIONAL MATERIALS.

Enforcement of US Court Judgments in China - Even a Single Example?

As noted in my last posting, we seldom recommend that clients specify US courts as the choice for dispute resolution in cross-border agreements that may need to be enforced in another country. Arbitral awards are simply a better enforcement bet among the many signatory countries to the New York Convention.

Don Clarke, the George Washington Law School professor who moderates an excellent China law discussion group, is reviving his search for even a single example of a US court judgment that has been enforced in China, and I will report back on specific examples. Don's criteria are as follows - a typical scenario wherein the local party challenges the enforceability of the judgment:

"1. I'm talking about judgments, not mediated settlements.

2. I'm not talking about cases where both parties wanted the judgment recognized (e.g., consensual divorce cases). I want cases where one side argued that the judgment should not be recognized and enforced, and lost the argument.

3. I'm talking about cases where the issue was whether or not to enforce the judgment without going into the merits, not where the merits of the matter were litigated (since in that case it wouldn't really be a case of enforcing a US judgment).

4. I really need a specific and independently verifiable reference, not something you heard about from somebody else. This is important because so far, every time I hear about a case that I'm told meets my criteria, when I am able to look at the specifics it turns out that it does not.

Our last discussion failed to uncover any cases meeting the above criteria; are there really none that anyone knows of?"

Online Terms and Conditions - Binding in the US and Internationally?

We have worked with clients to help ensure that online terms and conditions are enforceable, both in the US and in other countries. Apart from online agreements accepted by clicking "I accept," some agreements are signed by parties yet refer to materials posted online as part of the agreement terms. Will such online terms be enforceable?

Not always. In a US court case in Florida, the parties signed a written agreement yet tried to make various online terms binding through the following language:

“This contract is subject to all of X's terms, conditions, user and acceptable use policies located at http://www.X.com/about/legal/legal.htm."

These online terms included an agreement to arbitrate, and the Florida court found that the agreement to arbitrate was not binding. Why? In essence, the incorporation of the online terms needed to be more specific than a simple reference that it is "subject to" the online terms. There was no specific reference in the "offline" written document that is meant to include the online document that contains the arbitration provision, and the web address link apparently did not directly point to the terms containing the arbitration provision.

Such a defect can be devastating in a cross-border context. We often recommend arbitration for international agreements, in part to stay out of unfamiliar local courts and in part due to the greater chances of enforceability in many other countries of an arbitral award as opposed to a foreign court judgment. If a US court is reluctant to enforce online terms which are not clearly meant to be binding by the parties, courts in many other countries may be even less likely to enforce terms, especially if they disadvantage a local party.

The decision is Affinity Internet, Inc., d/b/a SkyNetWeb v. Consolidated Credit Counseling Services, Inc. No. 4D05-1193 (Fla. Dist. Ct. App. 4th Dist., March 1, 2006)

We Don't Pay Foreign Officials - Why Are We At Risk?

As they expand internationally, our clients want to be good corporate citizens and understand that payments should not be made to foreign officials in order to get business. Yet, many mid-market companies would be surprised to learn that they are at risk for failing to recognize "red flags" and failing to follow even basic corporate compliance practices.

The reason is the Foreign Corrupt Practices Act and the heightened enforcement activity over the past 18 to 24 months - companies are facing the highest level of scrutiny since the Act's introduction in the 1970s.

Are employees on that trip to Beijing handing over fists of cash to ministry officials in order to land new business or obtain approval for a new venture? Perhaps not so likely. What about that recent distributor in New Delhi and its relationship with government officials - is "don't ask, don't tell" good enough? Are you confident that you are not dealing with government officials - have you really explored the ownership of that "private" company in Shanghai or that hospital system in Bahrain?

If a U.S. company is faced with a murky set of facts, it may have sufficient "knowledge" of a possible improper payment to open the door to an investigation and potential fines (or worse). "Red flags" can include the insertion of a local intermediary without a clear business purpose. Due diligence on relationships and transactions is an important part of the response. Contractual language piously prohibiting corrupt payments is advisable, but will not be sufficient without more, including evidence that the company took steps to implement a compliance program and educate employees (something more than "thou shall not hand over bags of cash").

Better a little up-front investment than a front-page Wall Street Journal or Crain's article and a cloud over the international team.

Abe's Shameless Malarkey Refuted

Do I now have your full attention? Ready to take a break from cross-border legal updates?

Yes, this is in fact a North Korean news headline, in one of those priceless English translations. Here are a few excerpts:


"Abe's Shameless Malarkey Refuted

Pyongyang, March 14 (KCNA) -- Japanese Prime Minister Abe's reckless remarks aimed to throw the past crimes committed by Japan into the limbo of oblivion remind one of the saying that "Leopards don't change their spots," observes a Minju Joson analyst Wednesday.

Noting that he totally negated Japan's past crimes, letting loose a string of rubbish woefully lacking common knowledge, the analyst goes on: . . . . "


The next time I am out of good arguments on a client's behalf, I will simply accuse the other side of spouting "shameless malarkey" and of "letting loose a string of rubbish woefully lacking common knowledge."

By the way, the satellite image of North and South Korea shows in the starkest terms how economic development can turn dark into light. Whatever your political persuasion, many of us can agree that our cross-border efforts and market liberalization can lead to something positive.

India's Growth - Don't Overlook Manufacturing (and the Consumer Market)

We just received an update from one of our India-based contacts - the Indian economy continues to steam ahead, and note the importance of manufacturing to this growth. This economy has much more in its favor than software and back-office outsourcing.

"Goldman Sachs has projected that India will sustain over 8% growth until 2020 and become the second largest economy in the world ahead of the United States, by 2050. In their words- “…we project India’s potential or sustainable growth rate at about 8% until 2020...”. Standard & Poor’s, the global rating agency, has raised India’s sovereign credit rating to ‘Investment Grade’ (BBB-/A-3).

Recent reports released by the Central Statistical Organisation (“CSO”) and the Reserve Bank of India (“RBI”) further affirm the above facts. According to CSO, real gross domestic product (“GDP”) growth accelerated to 9.2% in the second quarter from 8.9% the preceding quarter and 8.4 % a year ago, led by manufacturing and services sectors. The manufacturing sector with double digit growth of 11.5% maintained its position as key driver of industrial activity, contributing almost 91.2% of the growth in industry. Growth in the services sector accelerated to 10.6 %."

Middle Market Companies Go International - A Terrific Conference

How many conferences really focus on the special needs of middle market companies as they expand abroad through acquisition, manufacturing, distribution and otherwise? What about the exploding interest among private equity firms in helping their portfolio companies into new markets and in exploring direct investments in China, India and elsewhere?

I was pleased to be part of a fine group of international committee members who organized ACG Chicago's "Is the World Really Flat? Middle Market Companies Competing in the Global Economy."

The February 28 event drew about 300 participants and featured Fareed Zakaria as our lunch keynote speaker (congratulations on a fine presentation, Fareed) as well as Julie Sell of The Economist and her cross-border dealmaker roundtable with Jay Jordan of The Jordan Company and Steve Pagliuca of Bain Capital (which I thought really went to the heart of many of the middle-market's cross-border challenges).

In addition to working with Julie, Jay and Steve on their panel, I put together and moderated our "Sourcing Cross-Border Deals" session. As described below (click on the images to enlarge), I was joined by senior dealmakers from Illinois Tool Works (a very international Fortune 100 company), Cathay Fortune Corp. (a China-based private equity firm) and S.H. Lang & Co. (Scott Lang, formerly of Brown Gibbons Lang, the mid-market investment banking firm).

Our China Roundtable Discussion

InternationalCounsel hosted a China roundtable discussion at our offices on Monday, February 26. We had a good group of attendees, including some manufacturers, consultants, representatives from Illinois and Wisconsin trade organizations and others interested in or already doing business in China.

I spoke on manufacturing and distribution in China, and Shawn He of MeetChinaBiz moderated the discussion.

These roundtable discussions allow participants to voice their special problems and concerns and learn from each other. We are finding something of an oversupply of China events in Chicago and elsewhere - how many more lectures on direct foreign investment in China are you prepared to sit through?

A roundtable format offers a more interactive setting, and most companies entering China are facing contracting, investment and IP issues that are not rocket science but require small teams of experienced advisors.

Investing in India? Our Recent Article

As part of our cross-border legal advisory services, we work with US companies investing and doing business in India (and also with Indian companies doing business in the US). China is also important to us, but it is seldom "all China, all of the time" for our clients!

Here is my recent article on foreign equity investment in Indian companies - published in the Association for Corporate Growth's Cross-Border Transactions Bulletin (we are active with the international activities of this mid-market-focused dealmakers' association). Click on the images to enlarge.

Clifford Chance Outsources Legal Support to India

London's Legal Week reported on October 2 that Clifford Chance expects to transfer 300 support staff jobs to India - at a savings of close to US$60 million. This is in addition to the outsourcing of document production which is run by Integreon in India.

Why do we care? Major law firms are feeling ever-greater pressure to meet the budget needs of corporate clients. Our practice offers a sophisticated cross-border legal capability at costs far below our large-firm competitors. I can tell you that we will not be able to find $60 million of savings in our overhead no matter how hard we look!

India - A Day Out of China's Shadow

There seems to be some convergence of India developments this week in our office and in the press.

Our office is closing this week on an acquisition of convertible prefered shares on behalf of an Indian publicly-listed company. Congratulations to the parties!

Already this week, the Wall Street Journal has reported on Wal-Mart's plans to expand in India through a joint venture with Bharti Enterprises Ltd. Plans call for "several hundred" stores within the next 5 years.

Here in the Chicago area, Crain's reported that Salton Inc. is in talks to acquire a majority interest in Softel Machines Ltd., an Indian home appliance make. Softel manufactures water purifiers, ice cream makers and popcorn maker, and the venture could expand into the manufacture and distribution of other appliances.

We are all seeing endless China conferences, and China's opportunites are just too massive to treat lightly. Work for US companies entering China is important to our practice. Yet, while everyone knows India as a great location for outsourced call centers and business services, India is also an important consumer market and manufacturing base.

Establishing a Presence in a Foreign Market - Korea

One of the core beliefs of our InternationalCounsel practice is that a legal advisor's "toolkit" of international law skills is generally of far greater importance to the success of a project than the particularities of a target country's local law.

For example, in the typical international transaction, whether a license, franchise, agency or distribution agreement or manufacturing/sourcing arrangement, substantial legal risk balancing goes into choosing among basic types of arrangements, and a dozen or so key agreement provisions require substantial modification. Local law modifications are important, but someone needs to be asking the hard up-front questions and have a handle on the kinds of issues that cut across many markets.

The same is true when deciding on market entry vehicles in a target country. A recent client project is a good example of factors to consider in establishing an office in another country. Like many projects, this challenge began with a simple message: "we need to distribute our product in Korea and want to establish a subsidiary there to show that we are serious."

1. Is an in-country office really essential? Keep in mind that (a) a local office typcially means that revenues from the country will be taxed by that country, and such revenues will also be taxed in the US or other home country. Yes, a tax credit in the home market may offset the foreign tax, but not always; (b) the cost of setting-up and maintaining the office may not be fully offset by the potential revenues (or margins that might otherwise be taken by a local agenty/distributor); and (c) local parties operating the office will likely be employees subject to laws making them difficult and expensive to terminate. Do such factors cause you to reconsider appointing that local agent or distributor to at least test the market first?

2. If an in-country office is chosen, countries often offer 3 main choices:

(a) a liaison/representative office, if the activities can be structured as non-revenue-producing. For example, it may be possible to route revenues directly from an in-country customer to the parent company and limit the liaison to strictly exploratory/promotional activities;

(b) a branch office, which is an extension of the home office and not treated as a separate entity for liability purposes. Special-purpose US companies can act as a firewall to protect against liabilities; and

(c) a subsidiary in corporate form, which will limit liabilities but be more expensive to maintain and may prevent a company from offsetting profits and losses against parent company income. Consider forming an in-country entity that will be treated as a corporation for local purposes but will have flow-through tax treatment for US purposes.


Yes, each country has local-law nuances, though this example of a "toolkit" of issues is meant to show that the overall structuring issues and interplay between the two countries can have even greater importance.

More Cross-Border Lawyering But Thinning Capabilities?

Several data points have left me wondering whether corporate America is better or worse off given the growing number of lawyers who profess to offer some type of international legal services.

In the last 5 years or so, a broader number of law firms have felt compelled to market some type of international legal services for a number of reasons, including (1) a perception that China is hot and they had better jump on the bandwagon, (2) a concern that internationalizing clients will take their work elsewhere unless they are persuaded that their law firm can offer some international support, and (3) more lawyers have had some exposure to international matters, often dragged along by their expanding clients.

This may have led to a spreading of intenational work to large numbers of newcomers to the cross-border world who may not be able to offer a real depth of experience.

A few trends may support this theory. We all have noticed the continued proliferation of "world law networks" - a growing range of law firms may believe that joining a network may be a shorthand way of communicating that they are serious about international work. To the extent that membership in such a network really draws and retains clients, what is the actual depth of teaming experience among network members and is the client offered an "adult in the room" who has substantial experience in the key risk-limiting and revenue enhancing deal terms for cross-border matters?

We have also seen a tendency among some large corporate in-house law departments to shift in-house control over cross-border matters from more specialized international attorneys to generalist domestic corporate/commercial lawyers who have not focused as deeply over extended periods for multiple projects on the deal terms and issues that are key for cross-border matters. For example, two large Chicago companies have de-emphasized their parallel international teams in recent years. Will there be an experience lag as the corporate/commercial generalists catch-up to the skill levels of their former international colleagues?

Growth in Internet Advertising = Global Online Compliance Challenge

When you think "e-commerce" and "Internet advertising," erase all of your images of inflated dot.com companies headed toward doom. The largest and most successful companies are driving an ever-greater percentage of their advertising dollars to the Internet. For example, a front page article in the April 17 Wall Street Journal presented a chart showing an expected $12 billion in U.S. online advertising revenue to be generated in 2005, up from just over $9 billion in 2004 (and less than a $1 in 1997).

Whatever the source of this increase in online advertising, companies will need to pay greater attention to the cross-border implications of their online content. Particularly when advertising is in local language and products are being sold into local overseas markets, local laws will impact just what can be claimed and online terms will need to be adjusted to take into account local laws and provide for preferred means of dispute resolution.

For some added background, see some of the issues noted in my earlier blog comments on the globalization of e-commerce conference and raised in some of our publications found at www.internatinoalcounsel.com.

Legal Outsourcing to India - Part II

An M & A deal financed by a major UK bank has apparently outsourced legal due diligence work to an Indian law firm, as reported in the Financial Times and picked-up by a law marketing blog.

We have been hearing about an increasing range of litigation support, document review and very basic corporate work going to India, and it is no surprise that India is receiving a share of ever-more-sophisticated legal work. As noted before, this is not for India law work - it is for projects from other countries based on US, UK and other laws. Those of us who have worked on major M & A deals are well-aware of the large revenue streams flowing to law firms from due diligence work handled by junior associates.