Copyright 2005InternationalCounsel 1 Cross-Border Agency and Distribution Agreements International Business Agreements David A. Laverty InternationalCounsel May, 2005

Copyright 2005InternationalCounsel 2 Cross-Border Agency and Distribution Agreements Deceptively Simple to Companies and their Lawyers?

Copyright 2005 InternationalCounsel3 Deceptively Simple Agreements?  Advantages of a Representative : A local representative can deliver knowledge of the target- country market, its channels of distribution, means of importing and sale and a network of contacts and relationships - acts as an extension of a company’s sales and distribution arm  Can be a substitute for costly and resource-intensive alternatives – such as establishing “greenfield” operations, acquiring or joint venturing

Copyright 2005 InternationalCounsel4 Deceptively Simple Agreements?  Underestimated by Companies : An agent or distributor may represent a simplified and less expensive alternative for entering, and getting out of, a foreign market  These agreements look like the kind of agreements used in a company’s domestic market - what can go wrong?  North American businesses are at a particular disadvantage - relative freedom of contract, lack of local dealer-protection, absence of currency and other cross- border issues

Copyright 2005 InternationalCounsel5 Deceptively Simple Agreements? A word of caution on terminology – “agents” vs. “distributors”  Very important to understand the underlying business structure of each  Very dangerous to rely on the labels – may or not conform to definitions in law

Copyright 2005 InternationalCounsel6 Cross-Border Issues – Our Focus 1. Local Dealer-Protection Legislation 2. Governing Law and Dispute Resolution 3. Competition Law Issues – EU Example 4. Tax-Related Issues I. Permanent Establishment Concerns II. Withholding Taxes

Copyright 2005InternationalCounsel 7 Agency and Distribution Agreements – Key Cross-Border Issues 1. Local Dealer-Protection Legislation

Copyright 2005 InternationalCounsel8 Local Dealer-Protection Legislation The Issue:  Local laws may restrict the termination of a representative through: 1.Mandatory termination notice 2.Mandatory post-termination compensation  Often a surprise to companies from common law jurisdictions within Canada, the US, Singapore or New Zealand

Copyright 2005 InternationalCounsel9 Local Dealer-Protection Legislation - EU  Perhaps the best-known framework of termination limitations is found in Europe - EU Directive 86/653 has been enacted into local law of EU member countries with local variations to generally apply to “agency” relationships

Copyright 2005 InternationalCounsel10 Local Dealer-Protection Legislation – Asia  Does the jurisdiction regulate or otherwise restrict the termination of agents and/or distributors, or is this purely a matter of contract?  Do any such regulations/restrictions provide for a mandatory termination notice period?  Is there mandatory post-termination compensation, such as in the form of a payment for goodwill generated by the representative or an “indemnity” payment?

Copyright 2005InternationalCounsel 11 Agency and Distribution Agreements – Key Cross-Border Issues 2. Governing Law and Dispute Resolution – Focus on dealer protection

Copyright 2005 InternationalCounsel12 A Word on Governing Law and Dispute Resolution The Issue:  Even where local dealer protection laws are mandatory, can governing law and dispute resolution help overcome the reach of local law?

Copyright 2005InternationalCounsel 13 Agency and Distribution Agreements – Key Cross-Border Issues 3. Competition Law Issues

Copyright 2005 InternationalCounsel14 Competition Law Issues The Issue: Clauses deemed anti-competitive may be prohibited  Resale price maintenance – distributor or reseller is required to charge a minimum amount for the product or licensed items  Territorial restrictions - the representative is required to sell only in its territory and not make sales outside of it, yet some countries prohibit the imposition of restrictions on “passive sales” from unsolicited orders outside of the country  Non-compete provisions – can these be extended beyond the term of the agreement, and if so for how long, and are there limitations even during the term of the agreement?

Copyright 2005InternationalCounsel 15 Agency and Distribution Agreements – Key Cross-Border Issues 4. Tax-Related Issues

Copyright 2005 InternationalCounsel16 Permanent Establishment – Tax I The Issue: Will the supplier/principal be taxed in a foreign country on income from sales or licenses there? Without a business presence in another country, such as through a branch or subsidiary, many may believe there would be no tax in the foreign country Yet, the concept of “permanent establishment” recognizes that one can still have enough interaction with the foreign country to be deemed taxable

Copyright 2005 InternationalCounsel17 Withholding Tax – Tax II The Issue: Even if the supplier/principal does not have a permanent establishment in the other country which would subject a foreign person to tax on business profits derived in that country, may some categories of income derived from that country still be taxable? Royalties and interest are two categories of income that may be subject to withholding tax

Copyright 2005 InternationalCounsel18 Case Studies Examples of InternationalCounsel projects:  Terminated Representative in Latin America  Terminated European Representative  Consolidation of Representatives After Acquisition  Seizure of CD Roms

Copyright 2005 InternationalCounsel19 InternationalCounsel An “In-House Equivalent” Cross-Border Legal Capability  A law firm formed by former in-house international legal counsel to provide legal services to companies with business interests in multiple countries  Delivers expertise in structuring, negotiating and documenting international transactions such as joint ventures, strategic alliances and agency/distribution arrangements, as well as foreign direct investment

Copyright 2005 InternationalCounsel20 InternationalCounsel Address: Telephone: Facsimile: Web Site: South Wacker Drive Suite 3000 Chicago, Illinois David Laverty