Chapter 5 Legal Environment

Chapter Outline Multiplicity of Legal Environments Legal Systems Jurisdiction and Extraterritoriality Legal Form of Organization Branch vs. Subsidiary Litigation vs. Arbitration

Chapter Outline Bribery -Legal Dimension -Ethical Dimension Intellectual Property -Categories of Intellectual Property -Legal Rights and Requirements

Legal Systems To understand and appreciate the varying legal philosophies among countries, it is useful to distinguish between the two major legal systems: common law and statute law.

Common Law There are some twenty-five common law or British law countries. A common law system is a legal system that relies heavily on precedents. Judges’ decisions are guided not so much by statutes as by previous court decisions and interpretations of what certain laws are or should be. Countries with such a system include the USA, Great Britain, Canada, India, and other British colonies.

Statute Law Countries employing a statute law system, also known as code or civil law, include most continental European countries and Japan. The main rules of the law are embodied in legislative codes. Every circumstance is clearly spelled out to indicate what is legal and what is not. There is also a strict and literal interpretation of the law under this system

In practice, the two systems overlap, and the distinction between them is not clear-cut. Therefore, the only major distinction between the systems is the freedom of the judge in interpreting laws. In a common law country, a judge’s ability to interpret laws in a personal way gives that judge a great deal of power to apply the law as it fits the situation. In contrast, a judge in a civil law country has a lesser role in using personal judgment to create or interpret laws because that judge must strictly follow the “letter of the law.” Distinction of two systems

Jurisdiction territorial range of authority a court's legal power to hear a case

Extraterritoriality a country's or court's application of national laws beyond its border

Legal form of Organization Firms doing business in Great Britain have three primary choices for the legal form of organization: British branch, limited company, or partnership. A limited company may be either a public limited company (PLC), which can raise capital by selling securities to the public, or a private company (ltd.), which is not allowed to offer shares or debentures to the public. In general, a public company must meet a number of requirements in terms of registration and capital structure, subscription for shares, and profits and assets available for distribution.

Legal form of Organization In the USA, a business is able to select from among these forms: sole proprietorship, partnership, and corporation. For firms involved in international trade, the most common choice is the corporation due to the limited liability associated with the corporate form, its relatively permanent structure, and its ability to raise money by selling securities.

Nomenclature indicating limited US firms have a Corp. or Inc. nomenclature as part of their trade names. For most British Commonwealth countries, corporate names include ltd. or ltd. co. to indicate that the liability of the company is “limited.” France, S.A., Germany and Switzerland, A.G., Japan, K.K., Sweden, A.B., Netherlands, N.V. To eliminate confusion and to ensure some uniformity, European countries are now encouraging the use of PLC instead of other nomenclature to indicate that a company is incorporated.

Branch vs Subsidiary One legal decision that an MNC must make is whether to use branches or subsidiaries to carry out its plans and to manage its operations in a foreign country. A branch is the company’s extension or outpost at another location. Although physically detached, it is not legally separated from its parent. A subsidiary, in contrast, is both physically and legally independent. It is considered a separate legal entity in spite of its ownership by another corporation. A subsidiary may either be wholly owned (i.e., 100 percent owned) or partially owned.

Reasons why MNC’s choose subsidiary When compared to the use of branches, the use of subsidiaries adds complexity to the corporate structure, they are also expensive. There are several reasons why a subsidiary is the preferred structure. One reason has to do with recruitment of management. Titles mean a great deal in virtually all parts of the world. A top administrator of an overseas operation wants a prestigious title of president, chief executive, or managing director rather than being merely a “branch manager.” Another reason for forming a subsidiary may involve gaining quick access to a particular market by acquiring an existing company within the market and making it a subsidiary.

Bribery Legal Dimension: Foreign Corrupt Practices Act (FCPA) - Bribery is "the use of interstate commerce to offer, pay, promise to pay, or authorize giving anything of value to influence an act or decision by a foreign government, politician, or political party to assist in obtaining, retaining, or directing business to any person."

Bribery Types of Payment - Permissible: expediting payments  payments to low-level officials who exercise only "ministerial" or "clerical" functions - Illegal: payments to an official exercising discretionary authority Ethical Dimension - Morality as a function of culture - corporate codes of conduct

Reasons of Bribe Some of the reasons why businesspeople are often willing and even eager to offer a bribe are: - To speed up the required work or processing - To secure a contract - To avoid the cancellation of the contract - To prevent competitors from getting the contract.

Intellectual Property "creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce" Trademark - symbol, word, or thing used to identify a product made or marketed by a particular firm Copyright -protection given to an author or artist for literary, musical, dramatic, and artistic works

Intellectual Property Patent -invention of a scientific or technical nature Trade secret -know-how that is kept secret within a particular business -e.g., manufacturing methods, formulas, plans