International Trade Issues in Supply and Acquisition Agreements
Sep 11, 2015 QuickCounsel Download PDF
Businesses that use inputs produced outside of the United States and/or that sell finished products outside of the United States, or that acquire a company that has used inputs produced outside of the United States and/or has sold finished products outside of the United States, have to screen a global supply arrangement at an early stage for trade, export and customs issues1. Exporting goods as part of an international commercial transaction requires the assessment of the trade law risk in the initial planning stages of such a transaction. Acquiring a company involved in such transactions also requires due diligence on trade law issues to avoid or mitigate future liability for the acquiring entity.
Considerations for Being An Importer of Record
When a shipment reaches the United States, the party responsible for clearing the goods through customs is the "importer of record." See 19 U.S.C. § 1484. As part of this process, the importer of record will obtain and maintain a customs bond and will file entry documents for the goods at the port of entry. Imported goods are not legally cleared until after the shipment has arrived within the port of entry, release of the merchandise has been authorized by U.S. Customs and Border Protection ("CBP" or "Customs"), and estimated duties have been paid. See http://www.cbp.gov/document/publications/importing-united-states.
It is important for importers to provide accurate and complete information to Customs. Liability for errors or material misstatements in information provided to Customs attaches to the importer of record. The U.S. Government can impose civil penalties against importers, detain or seize merchandise or even impose criminal liability under the customs and other laws affecting imports for import violations. Under the customs laws, importers must exercise "reasonable care" when providing information to Customs, which is defined as "that degree of care which a person of ordinary prudence would exercise in the same or similar circumstances."
Examples of key risks in supply and/or acquisition agreements for goods shipped to the U.S., focusing on U.S. requirements, include the following: (1) analyzing the risk of civil and criminal liability that could be imposed if the goods have been entered into the United States; (2) determining whether reasonable care has been used when importing; (3) performing due diligence reviews on key import compliance areas, such as classification, valuation, country of origin, recordkeeping, and duty deposits if the good is subject to antidumping/countervailing duties. CBP publishes basic guidance documents on these areas.
Considerations for Being the Exporter
The exportation of certain goods, services, and information from the United States is controlled by the U.S. government. http://www.state.gov/strategictrade/overview/ Violations of U.S. export laws can result in significant fines, reputational damage, debarment, imposition of third party monitors, and criminal prosecution. Certain goods and transfers require an export license depending on the country to which the good is being exported and the type of good or transaction. The U.S. governmental agencies involved with export laws include the U.S. Department of Commerce, Bureau of Industry and Security and Bureau of the Census; Department of State, Directorate of Defense Trade Controls; U.S Department of Treasury, Office of Foreign Assets Control; the U.S. Department of Justice, Bureau of Alcohol, Tobacco, Firearms and Explosives and Drug Enforcement Administration; and the Nuclear Regulatory Commission. Export control licenses are typically issued by the U.S. Department of Commerce (for items and technology set forth in the Export Administration Regulations or the U.S. Department of State (for items, technology, and services set forth in the International Traffic in Arms Regulations available at https://www.pmddtc.state.gov/regulations_laws/itar.html). Economic sanctions laws are monitored by the Office of Foreign Assets Control, which also issues licenses for economic activity with countries or individuals subject to economic sanctions. See http://www.treasury.gov/about/organizational-structure/offices/Pages/Office-of-Foreign-Assets-Control.aspx. Transactions involving nuclear technology are regulated by the Nuclear Regulatory Commission. The Bureau of the Census regulates reporting requirements for exports of goods.
Key considerations for evaluating risk for selling goods, services, and technology abroad to foreign customers include – taking steps to research the customer, the destination, the end use of the items, possible alternative uses for the item and the potential for diversion of the item. Export laws also regulate such areas of business as foreign travel of employees, contacts with foreign entities, and even employing foreign nationals in U.S. entities.
Generally, restrictions on exports include:
When acquiring a company that has exported items, technology, or services, due diligence should be conducted on the exporter as to (1) whether the item, service, or technology that was exported, re-exported, or transferred is controlled under the Export Administration Regulations of the U.S. Department of Commerce or the International Traffic in Arms Regulations of the U.S. Department of State; (2) the destination of item, service, or technology exports, re-exports, or transfers; (3) whether an export license was needed, and if so obtained exported, re-exported, or transferred properly; (3) whether appropriate duty drawback paperwork was maintained for any duty drawback claims; (4) whether appropriate denied party screening was conducted; (5) confirming no exports, re-exports, or transfers were to prohibited destinations or persons (e.g., North Korea), among others; and (6) whether the target company has filed any directed or voluntary disclosures with any government agency?
In an acquisition agreement with a company that has acted as the exporter, include provisions in the agreement to cover potential liability, through funds held in escrow, indemnification, and excess indemnification payable clause where the amount of liability is uncertain, to cover any excess liability.
Foreign Corrupt Practices Act/Anti-Corruption Concerns In The Negotiation And Drafting Of M&A Agreements
When negotiating and drafting an international merger or acquisition agreement, a company must consider and attempt to mitigate potential corruption risks stemming from domestic and international anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act (FCPA). See 15 U.S.C. § 78dd-1, et seq. The FCPA remains the most well known and aggressively enforced law outlawing bribery of foreign officials, but similar laws and enforcement are increasing as in, for example the United Kingdom and Brazil, which have both passed laws similar to the FCPA. Thus, anti-corruption due diligence is becoming increasingly important not just in the United States, but around the world. The focus here is on FCPA, but companies should determine what other anti-corruption and anti-bribery laws may be relevant, including any local anti-corruption laws in the target company's jurisdiction.
In the context of FCPA enforcement, mergers and acquisitions pose special risks for the purchasing company. Acquired companies may carry "tainted" assets or relationships that may be attributed to the new owner with the attendant potential civil and criminal liability along with harm to a business's profitability and reputation. Conducting pre-acquisition due diligence is the most crucial aspect of this mitigation and allows a company to evaluate more accurately the target's value and negotiate for the target to bear any costs of the bribery. Perhaps just as importantly, the U.S. Department of Justice has stated that it takes such due diligence into consideration when evaluating potential enforcement actions relating to acquired companies. Failing to conduct adequate due diligence can also result in the continuance of the bribery creating an even greater risk of civil and criminal liability.
Emerging International Corporate Social Responsibility And Supply Chain Issues
Businesses should also be aware of a number of emerging international corporate social responsibility and supply chain issues which can increase compliance costs and affect the reputation of the company. These issues include:
Identification of international trade issues in supply and acquisition agreements is necessary to reduce or eliminate unpleasant surprises in the form of additional costs for penalties and compliance. Conducting due diligence on all import and export activity, and making adjustments as needed, should prevent disruptions in the supply chain and protect a purchaser that is acquiring a company that has imported or exported through the appropriate indemnifications, representations, and warranties, as well as allow for the proper valuation of the company.
1For purposes of this discussion, "trade law" broadly encompasses the main areas of compliance with laws covering imports, export control, antidumping and countervailing duty, and economic sanctions.
The U.S. DOJ and SEC Resource Guide to the U.S. Foreign Corrupt Practices Act
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