doing business in the us

© 2012 Schiff Hardin LLP. All rights reserved.

The Structural and Legal ‘Need-to-Knows’ for French and European

Entrepreneurs and Companies

The Essentials of Expanding Your Business in the United States

Philippe C.M. Manteau


The Background

● Businessperson wants to expand into the United States and ensure that activities there are appropriately structured in a manner most beneficial for his or her company and shareholders

● Entry into the United States—3 typical ways: – Direct sales into the United States – Establishing a subsidiary in the United States – Acquisitions in the United States

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Direct sales into the United States

Generally, direct sales are the first step to approach the U.S. market.

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Consideration #1: distinguishing between distributors and agents

Distributor – think “buy-sell”: ● Distributor obtains title to products from principal ● Principal invoices distributor for products ● Distributor sets resale prices for products and is subject to

risks and rewards associated with resale (e.g., loss/gain of profit, risks of delivery)

Agent: ● Agent never obtains title to products ● Agent invoices principal for services rendered ● No “resale price maintenance” problem But in both cases – set up objectives (easier to terminate)

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Consideration #2: protecting intellectual property (IP)

● Common law rights to trademarks exist

● Additional layer of protection by registering IP at the United States Patent and Trademark Office

● Many companies overlook the concept of patenting their software

● Check your IP before you expand into the United States

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From the Oregonian, July 9, 2009:

“Chinese startup based in Eugene wants to sell inexpensive solar panels in U.S. A Chinese startup vying for a piece of the U.S. solar market has landed in Eugene, hoping to become a national player in the state’s growing photovoltaic industry. . . Centron Solar, whose Web site went live Thursday morning, is moving fast to sell and distribute bargain-priced solar panels made in China to the U.S. market, expected to be the world’s next big solar player. . .”

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From the Portland Business Journal, October 8, 2009:

“Centron Solar changes name to Grape Solar Centron Solar once said it wants to be the Wal-Mart of solar energy. That may still be true. But now the company is trying to sound a little more like Apple Computers. . . Despite the fruit-themed logic, combined with the notion that grapes grow with the help of solar energy, the real cause of the name change is rooted in a lawsuit filed Sept. 28 in the U.S. District Court in Arizona. CentroSolar Group AG, a $440 million German solar products manufacturer, filed the trademark infringement lawsuit claiming Centron Solar was intentionally trying to confuse customers.”

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Consideration #3: key provisions in commercial contracts ● Keep it U.S. law governed – EU protections not helpful if there is a

litigation in the United States

● Think first of an “exit strategy” – one-year contracts automatically renewable unless terminated by either party, with or without reason, upon 60- or 90-day notice are common

● Craft IP sections carefully to ensure that IP is not “assigned”

● Watch out for warranty, liability and indemnification provisions – Warranty: software, products or services should be sold “as is” but

for the very limited warranty set forth in the contract (contracts should carve-out implied warranty of merchantability or warranty of fitness for a particular purpose)

– Liability: contract should exclude consequential or incidental damages, and limit liability to only reimbursement of money received under the contract

– Indemnification by product supplier, software publisher or service provider: contract should restrict indemnification to a limited IP infringement, while control over litigation should be retained

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Consideration #4: having a “representative office” may be problematic

● Beware that an agent or branch, in the United States, of a foreign principal may subject such principal to U.S. tax on its revenues generated in the United States

● In reality, not frequently done but in some cases you can have a limited agency agreement to perform ministerial tasks for the parent

● When there is such a need, consider establishing a subsidiary

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Establishing a subsidiary in the United States

After initiating direct sales into the United States… consider setting-up a foothold there

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Consideration #5: do you really need an LLC?

● What is an LLC? Google will tell you

● What Google will not tell you: one generally should not form an LLC when the majority shareholder (a “member”) is a French corporation – French parent subject to U.S. income tax – Branch profit dividend tax: tax on “deemed distributed”

dividends – Law not as developed - liability issues?

● LLC’s are more commonly used “downstream” in order to bring in U.S. partners

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Consideration #6: try a corporation first

● Easy to form

● Easy to maintain

● Capitalization easy to manage – Remember to keep debt-to-equity ratio at a maximum of 1.5:1 – Augmentation of capital by way of “accrued paid in capital” – Disconnect between number of shares and amount of capital

● If a shareholder is not a 100% owner, consider the need for a shareholders agreement

● If a shareholder is a minority shareholder, remember to receive “tag-along” rights

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Consideration #7: labor and employment law

● The concept of “at-will”

● The concept of discrimination

● If you have an executive, you will want an employment contract to avoid disputes over: – compensation issues – termination issues – non-competition issues

● Beware of 401(k) and other benefit issues upon any

merger or acquisition in the United States

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Consideration #8: U.S. Stock as incentives?

● Usually part of an “equity incentive plan” to encourage employees to work to maximize a company’s profits and share in the future of a company

● Companies with U.S. stock option plans must comply with federal tax and securities rules

● Establishing a French stock option plan in the United States renders the incentive package more complicated to manage due to the requisite French vs. U.S. law analysis, but it avoids the inclusion of minority shareholders in a company’s subsidiary

● A U.S. stock option plan with a U.S. subsidiary is feasible, and potential workarounds exist, such as providing phantom rights (or profit-only interest in an LLC formed as an indirect subsidiary)

● Beware of valuation issues and consider shareholders agreements

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Consideration #9: immigration

● “Do it yourself” is not usually sufficient

● Strongly advise hiring an immigration lawyer

● Understand the differences among visas: L1 (intracompany transferee), H1B (professional worker) and E2 (foreign investor)

● Discuss future plans with an attorney to avoid pitfalls (e.g., E2 is easy to obtain but conversion to a green card is difficult)

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Consideration #10: managing IP

A software publisher/distributor may want to place the IP value at the U.S. subsidiary level:

● In a software distribution system, the reseller is a “distributor” of

products or services but the publisher maintains a license agreement directly with the end-user

● Granting IP rights to the U.S. subsidiary that acts as a re-publisher will create value in the United States

● Avoids litigation in France/Europe

● U.S. subsidiary would be exempt from withholding tax on royalties paid by the U.S. subsidiary to its French parent if the parent provides proper forms from inception

● Transfer pricing issues are always present when a related U.S. company and foreign company transact business

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Acquisitions in the United States

Managing your external growth in the United States… Or using acquisitions as a first step to penetrate the U.S. market (if you do so, think of creating a U.S. subsidiary as an SPV for the U.S. acquisition)

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Consideration #11: M&A – asset vs. stock acquisitions ● Stock Acquisition (or joint venture) – will you acquire all or a

control portion of the equity of target? – Watch for “change of control” issues – If buying at premium you do not get to reduce taxes

● Asset Acquisition:

– Select the specific assets and liabilities to purchase or not purchase – “Cherry-pick” employees (no statutory obligation to transfer

employees)

● Asset and Stock Acquisitions: – “Representations and Warranties” of seller are key – Escrow accounts are frequently used – Negotiate any earn-out payments – Do not forget non-compete/non-solicit provisions

● Tax Trick: The 338(h)(10) election under federal and many state laws to

treat the stock deal as an asset deal - Step-up your tax basis and amortize your goodwill over 15 years

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About Schiff Hardin LLP

Schiff Hardin LLP was founded in 1864. Since then we have expanded with offices in Chicago and Lake Forest, Illinois; New York, New York; Washington, D.C.; Atlanta, Georgia; San Francisco, California; Boston, Massachusetts; Ann Arbor, Michigan; and Charlotte, North Carolina. As a general practice firm with local, regional, national, and international clients, Schiff Hardin has significant experience in most areas of the law.

19 © 2012 Schiff Hardin LLP. All rights reserved.

About Our New York Office

In 1991, Schiff Hardin established an office in New York in response to a client's request and needs. Since that time, we have developed significant capabilities in complex general litigation, reinsurance, intellectual property, corporate and securities, real estate transactions and finance, estate planning and administration, labor and employment, international transactions, restructuring and bankruptcy, and an increasing array of other key legal services. Our New York office also serves as a focal point for our representation of overseas clients.



Philippe C.M. Manteau

[email protected] U.S. Direct: (212) 745-0856 U.S. Cell: (646) 251-9204

PRACTICE AREAS Corporate and Securities International Intellectual Property Litigation BAR ADMISSIONS New York Paris, France

Partner – Avocat aux Barreaux de New York et de Paris

Philippe Manteau’s practice focuses on growth and mid-cap companies, governmental organizations, and individuals in the United States and abroad in the areas of corporate and business law, as well as technology transactions. The core of his practice consists of assisting French and other international private companies in their U.S. investments and cross-border transactions and litigation.

Mr. Manteau’s training and international experience allow him to identify, analyze, and resolve issues arising in cross-border transactions for European and U.S. clients. Mr. Manteau is fluent in English, French and German.

● Fordham University School of Law (LL.M., Corporate Law and Finance, cum laude, 2006)

● Université Paris X - Nanterre (D.E.S.S., European Business Law, with honors, 1996)

● Université Paris X - Nanterre (J.D., French, German and European Business Law, 1995)

● Institut d'Études Politiques de Paris (M.B.A., Economics and Finance Section, 1993)



This publication has been prepared for general information of clients and friends of the firm. It is not intended to provide legal advice with respect to any specific matter. Under rules applicable to the professional conduct of attorneys in various jurisdictions, it may be considered advertising material. Tax Matters: The advice contained in this memorandum is not intended or written to be used, and cannot be used by a taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under law.

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