Douglas Stinemetz, Erika C. Anderson 0000-00-00 00:00:00
Sophisticated, experienced American international investors may have experience forming international joint ventures abroad, but the reverse has historically been less common. This is changing. International investment in the United States, and in Texas in particular, is on the rise. A host of articles advises U.S. companies on what to watch out for in forming joint ventures abroad.1 This article focuses on the opposite perspective: what international partners should know when investing and forming joint ventures in Texas. INTERNATIONAL JOINT VENTURES GENERALLY An international joint venture is a transnational cooperative arrangement to achieve common business goals. The term encompasses simple sales representations, distributorship agreements, franchising or licensing arrangements, and more complex ventures, including partial mergers, long-term corporate equity ventures, collaborative research and development projects, vertical supply alliances, or any combination of these arrangements. Joint ventures have inherent advantages for well-matched partners. Partners may share obligations and risks, allowing each to undertake the new venture where neither would be willing or able to do so alone. In addition, if the risks and obligations each partner bears are well matched to its particular talents and contributions, the overall burden of a particular risk or obligation will diminish. Even well matched co-venturers must work out a number of potential problems, including liability, management control, and dispute resolution regimes. Thus, formation negotiations should be approached with planning, flexibility, a willingness to compromise, and, the assistance of experienced business and legal advisers to alleviate potential problems. Taking on a local partner as a co-venturer is often the best way for an international partner to obtain use of the Texas partner’s knowledge, experience, and acumen on such topics as dealing with government authorities at multiple levels of jurisdiction, raising capital locally, hiring local management personnel, and accessing markets. A Texas co-venturer may also enhance the perception that the enterprise is a local operation, thereby encouraging good relations with local consumers, suppliers, and government. STRUCTURING A JOINT VENTURE IN TEXAS Prospective co-venturers must be carefully identified based on shared business goals, and time must be allowed to build a relationship before the actual joint venture negotiations can begin in earnest. Time invested in this initial step will pay off later in smoother dealings between the two parties. Business people in Texas, as in the rest of the United States, are accustomed to documenting a transaction in a highly detailed way from the very beginning. Those from different legal traditions who may be accustomed to more concise documentation may find this excessive. Striking a balance between these two approaches may present a significant challenge. Establishing a solid business relationship from the beginning helps to alleviate some of this difficulty.2 Typically, the joint venture process in Texas begins with a Letter of Intent (LOI), followed by Definitive Agreements and due diligence. The LOI is generally a non-binding, rough outline of the joint venture: It identifies the parties; describes their contributions and ownership percentages and how profits and losses will be shared; describes the purpose, scope, and location of the proposed venture; summarizes the management and control structure; and sets a timeline for final agreement. Hammering out the LOI can help the parties determine where the sticking points are and where to focus their efforts going forward. Parties should be careful not to place so much emphasis on the terms of an LOI that it stultifies later negotiations; they should remember that this is the outline stage, not the definitive stage. After the parties sign the LOI, they conduct due diligence into the nature of a prospective partner’s business, its viability and stature, and the viability of potential contributions to the venture. Simultaneously with due diligence, or shortly thereafter, the parties continue negotiating the details of the Definitive Agreements based on both the terms of the LOI and the results of due diligence. Because the structure of a joint venture can vary significantly, Definitive Agreements vary in scope and purpose. Some merely provide for the execution of other documents, such as a corporate charter and a shareholders’ agreement, after which the agreement no longer has any effect. Others remain binding for the life of the joint venture. Whatever the case, Definitive Agreements should always elaborate on all of the issues referenced in the LOI. They should give consideration to governance of the venture, contributions of the parties, responsibilities of the parties, risk allocation, technology transfer, a force majeure clause, the governing language and law of the agreement, and a dispute resolution framework. Corollary documents, which may be attached as exhibits, might include formation documents for new subsidiaries through which the parties enter into the venture, agreements for the provision of technical expertise or management services by one of the parties, agreements for the use of trademarks or other intellectual property, supply contracts, distributorship agreements, training agreements, and product maintenance and servicing agreements. Any of these agreements could be included within the text of the joint venture agreement itself, but it may be preferable to document them separately. If the parties wish to form any new business entities, either for the joint venture itself or as subsidiaries through which to enter into the venture, Texas law allows a number of different business formations that limit liability, including limited liability partnerships, limited liability companies, and corporations. Each has different insurance and capitalization requirements and comes with different tax implications. All must be properly registered with the Texas Secretary of State office, along with other formalities, which will vary depending on the specific corporate form chosen. A foreign party to a joint venture will likely be required to register with the Texas Secretary of State even if the co-venturers do not form a Texas entity. Local counsel can help choose and set up the type of entity best suited to the joint venture’s goals. KEY ISSUES TO WATCH OUT FOR This section describes legal issues for joint ventures in Texas, but legal issues may also arise at the other end of the venture in the home jurisdiction. Major potential issues might include antitrust, taxation, and trade laws. Local counsel in the investor’s home country should be consulted. Additionally, as always, local counsel in Texas can help navigate the host of complex issues outlined in this section. U.S. Laws on Doing Business Abroad When entities originating outside of the United States come to the United States to form new businesses or joint ventures, they will become subject to U.S. laws that regulate U.S. companies doing business abroad. For example, they will become subject to the Foreign Corrupt Practices Act, which mandates certain transparency requirements and prohibits bribery of foreign officials abroad. They will also become subject to U.S. international trade embargos, which may be quite broad.3 For example, current Iran sanctions prohibit U.S.-owned or -controlled financial institutions from knowingly engaging in transactions with or benefiting the Iranian Revolutionary Guard; this prohibition includes transactions with a list of affiliates and individual people maintained by the U.S. Treasury. Multiple Levels of Jurisdiction Multiple levels of government regulate activities in the United States; in some cases separate and overlapping federal and state regulations apply to the same action. Reporting requirements and enforcement mechanisms for federal and state entities are entirely separate, but may frequently overlap. Within Texas, in addition to statewide regulation, there are county and city level regulations and reporting requirements. Because of this complexity, knowledge of what level of government regulates what actions and where to report what information will be an important contribution of the venture’s Texas partner. Taxation All businesses in Texas are subject to federal and state taxes. Federal income taxes apply to businesses and to individuals. Texas collects a franchise tax from businesses, with some limited exceptions too complex to detail here, and unemployment taxes, for which the company must obtain an identification number. Individuals are not subject to Texas income tax. If your company will own income-producing property in Texas, Texas collects property taxes at the county level. Credit and exemption schemes for both federal and state taxes can significantly reduce tax exposure. At the state level, many of these are part of the extensive incentives programs discussed later in this article. Reporting Requirements Though many reporting requirements apply universally, some are specific to companies with foreign investors. These are complex and, unfortunately, neither found in any centralized place, nor made to a single agency. This section is intended to give a brief introduction to some of these, not a comprehensive review. ASSET ACQUISITIONS Some reporting requirements are triggered by the size of foreign investment or involvement. To name just a few examples: Business enterprises with 10 percent or greater foreign ownership must file reports with the U.S. Department of Commerce. Businesses at least 25 percent foreign-owned and foreign corporations doing business in the United States must disclose certain transactions to the U.S. Internal Revenue Service. The U.S. Bureau of Economic Analysis conducts periodic surveys of foreign ownership of U.S. firms. Foreign entities must file reports on the acquisition or transfer of agricultural land if it involves more than 10 acres or produces agricultural products of $1,000 or more per year. Requirements under the Exon-Florio Amendment are discussed later in this article. Antitrust laws, applicable to all companies, also trigger significant reporting requirements. The federal Hart-Scott-Rodino Antitrust Improvements Act requires larger companies attempting to merge to notify the Federal Trade Commission and the U.S. Department of Justice’s Antitrust Division for approval and review prior to consummating a merger. One of those agencies takes jurisdiction over the merger and may impose conditions on it if it is found to have antitrust implications. The antitrust division of the Office of the Texas Attorney General enforces Texas’ own entirely separate antitrust laws. REPORTING RELATED TO EMPLOYEES Though no law requires it, American employers typically provide employer-administered retirement plans and health insurance to full-time employees, and they will expect it. A number of state and federal laws closely regulate provision of employee benefits. Two of the most important and extensive are the federal Employee Retirement Income Security Act (ERISA), which regulates employer-provided retirement plans, and the federal Health Insurance Portability and Accountability Act (HIPAA), which protects the privacy of employees’ health information. The reporting requirements under ERISA and HIPAA are quite complex and may require specialized legal help. At the state level, Texas requires employers to report certain information on new hires to the State Directory of New Hires. There are also reporting requirements unique to foreign employees. For example, businesses usually require permits from the U.S. Department of Labor to employ foreign workers, though some types of visas do not require it. PERMITTING AND LICENSING There is no general business license in Texas, but specific permits and licenses may be required depending upon the type of business the entity engages in. Many agencies issue permits and licenses, often in ways that are not obvious from the agency’s name. For instance, the Texas Railroad Commission issues permits and licenses to operators for drilling, among other things. The Texas Governor’s Office maintains a wellorganized, searchable list online: www.texas.gov/en/discover/Pages/topic.aspx?topicid=%2Flicenses%2Fpermits. REAL ESTATE TRANSACTIONS As in all states, in Texas all transactions involving the sale of real estate must be in writing. Once made, purchases must be properly recorded with the county title records office to be protected if challenged. In addition, as discussed earlier in this article, foreign entities must report the purchase of large sales of agricultural land to the federal government. Texas real estate law also has some unique features, particularly with respect to treatment of property owned by married couples. Married couples’ property is treated as belonging to the couple as a unit, not to individual spouses, with limited exceptions. Therefore, usually both spouses must sign the documents to transact business with marital property, no matter whose name appears on the title documents. VISAS Visas are handled exclusively by the federal government. Individuals apply for business visas for short visits at their local consulates. To obtain an employment visa for a prospective foreign employee, the employer first files an application with the U.S. Citizenship and Immigration Services on the individual’s behalf. Once the application is approved, the individual is authorized to apply for a visa. (See p. 535 for more on visas.) This simple description of the process obscures its complexity. Attachments to the employer’s application depend on the job the individual is wanted for. If the job requires a college degree, additional paperwork and a good faith effort to recruit an American for the position are required. If the job is for an intracompany transferee, specific requirements depend on the transferee’s position in the company. Visas to the United States are notoriously difficult to obtain. Expense and delays inherent in the process may need to be factored into the venture’s risk profile. BARRIERS TO ENTRY AND RISK Barriers to International Investment Though the United States and Texas are generally open to international investment, there are some legal limitations and barriers. Some laws limit foreign investment in certain industries. For example, vessels or aircraft more than 25 percent foreign- owned cannot carry cargo or passengers between U.S. locations; foreign investors cannot hold mineral extraction leases on federally owned land; and foreign corporations cannot hold certain types of broadcast licenses.4 Other laws subject certain international transactions to review. The Exon-Florio Amendment gives the Committee on Foreign Investment in the United States (CFIUS) authority to review transactions that could result in foreign control of U.S. businesses to determine their effects on national security, particularly if it concerns “critical infrastructure.” Unlike in some countries, there is no dollar amount or specifically identified set of industries that triggers review. Nor is “national security” anywhere defined. Parties can voluntarily submit transactions to CFIUS, or CFIUS may initiate on its own. If CFIUS finds a national security risk, it can impose conditions on the transaction, or refer it to the president, who has authority to suspend or prohibit it. CFIUS clears the vast majority of transactions it reviews without imposing any conditions.5 Other laws raise barriers to entry into certain sectors, sometimes in ways that are protective of U.S. business interests and sometimes in the name of national security. To name one example of each, the Shipping Act of 1916 requires ships in intercoastal waters to sail under a U.S. flag and the Nuclear Regulatory Commission may not issue nuclear reactor operating licenses to foreign-owned or -controlled entities. Broadly speaking, these laws do not wholly prevent international investment in these sectors, but they do require it to be carefully structured.6 Unpredictable Electoral Politics Electoral politics in the United States can be volatile and unpredictable. The 2010 election results are illustrative. Public opinion swung strongly to the right of where it had been just two years earlier in 2008, resulting in significant changes in congressional bodies. In Congress, 63 (out of 435 representatives total) sitting Democrats in the House and five (out of 100 senators total) sitting Democrats in the Senate lost their seats to Republicans. In Texas, 21 (out of 150 representatives total) sitting Democrats in the House lost their seats to Republicans.7 This swing in electoral outcomes brought with it a swing in legislation, much of it affecting businesses, particularly in the area of tax policy. The sudden, and extreme, nature of political oscillations like this offers some risk to investors. Expensive Justice Americans often tout their legal system as an eminently fair one, characterized by the rule of law and a lack of corruption. But the American judicial system is not without its drawbacks. Americans in general are litigious and frequently use the courts for dispute resolution. Investors from countries where this is not the norm should be aware and prepare accordingly, factoring litigation and legal bills into risk assessments and cost projections. Discovery rules are much broader in America than is typical elsewhere. Discovery is limited only by relevance to the dispute and privilege rules. Investors should be aware that much that might be protected in other jurisdictions is subject to discovery in American courts. The depth and breadth of discovery also adds significantly to both the expense of lawsuits and to the time necessary to conclude them. Litigious States and Environmental Regulation Individual states within the United States have the power to sue the federal government over federal laws and policies. For example, during the current administration under President Barack Obama, the Texas Commission on Environmental Quality (TCEQ) has taken an aggressive, litigious stance against some environmental regulations promulgated by the Environmental Protection Agency (EPA). Much of the fervor with which these lawsuits between TCEQ and EPA are being pursued has to do with the oscillations in electoral politics and opinion discussed above. State versus federal litigation is a source of risk and uncertainty. The outcomes of litigation between a state and the federal government are highly unpredictable. Further, because multiple states often sue over the same regulation in multiple courts, outcomes can be uneven nationally until or unless the U.S. Supreme Court definitively settles an issue. In the meanwhile, businesses may have a difficult time determining what the applicable regulations are. Publicity Strategies to control publicity, both nationally and locally, are important. Some international deals have been noisily scuttled because of negative publicity. For example, highly public CFIUS scrutiny and the Congressional reaction to it, may have been part of the reason Chinese National Offshore Oil Corporation withdrew its UNOCAL bid in 2005. INCENTIVES Discussing only the risks and barriers to entry gives too bleak a picture of investment opportunities in Texas. In addition to a generally friendly investment climate, there are a number of incentive programs available for international investment in Texas from both state and federal governments, including significant tax abatements, loan programs, and direct grants.8 CONCLUSION International investment and joint ventures in Texas are on the rise and opportunities for both abound. In order to be successful, partners should be carefully selected, ventures should be carefully structured, and international partners should be aware of their obligations to both state and federal governments and have strategies to counteract political risks. Where these factors are taken into consideration, venture partners will be better able to take advantage of and profit from the available opportunities for investment than either would alone. NOTES 1. See generally, Transnational Joint Ventures, Business Laws, Inc. (66), Vols. 1 and 2, 1999. 2. For a thorough discussion, see S. Douglas Stinemetz, International Joint Ventures: A Practical Guide to Legal and Business Considerations, Transnational Joint Ventures (66 Supp. 11) at 1.103–4, Business Laws, Inc., March 1999. 3. The Treasury Department maintains a website on current sanctions regimes: http://www.treasury.gov/resource-center/sanctions/Pages/default.aspx. 4. For more detailed information, see Government Accountability Office, Foreign Investment: Laws and Policies Regulating Foreign Investment in 10 Countries, GAO-08-320, February 2008. 5. Remarks by Deputy Secretary Neal S. Wolin at the Singapore Exchange, May 19, 2011, available at http://www.treasury.gov/press-center/press-releases/Pages/ tg1186.aspx. 6. See John E. Matthews, Foreign Investment in U.S. Nuclear Generating Assets: Mitigation of Barriers Presents Opportunity, Proceedings of the Nuclear Inter Jura Congress of the International Nuclear Law Association (2009), available at http://www.morganlewis.com/pubs/6C580B13-F442-4755-8837AD56DB82CEBC_ Publication.pdf. 7. Election 2010, The New York Times, available at http://elections.nytimes.com/2010/results/house. 8. See Texas Office of the Governor, Foreign Investment in Texas: The Industries and Countries Leading the Growth, Economic Development and Tourism Report 2011, available at, http://www.texaswideopenforbusiness.com/cms-assets/documents/ 46578-825243.fdi-report.pdf. The U.S. Department of Commerce has a website dedicated to incentives, http://selectusa.commerce.gov/. S. Douglas Stinemetz is the founding member and presiding partner in the Stinemetz Law Firm, P.L.L.C. in Houston. He has more than 21 years of global transactional experience, specifically in the international oil industry. Erika C. Anderson is an associate of the Stinemetz Law Firm, P.L.L.C. in Houston. While in law school, she was an intern for Senior Judge Richard Goldberg on the Court of International Trade.
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