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

Copyright 2005 InternationalCounsel 1

Cross-Border Agency and Distribution Agreements

International Business Agreements

David A. LavertyInternationalCounsel

May, 2005


Cross-Border Agency and Distribution Agreements

Deceptively Simple to Companies and their Lawyers?


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



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



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


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


Agency and Distribution Agreements – Key Cross-Border Issues

1. Local Dealer-Protection Legislation


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


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


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?



2. Governing Law and Dispute Resolution –

Focus on dealer protection


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?



3. Competition Law Issues


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?



4. Tax-Related Issues


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


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


Case Studies

Examples of InternationalCounsel projects:

Terminated Representative in Latin America

Terminated European Representative

Consolidation of Representatives After Acquisition

Seizure of CD Roms


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


InternationalCounsel

Address:

Telephone:Facsimile:

Web Site:E-mail:

200 South Wacker DriveSuite 3000Chicago, Illinois 60606

312 236 5600312 575 0602

[email protected]

David Laverty 312 575 0601

Documents

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