When your business becomes international, your approach to the legal aspects of conducting business needs to take on an international component as well. Cross-border transactions present a number of unique legal issues; and in order to protect your company (and avoid jeopardizing the deal), you need to make sure you are aware of the various legal and practical considerations involved. This is true for transactions including:
- Contracts with foreign customers
- Contracts with foreign suppliers and service providers
- Leases for international facilities
- Mergers and acquisitions
7 Key Legal Issues in Cross-Border Transactions
1. Diplomacy and Cultural Awareness
Although less important in the United States, in countries around the world, diplomacy can play a major role in the success or failure of business negotiations. Even before making introductions, it is important to be aware of any cultural differences and societal norms that could impact how you are viewed by your counterparty.
For example, while it is common to address potential business partners by their first name in the United States, in other cultures, using someone’s first name during an introduction can be a sign of disrespect. Likewise, while business executives in some countries tend to have a deal-first attitude and are willing to get down to business immediately, in other cultures the pre-deal relationship can be just as important (if not more important) than the terms of the deal itself.
Showing awareness of scheduling considerations can go a long way as well. If you want to build good rapport, don’t schedule a negotiation session on a national holiday, and don’t expect others to wake up at 2:00am so that you can handle business during your normal working hours. Remember, there is a nine-hour time difference between Los Angeles and Barcelona. Between New York and Hong Kong, the time difference is 13 hours.
2. Differing Legal Systems
While the US, Canada, and England follow a common law system, the vast majority of developed countries around the world follow a system of civil law. These systems have fundamental differences that can drastically impact the risk profile of a deal, and this is before you get to the specifics of each country’s individual laws. (This may also apply to state or provincial borders.)
In a cross-border transaction, the choice of governing law can mean the difference between two competing (and potentially opposite) interpretations of key provisions, and it can potentially even mean the difference between enforceability and unenforceability of the entire agreement. These are not issues that you can leave to chance. In this vein, it is worth noting that intellectual property (IP) protections vary greatly between international jurisdictions. Rights that you have in the US may or may not be available in a foreign country.
3. Language of the Contract
If your counterparty speaks a different language, in which language should your contract be written? Should you create a bilingual contract? From a legal perspective, does it matter?
As you might expect, it does matter. In some countries, certain legal documents need to be prepared in the native language in order to be enforceable. Additionally, if you create a bilingual contract, how can you be certain that both versions will receive the same interpretation in domestic and foreign courts? If the interpretations are not identical, which language should control? These are questions that can be answered, but the answers will depend on the specific languages and jurisdictions involved.
4. Tax Implications and Tax Treaties
Tax laws vary widely across international jurisdictions. If your transaction has tax implications in a foreign country, you will need to factor the applicable taxes (as well as any possible tax avoidance strategies) into the economics of the deal. Also, keep in mind that while many countries have tax treaties designed to prevent double taxation, (i) these treaties are country-specific, and (ii) there may still be additional taxes from which you are not exempt under the terms of the treaty.
5. Dispute Resolution and Enforcement of Judgments
If your agreement is governed by foreign law, should you still seek to have exclusive jurisdiction in the United States? If you need to go to court overseas, are you going to be prepared to do so?
In cross-border transactions, these are critical questions. Unresolved questions of jurisdiction and venue can lead to costly litigation, and it can be very difficult (and, in some cases, impossible) to enforce a judgment from one country in a foreign jurisdiction. Arbitration may be a smart solution; but even if you agree to arbitrate, this still leaves open the potential for legal and practical issues regarding enforcement. The ideal solution is to avoid the need for dispute resolution all together, and this can be done through careful drafting and attention to detail during the deal-making process.
6. Data Protection Regimes
Many business owners are surprised to learn that the data protection regime in the United States is far less protective of individuals’ privacy than the comparable legislation in various jurisdictions abroad. In particular, the scope of the European Union’s data privacy laws is a shock to many US businesses seeking to expand across the Atlantic. And the new General Data Protection Regulation (GDPR) set to take effect on May 25, 2018 provides consumers with even greater protection than the current Data Protection Directive (Directive 95/46/EC).
In addition to these types of general data protection laws, industry-specific and audience-specific laws can create substantial compliance burdens for businesses entering into cross-border transactions in order to expand into foreign markets. Foreign analogs to the Health Insurance Portability and Accountability Act (HIPPA), the Children’s Online Privacy Protection Act (COPPA), and other data protection laws can be expansive and cumbersome to interpret, and dealing with local bureaucratic requirements can be a challenge unto itself.
Some other countries with strict data privacy laws include:
- Hong Kong
- New Zealand
In many countries, the penalties for unlawfully collecting or disclosing private information are severe; and in select jurisdictions (such as Hong Kong), business owners and executives can even face prison time for data privacy violations.
7. Finding Reliable Foreign Counsel
Finally, in order to navigate a foreign legal system and ensure that you are covering your bases with regard to legal compliance, you will need to work with experienced and reliable foreign counsel. Whether your options are virtually endless (in a major city such as Paris or London) or extremely limited (as is the case in various smaller countries around the globe), choosing the right attorney can have a significant impact on the outcome of your transaction. Typically, you will want to hire local counsel in your jurisdiction who can recommend a foreign counterpart, and who can work efficiently with your foreign counsel to make sure you have a clear picture of the legal issues you need to consider.
Need Legal Counsel for a Cross-Border Transaction? Contact Jiah Kim & Associates.
If you are preparing for (or are in the midst of) a cross-border transaction and need help from an experienced attorney, we invite you to get in touch with us. We work with clients around the globe, and we can help make sure your business’s interests are secure. To schedule an appointment, please call our offices at (646) 389-5065, or send us a message online and we will respond as soon as possible.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.