Category Archives: Corporate/Commercial Law

Doing Business in The Philippines

Articles, Corporate/Commercial Law, Latest News
  1. How can foreign corporations engage in business in the Philippines?

A foreign corporation may transact business in the Philippines after obtaining a license to transact business from the Securities and Exchange Commission (SEC), provided its country of origin allows Filipino citizens and corporations to do business in its own country. A foreign corporation transacting business in the Philippines without a license is not permitted to maintain or intervene in any proceeding in any court or administrative agency of the Philippines. It can, however, be sued before any court or agency in the Philippines.

The most common local forms of business enterprises used by foreign corporations are domestic subsidiary corporations, branch offices, representative offices, or regional headquarters, or regional operating headquarters.

  • Domestic Subsidiary Corporation

A domestic subsidiary corporation is one where at least 51% of its equity is owned by a foreign corporation or a foreign national. It is, however, considered as a legal entity separate and distinct from the parent corporation. It is incorporated in the same manner and procedure as that of any domestic corporation established under Philippine laws.

  • Branch

A branch office of a foreign corporation is established by obtaining a license to operate from the SEC, which requires the inward remittance of USD200,000.00. The establishment of the branch office also requires the appointment of a qualified resident agent to represent the foreign corporation.

The branch is considered as extension of the foreign corporation’s legal identity. The branch may, however, engage in the same line of business as the foreign corporation and is authorized to engage in profit generating activities.

  • Representative Office

A representative office must be registered with the SEC, which requires an initial inward remittance of at least USD30,000.00. Thereafter, the parent company may remit such amounts as may be necessary for the representative office’s operating expenses. A representative office acts as a liaison between the parent company abroad and its clients in the Philippines. It undertakes activities such as promoting company products, conducting market studies or surveys, and providing technical support for the company’s products. It cannot derive income from and solicit orders or sales in the Philippines.

  • Regional or Area Headquarters (RHQ)

An RHQ is a branch established in the Philippines by a multinational company which does not earn or derive income from the Philippines and which acts as supervisory, communications, and coordinating center for its affiliates, subsidiaries, or branches in foreign markets.

  • Regional Operating Headquarters (ROHQ)

An ROHQ is also a branch of a multinational company but can derive income from the Philippines by providing limited services exclusively to its affiliates, branches or subsidiaries. It cannot solicit goods and services on behalf of any company.

  1. What are the taxes imposed on entities operating in the Philippines?

Philippine taxes are imposed by both the national government and local government units (LGUs).

The national government imposes income taxes on corporations and individuals, as well as particular taxes for specific industries, while business tax is imposed by LGUs. The income tax rates depend upon the classification of the taxpayers. Domestic corporations are taxed at 30% of annual taxable income from worldwide sources with option for 15% tax on gross income subject to certain conditions. A foreign corporation, whether or not engaged in trade or business in the Philippines, is taxable on Philippine-sourced income at the rate of 30%. A resident foreign corporation is taxed based on net income with the same option to pay 15% tax on gross income. A non-resident foreign corporation is taxed based on gross income received. ROHQs pay taxes at the rate of 10% of its taxable income, while RHQs are exempt as these are not designed to be income-generating.

When the minimum income tax of a domestic corporation or a resident foreign corporation is greater than the regular corporate income tax, a Minimum Corporate Income Tax Rate (MCIT) of 2% of the gross income is imposable on the fourth taxable year immediately following the year in which such corporation commenced its business operations. Any excess of the minimum corporate income tax over the normal income tax shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.

The LGUs impose local business taxes at varying rates depending on the nature of the business; they also impose real estate taxes, local transfer taxes, and community taxes.

  1. Are there available tax incentives to companies operating in the Philippines?

Companies that are engaged in a preferred project listed in the Investment Priorities Plan (such as manufacturing, agribusiness and fishery, services, economic and low-cost housing, hospitals, energy, public infrastructure and logistics, and public-private partnership projects) or whose at least 50% of total production is for export may avail of tax incentives. These tax incentives include income tax holidays, exemption from taxes and duties on imported capital equipment, exemption from taxes and duties on spare parts, exemption from wharfage dues and export taxes/duties/impost/fees, exemption from contractor’s tax, tax credits and additional deductions from taxable income.

Incentives – by way of special tax rates, among others – are also available to business establishments operating within designated economic zones (Ecozones). In lieu of all other taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the Ecozones are remitted to the national government.

Rsegistered tourism enterprises and operators within the Tourism Economic Zones (TEZ) are granted income tax holidays, gross income taxation, exemptoin from taxes on capital investment and equipment, exemption from taxes on transportation equipment and spare parts, and exemption from taxes on importation of goods and services.

  1. Is there any limitation on foreign ownership of Philippine corporations? What limitations exist in the participation of foreigners in corporate management?

Foreign nationals and/or foreign corporations are generally allowed to hold as much as 100% equity ownership in domestic corporations (subject to minimum investment amounts), except in corporations engaged in certain businesses specified under the Foreign Investment Negative List (FINL) where foreign equity may be completely prohibited or limited to certain percentages (or those known as nationalized or partly-nationalized activities). For instance, the law limits to 40% the foreign equity ownership in public utilities.

Foreign nationals may also act as incorporators and directors of a domestic corporations provided majority of the incorporators and directors are residents of the Philippines. Foreigners may also serve as officers of the corporation, except as corporate secretaries as these should be Philippine residents and citizens. Treasurers are required to be Philippine residents.

For corporations engaged in nationalized or partially nationalized activities, foreign directors should not exceed the proportion of actual and allowable foreign equity ownership. In such industries, all of the executive and managing officers must be Filipino citizens.

  1. Are foreign nationals allowed to enter and stay in the Philippines without an entry visa?

A non-restricted foreign national whose country of origin has diplomatic ties or bilateral agreement with the Philippines is not required to secure an entry visa and may be allowed to enter and stay in the Philippines not exceeding twenty-one (21) days or seven (7) days, subject to extension, provided:

  • He/she holds a valid ticket for his/her return journey to port of origin or next port of destination; and
  • His/her passport is valid for a period of not less than six (6) months beyond the contemplated period of stay.

Immigration Officers at ports of entry may, however, exercise their discretion to admit holders of passports valid for at least sixty (60) days beyond the intended period of stay.

  1. What are the common visas available to foreign investors and expatriate personnel?

Foreign investors or expatriate personnel may avail of an Employment Visa, a Treaty Trader’s Visa, a Special Investor’s Resident Visa (SIRV) or a Special Resident Retiree’s Visa (SRRV).

An Employment Visa may be issued to foreigners who are engaged in lawful occupation in the Philippines with bona fide employer-employee relationship with a Philippine employer. The duration of this visa is co-terminus with the Alien Employment Permit issued by the Department of Labor and Employment. An Alien Employment Permit authorizes the foreign national to work in the Philippines

A Treaty Trader’s Visa may be issued to a foreigner who is entering the Philippines solely to carry on trade or commerce between the Philippines and the country of which he is a national pursuant to a treaty of commerce and navigation.

The SIRV entitles the holder to reside in the Philippines for an indefinite period as long as the required qualifications and investments are maintained. It is issued to any qualified foreigner, except for restricted nationals, at least 21 years old, who follows the prescribed rules and is willing and able to invest at least USD75,000.00 in the Philippines.

The SRRV may be issued by the Bureau of Immigration in connection with the Philippine Retirement Authority’s Retirement Program for all foreign nationals with entry visas and former Filipino citizens who are holders of foreign passports, both of whom are at least 35 years old. The SRRV is a special non-immigrant resident visa that provides its holders with multiple-entry and indefinite stay status in the Philippines. It is valid for so long as one remains a member of good standing of the Program.

Can Crowdfunding fill the gap for franchise development loans?

Articles, Banking and Finance, Corporate/Commercial Law, Latest News

Franchising is moving with the times. Originating with Albert Singer in 1851 (who used franchising as a method of distributing and servicing his eponymous sewing machines), the use of franchising grew slowly over the following century before gathering pace in the 1990s and booming in the 2000s. Nowadays it has become commonplace and we are starting to see a wide variety of would be Franchisors taking to Crowdfunding platforms such as ‘Crowdcube’ and ‘Kickstarter’ to try and secure funding for their franchise development plans.

Franchising is a business growth method whereby a business owner (the “Franchisor’) grants a type of license (known as a franchise) to another (the “Franchisee’), permitting the franchisee to run their own business following the processes, procedures and training set out by the Franchisor. The Franchisor allows the franchisee to trade under the name (and trade marks) of the Franchisor and gives them a complete package containing all that the Franchisee needs to run their business. In return, the Franchisee pays the Franchisor an upfront fee and an ongoing percentage of their turnover. The franchising industry is one which is well-established in many countries around the world with the global industry looking to hit £3 trillion by 2020 and the UK franchise industry alone being worth £13.4 billion to the UK.

It is evident that franchising is an enticing method of growing your business, however the cost of franchising your business can often be prohibitive as most of the costs have to be paid before a Franchisor recruits its first franchisee (and is able to start recovering its investment from franchise fees). By way of example, the fees charged by franchise consultants, lawyers and other professionals in setting up the network and the cost of marketing and advertising franchise opportunities for sale all require to be paid in advance of any franchisees coming in to the business. Given this, would be franchisors need to make sure they have this “development capital” in place to fund the set-up costs.

While banks (particularly those with designated franchising teams) have always been keen to stress their support for the franchising industry and are ready and willing to lend to many franchisees of established brands such as “Dominos Pizza” or “McDonalds”, we have noticed a reluctance since the recession to lend development capital to relatively new businesses seeking to franchise. This has forced such businesses to look into more innovative ways of securing funding including Crowdfunding and Mini-bonds.

Crowdfunding

Crowdfunding, whilst not a new concept, has seen significant growth in recent years thanks, in a large part, to increased internet accessibility and a significant increase in the number of Crowdfunding platforms. Crowdfunding utilises large groups of people (the “Crowd’) to collect a significant number of small contributions which (when added together) makes a usable sum. The main types of Crowdfunding are:

Equity – where members of the Crowd invest in return for a shareholding in the business;

Donation – where members of the Crowd simply donate money to the business (usually for a charitable cause);

Lending – where members of the Crowd are repaid their investment over a certain period of time; and

Reward – where members of the Crowd receive an item or service in return for their money (e.g. a limited edition product or a discount for future services)

Equity Crowdfunding is the method most frequently used by start-up and early stage businesses and, as such, it fits well with businesses looking to franchise. The advantage of the Equity model are:

  • Funding can be raised quickly with limited upfront fees;
  • Presenting the franchise project via the Crowdfunding website is useful marketing which can raise awareness of the brand and help recruit a franchisor’s first franchisee; and
  • Sharing the plans for franchising and monitoring any reaction or feedback is a great way of testing the potential market for franchisees.

Indeed as a live case study, one of our clients, specialising in craft beers and ciders, successfully raised £107,130 on Crowdcube in May 2015 and hopes to use the funds to aid their expansion through franchising.

Mini-bonds

Mini-bonds are an increasingly popular form of alternative finance which may also appeal to potential franchisors. Essentially a “Mini-bond” is an unsecured, non-convertible and non-transferable bond issued from a company in return for investment. The bond acts as a type of loan whereby the investor receives regular fixed interest (usually between 6% and 8% a year) for a specified term (usually around three to five years) and the return of the initial investment amount at the end of the term. This method of funding is normally used by businesses at a relatively advanced stage.

The growth of the mini-bond industry as a means of alternative finance is predicted to reach £8 billion in 2017. The application of mini-bonds to the franchising market can be seen through a number of successful franchise specific deals. For example, one of our clients (an established chinese takeaway franchise) has recently launched a mini-bond campaign with a target of raising £1 million (at the date of writing this article they have managed to raise £554,250 of this target). Also, although not strictly a franchising operation, Chilango (a mexican restaurant chain) recently secured £2.2 million of funding via the operation of a mini-bond which will be used to fund the opening of a further three Chilango restaurants.

In addition to the benefits of Crowdfunding there are many advantages to securing investment through mini-bonds. For example, there are no restrictions on the amount that can be raised and no equity needs to be sacrificed by the business (albeit the business will have to ensure that it meets all the interest repayments to its investors!).

In short, we predict that Crowdfunding and Mini-bonds will increasingly be used as an alternative means of raising the development capital required to set-up a franchise operation and, going forward, the establishment of new franchise brands will no longer be subject to the discretion of a bank.

 

Brazil – Hiring of Insurance Abroad; Regulations and Restrictions

Articles, Corporate/Commercial Law, Insurance, Latest News

The possibility of hiring insurance abroad by Brazilian individuals or companies is restricted according to Brazilian Federal Legislation, rules of the Superintendence of Private Insurance (“SUSEP”) and the Private Insurance National Board (Conselho Nacional de Seguros Privados) (“CNSP”), normative entity of insurance activities in Brazil.

Federal Regulations

Currently, the terms and conditions for hiring of insurance abroad by Brazilian domiciled individuals or entities are regulated by Complementary Law No. 126, dated January 15th, 2007 (“LCP No. 126”).

From a Brazilian legal perspective, it is of utmost importance to review the terms and conditions of the respective insurance agreement in order to determine whether or not Brazilian regulations which foresee restrictions on the hiring of insurance abroad are applicable to a specific case.

When reviewing an insurance agreement to be hired abroad it is relevant to analyze the following issues: (i) if the insurance contractor is domiciled in Brazil, (ii) if the insurance agreement is formalized with an insurance company that does not operate in Brazil, and (iii) if the subject-matter of the insurance is related to a person resident and domiciled in Brazil, as well as the risks covered.

Article 19 of LCP No. 126 determines that certain types of insurance must be exclusively hired in Brazil, such as (i) mandatory insurance foreseen under Brazilian laws and regulations; and (ii) insurance hired by individuals or entities resident in Brazil which subject-matter is the protection against local risks.

Exception to such general rules is made to the events foreseen under article 20 of said Law, as follows:

  • “Article 20:  The hiring of insurances abroad by individuals resident in Brazil or by entities domiciled in national territory is restricted to the following situations:
  • I – coverage of risks to which no insurance is offered in Brazil, considering that such hiring does not represent violation of the applicable regulations;
  • II – coverage of risks abroad in which the insured party is an individual resident in Brazil, to whom the effectiveness of the hired insurance is limited, exclusively, to the period in which the insured party is abroad;
  • III – insurances which are the subject-matter of international agreements and treaties acknowledged by the National Congress; and
  • IV – insurance which have already been hired abroad, according to the then applicable regulations, on the date of publication of this Complementary Law.
  •  Sole paragraph.  Entities may hire insurance abroad to cover risks abroad, informing such hiring to the Brazilian insurance supervising entity within the term and under conditions specified by the respective Brazilian regulatory insurance entity.”

CNSP, through Resolution No. 197/2008, ratified the exceptions for the hiring of insurances abroad, foreseen in article 20 of LCP No. 126 and mentioned-above and, still, authorized the hiring, abroad, of insurances covering hulls, machinery and civil liability for vessels registered under the so-called Brazilian Special Registry (Registro Especial Brasileiro – REB).

A Brazilian entity or individual must first search for an available insurance offered in Brazil before hiring insurance abroad. Lack of coverage for the risks in Brazil must be evidenced by the Brazilian individual or entity upon obtaining denial by local insurance companies for the risk coverage, according to SUSEP´s applicable regulations, or upon issuance of a denial letter by a class representative entity.

As a general rule, only if there is no similar insurance coverage available in Brazil may the individual or entity resident in Brazil hire the insurance abroad to cover risks in Brazil.

Compliance and Inspection

CNSP Resolution No. 197/2008 mentioned above is regulated by the Circular No. 392 of 2009 issued by SUSEP, which regulated, among other issues, the possibility of hiring insurance in foreign currency, which is limited to certain risks; the inspection of compliance with the applicable rules and the existence of penalties applicable to entities which fail to comply therewith.

SUSEP, as a supervisory institution may, according to articles 10 to 16 of its Circular No. 392, demand, at any time, certain documents described in these articles in order to assure that the risks cannot be covered by insurances offered in Brazil, among other legal requirements. This “supervisory power” is described in article 10 of the Circular No. 392, as follows:

  • “Article 10 : As set forth in the above article, SUSEP will be able to, at any time, require to the insured and / or to the respective insurance broker the documents that prove the compliance with the current regulations for the hiring of insurance abroad.
  • Sole paragraph: The non-presentation of documentation described in the above article subjects the insured and / or his intermediary, when resident and domiciled in Brazil, the applicable penalties, in the terms of the current legislation and regulation.”  

Among the documents which may be required by SUSEP are copies of the formal consultations submitted to 10 (ten) Brazilian insurance companies which operate in the respective insurance segment and the answers obtained from such insurance companies. Alternatively, SUSEP may accept consultations made by the class representative entity to all Brazilian insurance companies containing all the necessary information related to the risk to be covered. Issuance of the denial letter by the referred representative entity may only be issued if no Brazilian insurance company formalizes its intention to cover the risk or if the entity only receives negative answers from the insurance companies.

For purposes of the insurance hired abroad for hulls, machinery and civil liability for vessels registered under the Brazilian Special Registry (Registro Especial Brasileiro – REB) foreseen under item V, article 5, of CNSP Resolution No. 197/2008, whenever the Brazilian insurance market does not offer prices compatible with the international market, SUSEP may, at any time, require copies of the formal consultations submitted to 5 (five) Brazilian insurance companies which operate in the respective insurance segment, the answers obtained from such insurance companies and the answers from foreign insurance companies and their respective prices for the insurance to be hired abroad.

Penalties

The Law Decree No. 73 of 1966, amended by LCP No. 126 has established what penalties will be applied if an insurance is hired in violation of the insurance, coinsurance and reinsurance regulations.

Article 113 of said Law Decree states that: “the individual or entity that performed operations of insurance, coinsurance or reinsurance without proper authorization in the Country or abroad will be subject to a penalty equal to the amount insured or reinsured”.

Therefore, any Brazilian resident – individual or entity — who hired insurance abroad for covering risks in Brazil in violation of the applicable regulations shall be subject to a fine in an amount corresponding to the amount insured.

Securities and Exchange Commission’s Approval: Is it a Sine Qua Non for every Asset(s) Acquisition Transaction?

Articles, Competition and Anti-Trust, Corporate/Commercial Law, Latest News

The Securities and Exchange Commission (“SEC”), established under the Investments and Securities Act, 2007 (“ISA”) is the body charged with the overall regulation of capital market activities in Nigeria. The SEC has also unwittingly become a competition regulator. Accordingly, the SEC has the responsibility of reviewing, approving and regulating mergers, acquisitions, takeovers and all forms of business combinations. (ISA, s. 13.) Thus, every merger, acquisition or business combination between or among companies is subject to the prior review and approval of the SEC.

There are two topical issues among practitioners relating to the requirement for SEC’s approval for asset acquisitions: (A) whether the SEC’s approval is required for an asset acquisition; and (B) if the SEC’s approval is required, whether there is or there should be a monetary threshold or asset value that would trigger the SEC approval requirement? The ISA is not altogether clear on these and the lack of clarity is due largely to the language used in the SEC Rules and Regulations, 2013[1] (the “SEC Rules”).

(A)         SEC APPROVAL FOR ASSET ACQUISITIONS?

 Rule 421(1) of the SEC Rules defines “acquisition” as “the take-over by one company of sufficient shares in another company to give the acquiring company control over that other company” (emphasis supplied). Further, Rule 433 of the SEC Rules also defines “acquisition” as “where a person or group of persons buys most (if not all) of a company’s ownership stake in order to assume control of a target company” (emphasis supplied). Rule 421(1) is limited to shares acquisitions.   Rule 433 suggests that for there to be an “acquisition” the acquirer must assume control of the acquiree after the acquisition. The assumption of control of the acquiree does not necessarily occur in asset acquisition transactions. It is fair to say that both Rule 421(1) and Rule 433 do not contemplate SEC approval for asset acquisitions.

It is however arguable that the SEC’s approval is required for asset acquisitions for at least three reasons.   First, there are copious references to “asset(s)” under Part I of the SEC Rules that deals with “take-overs”, “mergers” and “acquisition”. Rule 422 of the SEC Rules sets out the scope of SEC’s regulation under Part I of the SEC Rules to include “every merger, acquisition or combination between or among companies, involving acquisition of shares or assets of another company” (emphasis supplied). Further, Rule 423(2) of the SEC Rules states that the SEC shall approve a merger, acquisition or external restructuring if SEC finds that “such acquisition, whether directly or indirectly, of the whole or any part of the equity or other share capital or of the assets of another company, is not likely to cause substantial restraint of competition to create monopoly in any line of business” (emphasis supplied).

One of the documents that is required to accompany a letter of intent to be submitted by an applicant seeking approval from the SEC under Rule 434 of the SEC Rules is a report of valuation of shares/assets to be acquired. (SEC Rules rule 434(xvii).) Again, Rule 436 of the SEC Rules sets out the contents of Information Memorandum for an acquisition. Part of the background information to be contained in an Information Memorandum is the “list of assets to be acquired and their value (where applicable)”. (SEC Rules rule 436(1)(d). Moreover, Rule 437 of the SEC Rules requires that an executed share/asset purchase agreement should be forwarded to the SEC post-acquisition.

The definitions of “acquisition” under the SEC Rules suggest that the scope of acquisition under the SEC Rules is limited to shares and does not cover asset acquisitions, notwithstanding, numerous references to “asset” under Part I (on take-overs, mergers and acquisition) of the SEC Rules which clearly show that the term “acquisition” as used in the SEC Rules also involves asset acquisition and therefore subject to the SEC’s prior review and approval. It is settled law that in the interpretation of statutes, every clause of a statute must be construed with reference to other clauses/provisions of that statute in order to have a consistent enactment. Nigerian Ports Plc v Okoh (2006) All FWLR 1145 at 1157H and Canada Sugar Refining Co. Ltd. v R (1898) AC 735.

Second, assuming that the term “acquisition” as defined in Rule 421(1) is limited to share acquisitions, asset acquisitions will still be subject to the SEC’s prior review and approval. This is because asset(s) acquisition is unarguably a form of business combination which falls within the SEC’s scope of regulation. By section 13(p) of ISA, one of the functions/powers of the SEC is to “review, approve, regulate mergers, acquisitions, take-overs and all forms of business combination and affected transactions of all companies” (emphasis supplied). Also, Rule 422(2) of the SEC Rules states specifically that the provisions of Part I (on take-overs, mergers and acquisition) of the SEC Rules shall apply to “every merger, acquisition or combination between or among companies, involving acquisition of shares or assets of another company” (emphasis supplied). Thus, all take-overs, mergers, acquisitions, business combinations undertaken by companies, partnerships or agencies of the federal government are subject to the SEC’s approval.

Third, SEC’s competition regulator status makes it incumbent for the SEC to review and approve every asset acquisition between companies in order to ensure that such asset acquisition will not cause substantial restraint of competition or tend to create monopoly in that line of business enterprise. (SEC Rules, rule 423(2)(a).) Even where the SEC’s prior approval is not obtained for an asset acquisition, the SEC has the power to break up such a company where it considers that such an acquisition constitutes a restraint to competition or creates a monopoly in a particular industry. (SEC Rules, rule 432.) A ground for the SEC to order a break-up of a company is where the company enters into an agreement or business undertaking which has the effect of preventing, restricting or distorting competition in any part of the Nigerian market. (SEC Rules, rule 432(3)(a).) It is, therefore, prudent (assuming it is not mandatorily required) to seek the SEC’s approval before entering into any agreement for asset acquisition which may have the effect of preventing, restricting or distorting competition in any part of the Nigerian market. If the SEC reviews the transaction documentation and comes to the determination that its approval is not required, it [the SEC] would issue a “No Objection” to the transaction.

(B)          WHEN SHOULD THE SEC APPROVAL REQUIREMENT APPLY?

The writer is of the strong view that it is not every asset acquisition transaction that requires the SEC’s approval. Otherwise, the SEC will be inundated with applications/requests for approval and the SEC will be unable to perform its other functions as the sale of a company’s asset, irrespective of the value, would require the SEC’s prior review and approval. There are at least three tests that could be adopted for determining when the SEC’s prior review and approval will be required for an asset(s) acquisition transaction. These tests are: (1) the asset value test; (2) the operating asset test; and (3) the competition test.

Asset Value Test.   This test involves setting a threshold in terms of the value of the assets to be sold/transferred. The SEC’s prior review and approval will be required where the value of such asset is above the set threshold.

Operating Asset(s) Test.   The SEC’s prior review and approval should be required in an asset(s) acquisition transaction where all or substantial part of the operating asset(s) (that is, asset(s) constituting the business of a company) of a company are to be sold or transferred to another entity. For example, the sale/transfer of all or substantial number of telecommunications masts/towers by a telecommunications company will require the SEC’s prior review and approval under this test as telecommunications masts/towers are the operating assets of telecommunication companies.

Competition Test. As stated above, the SEC in reviewing approving acquisitions or any business combinations has the obligation to ensure that such transaction would not cause substantial restraint of competition or create a monopoly in a particular line of business enterprise.   Thus, where the asset(s) to be sold/transferred does not constitute the substantial part of the operating asset(s) of a company but one with competitive significance, the SEC’s prior review and approval of such transaction should be required. For instance, the SEC Rules could provide that an asset or set of assets would be of competitive significance where the acquisition of such an asset or set of assets will likely result in the acquirer having ten per cent of the market share in that line of business in addition to the acquirer’s current market share.

CONCLUSION

The current state of the law is not altogether clear as to whether asset(s) acquisition transactions are subject to the SEC’s prior review and approval. It is, therefore, imperative to amend the SEC Rules to clearly cover asset(s) acquisition and provide clear parameters or thresholds for determining what asset acquisition will be subject to SEC’s review and approval.

[1] The SEC is empowered under s. 313 of ISA to make rules and regulations for the purpose of giving effect to the provisions of ISA.

Growing Demand for Warranty & Indemnity Insurance in Danish M&A Transactions

Articles, Corporate/Commercial Law, Insurance, Latest News

Until recently, warranty & indemnity insurance (W&I insurance) was only rarely used in Danish M&A transactions but due to faster underwriting processes and lower insurance premiums, we see a tendency towards an increased use of W&I insurance.

W&I insurance covers the economic loss suffered by a company where the warranties and indemnifications given in connection with an M&A transaction turns out to be incorrect. Both the buyer and the seller can take out an insurance policy, but the insurance coverage will differ depending on who takes out the insurance. This is described in more detail below.

Sell-Side and Buy-Side Policies

The sell-side policy is taken out by the seller and covers the potential liability of the seller as a result of breach of a given warranty or indemnity in the share sale and purchase agreement (the SPA). In sell-side policies, the seller often assigns its potential claim on the insurance company to the buyer. In a sell-side policy, breach of a given warranty or indemnity caused by seller’s fraudulent behaviour is not covered by the insurance policy. Hence, the buyer can only claim for damages from the seller in case hereof.

The buy-side policy is taken out by the buyer and covers the buyer’s potential claim against the seller in case of breach of the agreed warranties. The buy-side policy has the advantage that seller’s breach of a warranty caused by seller’s fraudulent behaviour is covered by the W&I insurance and the buyer’s coverage is therefore broader with a buy-side policy than with a sell-side policy. In our experience the predominant part of W&I insurance for Danish transactions are taken out as buy-side policies – presumably due to the broader coverage of the buy-side policy.

In both sell-side and buy-side policies the insurance company usually waives its right of recourse against the seller unless the breach of the warranty in question is a result of seller’s fraudulent behaviour.

Reasons for Choosing W&I Insurance in M&A transactions  

First of all, taking out W&I insurance limits the seller’s liability towards the buyer as the insurance company, as above mentioned, in most policies will waive its right of recourse against the seller, thereby providing for a “clean exit” for the seller.

However, W&I insurance is also an alternative to the general holdback mechanisms used in most SPA’s, e.g. to hold in escrow a certain amount of the purchase price for a specific period of time or using claw-back clauses in the SPA. Hence, one of the main reasons for a seller to take out W&I insurance in an M&A transaction is that the purchase price will be at the disposal of the seller immediately after closing. This is particularly relevant in M&A transactions where the seller is a PE fund as the fund can distribute the full purchase price to its limited partners after closing. Another advantage of W&I insurance is that the seller’s investment possibilities will increase compared to the limited investment possibilities in an escrow arrangement. Given the current low interest rates, the premium payable to the insurance company can be financed by the margin between the yield of a low risk investment compared to the interest paid by the relevant bank managing the escrow account.

There are also several reasons for the buyer’s interest in taking out W&I insurance. Firstly, coverage of a W&I insurance may cause the seller to undertake more warranties and indemnities and increase the cap and survival limitations in such warranties, which will eventually increase the purchase price or allow for a smoother negotiation of the deal. Secondly, by taking out W&I insurance the risk of seller’s insolvency is transferred to the insurance company. Thirdly, in an auction process the buyer can make its offer more attractive to the seller by including W&I insurance in the offer, giving the seller the above-mentioned advantages compared to offers comprising holdback mechanisms.

A mutual reason for both the seller and the buyer to take out W&I insurance arises where the seller holds a certain part of the shares in the company post transaction. In this case the W&I insurance eliminates the rather precarious situation where the buyer must initiate proceedings against a co-owner of the acquired company to pursue the buyer’s rightful claim arising out of a seller’s breach of the warranties in the SPA concluded between the parties.

Insurable Warranties and Limitation of Scope of Coverage provided by Insurance companies

Ideally, the W&I insurance policy mirrors the warranties in the SPA between the seller and the buyer as all risks are thereby transferred from the contracting parties to the insurance company (in excess of the retention amount).

For regulatory and commercial reasons, insurance companies do not underwrite all risks represented in the warranty catalogue of an SPA. Certain toxic risks, as e.g. transfer pricing issues and issues related to pension underfunding, are usually not underwritten by insurance companies. For commercial reasons, forward-looking warranties are generally not insurable.

In addition, we have also experienced an examples of unwillingness on the part of insurance companies to cover certain warranties given in relation to directors’ and employees’ potential violations of the U.S. Foreign Corrupt Practices Act of 1977 and the UK Anti Bribery Act 2010.

Despite insurance companies’ above-mentioned unwillingness to underwrite certain risks arising from the warranty catalogue of the SPA, there is a tendency towards improved coverage and insurance companies generally exclude less warranties just as a growing number of policies are taken out on back-to-back terms with the SPA.

Retentions and De Minimis claim thresholds

In order for the parties to have “skin in the game” and to ensure that the parties do not agree on excessive warranties and indemnities, the insurance coverage is usually limited in the insurance policy by way of a retention clause and a de minimis claim threshold. The retention is the amount which a claim, or if agreed in the policy; the cumulated claims, must exceed in order for the insured party to be entitled to insurance cover. The de minimis claim threshold defines the amount a single claim must exceed in order to be included in the loss calculation.

Generally, the retention amount is approx. 1 percent of the enterprise value but moving downwards. In real estate transactions, the retention amount may be significantly lower.

When negotiating the SPA the parties must agree on which party is to bear the risk of the claim or cumulated claims not meeting the retention threshold in the insurance policy. In our experience, depending on the circumstances and the parties’ leverage in the negotiations, both buyers and sellers undertake to bear the risk of the retention threshold not being met.

Ideally, the retention in the W&I insurance policy and the de minimis claim threshold match the deductible and the de minimis claim threshold agreed in the SPA.

Growing Demand for W&I Insurance in the Danish M&A Market

In general, we experience an increased use of W&I insurance in both Danish and Scandinavian M&A transactions.

We believe that the increased use is a result of lower premiums and a faster underwriting process but that it is also driven by the growing awareness of the product. W&I insurance is used both in PE fund transactions but also in other transactions. While a substantial number of the W&I insurances have been driven by PE funds we have also seen a number of other reasons, e.g. succession on seller side, seller retaining part ownership of target, etc.

Decrease in Premium Prices

In general, the premiums charged by insurance companies have decreased significantly as the market is maturing and along with the maturing market, insurance companies are getting more comfortable pricing risks arising from warranties in SPAs. Within a 4-year period, we have experienced a 50 per cent decrease in premium prices. The premium charged by insurance companies is generally within a margin of 1-2.5 per cent of the insured amount.

W&I Claim Handling – the Unanswered Question

Albeit the maturing market, we have yet to see how claims arising out of W&I insurance policies governed by Danish law will be handled. The majority of insurance companies operating within the field of W&I insurance also operate in more mature but still comparable W&I insurance markets as e.g. the Swedish and Norwegian markets. Hence, we foresee that insurance companies’ claim handling will be carried out similarly to such markets in case of claims arising out of W&I insurance policies taken out in Danish M&A transactions.

 

The European Commission and the e-Commerce sector: What to expect.

Articles, Competition and Anti-Trust, Corporate/Commercial Law, Latest News

According to the European Commission (the “Commission”), statistical data indicate that only 15% of EU citizens purchase online from suppliers located in a Member State other than their own country of residence. This does not only apply to the acquisition of goods, but also to that of multimedia content (video, music, games, apps, etc.).

Language barriers, consumer preferences and legislative differences could in part account for this situation, but the findings of previous case investigations conducted by the Commission and national competition authorities suggest that certain companies may be restricting cross-border e-commerce.

All this has resulted in an e-commerce sector inquiry that was officially launched by the Commission on 6 May 2015. The inquiry focuses on identifying artificial barriers which may hinder cross-border e-commerce, contained for instance in vertical distribution agreements between manufacturers or content holders and online retailers. In particular, the Commission is looking into possible (i) limitations to cross-border and/or online sales of goods (e.g. passive sales restrictions or geo-blocking) and (ii) restraints on the commercialization of digital content (such as geo-blocking requirements or absolute territorial protection).

The Commission’s investigation will address geo-blocking, which restricts access to content based on the users’ geographical location using data such as their IP address or their credit-card details. Although geo-blocking practices may sometimes be explained by copyright-based licensing restrictions, they also might be due to pure commercial strategies with anticompetitive effects.

The sector inquiry on e-commerce will therefore be accompanied by other initiatives at the European level, such as legislative actions.

Stakeholders, procedure and timeline

It is expected that approximately 2,000 companies will be approached by the Commission. Industry participants and other stakeholders across the 28 EU Member States, including owners of content rights, broadcasters, online retailers and online suppliers of goods and services will be addressed by the Commission during the inquiry. As announced by the Commission, the focus is placed on electronics and electrical household appliances, clothing, shoes and accessories, books, healthcare products, digital content and travel services.

The investigation does not only cover hi-tech multinationals, such as Amazon (e-commerce leader in the EU), eBay, Google or Uber, but also considerably smaller online firms, as well as trade and consumer associations.

Although the Commission stated that the inquiry will be carried out mainly through information requests (including requests for documentation; e.g. copies of agreements) made to operators, it should be borne in mind that the Commission has also powers to conduct dawn raids at companies’ premises.

To date, the Commission has already sent two batches of questionnaires.

  • At the end of June, the Commission sent the first one which was addressed to movie, TV, music and sport content owners and it has been reported to have more than 100 pages.
  • The second one, sent in mid-July, was directed to online retailers mainly in Germany, France and the United Kingdom. The deadline to respond is of approximately six weeks. This second set of questionnaires required stakeholders to provide feedback on the obstacles they face when selling their products online within the European market. In this sense, retailers have been asked to detail restrictions linked to customer’s location, prices differences depending on the sale channel, prices margins etc.

If a company or association is active in the e-commerce sector, but has not received a questionnaire, it is possible to inform the Commission about its interest to participate. This is only recommended if the company in question is exposed to restrictions and would like to raise its voice to the Commission.

As regard the obligation to respond, it is worth reminding that the Commission may impose fines for failure to supply information within the required time limit or for supplying incorrect or misleading information. Therefore, answers to information requests in the framework of this inquiry must be carefully drafted.

The preliminary report on the findings of the investigation should be published by mid-2016, to which stakeholders will be given the opportunity to comment, and the final report is not likely to be ready until the first quarter of 2017.

Sector inquiries may trigger formal investigations of individual companies for infringements of competition law. Companies operating online are strongly advised to start reviewing their standard terms and conditions for cross-border purchasing.

Moreover, it is expected that the conclusions drawn from the investigation will be used in future legislative initiatives to boost e-commerce at the EU level. Although Commission officials confirmed that it is not the intention of the Commission to amend exiting rules on vertical restraints, at the end of the day such amendment may be necessary.

 Parallel action

This sector inquiry is intended to complement the Commission’s Digital Single Market Strategy, which aims at removing barriers to cross-border e-commerce.

In addition, this measure arrives along with the following parallel Commission:

  • investigation into possible location-based restrictions put in place as regards the sale of online video games for personal computers;
  • investigation into licensing terms between six major US film studios and Uk broadcaster Sky;
  • assessment of agreements between major music labels in relation to paid music-streaming services; and
  • statement of objections sent to Google in relation to its comparison shopping service. This SO follows the investigations on Google’s conduct with regard to other four concerns: (i) the alleged more favourable treatment of other specialized search services; (ii) copying of rivals’ web content or ‘scraping’, (iii) advertising exclusivity and (iv) undue restrictions on advertisers.

Although officials of the Commission have repeatedly stated that the sector inquiry should not lead to an amendment of the existing rules on vertical restraints (Regulation (EU) Nº330/2010 and Guidelines on Vertical Restraints), the fact is that, quite likely, some amendments will have to intervene. Regulation 330/2010 was somehow already too old when it was born.

Investigatory Privilege

Articles, Corporate/Commercial Law, Latest News, Litigation Mediation & Arbitration

Introduction

The Commercial Court delivered judgment in the case of Quinn v Irish Bank Resolution Corporation Limited and Kieran Wallace[1] on 19 May 2015, confirming that the scope of litigation privilege extends not only to documents created for the dominant purpose of anticipated litigation, but also to documents created in contemplation of a criminal or regulatory investigation.

The judgment has significant implications for businesses engaged in a regulatory process, as it provides them with an opportunity to immediately engage with their lawyers on a privileged and confidential basis. It also highlights that the assistance of lawyers at an early stage of an investigation can have substantial benefits for an organisation, both in the regulatory process itself and in any future civil action.

The rationale for privilege

In general, a witness will be bound to answer all relevant questions put to him, and will be held to be in contempt of court if he refuses to do so; however, the law recognises that there are a number of instances in which a person enjoys a privilege from being compelled to answer a question or produce a document.

The law of privilege seeks to balance, on the one hand, the administration of justice and the interest in ensuring that all relevant evidence is before the courts, and on the other, the protection of the relationship between lawyer and client which relies to a degree on confidentiality. The reasoning behind the existence of legal professional privilege is that of encouraging a client to make full and frank disclosure of all relevant facts in relation to his case to his lawyer, in confidence that such disclosures will not be revealed without the client’s consent.

Legal professional privilege can be divided into two basic categories: “legal advice privilege” and “litigation privilege”. Broadly speaking, legal advice privilege protects a person from producing confidential communications made between him and his lawyer for the purpose of giving or receiving legal advice. In order to establish legal advice privilege, it must be shown that the document or information sought to be disclosed consists of a confidential communication made in the course of a professional legal relationship, for the purpose of giving or receiving legal advice. It should be noted that not all communications between a solicitor and client are privileged, only those made for the purpose of giving or receiving legal advice, and those made in confidence. This privilege will apply regardless of whether litigation is contemplated or not.

Litigation privilege, on the other hand, applies to confidential communications between a client and his lawyer or a third party such as a witness or expert, the dominant purpose of which is to prepare for anticipated litigation. A document will be privileged if the dominant purpose for its creation is contemplated or reasonably apprehended litigation. The test as to the dominant purpose of the creation of the document is an objective one, and it will not be sufficient that the document was created for more than one equal purposes, one of which is contemplated litigation.

It should be noted that no privilege is absolute; as the doctrine has its roots in public policy, exceptions may be made in circumstances where the balance of the public interest in disclosing the document or communication outweighs the maintenance of the privilege. In particular, privilege will not apply to communications made in furtherance of crime or fraud. The courts have held that the purpose of legal professional privilege is “to aid the administration of justice, not to impede it”[2].

Expansion of the doctrine of privilege

The Quinn v Irish Bank Resolution Corporation Limited and Kieran Wallace case concerned an application for further and better discovery; the defendants asserted privilege over a number of disputed documents and sought to establish that the dominant purpose for the creation of the documents was the contemplation of further litigation, or for the purpose of two investigations, one by the Financial Regulator, and one by the Director of Corporate Enforcement.

Previous caselaw has confirmed that privilege can be claimed by a person whose conduct is under examination by a tribunal of inquiry, on the basis that although such a tribunal may not be involved in the administration of justice, it does have an adjudicatory function, and any report it may produce has the potential to have serious and damaging effects for the persons called before it. In the case of Ahern v Mahon[3], the plaintiff was held to be entitled to claim litigation privilege in respect of communications between him and his legal advisors and experts retained by him for the purposes of the inquiry proceedings. As a person whose conduct was under examination by the tribunal of inquiry, the plaintiff was held to be entitled to certain fundamental constitutional rights, including the right to one’s good name, the right to fair procedures, and the right to natural and constitutional justice. Judge Kelly held that a person appearing before a tribunal of inquiry and to whom such fundamental constitutional rights apply to is to be regarded as being in the same position as a party to High Court litigation, and not a mere witness, from the point of view of legal professional privilege.

Judge McGovern in the Quinn judgment accepted the first defendant’s submission that it was entitled to assert investigatory privilege or regulatory privilege in respect of any documents created for the dominant purpose of engaging with the regulatory and investigative processes in question. Judge McGovern cautioned that the privilege did not extend to all documents created after the date on which the defendant became aware of the investigations, but only those documents created for the dominant purpose of engaging with those investigation processes.

The logic behind the application of privilege is the principle that a person must be able to consult his lawyer in confidence, and be sure that what he tells his lawyer in confidence will never be revealed without his consent. It has been described as “much more than an ordinary rule of evidence, limited in its application to the facts of a particular case. It is a fundamental condition on which the administration of justice as a whole rests”[4]. The labelling of a tribunal of inquiry as inquisitorial rather than adversarial will not be determinative, and the central issue will be one of fairness.

The Quinn judgment provides further clarity on the scope of documents that will attract privilege in the context of inquiries and investigations, and clearly establishes the principle of investigatory/regulatory privilege.

 

This briefing is correct as at 13 July 2015.

Disclaimer

This information is for guidance purposes only. It does not constitute legal or professional advice. Professional or legal advice should be obtained before taking or refraining from any action as a result of the contents of this publication. No liability is accepted by Eversheds for any action taken in reliance on the information contained herein. Any and all information is subject to change. Eversheds is not responsible for the contents of any other website or third party material which can be accessed through this website.

Eversheds is an Irish partnership and a member firm of the Eversheds International network of firms affiliated with Eversheds International Limited, an English company limited by guarantee. Member firms of Eversheds International are independent firms and members of Eversheds International Limited, but have no authority to obligate or bind Eversheds International Limited or one another vis-à-vis third parties. Neither Eversheds International Limited nor any of its member firms have any liability for each other’s acts or omissions.

[1] [2015] IEHC 315

[2] Gallagher v Stanley [1998] 2IR 267, 271.

[3] [2008] IEHC 119

[4] Lord Taylor in R. v. Derby Magistrates Court Ex parte B [1996] 1 A.C. 487, cited with approval in Duncan v. Governor of Mountjoy Prison [1997] 1 I.R. 558

Local Directors No Longer Needed in Japan: Practical Issues with the Recent Rule Change

Articles, Corporate/Commercial Law, Latest News

Over the past decade Henry Tan, Representative Director of Tricor K.K., has helped companies of all industries enter the Japanese market. Each time a company planned to set up an entity in Japan, without fail, there was a discussion about why there was a requirement to appoint a local Japanese resident, member or officer (details are explained below) (“local representative”). With the 16 March 2015 official statement by the Japanese Ministry of Justice (“MoJ”) abolishing this requirement, the details of the discussion have changed considerably. In the following article he will explore the history of the issue, how it was before the recent statement by the MoJ and provide personal insights into the reality of the situation.

The Companies Act of Japan, which came into effect on 1 May 2006 and before it, the Commercial Code of Japan put into place in 1899 states that there are four types of companies that can be incorporated under Japanese Law. Before the Companies Act, it was the Kabushiki Kaisha (“KK”, stock company), Yugen Kaisha (“YK”, limited company) and two other less frequently used types of companies (Gomei Kaisha, Goshi Kaisha). Now, after the establishment of the Companies Act, the YK has been removed and the Godo Kaisha (“GK”, limited liability company) has been added.

Neither the Commercial Code nor the Companies Act states anywhere that the above respective four types of entities are required to appoint a local representative. However, in 1984 and 1985 the MoJ provided a set of official statements which in summary required that at least one representative director named at the time of registration be a local resident.

The policy adopted by the 1984 and 1985 official statements was followed in company registration practice by all Legal Affairs Bureaus (“LAB”s) in the Japan, surviving the change from the Commercial Code to the Companies Act.

The MoJ and the LAB also, in company registration practice, applied the concept of this policy to the other three types of companies that were incorporated under Japanese Law. In such types of companies each member (i.e., equity holder) (or a part of members if otherwise provided by the AoI) has representative power; and if a member with representative power is a corporate body it must appoint an individual as a representative officer (shokumu-shikkosha). Under the policy at least one member with representative power who is an individual, or one representative officer appointed, was required to be a local resident.

However, since the Japanese business environment has become much more international and technology allows the people of the world to be in many places at one time it has led to an increased pressure and demand for Japanese companies to be able to incorporate under Japanese Law without a local representative.

In response, a Working Group for Fostering Inbound Investments organised by the Cabinet Office in December 2014 (the “Inbound Investment WG”) led government-internal discussion towards changing the policy and under “Abenomics” the MoJ accepted abolition of the requirement based on two factors:

  1. Adoption of a new requirement that all directors (not just representative directors) register their addresses for the benefit of creditors.
  2. Confirmation by the Japanese Supreme Court that directors of a Japanese company residing abroad would be subject to jurisdiction in Japanese courts.

From the discussion held by the Inbound Investment WG, the officers of the MoJ announced on 16 March 2015 that the company registration practice announced in 1984 and 1985 would be rescinded, and the LAB would accept applications for the establishment of KKs with no local representatives. This new announcement is also applied for local representatives of the other three types of companies incorporated under Japanese law.

The abolition of the local representative requirement does not apply to Japanese branches of non- Japanese entities. The Companies Act clearly states in Article 817 that a branch of a foreign company needs to have at least one representative who lives in Japan. Since this is an explicit statutory requirement it cannot be overridden by administrative action by the MoJ. The Inbound Investment WG has announced that it will consider further deregulation for branches of foreign companies in Japan.

After the New Official Statement made by the Ministry of Justice: Now that the policy has changed, practically speaking, it has become relatively easier to set up a subsidiary in Japan. Without the requirement of a local representative, simply collecting the information for preparing the necessary documents is enough for submission to the LAB (evidence of capital and a registered address in Japan are still required to be provided during registration). Even with this perceived simplification of the establishment process, there are some issues that may be of interest to foreign based executives of multi-national companies.

How to show Evidence of Capital: When you set up a KK [1] evidence of the initial capital has to be shown in a Japanese bank account before the LAB will process the registration of establishment of the company. Before the official statements were changed by the MoJ it was normal practice that the evidence of capital would be simply a copy of the bank book of the local representative showing the applicable capital amount. Now that the guidelines have changed it is not clear exactly how evidence of capital will be established. There are some options that can be entertained:

  1. Still appoint a local representative during the establishment phase to use his or her personal bank account.
  2. Appoint a promoter locally to set up the company who will initially own the shares of the KK. Once established the promoter would then transfer the shares to the appropriate shareholder immediately.
  3. Set up an Escrow bank account (別段預金 “betsudan yokin” in Japanese) for deposit of initial capital for evidence to show the LAB. Setting up an Escrow account may take considerable time depending on the bank.

 Setting up a Bank Account: Most banks in Japan require a local representative to set up a bank account. As of the writing of this article, Mizuho Bank is the only bank I have identified that accepts bank account applications without having a local representative in Japan.

Dealing with Landlords: If you have ever dealt with a Japanese Landlord you know how different the requirements can be amongst owners. My general assumption and experience is that foreign multinational friendly office space providers that offer “turnkey” solutions will be willing to rent space to companies without a local representative. It is yet to be seen how more conservative landlords will act towards companies without a local representative.

Business Licenses: Even though the policy regarding company registration practice has been changed, many business licenses in Japan still require a local representative to be named in order to apply.

Directors of Japanese Entities residing Abroad subject to Japanese Jurisdiction: During legal matters directors of Japanese companies residing abroad may be subject to jurisdiction in Japanese courts and thus be asked to appear in court.

Corporate Seals: Even if there isn’t a local director, every company must have at least one Corporate Seal (basically a portable power of attorney of the company which can bind the company to any agreement). Given that it is most practical to keep the seal in Japan for execution of Japanese documents, transactions, etc, it isn’t clear where the seal will be held. The seal is linked to the listed representative on the Corporate Registry (each representative can have their own seal, but only one seal is required). Without someone local to wield that power responsibly, how will the seal be maintained safely for clients that set up with the representative residing abroad?

What would I do?

So what do you do when setting up an entity in Japan? Honestly, with the ripple-effects from the announcement still visible it is hard to say. I am learning each day what the effects may be but it is still very exciting to see things changing in Japan; however small or large of a step it may be. One thing is for sure though; if you do not want to run into delays during your set up phase, it may be best to either hire a representative director from the pool of talent in Japan or to appoint a nominee local representative from a reputable service provider. Removing the local representative (hired internally or a nominee) later on once things are set up properly may be OK but it remains to be seen for all cases.

It should be noted that removing a local representative working at the company can become a burdensome task as this person may not be the most cooperative during a forced removal. I will cover this issue in more detail in a later article coming out soon. Further, if a company sets up without someone local to hold the Corporate Seal responsibly, a corporate governance risk exists since the seal is a portable power of attorney of the company. If not held safely issues may arise. At the end of the day I know that companies entering Japan do not want to take their first step backwards or in the wrong direction, so for now, I would still use a local representative during set up stages at the very least.

Key Points Summary:

  1. There is a difference between companies incorporated under Japanese Law and those that are not. Companies incorporated under Japanese law include the KK and GK among less commonly used company types. A Branch Office is always incorporated under the laws of the country the branch extends from and not under Japanese law.
  2. As of 16 March 2015 the KK and GK no longer require a local representative for establishment, Branch Offices do.
  3. The Japanese Companies Act, established on 1 May 2006 has not changed – this is a common misconception. Simply, the Ministry of Justice has announced a new official statement for Legal Affairs Bureaus to adhere to in order to accept an application for setting up a company incorporated under Japanese law.
  4. Issues may arise from this official statement change. The extent of the issues remains to be seen but as of writing this I have noticed that:
  5. The way of showing evidence of capital for a KK has shifted toward other, arguably, less commonly used methods before the official statement change. Most commonly a nominee promoter option has become the most used method of set up where a local shareholder will exist at the time of establishment and shares to the ultimate shareholder will be transferred after establishment is complete.
  6. Opening a bank account at certain Japanese banks may still require a local representative.
  7. Mizuho Bank, however, has been identified as a bank that accepts companies without a local representative.
  8. Dealing with Landlords without a local representative may become more difficult.
  9. Obtaining business licenses may be difficult or impossible without a local representative.
  10. Representatives appointed abroad may be subject to jurisdiction in Japanese courts.
  11. Where will the Corporate Seal be held if there is no local representative? The seal is a portable power of attorney which can bind the company to any agreement, so it should be held somewhere responsibly. Holding it outside of Japan is impractical, so how can companies ensure its safety?
  12. Using a local representative still is the most understood way for setting up smoothly in Japan. It remains to be seen what sort of delays may occur without one.

 Tricor K.K. (Tricor Japan), the Japan arm of Tricor Group, supplies comprehensive business and corporate services including entity establishment, accounting, payroll/benefits, HR Advisory, banking & administration, tax, corporate secretarial, serviced office space, and IT set up and support services. Tricor K.K. provides a bilingual and bi-cultural approach dedicated solely to foreign managed multi-national enterprises which value a native English point of contact and an understanding of the business culture, both locally as well as internationally.  As a group we strive to be Asia’s one-stop shop for international expansion back office needs.  For more information please contact [email protected].

The views and opinions expressed herein are solely the views and opinions of the author and are not in any way a guarantee or definitive conclusion on the subject.  Any actions taken by the reader based on the information presented in this document are solely the responsibility of the reader and not the responsibility of Tricor Group, Tricor K.K.  or any other affiliated companies.

1Evidence of equity contribution is required for a KK and GK establishment.  [For KK, this is Article 47(2)(v) of the Rules of Commercial Registration.  For GK, this is Article 117 of the Rules.] For a Gomei Kaisha and Goshi Kaisha, actual evidence of capital is not needed.

Doing Business in Puerto Rico

Articles, Corporate/Commercial Law, Employment and HR, Intellectual Property, Latest News, Tax

Introduction

The Commonwealth of Puerto Rico (“PR”) is a self-governing territory of the United States of America (“US”) with approximately 3,750,000 inhabitants. Located between the Atlantic Ocean and the Caribbean Sea, PR governs its internal affairs in a manner similar to that of the other 50 states of the US. The US has jurisdiction over foreign relations and commerce, customs, immigration, nationality and citizenship, postal service, currency and military matters, among others. Generally, US federal trade and economic treaties, laws and regulations apply in PR. The US is PR’s main trading partner. The official languages of PR are Spanish and English.

Business Entities

Domestic Corporations. The PR General Corporations Act is modeled after the Delaware General Corporations Law. Any natural or juridical person, acting singly or jointly with others, can incorporate or organize a corporation by filing a certificate of incorporation at the PR State Department. Generally, this certificate grants the corporation legal existence as soon as it is filed with the PR Secretary of State.

Foreign Corporations. Foreign corporations (including US corporations) desiring to operate in PR must request a certificate of authorization to do business in PR by filing an application at the PR State Department. The application to conduct business in PR must be accompanied by a certificate of corporate existence (or any other similar document) issued by the Secretary of State or other official having custody of the corporate register in the jurisdiction where the foreign corporation was incorporated. If such certificate of corporate existence is in a foreign language, a translation must be attached, together with a sworn certificate of the translator.

Limited Liability Companies. Limited liability companies or LLCs are fast becoming the preferred method of doing business in PR. LLCs offer their owners the same limited liability protection granted by law to corporations and the flexibility to manage their internal affairs as a partnership, a corporation or a combination of both in accordance with their Operating Agreement. LLCs are organized by filing a certificate of formation at the PR State Department.

Foreign Limited Liability Companies. Foreign limited liability companies desiring to operate in PR must request a certificate of authorization to do business by filing an application at the PR State Department. The application to conduct business in PR must be accompanied by a certificate of existence (or any other similar document) issued by the Secretary of State or other official having custody of the company register in the jurisdiction where the foreign corporation was incorporated.

Other Entities. Both the PR Civil Code and the PR Commercial Code allow for the creation and/or authorization to do business of other types of business entities such as civil and commercial partnerships and limited partnerships. A commercial partnership must be registered in the Mercantile Registry of the Registry of Property where its property is located. In order to have access to the PR Registry of Property, the partnership agreement must be constituted in Public Deed.

Taxes

For tax purposes, PR is a separate tax jurisdiction from the US.

Income Taxes. PR’s Internal Revenue Code of 2011, as amended, is modeled generally after the US Internal Revenue Code. All corporations, whether domestic or foreign which are engaged in trade or business in PR are taxed on their net income. Domestic corporations are taxed on their net income from all sources and foreign corporations are taxed on the income that is effectively connected with the conduct of a trade or business in PR. The maximum tax rate is 39%. Foreign corporations not engaged in trade or business in PR are subject to a flat withholding income tax rate of 29% on certain items of gross income received from sources within PR.

Municipal License Taxes. The Municipal License Tax Act imposes a license tax on the volume of business (gross income) on every person engaged in any business, including the sale of goods, the performance of services and any financial business, in any municipality in PR. The municipal license tax rate applicable to non-financial business businesses ranges from .27% to .5%. For financial businesses, the rate is usually 1.5%. Each municipality establishes its own rates.

Personal Property Taxes. Unless specifically exempted, every natural or juridical person engaged in a trade or business in PR is subject to the imposition of personal property taxes ranging from 4.33% to 6.58%, of the net book value of the taxable property. Taxable property includes cash on hand, inventories, materials and supplies, furniture and fixtures, and machinery and equipment used in a trade or business.

Real Property Taxes.   Real property tax rates vary for each municipality and generally are 2% higher than the personal property tax rate. For tax purposes, real property means the land, the subsoil, the structures, objects, machinery, or implements attached to the building or fixed on the ground in a manner showing permanence.

Sales and Use Taxes. Every merchant engaged in the sale of taxable items, or which provides a service not specifically exempted, has the obligation to collect a sales and use tax (“SUT”) as a withholding agent. The SUT rate on the sales and use of goods is generally 11.5%. Although originally exempted, services provided to businesses generally will be taxed at a rate of 4% commencing on October 1, 2015 and 10.5% commencing on April 1, 2016. There is a possibility that the SUT will be replaced by a VAT in 2016.

Tax Incentives. PR is focused in promoting foreign investment primarily on manufacture, biotechnology, communications, information technology, tourism and export services. To achieve this goal, PR offers tax incentives and exemptions for qualifying companies and individuals. Some of the tax incentive programs available in PR are:

  1. Economic Incentives for the Development of PR Act, as amended (“Act 73”). Act 73 provides a fixed income tax rate of 4% with a withholding tax on royalty payments of 12%. There is an optional fixed income rate of 8% with a withholding tax on royalty payments of 2%. There is a fixed income tax rate of 1%, or of 0% for pioneer products (as such term is define in Act 73). Distributions of earnings or profits and liquidations are tax free. The taxable gain realized on sales of stock and/or of substantially all of the assets of the exempt business are subject to an income tax rate of 4%. Act 73 also provides a 90% exemption from property taxes and a 60% tax exemption from municipal license taxes. Act 73 provides tax credits for purchases of products manufactured in PR, job creation, investments in research and development and technology transfers, among others. Some credits are transferrable.
  2. The PR Export Services Act, as amended (“Act 20”). Act 20 provides a 4% fixed income tax rate on the net income generated from the operation of an eligible export service activity which may be reduced to 3% if more than 90% of the income generated by the entity is generated from qualified export services activities and the services are considered strategic services. Accumulated earnings and profits derived from the export service activity are 100% exempted from income tax upon distribution. Act 20 also provides a 90% exemption from real and personal property taxes if the qualified eligible business is engaged in management headquarters services, call centers, and shared services center. The businesses engaged in any of these three services will enjoy a 100% exemption from all property taxes during the first five (5) years. The Act also provides a 60% exemption from municipal license taxes. These benefits would be provided for a 20 year period, and may be extended for 10 additional years.
  3. Act to Promote the Transfer of Individual Investors, as amended (“Act 22”). Act 22 provides a 100% income tax exemption on interest income, dividend income, and short and long term capital gain, derived from any source, which is generated by an individual investor that becomes a resident of PR or transfers his residency to PR. The income must be generated between the date in which the foreign individual is considered a resident in PR (i.e. 183 days test) and before January 1, 2036. In general, a special tax rate of 5% applies to capital gains accrued prior to the individual becoming a resident of PR which are recognized within 10 years after the residency in PR is established.
  4. The Tourism Incentives Act of 1993. The Tourism Incentives Act provides eligible tourism activities with partial exemptions from income, property, and municipal license taxes for a period of up to ten years. Qualifying investments in tourism activities may receive tax credits.

Labor Legislation

Both federal and local laws apply to employers in PR. The Fair Labor Standards Act (FLSA) applies to employers in PR engaged in interstate commerce. The federal minimum wage applies automatically in PR to employees who work in companies covered by the FLSA. Companies not covered by the FLSA must pay a minimum wage equivalent to 70% of the prevailing minimum wage.

In PR, a regular work day consists of 8 hours of work and a regular work week consists of 40 hours. Employers covered by the FSLA must pay overtime at a rate of not less than 1 ½ times their regular rates of pay, after 8 hour of work per day and after 40 hours of work in a workweek.

The meal period must be no less than 1 hour, unless a shorter period is agreed to by the employer and the employee. The meal period may be reduced for certain types of employees. Work performed during the meal period, or any part thereof, must be compensated at twice the regular hourly rate.

An employer is also required to pay a Christmas Bonus to each employee who has worked 700 hours or more between October 1 of the previous year and September 30 of the current year.

In PR, employees are entitled to compensation and medical treatment for work-related accidents or illnesses. The employer is not liable to the employee for damages arising out of an occupational accident in those cases where the employer is fully insured through the State Insurance Fund. There is also a short term disability insurance to cover non-occupational disabilities. This plan covers the risks of sickness, total and permanent physical disability, or death. Both, the employers and employees, are required to make payments to this plan. PR and US unemployment acts provide for a coordinated US/PR Plan designed to provide economic security for employees during temporary periods of unemployment.

There are several statutes, both local and federal, that prohibit discrimination in hiring, promotions, discipline or otherwise treating differently in employment persons on account of age, race, color, national origin, religious or political beliefs or sex, among others. There is also legislation protecting qualified individuals who are disabled veterans, veterans of the Vietnam era, or individuals with disabilities. Sexual harassment is forbidden in the workplace. The law provides for strict liability for the employer for the actions of its agents and supervisors.

Employees employed for an indefinite period and discharged from employment without just cause, as defined in PR Act 80, are entitled to a severance payment based on years of service and the highest salary earned in the last 3 years of employment.

Other US laws such as COBRA, WARN, OSHA, Title VII, ADEA, ADA and IRCA apply to PR.

Intellectual (Industrial) Property

US federal protection, laws and regulations regarding Trademarks, Patents and Copyrights apply to PR. The PR Trademarks Act provides ample protection for the rights of the owners of locally registered trademarks, such as granting the prevailing registrant the right to always recover the costs, fees and expenses of an infringement lawsuit. It also allows the issuance of an ex-parte temporary restraining order to cease and desist of the use of the mark and the seizure of the articles on which the mark was affixed.

The upcoming Swiss Financial Market Regulations – Risks and Opportunities

Articles, Banking and Finance, Corporate/Commercial Law, Latest News

Switzerland is currently in the process of overhauling the existing Swiss financial market regulations in order to implement international standards, to create a level playing field for market participants and to increase the stability of financial market infrastructures and client protection. This summer, the Swiss Federal government took a number of key decisions; important changes will be implemented in early 2016, others in 2017. Generally speaking, the idea was to shift the regulatory structure from specific regulations for each sector (banks, stock exchanges, insurance companies, etc.) to regulations applying to all industry sectors alike under the rule of “same business, same rules”. However, in the process, it became clear that specific rules and laws for collective investment schemes, for insurance companies and for banks will remain in place. Hence, the scope of application of the new acts will overlap with these existing laws. Three new acts are planned: FINFRAG, FIDLEG and FINIG. However, in addition, most of the existing laws will be or have been subject to considerable changes, the most relevant of which are summarized below:

FINFRAG

The new FINFRAG (Financial Market Infrastructure Act) is the first of the new acts that passed parliament; it will become effective on 1st January 2016. Its content is heavily influenced by EMIR and MiFID II. Under the act, new licensing requirements for FMIs (financial market infrastructures) such as trading venues (stock exchanges and multilateral trading facilities), central counterparties, central securities depositories, trade repositories and payment systems will be introduced. However, there will be a number of differences to the regulations in the EU, among which are the following: Self-regulation will continue to play an important role; an operator of an organized trading facility may trade on the platform for its own account; and the transfer of data to foreign authorities is more restricted than under the EU regulations. The act furthermore introduces new standards on derivatives trading which are compatible with foreign regulations, in particular Emir and the US Dodd-Frank Act. Swiss market participants, among others, have to clear derivatives transactions through central counterparties, must report transactions to trade repositories, and must take certain risk-mitigating measures. Again, there will be a number differences to the current EU regulations due to FINFRAG introducing local concepts such as that asset managers that do not manage collective investment schemes and investment advisors will qualify as non-financial counterparties, that group internal transactions are not subject to approval by the authorities (compliance will be monitored by the auditors of the participant) and that it will not be necessary to disclose the beneficial owner under the reporting obligations.

FIDLEG

In June 2015, the Swiss government agreed on key elements of the new Swiss Financial Services Act (FIDLEG) and mandated the Federal administration to draft the so-called message to parliament by the end of 2015. Therefore, it can be expected that parliament will discuss the new act in 2016 and that it may become effective sometime in 2017. The new act introduces a variety of MiFID II standards into the Swiss Financial Market Regulation, in particular with respect to conduct and prospectus requirements. Conduct duties include comprehensive information duties, appropriateness and suitability obligations, rules on inducements, cost transparency and conflicts of interest and the need for client segmentation, among others. The rules differentiate between professional and private clients, with possibilities to opt in or out. The rules may also apply to non-licensed market participants such as investment advisors. Product documentation requirements will be similar to those applicable in the EU. For the first time in Switzerland, FIDLEG intends to introduce regulations on the rendering of cross-border services and product offerings into Switzerland (up to today, this was only regulated and restricted for collective investment schemes and insurances) and such service or product providers will have to register with the Swiss FINMA (Financial Market Supervisory Authority); the same will apply to client advisors of non-prudentially supervised market participants. For the offering of financial products, a prospectus is required which needs to be pre-approved by FINMA in case of a public offering.

FINIG

Timing for the introduction of the Swiss Financial Institutions Act is parallel to the introduction of FIDLEG. FINIG will govern the supervisory and regulatory regime for financial institutions, including financial institutions providing asset management services to third parties. As a rule, independent asset managers were not subject to prudential supervision in Switzerland (unless managing collective investment funds). Under the new act, the Federal Council decided in June 2015 that independent asset managers should become prudentially supervised by a new supervisory organization which will in its turn be authorized and supervised by FINMA. A risk based supervision approach will be taken so that small asset managers will only be subject to a reduced supervisory burden. Certain small asset managers will benefit from a grandfathering clause.

New AML and Due Diligence Convention

Considerable changes were made in 2015 to the existing Anti-Money Laundering Act. New rules regarding bearer shares (increased transparency) became effective as of 1st July 2015. As of 1st January 2016, new rules on predicate offences under the Anti-Money Laundering Act will become effective rendering the qualified tax offence a predicate offence under the act. A qualified tax offence is defined as any tax fraud (in Switzerland or abroad) by which the amount of taxes not paid per tax period exceeds the amount of CHF 300’000.

Furthermore, stricter rules on the identification of the beneficial owner of bank accounts are introduced under the new Swiss Bankers Due Diligence Convention (VSB 16) which will become effective on 1st January 2016. Banks have to identify the beneficial owner of operative companies (defined as a person holding 25 % or more of the voting rights or of the capital or the person exercising factual control over the company by other means). If there no such controlling persons, the managing director of the company has to be determined and will be treated as the person controlling the company.

Automatic Information Exchange and changes to FINMAG

Also in June 2015, the government published the message to parliament for a Federal Act about the Automatic International Information Exchange in Tax Matters. The proposed act implements the global AEOI standard of the OECD. The introduction of the federal act is part of the general strategy of the Swiss government to implement international standards (including with respect to tax transparency) in Switzerland. Under the act, finance companies will collect finance information of their customers domiciled abroad and will transfer such information to the Swiss tax authorities which will forward the information to the foreign tax authority at the customer’s domicile.

The already existing FINMAG (Financial Markets Supervision Act) will also be revised and amendments include new rules for cross-border information flow. FINMA will be entitled to spontaneously exchange information with foreign authorities (no longer limited to supervisory authorities), provided that such information exchange serves the purpose of enforcing financial market regulations and that the foreign authority is bound by official or professional secrecy. As the client may be refused access to the formal request by the foreign authority and as FINMA has the option not to inform the client prior to the delivery of the information, client defense rights against transfer of the information will become more restricted.

Conclusions

Switzerland’s financial market laws are going through a period of dramatic change, which has implications not only for markets participants in Switzerland but also for foreign participants involved in cross-border financial services or transactions. Key issues to be aware of include, among others, the increased cross-border exchange of information, new licensing requirements for FMIs, new rules applicable to derivatives trading, prudential supervision of asset managers, new rules on retrocessions, new rules for clients segmentations, client information and suitability tests and new prospectus requirements. Any participant in the Swiss market needs to review its current business model and evaluate whether and to what extent it needs to be adapted to comply with the comprehensive changes made to the Swiss regulatory architecture.