Doing Business in Europe

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Doing Business in Europe

• Legal rules, and traps for the unwary

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Osborne Clarke

• Pan European Law Firm
• Providing a complete range of legal services
• Technology industry focus
• Recognised as European Technology Law Firm of the
  Year 2001 and 2002 by the European Technology
  Forum
• Office in Palo Alto European legal advice in
  Californian time

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European Law?

• Not quite
• European Treaties, Regulations and Directives are
  in place but.
• Advice is still required on a country by country
  basis

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Do you need a presence in Europe?

• You could use existing channels can be more
  cost effective to employ an agent or distributor
  with local knowledge
• Types of relationship which are dealt with very
  differently from a legal perspective
• Agent - generates leads or enters into agreement
  with customer on behalf of the supplier
• Distributor is an independent party which buys
  your product and sells them on its own account
• Distributor is usually preferred choice as you
  can to a certain extent leave them to it

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Why use an Agent?

• Greater control over them. You also have more
  choice over who they sell to and prices they sell
  at (important in some industries e.g. fashion)
  Unable to impose such controls in distribution
  agreements without falling foul of anti-trust law
• Agents are usually paid less commission

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Agency Agreements

• Key Aspects
• Exclusivity
• Territory
• Term
• Agents authority
• Commission/payment terms
• Consequences of termination

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Commercial Agents Directive

• This governs agreements between suppliers and
  agents across Europe and gives a host of rights
  and protection provisions to agents including
• The right to have a written agreement
• The right to a reasonable commission if nothing
  has been agreed
• The supplier has an obligation to act dutifully
  and in good faith
• Non-compete provisions - only on a geographic
  basis and must be less than 2 years

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Commercial Agents Directive

• Notice periods for termination Must give at
  least one weeks notice per year up to three
  years
• Compensation / indemnity payable to agent in
  event of termination except where the agent is in
  breach dealt with differently across Europe
• Compensation based on actual losses suffered and
  includes loss of future earnings (UK)
• Indemnity usually based on how much the agent has
  been paid over the last few years (Germany)

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Commercial Agents Directive

• Each member state has implemented this
  differently (e.g. in the UK it is only relevant
  to agreements governing the sale of products
  whereas France and Germany extend it to products
  and services)
• Unable to contract out even if agreement is
  subject to Californian law as was shown in Ingman
  GB Ltd v Eaton Leonard Technologies Inc. (Nov
  2000) freedom of establishment and undistorted
  competition

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Distribution Agreements

• No EC Directive governing Distribution agreements
• Many countries in continental Europe have similar
  provisions to those in the Commercial Agents
  Directive
• English law provides very little protection to
  distributors meaning it is possible to terminate
  on short notice with no compensation payable

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Distribution Agreements

• Key aspects
• Exclusivity
• Territory
• Term
• Conditions of supply/delivery
• Order terms and prices
• Local legal requirements
• Defective product liability/warranties
• Confidentiality provisions
• Consequences of termination

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Anti-trust Law

• Applicable to distribution agreements with an
  appreciable effect on trade Look at market
  share
• The Following are seen to be anti-competitive
• Price fixing
• Bid rigging Agreeing tender prices with
  competitors
• Obligations on the distributor not to purchase
  competing brands
• Obligations on the distributor to only supply a
  particular buyer
• Consequences

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Other contractual matters

• Currency and method of payment
• Language
• Insurance Are you covered abroad
• Intellectual Property rights
• Limitation of Liability Clauses local advice is
  essential (e.g. death and personal injury)
• Jurisdiction

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European Establishment

• If a physical location is required registration
  of the business will be necessary
• Subsidiary company - separate legal entity from
  its parent company, but can be fully owned and
  controlled by the parent
• A branch - an extension of the US parent, but
  which conducts business in the UK in the name of
  the US parent

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Factors to consider Subsidiary vs. Branch

• Control
• Liability issues
• Practicalities
• Privacy law issues
• Tax
• Formalities of Establishment
• Start-up Costs and Speed
• On-going obligations
• Labor Law

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Control

• Subsidiary
• This is a separate entity controlled by its
  board of directors, but US parent dictates all
  board appointments
• Branch
• This is an extension of the US company and is
  therefore directly controlled by the US parent
  company

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Liability Issues

• Subsidiary
• Shareholders (i.e US Parent) not generally
  liable for acts of the subsidiary company
• Liability is limited to the share capital of the
  subsidiary Product liability is a different
  regime
• Directors or other company officers may be
  personally liable in certain circumstances (e.g.
  fraudulent or wrongful trading)
• Branch
• The directors of the US parent are responsible
  for ensuring local law compliance

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Practicalities

• A subsidiary is regarded as indicative of a more
  substantial presence and this will assist with
• Getting a bank account
• Obtaining a lease
• Entering into commercial agreements

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Privacy Issues 1

• Data Protection Directive has been implemented by
  all EU member states
• It introduced 8 fundamental principles dealing
  with how personal data is collected processed and
  transferred from one party to another
• It provides the individuals concerned certain
  rights

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Privacy Issues 2

• Restrictions on transfer of personal data outside
  the EEA
• To comply with European legislation, if a US
  company wishes to transfer personal data to the
  US from Europe it may only do so
• If the data subjects have consented or
• If the company receiving the personal data is
  Safe Harbour Certified (approx 550 US companies
  are certified) or
• If there is a contract in place that ensure that
  the company receiving the personal data has
  adequate protection in place.

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TAX

• No one tax law relevant across Europe
• Relevant to both branches and subsidiaries. A
  business is subject to tax if it has a permanent
  establishment in that country
• The US and EU member states have entered into
  double taxation treaties to ensure that companies
  are not taxed in full both in the US and the
  European countries in which they trade.

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Corporation Tax Issues

• Branch Vs Subsidiary
• A subsidiary is charged on the world-wide profit
  of the subsidiary company
• A branch is taxed only on those profits which
  arise in that country
• Start up costs usually can be carried forward and
  set-off against future profits both with a branch
  and a subsidiary. Branches can benefit from
  double tax relief by setting its loses against
  worldwide profits of the parent

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Sales Tax

• Different sales tax laws across Europe
• In UK
• In UK Value Added Tax is charged on all supplies
  of goods and services
• Registration with UK Customs Excise when UK
  turnover reaches or is likely to reach the VAT
  registration threshold (currently 58,000)
• Quarterly returns thereafter
• Similar provisions across EU

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Formalities Subsidiary

• "Off the shelf" or form your own
• Corporate name registration
• Registered address
• Share Capital requirements In Denmark -
  125,000DKK, In France - 0 - 37,000 depending on
  the type of company you incorporate, In UK - 1
• How you do business and shareholders rights (UK -
  Memorandum and Articles of Association)
• Appointment of directors and secretary

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Formalities Branch

• Statutory registration forms
• Copy of parent company constitutional documents,
  latest set of audited accounts, and other
  domestic filings, registration fee
• A separate branch registration is required for
  each and every branch within a country that has a
  separate management structure and separate
  reporting lines back to the US.

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Legal start-up costs/timing

• Subsidiary
• Approximately 750 for basic company formation
• Can be achieved in 24 hours
• Branch
• In the range of 750 - 1000 depending on the
  availability of registration information
• Usually takes about a week

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On-going obligations/costs

• Subsidiary
• Approx 1000 p.a.for legal/registration
• Ongoing filing obligations including annual
  accounts and annual returns
• Additional accounting costs
• Branch
• Ongoing filing obligations partly dependent upon
  filing obligations of country of parent
  obligations
• Legal costs approx 500 p.a

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Maturity/Substance

• Annual costs for a subsidiary are likely to be
  more than a branch, BUT
• Costs of changing a branch into a subsidiary far
  outweigh the higher cost of having formed a
  subsidiary from the outset

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Labor law issues 1

• Work permits for non-European nationals
• European labor laws are applicable to employees
  residing and working in the a member state
  regardless of whether (1) they are employees of
  a European subsidiary or a branch of a US parent
  or (2) they are European nationals or
  non-European nationals
• Beware There are a host of consequences

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Labor law issues 2

• Employees working in Europe have a variety rights
  varies from country to country
• Working Time Directive (Max hours spent working
  during any week (Germany, Finland, Spain 40
  hours per week. Ireland 48 hours per week)
• Holiday 31 days in Germany, 29 days in Ireland,
  30 days in Spain, 20 days in UK
• Anti-discrimination laws (similar to those in the
  US)
• Notice In UK - 1 weeks notice for each year of
  service (up to 12 weeks minimum after 12 or more
  years)
• Unfair dismissal claims (In UK right not to be
  unfairly dismissed arises after 1 year. Max
  compensation payment 61,300)

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Consultants a way out of Labor law obligations ?

• Genuine independent 'consultants' do not acquire
  employment rights but ..
• In certain circumstances what may have been
  intended to have been an independent consultant
  will be treated as an employee
• Income tax company's obligation to pay tax at
  source
• Intellectual Property ownership

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Employee or Consultant some Do's and Don'ts

• No single test courts look at the overall
  situation. If you want a consultant
  relationship, then
• DO
• Make clear that any office space provided is
  temporary accommodation
• Address correspondence to the consultant to his
  Company, not the individual
• Ensure that the consultant' records "fees" in
  the Company books, not "salary"

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Employee or Consultant some Do's and Don'ts

• DON'T
• Allow paid holiday or paid medical absence
• Include the consultant in any internal
  documentation such as a telephone lists etc
• Issue instructions regarding the work undertaken
  by the Consultant
• Prevent the Consultant from accepting work from
  other sources

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More Questions ?

• Andrew Gowansandrew.gowans_at_osborneclarke.com(650
  ) 462 4020
• Rupert Vernallsrupert.vernalls_at_osborneclarke.com
  [phone]