1. Acquiring and Investing in U.S. Businesses Legal Considerations September 19, 2012 Patrick J. Dalton pdalton@harrisbeach.com 99 Garnsey Road Pittsford, New York 14534 (585) 419-8607 www.harrisbeach.com

2. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations General Overview  The nature of business structures in the US is left to the 50 states  The primary business structures, which are similar in title and operation to similarly-named businesses in Canada, and which are more or less uniform throughout the states are sole proprietorships, partnerships, corporations, limited liability companies and branches  Businesses may also be commenced through a merger, acquisition or joint venture  Choice of the business entity is an important consideration  Tax considerations  Flexibility regarding operations 2

3. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Sole Proprietorships  A single individual owns and operates the business  The proprietor is personally responsible for all liabilities of the business, is entitled to all the income from it and pays individual income taxes on that income  There are no governmental fees to establish a proprietorship 3

4. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Partnerships  A partnership is an association of individuals or other entities to operate a business  While not required, most partnerships operate under a written partnership agreement that describes the responsibilities and benefits to each partner  Partnerships operate under State Law  The partners of a general partnership are responsible for the actions of the partnership and are taxed individually on the income of the Partnership 4

5. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Partnerships (continued)  Although there are usually no stated costs to establish a partnership (there may be filing and publication fees associated with a limited partnership), legal counsel should be consulted regarding preparation of a partnership agreement and the necessity to register the partnership with state or local authorities.  Most states permit a special arrangement called “Limited Partnerships” – in these partnerships, limited partners do not have personal responsibility for the debts and obligations of the partnership. There must, however, be at least one General Partner who is not protected by limited liability.  Securities Law analysis 5

6. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Corporations  The incorporated business is a distinct entity from its owners, the “stockholders” or “shareholders,” who are not personally liable for the debts and actions of the corporation  This is the most formal means of conducting business and is preferred by foreign companies doing business in the US because of US tax law and insulation from legal claims  Corporations, which are “incorporated” under state law by filing a Certificate or Articles of Incorporation with the proper state agency, can exist perpetually 6

7. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Corporations (continued)  Corporations operate under the general direction of a Board of Directors, which establishes the policies under which the officers conduct daily corporate business  There are no restrictions on ownership of corporations. A US corporation may be a subsidiary that is wholly-owned by foreign persons or a foreign company and there is no citizenship or residency limitation on directors or management  Except for certain regulated industries, there are few minimum capital requirements and a corporation may have only one shareholder 7

8. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Corporations (continued)  Unless the corporation is a “public company,” it is customary to have a shareholders agreement governing the relationship among the shareholders, much like a partnership agreement  Each state has an established fee schedule for the incorporation of a corporation  Accounting records should be formalized  There are no statutory audit requirements unless the corporation’s stock is publicly traded 8

9. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Limited Liability Companies (continued)  The limited liability company (often called an “LLC”) is a relatively newer form of entity that provides limited liability for owners (called “members”), like that of a traditional corporation, but provides significantly more structural flexibility  As is the case in partnerships, LLCs do not pay taxes and the tax consequences flow through to the owners, or members, unless the LLC elects to be taxed as a corporation 9

10. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Limited Liability Companies (continued)  LLCs are formed by filing organizational documents with the appropriate state  Operating Agreements or LLC Agreements define the rights and powers of the LLCs members and designate the management of the LLC – these documents are the equivalent of a partnership agreement, corporate bylaws or shareholder agreements  Very flexible because the state LLC laws that are most popular contain “default” provisions (i.e., the members will act as set forth in the statute unless the Operating Agreement provides otherwise) 10

11. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Branches  A foreign company may operate a branch, perhaps a simple sales office, in any state  The company would be subject to state laws and would have to be registered as a “foreign corporation” in most states, subject to the usual corporate laws and state and federal income taxes  As a branch operation, the liabilities of the branch are the responsibility of the corporate owner  For reasons associated with liability exposure, as well as adverse tax consequences, branches have become unpopular 11

12. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Joint Ventures  A foreign company may form a joint venture with a company in the U.S. for a specific purpose for a particular length of time  The joint venture may be operated as a partnership, limited partnership, corporation or LLC and will be taxed accordingly  A Joint Venture Agreement should clearly describe the relationship between the parties and their respective responsibilities and should provide especially detailed provisions on the resolution of disputes  Management Structure  Allocation of Taxable Income  Distribution of Cash Flow  Exit Strategy 12

13. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Mergers and Acquisitions  A foreign company may want to conduct business in the U.S. by acquiring or merging with an existing business (the target company)  An acquisition is typically accomplished by: buying the target’s stock for cash or by giving acquiring company securities in exchange; acquiring the target’s assets for cash or for the acquiring company’s securities; or merging the target with another company owned by the foreign investor  States have specific rules regulating mergers and other take-overs  The use of stock (or other securities) in these transactions bring the federal and state securities laws into play and could require approval by the Securities and Exchange Commission or state securities regulators 13

14. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Mergers and Acquisitions (continued)  Certain larger mergers and acquisitions (including the formation of joint ventures) are required to file “pre-merger” notifications and observe waiting periods  The Committee on Foreign Investment in the United States (CFIUS) has the power to review and possibly prohibit a merger or acquisition if the transaction might pose a threat to national security  Done by way of Voluntary Filing  Taken on greater importance since 9/11  Terms and Conditions of Definitive Agreements  Allocation of Risk  Representation and Warranties  Covenants  Indemnification Provisions 14

15. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Legal Risk Management for US Operations  First, establish a legal risk management plan, which will almost always call for the creation of a separate subsidiary (a corporation or LLC for the reasons previously discussed)  Address immigration issues at an early stage  TN Visa (NAFTA)  H-1B (Specialty Application)  L-1A (IntraCompany Transferee – Executives and Managers)  L-1B  Blanket L Petition  E Visas (Treaty-Traders and Investors)  Evaluate measures to Insulate the Parent from the U.S. legal system 15

16. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Legal Risk Management for US Operations (continued)  Take measures to maintain the distinction between parent and subsidiary  Due Diligence – Extremely important  Risk is fine if the risk is understood  Be sensitive to commercial practices, including the contract forms for transactions between the parent and the US subsidiary and limit liability through the inclusion of appropriate liability disclaimers in agreements with third parties  Liability insurance is another high priority item – US-based insurance companies provide commercial or comprehensive general liability policies that provide surprisingly broad coverage for liability arising from commercial activities 16

17. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Legal Risk Management (continued)  Be sensitive to the protection of intellectual property – trade secrets; trademarks and related rights, such as trade dress; copyrights and patents – develop a plan for protection of those assets in the US  Liability in employment matters has become of increasing concern for US based businesses. The parent and subsidiary should consider employment strategies in the US at an early stage – clearly articulated employment policies and procedures are becoming increasingly important to avoid liability  Some states allow for “at will” employment 17

18. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Legal Risk Management (continued)  Tax Law issues – issues like permanent establishments and transfer pricing require careful advance planning  Regulatory issues – any foreign parent planning to do business in the US is well advised to conduct a survey of the regulatory landscape surrounding the proposed business. The regulatory environment will vary from industry to industry, but don’t let the applicable regulations come as a surprise – for example, the US has a fairly complex export control regime that often comes as a surprise to foreign companies establishing software subsidiaries in the US 18

19. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 Legal Considerations Conclusion: The US markets provide a tremendous opportunity for a foreign parent desiring to invest or acquire a business in the US. To secure these advantages and avoid fatal missteps, it is important to become familiar with the legal issues that will arise in connection with operations in the US and to implement a risk management plan at an early stage. 19

20. Patrick J. Dalton, Esq. (585) 419-8607 © Harris Beach PLLC, 2012 THANK YOU 20