1. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. In-House Counsel Summit Export & Import Considerations and Successor Liability October 24, 2013 Adrienne Braumiller, Partner Michelle Schulz, Partner www.BraumillerSchulz.com

2. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Agenda Definition and Introduction Hypothetical transaction #1 Export controls Basic compliance issues Successor liability in an export situation Due diligence and disclosure Hypothetical transaction #2 2

3. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Agenda (cont’d) Customs & import controls Basic compliance issues Successor liability in an import situation Due diligence and disclosure Takeaways 3

4. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Definition and Introduction Successor liability means the potential liability of the acquiring company for violations committed by the acquired company. Typically triggered via a merger or acquisition. –Certain exceptions where an asset sale could generate the same successor liability as a merger or acquisition.  i.e., a de facto merger or a continuation of the business. 4

5. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Definition and Introduction (cont’d) Successor liability (cont’d): Not codified in customs and export laws. Authority extrapolated from federal court or common law, and from rules of constitutional construction. 5

6. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Definition and Introduction (cont’d) Liability includes: Audits Investigations Disclosures Liquidated damages Penalties Additional duties, taxes, fees. 6

7. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Introduction (cont’d) Seminal Cases: Export: –Sigma-Aldrich, 2002 –Hughes Electronics/Hughes Aircraft and Boeing, 2003 –Meggitt USA Inc., 2013 Import: –Shields Rubber Co., 1989 –Ataka America, 1993 7

8. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Hypothetical Transaction #1 Giant Corporation (Giant) is in the process of acquiring Little Corporation (Little). Little sells in the domestic market and for export. Little’s products and technology are subject to U.S. export controls. 8

9. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Hypothetical Transaction #1 (cont’d) After acquisition, Little will be merged into Giant as an operating division. Does Giant have any concerns? What should Giant do to mitigate those concerns? 9

10. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Export Controls More than 20 different U.S. Government agencies have regulations controlling exports. The primary agencies are: Directorate of Defense Trade Controls (DDTC) of the Department of State; and Bureau of Industry & Security (BIS) in the Department of Commerce. 10

11. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Export Controls (cont’d) DDTC administers the International Traffic in Arms Regulations (ITAR) in 22 CFR 120-130 governing export of defense articles and technical data. BIS administers the Export Administration Regulations (EAR) in 15 CFR 730-774, governing export of commercial and dual-use articles and technology. Both agencies have a strict policy of enforcement. Both agencies also have procedures for voluntary disclosures. 11

12. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Basic Compliance Issues Some situations that can result in export compliance liability. For example: Failure to obtain and use appropriate export licenses, Failure to properly declare export transactions, Incorrect license jurisdiction, Deemed exports – foreign national employees, visitors, contractors, and Failure to maintain records And of course, intentional or fraudulent conduct. 12

13. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Successor Liability In An Export Situation The basic rule: By acquiring the company, you are acquiring their export compliance liabilities. If the acquired company is found to have export compliance liabilities, the acquiring company will be held responsible for them. This can occur after the acquisition is complete. This rule has been upheld in the courts. 13

14. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Successor Liability In An Export Situation (cont’d) The basic strategy: Check everything out prior to acquisition and voluntarily disclose any compliance issues. Sometimes disclosure does not occur until after closing. 14

15. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Due Diligence and Disclosure Examples of due diligence that should be performed: Export policies, procedures and internal structure Review past 5 years of export records and licenses Obtain a report from Census containing export data Export violations, disclosures penalties Export compliance training given and received Anything discovered needs to be disclosed. 15

16. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Hypothetical Transaction #2 Acme Corporation (Acme) is acquiring ABC Company (ABC), a U.S. importer and distributor. ABC has been importing for several years and takes advantage of free trade agreements. 16

17. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Hypothetical Transaction #2 (cont’d) After acquisition, ABC’s business and assets will be incorporated into Acme, and ABC itself will be dissolved. Does Acme have any concerns? What should Acme do to mitigate those concerns? 17

18. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Customs & Import Controls US Customs & Border Protection (CBP) enforces the Tariff Act of 1930 (Title 19 USC), the Customs Regulations (19 CFR), and the Harmonized Tariff Schedule of the US. CBP has broad authority to examine goods, review transactions, conduct audits, and investigate violations. CBP can also assess penalties and liquidated damages for violation. 18

19. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Basic Compliance Issues Some import and Customs compliance issues: Undeclared assists, Tariff classification errors, Use of free trade agreements, Dumping and countervailing duties, Use of duty free exemptions, and Recordkeeping errors. And of course, deliberate or fraudulent activity. 19

20. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Successor Liability In An Import Situation If the acquiring company maintains the acquired company as a separately incorporated subsidiary, the liability remains with the subsidiary. If the acquired company is merged into the acquiring company and is dissolved as a separate corporation, the liability is typically dissolved - but there are exceptions. There are many other things that may need to be done or fixed – but that is another discussion. 20

21. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Latest Update! Decision of the U.S. Court of International Trade (USCIT) in United States v. Adaptive Microsystems LLC, Slip Op. 13-50, Apr. 10, 2013 Adaptive Microsystems’ predecessor company had alleged Customs violations. 21

22. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Latest Update! (cont’d) Adaptive Microsystems went into receivership, then was acquired. New company also named Adaptive Microsystems. A corporate officer of new company was also officer of predecessor company. A substantial number of employees were transferred to new company. A Wisconsin court had authorized the acquisition and said that the new company would not assume any of the predecessor’s liabilities. 22

23. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Latest Update! (cont’d) The USCIT did not agree with the Wisconsin court: The USCIT cited Wisconsin law on continuation of liability and that the court may not have been aware of the Customs liability. The USCIT cited the continuation of officer and employees, the use of a very similar name, and Adaptive Microsystems’ own representations that it was the same company. 23

24. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Latest Update! (cont’d) Based on this, the new Adaptive Microsystems was responsible for the liabilities of the predecessor company. This ruling may be subject to appeal to the Court of Appeals for the Federal Circuit, so may be subject to change. 24

25. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Due Diligence and Disclosure Import and Customs compliance things to check in an acquisition: Compliance policies and procedures ITRAC report covering 5 years of imports Use of free trade agreements and duty free exemptions Last 5 years of import records – if they exist 25

26. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Due Diligence and Disclosure (cont’d) Import and Customs compliance things to check in an acquisition (cont’d) : Tariff classification database Purchasing records for assists and separate payments Products subject to dumping and countervailing duty 26

27. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Due Diligence and Disclosure (cont’d) File a prior disclosure for any issues discovered. 27

28. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Takeaways This is a subject frequently overlooked in an acquisition but may be dangerous. The regulating agencies may be vigilant in enforcement, but also have generous prior disclosure procedures. Find and fix the problems before the acquisition is final. Due diligence and voluntary disclosures will help to prevent successor liability issues. Get expert assistance if you don’t have it in-house. 28

29. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Questions 29

30. © 2013 Braumiller Schulz PLLC Any copying or distribution is prohibited. Contact Information 30 Adrienne Braumiller Partner Michelle Schulz Partner Braumiller Schulz LLP International Trade Law 5220 Spring Valley Rd Suite 200 Dallas, TX 75254 214-348-9306 Adrienne@BraumillerSchulz.com Michelle@BraumillerSchulz.com www.BraumillerSchulz.com