United States
Expansion of Non-US Companies to the US: The US is a fairly business-friendly market with low barriers to entry; however, certain types of businesses may be highly regulated by federal and state entities. Companies expanding to the US will often reincorporate by forming a US holding company and having the non-US company become a subsidiary of the US holding company (known as a “Delaware flip”). This structure allows non-US companies to be more attractive to US investors but can create uncertainty for non-US investors. As a US company, the entity may be subject to certain restrictions prohibiting investment of investors from certain sanctioned countries and in certain industries. US investors may also request that the IP be held by the holding company.
The data privacy landscape Is evolving in the US. Certain US states have passed laws that make privacy laws more restrictive, similar to European and Canadian privacy protections.
Additionally, the US is known for being protective of intellectual property rights, primarily through formal contractual protections and/or licensing as well as filing (and enforcing) registrable IP rights. While employment in the US is generally “at will”, state laws govern the relationships between employees and employers.
Expansion of US Companies Overseas: US businesses are global leaders when expanding their domestic operations overseas. Investors often have experience in growing revenues outside the US, and many serial entrepreneurs will have had positive experience with significant international customer acquisition. However IP is key, and most investors will insist that IP is retained onshore and transferred to the US parent company if created in another jurisdiction.
Europe
Formal legal processes: One of the differences that companies face when expanding to Europe is the formalities present in some countries, like the role of notaries and the requirement to file certain documents with a commercial registry to make them enforceable. Likewise, a Power of Attorney is mandatory to prove capacity, as it is not valid to sign a document under a premise of apparent authority.
Liability of directors: Since the 2008 financial crisis, the European Commission has introduced a series of recommendations intended to harmonize and improve corporate governance regimes across Europe, based on the “comply or explain” principle. Board members in Europe are subject to increased scrutiny by regulators.
Sanction regimes: Sanctions may be applied differently in the EU than in the US in ways that could potentially be used to structure a business model to enter into new markets without violating any sanction regimes. For example, a European parent holding company and European subsidiaries may be able to do business in Cuba while US subsidiaries cannot.
Foreign direct investment regulation: The EU’s Foreign Direct Investment (FDI) Regulation, in effect since October 2020, establishes common criteria to identify risks relating to the acquisition or control by foreign investors of strategic assets.
Antitrust: Analysis can be conducted by national authorities, EU authorities, or both.
Hiring and firing in the EU: One of the biggest conceptual differences for companies expanding overseas is the unique US employment at-will doctrine—which does not exist in European employment law. In some countries, termination without a legally valid reason may be null and void, and it may result in large severance and damage awards for unfair dismissal.
In Europe, there are also laws that relate to a wide variety of employee benefits, including caps on hours worked and allowances for vacation, holidays, sick leave, parental leave, and more.
M&A transactions: A prior consultation with labor unions or work councils might be mandatory in some countries before completing an M&A deal.
India
FDI approval routes: The pivotal aspects for consideration when it comes to expanding your business into the Indian subcontinent are the sector-specific regulations and entry routes for receiving investments into India. Foreign investments in India can be made through one of two means: the automatic route or the government approval route. While most investments fall under the automatic approval route, some may entail prior approval of the Government of India.
Competition law guidelines: In addition to the structuring of a deal, investors must be aware of the compliance framework prevailing in India. Investments that are over certain limits prescribed in respect of turnover, existing asset value, or the criterion of deal value are subject to the regulatory scrutiny of the competition watchdog of the country, the Competition Commission of India (CCI).
Choice of entity: It is important to determine the nature of the entity to be established in India for the purpose of carrying out business objectives. Subject always to the guidelines prescribed by the Reserve Bank of India, foreign companies can operate through a subsidiary, branch office, liaison office, project office, or representative office.
Industrial policies: The Indian government has established foreign trade zones such as Special Economic Zones and Software Technology Parks (STPs) to incentivize foreign investments, improve the ease of doing business, and reduce the tax burdens on businesses operating in these zones.
Nature of funding: Indian companies can issue equity shares; fully, compulsorily, and mandatorily convertible debentures; and fully, compulsorily, and mandatorily convertible preference shares subject to pricing guidelines/valuation norms prescribed under FEMA regulations.
Repatriation of funds: Profits from an Indian entity can be repatriated abroad by various means, such as dividends, buyback of shares, reduction of share capital, use towards fees for technical services, consultancy services/business support services, or royalty.
Statutory dues, licenses, and registrations: Other than the aforementioned approvals from the Reserve Bank of India and the CCI, investors in India should also be acquainted with the nuances of the statutory payment such as taxes, levies, and stamp duties.
Hiring of employees and labor law compliance: Foreign companies intending to venture into India must also consider the plethora of labor laws in India. In the absence of a subsidiary, project office, liaison office, or branch office, it is not legally permissible for a foreign entity to directly hire Indian resident employees for running their business operations in India. In such a case, the Indian resident employees can only be hired through an appropriate agency (Professional Employer Organization (PEO) or Employer of Record (EOR)).
Taxation: A company is said to be a resident in India—and therefore, taxable—in any previous financial year if such company has its place of effective management in India.
Choice of law: Choice of governing law and dispute resolution mechanism is of vital importance for cross-border investments and M&A. In India, arbitration is increasingly preferred over traditional dispute resolution through courts due to delays and time consumption in resolving disputes through the court system.
Chile
Taxes and structuring: Chile has undergone several tax reforms in the past fifteen years and is currently discussing the need for a new tax reform. The Chilean tax system is applied on a national level and generally does not have special regimes for different industries.
Intellectual property: IP is a constitutional right in Chile, for both industrial property rights (trademarks, patents, trade secrets) and copyrights. This type of ownership of rights is protected with the same force as regular property under Chile’s constitution.
Hiring of employees and labor law compliance: Foreign entities planning to hire employees in Chile need to consider that the country has a strong range of regulations set out on the Constitution, the Labor Code, and different minor legislation regulating the country’s social security system. Additionally, the protection of employees’ rights has been considered a key principle for employment courts, which decide cases with a pro-employee criterion.
Chile is not an employment at-will country, so employers are required to invoke legal grounds for terminations even in redundancies.
Foreign entities are allowed to hire employees in Chile, provided they designate a local legal representative and address or set up a subsidiary.
Finally, local regulations consider a strong protection of fundamental employment rights, which are a set of constitutional rights protected in the context of employment such as the rights to life, to work, and not to be discriminated against. Litigation related to such rights can allow employees to claim their reinstatement on serious discrimination claims and can involve additional penalties and restriction on the company’s participation in biddings with public entities for a two-year period.
Regulatory considerations: Finally, Chile has been a very stable country for the last thirty years. It is now in the process of drafting a new constitution, which likely will end up granting more rights to the Chilean population. Its regulation is sophisticated and provides a number of areas that need to be understood by investors and their portfolio companies who are targeting consumers or who profit from the collection and exploitation of personal data. Chile supports innovation through its regulations and encourages international investment in its forward-looking and established economy.
Renewable energy has become a significant industry since recent governments issued regulations toward promoting foreign investment in this area. Solar and wind projects have been active during recent years, receiving significant amounts of investment from abroad. Now, green hydrogen has triggered interest, since experts consider Chile to have the best conditions for these types of projects.
Conclusion
Opportunities for overseas growth are huge, but navigating the local issues needs to be prioritized. Doing it right is far more likely to lead to a successful market entry and greater profits, ensuring the return on investment for the investor is maximized and keeping everyone happy!
This discussion is a general, high-level summary and not an exhaustive checklist or legal advice. Obtaining local counsel is vital, and adequate time and resources should be allocated to any international expansion project.
This is an excerpt from the American Bar Association’s Business Law Today. It is also related to a CLE program titled “What Legal Issues Should Investors Ask Their Portfolio Companies to Prioritize When Growing Overseas?” from the ABA Business Law Section’s 2023 Fall Meeting. To learn more about this topic, listen to a recording of the program, free for members.
