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Global Expansion Checklist for Legal Compliance

Global Expansion Checklist for Legal Compliance

Going global offers many benefits, yet also comes with its share of business challenges: managing cash flow, securing the appropriate talent and establishing core business operations, just to name three. Yet another consideration exists that's just as critical—especially since it often presents unforeseen issues: Compliance.

Failing to remain legally compliant can trigger a cascade of serious consequences for businesses, including reputational harm, financial sanctions, personal liability and administrative dissolution. To prevent such outcomes, it helps to plan ahead and address some of the more common compliance traps that can snare companies expanding into new territories.

When it comes to global operations, one size will never fit all. With that in mind, let's review some key legal compliance challenges companies face in entering global markets.

Due Diligence Searches

International growth typically has far-reaching implications on the company expanding. Whether the company is only engaged in cross border e-commerce or opening offices around the world, it will need to comply with the laws of all the countries of operation. As such, businesses should make an effort to understand and anticipate the precise scope of the impact.

Global expansion is not only about doing a market segmentation analysis to see if the products or services will sell successfully in another country. It also often means integrating new acquisitions within a portfolio. In order to make these integrations as seamless as possible (and mitigate any looming problems) businesses should endeavor to fully understand these new entities.

Companies that deal with foreign debtors and filings should be cognizant of different jurisdictional requirements, all of which must be appropriately reconciled. Local nuances are key. Differences in business culture, and local laws and regulations, require a deft touch and special consideration when pursuing a transaction.

Common problems in this area include varying contractual nomenclature and extended turnaround times tied to prevailing local standards. For more information on this issue please see Performing Lien and Court Searches Outside the U.S.

Understanding and fulfilling all of the requirements in each country—which often involve dealing with different languages, time zone and currencies—can drain the internal resources and expertise of a business of any size and it gets more complex if the company is interested in doing alliances or partnerships with local businesses.

Entity Compliance

Creation of any new entity – whether an LLC, a corporation or other type or entity - requires proper registration within its jurisdiction. Such new entities must be governed according to local laws and regulations.

Compliance obligations don't end with a successful business formation. There are ongoing issues that must be addressed. One example: The jurisdictional equivalent of standard U.S. annual reports and other filings. Depending on the country, a company’s obligation may include registering for VAT and filing annual financial statements or corporate income tax returns.

In any case, documents will need to be produced in a timely fashion and adhere to local requirements. Businesses must bear in mind that the type of entity selected and created will have a different impact in the company’s tax compliance matters.

Entity compliance is not limited to external governance and management requirements. Businesses are also exposed to internal control risks linked to their subsidiaries around the world.

Corporate Governance Requirements

Businesses need to understand jurisdictional requirements for corporate governance, while also creating a plan for the effective management of governance functions.

Businesses also need to ascertain whether it's necessary to maintain a local corporate presence. If so, does that take the form of a full subsidiary, or would a branch office or representative office suffice? Business leaders also need to understand the timeline under which all this must occur.

Director requirements for new entities should also be explored. Does the jurisdiction require local representation? This also extends to local agent and resident requirements. If foreign directors are seated, businesses need to have a process in place to ensure they remain fully compliant with all relevant laws and regulations.

External requirements are not the only requirements. Businesses are responsible for advising their board, committees and senior management about all corporate governance matters and of providing secure access to the corporate records to also support internal business needs. This means that essential paperwork like Articles of Incorporations, stock certificates, bylaws and meeting minutes, for example, must be safely kept and accessible for people in different departments to review or edit.

Finally, businesses should determine whether jurisdictional rules require local shareholder meetings.

Ensuring Legal Compliance

Nations vary widely in terms of litigiousness, so expanding businesses need to prioritize the creation of vigorous legal processes in order to mitigate commercial risk. Additionally, legal requirements often differ significantly between countries. Some have relatively strict documentation standards necessitating that all legal documents be in place prior to operation.

Taking active measures to ensure compliance may require more time and money up front, but these expenditures are easily offset by the mitigation of risks and liabilities further downstream.

Expanding businesses might also consider ESG (environmental, social and governance) integrations. Sustainable finance is now considered a core aspect of fiduciary duty in many key markets, including the European Union.

This view is supported by recent policy changes. In 2018, an ESG proposal emphasizing greater transparency and duties for corporations was released by the European Commission. By better understanding ESG factors—and incorporating these factors into the risk identification and management process—compliance personnel can protect their firms and their end customers, while also adding value by supporting prudent business decisions.

Understanding Regulatory Issues

License, tax and permit requirements will vary between countries, even down to the local level. It's also essential to discover whether any specialized licenses are necessary. Another important element to consider is the workforce. Before starting operations, businesses must understand the local labor laws and norms. For example, to operate in multiple countries, a business might need to prepare customized contracts for the employees in different locations, comply with different employee data protection standards, and implement different procedures and policies for employee onboarding, management and termination.

Companies should ascertain if export licenses are needed to ship products and technology outside of U.S. borders. By the same token, they should look into whether import licenses are required in order for the shipped products or technology to be received from outside entities. Because timelines vary by jurisdiction, businesses should establish a process for researching regulatory requirements and the local turnaround time for various licenses and permits.

Local anti-bribery and corruption rules—and compliance with the U.S. Foreign Corrupt Practices Act and its international equivalents—should also be considered.

The Importance of Registered Agents

As most corporate owners, officers, and lawyers know corporations formed in the United States are required to have a Registered Agent in the state where they incorporate. That’s an agent authorized by the corporation to receive service of process and other court documents and official notices on its behalf. The Registered Agent must have a physical location in the state. That location is often referred to as a registered office.

But what about corporations formed outside of the U.S.? Or U.S. corporations that want to transact business in countries or territories outside of the U.S.? Do the laws of foreign jurisdictions have a similar requirement to appoint an agent to receive documents and other notices or communications on behalf of their corporations?

It's important to consider the role of a Registered Agent (or its equivalent) when pursuing global growth opportunities. Awareness of any international regulatory or legal notification, whether issued or pending, is critical for businesses. For example, what is the process for responding to local legal documents (service of process, summonses, writs) and communications dealing with tax and compliance issues? Communication in this context is important, and a Registered Agent (or its equivalent) can help ensure timely and accurate receipt and exchange of information.

Why Planning Early Is Critical

For any kind of business, going global is a significant undertaking that will potentially disrupt existing business activities. The process should not be rushed - global expansion often begins with preparing at least months before taking steps toward establishing a physical presence.

Companies should prioritize the rigorous examination of the cultural, political and legal environment of each potential jurisdiction. It's essential to pay attention to business factors (competitive forces, local markets, local workers) while performing this analysis, both from a launch and a future growth perspective.

Understanding the key local factors and nuances that could impact the organization's operations, business leaders can avoid legal, financial and reputational risks and help pave the way for a successful entry into new markets.

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