1、Chapter 17 Subsidiaries,Mergers,Acquisitions and Regulations in Foreign Countries 1.Forming a Foreign Subsidiary 2.International Mergers and Acquisitions 3.International Corporate Regulations 4.ChinasOverseas Investment Policies 目录目录Forming a Foreign Subsidiary 01A.Why Incorporating Internationally
2、1Step OneAs the economy develops more globally,more often a company may decide to form a new foreign subsidiary or office,or to acquire or to merge with an existing company with foreign presence.The target company may be a foreign business enterprise,or it may be a domestic company that owns foreign
3、 subsidiaries.Foreign investment takes a wide variety of forms but raises multifaceted legal issues whatever form it takes.A company decides to incorporate internationally,the main reasons are as follows:A-1.Reducing Transaction Cost 01An investor may wish to establish a presence in a foreign countr
4、y,called a host state.for reducing transaction cost.Suppose a Chinese manufacturer of gadgets has several buyers throughout a foreign region,such as Europe,that periodically place orders for unpredictable quantities of gadgets for delivery on short notice.The Chinese manufacturer may find that the m
5、ost reliable and efficient means of supplying its customers is to purchase or lease a customs warehouse in Europe(we will use Italy as an example)for storage and quick de-livery of its products to its European customers.The warehouse is simply property owned or leased by the Chinese company but subj
6、ect to Italian law.If the Chinese company has ongoing business with European customers,it may find it convenient to have a local branch office in Italy to promote sales and handle customer service.A branch office is an extension of a business into a new jurisdiction through a physical location such
7、as leased rooms or floors in a commercial property.It is not a legal person separate from the company that owns it;it is merely an operational unit of the company.It is important to be aware that,whatever the form of the foreign investment,the investor must comply with the host states laws regulatin
8、g both foreign investment and the establishment of business organizations.A-2.Administrative Convenience 02For some companies,establishing a separate legal entity facilitates and simplifies the administration of the organizations business.Directors and executive officers of the parent company need n
9、ot maintain careful scrutiny of and control over the daily operations of the foreign part of the business because this responsibility is delegated to the executive officers of the subsidiary itself.As the company expands multinationally,the task of centrally monitoring business activities in an ever
10、 increasing number of foreign jurisdictions becomes progressively more burdensome.Incorporating foreign subsidiaries helps the parent company to decentralize administration accordingly.A-3.Limitation of Liability Excepteur sint occaecat cupidatat non proident03Because a subsidiary is a separate lega
11、l person,it may be possible to limit liabilities incurred by a foreign subsidiary to the amount of the foreign investment.In other words,if a foreign subsidiary incurs any sort of debt,whether arising by commercial loan,tort action,criminal penalty,or tax liability,the investors exposure to liabilit
12、y may be limited to the amount of the foreign investment put into the subsidiary and no more.Of course,the question of liability is governed by the law of the host state,but most states provide in their law for a form of business entity,the liability of which is limited to the entitys own assets.A-4
13、.Tax Advantages04When a company operates a foreign branch office,the company itself is subject to taxation in the host state on the offices income earned in that host state.The company may al-so be subject to taxation by the investor state on its worldwide income,which includes for-eign branch offic
14、e profits.In other words,it is theoretically possible that the company will be taxed twice on its foreign source income.Income taxation rules of the host state and/or investor state may relieve this problem of double taxation,but a problem may re-main.Foreign branch profits may be taxable in the yea
15、r in which they are earned,because they are attributed as income to the investor.By incorporating a foreign subsidiary,the investor may be able to delay taxation by the investor state,because the income earned by the foreign subsidiary may not be taxed to the investor until the foreign subsidiary pa
16、ys the profits to the investor in the form of dividend or capital distribution.This is an oversimplification of the tax rules governing foreign profits,but it illustrates the principle that structuring a foreign control over how its profits are taxed and to use that control to minimize its total tax
17、 liability.A-5.Advantages of Foreign Direct Investment05Foreign direct investment in a subsidiary or branch office has its notable advantages.First,the investor will retain all profits from the foreign operations and not need to share them with an unaffiliated contractor.Second,the investor will hav
18、e maximal control over the foreign operations,because he hires the managers of his own foreign subsidiary or branch office.Whenever,reliability and trust are crucial business factors,the investors control over his own subsidiary or office allows that investor to ensure that customer service meets hi
19、s own quality standards,supply remains reliable,and intellectual property is unlikely to be infringed.B.International Investment Treaties Unlock PageHummerUmbrellaBulbUsually various complicated legal issues may be involved in the management of foreign investment.Cross-border investment is often fac
20、ilitated and sustained by international treaties designed to protect foreign investments from certain risks and pitfalls associated with doing business abroad.There is no single multilateral treaty or convention that addresses these issues comprehensively,but there are some important international i
21、nvestment treaties.B-1.The TRIMs AgreementThe most general multilateral treaty for the protection of international investments is one of the World Trade Organization(WTO)Agreements known as the Agreements on Trade-Related Investment Measures(TRIMs Agreement).The TRIMs Agreement contains only a few b
22、asic commitments.First,it requires WTO members to afford national treatment to foreign investments affecting trade and prohibits WTO members from applying certain quantitative foreign investment restrictions that would distort or restrict international trade in goods.National treatment means treatin
23、g foreign persons according to standards no less favorable than those applicable to domestic persons.In other words,the TRIMs Agreement provides that,in regulating in-vestments,a WTO member will not impose any regulation on foreign investors that is more burdensome than the regulations imposed on do
24、mestic investors.The TRIMs Agreement also prohibits quantitative restrictions on the importation of goods that may be used in the foreign investment,for example,the importation of inputs for use in manufacturing goods for export.The TRIMs Agreement sets relatively low minimum standards of treatment
25、for foreign investments.The reasons for the failure of TRIMs Agreement negotiations to create a strong and uniform standard of investment protection are complex,but one of the reasons is that foreign investment is a sensitive issue for many countries,implicating their national pride,control over the
26、 domestic economy,and the protection of cultural interests.The difficulties in finding a durable balance between the protection of foreign investments and the interests of WTO members are to be hopefully overcome in the current WTO Doha negotiations.B-2.The GATS The cross-border manufacturing of goo
27、ds for international trade is not the only kind of foreign investment.Much foreign investment takes the form of the provision of services abroad.Many kinds of services that a company may seek to provide in a foreign state re-quire or are facilitated by investment in the foreign state.This is especia
28、lly true of construction services;mineral extraction and transportation;airline operation;the provision of tourist services through hotels and resorts;the provision of energy through power plants;or the operation of infrastructure and major facilities such as airports,seaports,mass transit,telecommu
29、nications facilities,or prisons.But it is also true to a degree in less costly forms of foreign investment,such as setting up a law office or providing insurance,banking,or investment services in a foreign state.The General Agreement on Trade in Services(GATS),another of the WTO Agreements,applies n
30、ot only to trade-related foreign investment,but to any services provided by a company in one WTO member to anyone in another WTO member,whether or not performed through a presence or local company in the host state.Unlike the TRIMs Agreement,the GATS imposes most-favored-nation treatment (MFN)obliga
31、tions on members with respect to foreign services providers.Instead of applying to all service sectors equally,the GATS is designed to allow WTO members to exempt entire service sectors(such as higher education,retail sales,or courier services)from foreign market access and any national treatment co
32、mmitment.3.Bilateral and Regional Investment Treaties(1)Because of the limitations of the TRIMs Agreement and GATS,including their non-applicability to construction contracts,purely local business operations with no trade component,and some other major forms of foreign investment,many states have en
33、tered into bilateral or regional treaties to protect investors and to ensure a more or less even playing field between their investors and the nationals of the host state.A very common form of treaty,the bilateral investment treaty(BIT),covers only investments between the nationals of the two state
34、parties.Another form of bilateral treaty that often guarantees a minimum standard to foreign investors is the treaty of friendship,commerce,and navigation(FCN treaty).FCN treaties were in widespread use before BITs became common,and in many cases when two states have not signed a BIT,a FCN treaty ma
35、y nonetheless govern their relationship.3.Bilateral and Regional Investment Treaties(2)BITs almost always include national treatment and MFN treatment obligations with respect to foreign investments.In addition,BITs may provide for minimum standards of fair and equitable treatment and full protectio
36、n and security of foreign investments.Finally BITs typically provide some standard of protection against expropriation of the investment by the host state.China has entered into bilateral investment treaties(BITs)with more than 130 countries since the early 1980s,when the nation began its path to re
37、forms under then-Premier Deng Xiaoping.The purpose of a BIT between two countries is reciprocal encouragement,promotion and protection of investments in each others territories by companies based in either country.These treaties typically cover the following areas:scope and definition of investment;
38、admission and establishment;national treatment;most-favored-nation treatment;fair and equitable treatment;compensation in the event of expropriation or damage to the investment;guarantees of free transfers of funds;and dispute settlement mechanisms.C.Forming a Foreign Subsidiary PotentialThe modern
39、process of forming a foreign subsidiary is not in itself especially complex,so long as the subsidiarys stock will not be publicly traded.A company seeking to incorporate abroad usually has two options:It can either incorporate from scratch or purchase an existing corporation.The process of incorpora
40、tion involves several steps.First,the invesquires little more than registering the branch and designating or hiring its managers or employees.If a separate business entity is being contemplated,the basic choice will be between a limited and unlimited liability form.The more common choice is limited
41、liability,although a general partnership or other unlimited liability entity is sometimes chosen.In most countries,there are several forms of both limited and unlimited liability business entities,and a decision will be made with the assistance of corporate counsel in the host state and internationa
42、l tax counsel as to which form best suits the investors needs.C-1.Wholly-Owned Subsidiary Companies ONE!Finish OrderThe advantages of creating a wholly-owned subsidiary as a foreign investment vehicle are fairly straightforward.The parent company assumes all of the risk of loss of its foreign invest
43、ment(and possibly more than its foreign investment if the subsidiary is an unlimited liability company),but in return the company has complete control over the subsidiary by virtue of its ability to fire and hire the companys directors or managers.In addition,the company reaps all of the profits fro
44、m the investment,because the subsidiarys net profits will typically be distributed to the parent company in the form of periodic dividends.Therefore,bearing all of the risk in exchange for total control of the company and full entitlement to the profits(subject to the law of the host state)is what m
45、akes the corporate subsidiary an especially attractive vehicle for foreign investment whenever risk can be contained through the use of a limited liability company type.Such companies are,consequently by far the most popular form of foreign direct investment.C-2.Joint Ventures(1)Many foreign investm
46、ents are fully owned by the investor,and the investor bears all of the risk and reaps all of the reward of the investment.However,a foreign investor sometimes decides to cooperate with another company in a host country because of the following reasons:(1)The investor may have insufficient funds to s
47、upport a large investment and to sustain his risk without the assistance of another investors (2)The investor may need intellectual property that the owner refuses to license to anyone except a business partner;(3)The investor would like to begin manufacturing or providing services on a foreign mark
48、et immediately and needs a partner on that market with an existing manufacturing plant or other facilities;(4)The investor may wish to do business on a foreign market in which it has little experience or knowledge and seeks long-term assistance from a company that is already well established on that
49、 market,has business contacts and a well-known reputation,has a credit rating on the local market that can facilitate loans from local banks,and has facilities or labor readily available in the host state:or (5)The law of the host state may require part or majority ownership by local nationals of ce
50、rtain kinds of businesses within its territory,or it may simply require some projects to be undertaken in the form of a joint venture with local nationals.When an investor decides to cooperate with another,it may choose a joint venture (JV)as the business model.A JV can be structured entirely by con
