Times You May Not Need a US Affiliate

Ten days ago I was in Belfast, speaking on a joint Invest Northern Ireland- Catalyst program about doing business in the US. Much virtual ink has been spilled on this blog about when an Irish or Northern Irish company should form an affiliate in the US, and the reasons why. At the Belfast program, a participant asked me when an Irish or Northern Irish company might not need to form an affiliate in the US. Specifically, I was asked whether having/using a ‘hot desk’ in the US would require the Irish or Northern Irish company to form a US affiliate. The short answer is ‘no.’

Of course, there is a bit more explanation needed (I’m a lawyer after all…).  First, the answer to the question of whether one needs to form an affiliate in the US depends in part on whether the parent company can be deemed or determined to be doing business in one of the US states. That analysis can vary from state to state, and each US state has its own rules. But, in general, the use of a ‘hot desk’ on a periodic basis should not cause an Irish or NI company to be deemed to be doing business in most states. The second point is that the ‘doing business’ determination can and will change the more things an Irish or Northern Irish company does with that ‘hot desk.’ The more activity–making sales, servicing customers, executing contracts, hiring employees or contractors–and the greater the likelihood that the parent company would be deemed to be doing business in that state, and that’s when I recommend the formation of a US affiliate.  In other words, the more you do with a ‘hot desk’ and the more commercial contacts you have, the greater the likelihood that you’d be deemed to be doing business in a US state (or more than one) and should consider forming an affiliate.

No Termination Payment for You!

I was recently asked whether the US had any regulations similar to the EU’s Commercial Agent Regulations–pursuant to which, upon termination or expiration of certain agency contracts, the agent would be entitled to an indemnity/compensation payment. The specific question related to a sales agency agreement, but the answer for the US is valid for agency, distribution and similar agreements.  The short answer is ‘no,’ the general rule in the US is that there are no termination payments due upon termination of a ‘commercial agent’ (or expiration of the term of the agency agreement). Notwithstanding that answer, I’d point out two things for an Irish/NI company potentially appointing a commercial agent in the US: (i) the underlying agency agreement should be clear on intellectual property rights in that the ownership of principal’s IP remains with the principal, the agent’s use of that IP inures to the benefit of the principal, and that the agent, even after termination/expiration, will execute whatever document are reasonably necessary to reflect the principal’s ownership of its IP; and (ii) the underlying agreement should also be clear that the agent must return all confidential materials/information to the principal upon termination/expiration of the term.

 

Please Don’t Do This With Your US NDAs

Over the past two weeks, I’ve reviewed two non-disclosure agreements (NDAs) for Northern Irish companies that are expanding to the US. I’ve written about NDAs in the past: NDAs and You: Perfect Together. The NDAs were well-drafted, but each contained the same mistake–something I’ve seen more than once: each selected the law of Northern Ireland to govern the NDA. Each company ‘was told’ (I’m not sure by whom) that selecting NI law was appropriate–and to be sure, I’ve seen the same mistake made by Irish companies. On the one hand, there is nothing wrong with selecting NI (or Irish) law to govern a NDA…if you don’t need to enforce that NDA in the US.

Most NDAs will include language that allows the disclosing party to obtain injunctive relief in the event the party receiving the confidential information threatens to disclose/breach the NDA or actually does so. Injunctive relief in the US allows a party to obtain an order requiring the other party to stop doing something or face court sanction; it is, in the most basic sense, a fast (but temporary) resolution to a legal issue that doesn’t require the time or incur the cost of full-blown litigation. But selecting a non-US law to govern an NDA can make enforcing that NDA more difficult than it should be.

Let’s take one of our NI companies–under the NDA, they would be disclosing their confidential information to a potential distributor in Virginia (for example). Therefore, if there is an actual or threatened breach of the NDA, that breach would most likely occur in Virginia. Meaning that the court with appropriate jurisdiction over a potential injunctive relief request also is in Virginia. If the NI company goes to court in Virginia to seek injunctive relief based on the NDA, and the NDA has NI (or Irish) law as the governing law, there is a very real/significant risk that the Virginia court would decline to take action, based on the idea that the Virginia court is not the appropriate venue for matters of NI law. The court could tell the NI party to have the dispute resolved in NI and then take the NI judgment back to the Virginia court to be perfected/enforced.

That’s a lot of time and expense–so much so it destroys the value of the injunctive relief option in the first instance, at least in my view.  So, here’s my recommendation- select relevant U.S. law to govern your U.S.-focused NDA. It will make enforcement easier and more predictable.

What Irish and Northern Irish Companies Need to Know Now: Doing Business in the U.S.–Free Webinar

Irish Export Insights

Thursday, June 30, 2016 at 3:00 pm Dublin/Belfast.

The attorneys of Arnall Golden Gregory’s International Business Practice invite you to attend a complimentary, 60-minute webinar “What Irish and Northern Irish Companies Need to Know Now: Doing Business in the U.S.” The webinar will be held Thursday, June 30, 2016 at 10:00 am EDT (3:00 pm Dublin/Belfast). The United States is an attractive, and expanding, market for Irish and Northern Irish goods and services. Despite suggestions to the contrary, the U.S. can be an easy market for business expansion—with a little bit of planning. This webinar will examine key legal issues for doing business in the U.S., including:

  • Protecting the Irish and Northern Irish parent company, its investors, and capital from U.S. legal risk;
  • Avoiding branch profits tax issues;
  • Reducing payment risk by ensuring prompt payment from customers, and other U.S. contract essentials;
  • The product liability risks that may attach…

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What Irish and Northern Irish Companies Need to Know Now: Doing Business in the U.S.–Free Webinar

Thursday, June 30, 2016 at 3:00 pm Dublin/Belfast.

The attorneys of Arnall Golden Gregory’s International Business Practice invite you to attend a complimentary, 60-minute webinar “What Irish and Northern Irish Companies Need to Know Now: Doing Business in the U.S.” The webinar will be held Thursday, June 30, 2016 at 10:00 am EDT (3:00 pm Dublin/Belfast). The United States is an attractive, and expanding, market for Irish and Northern Irish goods and services. Despite suggestions to the contrary, the U.S. can be an easy market for business expansion—with a little bit of planning. This webinar will examine key legal issues for doing business in the U.S., including:

  • Protecting the Irish and Northern Irish parent company, its investors, and capital from U.S. legal risk;
  • Avoiding branch profits tax issues;
  • Reducing payment risk by ensuring prompt payment from customers, and other U.S. contract essentials;
  • The product liability risks that may attach to selling in the U.S. market;
  • Navigating which jurisdiction’s laws govern the sale of Irish and Northern Irish-origin products in the U.S. market; and
  • Intellectual property protections.

Register now to hear AGG Partner Michael E. Burke discuss a business sensible, proactive approach to doing business in the U.S. while minimizing risk to the Irish and Northern Irish parent company and its investors.

Mike has an AV Preeminent™ Rating from Martindale-Hubbell, and has been named a Washington, DC Super Lawyer by Thomson Reuters since 21015. He also is a former chair of the American Bar Association Section of International Law, was named in 2014 by Business & Finance Magazine/IrelandInc.as one of the 100 Global Irish Business Leaders, and has been named three times to the Irish Legal 100.

Free Resources for Irish and Northern Irish Companies Forming US Affiliates

I’ve written several times (Minimizing ‘Alter Ego’ Risk for Irish and Northern Irish Parents of US Affiliates; and Effectively Using a Lightning Rod) about the need for Irish and Northern Irish companies to form a formal US affiliate as part of their US expansion strategy. I know that several US law firms have free online forms libraries/generators for US startups. That got me thinking—where are the free online forms/resources for Irish and Northern Irish companies looking to expand to the US? Well, it’s right here.

Let’s assume that the Irish/Northern Irish company will form a Delaware corporation (which is what I’d recommend in many cases). For a proper/complete formation, the Irish/NI company would need to draft (i) articles of incorporation (to be filed with the Delaware Secretary of State’s Corporations Division); (ii) bylaws; (iii) an initial action/consent of the incorporator; (iv) initial consent of the Board of Directors; and (v) SS-4/application for an employer identification number (to be completed and filed with the IRS). The filing with Delaware requires payment of a filing fee—and a filer can pay more for expedited service and other items; also, since the Irish/NI company is, well, in Ireland/NI, they will have to engage a registered agent (the registered agent serves as a point of contact between the company and the State of Delaware). And, filing can be made directly by the Irish/NI company—no real need to incur third-party filing or convenience fees. Continue reading

Minimizing ‘Alter Ego’ Risk for Irish and Northern Irish Parents of US Affiliates

Previously, I’ve written how forming a U.S. affiliate can be like using a lightning rod for U.S. litigation risk. Properly used, a U.S. affiliate can help keep U.S. litigation risk away from the Irish/NI parent and its investors. Forming a U.S. affiliate is not enough, and the lightning rod is useless if the U.S. affiliate is considered to be an ‘alter ego’ of the Irish/NI parent.

The corporation (and limited liability company) form in the U.S. generally shields an entity’s investors from the entity’s liabilities; investors would stand to lose their investment, and nothing more, if the entity collapses. There are some limited circumstances where an American court can ‘pierce the veil’ of this liability shield, and impose entity liabilities on an investor—one of those circumstances is when the entity in question is an ‘alter ego’ of one if its investors. In other words, if a U.S. affiliate were deemed to be an ‘alter ego’ of its Irish or Northern Irish parent, the parent and its investors could be responsible for the U.S. affiliate’s liabilities.

When determining whether a subsidiary is an alter-ego of its parent, U.S. courts consider many factors, including whether the:

  • Parent owns all of the stock in the subsidiary;
  • Subsidiary is adequately capitalized;
  • Corporate formalities are observed;
  • Parent and subsidiary share corporate officers and directors;
  • Subsidiary has its own offices, employees and bank accounts;
  • Parent pays the salaries of the employees of the subsidiary;
  • Parent siphons money out of the subsidiary;
  • Subsidiary and parent share administrative services, employees or insurance arrangements without proper, arm’s length compensation between them;
  • „Parent uses the subsidiary’s property as its own; and
  • Subsidiary’s function is a mere façade for the parent company.

Irish and Northern Irish parent companies can minimize the risk of having their U.S. affiliate being deemed to be an ‘alter ego’ of the parent by:

  • Properly capitalizing and insuring the subsidiary. U.S. courts are less likely to extend jurisdiction over foreign parent if the plaintiff can collect the full amount of a judgment against a properly capitalized U.S. corporation;
  • Complying with corporate formalities;
  • Creating the subsidiary’s own bank account;
  • Documenting rationale for the subsidiary’s capital structure;
  • Documenting inter-company loans;
  • Maintaining appropriate debt/equity balance;
  • Having the subsidiary hire and pay for its own employees; and
  • Creating the subsidiary’s own board of directors.

None of this is bullet-proof, of course, but the above steps should help the U.S. affiliate act like the lightning rod as intended.