The US is fertile ground for Indian companies hungry to sow new seeds of investment. But without adequate knowledge, preparation and legal guidance, they could rake in more regrets than rewards
The US is a familiar destination for Indian corporate investment. The statistics speak for themselves. Indian companies invested US$870 million in the US from April 2011 to 28 February 2012, according to the Reserve Bank of India (RBI). This made the US the No. 3 choice, after Mauritius and Singapore.
Companies of Indian origin have a presence across 40 states, in sectors such as manufacturing, IT, healthcare, financial services, telecommunications, education, energy and hospitality. These companies expect to create 3,400 US jobs in 2012, the Confederation of Indian Industry says in a report on its second annual survey, titled Indian Roots, Amercian Soil, published in April.
For the most part, Indian investment has been welcomed with open arms. Many large Indian companies currently operate in the US, including Dr Reddy’s Laboratories, Infosys, Infotech, Larsen & Toubro, Ranbaxy, Wipro and Wockhardt.
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In 2010, the White House issued a series of fact sheets on the US-India partnership, one of which stated that the flow of capital from India has benefited the US through “increasing US exports and supporting tens of thousands of jobs in the last six years alone.”
To some extent, these sentiments remain, despite anti-foreign company and anti-outsourcing rhetoric, new employment restrictions, and an increase in visa fees for professional immigrants.
The flailing and faltering economies in many debt-addled Western countries present a plethora of opportunities for Indian companies. “There are now increased distressed opportunities to acquire US companies and assets at lower valuations than in the past,” say Craig Sklar and Jim Abott, two partners at Seward & Kissel.
“Many of our Chinese and Indian clients also realize that acquiring or joint-venturing with US businesses [are] faster paths to growing their US operations, as opposed to relying solely on organic growth within the US,” they add.
Mahesh Nayak, who heads Clark Hill’s India practice, says 2009 and 2010 in particular offered terrific opportunities for foreign companies to capitalize on distressed assets. But that does not mean great deals cannot be found in 2012.
“Today, real estate is an excellent opportunity,” says Nayak. “High-end properties available for substantial discounts with a large pay-off are waiting for those that are in the position to sit on them for seven or more years.”
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In addition, small and medium-sized businesses may consider generating fresh capital with listings on US bourses, which hold greater attraction following the introduction of the US Jumpstart Our Business Startups Act (see New appeal on page 26).
Tough lessons
Although entry onto US soil has been relatively easy, the recent turmoil suffered by large Indian corporate investors suggests that companies targeting the US still have many lessons to learn. Tata Consultancy Services and Mahindra & Mahindra are cases in point. The former is embroiled in a class action lawsuit filed by its Indian employees in the US accusing it of violating employee contracts and US laws, while the latter has been sued by US car dealers for mass fraud.
Ranbaxy has encountered trouble too. In January the US Department of Justice, on behalf of the Food and Drug Administration (FDA), filed a consent decree of permanent injunction after the generic drug manufacturer agreed to remedy deviations from good manufacturing practice requirements and to resolve data integrity issues at several facilities.
Specialized legal advice can help companies prevent or overcome trouble, whether in relation to employment law, FDA compliance or other areas. To prosper in the current US environment, Indian companies must first clear a series of hurdles – regulatory, logistical, political and cultural.
Politics and national security
For lawyers representing non-US clients who are considering acquiring a US company, questions of national security may come into play.
The Committee on Foreign Investment in the United States (CFIUS) – which is composed of several members of president Barack Obama’s cabinet, including the secretaries of the treasury, commerce, defence, state, and homeland security – is charged with reviewing transactions to decide whether they pose a threat to US national security. If CFIUS rules a takeover or joint venture a threat, it can set conditions that are meant to diminish the potential threat, or even recommend that the president axe the transaction.
CFIUS rarely disallows deals altogether, but it can certainly impact the time frame of transactions. It is allowed to initiate its own review but many businesses elect to file a voluntary notice with CFIUS instead of waiting to see if that happens.
“Filing a voluntary notice is important for any proposed US transaction that has conceivable national security significance to avoid the risk of later government action,” say Sklar and Abott. In this category, they place transactions involving a non-US company owned in whole or in part by a foreign government, or US businesses involved in critical infrastructure, energy, classified contracts or security clearances with the US government.
Michael Amm, a Toronto-based partner at Torys, calls CFIUS one of the “biggest impediments” to transactions in the US. “There’s a lot of concern [about] how the legislation will be applied and getting approval of the deal.” In Canada, by contrast, Amm says a similar review process is largely unpoliticized.
Christopher Hagan, a partner at Brown Rudnick and a member of the corporate team in New York and Washington, DC, says anxious companies may want to consider an informal check. “A lot of times you can reach out to CFIUS and they can give you guidance if you should make a filing or not,” he says. “It’s better to be safe than sorry.”
Robert DeLaMater, a partner at Sullivan & Cromwell in New York, recalls how he ran into a CFIUS stumbling block while representing Dubai Ports World, a state-owned company in the United Arab Emirates. The company wanted to acquire the Peninsular and Oriental Steam Navigation Company (P&O), a British company that operated six US ports, in addition to many others, around the world.
CFIUS questioned whether Dubai Ports would have adequate security procedures at its US ports. While CFIUS eventually approved the sale, when the deal was made public, lawmakers from both parties raised concerns that US security could be compromised. In the end the US ports were sold to a unit of American International Group, and Dubai Ports went ahead with the acquisition everywhere else.
“I think the main lesson was to keep an open mind,” DeLaMater says, “and to be analytical in what you think the issue is and what you might do to resolve it. Be willing to work with regulators on a solution.”
Foreign Corrupt Practices Act
As companies expand into new markets, regulators in many countries are more vigorously enforcing laws against improper payments to government officials, and other corrupt activities.
In the US, the Foreign Corrupt Practices Act (FCPA) makes it illegal for companies to make an offer or payment of anything of value to a foreign official, foreign political party, or candidate for political office with the purpose of influencing any act or to secure any improper advantage to obtain or retain business.
Elliot Feldman, a partner at Baker Hostetler, says that while foreign companies are unlikely to try bribing in the US because of the strict FCPA rules, if a company is accustomed to bribing in other countries, it can come back to haunt them.
Hagan agrees: “If a business is distributing things here and they are using bribery or influence payments to get governments in other countries to take those products made in the US, they can certainly run into problems where they never have before.”
If a company has a murky past abroad, it may be best for everyone to just be candid and “lay out the cards a little bit,” Hagan says. And if necessary, it “may be better to do a joint venture than to outright buy a company,” as a venture with an American partner is unlikely to draw regulatory scrutiny the same way an outright takeover would.
But the best way to avoid getting ensnared by the FCPA is to be “preventative,” says Nayak.
Companies must be “trained on the dos and don’ts and the strict liability that follows and where knowledge, or lack thereof, is not a defence. Middle managers need to be extensively trained on these matters,” he says.
“US regulators have definitely stepped up efforts to enforce FCPA and a non-US company acquiring or joint venturing with a US-based business must be aware that scrutiny of improper payments around the globe may follow,” add Sklar and Abott.
Similarly, Canada’s Corruption of Foreign Public Officials Act (CFPOA) prohibits giving or offering to give a benefit of any kind to a foreign public official or any other person in order to obtain or retain a business advantage.
“Foreign investors should take note that the Canadian government takes these sanctions seriously,” says Dee Rajpal, a partner with Stikeman Elliott in Toronto. He says violations can result in extradition, imprisonment of up to five years and an unlimited fine.
Rajpal points to Niko Resources, a Calgary-based oil and gas exploration and production company, which in June 2011 pleaded guilty to charges of bribing the energy minister in Bangladesh with a C$190,000 (US$188,000) vehicle for personal use, as well as trips to Calgary and New York.
Niko’s sentence included a hefty C$9.5 million fine and a three-year-probation order.
Rajpal says that prior to Niko’s conviction, only one Canadian company had been convicted of foreign bribery under the CFPOA. Still, “we emphasize the importance of the due diligence process for foreign investors,” he says. “Aside from the potential fines that may be levied by a government body, any negative publicity can taint the reputation of a foreign investor.”
Tax masters
Foreign investors are likely to face more complicated tax issues under the US Foreign Account Tax Compliance Act (FATCA), which goes into effect in 2014.
FATCA imposes rules on US taxpayers and withholding agents, in addition to foreign financial institutions and non-financial foreign entities that deal with US persons or foreign entities with substantial US ownership. The act introduces a withholding tax on payments made to a foreign financial institution or non-financial foreign entity if it fails to comply with new reporting, disclosure and related requirements.
As Rajpal notes: “Foreign financial institutions can avoid the withholding tax by entering into an agreement with the Internal Revenue Service to provide required information with respect to US accounts.”
Feldman calls FATCA a “huge looming issue,” adding that “financial institutions need to understand it much better, and they are facing looming deadlines to address it.” And yet, he says, “they are generally unaware”.
Navigating the rules
If a foreign company is involved with importing food or drugs into the US, it’s critical to hire an expert that understands the FDA’s complex web of regulations and strict requirements.
“Get the right people,” Hagan says. “Some law firms say, ‘We can do it all,’ and they end up hurting their clients because they might be really good in some areas but really weak in others.”
For manufactured goods generally, Feldman stresses the strict requirements to prove that a product is safe. “You can be exposed to product liability laws” at the state and federal level if you fall short here, he says, suggesting that prospective Indian investors hire a specialist in product liability to ensure they don’t slam into hurdles by failing to properly explain how their product is secure and safe.
Cultural considerations and comfort
An Indian company may be well prepared for every potential legal and regulatory obstacle, but if cultural and workplace sensitivities aren’t respected, a deal can be sunk on the spot.
Hagan provides a China-related example. “If the whole reason to do [a deal] is to … buy a plant, shut it down, and move all the jobs to China,” he says, “that’s going to run into more political hot water than if you’re saying, ‘We don’t really plan to make any major changes. We just want the ability to distribute our products to get a market share in the United States.’ Those things are easier sales.”
That’s why it’s important for investors to publicly stress that a deal is a positive for North American employees, local residents, and potential customers, Hagan says.
He points to a transaction he worked on in 2005, in which a Chinese company – whose name he declined to reveal – wanted to invest in a 500-employee industrial manufacturing company in Ohio.
Because the company had industrial revenue bonds (IRBs) locally, the potential takeover caused a controversy. Critics say IRBs – which allow public agencies to offer developers incentives to build in their towns by reducing expenses – negatively affect the tax base of local communities. And many Ohioans didn’t like that a Chinese company stood to gain from a US tax break.
“One of the things we did to diffuse it and make it a successful transaction was by making sure we were well positioned, and that employees knew that this was to help them grow and bring them new opportunities,” Hagan says, adding that part of the strategy was to make public that there would be a net increase in jobs. “Part of it was getting the buy-in from local management,” he says.
DeLaMater also stresses the need to communicate the positives of an acquisition.
“Employees in the US, the customers, regulators, buyers, politicians can be very concerned about foreign investment. You need to have a strategy to be able to explain to all of the stakeholders what your acquisition is and what you plan to do with the business in the future … [and] address any concerns those people may have,” he says.
Being aware of cultural differences in deal making is also critical, says Geoffrey Burgess, a partner at Debevoise & Plimpton.
“We have seen Indian companies face hurdles with the disclosure regime differences between India and the US,” he explains. “Indian businesses are mostly promoter led and family controlled and information regarding matters is generally kept in tight control. In addition, India does not have as many laws relating to disclosure of information as the US and this can be a challenge for Indian promoters to understand.”
Perry Dellelce and Vaughn MacLellan of Wildeboer Dellece in Toronto say that bridging cultural and language differences, which affect the parties working styles and decision making, is one of the principal obstacles that foreign investors encounter in Canada. “Without a proper understanding of each other’s business culture and approach, communications, negotiations and transactions and relationships between foreign investors and Canadian businesses can become inefficient, and at worst, ineffective and break down,” they say.
On the employment side, it’s important that companies are aware of unions and workplace laws. Due diligence is critical, and often means hiring employment and pension lawyers who specialize in such areas.
In many cases, after acquiring a company, “you can’t fire all the personnel. You can’t walk away from pensions and medical plans,” says Feldman. You need to know what laws apply to the company you’re acquiring: “What’s the obligation to the workers, obligations you’re going to inherit? All of those are significant liabilities.”
Assembling an all-star team
Specialized knowledge can be critical to ensuring legal and regulatory problems are avoided, and that East-to-West business transactions are successful.
Feldman notes that Indian law firms are historically small, family-run firms that typically lack robust knowledge of US regulatory laws.
“They’re not specialized,” Feldman says of many Indian firms. “The convention is that the lawyers can do everything.”
“When [such] lawyers are talking to their corporate clients about what they need to do in the United States, they’re not themselves all that aware of the specialties,” he says. In some deals, it may be important to get lawyers who specialize in taxes, antitrust, product liability, intellectual property, and employment and pension law.
Hagan suggests that companies which are thinking about doing business in North America should start contacting specialists as soon as possible. “Look for some informal, free advice,” he says.
“A lot of law firms, if they know they are going to get retained, give pre-advice upfront. Take advantage so you can plan, plan, plan and learn as much as you can before you do something.”
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New appeal
The JOBS Act vastly reduces the regulatory burdens on small and medium-sized companies going public in the US
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