Going Global: Think First. Then Act.
Your product is almost ready for launch. You still have cash from the last financing, but the investors are getting testy. They want to see sales. . . . Real SALES.
Someone from an exotic overseas country approaches you at an industry conference and effusively gushes over your prototype. He says it will be a big success in his country, given the right partner (his company). His proposal, logical to him, is for you to provide samples, designate his company as exclusive distributor in the territory, but not tie his company to a defined minimum quota.
You might be thinking: Wow, I can show my investors a contract to distribute the product in a country that won’t interfere with the distribution plan domestically or in the EU/Far East. What’s the downside?
Resisting the impulse to simply rein in your optimism (or rain on your parade), it’s incumbent on your advisers –whether legal or business-to at least identify some action items for you to consider, at a minimum.
Once you have considered these points and fully understand the risks vs. benefits, then make your decision whether to get involved with the distributor or agent. If you decide to proceed, by all means have a good lawyer help you structure the arrangement to best protect your interests.
Here are the minimum considerations I would raise:
1) Do you have any intellectual property protection in the territory that could be enforceable under local laws? Enforcement of intellectual property rights is best enforced if specifically provided by local law or under a treaty to which the home country of the distributor or agent is a party.
2) Does the local law provide you with any reasonable means to protect your assets and rights under the agreement? Even though your agreement specifies that the laws of a state in the US govern and that all disputes will be settled in a court of that jurisdiction or international arbitration, you would still have to ENFORCE any judgment rendered through that process in the local jurisdiction.
The most direct ways to enforce your rights, or any judgment upholding your rights, are to: 1) prevent the proposed distributor or agent from taking your rights and inventory altogether, or compel it, him or her to abide by your agreement, and/or 2) make the proposed distributor or agent pay you for the breach. Believe it or not, the first option, and actual enforcement of the second option, is not always available under local laws, for a variety of reasons. (I am informed that under laws of one Arabic country, judgments are interpreted by Muslim clerics in accordance with the Koran. There’s no injunctive relief.) However, if the distributor or agent has assets in another jurisdiction which does provide the first remedy, the arrangement may be structured to position those assets as “security” for its, his or her compliance with the agreement, which might then be enforced in the other jurisdiction.
3) Have you planned around other local law restrictions? Many local laws contain severe restrictions on terminating a distributor or agent, and specify terms that must be contained in any agreement with such distributor or agent. Additional complications arise if the distributor or agent has registered with the local government, and has close ties to various government agents.
4) What information do you have on the proposed distributor or agent? Are you sure it, she or he has never been found guilty of an anti-bribery law? Trust me, if you plan on selling your company at any time, or ever plan on adding business savvy individuals to your board, the buyer or board candidate is going to insist there are no lurking liabilities which could also put them at risk. It’s very difficult to cleanse an FCPA or other anti-bribery breach after the fact, and the breach could drag even individuals who were innocent or ignorant of the event into risk for personal liability.
5) How are you planning on holding the distributor or agent accountable? Do your best to arrive at a reasonable quota for sales of your product in the territory. If you can’t agree now, you certainly won’t be able to agree later, when the distributor or agent does not sell as many units as you thought it, she or he could or should at the onset. Again, imagine what will happen if local laws restrict your ability to terminate the agent or distributor, even when the distributor or agent has sold nothing-I mean, really nothing, zilch, nada, rien. Since you failed to include a quota in the agreement, you can’t even start to formulate a reasonable argument to support your action.
6) Have you thought about tax planning? You don’t want to subject the hard earned revenues you do receive globally to local taxes, especially if the revenue wasn’t earned there. In addition, even if you do set up the proper structure that works at the outset, consider what happens when you repatriate any cash: taxaggedonl! Please, please consult a knowledgeable international tax expert.