Business culture, human rights concerns and relationship nuances are just a few of the myriad considerations in-house counsel must look at when their companies are thinking of expanding globally
If your company is thinking of expanding abroad, the legal issues and risks to consider can vary tremendously among geographies yet the fundamental questions are often the same. Continuing global trade talks, like those aimed at a Trans-Pacific Partnership trade agreement, suggest many more Canadian companies will likely contemplate going global. Below are some of the most important considerations when contemplating global growth, according to experts operating or advising those who operate internationally.
Are regulatory practices uniform?
One of the most common misconceptions is that companies prefer to operate in zones with weak regulation, says Jonathan Drimmer, Vice President and Deputy General Counsel at Barrick Gold Corporation. “There may have been an era when that was the case, but that is not true now. What we want on the corporate side is regulatory and political certainty.”
Drimmer says in-house counsel should ascertain the specific areas of risk and vulnerability. “Just on the corruption side, for example, you have the Transparency International Corruption Perceptions Index, which will tell you that Ghana, for example, is 48, but what does that really mean to you? Does that mean that it’s a 48 regardless of where you operate within the country or what kind of business you are in?”
According to Drimmer, from the vantage point of a company with activities on five continents, the analysis is often about the geography. Is it better or worse in the capital? Are some government agencies more or less reliable? What is the profile in terms of the specific areas where you have to be most concerned? Sometimes in developing countries, he says, “you’ll find stronger processes and stronger regulatory processes in capitals; but then the question is, ‘are your risks, for instance, with the judiciary, with visas, with the Department of Labour, or somewhere else?’”
But often the way it ends up working, says Toronto-based Drimmer, “is that smaller investments in places that have weaker rule of law require a lot more attention; so it doesn’t always work that the size of the investment and the size of the financial return works hand in hand with the amount of attention you need to pay to regulatory issues.”
In looking at the span of operations a company will have in developing areas, when Drimmer thinks of rule-of-law issues he thinks about legal, political and legislative, but also about communities. “The challenge is how do you create internal processes and controls in this environment in a way that squares with your own standards and the standards that apply to you by being a Canadian or US company?”
Peter Harder, Senior Policy Advisor with Dentons LLP in Ottawa, points to regional differences within countries as a key consideration. “China is a large piece of geography, the role of sub-national governments is extraordinarily strong, and that means provinces, and in some cases cities, have their own peculiarities in administration. Regulatory practices may not be uniform across the country.
“The experience of regulatory practices and the attention to regulatory practices differ given the very different economies there are in China, for example intellectual property protection is well-developed and more mature in Shanghai than it would be in Western China. So understanding that is very important if you want value to your in-house practice area.”
As a result, Harder says you can’t practise good corporate law by just being in a corporate headquarters in Beijing or Shanghai. “Rather, you have to be where your businesses are located; this is very important for companies and in-house counsel,” he says, because sometimes those running the business tend to think, “‘I only need to be at headquarters and administer the business from there.’ But as I say about China, ‘the mountains are large and the Emperor lives far away.’”
What value can local partners bring to the table?
Going it alone or with a local joint-venture partner is one of the first decisions for Canadian companies and their in-house counsel when considering expansion abroad, says Martin Kovnats in Toronto, Chair of the Mergers & Acquisitions Team and Co-chair of the International Team at Aird & Berlis LLP. Kovnats says local partners, if chosen wisely, will provide local intelligence as to best locations for facilities, accessibility of governmental support and grants, an understanding of the political stability of the area, and availability of a skilled labour force.
Kovnats, who advises a number of clients expanding into EU countries, cites the example of Germany, which essentially has employment for life, industry pattern bargaining and pricing as well as employee representation on the governing body for the enterprise. There may also be limits on the scope and duration of non-competition and non-solicitation covenants.
Relationships between business partners, such as suppliers and customers, may be very different than what is often expected in Canada. This is especially likely when the expansion is dedicated to a specific customer. That’s because it’s not unusual for detailed drawings to be exchanged and shared access to computer systems may be expected. “This may create difficult situations about unauthorized information sharing, which may be managed while the relationship is continuing,” says Kovnats, “but may be much more challenging when the relationship is diluted or terminated.”
Still, choosing to expand through a local joint-venture partner may be a short-term strategy, with an end date in sight. “The Canadian enterprise will likely have a co-owner, which may provide for a buy-out of the local partner once the Canadian enterprise is more comfortable with the expansion and its success,” he says.
What does it really mean when negotiations go on and on?
In Mexico, business people put a high value on relationships, says Ryan Keays, a partner in the Calgary office of Norton Rose Fulbright Canada LLP. “Mexicans view the business relationship as an extension of their personal relationships, so it’s necessary to build a level of trust before being ready to negotiate the specifics of a deal,” he says.
“It’s important to understand the nuances of these relationships. For example, Mexicans, as a very hospitable and polite people, don’t like saying ‘no,’ so sometimes what can seem like a protracted negotiation really just needs to be taken in a different direction.”
According to Dentons’ Harder, “the Chinese love to negotiate; the signature is often just a pause in negotiation. It’s a relationship and that goes back to business culture. Chinese are very entrepreneurial, have been for millennia. So they think very long-term and they do business with people they know and like. So don’t think that a narrow difference of advantage, think of whether that partner is the long-time partner that you want to be associated with.”
Not only are the Chinese looking “generational,” adds Harder, often they are looking for a mutual investment. So it’s not just Canadians going to China, the Chinese partner will want to know what business you can do together, both in Canada and in third countries.
He says increasingly the partnerships that are quite interesting are the ones that are not just bilateral in terms of either trade or one-way investment, but are actually two-way investments that reflect, for example, business practice expertise or supply chains that are mutually beneficial. “I’m thinking of a Chinese company that partnered with a small Canadian company because they wanted the business expertise of that company so that they could expand that capacity in China. It was completely necessary to understand the best business practice in that area in China.”
Further, don’t limit your thinking to only state-owned enterprises. “I think we undervalue the extent to which there has emerged, in the last five to seven years, a very sophisticated private sector in China,” says Harder, who is also President of the Canada China Business Council. “As you would expect, this sector is more agile, is probably a more demanding partner, and could be a more rewarding partner.”
Is your project viable in the context of environmental and community issues?
The environmental regulatory process and the community and social context have really become critical issues for consideration of any new entry, says David Hardy, Vice President Legal and General Counsel of Gran Tierra Energy Inc. in Calgary.
“Today, most companies fully accept that maintaining high environmental standards in their operations is just the right thing to do. In most jurisdictions there is no issue with regulations that require such standards; the companies want to operate to those standards,” he says. “The issue can be with the processes that regulate the environmental standards; there are jurisdictions that have inefficient processes, or inefficient administration of the processes, that unreasonably delay activities, sometimes for many years.”
Hardy says community issues can be particularly complex in some jurisdictions; the government may be absent and the communities may be looking to companies to fill the role of government in providing services. Communities, even different communities in the same region, may have very different attitudes towards resource development. Communities may have unrealistic expectations about what benefits they should be receiving.
In this context, Hardy says a number of questions need to be considered. These include: what communities are in the area of interest? What are the prior consultation or consent requirements? What is the history of interaction between communities and companies operating in the region? What are the expectations of the communities? What will your CSR programs cost? What delays are you likely to experience in your project schedule? How will that impact your project economics?
The bottom line, says Hardy, whose company is engaged in oil and gas exploration, development and production, with rights to properties in Colombia, Peru and Brazil, “is that you can have great prospectivity for resources and top-tier fiscal terms, but you don’t have a business if you can’t explore and develop a project in a reasonable time frame because of delay caused by regulatory processes or community opposition.”
What are the labour and human rights risks?
As part of their enterprise risk analysis in expanding abroad, Canadian companies must include compliance with international labour and human rights, both in terms of soft law and hard law, says Kevin Coon, an international human rights lawyer and Managing Partner, Toronto, of Baker & McKenzie LLP. Coon says there’s legal as well as brand and reputational risk.
“This must be an area of huge concern for in-house counsel that is simply going to multiply rapidly within the next 12 months,” he says. “Most recently, there are legislative initiatives around reporting anti-slavery and human trafficking activity by companies in the UK and France. President Obama has put in place Executive Orders and the EU Non-Financial Reporting Directive. There is a clear trend requiring companies to report on respect for human rights and other social matters.”
Although it hasn’t had much publicity yet, adds Coon, “there’s currently legislation in the US which targets human trafficking, forced labour and the worst forms of child labour in global supply chains. The Bill essentially takes the California Transparency in Supply Chains Act and applies it across the country, expanding its coverage and requiring disclosure to the SEC.”
As a result, companies have to look farther than internally; the risk analysis “also has to include your supply chain. If you’re saying ‘we take all steps to prevent human trafficking or human rights abuses in the manufacture or delivery of our products,’ often in Codes of Conduct or Sustainability Reports, it better be true. That is a difficult balance.”
The biggest challenge for in-house counsel, says Coon, is “there’s no bright line as to how deep you go in your supply chain, so as a company you have to scope out where you want to position your investigation and from there build your risk mitigation processes around that. The key is to have a credible and cogent plan that will allow the company to describe and defend its actions for the eventual and likely complaint of international labour and human rights violations by a myriad of social actors, including competitors.”
New reforms, new opportunities?
What’s new right now, says Keays, who advises Canadian companies investing in the upstream oil and gas sector internationally, most recently focusing on Latin America and Mexico in particular, is that the country is opening up the regime to foreign investment in the upstream sector, that being the exploration and production of oil and gas.
“The impact of Mexico’s energy reforms is significant. They will allow energy companies that have historically been restricted from entering the Mexican upstream oil and gas sector to potentially develop one of the largest underdeveloped resource bases on the planet,” says Keays. “Apart from the reforms having a positive impact on the Mexican economy in the years to come, the potential for growth and development within the region for Canadian energy companies and investors is huge.”
When looking at a new jurisdiction, Keays recommends taking a “top-down approach” to the analysis of the jurisdiction’s legal regime, beginning with a high-level review of the constitutional laws for principles applicable to your industry. As examples, “when looking at Mexico in particular, a review of key constitutional provisions reveals that environmental regulation is under the joint authority of the federal government, the state government and local governments, alerting in-house counsel to the need to coordinate your activities with the regulators at all three levels.
“Similarly, a review of the constitution will also alert you to considerations surrounding certain agrarian lands being communally held by ejidos under Mexican law, which could have implications on surface access for the development of the project.”
Will contracts be upheld? Arbitration awards enforced?
Graham McLeod, Managing Partner, Middle East Offices, at Blake, Cassels & Graydon LLP, lives in Bahrain and oversees the firm’s offices there and in Saudi Arabia. He operates in a large market with an abundance of opportunities; in Saudi Arabia, for example, a huge focus of the economic development plan for is diversifying the economy.
A former in-house counsel with Infrastructure Ontario, McLeod says the opportunities include investments in construction and infrastructure projects; special economic zones such as King Abdullah Economic City, where there are opportunities in sectors as diverse as pharmaceuticals, plastics and manufacturing; and, since almost a quarter of the world’s trade passes by their coastline on the Red Sea, there’s potential for a really vibrant logistics hub.
McLeod gets a lot of questions from clients about commercial agreements and their enforcement. “There’s an increasing desire and tendency of Saudi Arabian companies to want to use local law and the good news is that what we have seen in the past five to six years is an increased level of comfort with that among foreign investors; for example, there’s new arbitration law in Saudi Arabia, so there is a newfound commitment to enforcement of foreign awards that is definitely more on par with international standards.”
As well, “certainly Sharia law is a factor when disputes end up in court, where the approach to judicial decision-making is different than in Canada as there are no binding precedents, for example,” says McLeod. “It can cause some trepidation, but in terms of what this can mean for commercial lawyers, there really is a strong deference to the will of the parties as expressed in the contract. So while we may not have precedents, there is still a very strong proclivity to uphold that contract.”
As in-house counsel find themselves increasingly advising their companies on the ways and wherefores of global expansion, all the experts agree that what’s required is in-depth and wide-ranging research.
“Don’t confine yourself just to desktop research; talk to experts in various disciplines who can advise on a whole range of issues: operational, regulatory, community and political to gain a full understanding of the landscape before you go,” says Barrick Gold’s Drimmer. “The biggest problems come from when you are surprised at what you’ve inherited.”