Doing Business in Europe

1. Doing Business in Europe Legal rules, and traps for the unwary

2. Osborne Clarke • Pan European Law Firm • Providing a complete range of legal services • Technology industry focus • Recognised as European Technology Law Firm of the Year 2001 and 2002 by the European Technology Forum • Office in Palo Alto – European legal advice in Californian time

3. European Law? • Not quite • European Treaties, Regulations and Directives are in place but…. • Advice is still required on a country by country basis

4. Do you need a presence in Europe? You could use existing channels – can be more cost effective to employ an agent or distributor with local knowledge Types of relationship which are dealt with very differently from a legal perspective: • Agent - generates leads or enters into agreement with customer on behalf of the supplier • Distributor – is an independent party which buys your product and sells them on its own account Distributor is usually preferred choice as you can to a certain extent leave them to it

5. Why use an Agent? • Greater control over them. You also have more choice over who they sell to and prices they sell at (important in some industries e.g. fashion) – Unable to impose such controls in distribution agreements without falling foul of anti-trust law • Agents are usually paid less commission

6. Agency Agreements Key Aspects: • Exclusivity • Territory • Term • Agent’s authority • Commission/payment terms • Consequences of termination

7. Commercial Agents Directive • This governs agreements between suppliers and agents across Europe and gives a host of rights and protection provisions to agents including: • The right to have a written agreement • The right to a reasonable commission if nothing has been agreed • The supplier has an obligation to act dutifully and in good faith • Non-compete provisions - only on a geographic basis and must be less than 2 years

8. Commercial Agents Directive • Notice periods for termination: Must give at least one weeks notice per year – up to three years • Compensation / indemnity payable to agent in event of termination except where the agent is in breach – dealt with differently across Europe • Compensation based on actual losses suffered and includes loss of future earnings (UK) • Indemnity usually based on how much the agent has been paid over the last few years (Germany)

9. Commercial Agents Directive • Each member state has implemented this differently (e.g. in the UK it is only relevant to agreements governing the sale of products whereas France and Germany extend it to products and services) • Unable to contract out – even if agreement is subject to Californian law as was shown in Ingman GB Ltd v Eaton Leonard Technologies Inc. (Nov 2000) – freedom of establishment and undistorted competition

10. Distribution Agreements • No EC Directive governing Distribution agreements • Many countries in continental Europe have similar provisions to those in the Commercial Agents Directive • English law provides very little protection to distributors meaning it is possible to terminate on short notice with no compensation payable

11. Distribution Agreements Key aspects: • Exclusivity • Territory • Term • Conditions of supply/delivery • Order terms and prices • Local legal requirements • Defective product liability/warranties • Confidentiality provisions • Consequences of termination

12. Anti-trust Law • Applicable to distribution agreements with an appreciable effect on trade – Look at market share • The Following are seen to be anti-competitive: • Price fixing • Bid rigging – Agreeing tender prices with competitors • Obligations on the distributor not to purchase competing brands • Obligations on the distributor to only supply a particular buyer • Consequences

13. Other contractual matters • Currency and method of payment • Language • Insurance – Are you covered abroad • Intellectual Property rights • Limitation of Liability Clauses – local advice is essential (e.g. death and personal injury) • Jurisdiction

14. European Establishment • If a physical location is required registration of the business will be necessary • Subsidiary company - separate legal entity from its parent company, but can be fully owned and controlled by the parent • A branch - an extension of the US parent, but which conducts business in the UK in the name of the US parent

15. Factors to consider Subsidiary vs. Branch • Control • Liability issues • Practicalities • Privacy law issues • Tax • Formalities of Establishment • Start-up Costs and Speed • On-going obligations • Labor Law

16. Control • Subsidiary This is a separate entity controlled by its board of directors, but US parent dictates all board appointments • Branch This is an extension of the US company and is therefore directly controlled by the US parent company

17. Liability Issues • Subsidiary • Shareholders (i.e US Parent) not generally liable for acts of the subsidiary company • Liability is limited to the share capital of the subsidiary Product liability is a different regime • Directors or other company officers may be personally liable in certain circumstances (e.g. fraudulent or wrongful trading) • Branch • The directors of the US parent are responsible for ensuring local law compliance

18. Practicalities • A subsidiary is regarded as indicative of a more substantial presence and this will assist with: • Getting a bank account • Obtaining a lease • Entering into commercial agreements

19. Privacy Issues 1 • Data Protection Directive has been implemented by all EU member states • It introduced 8 fundamental principles dealing with how personal data is collected processed and transferred from one party to another • It provides the individuals concerned certain rights

20. Privacy Issues 2 • Restrictions on transfer of personal data outside the EEA • To comply with European legislation, if a US company wishes to transfer personal data to the US from Europe it may only do so: • If the data subjects have consented; or • If the company receiving the personal data is Safe Harbour Certified (approx 550 US companies are certified); or • If there is a contract in place that ensure that the company receiving the personal data has adequate protection in place.

21. TAX • No one tax law relevant across Europe • Relevant to both branches and subsidiaries. A business is subject to tax if it has a permanent establishment in that country • The US and EU member states have entered into double taxation treaties to ensure that companies are not taxed in full both in the US and the European countries in which they trade.

22. Corporation Tax Issues Branch Vs Subsidiary • A subsidiary is charged on the world-wide profit of the subsidiary company • A branch is taxed only on those profits which arise in that country • Start up costs usually can be carried forward and set-off against future profits both with a branch and a subsidiary. Branches can benefit from double tax relief by setting its loses against worldwide profits of the parent

23. Sales Tax • Different sales tax laws across Europe • In UK: • In UK Value Added Tax is charged on all supplies of goods and services • Registration with UK Customs & Excise when UK turnover reaches or is likely to reach the VAT registration threshold (currently £58,000) • Quarterly returns thereafter • Similar provisions across EU

24. Formalities: Subsidiary "Off the shelf" or form your own • Corporate name registration • Registered address • Share Capital requirements: In Denmark - 125,000DKK, In France - €0 - €37,000 depending on the type of company you incorporate, In UK - £1 • How you do business and shareholders rights (UK - Memorandum and Articles of Association) • Appointment of directors and secretary

25. Formalities: Branch • Statutory registration forms • Copy of parent company constitutional documents, latest set of audited accounts, and other domestic filings, registration fee • A separate branch registration is required for each and every branch within a country that has a separate management structure and separate reporting lines back to the US.

26. Legal start-up costs/timing • Subsidiary • Approximately £750 for basic company formation • Can be achieved in 24 hours • Branch • In the range of £750 - £1000 depending on the availability of registration information • Usually takes about a week

27. On-going obligations/costs • Subsidiary • Approx £1000 p.a.for legal/registration • Ongoing filing obligations including annual accounts and annual returns • Additional accounting costs • Branch • Ongoing filing obligations partly dependent upon filing obligations of country of parent obligations • Legal costs approx £500 p.a

28. Maturity/Substance • Annual costs for a subsidiary are likely to be more than a branch, BUT • Costs of changing a branch into a subsidiary far outweigh the higher cost of having formed a subsidiary from the outset

29. Labor law issues 1 • Work permits for non-European nationals • European labor laws are applicable to employees residing and working in the a member state regardless of whether (1) they are employees of a European subsidiary or a branch of a US parent; or (2) they are European nationals or non-European nationals • Beware: There are a host of consequences

30. Labor law issues 2 • Employees working in Europe have a variety rights – varies from country to country: • Working Time Directive (Max hours spent working during any week (Germany, Finland, Spain – 40 hours per week. Ireland 48 hours per week) • Holiday – 31 days in Germany, 29 days in Ireland, 30 days in Spain, 20 days in UK • Anti-discrimination laws (similar to those in the US) • Notice – In UK - 1 weeks notice for each year of service (up to 12 weeks minimum after 12 or more years) • Unfair dismissal claims (In UK right not to be unfairly dismissed arises after 1 year. Max compensation payment £61,300)

31. Consultants – a way out of Labor law obligations ? • Genuine independent 'consultants' do not acquire employment rights – but ….. • In certain circumstances what may have been intended to have been an independent consultant will be treated as an employee • Income tax – company's obligation to pay tax at source • Intellectual Property ownership

32. Employee or Consultant – some Do's and Don'ts • No single test – courts look at the overall situation. If you want a consultant relationship, then • DO: • Make clear that any office space provided is temporary accommodation • Address correspondence to the consultant to his Company, not the individual • Ensure that the consultant' records "fees" in the Company books, not "salary"

33. Employee or Consultant – some Do's and Don'ts • DON'T: • Allow paid holiday or paid medical absence • Include the consultant in any internal documentation such as a telephone lists etc • Issue instructions regarding the work undertaken by the Consultant • Prevent the Consultant from accepting work from other sources

34. More Questions ? • Andrew Gowansandrew.gowans@osborneclarke.com(650) 462 4020 • Rupert Vernallsrupert.vernalls@osborneclarke.com(650) 462 4022