The Internationalizing of a Canadian Business
(This Client Guide provides general information and is made available to provide a general description of the transition process for a Canadian company to operate internationally. This is not intended to constitute legal advice, which by its nature is situation specific. If you have questions about a specific legal issue in this area, you should consult a lawyer who will provide legal advice only after reviewing all the facts relevant to your situation, rather than relying on the general information provided in this Guide.)
The transition of any business enterprise from a strictly Canadian domestic business into one carrying on business internationally, whether it be in one or more other countries, typically occurs through three distinct phases.
The first phase starts after a product or service has achieved domestic market success and/or the domestic market has been saturated or exploited to its fullest. The business then will probably want to expand into new markets elsewhere in the world. A natural way to do this is to start to engage in the export of its product or service which has proved to be successful in the domestic Canadian marketplace.
Because domestic business success is one of the best indicators of predicting international success, the Canadian business at this stage, would probably be familiar with one or more of the following types of commercial documents:
(i) Sales Contracts;
(ii) Procurement/Purchase Contracts;
(iii) Commission Sales and Representative Agreements;
(iv) Distribution Agreements; and/or
(v) Franchise Agreements.
Phase One for the "Internationalizing" Business involves not only the use of this documentation within the country of export but also making the necessary changes to have similar foreign commercial contracts which will ensure the proper export, transport and delivery of the product or service to and in the new market. Additional new types of documentation will be encountered in this process, including documentation related to commodity tax, customs and duties issues.
Phase Two for the "Internationalizing" Business begins when the business, having successfully engaged in some international business, begins to aim for more substantial activities in other countries, either to meet new product demands established in Phase One or to secure new sources of manufactured products, or both. Typically, the Canadian business will do this through licensed production agreements, manufacturing agreements or franchise agreements with a variety of selected parties in the other countries where it may wish to do this. Businesses may target new market "regions" but only wish to have licensed production or manufacturing in one country. An example would be to target Asia but only have South Korea as the location of production or manufacturing.
The final and most mature stage of the internationalizing business occurs with the decision by the Canadian business to directly invest capital in another country by establishing a permanent business enterprise in that other jurisdiction. This process is called foreign direct investment.
Standard Form Documentation
In beginning to establish international business operations, i.e. in stage one, the manager of an enterprise responsible for the venture into another country will often begin to prepare or have prepared a standard sales representative agreement, a standard form distribution agreement or other appropriate standard form agreements. These documents will become the legal template for the Canadian enterprise to begin business in any new country throughout the world.
There are a great many of these particular types of agreements, and their form and substance vary significantly from jurisdiction to jurisdiction because they are significantly affected by or regulated by local law (meaning the law of the other jurisdiction and not that of Canada) and by the specific legal considerations (such as currency exchange restrictions) relevant in that other jurisdiction. There are some sets of countries where it is more or less appropriate for a standard form of agreement to be prepared, such as those in the European Economic community. This can, however, be somewhat dangerous and the prudent business lawyer will therefore advise the Canadian business to take great care to ensure its form of agreement actually works in all countries where it is expected to be used.
When the next phase is reached, and the Canadian business has to consider the assembly or production of the Canadian business' goods in the foreign country, a form of licence, production or franchise agreement will be required. Under such agreements, the Canadian enterprise provides the foreign importer or other national resident in the target country with a right to sell, to produce or manufacture or process by franchise, the particular product in that other country. Underlying the success of this type of transaction, from the perspective of the Canadian business, is the prerequisite that it maintain and have direct control over the exported product and how it is dealt with at all stages before its sale to the ultimate customer.
Intellectual Property Matters
As a result of this latter fact, intellectual property matters (namely, all of the patent, trade-mark and trade-name and design mark considerations) become very important features of any such arrangement. Since the foreign producer is actually going to use the "know how" of the Canadian business to produce and, probably, market the unique product (or a non-unique product at substantially lower cost), it is critical to provide that legal control over the utilization of the relevant intellectual property remains within the hands of the Canadian enterprise.
The IP Audit
A clear assessment and understanding of the intellectual property situation with respect to the exporting Canadian entity is key at this point, because such an assessment can identify the protections which may be necessary and available and provide guidance on the protection of "know-how" issue to the "Internationalizing" Business right from the first export agreement through the licensing situation and even into the direct investment stage.
The package of intellectual property rights, raw material sourcing and local law restrictions on the use of those rights will often provide either a good road map for the successful internationalizing of a product or service or a "red flag" notice of the perils of proceeding with internationalization at all. Business managers should note that this area of the law is highly technical and very specialized, both with respect to the contracts that are developed and with respect to the registration requirements and applicable legal structures in each different country.
One frequently hears of the "Internationalizing" Business entering a joint venture. The term "joint venture" is one of the most over-used and imprecise legal tags applied to any type of arrangement. Business generally seems to have become infatuated with this term. However, in many cases, upon analysis, a joint venture turns out to be a strictly contractual undertaking which may involve only product sales or distribution by one of the parties and/or licensed manufacturing. Business lawyers would consider this type of "joint venture" to be a hybrid form of arrangement as opposed to a strict or true joint venture.
A true joint venture would be considered by most Canadian business lawyers to be a duly and properly formed legal entity (typically a corporation) formed by two or more other legal entities, individuals, or any mixture of them, having as its particular purpose the completion of a specified project and/or the conducting of business by that project or entity over a relatively long period of time, but for no other reason.
Offshore Manufacturing - Importing back into Canada
One other type of international legal agreement is the manufacturing agreement, whereby a Canadian business arranges to have some or all of its Canadian market share supplied by product manufactured offshore. Usually, this is for one or more of the following reasons:
(i) the availability of low cost, skilled labour;
(ii) the ability to qualify for low or zero customs duties;
(iii) the proximity to high quality raw material sources or unused plant capacity;
(iv) the benign regulatory climate for manufacturers in the particular jurisdiction; and
(v) the financial and other incentives offered by the foreign government.
The well prepared manufacturing agreement aims at achieving one or more of the following goals:
(i) consistent high quality production of the product;
(ii) suitable and appropriate packaging for the product;
(iii) the prohibition of the production of product in excess of that ordered by the Canadian party; and
(iv) the establishment of suitable warranties, terms and conditions.
Important to any international business transaction is the process to be used for dispute resolution between the parties and choice of the law of the contract. There is a high degree of international acceptance of various commercial arbitration rules which are specifically designed to be used in the settlement of international commercial disputes. As a result, "Internationalizing" Businesses most often select commercial arbitration as their preferred method of solving these types of problems. An example of rules frequently selected is the International Chamber of Commerce (ICC) Rules of Conciliation and Arbitration. The lower cost and the efficiency of the use of the arbitral process, which more suitably provides for a continuing relationship between the parties, provides the best basis for solving disputes arising from international agreements. Other dispute solving mechanisms are also available.
Factors which need to be considered in selecting the appropriate dispute resolution mechanisms include:
(i) cultural sensitivities such as the need for one party or another to "save face";
(ii) concerns over the litigious nature of a party based in North America;
(iii) drafting - unlike Canadian business lawyers, lawyers and parties based in other countries would like to use precatory or expression of intent
(iv) choice of dispute resolution site and language(s); and
(v) governing law choice so that each party will be comfortable that there will not be conflicting interpretations or other aberrations which render the
contract less than adequate for its purpose.
These are just some of the issues confronting the "Internationalizing" Business. It is necessary to re-emphasize that it is essential to understand, from the Canadian business point of view, the position it is in vis-a-vis the intellectual property rights which pertain to its products or services. This assessment should be not only from the perspective of what the situation is in Canada, but also the perspective of what the situation is in any country to which the Canadian business is going. This understanding can provide the lawyer the opportunity to develop certain protective devices and address the general concerns of a Canadian seller in establishing and in maintaining a successful and profitable foreign distribution network over the period of foreign export.
It is hoped these comments will be of help to you in understanding some of the basic features of foreign trade and investment.
If you have any questions or wish further information on securities matters, please contact:
Richard A.B. Devenney (416) 362-4225 (Direct Dial and Phonemail) or
E-mail to: firstname.lastname@example.org
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