When companies want to expand globally, in-house legal departments need to be part of the process.
Businesses need to turn to their legal departments for advice on worldwide risks, given the fact that most U.S. enterprises have a long-term interest in foreign expansion.
In fact, 84 percent of companies included in EY's 2015 Capital Confidence Barometer, which was released in April, said overseas expansion is expected to be the focus of their mergers and acquisitions strategy over the next year. Similarly, 80 percent of business executives said that U.S. companies should expand internationally for long-term growth, according to a recent Wells Fargo study. The study also showed that larger companies favor expanding in China (31 percent), India (24 percent) and Brazil (24 percent), while smaller companies favor Canada, Mexico and China (each getting 17 percent).
“Expanding globally seems to be a trend,” James A. Merklinger, chief legal officer for the Association of Corporate Counsel (ACC), tells InsideCounsel.
This comes as some nations are harder for companies to operate in legally than others. Many have already or will soon implement new laws or regulations.
Consider what is taking place now in Cuba. Under President Obama, regulations on U.S. commercial activity there have been “liberalized,” though the long-standing embargo remains in place, according to Pedro A. Freyre, chair of the international practice at Akerman and former general counsel for Dow Chemical's Latin American Division.
“The scenario changed very, very quickly in the past eight months,” Freyre says. “Inside counsel need to keep abreast of the changes.”
“Cuba is the land of Oz,” he adds. “You are not in Kansas anymore…. It's a maze, self-contradictory at times.”
Given its Marxist economy, Cuba is similar to China 30 years ago or Vietnam 20 years ago, Freyre said.
In Cuba, U.S. companies will find that authorities are “well-trained… (and) intelligent technocrats,” he adds. The building of trust and reliability, as well as strong human relationships are “absolutely critical” there, he adds, and U.S. companies and lawyers will likely find that Cuban officials are “fairly sophisticated in transnational deals.”
“Do not assume you are dealing with a backwater of civilization,” Freyre says. “These guys know a lot. They are very tough negotiators.”
U.S. companies may want to hire a law firm knowledgeable on Cuba and, as needed, hire local Cuban lawyers for local matters. Freyre advises that U.S. counsel should supervise and control any lawyers in Cuba that may be required for specific tasks.
When seeking a lawyer anywhere in the world, Merklinger has found that many legal departments are not hiring a law firm but hiring a specific lawyer at that firm.
In addition, some companies opt to have a lawyer who is from a certain country become an employee and work for the legal department.
That person would have knowledge of the nation's “local law, customs and culture,” Merklinger says. The lawyer could be initially recruited to work at the company's world headquarters for a year or two of training, and then go back to his or her original nation to work in a company office.
Local in-house lawyers typically handle certain kinds of local issues. If warranted, some cases may be sent back to practice groups at headquarters where specialists will handle them.
“It's up to the company to determine what works best,” Merklinger says.
Whatever is decided in terms of hiring, it is important for general counsel and other in-house lawyers to be involved in global expansion discussions sooner rather than later, Merklinger says. That way companies find out early in the process if something is prohibited by law, trade restrictions or sanctions. Merklinger has even heard of an instance where a company thought it was acquiring an entire business, but all it had purchased was a building. Appropriate legal advice would have prevented this error.
“The lawyers need to be involved in the deal from the beginning,” Merklinger says, advising companies against playing “catch up” with their legal needs.
As a company's presence in a foreign nation evolves, its legal needs evolve as well. Initially, it may need a real estate lawyer, but once it builds a manufacturing plant, that plant needs to be staffed, and the company may need an employment lawyer, Merklinger says.
Similarly, when dealing with foreign officials, anti-bribery laws are often different in each nation. “What is culturally acceptable in one country could land you in jail in the United States or the United Kingdom,” Merklinger says.
Freyre notes that in Cuba, “The issue of bribery is very low down on the scale of risk.” It is “far lower” of a risk than in Venezuela, which he described as “profoundly corrupt.” But it is noteworthy that almost everyone that U.S. businesses interact with in Cuba will be a “public official,” he says. That could be important as far as the Foreign Corrupt Practices Act is concerned.
In addition, there have been many mergers and acquisitions in the past year, according to ACC survey results. Merklinger says that leads to a company thinking more “globally.” M&A activity may also mean that the acquiring company will get a business with an existing legal department. The company will then have to decide whether to keep these employees or reduce the staff.
There is also the more practical concern of cost. When considering alternative fee arrangements vs. traditional hourly billing for the use of law firms, a recent ACC survey revealed that general counsel in many foreign nations are more likely to use alternative options than their colleagues in the United States, Merklinger says.
The big picture
When looking at the big picture, A. Douglas Melamed, a professor at Stanford Law School and former general counsel at Intel, compares the in-house legal department to a primary-care or family-practice physician. It provides primary-care law, just like a doctor would give primary care to a patient. If there is a legal matter that needs the attention of a specialized outside lawyer, it acts as an interphase, just like a primary-care doctor would with a specialized doctor, such as a cardiologist.
“The in-house lawyer has a comparative advantage over the outside lawyer in understanding of the company and the industry,” Melamed says. The in-house lawyer has just one client—the company—but deals with a broader range of legal problems.
On the other hand, the outside lawyer has a number of clients and has greater expertise in a certain area of law.
When trying to find a lawyer or law firm with regional specialization, ask around. Obviously, one issue is cost, but stressing cost too much could lead to forgetting about the “long-term” cost if the advice causes “legal mistakes,” Melamed says.
Knowledge of the culture of another nation is also very important when selecting a lawyer. Melamed says that lawyers need to be effective communicators with participants in the legal system. For instance, the general counsel in an American company likely has “an intuitive feel how things work in the United States.”
“They can make judgments, they can hire lawyers from instinct and experience,” Melamed says. It becomes much more difficult for the American general counsel to do the same things in a foreign culture, such as in China.
Even with Europe, there are some important differences that American general counsel may face. For instance, European Union law does not recognize attorney-client privilege between in-house counsel and the corporation—in contrast to the United States, Melamed says.
Melamed says that “every country is different” when it comes to the practice of law. Some have “immature legal systems” or “corrupt legal systems” or a government that does not “keep its word,” he explains.
“When you leave the United States a lot of what we take for granted … just doesn't apply out there—even if they are developed countries,” Melamed says.