in house counsel summit successor liability export import considerations september 12 2013
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In-House Counsel Summit Successor Liability: Export & Import Considerations September 12, 2013 . Ashley McCauley, Attorney C USTOMS AND B ORDER P ROTECTION “Policemen” to Enforce Regulations 19 CFR. Export Controls. D EFENSE I TEMS

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in house counsel summit successor liability export import considerations september 12 2013
In-House Counsel SummitSuccessor Liability:Export & Import ConsiderationsSeptember 12, 2013
  • Ashley McCauley, Attorney
export controls


  • “Policemen” to Enforce Regulations
  • 19 CFR
Export Controls
  • Directorate of Defense Trade Controls
  • International Traffic in Arms Regulations
  • (ITAR)
  • 22 CFR
  • Bureau of Industry & Security
  • Export Administration Regulations
  • (EAR)
  • 15 CFR
  • OFAC, Census Bureau
export controls cont d
Export Controls (cont’d)
  • BIS, DDTC, OFAC, and other agencies regulate the export, reexport, and transfer of:
    • U.S. origin commodities, software, technology, and services
    • Certain foreign-origin commodities, software, technology, and services
    • Even purely foreign activities of U.S. subsidiaries or affiliates abroad
  • All agencies have a strict policy of enforcement.
  • Most agencies also have procedures for voluntary disclosures.
basic compliance i ssues
Basic Compliance Issues
  • Some situations that can result in export compliance liability. For example:
    • Failure to obtain and use appropriate export licenses
    • Failure to properly declare export transactions
    • Incorrect license jurisdiction
    • Deemed exports – foreign national employees, visitors, contractors
    • Failure to maintain records
  • And of course, intentional or fraudulent conduct.
successor liability i n an e xport s ituation
Successor Liability In An Export Situation
  • The basic rule: By acquiring the company, you are acquiring its export compliance liabilities.
    • If the acquired company is found to have export compliance liabilities, the acquiring company will be held responsible for them.
    • This can occur after the acquisition is complete.
    • This rule has been upheld in the courts.
  • The basic strategy: Conduct full due diligence prior to acquisition and voluntarily disclose any compliance issues.
  • Sometimes disclosure does not occur until after closing.
  • Successor liability means the potential liability of the acquiring company for violations committed by the acquired company.
    • Typically triggered via a merger or acquisition.
      • Certain exceptions where an asset sale could generate the same successor liability as a merger or acquisition.
        • i.e., a de facto merger or a continuation of the business.
    • Not codified in customs and export laws.
    • Authority extrapolated from federal court or common law, and from rules of constitutional construction.
  • Liability includes:

-Audits -Investigations -Disclosures -Liquidated damages

-Penalties -Additional duties, taxes, fees.

seminal export cases
Seminal Export Cases
  • Export:
      • Sigma-Aldrich, 2002
      • Hughes Electronics/Hughes Aircraft and Boeing, 2003
hypothetical transaction 1
Hypothetical Transaction #1
  • Giant Corporation (Giant) is in the process of acquiring Little Corporation (Little).
  • Little sells in the domestic market and for export.
  • Little’s products and technology are subject to US export controls.
  • After acquisition, Little will be merged into Giant as an operating division.
  • Does Giant have any concerns?
  • What should Giant do to mitigate those concerns?
due diligence and disclosure
Due Diligence and Disclosure
  • Examples of due diligence that should be performed:
    • Export policies, procedures and internal structure
    • Review past 5 years of export records and licenses
    • Obtain a report from Census containing export data
    • Export violations, disclosures penalties
    • Export compliance training given and received
  • Anything discovered needs to be disclosed.
customs import controls
Customs & Import Controls
  • US Customs & Border Protection (CBP) enforces the Tariff Act of 1930 (Title 19 USC), the Customs Regulations (19 CFR), and the Harmonized Tariff Schedule of the US.
  • CBP has broad authority to examine goods, review transactions, conduct audits, and investigate violations.
  • CBP can also assess penalties and liquidated damages for violations.
basic compliance issues
Basic Compliance Issues
  • Some import and Customs compliance issues:
    • Undeclared assists,
    • Tariff classification errors,
    • Use of free trade agreements,
    • Dumping and countervailing duties,
    • Use of duty free exemptions, and
    • Recordkeeping errors.
  • And of course, deliberate or fraudulent activity.
seminal import cases
Seminal Import Cases
  • Import:
      • Shields Rubber Co., 1989
      • Ataka America, 1993
hypothetical transaction 2
Hypothetical Transaction #2
  • Acme Corporation (Acme) is acquiring ABC Company (ABC), a US importer and distributor.
  • ABC has been importing for several years and takes advantage of free trade agreements.
  • After acquisition, ABC’s business and assets will be incorporated into Acme and ABC itself will be dissolved.
  • Does Acme have any concerns?
  • What should Acme do to mitigate those concerns?
successor liability in an import situation
Successor Liability In An Import Situation
  • If the acquiring company maintains the acquired company as a separately incorporated subsidiary, the liability remains with the subsidiary.
  • If the acquired company is merged into the acquiring company and is dissolved as a separate corporation, the liability is typically dissolved - but there are exceptions.
  • There are many other things that may need to be done or fixed – but that is another discussion.
latest update
Latest Update
  • Decision of the US Court of International Trade (USCIT) in United States v. Adaptive Microsystems LLC, Slip Op. 13-50, Apr. 10, 2013
  • Adaptive Microsystems’ predecessor company had alleged Customs violations.
  • Adaptive Microsystems went into receivership, then was acquired.
    • New company also named Adaptive Microsystems.
    • A corporate officer of new company was also officer of predecessor company.
    • A substantial number of employees were transferred to new company.
latest update cont d
Latest Update (cont’d)
  • A Wisconsin court had authorized the acquisition and said that the new company would not assume any of the predecessor’s liabilities.
  • The USCIT did not agree with the Wisconsin court.
    • The USCIT cited Wisconsin law on continuation of liability and that the Court may not have been aware of the Customs liability.
    • The USCIT cited the continuation of officer and employees, the use of a very similar name, and Adaptive Microsystems’ own representations that it was the same company.
latest update cont
Latest Update (cont.)
  • Based on this, the new Adaptive Microsystems was responsible for the liabilities of the predecessor company.
  • This ruling may be subject to appeal to the Court of Appeals for the Federal Circuit, so may be subject to change.
due diligence and disclosure1
Due Diligence and Disclosure
  • Import and Customs compliance issues to review in an acquisition:
    • Compliance policies and procedures,
    • ITRAC report covering 5 years of imports,
    • Use of free trade agreements and duty free exemptions,
    • Last 5 years of import records – if they exist,
    • Tariff classification database,
    • Purchasing records for assists and separate payments, and
    • Products subject to dumping and countervailing duty.
  • File a prior disclosure for any issues discovered.
why it matters penalties
Why It Matters: Penalties
  • EAR
    • Civil penalties up to $250,000 per violation
    • Criminal penalties up to $1,000,000
  • ITAR
    • Civil penalties up to $500,000 per violation
  • Other penalties:
    • Imprisonment, loss of export privileges, seizure of goods, damage to reputation
  • This is a subject frequently overlooked in an acquisition but may be dangerous.
  • The regulating agencies may be vigilant in enforcement, but also have generous prior disclosure procedures.
  • Find and fix the problems before the acquisition is final.
  • Due diligence and voluntary disclosures will help to prevent successor liability issues.
  • Get expert assistance if you don’t have it in-house.
contact information
Contact Information

Ashley McCauley


Braumiller Schulz PLLC

International Trade Law

5220 Spring Valley Rd Suite 200

Dallas, TX 75254