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In-House Counsel Summit Export & Import Considerations and Successor Liability April 4, 2013

In-House Counsel Summit Export & Import Considerations and Successor Liability April 4, 2013. Adrienne Braumiller, Partner Michelle Schulz, Partner www.BraumillerSchulz.com. Agenda. Definition and Introduction Hypothetical transaction #1 Export controls Basic compliance issues

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In-House Counsel Summit Export & Import Considerations and Successor Liability April 4, 2013

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  1. In-House Counsel SummitExport & Import Considerations and Successor LiabilityApril 4, 2013 • Adrienne Braumiller, Partner • Michelle Schulz, Partner • www.BraumillerSchulz.com

  2. Agenda • Definition and Introduction • Hypothetical transaction #1 • Export controls • Basic compliance issues • Successor liability in an export situation • Due diligence and disclosure • Hypothetical transaction #2 • Customs & import controls • Basic compliance issues • Successor liability in an import situation • Due diligence and disclosure • Takeaways

  3. Definition and Introduction • 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.

  4. Introduction Continued • Seminal Cases: • Export: • Sigma-Aldrich, 2002 • Hughes Electronics/Hughes Aircraft and Boeing, 2003 • Import: • Shields Rubber Co., 1989 • Ataka America, 1993

  5. 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?

  6. Export Controls • More than 20 different US Government agencies have regulations controlling exports. • The primary agencies are the Directorate of Defense Trade Controls (DDTC) of the Department of State and the Bureau of Industry & Security (BIS) in the Department of Commerce. • DDTC administers the International Traffic in Arms Regulations (ITAR) in 22 CFR 120-130 governing export of defense articles and technical data.

  7. Export Controls (cont’d) • BIS administers the Export Administration Regulations (EAR) in 15 CFR 730-774, governing export of commercial and dual-use articles and technology. • Both agencies have a strict policy of enforcement. • Both agencies also have procedures for voluntary disclosures.

  8. 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, and • Failure to maintain records • And of course, intentional or fraudulent conduct.

  9. Successor Liability In An Export Situation • The basic rule: By acquiring the company, you are acquiring their 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: Check everything out prior to acquisition and voluntarily disclose any compliance issues. • Sometimes disclosure does not occur until after closing.

  10. 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.

  11. 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?

  12. 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 violation.

  13. 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.

  14. 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.

  15. Due Diligence and Disclosure • Import and Customs compliance things to check 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.

  16. Takeaways • 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.

  17. Questions

  18. Contact Information Adrienne Braumiller Partner Michelle Schulz Partner Braumiller Schulz LLP International Trade Law 5220 Spring Valley Rd Suite 200 Dallas, TX 75254 214-348-9306 Adrienne@BraumillerSchulz.com Michelle@BraumillerSchulz.com www.BraumillerSchulz.com

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