Doing Business in the United States of America

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Doing Business inthe United States of America

• By Dr. David W. Leapard
• Eastern Michigan University
• Ypsilanti, MI
• ACTE, Las Vegas, NV
• December 15, 2007

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U. S. RegulationofForeign Investments
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• There is no need to obtain formal approval from
  financial authorities to set up a company in the
  U.S.
• Foreign exchange controls are generally absent.
• The non-U.S. investor is generally free to make
  any desired arrangements for financing the U.S.
  enterprise.
• There are no requirements to register the
  investment of foreign equity capital or loans.
• Interest and royalty rates charged to the U.S.
  company may be freely established, although they
  will be scrutinized by U.S. tax authorities.
  There are no registration requirements as to
  transfer of technology agreements.
• The foreign-owned U.S. enterprise may freely
  remit U.S.profits abroad, and its owners may
  freely repatriate their equity or debt capital
  investment. Dividends, interest, royalties and
  service fees may also be freely repatriated,
  although such payments may be subject to U.S.
  withholding tax of 30 or a lower treaty rate, if
  applicable.

4
Aviation

• Domestic air transport of passengers and freight
  in the U.S. is limited to U.S.-registered
  aircraft. These aircraft may only be registered
  by U.S. citizens or permanent residents,
  partnerships in which all partners are U.S.
  citizens, or companies organized in the U.S. in
  which the president and 2/3 of the directors and
  managing officers are U.S. citizens and 75 of
  the capital stock is held or controlled by U.S.
  citizens.
• Foreign corporations lawfully organized and doing
  business under the laws of the U.S. or any state
  thereof may register aircraft if such aircraft is
  based and primarily used in the U.S. In addition,
  a certificate of public convenience and necessity
  is required for operation as a domestic carrier,
  and such certificates are limited by statute to
  U.S. citizens. Moreover, the approval of the U.S.
  Department of Transportation is required for all
  mergers with, or acquisitions of control over,
  U.S. air carriers.

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Banking

• Both the federal government and the states
  highly regulate banking, and their impact on
  foreign banks isparticularly complex. In general,
  several legal forms are available to foreign
  banks, and a government charter or license is
  required. A banking charter may be obtained from
  either the U.S. Comptroller of the Currency for a
  national bank, or from the pertinent state
  banking supervisor for a state bank. Before
  obtaining such a charter, a foreign bank must
  receive U.S. Federal Reserve Board approval to
  become a bank holding company. All directors of a
  national bank must ordinarily be U.S. citizens,
  although the Comptroller has the authority to
  waive this requirement as to a minority of the
  directors when the bank is affiliated with a
  foreign bank. A similar requirement often applies
  on the state level.

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Communications and Broadcasting

• The Federal Communications Act of 1934 prohibits
  the granting or transfer of licenses to any
  foreign government or its agent, a foreign
  individual or entity, or to any U.S. corporation
  whose capital stock may be voted or is controlled
  more than 20 by foreign persons.
• The FCC has authority to review mergers between
  telecommunications common carriers under a public
  interest standard in which foreign ownership or
  control may be a factor.
• State public service commissions also regulate
  telecommunications mergers, acquisitions, and
  financing transactions in intrastate
  communications services such regulatory
  authority may impact foreign investors through
  certification procedures for market entry and
  reporting requirements for changes of control of
  telecommunications companies licensed therein.

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• Defense Industries Generally

• The Defense Industrial Security Program is
  designed to promote national security by
  preventing companies under excessive foreign
  control from engaging in classified work.

8

• Insurance

Insurance companies in the U.S. are regulated
heavily on the state level. This includes
extensive financial disclosure in establishing or
acquiring an insurance business in a state as
well as approval from the state insurance
commissioner. Some states have U.S. citizenship
and residency requirements for directors of
insurance companies. Despite this regulation,
there are many foreign insurers operating
throughout the U.S.
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• Maritime
• Coastal and freshwater shipping in the U.S. is
  restricted (with
• limited exceptions) to vessels built and
  registered in the U.S.
• and owned by U.S. persons. For this purpose a
  corporation
• qualifies as a U.S. person only if it is
  organized under U.S.
• law its chief executive officer, chairman of the
  board and a
• majority of its U.S. directors are U.S. citizens
  and at least
• 75 of its shares are owned or controlled by U.S.
  citizens.
• Similar restrictions apply with respect to
  vessels engaged in
• towing or salvaging operations in the U.S., and
  to fishing
• vessels operating in U.S. territorial waters.
  Generally, only
• U.S. vessels are permitted to fish in U.S. waters
  or bring fish
• caught in non-U.S. waters into U.S. ports except
  where
• applicable treaties provide otherwise.

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Mineral Leases and Resources

• Energy resources generally are regulated by both
  state
• and federal laws. The federal Mineral Lands
  Leasing Act
• allows mineral lands owned by the federal
  government
• to be leased only to U.S. citizens and to
  corporations
• organized in the U.S. The latter may be
  foreign-owned,
• but in general a greater than 10 foreign
  ownership is
• allowed only to the extent the foreign owners
  country
• grants similar rights to U.S. citizens - that is,
  reciprocity
• is required. The Secretary of the Interior
  determines
• what countries do not provide reciprocal
  treatment.

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Power Generation and Utility Services

• The Atomic Energy Act prohibits foreign ownership
• or control of nuclear power facilities. In
  addition,
• only U.S. persons may obtain geothermal steam
• and similar leases of federal land or licenses to
  own
• or operate hydroelectric power facilities. In
  these
• latter cases, the U.S. person may be a U.S.
• registered corporation, and there is no limit on
• foreign ownership or control however,
  applications
• where foreign ownership or control is involved
  are
• often more highly scrutinized.

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Real Estate

• Over 30 states, particularly those with
  extensive farming areas, have laws restricting
  foreign interests in real estate, some applicable
  to ownership by foreign persons and some
  applicable only to inheritance by foreign
  persons. Certain of these laws are specifically
  directed to investments in agricultural land. In
  most instances it is possible to structure the
  investment to avoid the applicability of the
  state laws concerned.

13
Reference

• Goldman, Marvin S., U. S. Regulation of Foreign
  Investment, Chapter 4, Doing Business in the
  USA. Thelen, Reid Priest, LLC.

14
Financing in the United States

• With the globalization of world economies,
  non-U.S. businesses have increasingly looked to
  the U.S. capital markets as a major financing
  source. Many are attracted to the size of the
  U.S. capital markets and to their sophistication
  and well-established stability. Moreover, the
  U.S. capital markets provide non-U.S. businesses
  with a means to broaden their investor bases, and
  to gain a higher profile both in their home
  markets and abroad.

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Types of Financings

• There is no regulatory limitation on types of
• financing vehicles available to non-U.S. issuers
• in the U.S. capital markets. The most common
• Financing vehicles are equity and debt offerings,
• and commercial bank borrowings.

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Equity Offerings

• Capital is often raised in the U.S. by non-U.S.
• businesses through the issuance and sale of
  equity
• securities on either a public or private basis.
• In addition to common equity, non-U.S. issuers
  can also offer
• preferred or preference stock. The terms of
  preferred
• securities can vary in many ways, including, for
  example, as
• to dividend, voting and redemption rights as well
  as rights
• upon liquidation or dissolution of the company.

17
Offshore Transactions Exemption (Regulation S)

• Regulation S generally provides that any offer or
  sale of securities
• that occurs outside the U.S. is not subject to
  the registration
• requirements of the 1933 Act. An offer, sale or
  resale of securities
• That satisfies all conditions of Regulation S is
  deemed to have
• Occurred outside the United States. and, thus is
  not subject to
• Registration requirements. The Regulation S safe
  harbor is available
• for the issuer of the offered securities and, if
  the issuer is a non-U.S.
• company, for resale by persons other than the
  issuer. Securities
• offered outside the United States by a U.S.
  issuer, however, will be
• Considered restricted and subject to holding
  period and other
• resale restrictions.

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Offering Employer Securities to Employees Located
in the United States (Rule 701)

• Many foreign companies with operations in
• the U.S. have stock option or stock
• purchase plans that they would like to make
• available to their U.S. employees. However,
• they often do not want to register with the
• SEC or otherwise become subject to the
• reporting and regulatory system of the U.S.
• securities laws. SEC Rule 701 is the principal
• means by which companies accomplish this
• objective.

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American Depositary Receipts

• American Depositary Receipts (ADRs) are
  transferable
• certificates that enable U.S. purchasers to
  acquire foreign
• securities. ADRs are issued by a depositary
  bank, usually
• located in the U.S. Each ADR represents an
  interest in
• securities of the foreign issuer held by an agent
  of the
• depositary bank, usually called the custodian, in
  the home
• country of the issuer. They can be used in
  connection with a
• public securities offering or an offering under
  Rule 144A.
• Under normal circumstances, the holder may
  surrender the
• ADRs to the depositary at any time for the
  underlying
• securities of the foreign issuer. Because ADRs
  offer
• practical advantages for U.S. investors, they are
  frequently
• utilized by foreign issuers raising capital in
  the U.S.
• marketplace.

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Sarbanes-Oxley Act

• The Sarbanes-Oxley Act, effective 30 July, 2002,
  makes extensive changes in
• corporate governance and disclosure obligations
  of companies that file registration
• statements under the 1933 Act or become reporting
  issuers under the 1934 Act. The
• law has generally ignored the differences in
  practices and corporate governance
• regimes between the United States and other
  countries, and has extended the reach
• of the U.S. laws to many aspects of the internal
  affairs and governance regimes of
• non-U.S. companies and their auditors. The SEC
  continues to adopt rules to
• implement the Act, with the result that there are
  continuing changes in the
• applicable rules. For that reason, it is
  important that any foreign private issuer
• considering registering shares under the 1933 Act
  or becoming a reporting issuer
• under the 1934 Act consult its advisors as to the
  latest developments in this area.
• Although the Act gives the SEC specific rule
  making authority to reduce the
• application of certain provisions to foreign
  companies and their auditors, to date the
• SEC has made relatively little distinction
  between U.S. and non-U.S. companies.

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Environmental Protection

• Any foreign party interested in extending its
  operations to the United States must consider the
  potential risks of environmental liability early
  in the process of entering into a transaction.
  Federal, state and local laws in the U.S. impose
  numerous environmental restrictions and
  obligations upon business operating in the U.S.
  The Environmental Protection Agency (EPA) is the
  government agency primarily responsible for
  enforcing environmental restrictions and
  obligations contained in federal environmental
  statutes. However, the EPA often delegates its
  enforcement obligations to state environmental
  agencies.

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U.S. Bankruptcy andReorganization Law
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Types of Legal Recourse Available to U.S.
Companies in Financial Difficulty

• U.S. companies facing serious financial
• difficulties have a choice of filing one of two
• kinds of bankruptcy cases, known as Chapter 7
• and Chapter 11, after two chapters of the U.S.
• Bankruptcy Code. The Bankruptcy Code is a
• federal law, so either Chapter 7 or Chapter 11
• can be used by a company organized in any of
• the 50 states. In addition, there are state law
• procedures available to companies in
• financial difficulty.

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Goals of the Two Types

• In a Chapter 7 case, the trustee
• liquidates the assets of the debtor and
  distributes them to creditors according to a
  statutory scheme.
• In Chapter 11, within limits, the debtor can
  create an individualized plan for the
  reorganization of its business and the treatment
  of its creditors, and the creditors can vote to
  accept or reject the plan.

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Establishing the Claim

• The creditor should file a proof of claim
  before the bar date. (the court imposed deadline
  to file claims) in order to establish its claim.