Safely Navigate Legal and Regulatory Minefields in International Expansion
You may have at some point thought about taking your business beyond Singapore’s shores. Overseas markets present new opportunities but such ventures come with risks and you need to be properly armed and advised to navigate what may potentially be a legal minefield. Here are some tips to steer you on the right path.
Decide On The Structure
What corporate vehicle will the partnership take place under and what corporate vehicles does the company you are expanding to even have? Will you and your partner be shareholders and directors in a private limited company, or a more informal partnership?
You should familiarize yourself with the pros and cons of each type of corporate vehicle so that you can make an informed decision – for example, can you be made personally liable for the debts of a company? Which corporate vehicle reduces your tax liability?
Put Everything Down On Paper
- Once you have chosen the corporate vehicle for your venture, consider having a shareholders / partnership type of agreement. Such an agreement will set out important terms such as:
- The term of the venture;
- The split in contributions (monetary or otherwise) / profits between you and your partner;
- How the venture may be terminated;
- The exit terms should either of you decide to terminate the venture;
- How the business should be run on a day to day basis – for example, who will be the authorized cheque signatories? Is it practical for the both of you to be signatories if you are not staying in the country of business? What types of decisions must be made by the both of you together, and what types of decisions can be made by each of you without consulting the other?
- Restrictive covenants – what happens if your partner leaves the venture after 1 year and sets up a competing business right across the street? What if he takes all of your staff who join him on the other side? Consider protecting yourself with a non-compete / non-solicitation clause in the agreement and check if such clauses are enforceable in the jurisdiction that you wish to operate in.
- You should also consider what should be the governing law to your agreement and what the dispute resolution mechanism should be. Should the law governing the contract be Singapore, or will it be in the country which you will be setting up shop in? Factors such as the nature of your business, the location of parties and the efficiency of the judicial system should be considered as it will significantly affect (1) how your agreement is interpreted and (2) where you / your partner will need to commence proceedings in the unfortunate event of a dispute.
Also, how will the dispute be resolved? Will parties be allowed to proceed straight to court, or will parties be required to undergo mediation by a chosen mediation service provider before being allowed to commence proceedings? This may also impact your decision on choosing the law governing the contract – for example, the Mediation Act 2017 in Singapore provides that where there is an agreement to mediate and a party to the agreement commences proceedings without first attempting mediation, the other party may apply to the Singapore court to stay proceedings until mediation has been concluded. Such a remedy may not be available in another jurisdiction. Another option for parties is to opt for arbitration in which case parties will have to ensure that they have a properly drafted arbitration clause in their agreement.
- If your venture involves the creation of intellectual property, the assignment of the rights to the intellectual property should be addressed in your agreement as well. Otherwise and when one of you decides to terminate the venture, there may be a dispute over who owns the right to the intellectual property. To that end, you should also check if the country you are looking to do business in has a robust IP protection regime.
Seek Expert Advice For Your Venture
In addition to finding a trustworthy business partner, one of your top considerations should be navigating the regulatory framework in the other country. You don’t want to pour out your entire war chest into establishing connections with a business partner or third party suppliers etc, signing agreements to invest in infrastructure and to purchase inventory when you hit a regulatory stone wall which hinders you from carrying out your business e.g. export / import controls.
You may not even be aware that some practices are illegal. For example, you may be told that it is customary and completely alright to pay a supplier or government official in another country “coffee money” to secure distribution rights etc. Not only may this practice be actually illegal in that country, you will also be liable for an offence under the Prevention of Corruption Act which has extra-territorial effect, allowing you to be charged for corrupt acts which took place even overseas.
Your business may also be significantly affected by the local labour laws – for example, you may find that in other Asian jurisdictions terminating an employee may not be as straightforward as it may be in Singapore or other “at will” jurisdictions.
As a new entrant into a foreign market, you may not be as familiar with the local regulatory landscape as you may be in Singapore and this problem is compounded when the laws, rules and regulations overseas are inconsistent or inaccessible. The best way around this problem is to seek the advice of local counsel who are familiar and well versed in the relevant areas of the law – for example, Rajah & Tann Singapore is part of the Rajah & Tann Asia network with a presence in 10 countries in Asia including Singapore and our clients appreciate that we are able to connect them seamlessly with our regional offices and to provide the contextualized advice that they need.
When a dispute arises with suppliers and customers and friendly negotiations break down, your first port of call is to check the dispute resolution clause and governing law clause of your agreement, if any. This will determine how and where you can commence proceedings or resolve your dispute. If the contract is completely silent on these things, you may be at the mercy of the foreign court processes which you may not be familiar with.
In respect of suppliers and customers, disputes may be inevitable but it will be significantly easier for you to navigate these disputes if you have a properly and clearly drafted agreement which clearly sets out the rights and obligations of each party (see our contribution to the previous article on granting credit terms of sale to its customers where we had set out what sales contracts should contain).
In respect of your business partner, we would again emphasize the importance of having a formalized agreement between the both of you so as to prevent any misunderstandings and to allow the both of you to navigate a dispute in a civil manner.
Any opinions or views of third parties expressed in this article are those of the third parties identified, and not those of OCBC Bank. The information provided herein is intended for general circulation and/or discussion purposes only. Before making any decision, please seek independent advice from professional advisors.
No representation or warranty whatsoever in respect of any information provided herein is given by OCBC Bank and it should not be relied upon as such. OCBC Bank does not undertake an obligation to update the information or to correct any inaccuracy that may become apparent at a later time. All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.
Francis Chan — Deputy Head (Disputes) Rajah & Tann Legal Basix Practice Group
Francis Chan — Deputy Head (Disputes) Rajah & Tann Legal Basix Practice Group
Francis is a leader of Rajah & Tann’s Legal Basix practice which provides growth-stage legal advice, representation and documentation to emerging enterprises, start-ups, SMEs and high growth companies. Francis advises clients in respect of commercial disputes involving shareholders / directors, tenancy, contract and debt recovery. Francis specialises in employment law and has advised institutional employers and C-suite/management level employees including conducting investigations and disciplinary proceedings, litigating employment disputes, and engaging with and resolving disputes with the MOM / CPF Board / TADM / TAFEP and union representatives.
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