There are a range of legal decisions that are made during the lifecycle of an international investment. Whilst initially you might decide to invest in a company, property or interest, there will be decisions to be made throughout the investment to ultimately generate a return. An investment structure that was efficient at the time of incorporation may no longer be the most efficient when looking to raise external finance, expand into new markets, bring in new shareholders or sell.
This is an important consideration for international investors, as your company might be incorporated in one jurisdiction, but held through a holding company in another, have banking relationships in a third and generate income from a number of different jurisdictions. Each will have its own legal requirements, tax implications, disclosure requirements and potential for disputes.
Overall, there are nine main areas to consider within the lifecycle of an international investment. Whilst they are listed below in order, they can overlap significantly, and decisions made early on can impact what options you have much later in the lifecycle. You may find that you need to reconsider your original investment structure based on developments during the investment.
Formation
The first key decision to be made is where and how to set up your investment. There are a number of factors to consider when deciding on the jurisdiction, including the legal environment, political and regulatory stability, market access, enforceability of contracts, banking facilities and the treatment of foreign ownership.
If the business is looking to operate within the UAE, there are a number of options to consider, such as setting up a mainland company, a free zone company or a holding company in an appropriate financial centre. Each will have its own legal requirements, permitted activities and implications for operating in and out of the jurisdiction. This should also be considered for other jurisdictions such as Singapore, Hong Kong, Mauritius and Luxembourg.
You also need to think about the legal structure you would like to set up. If the business is operating, you may want to set up a limited liability company. However, if you are looking to hold shares in subsidiaries, IP or other assets, then a holding company may be more appropriate. Partnerships, trusts and foundations may also be useful, depending on your investment or family wealth goals.
Your formation documents should reflect the relationship between the parties. The memorandum and articles of association, shareholders' agreement, investment agreement and constitutional documents should outline who has control, what capital is being invested, restrictions on the transfer of shares, voting rights and dispute resolution.
If you set up your company cheaply, you could end up paying dearly if the structure doesn't fit your needs going forward.
Ownership
Once your investment vehicle has been set up, you will need to consider who owns it. With international investments, the shareholder on the register may not actually have control or benefit from the investment. Shares may be held indirectly through intermediary companies, trusts or other recognised legal structures.
Determining who the ultimate beneficial owner is now plays a key role in international corporate regulation. Many jurisdictions will require companies to accurately record their ownership and identify who ultimately controls the company and who will economically benefit. This can be relevant during the incorporation stage and when there is a change of ownership.
While you may have a legal owner of the shares, they may not be the beneficial owner or the person with control of the company. If certain powers are reserved in the constitutional documents or shareholders' agreement, the majority shareholder may not have full control over key decisions.
Having a well-negotiated shareholders' agreement in place can help to outline how directors will be appointed, any reserved matters, dividend payments, extra capital requirements, transfers of shares and deadlock situations. It can also provide a mechanism to deal with any disputes between majority and minority investors.
With international ownership, there may be a number of restrictions on foreign investment, industry-specific licensing requirements, exchange controls and tax implications to consider. Just because something is allowed in the country of incorporation, it may not be acceptable in the country of the underlying business.
Banking
Just because you have incorporated your company doesn't necessarily mean you will be able to open bank accounts. Opening and maintaining bank accounts for an international investor can be one of the most challenging parts of setting up your business.
Banks will carry out a lot of due diligence on the company, including who owns it, where the funds are coming from, what the company does, how much it expects to transact and where it is exposed geographically. They may also ask for details of directors, shareholders, ultimate beneficial owners and counterparties, as well as the commercial reasons for the transactions.
If the ownership structure is complex or the business doesn't make sense, it could cause delays. Banks will also look at any exposure to sanctions, politically exposed persons, money laundering and the types of countries in which the company operates.
Your legal structure should be set up so that it will be easy to open bank accounts. All documentation should be in order, including company records, board minutes, shareholder information, contracts and evidence of where the investment funds are coming from.
Currency exposure, payment methods, foreign exchange restrictions and banking facilities should also be considered. If your corporate structure is not suitable for providing reliable banking facilities, it may not provide much commercial value.
Operations
Once your investment is in operation, there will be a number of things to consider from a legal perspective. This will depend on what you are doing with your business, which jurisdictions you operate in and whether your company is regulated.
Depending on the industry you are in, you may have licensing, employment law, tax, data protection, consumer protection, competition and industry-specific regulations to consider. Your company may be compliant in the country of incorporation; however, you may be breaching local requirements in the countries where you have employees, customers, assets or a permanent presence.
Contracts should also be considered. Supply, distribution, franchise, IP licence, employment and service contracts should clearly outline what each party is responsible for, what they will be paid and what the risks are.
Consideration should be given to which law governs the contract and where any disputes may be resolved. If the contract is governed by the law of one country, you may need to enforce it against your counterparty or its assets in another country. Arbitration can be a good neutral option for resolving disputes, but you should consider whether the award will be enforceable and what interim relief is available.
Tax compliance can also be an issue. You may have transfer pricing, withholding tax, permanent establishment, VAT and economic substance requirements to consider.
Financing
As your business grows, you may need to raise more capital than was invested by the original shareholders. You may look to raise finance through bank loans, private equity, venture capital, shareholder loans, trade finance or other methods.
Different financing options will have different legal implications. Equity financing will dilute your ownership, but generally there will be no obligation to repay. Debt financing will preserve your shareholder percentages but will create an obligation to repay, along with interest costs, covenants and potential enforcement of security.
Lenders may also require guarantees, share charges, property mortgages, assignments of receivables or security over other business assets. With international financing, you need to consider whether these are valid, registered and enforceable under the laws of the relevant jurisdictions.
You should also consider any restrictions on paying dividends, changes in control, additional debt and the disposal of assets. Loan agreements often have clauses that can restrict your ability to restructure or undertake large transactions without the lenders' approval.
If your business has multiple subsidiaries, you also need to consider how you will split the debt and security. If your financing creates exposure to assets throughout your group, it can create risks.
Expansion
Expanding internationally can create further legal complexities. When entering a new country, you may want to set up a subsidiary, register a branch, appoint a distributor, enter a joint venture or purchase an existing business.
Each option will have different implications. A subsidiary will generally be a separate legal entity, whereas a branch will be part of the foreign parent company. This could create exposure for the parent company to liabilities incurred locally.
Joint ventures can help you gain local knowledge, access to distribution networks and approvals, but you need to ensure that capital contributions, control and profit-sharing arrangements are clearly outlined. If there are differing expectations between the partners, this can create significant disputes if they are not covered in the documentation.
You also need to consider IP protection, data, competition and employee movement. What is lawful in one market may need to be significantly changed in another.
Before investing, you should consider these factors:
Restructuring
It is rare for an international investment structure to remain the same. Tax changes, changes in ownership, business strategy, financing requirements and regulatory changes may mean your structure is no longer suitable.
A restructure can include transferring assets, merging subsidiaries, setting up a new holding company, changing shareholders, consolidating operations or splitting business activities. In some situations, you may also wish to change the jurisdiction in which the company is incorporated using a recognised continuation or re-domiciliation process.
However, there may be implications to consider. Transferring assets may incur capital gains tax, stamp duty, VAT or other costs. Creditors' rights, security arrangements, employee entitlements and change-of-control clauses in contracts should also be considered.
If you are restructuring to make your position more tax-efficient, you should ensure that it has a genuine commercial purpose. If it doesn't have a commercial purpose or doesn't comply with applicable anti-avoidance rules, it could come under scrutiny. Transactions between related parties should have supporting documentation and follow transfer pricing principles.
The key is to ensure that there is a genuine commercial purpose and that the arrangement will stand up to legal, regulatory and tax scrutiny in all relevant jurisdictions.
Succession
Succession planning is often overlooked until something happens unexpectedly that highlights issues with the ownership structure. In family-run businesses and private investment groups, the death or incapacity of a key shareholder can cause uncertainty around who will have control, manage the company and distribute the assets.
There are a number of differences between jurisdictions regarding the legal position of shares, business interests and personal assets. Inheritance laws, forced heirship provisions, matrimonial property rules and foreign wills should be considered.
Trusts and foundations can be used to hold and manage assets. This will depend on which law governs the trust or foundation, what the assets are and whether they are recognised in the relevant jurisdictions. Family constitutions, shareholders' agreements, succession documents and powers of attorney may also be used.
If you have assets in multiple countries, you should consider how the different legal systems will interact. A will in one jurisdiction may not resolve succession issues relating to property or company shares in another.
Having a well-documented succession plan can help reduce the risk of the company becoming fragmented, management disputes arising and assets having to be sold under pressure.
Exit/Sale
The final stage of your investment lifecycle will be selling, transferring or realising your investment. Having a plan in place for exiting your investment is important. How well your company is documented, its ownership structure, tax compliance, licences and contracts can directly affect how valuable your business is and how long it will take to complete a transaction.
There are a number of ways to exit, including selling shares or assets, a merger, a management buyout, a public offering or liquidating the investment vehicle. Each will have different implications for tax, liabilities, approvals and employees and creditors.
If you sell the shares, generally the purchaser will gain ownership of the company along with any existing liabilities. If you are selling the assets, you can transfer specific assets and liabilities. This may require individual consents, registrations and approvals.
Due diligence will be key. The purchaser will want to review your financials, ownership, any litigation, employment matters, IP, tax, regulatory compliance and key contracts. Representations, warranties, indemnities and escrow arrangements will often be negotiated.
If you have operations in multiple jurisdictions, there may be local implications. Restrictions on transfers, merger control, foreign investment approvals and tax implications can affect how quickly you can complete the transaction and how much you will receive.
Investment Structures Must Adapt
The legal lifecycle of an international investment demonstrates that you shouldn't consider your international structure only once. Decisions made during formation can affect your ability to access banking, raise finance, expand and plan for succession many years later. As your investment grows, you may also find that your initial structure needs to change significantly.
Finding the right balance between certainty, flexibility, tax efficiency and compliance can be a challenge. Working closely with your corporate lawyers, tax advisers, accountants, banks and local counsel can help.
There isn't a one-size-fits-all approach when it comes to international structures. It will depend on your goals, where your assets are, what markets you are targeting, how you want to own them and how long you plan to hold them.
The most successful investments will be those that have an appropriate structure that allows them to adapt to changing commercial circumstances, ensuring that ownership is protected, operations continue and there is a clear exit strategy.
Dr Sunil Ambalavelil is the Global Executive Chairman of Kaden Boriss, an international law firm specialising in franchise and business agreements. He is an experienced legal adviser who has advised and supported the international expansion of numerous global brands.
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