International Contracts and Business Structures
Contracts: Essential Elements
- Consent: Agreement between parties with legal capacity, declared or explicitly stated.
- Object: Must be real, lawful, and capable of being determined.
- Cause: Onerous and licit.
- Form: Mandatory for certain contracts, generally speaking.
International Contracts
Types:
- Unilateral/Bilateral
- Short-term/Long-term
- Agreement
- Cooperation
- Public/Private
According to Object:
- Sale & Purchase
- Commercial Agency or Distributor
- Franchise
- Joint Venture, etc.
Structure:
- Place and date of execution
- Title
- Identification of the parties
- Whereas clauses
- Clauses: definitions, purpose, obligations, termination and effects, confidentiality, assignment, governing law, dispute resolution, miscellaneous, schedules.
Establishing a Business in Foreign Markets
- Mergers and Acquisitions (M&A): New corporation or takeover of one or more companies.
- Share Purchase Agreement
- Transfer Agreement
- Joint Venture
Vienna Convention (CISG)
The UN Convention for the International Sale of Goods (1980).
Applies to:
- Formation of contracts between parties in Member States of the EU.
- Transfer of personal property (raw materials, manufactured goods).
- Parties’ rights and obligations.
- Remedies in case of breach.
Not Mandatory: Option-out clause available.
Does Not Regulate: Validity, ownership, liabilities for death or injury of third parties.
UNIDROIT Principles
Applies to interpret international commercial contracts, covering validity, formation, interpretation, content, third-party rights, performance, breach, and consequences. Parties must agree on them or not have chosen any applicable law.
Principles:
- Freedom of contract
- Binding effect
- No form required
Not mandatory unless specified by the parties.
Commercial Distribution Agreements
Types: Commission, agency, distributor, franchise.
Rome Convention (1980)
An international convention that unifies rules at the European level, increasing contracting relationships and avoiding “forum shopping.”
Applies to: Choice of applicable law in international contracts, all EU Member States and submitted countries.
Uniform Rules or Main Clauses:
- Freedom of choice.
- In absence of choice: closest connection, where performance takes place, country carrying out the performance.
- Closing and specific rules: mandatory rules, consumer protection, credit, non-habitual professional transactions.
Applies even if the parties have not submitted to it. Does not regulate contracts with prevailing conventions and some insurance contracts.
Rome I Regulation (2009)
Result of EU community law, applicable by national laws, harmonizing conflict-of-law rules in the EU. Exception: Denmark.
Applies to: Choice of applicable law in international civil and commercial contracts, all EU Member States submitted to the Rome Convention.
Uniform Rules or Main Clauses:
- Freedom of choice.
- In absence of choice: seller’s habitual residence, country carrying out performance or closely connected.
- Specific rules: carriage of goods, consumer contracts, insurance contracts, individual employment contracts.
Applies even if the parties have not submitted or are not Member States. Does not regulate public law contracts, some insurance contracts, or pre-agreements.
Agent Contract & Agency Agreement
Commercial agreement between a principal (company with ownership) and an agent (carries out activities on the principal’s behalf in a specific territory).
Characteristics: Autonomy, continuity, negotiation and conclusion of business on behalf of others, and remuneration.
Agent’s Rights: Receive remuneration (fixed, dependent, variable), review accounting of the principal, contract subagents, receive commissions.
Agent’s Obligations: Sell a minimum amount, operate within a limited territory, non-competition clause.
Principal’s Rights: Prohibit the agent from competing for up to 2 years after termination.
Principal’s Obligations: Provide the agent with necessary documentation and information, pay the agreed remuneration, notify acceptance or rejection of a transaction (within 15 days in Spain).
Main Contractual Clauses
- Territory
- Products
- Scope of the agency (exclusivity, non-competition, risk assumptions)
- Agreement terms (payments, eligible operations, responsibilities)
- Remuneration
- Duration and termination
Consequences of Termination: Breach (customer indemnification – annual average of the last 5 years), death, compensation for loss of customers, or compensation for damages. Intellectual property rights and miscellaneous clauses.
Summary: Agent acts on behalf of the principal, remuneration is commission-based, lasting relationship, medium management costs for the principal, medium control, risks and rewards on the principal, medium control of policies, existence of international uniform legislation.
Distribution Agreement
The distributor resells, accepting the risk. Independent. Resale price limited in the contract. Can only operate in one territory; active sales (resale in another territory) are forbidden, but passive sales (customers from another territory) are allowed.
- Full Exclusivity Distribution Agreement: Only the distributor can sell.
- Partial Exclusivity Agreement: Only one distributor, but the principal can also sell.
- Selective Distributor Agreement: For luxury products.
Distributor’s Rights: Decide the price.
Distributor’s Obligations: Not sell similar products for one year after termination, minimum purchase or resales, minimum stock level.
Principal’s Rights: Stop if the distributor doesn’t pay, establish a maximum price.
Principal’s Obligations: Deliver and sell to the distributor at the agreed time, repair or substitute in case of defect, offer post-sale assistance.
Termination: Fixed term accomplished or denied by mutual decision; if there is no fixed term, prior notification is needed some months before. If there is a breach, termination can be immediate or delayed as established.
Consequences: Indemnifications are unusual in Spain, but there are damages and losses indemnification (abusive termination by the principal) or customer indemnification based on the legal theory of unjust enrichment, with the same requirements as agency regulations.
Summary: Distributor acts in its own name, profit consists of the margin obtained in resales, lasting relationship, low management costs for the principal, low control over customers and sales policy, risks and rewards on the distributor, absence of international uniform legislation.
Share Purchase
Transfer of business as a whole (set of elements comprising the establishment, brands, and labels) to continue operating.
Transfer of Shares: The property of the legal entity owner is acquired, assuming assets and liabilities within it.
- Acquisition Advantages: Only assets transferred are shares, and the status and conditions are verified by the purchaser in the due diligence procedure.
- Acquisition Disadvantages: The purchaser directly acquires liabilities and obligations, and some contracts may provide that a change of control in the company terminates the contract.
Transfer of Assets: Without liabilities unless specified.
- Acquisition Advantages: Purchaser only acquires assets and liabilities agreed upon and is aware of them.
- Acquisition Disadvantages: More complex.
Differences:
- Share purchase involves target shareholders and buyer (transfer of assets involves only the target and buyer).
- Liabilities of the target continue (more limited in asset transfer).
- Payment is made directly to the owner (payment is made directly to the company in asset transfer).
Stages of the Agreement
- Identification of the Object: Target company.
- Preliminary Negotiation: Meetings, contacts.
- Establishing the Basis for Negotiation:
- Confidentiality Agreement: Restricts access and use of confidential information provided.
- Letter of Intent: Sets main terms and conditions of the transaction and the schedule.
- Due Diligence Process: Review of the company, covering financial and legal aspects. Detects risks and contingencies.
- Essential Risks: Political risks of the country, accuracy of the accounts, whether key personnel will remain involved.
- Types of Due Diligence: Data room (traditional), virtual data room (relevant documents online), data bundle (seller provides all requested documents).
- Due Diligence Report: Executive summary (briefly states contingencies found) and a detailed report (extended information).
- The Agreement Itself: Private document drawn up by the two parties, defining all purchase and sale terms and conditions:
- Prerequisites and conditions of execution.
- Limitations on liability (for purchaser and vendor).
- Non-compete clauses.
- Confidentiality.
- Guarantees and procedures for claiming contingencies.
- Choice of law clauses and other clauses.
- Prerequisites: Terms and conditions that MUST be met to effect the transfer of shares, ownership interests, or assets.
- Closing: Transfer effectively made in compliance with prerequisites and mandatory formalities of the applicable legislation.
- Post-Closing: Happens if a posterior review was agreed. The vendor undertakes to respect the result of the audit. Based on the balance sheet differences, the auditor will adjust the price.
Agreement Structure
- Attendees: People involved.
- Acting: Detail of the parties.
- Recitals: Characteristics of the companies involved.
- Clauses:
- Definitions of terms.
- Object description.
- Price and price adjustment.
- Payment and terms.
- Party representations and warranties.
- Party liabilities and guarantees.
- Renewal of the managing body.
- Additional assistance.
- Non-competition agreement.
- Confidentiality.
- Resolution of discrepancies.
- Expenses.
- Service of notice clauses.
- Governing law.
Purchase and Sale of Goods
Bilateral agreement: exchange of price for a single transaction. National transactions are governed by the Civil Code; international transactions are governed by CISG, Rome Convention, ICC, UNIDROIT. No mandatory nature; parties can exclude, derogate, or modify it.
Formation of the Contract:
- Preliminary stage: Negotiations.
- Offer: Terms to enter into the contract.
- Acceptance: Clear and absolute, without conditions. Modifications constitute a counter-offer.
- Conclusion: Acceptance.
Documentation: Transportation documents (bill of lading), commercial invoices, insurance and payment method, packaging list, certificates (origin and inspection), export license.
Seller’s Obligations and Rights: Deliver the goods (material delivery means placing goods in possession of the buyer or representative, and place of delivery), deliver on time, deliver goods in correct condition, hand over related documents, deliver possession of goods.
Buyer’s Obligations and Rights: Pay for the goods, pay on time, take delivery of the goods, examine and confirm conformity of the goods, accept goods at the agreed time and place, reject within a limited period if goods are damaged.
Breaches:
- By the Seller: Claim for damages, additional time, repair or substitution of product, termination of contract, price reduction.
- By the Buyer: Interest on payment (in case of late payment), delay in delivery, claim for damages, termination of agreement, additional time.
Franchises
Independent companies:
- Franchisor: Grants the right to operate under its format. Provides initial capital investment, know-how, and experience.
- Franchisee: Receives the right to use the operating system and trademark. Gains own clients, business, and access to a new market.
Types:
- Product Franchise: Manufactured goods.
- Business Franchise: Licenses, management system, know-how.
Legal Framework: National law, EU Treaty, Royal Decree, European Ethics for Franchisees.
Essential Elements: Parties, written agreement, granting (licenses, technical know-how, uniform image, trademark), exclusivity, continued assistance, consideration (royalties).
Franchisor’s Obligations: Maintain image, trademark, and know-how, promotion, quality, assistance, accounting and administrative services, management of employees.
Franchisee’s Obligations: Maintain image and protect trademark, payment of royalties, operate according to the operating system, cooperation, confidentiality.
Exclusivity: Certain geographical area or partial exclusivity.
Breach of Contract: For confidentiality or non-competition. Arbitration will regulate. Consequences: unilateral termination, restitution by the franchisor, payment plus indemnifications.
Mergers and Acquisitions (M&A)
(Usually take place in the same countries or without significant cultural differences.)
- Simplified: A surviving company directly holds all of the capital representing a company being taken over.
- Non-Simplified: More than two companies interacting.
Steps in a Merger:
- Analysis of capability.
- Merger plan development (balance sheet, management body, exchange of shares).
- Call: Meet with directors to approach and inform employees (SA: 30 days, SL: 15 days).
- Committee of shareholders.
- Publishing of the merger project (1 month before).
- Merger deed (formalized at a notary).
- Registration (Commercial Registry).
Joint Venture Agreement
Two or more companies perform a different activity, and each one makes contributions. This creates a new legal entity. Common control; the objective is to combine human resources and materials.
Characteristics: New company that benefits the parent companies, common interests, sharing of risk and reward, independent management bodies.
Advantages: Sharing of costs, complementarity, risk limitation.
Disadvantages: Shared management, risk related to the chosen partner, legal risks such as changes in local legislation.
Types:
- Based on Activity:
- Horizontal JV: Two companies with equity interest in the same or related business, at the same level of the production chain.
- Vertical JV: Two companies working independently at different levels.
- Combined JV: Created in an area not common to the parties.
- Based on Involvement of Shareholders:
- Controlled JV: One member controls the company.
- Independent JV: The parent companies merely invest in the operation.
- Participatory JV: Companies are shareholders and are directly involved.
- Based on Percentage of Ownership:
- 50/50 Equity Interest: Perfect balance maintained between the parties.
- Multiple Venturers: Control distributed among various shareholdings.
- Majority Shareholders: Party with control.
Contractual Structure
Preliminary Documents:
- Confidentiality and Exclusivity Agreement: Prevents revealing confidential information that may be created or exchanged.
- Letter of Intent: Non-binding document establishing the main points for negotiations.
Shareholders’ Agreement:
- Basic Terms and Conditions: Object of the agreement (definition of all activities, products, or services forming the subject matter, and identification of the geographical area).
- Bylaws.
- Contributions by the shareholders: Assets or monetary.
- Structure and percentage of participation: Level of shares/participation allocated based on the measurement of each contribution. Determines ownership by the shareholder’s percentage.
- Shareholders’ meeting: Central governing body at the General Meeting.
- Administration system: Determines the system to manage the company’s daily activities (Board of Directors).
- Transfer of shares regime: Limits.
A non-competition clause is normally included. Reporting accounting and financial information is an essential part of the JV. A dividend policy must be established (minimum and in proportion to the shareholder’s ownership, normally). Deadlocks provisions should be included.