Integration of New Business Units (Acquisitions) & The Implementation of Compliance. August 9 th, 2016 Olga Torres Lenny Feldman Mary King

Transcription

1 Integration of New Business Units (Acquisitions) & The Implementation of Compliance August 9 th, 2016 Olga Torres Lenny Feldman Mary King

2 MAD Due Diligence Merger, Acquisition, Divestitures and Trade Compliance Considerations

3 Agenda Purpose of Trade Compliance Due Diligence Successor Liability Pre and Post MAD Integration Tips & Recommendations

4 Why trade due diligence? Reduces the buyer s chances of buying violations Successor liability Reduces the seller s risks Price impact Liability under indemnity clauses if deal goes through Buyer may walk away (deal falls through) Successful integration post-merger Determine if certain government notifications or filings are required pre or post merger

5 Successor Liability Sigma-Aldrich Case BIS sought to impose penalties for EAR violations for the alleged unlicensed export of biological toxins made by a target company prior to selling its partnership interests to Sigma- Aldrich. Boeing Case Boeing paid $32 million to settle ITAR violation charges Hughes Space and Communications (HSC) provided Chinese nationals with ITAR technical data Ultimately, Boeing settled the case and assumed joint responsibility for a $20 million fine and $12 million suspended penalty.

6 Trade Due Diligence Analysis of trade transactions: imports/exports International Traffic in Arms Regulations (ITAR) Export Administration Regulations (EAR) Deemed exports Anti-boycott laws OFAC sanctions and proscribed parties

7 Directorate of Defense Trade Controls (DDTC) controls defense articles, defense services, and related technical data, including most space-related articles - ITAR. / 22 CFR Bureau of Industry and Security (BIS) controls dual-use items EAR/ 15 CFR; and the Bureau of Census controls trade-statistics and EEIs Office of Foreign Assets Control (OFAC) oversees embargo and sanction lists - OFAC regulations. U.S. Customs and Border Protection enforces all exports & imports at U.S. borders. Policemen Customs Regulations / 19 CFR

8 Exports Due Diligence Exports: If the target regularly exports commodities, technology or software from the U.S. it should have an export compliance program in place. Ask to examine the target s export compliance manual If the company is relatively small, its exports are not particularly sensitive commodities, and those exports are not to sensitive destinations, the export compliance program need not be complex or highly documented. If there is no export compliance program, and the company is a regular exporter of goods, services or technology--- possible --- export violations. The lack of an export compliance manual is a major red flag! Lack of interdepartmental communication is a major red flag! Lack of management involvement in export compliance is a major red flag!

9 What documents should you Policies and export control manuals review? Copies of filings with the government & correspondence and licenses received Export control classification (matrix) of goods, technology, services and software List of international sales Is screening conducted? Documented? Do they conduct export audits regularly?

10 International Transactions: Exports Has the target company been charged with export violations in the past? If so, review the paper trail. The acquiring company should examine the facts giving rise to the violation, whether the matter has been solved. Has the target eliminated weaknesses? Have there been any voluntary disclosures by target company? If so, review this documentation as well.

11 International Transactions: Exports Interview export compliance managers, compliance personnel and business representatives. Is the program s implementation overseen by a senior company official? Are employees regularly trained on export controls and recordkeeping? Assessment of the training program, and the extent to which the training is actually understood and followed by company personnel.

12 Due Diligence Concerns: Seller What is your overall state of compliance? Prepare to submit export documentation to Buyer and Buyer s counsel Update export classification matrix Prepare to provide up-to-date chart of export licenses and other authorizations to buyer Do you have good recordkeeping? Perform self assessments and/or audits Train personnel responsible for trade compliance issues to coordinate with Buyer during due diligence review Identify trade compliance point person for the deal Work with outside counsel

13 Due Diligence Concerns: Buyer Seller s industries & technologies? Seller s operating locations and sales territories? What entities will be involved in the transactions? Who will conduct due diligence? Will you use outside counsel? Who are the key legal and business contacts at Seller s? Volume and nature of imports/exports POST ACQUISITION GOAL: Integration into pre existing business

14 Pre-closing considerations Pre-close actions will depend on factors such as: Due diligence findings and overall compliance Whether Seller has highly-regulated products or transactions Location of Seller s operations & customer base; are high risk countries involved? Whether the Buyer is a foreign person Post-merger integration and business plans

15 Pre-closing Consider requiring Seller to conduct a compliance audit Identify upcoming exports and plan for compliance If violations are identified, consider voluntary self-disclosures Inform business team of any trade compliance risks Confirm that acquisition agreement fully addresses trade compliance issues

16 Pre-closing If Buyer is a foreign party assess whether deemed export licenses will be required? Is Buyer from a high risk country? E.g., China, Russia Assess whether segregated systems or facilities will be required Could export licenses be required to transfer USML/CCL-controlled assets or commodities? If buying a foreign company, could they be engaged in business with denied countries that could impact your compliance post-acquisition? Assess whether Seller s business activities include defense items or classified information Confirm that required record-keeping structures are in place Develop post-merger integration plan

17 Voluntary Self-Disclosures How to handle voluntary disclosures and investigations? If VSDs are required, who will report what when? Outreach to U.S. Government? Successor liability

18 Government Required Notifications 60-day advance notification to DDTC generally required for any intended sale or transfer of ownership or control of an ITAR-registered entity to a non-u.s. person New detailed instructions issued by DDTC in 2012 Transactions with countries in ITAR are prohibited Licenses and Agreements need to be amended? Seller and Buyer may prepare a consolidated submission or coordinate on sending separate filings to DDTC If all information is not available at time of filing, indicate in letter when additional facts will be available CFIUS filing ITAR compliance plan

19 Foreign Buyer Most likely DDTC approval will be required for certain elements of the transaction Coordination with Committee on Foreign Investment in the United States (CFIUS) Voluntary filing Require the submission of detailed information about the business operations of the jointly-filing companies, including information on export controls applicable.

20 Post-Acquisition Integration Post-close filings with State Department (e.g., amending TAAs/licenses or submission of GC to change names of parties signatory to TAA/licenses). Conduct export compliance review of acquired entity Meetings with specific entities and personnel Harmonization of policies, procedures & cultures IT systems integration Training (e.g., provide export compliance training to acquired company s personnel. They should become familiar with Buyer s export compliance structure.)

21 Post-Acquisition Integration The Buyer should establish an internal system to address potential deemed exports. If the Seller or Buyer manufactures or sells products that are on the CCL or USML, foreign employees will not be permitted to have access unless export licenses are obtained. May require coordination with HR and trade at both companies If the Buyer is a foreign party, export licenses may be required for Buyer s foreign national management to inspect the operations of the acquired company.

22 Post-Closing Integration In all transactions, even if only involving U.S. companies, companies must notify DDTC within 5 days of closing: Effective date of closing; Names and addresses of all parties involved (including all subs, divisions, etc.) of the target company and whether any corporate name changes have occurred as a result of the transaction; DDTC registration codes of all parties involved; Case numbers of licenses/agreements or approvals to be assumed or relinquished; List of senior officers and points of contact for each party.

23 Post-Closing Integration EAR requirements All valid export licenses should be transferred pursuant to EAR A list of transferable licenses should be developed for each business unit. Note that reexport licenses cannot be transferred pursuant to and the acquirer will need to obtain new licenses.

24 Post-Acquisition Integration Obtain copies of CJs/CCATs Termination of business with embargoed countries. E.g., cessation of contracts. Adoption of export compliance program. Post-closing discovery of a violation: Stop the activity giving rise to the violation immediately. Conduct an internal investigation. Voluntary Disclosure Consider action for breach of contract

25 Questions? Olga Torres, Managing Member

26 Integration of New Business Units (M&A) & Best Practices for the Implementation of Compliance Programs Lenny Feldman, Esq. Senior Member SANDLER, TRAVIS & ROSENBERG, P.A

27 Disclaimer All materials contained in this presentation are protected by United States copyright law and may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written approval of Sandler, Travis & Rosenberg, P.A.. You may not alter or remove any trademark, copyright or other notice from copies of the content. The materials contained in this presentation are provided for informational use only and should not be considered legal advice. The hiring of a lawyer is an important decision that should not be based solely on advertisements or seminar/ webinar materials. Before you decide, contact us and we will send you free written information about our qualifications and27 experience. Sandler, Travis & Rosenberg, P.A. All Rights Reserved.

28 I. General Considerations

29 Initial Considerations Asset purchase. Operating entity usually retains its Tax ID (IRS) Number(s) used for current licenses/certifications. Equity/Stock purchase. Different entity usually becomes the company carrying all licenses/certifications under its Tax ID (IRS) Number. Personnel: Will managing and hands-on personnel remain intact in either scenario? Will qualifying brokers, individuals and coordinators for the licenses/certification remain? Board of Directors: Will at least some of the current directors remain on the Board in either scenario?

30 Importance of Customs Rules Equity Transaction -Are you paying the proper price? Asset Transaction - Are you confident the company assets are accurately presented and valued?

31 Global Customs Processes Impact on multiple company functions IT Functionality Data IT Support IT Organization Roles Responsibilities Technical Skills Training Information Technology Organizational Structure Suppliers Customers Brokers I/E Agents Customs Process Relationship with Third Parties Financial Systems and Procedures Supply Chain Processes System Interfaces Accounting Transactions Budget Manufacturing Logistics Inventory Process Interfaces

32 Global Customs Exposure Loss of Market Share Penalties of as much as 800% of the loss of revenue, not to exceed the value of the goods Criminal Liability Loss of Preferential Tariff Treatment Negative Media Exposure Impact upon Share Price Seizure of Merchandise Cross border delays Revenue Losses Impact with direct and indirect taxation Sarbanes-Oxley and internal controls for public cos.

33 Legal Standard Generally, the corporation who purchases assets as opposed to equity or stock does NOT succeed liability of selling corporation. Two recognized exceptions when acquirer will be liable: Mere continuation of seller De facto merger Adaptive Microsystems CIT case. Finding of mere continuation and liability in context of $6.8 million penalty.

34 Corporate Compliance Activity Corporate compliance activity means activity performed by a business entity to ensure that documents for a related business entity or entities are prepared and filed with CBP using reasonable care, but such activity does not extend to the actual preparation or filing of the documents or their electronic equivalents. For purposes of this definition, a business entity is an entity that is registered or otherwise on record with an appropriate governmental authority for business licensing, taxation, or other legal purposes, and the term related business entity or entities encompasses a business entity that has more than a 50 percent ownership interest in another business entity, a business entity in which another business entity has more than a 50 percent ownership interest, and two or more business entities in which the same business entity has more than a 50 percent ownership interest.

35 CBP Position In Customs Service Decision (C.S.D.) 82-79, Customs stated that "provided a broker s legal status does not change, a mere change in name effects only powers of attorney filed thereafter [e]xisting powers to that broker remain effective". If there is a change of an entity s legal status, consider how extensive is the change, whether a new broker license is required, and whether an entirely new entity is created. HQ , issued 9/6/2000.

36 II. Due Diligence Checklist (Customs Broker)

37 Checklist Corporate Formation Corporate License Local Permits National Permit(s) Officers Background Surety Bonds IOR, Custodial, Other Automation & Filing Powers of Attorney Terms & Conditions

38 Checklist(2) Client Intake & Maintenance Responsible Supervision & Control Other Licenses Conflicts/Relations Financial Recordkeeping Security / C-TPAT History of Legal Actions Open Claims/Issues with CBP & PGAs

39 Responsible Supervision & Control Classification Value Preference Programs Origin Entry Bonded, TIB, etc. Bonded Warehouse, FTZ Reconciliation CBP inquiries 28s and 29s PEAs (PSCs) & Protests CBP claims liquidated damages, penalties, seizures CBP rejects, late files, census errors PGAs (Permits, licenses, declarations)

40 III. Import

41 A. CBP Broker Permits Agency: U.S. Customs and Border Protection (CBP) Service: Local and national permits enable company to file import entries with CBP Standard: Licensed customs broker must serve on board of directors Client Base: Importers

42 Broker Permits Asset Purchase Necessary Steps: Provide written notification to CBP s national and local offices advising of change in ownership Provide names/information of additional members on board of directors for background investigation Time Frame: Immediate.

43 Broker Permits Equity Purchase Necessary Steps: Issue Articles of Incorporation empowering company to conduct brokerage business, including an officer who is a licensed customs broker. Submit an application to CBP in order to become a licensed customs brokerage. Subject each officer to a background investigation (takes several months unless underwent investigation within last 3 years) along with supporting documentation. File applications for local and/or national permits to conduct business in various districts. Reapply for automated broker interface and Automated Commercial Environment (between broker and CBP).

44 Broker Permits Equity Purchase (2) Necessary Steps: Undergo CBP testing to demonstrate ability to file nationally under remote location filing or RFI. Terminate existence of current entities by providing proper notification to CBP. Register in all states where conducting business and provide proof to CBP. Obtain new surety bond. Time Frame: 4 to 7 months

45 B. CBP Warehouse Permits* Agency: U.S. Customs and Border Protection (CBP) Service: Allows warehouses to store and/or manipulate merchandise for import or export and defer/ avoid duties Standard: Warehouse meets all recordkeep -ing and filing standards Client Base: Importers Exporters *Includes container freight stations and general order warehouses.

46 Warehouse Permits Asset Purchase Necessary Steps: Provide written notification to CBP local offices advising of change in ownership Provide names/information of additional members on board of directors for background investigation Time Frame: Immediate.

47 Warehouse Permits Equity Purchase Necessary Steps: Issue Articles of Incorporation and provide to CBP. Submit a new application to CBP for each bonded warehouse. Provide financial statements. Provide copies of leases, fire/theft insurance, etc. in new company s name. Provide copies of federal, state, country or local occupational licenses/permits in new company s name. Provide personal references. Subject each officer to a background investigation (takes several months unless underwent investigation within last 3 years) along with supporting documentation. Obtain new surety bond. Undergo CBP premises inspection. Time Frame: 2 to 4 months

48 C. CBP C-TPAT* Certification Agency: U.S. Customs and Border Protection (CBP) Service: Enables importers, brokers and consolidators to receive reduced and/or expedited inspections Standard: Maintain updated supply chain security program. Undergo periodic CBP review Client Base: Importers Exporters Business partners (carriers, brokers) *Customs-Trade Partnership Against Terrorism

49 C-TPAT Certification Asset Purchase Necessary Steps: Revise on-line corporate profile for any changed corporate data or critical company contacts. Ensure all locations and affiliates implement security procedures. Time Frame: Immediate.

50 C-TPAT Certification Equity Purchase Necessary Steps: Advise all clients and business partners of change in ownership and C-TPAT status. Ensure implementation of all C-TPAT security criteria within and external to company. Reissue corporate security policies and procedures as necessary to reflect new company. Complete new corporate profile and security assessment in on-line C-TPAT security portal and submit to CBP along with copies of new policies and procedures for re-certification. Within one year participate in on-site C-TPAT validation conducted by CBP officials. Time Frame: 2 to 4 months for re-certification. 8 to 12 months for validation.

51 IV. Export

52 A. FMC Consolidator / Freight Forwarder Agency: Federal Maritime Commission (FMC) Service: Ability to dispatch and book sea cargo, consolidate shipments, issue bills of lading, etc. Standard Requires qualifying individual with at least 3 years industry expertise Client Base: Exporters Some importers

53 FMC Consolidator/Freight Forwarder License Asset Purchase Necessary Steps: Inform FMC of purchase and provide purchase agreement Time Frame: Immediate.

54 FMC Consolidator/Freight Forwarder License Equity Purchase Necessary Steps: License can transfer to a new entity if qualifying individual remains. Complete relevant sections of new application including business information, name change, license transfer, ownership and affiliations, and branch offices. Provide new articles of incorporation, board meeting minutes, certificate of good standing. Provide proof of trade name registration. Obtain new surety bond. Revise all bills of lading. Time Frame: 2 to 3 months

55 B. TSA Indirect Air Carrier License Agency: Transportation & Security Administration Service: Ability to dispatch and handle/ screen air cargo particularly on passenger jets Standard Requires security coordinator, security plan and continued training Client Base: Exporters

56 TSA Indirect Air Carrier Asset Purchase Necessary Steps: Inform TSA of ownership change. Time Frame: Immediate.

57 TSA Indirect Air Carrier License Necessary Steps: Equity Purchase Unless purchasing company already was certified, the company must undergo certification process. Provide on-line application with company information. Provide Articles of Incorporation. List all business locations in U.S. Provide copy of valid photo ID from government authority for all IAC principals and security coordinator. Submit information on each partner, office, director or principal for background review. Submit security threat assessments on applicable individuals. Conduct and document training. Undergo TSA premises inspection. Time Frame: 2 to 3 months

58 C. Census AES Registration & Certification Agency: Bureau of the Census (Census) Service: Ability to file electronic export information with Census via Automated Export System (AES) Standard Requires AES certified individual Client Base: Exporters (U.S. or foreign)

59 Census AES Registration & Certification Asset Purchase Necessary Steps: None. Time Frame: Immediate.

60 Census AES Registration & Certification License- Equity Purchase Necessary Steps: If the new company does not yet have an account, submit on-line registration form with company information. Take certification quiz Time Frame: Several days

61 V. Other Requirements

62 Powers of Attorney, Authorization Letters, Terms and Conditions Agency: CBP Census FMC TSA Service: Ability to file documents and service importers and exporters in various transactions. Standard Requires appropriate authorization from client (corporate officer) Client Base: Importers Exporters (U.S. or foreign)

63 Powers of Attorney, Authorization Letters, Terms and Conditions Asset Purchase Necessary Steps: None. Time Frame: Immediate.

64 Powers of Attorney, Authorization Letters, Terms and Conditions Equity Purchase Necessary Steps: Issue new forms to all clients in order to possess legally required authorization to file documents and represent clients before government agencies. Issue new terms and conditions document setting forth liabilities and disclaimers with all clients. Time Frame: 1 to 3 months.

65 VI. Suggested Process

66 Global Customs Due Diligence Review Objectives Global Customs due diligence review should meet the following objectives: Understand the Company s risk profile Understand/document import/export processes, internal controls, policies and procedures Identify exposures, risks and weaknesses Present potential solutions to management

67 Global Customs Due Diligence Review Conduct an on-site review at the importer s premise to achieve the following objectives: Confirm understanding of operations and questionnaire responses Interview Company personnel and responsible for activities that affect information submitted to Customs Limited testing of import/export transactions Identify areas of risk and customs exposure Request information to substantiate operations and internal controls Test internal controls, policies and procedures

68 Global Customs Due Diligence Review Process On Site Interviews Internal Control Testing Recordkeeping Review Test Transactions (Critical Areas & Documents) Due Diligence Report

69 QUESTIONS? Lenny Feldman, Esq. Senior Member SANDLER, TRAVIS & ROSENBERG, P.A

70 Thank you!