March 29, 2019

Global Contractual Framework Legal Considerations

Digital Technology & E-Commerce Blog
Brian Gannon | Ross Berger

In today's business environment, many technology companies find themselves selling their products and services on a global basis. As evidenced by recent news regarding Google, Facebook and Uber that all of them are facing large fines for violating European data protection rules and regulations, companies may find themselves having to navigate local laws and negotiating with governmental authorities or customers outside of their home marketplace. When a company realizes that it needs to expand outside of its local marketplace and offer its products and services on a global basis, it is important for the company to establish a global contractual framework that protects its rights, addresses potential liability issues and satisfies the needs of internal stakeholders. When establishing a global contractual framework, it is recommended that the following be considered:

Diligence Process

What does the global contractual framework need to cover? As a first step, a company will need to conduct an initial diligence process to determine, among other things, where business is conducted, what products and services are being offered, where the products or services are being sold, if sales will be made through resellers or distributors, will global sales impact embedded services or products (or require alternative vendors) and what contracts are in place that support the existing business. A company will also want to receive input and approval from its leadership team regarding future plans. Global contractual framework that does not correctly address future business needs will be outdated on the date it is implemented.

Taxes

Has the most efficient corporate and tax structure been implemented to proactively address tax issues? Companies buying and selling products and services globally should consult with tax advisors to make sure the companies are complying with applicable tax laws, establishing tax strategies that meet business needs and are tax efficient. Tax laws and tax rates vary significantly between jurisdictions. Companies may want to adjust their corporate structure and operations to control how and when they are taxed. Companies often strategically locate entities, assets and operations in certain jurisdictions to reduce their tax burden.

Revenue Recognition

Which legal entity should recognize revenue from the sale of a product or service? When building out a global contractual framework, the framework should ensure that the correct legal entity is recognizing revenue and that the provisions contained in the framework satisfy the company's revenue recognition policies. A company's accounting and finance team should be considered as a key stakeholder during the creation of the framework to ensure that it satisfies finance and accounting needs and adheres to accounting principles during an audit. A company's tax strategy will be directly impacted by applicable revenue recognition policies and should be considered when establishing such policies.

Licensing

Has the relevant legal entity licensed all necessary technology and intellectual property rights to its local affiliates or subsidiaries? If sales must occur utilizing a local affiliate or subsidiary, then appropriate intercompany licensing arrangements must be implemented to ensure that the local affiliate or subsidiary has the necessary rights to sell or license a product or service to a local customer. Intellectual property licensing may also play an important role when setting up any manufacturing operations in a local jurisdiction. Fees paid between entities for intercompany licensing can also affect tax strategies. If a company plans to use third-party distributors or resellers as part of its global distribution, then the company will need to make sure that the third parties are provided with the necessary license and sub-license rights and that any contracts with the third parties adequately protects the company's intellectual property rights.

Data Privacy and Security Issues

Will the current contracting approach satisfy data privacy, security laws and regulations? Have sufficient organizational measures been implemented to satisfy such laws and regulations? Certain jurisdictions have promulgated laws and regulations that require certain types of data (such as personal data or protected health information) to receive minimum levels of protection, grant certain rights or protections to the individuals to which the data pertains. A company must ensure that requisite protections and processes have been implemented to satisfy any rights or protections relating to protected data (such as ensuring processes are in place to provide personal data to individuals that are permitted to receive copies of the data maintained by the organization). When setting up a global contractual framework, a company will need to consider what data is collected and how such data is handled, including how vendors may store or process such data on the company's behalf. 

 Cultural Norms and Standards

Does the current contracting approach satisfy local cultural norms and standards? If a company fails to address local expectations in its global contractual framework, then the company is signaling that it is not accustomed to doing business in the local jurisdiction and transactions there will be delayed while customers negotiate for these expected provisions. For example, customers in certain jurisdictions may expect certain indemnification obligations or exclusions that are not typically offered by default in the U.S.

As a result of globalization, today's technology companies have unlimited opportunities to conduct business across the world. If companies focus on building an appropriate global contractual framework, then those companies can avoid many of the pitfalls that arise from conducting business in multiple jurisdictions. Companies should discuss global contracting and related issues with their strategic advisors as early in the process as possible.

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