If the United States and the United Kingdom are two countries separated by a common language, Europe is a common market separated by 28 languages. Doing business, even in England, where, as George Bernard Shaw (or maybe Oscar Wilde) alluded to, words may be common to both countries, but the meaning of those words in English may not be as they are in American.
Here's five areas anyone thinking about crossing the pond needs to bear in mind.
The employment landscape in Europe is heavily regulated, with the concept of "atwill" employment being alien in the European Union. Employees benefit from significant protection against dismissal and discrimination (on grounds of sex, race, disability, religion, age, sexual orientation and more) and enjoy generous welfare rights which promote rest and family life Contravening prescribed legal protocols when terminating an employee can result in severe financial penalties and may invalidate a dismissal entirely.
Whilst the U.K. may be an exception, in mainland Europe collective bargaining is pervasive. Local works councils and trade unions are omnipotent, wielding material influence over business. Failure to involve them in planning decisions can be hugely damaging; they are ignored at employers' peril.
Corporate acquisitions and restructures introduce a regional peculiarity. Under a law known colloquially as TUPE (pronounced: tew-pee), employees may transfer automatically with a business that is sold or outsourced; they should be consulted before the transfer, their employment rights will be preserved and they gain "super" immunity against dismissal.
The ability to protect employment trade secrets varies across the region. Reasonable employee noncompetes are viable but in some jurisdictions enforcement requires that restrictions be specifically compensated.
If your transactions are largely business to business, then it may be possible to use your existing contract documents with modifications to account for mandatory national laws. Consumer contracts will almost always need to be localised.
Many U.S. companies localise their contract documents either for legal or market reasons. Key areas to consider include:
Choice of law: In contrast to the U.S., it is possible in the EU to also agree a governing law for noncontractual disputes relating to the contract.
Liability: Approaches to limiting liability can be quite different across the EU. In the U.K., a test of reasonableness generally applies for most consumer limits on liability and liability limits agreed in standard- form business to business transactions.
Interest on late payments: In the EU, payment deadlines and interest due will be determined as a matter of law as opposed to the more commercial approach to these issues in the U.S. Parties can agree alternative deadlines and interest rates in a contract, as long as these are substantial remedies.
Data Protection (what we in Europe call "privacy")
One of the thorniest topics U.S. companies must address when looking to expand in and into Europe is data protection. Whilst in the U.S. data privacy is protected by a variety of sector-related privacy laws at state and federal levels, in the EU there is a single over-arching data protection regime under the EU Data Protection Directive. The definition of personal data is broad and can catch anonymised data, IP addresses, vehicle number plates and MAC addresses picked up by public Wi-Fi networks as well as the more obvious types of personally identifiable data.
The statutory obligations are on the "data controller" who determines how and for what purpose personal data is collected and processed. This is usually the organisation with the relationship with the consumers or individuals (e.g., employees). If this data processing is outsourced or the data stored by a third party and that third-party supplier suffers a security breach, the regulatory liability will still be with the customer organisation. This leads to tough contractual requirements to flow down the responsibilities and some reluctance to deal with U.S. suppliers (as a result of rules about transfers outside of the European Economic Area, scepticism about the adequacy of the Federal Trade Commission's "safe harbor" regime and the possibility of U.S. court orders requiring disclosure).
The EU directive has been implemented on a country-by-country basis and the implementation varies. Taken with cultural differences between countries regarding attitudes to enforcement, U.S. companies often find it surprising there is no single consistent approach across the EU. This may impact the way you carry on your data processing activities across the EU.
Mergers and Acquisitions
The concept of "merger" does not exist in Europe in the way that a U.S. lawyer would understand, where M&A is done by one company acquiring the shares or business of the other. Two exceptions to this are:
- the European Cross Border Merger Directive, which allows for mergers between companies in different member states of the EU; and
- in the U.K., a "scheme of arrangement," which is a court approved merger voted on by the shareholders in the target.
Representations and warranties may mean the same in the U.S., but in the U.K. they are different, leading to different remedies for breach. On which point, an indemnity for breach of warranties is extremely rare, rather contractual damages are the usual level, with indemnities being given to cover areas specifically identified in due diligence, as well as for any unpaid tax.
Disclosing against warranties in the U.K. is more general than the specific disclosure schedule route in the U.S., and it is common practice for any data room to be disclosed in full.
Differences aside, concepts like MACs, net asset adjustments, earn-outs and limitations on liability are all ones that U.S. lawyers will be familiar with, although their implementation in Europe can be markedly different. Finally, whilst several M&A concepts have started in the U.S. and spread to Europe, warranty and indemnity insurance is one that is taking off in Europe, but has not yet had the same impact in the U.S.
A key question for any company seeking to trade in a jurisdiction outside the U.S. is whether any local presence constitutes a permanent establishment (PE) for tax purposes and as such is subject to local tax. This will be the case for a company trading in many jurisdictions, including the U.K., if either:
- it has a fixed place of business in the jurisdiction; or
- it has a dependent agent acting on its behalf who habitually exercises authority in the jurisdiction to do business on its behalf.
Many tech companies will seek to avoid a PE, either by:
- transacting on the internet with no physical presence outside the U.S.; or
- having a local agent/employee with a limited role and, importantly, no authority to conclude contracts on behalf of the U.S. company;
- undertaking only preparatory or auxiliary activities in the U.K.
These strategies for avoiding a PE are under attack. The Organisation for Economic Co-operation and Development has initiated a project titled "base erosion and profit shifting," which seeks to counteract tax avoidance by large multinational enterprises, including "artificial avoidance of permanent establishments."
Importantly in the U.K., a new tax is being introduced in April 2015 called the "diverted profits tax." This is going to tax entities trading with the U.K. which have artificially avoided a permanent establishment or which lack economic substance. Typical strategies such as ensuring your local representative does not have authority to conclude contracts would count as avoidance for this purpose.
This article was originally published in The Daily Journal on 3 February 2015 and has been reproduced with kind permission.