Ten Legal Mistakes Commonly Made By SMEs Going International

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Over the decades of practice, we have seen many mistakes made by SMEs; common mistakes that smart companies will take time to address early on to avoid a future situation that could prove fatal to their survival. Here are ten of those:

1. Not checking local laws

A cardinal sin that can cost you. Your business is all ready to go but you failed to check for local privacy laws or whether there are strict consumer protection regulations governing online sales. Mismanaging such an international launch can be both costly in financial terms (penalties, fines) and in reputation terms (poor service and delivery).

2. Not reaching agreement with your business partners

Have you agreed your expansion plans with your business partners? Have the necessary shareholder resolutions been reached? Is the expansion authorised? It is common that companies with no shareholders agreement will end up with no resolution if there was an objection. This in itself will create a roadblock to expansion.

So, what happens when one of the company’s founders decides to leave because he disagrees with the expansion or the other founding members decide they have had enough? How do you deal with the departing founder’s shares?

To avoid these difficulties, clear shareholders’ agreements need to be in place to provide for various exit scenarios. Provisions giving the remaining founders the option to buy all or a portion of the original founder’s shares at agreed values or values provided by independent valuers would avert the problem.

3. Not documenting equity promises

It is common for company owners to make vague promises to employees that they will receive a certain number of shares or that they will obtain a percentage of the company, as a share incentive. Such promises are usually made orally or sometimes contained in an exchange of emails. Confirmation of these details and appropriate paperwork tend to be left to another day or forgotten entirely.

This “paperwork”, or rather the lack of it, is a common source of problems. We have been asked regularly to resolve complaints from disgruntled employees because the company’s promises have not been fulfilled. This commonly occurs when the company is doing well and the employee is concerned that he cannot participate in that success.

It can be time consuming and costly determining what had been offered by the company’s founders as it invariably requires some level of forensic analysis involving a review of all the documentary evidence including all emails and the chronology of events. Inevitably imperfect recollection and the lack of evidence opens the door to disagreements over what was intended. Was the employee offered a fixed number of shares or was it a fixed percentage with anti-dilution rights? And, what was the agreed share price?

If you intend to incentivise your employees, it is better to consider a written share option plan, determine the tax incentives and have the contracts in place. By doing so, it will then be simple and safe to offer valued employees shares as you know the framework you are working within. It will also be more cost-effective from a legal standpoint.

Difficulties can also arise with joint venture partners. Same issues arise as to how the shares are priced and valued, anti-dilution and number of shares. In some instances, even the right to a board position may be in dispute.

4. Failing to lock up trade secrets

Do you know what “trade secrets” your business has? More often than not businesses do not appreciate their trade secrets until they are lost, often to a competitor. In many cases it is a former employee, investor or business partner that has removed them. By then, it is often too late to do much about it.

Every business must develop policies surrounding the protection of its trade secrets. If litigation ensues, the business will need to prove that the trade secrets are not readily available to others and that the business has taken reasonable steps to protect the confidentiality of the information.

Customer and prospect lists, and secret processes generally spark the most frequent trade secrets dispute. How do you evaluate what is or is not a trade secret? Ask yourself: “If your key employee left today and joined a competitor, what information could he take that would hurt your business?”

You need to check that your employment agreements contain appropriate provisions identifying the business as the owner of the trade secrets and obtaining undertakings from employees that they will be kept confidential and not be used other than for the benefit of the business. Similar restrictions and undertakings should be taken in the form of confidentiality agreements from investors or business partners.

5. Carrying inadequate insurance

And in some cases, maybe no insurance at all! Every business needs to assess the risks that it is likely to encounter. Insurance policies needed for a consultancy business usually include professional indemnity insurance and should also cater for loss of electronic data, privacy claims and all companies need employer’s liability insurance. Insurance is necessary for the continued operations of your business.

6. Failing to update your privacy policies

With the ever-changing landscape of privacy laws, it is important to constantly review your privacy policies and privacy notices where you are collecting and using data both online and through mobile apps. The use of cookies needs to be carefully monitored.

7. Failing to protect Intellectual Property Rights

Putting off and delaying applying for registration of any intellectual property rights in order to save some money may be somewhat short term. If your business’ key assets involve designs, patents, trade marks and any service marks, the one advantage of registration is that it establishes constructive notice of the existence and ownership in the intellectual property right even if the business may not be using it in all the countries it may be considering operating in. Practical measures need to be taken to protect unregistrable intellectual property rights.

You should not consider entering a new country without first protecting your intellectual property rights. In some countries in Asia, there are companies that simply wait and watch to see which business is registering a new company and will immediately register the trade marks and trade names. By doing this, they will then require that you pay them for assigning those marks to your business or you will be forced to trade under a different name which diminishes the value of your brand and reputation.

8. Not Getting Written Assignments of Intellectual Property Rights

If your business outsources part of the development of its technology to consultants or independent contractors, having proper written assignments of all intellectual property in such developmental work are critical. These assignments may be contained in the engagement letters or contracts for services.

Unlike employees, independent third parties continue to own the intellectual property rights of any research and development products they create unless there is a clear assignment in the agreements with them. Having proper written agreements with such third party consultants or contractors is critical to maintaining clear ownership of the intellectual property rights arising from such development.

9. Social Media challenges are not addressed

Social media sites such as Facebook, Google, Twitter and LinkedIn all present new challenges in terms of marketing issues, IP rights protection and employee confidentiality and privacy. Companies need to establish a formal and strong policy on the use of social media for employees and third parties to ensure that those risks are managed. These are policies that should be included in any employee handbook.

10. Not knowing how to operate in the country

Do you start a local company? Do you operate through a wholly owned subsidiary from the UK? Do you need local partners or shareholders? Do you licence your IP to the new company? These are some of the questions that need to be asked. You will also need good tax advice to structure your investment in the new country. Failing to understand the rules of operation could adversely impact on your ability to claim certain tax incentives, or cause problems in the repatriation of profits or affect your ability to enter into contracts in that country. Having to re-organise or unravel your structure can be very expensive.

Conclusion

Tips for companies going international:

• Understand the local laws
• Check that your shareholders agree to the new entry and business plan or there is an exit package available
• Decide what you wish to offer partners or employees and document it before you make any offers
• Protect your trade secrets and document it in a manual that is confidential
• Check that you have adequate insurance for the business in the new country
• Check and update your privacy policies to comply with the new country’s laws!
• Ensure that you have protected through registration your intellectual property rights before you enter the new markets
• Independent third party consultants and contractors must have documentation and any intellectual property rights are clearly assigned to your business
• Have a clear and formal social media policy in relation to what information can be released and whether it must be pre-approved before it is released on social media sites
• Check how you will or should operate in that country

For further information

If you have any further queries this topic, please contact Francesca Lee on 01865 3399360 or email fsclee@crescolegal.com

Cresco Legal