978-0132718974 Chapter 4 Solution Manual Part 1

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The Mulnaonal Enterprise

I. Text Materials

Introduction

Any business wishing to globalize has a number of choices, ranging from relatively little presence

in foreign nations (licensing intellectual property, exporting, importing, franchising) to more

intense involvement in legal entities formed in foreign nations (joint ventures, general

partnerships, limited partnerships, corporations, and limited liability companies). Multinational

enterprises (MNEs) can take on a variety of operational structures, but common to all is the

linking of two legal business entities in ways that go beyond contracting and licensing.

The regulation of multinationals is principally a matter of municipal law. As a general rule, home

states regulate the parent firms and host states regulate the subordinate firms. At times, however,

home states are able to regulate foreign subordinates with extraterritorial laws, and host states

may regulate the parents by piercing the fictional veil that separates the subordinates from their

parents.

Strategies for Doing Business Globally

Exporting and Importing – One way for a business to operate internationally is to export its

goods (or services) to another nation. Firms may also operate internationally by importing goods

or services from another country.

Exporting raises issues of a different order from domestic sales: transportation, financing, and

contracting must be carefully considered, along with obtaining the proper export licenses.

Constraints on exports and imports may also exist at a policy level: National laws may prohibit

imports from or exports to certain countries.

A business that routinely exports may need full-time export managers who deal with foreign

buyers and understand the complexities of compliance with various import and export

regulations, transportation/shipping issues, and financing. For businesses that do not have

full-time export managers, foreign sales agents or foreign distributors are available.

A business that exports, imports, or grants licenses to a foreign national or foreign business entity

is not a multinational enterprise.

Branches and Subsidiaries – A branch is usually considered to be just an extension of the

corporation, which is generally liable for any debts of the branch. Short of establishing a branch,

a business entity may simply engage a foreign agent to serve as a representative of the business.

The agent may do market analysis and product promotion or may also serve as an import

representative. Host country laws will determine what the agent may or may not do.

The Multinational Enterprise

Licensing Intellectual Property and Franchising – A license is a contractual grant of a legally

recognized right; it becomes an international marketing tool whereby the license of a business

entity in one nation is extended to a party in a different nation. Franchising from one nation to

another involves substantial elements of intellectual property: trade secrets and trademarks are

both integral parts of franchising.

A foreign market sometimes has national laws that restrict the import of finished goods; licensing

a foreign entity to produce the product allows the owner to collect royalties through contract with

the foreign entity, and allows the foreign entity the chance to capitalize on the brand name and

goodwill of the product’s owner. Restrictions on franchising can be found in many municipal

legal systems.

The Business Form

The company laws in various countries may have many unique features. Businesses attempting to

go beyond branch offices to create subsidiaries or partnerships must look closely at the particular

laws of a host country.

The Importance of the Separate Legal Identity of Juridical Entities – Corporations and

certain other companies are juridical entities that have legal identities separate from those of their

owners.

This separate legal identity has several important consequences. First, it means that the liability of

the owners is limited to their investment in their company. Second, it means that rights and

benefits accruing to the company belong to the company, not to its owners.

Case 4-1: Case Concerning Barcelona Traction, Light and Power Co. (Second Phase)

Facts: Barcelona Traction (BT) was incorporated in 1911 in Canada to supply electricity in Spain.

Issue: Did the shareholders suffer an injury for which they had the legal right to seek redress?

Holding: The shareholders are not entitled to redress.

Law: So long as a company is in existence, it is an entity that is independent from its

Explanation: Although the relationship between a company and its shareholders can be described

Order: Case dismissed.

The Multinational Enterprise

The Multinational Organization

The Parent Company – To carry out operations internationally, large business firms have

adapted their organizational structures to share risks and to take advantage of economies of scale.

The Nonmultinational Enterprise

It is the simplest operating structure in which a firm organized in one country contracts with an

independent foreign firm to carry out sales or purchasing abroad.

The agent, who may be a private individual or an independent firm, acts on behalf of the domestic

firm or principal to either sell the principal’s goods or services abroad or to buy goods or procure

services for the principal. Neither the principal nor the agent is truly a multinational enterprise.

Their relationship is governed by an agency contract and by the agency laws of the home and host

countries.

The National Multinational Enterprise

Slightly complex than the nonmultinational enterprise, the national multinational enterprise is an

organizational structure in which a parent firm established in one country establishes wholly

owned branches and subsidiaries in other countries.

A branch is a unit or a part of the parent, whereas a subsidiary is a company organized as a

separate legal entity that is owned by the parent. The parents of national multinationals are most

likely to be found in the United States, Europe, China, India, Brazil, and Japan.

The International Multinational Enterprise

The most complex international operating structure is the international multinational enterprise

made up of two or more parent firms from different countries that co-own operating businesses in

two or more countries. It is like a national multinational in that it operates through subsidiaries.

The difference lies in its having two or more parent companies located in different states.

The Subordinate Structure – To do business internationally, companies must establish a foreign

presence. This requires the creation of subordinate entities, such as representative offices,

agencies, branches, subsidiaries, joint ventures, and holding companies.

A representative office does not actually conduct business; rather, it functions as a foreign contact

point where interested parties can obtain information about a particular firm.

An agent is an individual who is employed as an independent representative of a firm. Agents are

subject to the supervision of the parent firm.

A branch is a unit of the parent company that involves not only the placement of individuals in a

particular locale but also the establishment of a facility, such as an assembly plant, mining

operation, or service office.

Establishing representative offices, agencies, and branches is advantageous because these entities

allow the parent to maintain direct control of the foreign operation. The practice can be

disadvantageous, however, because:

The Multinational Enterprise

(1) The parent has to assume all of the risk of investing abroad.

(2) A foreign firm (or its agent or its branch) is often taxed at higher rates than local firms.

(3) Many developing states require local participation in order for a foreign firm to either invest

or expand its local investment.

A subsidiary is an independently organized and incorporated company. Setting up one can benefit

a multinational firm because:

(1) The subsidiary’s company status insulates the parent from unlimited liability.

(2) Locally organized companies are commonly entitled to certain tax benefits that foreign

branches are not.

A joint venture is an association of persons or companies that are involved in a collaboration for

more than a transitory period. It can assume any type of business form, including that of an

association, a partnership, a limited partnership, a secret partnership, or an LLC. Multinational

enterprises use joint ventures as a way to share risk and to facilitate entry into foreign markets.

A holding company is a subsidiary company that in turn owns other subsidiaries. Holding

companies are created primarily (1) to establish a consolidated management team for a group of

subsidiaries or subsidiaries owned by different parents or (2) for tax advantages. Commonly, a

holding company is an LLC whose shares are held by its parent or parents.

International Regulation of Multinational Enterprises

Rules of ethical behavior for multinational enterprises have been promulgated by several

international organizations, including the Organization for Economic Cooperation and

Development (OECD), the International Labor Organization (ILO), and the World Bank. Until

recently, these were only suggested rules that multinationals were asked to comply with

voluntarily, and most international rules continue to be voluntary.

Bribery and Corruption Rules – The main exception to the rule that international guidelines for

ethical behavior should be voluntary is the OECD-sponsored Convention on Combating Bribery

of Foreign Public Officials in International Business Transactions, and also the implementing

legislation of some 38 states that have ratified it. The convention requires states parties to outlaw

the “active bribery” of foreign officials. They are not required, however, to outlaw the acceptance

of bribes.

As a general rule, home states regulate the parent companies and host states regulate the

subordinates. Sometimes, however, home states are able to regulate foreign subordinates with

extraterritorial laws, and host states are able to regulate parent firms by piercing the fictional veil

that separates the subordinates from their parents.

Home State Regulation of Multinational Enterprises

The most important forms of national regulation include (1) the regulation of competition, (2) the

regulation of injuries caused by defective products, (3) the prohibition of sharp sales practices, (4)

the regulation of securities, (5) the regulation of labor and employment, (6) the establishment of

accounting standards, and (7) taxation.

The Multinational Enterprise

Many of these rules have been applied to activities that take place outside the territorial

boundaries of a particular state, most notably: regulation of competition, regulation of injuries

caused by defective products, and prohibition of fraudulent sales practices.

The country that has been most willing to apply its laws extraterritorially has been the United

States. The European Union, to a lesser extent, has also begun to apply its internal regulations

extraterritorially.

Unfair Competition Laws – In the United States, the principal law regulating anticompetitive

activity is the Sherman Antitrust Act of 1890.

Section 1 of the act prohibits contracts, agreements, and conspiracies that restrain interstate or

international trade. In determining whether a particular activity violates §1, the courts ordinarily

do so on a case-by-case basis using a so-called rule of reason.

Section 2 of the Sherman Antitrust Act forbids monopolies and attempts to monopolize commerce

or trade either between the states of the United States or in international commerce affecting the

United States.

The Clayton Act of 1914 was enacted to give more teeth to the Sherman Antitrust Act, both by

expanding its enforcement provisions and by defining certain specific acts that constitute unfair

business competition. These include exclusive dealing and tying clauses, mergers that result in a

monopoly, and interlocking directorates.

The Robinson-Patman Act of 1936 was added to the panoply of American anti-trust law to make

price discrimination illegal.

Enforcement Provisions of U.S. Anti-trust Laws

The enforcement provisions of the American anti-trust acts are one of their two most

controversial aspects. The U.S. Justice Department may bring criminal suits for egregious

violations, and the U.S. Federal Trade Commission may bring civil actions (notably for

injunctions) to ensure full compliance. More important, private persons are given the right to sue

and recover treble damages for injuries they have suffered.

Treble damages is a term in some statutes that permits a court to triple the amount of the

actual/compensatory damages to be awarded to a prevailing plaintiff, generally in order to punish

the losing party for willful conduct.

Extraterritorial Application of U.S. Antitrust Laws

The other controversial feature of American antitrust law is the willingness of American courts to

apply it extraterritorially. The statutory provision in the Sherman Antitrust Act declares that it

applies to conduct affecting “trade or commerce among the several states, or with foreign

nations.” The courts have imposed several jurisdictional tests that limit the legislative rule.

Personal Jurisdiction Requirements of U.S. Antitrust Laws

The Multinational Enterprise

The American antitrust laws authorize a court to assume personal jurisdiction if a defendant has

the contacts specified either by (1) Section 12 of the Clayton Act or (2) an applicable state long

arm statute.

Section 12 of the Clayton Act allows a court to assume personal jurisdiction over an antitrust

defendant who “transacts business” in the forum jurisdiction. State long arm statutes are

applicable to antitrust proceedings because of a provision in the U.S. Federal Rules of Civil

Procedure that looks upon state law as an independent basis for exercising personal jurisdiction in

federal cases.

The principal limitation of the assumption of personal jurisdiction by U.S. courts is the federal

constitutional requirement of due process. This forbids the court from assuming personal

jurisdiction unless a defendant has minimum contacts with the forum. In essence, a court has

jurisdiction only if (1) the defendant purposefully did business in the forum and (2) the defendant

reasonably could have anticipated that it would have to defend itself there.

Subject-Matter Jurisdiction Requirement of U.S. Antitrust Laws

Two tests are used to determine whether a court has subject-matter jurisdiction in an American

antitrust case: (1) the effects test and (2) the jurisdiction rule of reason test.

Under the effects test, companies carrying on business outside the United States will come within

the subject-matter jurisdiction of an American court if their business activity is intended to affect

U.S. commerce and is not de minimis.

A court will ask the following three questions before assuming jurisdiction over a foreign

business for violation of U.S. antitrust laws:

(a) Was the alleged conduct intended to affect the foreign commerce of the U.S.?

(b) Was the conduct of such a type and magnitude to violate the Sherman Act?

jurisdiction?

The last of these three prongs requires courts to balance the interests of the United States in

assuming jurisdiction against various competing interests. The factors the courts balance include:

(a) The degree of conflict with foreign law or policy.

(b) The nationality of the parties involved.

(d) Relative importance of violations to U.S. commerce as compared to commerce abroad.

(e) Whether the explicit purpose of the alleged conduct was to harm American commerce.

(f) The foreseeability of the anti-competitive effects and the relative importance of the violations

to commerce within the United States as compared with commerce abroad.

Case 4-2: Metro Industries v. Sammi Corp.

Facts: Sammi took advantage of a Korean design registration system to obtain the exclusive right

The Multinational Enterprise

Issue: (1) Was the conduct a per se violation of §1? (2) Does the per se rule apply to conduct

Holding: (1) No. (2) No. (3) Yes. (4) Unproven.

Law: (1) Conduct which almost always tends to restrict conduct and decrease output is regarded

Explanation: (1) There was no per se violation of §1 as the conduct was authorized by a Korean

Order: Judgment affirmed.

Regulation of Anticompetitive Behavior in the EU

The European Community Treaty contains two articles—Articles 81 and 82—that regulate

business competition.

Article 81 (which is analogous to Section 1 of the U.S. Sherman Antitrust Act) prohibits normal

arm’s-length competitors from entering into agreements or carrying on concerted practices that

either prevent, restrain, or distort trade.

Article 82 (which is analogous to Section 2 of the Sherman Antitrust Act) forbids businesses with

a dominant position in their marketplace to take improper advantage of their position to the

detriment of consumers.

Determining compliance with Articles 81 and 82 is left solely to the European Commission,

which can impose substantial fines in its own right. The European Commission and the European

Court of Justice have applied the rules to foreign firms to the extent that the firms’ activities have

an effect on trade or commerce within the EU. In essence, the commission and the court are using

the American effects test. Thus, a foreign firm that conspires with EU firms to monopolize trade

within the EU would be in breach of the EC Treaty.

Opposition to the Extraterritorial Application of Unfair Competition Laws

The willingness of American and EU courts to apply antitrust laws extraterritorially has been

roundly criticized by many countries, especially Third World states. The British objections to the

American antitrust laws have been twofold. One, they dislike the fact that suits for punitive treble

damages can be brought by private plaintiffs. Two, they dislike the discriminatory application of

U.S. antitrust laws.

These two negative features of the U.S. antitrust laws have led to diplomatic protests and to the

enactment of blocking statutes, not only by Britain but also by many other states.

The Multinational Enterprise

Blocking Statutes: These statutes typically have three features: (1) they limit the extent to which a

U.S. plaintiff can obtain evidence or seek production of commercial documents outside of the

United States for use in investigations or proceedings in the United States; (2) they make it

difficult for a successful plaintiff to enforce a U.S. judgment outside the United States; and (3) by

virtue of a clawback provision, they allow defendants to bring suit in their home country to

recover the punitive damages they paid in the United States.

Anti-Suit Injunctions: Foreign courts have sometimes been willing to hand down injunctions

forbidding one of their nationals from initiating an antitrust suit in the United States against

another of their nationals.

Case 4-3: Airbus Industrie G.I.E. v. Patel

Facts: Four U.K. citizens were killed and four injured when an Airbus plane crashed in India.

Issue: Should an anti-suit injunction be granted by the U.K. against U.K. citizens proceeding in a

U.S. court?

Holding: No.

Law: U.S. case law has devised two approaches for granting anti-suit injunctions. The stricter

Explanation: The House of Lords adopts the stricter approach. Because Texas now recognizes

Order: The anti-suit injunction is dismissed.

Tort and Products Liability Laws – Whether plaintiffs make claims based on intentional tort or

negligence, the actions (or inactions) of an MNE in one nation can cause harms to individuals or

business entities in another nation.

Intentional Tort Liability

Certain torts are deemed intentional. That is, a court may find that the defendant did not harm

someone out of neglect or carelessness, but probably acted with an intent to do harm.

Cases of assault, defamation, intentional infliction of emotional distress, interference with

contract, trespass, nuisance, and other causes of action are not torts of negligence but are torts of

intent.

Case 4-4: Dow Jones & Co. Inc. v. Gutnick

The Multinational Enterprise

Facts: Dow Jones publishes Barron’s Online, whose October 28, 2000 edition had an article

Issue: Do the Australian courts have personal jurisdiction over Dow Jones & Co.?

Holding: Yes.

Law: Defamation does not occur at the time of publication or where a web server resides, but

Explanation: United States law is friendly to commercial media, and defendant’s position would

Order: Dow Jones’s appeal is dismissed with costs.

Products Liability Theories

Products liability laws attempt to discourage manufacturers from putting defective products into

the marketplace by requiring them to assume liability for the injuries their products cause. Three

theories are commonly relied upon to do this: (1) breach of contract, (2) negligence, and (3) strict

liability. Most states use only the first two of these. The common law countries use all three. The

EU now relies principally on the last.

Japanese Products Liability Laws: The Japanese Civil Code provides two ways to impose liability

for defective products: breach of contract and negligence.

A seller’s obligation with respect to every sales contract is to deliver a product that is fit for the

purpose for which it was sold. Failure to perform by delivering a defective product is a breach of

both the seller’s obligation and the contract. The seller is then responsible for damages for

personal and property losses and for economic losses as well.

This remedy is limited, however, by two familiar rules: privity and burden of proof. Privity only

allows the immediate purchaser to sue. Because contracts are part of the Japanese law of

obligations, the burden of proof is on the plaintiff to show that the seller was at fault. Moreover,

even when this can be done, the seller can avoid liability by showing that the defect was due to

some factor beyond the seller’s control or that the seller took reasonable steps to prevent the

defect. Liability for breach of the implied warranty not to deliver a latent defect is also a very

limited remedy.

The usefulness of contract law to impose liability on a seller for a defective product is minimal.

Negligence is a more likely basis for imposing liability. Even so, the proof requirements are

relatively demanding. A claimant must prove (1) the existence of a defect, (2) that the defect was

the result of the defendant’s conduct, (3) that the plaintiff suffered an injury, (4) that the injury

was caused by the defect, and (5) that the defendant breached a duty of care to the plaintiff.

The Multinational Enterprise

Common Law Products Liability Rules: Liability for defective products may be shown in the

common law countries through breach of contract, negligence, or strict liability. Claimants in

these countries most often rely on the theories of negligence and strict liability.

Two doctrines make it somewhat easier for a common law claimant to meet the proof

requirements. One is the doctrine of res ipsa loquitur. This excuses an injured claimant who can

show that a product was defective when it left the hands of the defendant from having to prove

that the defendant caused the defect. The other doctrine is negligence per se. This excuses a

claimant from showing that the defendant breached a duty of care in those cases where the

defendant violated a statutory manufacturing or disclosure requirement.

Under the common law theory of strict liability, defendants can be held liable for acts that are

unreasonably dangerous no matter what their intentions may have been or whether or not they

exercised reasonable care.

The major advantage of strict liability from the claimant’s perspective is that it does not require

the showing of negligence. There is, however, a significant limitation: The defective product must

be “unreasonably dangerous.”

EU Products Liability Rules

An EU directive establishes a common minimum products liabilities standard for all EU member

states. It does not require the claimant to show that a defect is unreasonably dangerous.

Extraterritorial Application of Products Liability Laws

The U.S. courts have been the most willing to apply their domestic products liability laws

extraterritorially. U.S. courts consider two issues when deciding whether they can exercise

jurisdiction in a product liability case: personal jurisdiction and forum non conveniens.

Personal Jurisdiction Requirements of U.S. Products Liability Laws: Products liability is a

creature of the laws of the individual states of the United States rather than federal law. As a

consequence, personal jurisdiction must be found in the individual states’ long arm statutes.

Besides establishing long arm jurisdiction, a claimant must also satisfy the federal constitutional

requirement of due process by showing that the defendant had minimum contacts with the forum.

The minimum contacts test allows a court to assume jurisdiction only if (1) the defendant

purposefully availed itself of doing business in the forum and (2) the defendant reasonably could

have anticipated that it would have to defend itself there.