That social media account is valuable, until you try to transfer it.

Wikimedia The Scream by Edvard Munch 1893 Nasjonalgalleriet

The internet is is a social-media driven marketing platform, driven by technologies which seek to move consumers to specific branded content and humans who try to corral that technology as best they can. Billions of dollars are spent in the chase to build an online brand, and those brands are feverishly protected. What happens, then, when the time comes to cash in? The problem is that most of the drivers behind online brands aren’t really under the control of the brand owner, and for all of the money invested in those online brands there’s a surprising lack of clarity as to how (and if) those brands can be transferred. In some sense, social media accounts are like a piece of stolen artwork – incredibly valuable, but difficult to cash in on.

While lawyers here in the US often refer to social media accounts as “property,” that property right is limited by the provider’s right to limit your use of or control over that account. In many cases, the provider’s terms of service do not permit the transfer (or “assignment” in legal-speak) of those accounts without their consent (or, in some cases, at all).

So, for example, if your company has an instagram account which is key to the product’s marketing, your company’s rights to that account are limited to the rights granted in their terms of service. That’s where things get interesting – according to the terms of service with Facebook (owner of instagram) you “cannot transfer your rights or obligations under this agreement without our consent.” If you make that transfer anyway, by simply passing on the password and user id, instagram could suspend or terminate the account, leaving you with a whole lot of nothing.

There are often other terms which are disadvantageous to business transfers, including terms prohibiting the commercial use of the account (as is the case for Tik Tok, for example). Most if not all of those clauses allow for immediate termination, meaning any valuation in a transfer is pretty much a house of cards that could be destroyed at any time.

There aren’t really many workarounds, either, and none are foolproof. You could, for example, have the original owner keep the account, but sign an agreement which allows you to control of the account (so it would basically be that owner’s account in name only). That’s probably not a great option for either party, though, since the original owner has clearly decided to exit the business and doesn’t necessarily want to be saddled with obligations going forward, and you probably don’t want to be dependent on them for an eternity. That may also run afoul of some provider’s terms, which often prohibit sharing passwords and ids. Another alternative would be for the old owner to terminate the account and for you to register it, but even assuming you succeeded in obtaining the new account, you’d have to start from scratch in terms of followers which destroys the value of the transfer.

If the entire business is to be transferred, you have another option. Instead of purchasing the assets of the business, which would require a transfer of the contract with the provider, you can purchase the shares in the target business. You can then continue to run the account under the original business, even if you clear out all of the assets after the sale. That, however, may give rise to other unpleasant risks going forward, since a purchase of the shares brings any open liabilities with it as well.

The problem is that under regular property law principles you can own the account, but on the internet that ownership right is subject to the whim of the provider. As a result, the value of that ownership right is limited and unpredictable, since all of the above options could result in termination under the terms of most social media providers. That said, for many it seems to be a risk worth taking.

Shareholder and Board of Directors

As part of our short series on forming a US corporation, it’s important to understand the management structure, since there are significant differences between those structures in Germany (and many other countries) and the US. First, we’ll start with the shareholders and board of directors.

Shareholders
The Shareholders are the owners of the company (Aktionäre) and, in a C Corporation, hold shares much like they might in a German Aktiengesellschaft. There can be as many shareholders as there are shares, or shares can all be held by a single person or entity. The shareholders exercise power over the corporation by appointing the Board of Directors, which in turn appoint officers to handle the daily activities of the corporation. Thus, the exercise of power by the shareholders over the corporation is indirect, and unless the shareholder is also an officer the shareholder cannot sign contracts or direct the daily operations of the company. Of course, by threatening to remove the board of directors the shareholders can influence the actions of the board and the officer they appoint, but that influence is exerted indirectly rather than directly.

A word of caution – a lot of startups in the US are quick to give equity, and some Germans, in an effort to accommodate US partners, may decide to do the same. While this is certainly permissible, giving up even minority ownership in your US subsidiary should be done cautiously, if at all, and should be linked to mutual goals which ensure that the partnership is a lasting one.

Board of Directors
The board of directors (Aufsichtsrat also does not directly manage the company – rather, they appoint officers and provide the officers with an overall strategic direction for the company. German clients in particular often get confused about this, because the “director” or “managing director” in a German GmbH is usually authorized to act directly on behalf of the company, whereas the director in a US stock corporation is not. If one of the board members is also expected to act on behalf of the company then he or she should also be appointed to an appropriate officer position.

Although most states allow as few as one board member, a board of at least three members will ensure that the corporation can act if one of the board members becomes unavailable or incapacitated. It is always better to have an odd number of board members to prevent ties, even within closely held corporations.

Many companies have a chairman of the board, who presides over board meetings. Generally the board is required to have at least one meeting annually, although additional meetings may be called to address specific issues between annual meetings.

Obtaining your company’s US tax number

Excerpt, IRS Form SS-4

One of the most important steps in the formation of a new company is the application for an Employment Information Number (EIN, or also FEIN). The EIN is a unique nine-digit number assigned by the Internal Revenue Service (IRS) to business entities operating in the United States. Originally, the EIN was limited to reporting employment-related taxes, but it has since become a more generalized identification number for US corporations. Changes in the law since 2001 have made it impossible to get a bank account without one, and have also made much more difficult to obtain without a US Social Security Number (SSN, the US equivalent of an individual tax identification number).

For the average US citizen or holder of a US SSN or other US tax identification number, the EIN is simple to get. The application can be completed online and the EIN is provided immediately. Since you can’t save your online application session, it’s typically best to download and fill out the IRS Form SS-4 (pdf) so you can be certain you have all of the necessary information available.

Without a US tax number, however, the process becomes more complicated. Applications without an SSN can be filed by mail, fax, or telephone, but processing takes significantly longer. The IRS website claims response times as low as four days for faxed EIN applications or four weeks for mail. That used to be true, but in our experience processing time over the past few years can and sometimes does take far longer than that. Unfortunately, addressing those delays can be extremely difficult, since IRS agents typically can’t provide any additional information about applications once submitted.

Unfortunately, due to these delays, sometimes companies are tempted to call on a business partner or even friend to submit the EIN application on the company’s behalf. The IRS frowns on the use of these “nominees,” as they are called, stating that the responsible party on Form SS-4 must be a person who “controls, manages, or directs the applicant entity and the disposition of its funds and assets.” If you’ve already filed for an EIN using a nominee, you can (and probably should) update the company’s information by filing Form 8822-B

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Part of an occasional series of posts on starting your business in the US.

Incorporating in the United States

Mabbett Railway Chair Manufacturing Company share certificate 1867

A while ago, I wrote an article on choosing the state of incorporation for your US company. Now that you’ve decided where your company will be located (probably Delaware), the next step, of course, is to incorporate:

  1. First, you file a brief document (the Articles of Incorporation or, in Delaware, Certificate of Incorporation) outlining the basic structure of the company (typically name, initial corporation address, number of shares authorized, and often some sort of provisions for indemnification of officers and directors. Once the Articles are stamped by the state the corporation is in existence.
  2. The person who filed the Articles (called the incorporator) appoints the first board of directors and enacts the first bylaws (basically, the rules of operation of the company) in a written “Consent of the Incorporator.” The incorporator is a bit of an odd concept, since he or she has all power or responsibility for the company once formed, but is often a third party service provider not in any way related to the company. The position is really a temporary vehicle to effect the incorporation and the appointment of the board of directors, and the incorporator will typically resign right after formation.
  3. While not technically a corporate document, the incorporator will also typically file for a federal tax ID (commonly referred to as an Employer Identification Number or EIN). This can be a royal pain for non-US companies, but I’ll get to that in a later post.
  4. At this point the corporation has the beginnings of a structure but no owner or officers. The board of directors (similar to the German Aufsichtsrat) meets or signs a written consent appointing officers for the corporation, issuing stock to the shareholders, and if no bylaws have been put in place, enacting bylaws. The Board will typically also pass resolutions directing the officers to carry out some of the tasks necessary to make the company fully operational, such as opening bank accounts, signing a lease for an office, appointing counsel and an accountant, and signing other necessary documents or agreements.
  5. The Shareholder(s) may, but need not, sign a consent confirming the appointment of the board and ratifying any of the actions taken by the board.

The company is now fully functional, and can operate under the direction of the officers without further documentation. Note that the officers fulfill a role similar to the German Vorstand, but with significant differences. The signed documents are placed in a corporate minute book, which should be maintained for the life of the corporation.

After the initial incorporation, most jurisdictions require that the shareholder and board hold at least one meeting per year and maintain written minutes of that meeting in the corporate minute book. The board should also consider a meeting or written consent approving any transactions which impose a significant cost on the corporation, obligate the corporation for a long period of time, or which fundamentally change some aspect of the corporation’s operation or structure. More on that in a future post.

Part of an occasional series of posts on starting your business in the US.

US Citizens renouncing citizenship in record numbers

516px US passport high resolution
Here in the US, folks tend to assume that the United States is the proverbial “city upon a hill,” a place to which everyone does (or at least should) aspire. Many of my colleagues overseas have had some serious doubts about that premise for some time, but increasingly, even US citizens are having their doubts. According to a report in Newsweek, an increasing number are putting their money where their mouth is, with over 5,000 US citizens giving up their citizenship in the first half of 2020, more than twice the number for all of 2019.

A significant number of those giving up their citizenship are likely individuals who were born in the United States or to United States parents, but who no longer reside here and who have few or no ties to the United States. Many of those folks (like former London mayor and now Prime Minister of the United Kingdom Boris Johnson) have become increasingly disenchanted with the long arm of American tax law. Wealthy citizens should be aware, however, that giving up citizenship can be very expensive given the United State’s expatriation tax.

In any event, neither the process nor the cost has changed, so pundits speculate that the increase is due an increasingly divided electorate (and society) as well as economic and societal turmoil resulting from the COVID-19 pandemic. Some may have just realized that the dwindling reach of a US passport isn’t worth the headache, especially now.

By United States Department of State – Scan made by Ovinus Real, Public Domain, Link

Business visas to the US about to get more expensive

USCIS Filing Fee Table

As if coronavirus hasn’t already made business travel complicated enough, the cost of many of the most common non-immigrant business visas to the US is about to increase significantly. The USCIS recently announced an increase in the filing fees for certain immigrant and non-immigrant visas which allow foreign citizens to live and work in the United States. A chart of the fee changes for some of the most important visas for businesses is above, but overall it appears that the agency has chosen to spare immigrant visa applications the bulk of the costs, since those forms actually decreased as much as 21%. Those reductions were made at the expense of non-immigrant visa petitioners. The I-129 L increased a whopping 75% to $805 per petition.

The fee increases become effective October 2, 2020, and are intended to cover the costs of the agency’s activities, since the USCIS is supposed to be self-funding.

Overall, this seems consistent with the current administration’s general trend towards discouraging temporary business assignments to the US in favor of longer-term stays (or simply not coming to the US at all). Whether this is good for foreign direct investment remains to be seen.

Where in the World is our Case to be Litigated

Supreme Court of the United Kingdom

A little while back I wrote about choosing the law which applies to your transaction in an international setting. While often the party which initiates the transaction (and provides the first draft of the contract) will dictate the law and venue, that’s not always the best option. Indeed, in some cases it’s wildly impractical, particularly where far-flung parties want to compromise on a central location for litigation but want to keep their own law. It’s going to be hard to find a New York arbitrator who can effectively apply Estonian law to a contract between an Estonian and a Thai company. Even larger countries like Germany or France can’t always count on reliable interpretation of their laws in faraway locations.

One alternative is to choose a “neutral” forum, often one physically located between the parties, to reduce the burden of travel and allow the application of one set of laws which are readily understandable by both parties. There are many different options for neutral venues, but a few examples include:

  • United Kingdom. The UK, particularly London, has long marketed itself as a reliable and convenient venue for the resolution of legal disputes, and has the advantage of the English language and ready access from much of the world. UK law also reduces the burden of discovery which would otherwise be available in the US, and remains the most popular “neutral” law for international transactions.
  • New York. As a global center of international business, readily accessible from much of the world, New York has long been seen as a good neutral forum for international disputes, particularly for finance transactions. And yes, in the US you have to choose the law of a particular state.
  • Delaware. Long the choice of corporations in the US, Delaware is also a viable choice for resolution of international disputes which otherwise have no connection to the state, as long as there is some reasonable link to the state or if the value of the contract is above $100,000. Delaware’s dedicated business court (the Court of Chancery) is also seen as a plus, streamlining litigation in comparison to other US jurisdictions.
  • Switzerland. Switzerland has historically been considered a viable neutral venue for international disputes, in large part because of a general sense of reliability and neutrality, although the complexity of some Swiss laws and the need to litigate in a language other than English may well be an obstacle for some.
  • Singapore. Singapore is an increasingly popular venue for international dispute resolution, particularly in Asia, gaining in popularity over neighboring Hong Kong. Again, efficiency and ready use of the English language are pluses, as well as ready access from international markets.

Whatever venue or law you choose, arbitration can limit some of the risk of choosing a venue which is not otherwise related to the transaction at hand, and the adoption of international definitions (like INCOTERMS) and international legal frameworks (like CISG) can help ensure consistent resolution of disputes which may arise.

A lot goes into the choice of law, much more than can be covered in a single blog post. Whatever choice you make, be sure that the chosen venue will be amenable to hearing your case if and when the time comes.

Image courtesy of Diliff / CC BY-SA (https://creativecommons.org/licenses/by-sa/3.0)(cropped)

Dealing with the Risks of Remote Service

Lufthansa Boeing 747 430

The German business newspaper Handelsblatt ran an article (in German) last week discussing the issues facing German companies with US subsidiaries during the coronavirus. While a lot of business can be done remotely, much of Germany’s export economy is based on industrial goods, and those goods often require in-person service or installation. Given that most Germans cannot travel to the United States right now, in-person service is impossible. Since travel in the other direction is largely forbidden, US workers can’t be trained in Germany to do the work themselves either. That makes the inability to travel a massive thorn in the side of German business.

This thorn has a legal aspect as well – many sales and service contracts require in-person service, and mid-sized German manufacturers may not have enough (or any) technicians located in the US to provide the necessary services. They are used to sending technicians over as needed, but that’s obviously not possible now. Similar problems may arise where warranty service is needed on site, but cannot be provided due to the travel restrictions. In either case, companies are looking at both a customer service issue and a legal issue, and the resolution of one may in fact complicate the other.

Of course, contracts usually try to address these eventualities. For example, in some instances, force majeure clauses may allow for delays in service or termination of the contract in the event of certain disasters, but it’s not always clear if and when this particular disaster is covering, since the language in those clauses varies widely. On the customer service side, delaying service or terminating the agreement doesn’t help the end customer who may be sitting in the US with non-functioning equipment. It also doesn’t necessarily help the German vendor, since a customer which has experience this type of business interruption might favor a local (or larger) supplier in the future.

As a result, many mid-sized companies are getting creative with remote services. Unfortunately, sometimes those efforts also backfire. What happens if the instructions given over Zoom or Google Meet are unintelligible, or if the customer’s employee makes an error which damages or destroys the product which is being serviced? Some unwitting customers may find that they’ve voided their own warranty by accepting an offer to do the work themselves, even with the vendor’s assistance, and others just enter a gray area where the risk and liability issues are muddied, with no clear resolution when things go wrong.

Especially in high risk industries, manufacturers who agree to this type of service (and their customers) may want to consider a brief agreement or amendment to their sales and service contract which allocates those risks during the pandemic. That ensures that both parties can move ahead secure in the knowledge that the business relationship on which both parties rely survives the pandemic as well. If the risks are too great to reach agreement, maybe that’s a sign that you need to consider your options for termination after all, even if it does sour the business relationship.

Unfortunately, the travel limitations seem likely to stay for a while, given German skepticism of the United States’ handling of the coronavirus, so it looks like we might be dealing with these kinds of risks for a while as well. We might as well deal with them.

Photo courtesy of Kiefer. from Frankfurt, Germany / CC BY-SA (https://creativecommons.org/licenses/by-sa/2.0)

Setting the Ground Rules

640px Card Game 05

I’m working on a few transactions right now between companies in different countries (heck, on different continents), and there seems to be one issue none of my clients or their counterparts really want to deal with, and that’s choice of law. The problem is that choice of law is really important, and drafting a contract without knowing which law applies is kind of like playing cards but not knowing whether it’s poker or pinochle. It’s all cards in the end, but the rules matter.

The biggest differences are probably between civil law countries, like France and Germany, and common law countries, like the United States and the United Kingdom. As a rule, civil law countries are more likely to dictate the terms of a contract as a matter of law, rather than allowing the parties to work the rules out amongst themselves. This has the advantage of protecting the weaker partner, of course, but also the disadvantage of preventing two parties who both know and understand the terms of an agreement from getting the agreement they really want.

A good example is online terms and conditions, which are typically dictated by one party to the other without any meaningful opportunity to negotiate (essentially, a take-it-or-leave-it contract). In the US, those online terms are usually enforced largely as written (as long as they are properly entered into, which should be the subject of an entirely separate blog post). That means most if not all of those disclaimers, liability caps, and waiver stand a pretty good chance of being enforced. That’s not to say there’s no risk for the service provider in those situations, but ultimately most of the words in that contract stand a good chance of being enforced against the less powerful party.

Things are different in Germany, where you can pretty much toss out a significant chunk of some of those agreements, or at least contest them with a decent chance of prevailing. Your typical US online terms, with its lengthy, all-caps paragraphs, stands a pretty good chance of modification by the court if it comes to that. That’s not the only example of contract clauses which won’t survive under German law, and those issues can also come up in heavily negotiated contracts between sophisticated parties as well.

So, if you’re negotiating a contract with another party, work out the ground rules first, and decide which law and which courts will apply. Otherwise you may still be figuring out your meld while your opponent is putting down their royal flush.

Image courtesy of Benebiankie / CC BY-SA (https://creativecommons.org/licenses/by-sa/4.0)

Secret Service starts new Cyber Crime Task Force

Robert Warwick in Secret Service

Last week the United States Secret Service announced the creation of the “Cyber Fraud Task Force,” to focus on the investigation of cyber financial crimes. The new task force is the result of a merger of two prior groups focusing on cyber crime and financial crime respectively, and is an acknowledgement that many if not most financial crimes have a significant online component these days. After all, why bother crawling the streets with dirty, gun-toting conspirators when you can suck millions of dollars out of the world economy from the air-conditioned comfort of your parent’s basement?

In theory the new task force will allow the Service to utilize the expertise of both groups in a more coherent and uniform fashion. The Secret Service has long been involved in the investigation of financial crimes, and was originally part of the Treasury Department. Now part of the Department of Homeland Security, there are discussions in Washington about moving the Secret Service back to Treasury, however, as part of an increased focus on financial crimes.

Although this decision has been years in the making, the timing during the coronavirus pandemic is not necessarily a coincidence, given a significant uptick in financial crimes expected in the wake of efforts to keep the world economy afloat, including PPP and record numbers of unemployment claims.

Image courtesy of Wikimedia Commons, public domain.