Latin American Blog

Mexican Federal Labor Law Reform: What Companies Doing Business in Mexico Need to Know

Sheppard Mullin — Thu, 16 May 2013 10:23:54 -0800

Mexico’s new Federal Labor Law (FLL) took effect on December 1, 2012. The reform seeks to modernize Mexico’s labor law. The new FLL’s major, employment related amendments include increased regulation of outsourcing jobs, increased flexibility in hiring and payment of wages, the addition of the concepts of diversity, nondiscrimination and anti-harassment, and parental leave rights.

Previously, companies entering Mexico would set up two entities, one of which would be used to outsource employment to avoid paying worker benefits, including avoiding Mexico’s mandatory 10% employee profiting sharing requirement. Now, among other requirements, employers may only outsource employees if the outsourced employees perform work of a specialized character. In other words, under the new FLL, companies will need to evaluate the way they are structured or risk paying all employees (outsourced or otherwise) all employment related liabilities (such as notice requirements, severance payments, profit-sharing and social security).

Outsourcing and Profit-Sharing

The Mexican Labor Law has a mandatory requirement whereby employers must share 10% of their profits with employees. To mitigate this requirement, companies have traditionally set up two separate entities in Mexico: one to run the business with limited employees and the other one to hire and lease out employees to the business. The new FLL puts companies who follow this traditional set-up at risk of having to provide the leased employees 10% of its profits, along with satisfying all other labor law obligations, because very few will qualify as valid outsourcing agencies.

Under the FFL, for outsourcing to be valid, it must meet the following terms and conditions:

It may not cover all the activities carried out in the workplace,
It must be limited to specialized tasks that fall outside of the beneficiary’s ordinary course of business and thus, justified by its specialized nature,
It may not include tasks that are the same or similar to those being performed by the beneficiary’s employees, and
It must be documented through an outsourcing agreement.

If these conditions are not met, the beneficiary may be deemed a co-employer of the outsourced employees and, as a result, may be obligated to pay associated labor liabilities, including salaries, local social security contributions, and benefits, which include sharing 10% of its profits with the outsourced employees.

Expanded Hiring Methods and Employment Relationships

The new FLL adds two new hiring methods: Trial Periods and Initial Training Periods. Definite and indefinite term employment over 180 days may now include a Trial Period. This allows employers the ability to evaluate whether a new employee can perform the requisite job functions. Employers may also opt for an Initial Training Period, which allows the employer to train the employee on the skills necessary to perform the job. In both cases, the type of “new hire method” must be explicitly written into the employment agreement.

Both the Trial Period and the Initial Training Period have time limits. The Trial Period may only last up to 30 days for rank-and-file type employees, but for management-level employees and high-level executives, an extension may be granted allowing for a maximum of 180 days in total. The Initial Training Period has a maximum term of three months, with high-level general administrative functions or functions requiring special professional knowledge qualifying for an extension of up to six months in total. Please note that these terms cannot be combined. The advantage of these new hire methods is that once the trial or training period has expired, if the employee is not able to perform the skills for the job, the employer may terminate the employee without having to pay severance.

The FLL also adds to the existing contracts for an indefinite term or specific project. Specifically, in order to allow “seasonal” employees to gain seniority, employers may now offer employment for an indefinite term for un-continuous work when the services required are for fixed and periodic tasks, in the cases of seasonal activities, or that do not require the provision of services throughout the entire week, month, or year. Under this arrangement, the employment relationship can be suspended during off periods in order to relieve the employer of wage payment obligations and the employee of any service obligations.

Wages

Back wages has been an issues of great concern to small and medium-sized businesses. Currently, the prolonged duration of labor trials is the cause of massive economic liabilities due to the accumulation of back wages. Therefore, new FLL limits the accumulation of back wages to 12 months. Once that period has concluded, a monthly interest rate of 2% will be generated on 15 months of the employee's monthly wage, which are to be paid once the process has concluded. Additionally, under the new law, the accrual of back wages will be suspended if the worker has died.

Furthermore, with the reform, employers are now allowed to utilize additional methods to pay wages. With the employee's prior consent, an employer will be able to pay wages by check, direct deposit, transfers, or through any other electronic means. This would provide workers with greater safety given the current circumstances.

The reform also allows employers and employees the option of paying for work at an hourly, rather than a per diem rate, provided that the maximum daily working hours (eight per day) are not exceeded and the employees’ daily income is not less than the minimum daily wage. This latter provision can be interpreted as being in harmony with the definition of minimum wage established by the Law, which would mean that the worker should receive at least the minimum wage, even when working fewer hours than the maximum established under the Law.

Nondiscrimination and Anti-Harassment in the Workplace

The new law introduces the concept of a decent or respectable job, the definition of which includes the concepts of diversity, nondiscrimination, and anti-harassment. The FLL now prohibits discrimination on the basis of race, national origin, gender, age, disability, social status, health condition, religion, citizenship status, sexual preference, marital status, opinions, or any other category of discrimination that contradicts human dignity. The law also prohibits harassment, including sexual harassment and bullying and gives these provisions teeth by adding them to the list of justifiable causes for termination.

Just as in the US, all anti- discrimination and anti-harassment policies and training programs should include reporting mechanisms that will help the employer investigate and, if necessary, put an end to any illegal harassment.

Maternity Leave Changes

Under the previous law, women had the right to a six weeks’ leave prior to the birth of a child and six weeks following the birth of a child. Under certain circumstances, the new FLL allows women to allocate up to four of the six weeks of the pre-birth leave to the post-birth leave period (i.e., a woman may take maternity leave as few as two weeks before the birth of a child and up to ten weeks after the birth of a child). Additionally, if a child is born with disabilities or requires medical attention, the post-birth leave may be extended for up to two additional weeks. In the case of adoption, female employees are entitled to six weeks’ leave following receipt of the child.

While an employee is breastfeeding, working hours may be reduced, for up to a maximum of six-months, by one hour in order to allow a mother to be with her newborn child. In case of a health emergency, pregnant or breastfeeding women shall not be required to work and shall receive full salary and benefit payments.

New Paternity Leave

The FLL provides for a mandatory paternity leave up to five paid working days for the birth or adoption of a child.

Sanctions

Under the FLL, the amount of the fines that employers may incur in the event of non-compliance with any provisions under the Federal Labor Law increase significantly. The fines may now be up to an amount equivalent to 5000 minimum salary days (approximately $311,000 Mexican Pesos or US $24,000 Dollars) in some cases, per occurrence.

Implications

Mexico’s labor law reforms are a positive step toward stimulating job creation and providing greater certainty regarding legal and economic exposure to companies doing business in Mexico. Although the practical implications of the law are yet to be determined, we recommend that U.S. employers with operations in Mexico revisit their employment practices to take advantage of, and ensure compliance with, these reforms.

Furthermore, given the new outsourcing provisions, companies will need to evaluate the structure of their current legal entities in Mexico. Employers that use outsourcing services to staff their operations in Mexico should review their existing practices and policies, as well as their services agreements to ensure they comply with the new legal framework.

FCC Considers Proposal To Lift 25% Cap On Indirect Foreign Investment In Broadcast Licensees

Sheppard Mullin — Tue, 23 Apr 2013 09:44:19 -0800

By Brian Weimer and Douglas Svor

In August 2012, the Coalition for Broadcast Investment (“CBI”), a group comprising national broadcast networks, radio and television station licensees, and community and consumer organizations, filed a letter with the FCC requesting clarification of the foreign ownership rules contained in Section 310(b)(4) of the Communications Act. Specifically, CBI requested clarification that “the FCC will conduct a substantive, facts, and circumstances evaluation of proposals for foreign investment in excess of 25 percent in the parent company of a broadcast licensee.…” If adopted, this approach would represent a marked change of course for the FCC, which has in the past “categorically refused” to consider transactions involving investment in broadcasters above the 25% benchmark, according to CBI.

Citing the numerous other contexts where foreign investment above 25% is permitted (including, among others, sectors such as cable, direct-to-home satellite, and wireless), CBI highlighted the “structural disadvantage” broadcasters face because of the FCC’s “effective presumption” against foreign investment above 25% in the broadcast sector. In addition, CBI pointed out that ending the presumption would place broadcasters “on the same footing” as other industry participants, facilitating crucial access to capital in a market where they face increasing competition for consumers.

In February 2013, the FCC responded with a Public Notice (MB Docket No. 13-50) soliciting comments on CBI’s request. The first round of comments were due April 15, and a review of those submissions reveals a uniform desire for the FCC to relax the de facto 25% indirect cap applied to foreign ownership in broadcasters. Although all commenters supported CBI’s request, different groups highlighted particular points of emphasis.

Adelante Media Group, the National Association of Broadcasters, and Nexstar Broadcasting all noted that the Over-the-Top providers competing with traditional broadcasters face no restriction on foreign ownership. The Minority Media and Telecommunications Council emphasized that encouraging foreign investment in broadcasters would help “reverse the decline in minority broadcast ownership.” The National Association of Media Brokers referenced the fact that many entities that provided working capital to prospective new broadcasters were no longer in the market.

The question remains whether the FCC will hear the pleas of the broadcasters for regulatory parity. On the one hand, broadcasters may have reason for optimism if the FCC’s recent Public Notice (IB Docket No. 11-133) stating that it has streamlined its policies and procedures for reviewing foreign ownership of common carrier wireless licenses and certain aeronautical radio licenses is any indication. On the other hand, the broadcast industry has a long history of special concern in Congress due to its potential to influence the outcome of elections, and the FCC has not yet heard from Congress on these issues.

Reply comments on the proposal to lift the 25% cap on indirect foreign ownership of broadcast licensees are due at the FCC on April 30.

Considerations For International Clients Who Intend to Buy A Home In the U.S.

Sheppard Mullin — Mon, 22 Apr 2013 09:15:25 -0800

By Amy McEvoy

International buyers invested $82.5 billion in U.S. residential real estate (4.8% of total U.S. sales) according to the most recent survey conducted by the National Association of Realtors for the 12 month period ending with March 2012. According to that survey, the top states in the U.S. for international buyers were Florida, California, Arizona and Texas. That survey also finds that the top-five international buyers were from Canada, China, Mexico, India, and the United Kingdom and that Brazil also remains a major source of purchasers. Homes are bought in the U.S. for investment, vacation-use, temporary use for professional, educational (which could include providing a home to a child who is pursuing his or her education in the U.S.), and a myriad of other reasons.

U.S. home buying and ownership, without proper planning, can have unexpected and unintended consequences. Many international clients are not aware that ownership of a U.S. home triggers U.S. estate tax on death and a gift of the property during lifetime triggers U.S. gift tax. U.S. estate and gift tax is imposed at a rate of 40%. An individual who is neither a U.S. citizen nor domiciled in the U.S. can shelter only $60,000 of U.S. situs assets on death (i.e. assets located or deemed to be located within the U.S.). In terms of gifting, an individual who is neither a U.S. citizen nor domiciled in the U.S. can make annual exclusion gifts of $14,000 per year to anyone and can currently pass $143,000 per year to a spouse who is not a U.S. citizen free of gift tax. That is in contrast to the $5,250,000 that a U.S. citizen or domiciliary can pass free of estate tax on death or by gift during lifetime as well as unlimited transfers to a U.S. citizen spouse.

To avoid triggering U.S. estate tax on death, many international clients are counseled to take title to the home in a foreign “blocker” corporation which, if respected, is not subject to U.S. estate tax on death. This form of title has the added advantage of providing anonymity and liability protector to the shareholder . Owning a home in a foreign corporation triggers other more immediate tax concerns such as application of the corporate tax rate (up to 35%) in lieu of the preferential long-term capital gains rates on sale (up to 20%), possible imputed rental income for use of corporate property by the shareholder, loss of step-up in the income basis of the home on the death of the owner (the basis of the stock in the corporation would be adjusted but the inside basis—the home itself would not be entitled to a basis adjustment), and loss of the ability to avoid the home being reassessed for California real property tax purposes on transfer from parent to a child. In addition, a U.S. person who will inherit shares in a corporation that will either become a Controlled Foreign Corporation (CFC) or a passive foreign investment company (PFIC) faces numerous special compliance obligations and substantive tax issues as a result of the ownership of those shares. There are many other ways to take title, such as through a LLC or a trust and each option should be explored in depth to achieve the client’s objectives to the maximum extent possible. Consideration should also be given to planning aimed at avoiding a public court proceeding that would be necessary to convey title to the beneficiaries of an international client who dies holding title directly to a U.S. home.

Buying a U.S. home involves many competing objectives. We use an interdisciplinary approach among our corporate, income tax and trusts and estates attorneys, to guide our clients through the decision-making process. For more info, please contact Jerry J. Gumpel at 858.720.8965, Keith Gercken at 415.774.3207 or Amy L. McEvoy at 213-617-4159.

The fate of Argentina's debt restructuring is getting closer

Sheppard Mullin — Wed, 10 Apr 2013 09:07:57 -0800

By Marcos Vergara del Carril

In what the Financial Times has called “the sovereign debt restructuring case of the century,” Argentina has timely submitted its proposal as requested by the U.S. Court of Appeals for the Second Circuit, with which it is willing to make payments on approximately $1.3 billion of unpaid debt obligations that stem from the country’s $95 billion debt default of December 2001.

The case is getting closer to completing its more than 10-year marathon in the courts of New York, in a long battle between the Republic of Argentina and NML Capital Ltd., a fund affiliate of the hedge fund firm Elliott Associates. As said in our previous blog entry (click here), NML, based in the Cayman Islands, is seeking to repeat its landmark victory when it won a case against Peru in the 1990s, recovering approximately 400% what it paid for Peru’s debt.

Argentina’s proposal almost mimics the terms and conditions of the 2010 debt exchange, and requests the court to support this “cram down,” claiming that, if rejected, Argentina will be forced to reopen the entire debt restructuring, which has already been accepted by creditors holding 93% of the debt (Argentina agreed to exchange defaulted bonds with restructured debt obligations initially paying bondholders approximately thirty cents on the dollar).

Under the proposal, the par option is intended for smaller investors (less than $50,000). It would give bondholders new bonds due in 2038 with a nominal face amount equal to the amount of their defaulted debt, plus unpaid interest up to the end of 2001. The bonds would pay interest (from 2.5% to 5.25% annually) over the life of the bonds. Past due interests would be paid in cash.

On the other hand, the discount option would give holdouts bonds due in 2033 for 34% of the defaulted amount, with an 8.28% annual rate. Creditors would be compensated for past due interest on the restructured bonds with new bonds due in 2017 that pays 8.75% annually (Bono Global 2017).

Both par and discount options are supplemented with securities that are tied to Argentina’s GDP growth.

It is expected that by the end of April the court will reach its decision. Stakes are high for both Argentina and future sovereign debt restructurings. That is the main reason why the Federal Bank Reserve of New York, the American Bankers Association, and the U.S. Attorney General's office favored Argentina’s position. The latter argued that "by unduly restricting the immunity afforded to foreign state property, the decision not only contradicts this Court's precedent, but could adversely affect U.S. foreign relations and threaten U.S. government assets…The panel in this case adopted a novel interpretation of a standard pari passu clause found in many sovereign-debt instruments, in a manner that runs counter to longstanding U.S. efforts to promote orderly restructuring of sovereign debt.”

Historical Reform of the Mexican Telecommunications Industry

Sheppard Mullin — Tue, 19 Mar 2013 10:55:39 -0800

By Marcos Vergara del Carril

The new President of Mexico, Mr. Peña Nieto, has reached an unprecedented multi-party agreement between his party, the Partido Revolucionario Industrial (PRI), and the rest of the major political forces: the Partido Acción Nacional (PAN), which governed Mexico between 2000 and 2012, the Partido de la Revolución Democrática (PRD) and the Partido Verde Ecologista (PVE).

The implementation of the agreement, known as “Pact for Mexico,” will have a tremendous impact in the realm of telecommunications. The main objectives of the bill are as follows:

Restrictions to media ownership

The Federal Telecommunications Institute (Instituto Federal de Telecomunicaciones) (“FTI”), sister to the Federal Communications Commission (“FCC”) of the United States, will impose limitations on both national and local media ownership consolidation.

The FTI will have powers which in the United States are under the umbrella of the Antitrust Division of the Department of Justice, since it will supervise the economic competition within the main players of the industry by investigating and scrutinizing monopolies, media ownership consolidation and other economical restrictions that cause market inefficiencies in accordance with the Herfindahl index.

Although it has not been decided which threshold the FTI will use for horizontal and vertical ownership restrictions yet, the bill grants the FTI with the power to order mandatory divestments on certain entities that cause restrictions on competition. The question is how will they approach such divestments.

One alternative would be the one carried forward in the United States in FCC v. National Citizens Committee, 436 U.S. 775 (1978), where the ban on cross-ownership between newspapers and broadcast was deemed constitutional, but mandatory divestments were only ordered on egregious cases (i.e. those where one entity or person was holding the only newspaper and the only broadcast station in a particular local market). Such entities were given a five (5)-year period to divest, together with some tax exemptions for the transaction.

Another alternative could be the Argentine route. Unlike the United States, Argentina’s telecommunications law, enacted in 2009, mandates a divestment at a national and local level, but only giving a one (1)-year period to do so, regardless of how many entities are in the relevant market prior to divesting. These measures are currently being challenged in Argentina’s highest court.

Further, the FTI will also be entitled to supervise all activities that are against the public interest. Therefore, like the FCC, it will seek diversity, localism and competitiveness to achieve benefits for the public interest. For example, it will regulate the advertising of kids’ programming and promote a wide variety of viewpoints in the airwaves.

The FTI will not be entitled to restrict freedom of expression by any arbitrary and capricious decision or prior restraint.

On the other hand, Congress will create new criminal sanctions that severely punish monopolies and media consolidation.

Opening the doors to foreign investment

Currently, there is a 49% threshold for direct foreign investments in entities within the scope of the telecommunications industry. Moreover, there is no access for foreign investments in broadcast.

Since the aim of these changes is to foster competition, the bill intends to allow unlimited direct foreign investments in telecommunications entities, including satellite, and up to a 49% stake in broadcast stations.

Additionally, the development of the backbone to provide better network coverage for the general population could arise from private, public or PPP investment. Further, the 700 MHz and 2.5 GHz bandwidths will be used under the principles of non-discrimination, universal access, interconnection and common carriage.

Television: Digital transition

It is expected that by December 31, 2015, all full-power television stations nationwide will be broadcasting exclusively in a digital format. Once these steps are completed, licensees are requested to return the frequencies that were originally granted by the State. The goal is to guarantee an efficient use of the electromagnetic waves and have a better use of the 700 MHz bandwidth.

Further, at least 90 Mhz of the freed bandwidth will be used for expanding broadband services to the general population.

Must Carry Rules

Following the steps of the United States (see Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622 (1994)), the FTI will implement must-carry rules for free and simultaneous retransmission of over-the-air television stations, without any preemption powers whatsoever. However, the FTI will be entitled to deny free retransmission when it concludes that (i) there is competition in the market, or (ii) such networks have been labeled as having a “substantial power” in the market.

The FTI will closely scrutinize those entities that either directly or indirectly have a national participation of more than 50% of the broadcast or telecommunication services. Such percentage will be measured by the number of customers, the network’s traffic and its capacity, in accordance with the data collected by the FTI.

Two (2) new television stations

No later than 120 days after its new composition, the FTI will release the bidding terms and conditions to create two (2) new national broadcast television stations. Licensees that are in any way controlled by entities that have accumulated at least 12 MHz of broadcast services in any geographical area are not allowed to participate in the public bid.

Structure of the FTI

The FTI will be a fully independent agency of the government, integrated by seven (7) commissioners for a nine (9)-year term, without the possibility of reelection. These commissioners will be appointed by the President with the advice and consent of the Senate (they need at least the approval of two-thirds of the senators present at the time of voting). There are certain restrictions for the appointments. For example, those who have served as governors or members of congress five (5) years prior to an appointment cannot be considered for the position.

The decisions of the FTI (which will be issued by a majority vote) can be appealed to specialized courts that will be created no later than the second quarter of 2014. These courts will only hear cases related to (i) the implementation of the new telecommunications act, and (ii) antitrust. It should be noted that the FTI decisions will not be stayed through the entire proceeding of a relevant challenge.

Section 230 of the Communications Decency Act (“CDA”)

There is nothing in the bill that seems to create a mirror to section 230 of the CDA, which provides a safe harbor against laws that might otherwise hold providers that host third-party speech liable for what users publish therein (see Fair Housing Council of San Fernando Valley v. Rommate.com, LLC 521 F.3d 1157 (9th Cir. 2008); Zeran v. America Online, Inc., 129 F.3d 327 (4th Cir.1997); Ben Ezra, Weinstein & Co. v. America Online, Inc., 206 F.3d 980 (10th Cir.2000); Green v. America Online, 318 F.3d 465 (3d Cir.2003); Batzel v. Smith, 333 F.3d 1018 (9th Cir.2003); Universal Communication Systems, Inc. v. Lycos, Inc., 478 F.3d 413 (1st Cir.2007); Chicago Lawyers' Committee For Civil Rights Under Law, Inc. v. Craigslist, Inc. 519 F.3d 666 (7th Cir., 2008)).

Therefore, websites and search engines need to be aware that the general rules of defamation and invasion of right to privacy, amongst others, will still apply under Mexican jurisdiction, regardless of whether the content has been created by the provider itself or by an unrelated third party.

Mexico's Education Reform May be a Catalyst for Change

Sheppard Mullin — Tue, 12 Mar 2013 08:58:54 -0800

Under the leadership of President Enrique Pena Nieto, Mexico has recently approved a historic constitutional amendment reforming the country’s archaic education system. In order to push this historic reform, which is commonly known as the “education reform”, President Pena Nieto overcame great opposition from the country’s teachers union, which is the largest union in Latin America. The powerful union has been led by Elba Esther Gordillo for over thirty years and has wielded great power over elections throughout the country. In an unprecedented turn of events, the union lost the battle against the reform and its omnipotent leader was arrested and now faces embezzlement charges. If found guilty, Gordillo could face thirty years in prison.

The reform establishes a merit based system and does away with the tight control the union has held over all facets of the education system. Until now, the union has unilaterally controlled all hiring and firing of teachers. This has led to wide-spread corruption whereby teacher positions may be traded or sold to unqualified teachers. It is also believed that the education system’s payroll currently includes thousands of phantom teachers who simply collect a salary. The reform will allow for the first audit of the education system and an end to much of the corruption and waste.

More importantly, the education reform seems to signify a willingness and an appetite for change. Mexico’s education system has been untouched for over seventy years. This new administration has successfully taken on an archaic system and a very powerful union. It appears as though President Pena Nieto is sending a message to Mexico and beyond that it’s time to do things differently. This monumental reform may be the catalyst the country needs to push for further tax and other business reforms that will allow Mexico become more competitive and business-friendly. For now, the education reform has opened the way for Mexico to become more prosperous across the board by giving its population a better quality education.

To see Mexico’s constitution, including the education reform amendment please visit: http://www.diputados.gob.mx/LeyesBiblio/pdf/1.pdf

U.S. Court of Appeals (2nd Circuit) Orders Argentina To Submit Proposal For Alternative Payment Plan To Avoid Debt Default... Again

Sheppard Mullin — Fri, 08 Mar 2013 09:45:13 -0800

By Gabriel Matus

On March 1, 2013, the U.S. Court of Appeals for the Second Circuit ordered Argentina to submit its proposal for the terms on which it is prepared to make payment on approximately $1.3 billion of unpaid debt obligations stemming from the country’s $95 billion debt default a decade ago. The court’s ruling is the latest milestone in the marathon court battle between the Republic of Argentina and NML Capital Ltd., a vulture fund affiliate of the hedge fund firm Elliott Associates, run by billionaire Paul Singer.

Following its 2001 debt default and ensuing economic collapse, Argentina agreed to exchange defaulted bonds with restructured debt obligations initially paying bondholders approximately thirty cents on the dollar. However, NML did not participate in the exchange offer, demanding instead that Argentina make payment in full on the principal amount of the bonds it purchased at heavily discounted prices. NML, based in the Cayman Islands, is seeking to repeat its landmark victory when it won a case against Peru in the 1990s, recovering approximately 400% what it paid for Peru’s debt. Those who participated in Argentina’s 2005 exchange offer have gradually been made whole to the tune of approximately seventy-one cents on the dollar which pales in comparison to NML’s recovery in the Peru case.

The dispute focuses on provisions in the original bond terms that require equal treatment for all bondholders. President Cristina Fernandez has historically vowed not to pay anything to the “vulture funds” that she views as impeding Argentina’s economic recovery. However, in a speech to the Argentine congress on March 1st, President Fernandez indicated a willingness to pay the holdouts (those bondholders, such as NML, that did not participate in the prior exchange offers), but on terms not more favorable than those offered to bondholders in the two prior exchange offers.

The court set March 29th as the deadline for Argentina to submit a proposal for the terms of new bonds (e.g., formula, schedule, interest rate, assurances of payment) that would be exchanged for the Argentine bonds still held by NML. Check this blog for availability of the court’s March 1st order.

Line in the Sand: Siemens Argentina Case Limits Personal Jurisdiction Under the FCPA

Sheppard Mullin — Fri, 08 Mar 2013 09:44:53 -0800

By Thad McBride and Cheryl Palmeri

A New York federal district court judge has dismissed a Foreign Corrupt Practices Act (“FCPA”) claim against a former executive of Siemens, S.A. Argentina and Siemens Transportation Systems for lack of personal jurisdiction. The U.S. Securities and Exchange Commission (“SEC”) brought the civil FCPA enforcement action against Herbert Steffen for his role in an alleged scheme by which Siemens paid bribes to top government officials in Argentina to secure a project to create national identity cards.

Siemens settled related FCPA charges with the SEC and the U.S. Department of Justice (“DOJ”) in December 2008 for $800 million – the largest ever FCPA settlement (at least so far). The SEC then brought civil charges against Steffen and six of his colleagues in December 2011. And a year later, the DOJ brought criminal charges against Steffen and seven other former Siemens executives. All of the defendants named in the civil and criminal cases are non-U.S. citizens living outside the United States, a fact that led the DOJ to put its criminal case on hold just one day after the defendants’ arraignment.

At least one of Steffen’s co-defendants has settled with the SEC, and another is reportedly close to doing so. But Steffen fought the SEC’s claim, in part on the grounds that the court lacked personal jurisdiction over him. In his motion to dismiss, he pointed out that he had never been employed in the United States or traveled there on Siemens’ business during the period alleged in the complaint. The court agreed, holding that the SEC had failed to meet the Constitutional requirements of demonstrating that Steffen had sufficient minimum contacts with the United States or that asserting personal jurisdiction would be reasonable.

With regard to minimum contacts, the court pointed out that, even if Steffens’s actions were the proximate cause of Siemen’s falsified SEC filings, he did not actually authorize the bribes or direct, order, or know about the alleged cover-up. To find personal jurisdiction under such circumstances, said the court, would subject to the jurisdiction of U.S. courts “every participant in illegal action taken by a foreign company subject to U.S. securities laws.” Such an outcome would, according to the court, apply an inappropriate tort-like foreseeability standard to the FCPA.

The court also held that personal jurisdiction was unreasonable, given Steffen’s lack of geographic ties to the United States, his poor proficiency in English, and the court’s limited interest in adjudicating the matter. In so holding, the court noted that the SEC and DOJ had already obtained comprehensive remedies against Siemens, and Germany had resolved an action against Steffen individually.

While the outcome in this case makes sense, it may have come as quite a shock to the SEC which, only a few months ago, asserted personal jurisdiction under the FCPA based on accomplice liability alone. As we discussed at the time, that broad basis for personal jurisdiction asserted in the FCPA Resource Guide lacked any real legal support. With Steffen, it seems the SEC tried this theory of personal jurisdiction and lost. Whether the court would have found personal jurisdiction in a criminal case – which would presumably focus on the alleged bribery, not the falsification of financial documents – is a different matter. In such a case, a court might find sufficient minimum contacts with the United States with regard to executing the bribery scheme to assert personal jurisdiction.

Whether the court would have found personal jurisdiction in a criminal case – which would presumably focus on the alleged bribery, not the falsification of financial documents – is a different matter. In such a case, a court might find sufficient minimum contacts with the United States with regard to executing the bribery scheme to assert personal jurisdiction.

As with other assertions in the FCPA Resource Guide, it is clear that additional case law is necessary to test the scope of personal jurisdiction. But the Steffen case is illuminating: it suggests that the government’s sweeping claims of power under the FCPA may not go unchecked by the courts.

Sheppard Mullin Offers Full Range of Immigration Expertise

Sheppard Mullin — Mon, 04 Feb 2013 10:14:07 -0800

Whether your company requires assistance in selecting the appropriate visa for an executive rotating into the U.S. or help in assessing the immigration impact of a U.S. merger or acquisition, Sheppard Mullin’s seasoned immigration attorneys can help. We provide comprehensive global business immigration services, including strategic planning, advice, case preparation, filing and monitoring, as well as development of corporate compliance policies and visa training programs. Our team also works extensively with individuals and entrepreneurs considering family or business sponsorships, facing bars of entry to the U.S. or seeking naturalization.

With over two decades of experience representing high net worth individuals seeking investor related visas in the U.S., and more recently developers and others involved in with forming Regional Centers, we are intimately familiar with the EB-5 Entrepreneur program bringing foreign investment into the U.S.

We have a dedicated team of immigration compliance professionals that provide representation to companies involved in government investigations including Form I-9, E-Verify matters, government contract and visa fraud matters.

This strong combination of immigration related experience, cultural fluency, and political sophistication, allows our immigration attorneys well serve the diverse needs of the Latin American market.

For more info, please contact Dawn Lurie at 202.469.4963 or dlurie@sheppardmullin.com.

Fifth Circuit Refuses to Enforce Mexican Reorganization Plan's Proposed Release of Non-Debtor Bond Guarantors

Sheppard Mullin — Fri, 14 Dec 2012 10:26:18 -0800

The Fifth Circuit recently upheld a Texas Bankruptcy Court’s refusal to enforce non-debtor third party releases in the Mexican reorganization proceeding (known as a concurso mercantil) of Mexican glass manufacturer Vitro SAB de CV. As a result of this decision, Wall Street and the capital markets will breathe a sigh of relief and will likely continue to extend credit to Mexican corporations with some confidence that guaranties will be enforced.

In June 2012, a Texas Bankruptcy Judge refused to enforce, under Chapter 15 of the US Bankruptcy Code, a reorganization plan approved by a Mexican court in Vitro’s concurso mercantil proceeding. Vitro’s non-debtor subsidiaries had guaranteed over $1 billion in US bonds, and under Vitro’s reorganization plan, among other things, those guarantees would have been released. Vitro’s reorganization plan was approved using the votes of the non-debtor guarantor subsidiaries, as well as other insider claims. The US bondholders vigorously opposed enforcement of the plan in the Texas Bankruptcy Court. The Bankruptcy Court’s decision relied upon the rarely used Section 1506 of the US Bankruptcy Code, which provides that Vitro’s plan could not be enforced if it was “manifestly contrary to the public policy of the United States”. Vitro’s appeal was certified for direct appeal to the Fifth Circuit.

While the Fifth Circuit upheld the Texas Bankruptcy Judge’s decision, it declined to do so based on public policy reasons and Section 1506. Instead, the Fifth Circuit parsed Chapter 15 of the US Bankruptcy Code (in particular, Sections 1521, 1522 and 1507), and determined that those Bankruptcy Code sections did not authorize the release of claims against non-debtor guarantors in this particular circumstance. While the Fifth Circuit left open the possibility that a US court could enforce a release of non-debtor entities pursuant to a foreign reorganization plan, the decision makes it clear that such releases will be scrutinized carefully and granted under extraordinary and compelling circumstances.

Following the Fifth Circuit’s decision, lenders may still reasonably rely on the commitments of guarantors and other third parties in extending credit and underwriting Mexican and other foreign transactions. However, because the decision does leave some possibility, however small, that such guarantees and other commitment will not be enforced, there may be some minor disruption in the capital markets. Any such disruption will be very small compared to the dramatic effect that would have ensued had the Fifth Circuit reversed the Texas Bankruptcy Court.

Fifth Circuit Expected To Issue Landmark Ruling Concerning Recognition of Foreign Bankruptcy Proceedings Contrary to US Public Policy

Sheppard Mullin — Tue, 20 Nov 2012 10:00:31 -0800

By Alan Feld

In a widely followed dispute, the Fifth Circuit Court of Appeals will soon render a decision on the appeal of a Texas Bankruptcy Court’s refusal to recognize non-debtor third party releases in the Mexican reorganization proceeding (concurso mercantil) of Mexican glass manufacturer Vitro SAB de CV. Wall Street and the capital markets will be watching this appeal closely as a reversal of the Bankruptcy Court would likely make lenders and bondholders extremely nervous about extending future credit to Mexican corporations.

In June 2012, a Texas Bankruptcy Judge was faced with recognition (under Chapter 15 of the US Bankruptcy Code) of the plan confirmed in the Mexican concurso mercantil proceeding of Vitro. The plan was extremely controversial as inter-company and insider claims were used to outvote the third party claims of foreign (mainly US-based) bondholders to substantially reduce the payout to creditors while preserving the equity position of the controlling shareholders. The recognition proceeding in the US Bankruptcy Court was vigorously opposed by the US bondholder group on the grounds that, among other things, the enforcement of 3rd party non-debtor releases are contrary to US public policy and completely cut off the rights of American creditors who hold, in the aggregate, approximately $1.2 billion in bonds guaranteed by Vitro’s non-debtor US based affiliates.

Relying on a rarely used public policy exception, the Bankruptcy Court ruled that Vitro’s concurso mercantil improperly extinguished the bondholder claims against the non-debtor subsidiary guarantors in violation of fundamental US policy against the discharge of claims against a non-debtor party. The Bankruptcy Court specifically ruled that Vitro’s concurso mercantil would violate section 1506 of the Bankruptcy Code in that it was “manifestly contrary to the United States’ public policy of preserving a creditor’s rights and claims against a nondebtor.”

In light of the importance of this issue, the Bankruptcy Court’s ruling has been “certified” for direct appeal to the Fifth Circuit Court of Appeals (bypassing the District Court). Oral argument was recently conducted and a decision is expected shortly. The capital markets will be watching this one closely as this ruling will impact a lender’s ability to rely on the commitments of guarantors and other third parties in extending credit and underwriting risk. The availability of credit to Mexican businesses may be dramatically affected by the ruling on this important issue.

Amendment to Mexican Commerce Code Facilitates Registration of Liens Against Mobile Assets Located In Mexico

Sheppard Mullin — Mon, 19 Nov 2012 09:15:11 -0800

The Official Gazette of the Federation (the “Gazette”) published an amendment to the Mexican Commerce Code (Código de Comercio) by which foreign entities (and not only individuals) acting as pledgors who have not been previously recorded in the Public Registry of Commerce, may validly obtain a registration number from the Unique Registry of Mobile Asset Collateral (Registro Unico de Garantías Mobiliarias) (“RUG”), under which first priority liens on mobile assets located in Mexican territory and documented through Mexican security documents (i.e. Floating Lien Pledge Agreements) will be recorded in the RUG perfecting such first priority lien for purposes of third parties.

Unlike in the past, from the date in which the amendment is mandatory, foreign entities intending to grant a security interests on mobile assets located in Mexico to secure obligations under credit or loan agreements or any other kind of agreement, will be able to create liens on those assets for the benefit of their creditors and such liens will be publicized to have effects against third parties.

The amendment took effect the day after its publication in the Gazette.

Mexico Added to UK Open General License for Export Controls Following Wassenaar Accession

Sheppard Mullin — Mon, 20 Aug 2012 09:20:40 -0800

By Curtis Dombek

Earlier this year Mexico became a member of the Wassenaar Arrangement for multilateral military and dual-use controls. The Wassenaar Arrangement is a group of 41 countries that cooperate in the export control of dual-use goods and technology, items that pose a risk if trade is uncontrolled because of their potential for use in military systems and terrorist activities.

Although Mexico has long been a popular site under NAFTA for manufacturing operations in the consumer goods sector, its absence from the Wassenaar regime has long limited the ability of American and European firms to take full advantage of its potential in the high tech sectors that involve dual-use goods and technology. Mexico’s accession to the Wassenaar Arrangement and institution of export controls now offer opportunities for expanded manufacturing and design activity involving semiconductors, software, aerospace, lasers, sensors and chemical production.

The new Mexican export control law exempts exports to other Wassenaar member countries from the Mexican export licensing requirements. This allows Mexican companies to export such items without export licensing to the United States and the many other Wassenaar countries, which include all the EU member states other than Cyprus, as well as countries such as Australia, Canada, Japan, New Zealand, Russia and Switzerland.

The United States has not yet reciprocated by relaxing dual use export controls with respect to Mexico in the same manner it has done for Canada and many EU countries. Some U.S. export license exceptions are available for Mexico, but there remain important limitations for certain dual-use goods and technology. This is an area to watch, however, given the important step Mexico has taken to institute export controls as a new Wassenaar member.

Meanwhile, the United Kingdom has moved quickly to liberalize its export controls relating to Mexico. It recently amended its Open General License (OGEL) to allow most dual-use goods and technology that previously required an export license to Mexico to be exported there without a license. For example, data for the development or production of 3A001 semiconductor components that previously required a UK export license to Mexico no longer does. This control previously restricted the ability of British firms to collaborate freely with Mexican firms on semiconductor development, but such development technology may now be freely exchanged between UK and Mexican firms provided there is no indication that the technology is for weapons of mass destruction, diversion to embargoed or prohibited destinations or to parties who have committed export violations. UK firms wishing to rely upon this OGEL for Mexico are required to file a notice with the British Secretary of State giving the name and address where copies of the records concerning the exports are kept and available for UK government inspection, and the exporter needs to update this information if it changes.

Other European countries have not moved as fast to liberalize their export controls with respect to Mexico, but many of them may follow the UK’s lead in the coming months.

With these new developments, multinationals with cross-border engineering and development programs will be in a position to consider Mexico for participation in new programs that may not have been practical in years past due to export licensing requirements.

Meaning Of FCPA's "Foreign Official" Causes Uncertainty For Companies Doing Business Abroad

Sheppard Mullin — Thu, 24 May 2012 08:36:42 -0800

By Alison N. Kleaver and Joseph Barton

One of the goals of the Foreign Corrupt Practices Act (“FCPA”) is to prevent US companies and individuals from paying bribes to foreign officials in exchange for business. To this end, the FCPA prohibits any domestic individual or business entity from making payments to a “foreign official” for the purpose of obtaining or retaining business. 15 U.S.C. § 78dd-2(a)(1). However, who, precisely, qualifies as a “foreign official” is the subject of much uncertainty. In particular, whether employees of a state-owned company qualify as foreign officials for purposes of FCPA is an area of great concern—and potential liability—particularly for US companies doing business in Latin America where governments often have at least some level of involvement in various business sectors from education to utilities to health care.

The FCPA defines a “foreign official” as “any officer or employee of a foreign government or any department, agency or instrumentality thereof.” 15 U.S.C. § 78dd-2(h)(2)(A). Thus, whether an employee of a state-owned company is a foreign official depends, in part, upon whether state-owned companies are “instrumentalities” of a foreign government. Two courts have recently weighed in on this issue, finding that the determination is a fact-specific inquiry. In United States v. Carson, 2011 U.S. Dist. LEXIS 88853 (C.D. Cal. May 18, 2011), the court identified several factors including: (1) the foreign state’s characterization of the entity and its employees; (2) the foreign state’s degree of control over the entity; (3) the purpose of the entity’s activities; (4) the entity’s obligations and privileges under the foreign state’s law, such as whether the entity has exclusive or controlling power to administer its functions; (4) the circumstances surrounding the entity’s creation; and (5) the extent of the foreign state’s ownership of the entity and level of financial support, such as subsidies, special tax treatment, and loans. 2011 U.S. Dist. LEXIS 88853, at *11-12. The court emphasized that state ownership by itself is insufficient to determine that the company is an “instrumentality” under the FCPA. Id. at 12. In United States v. Aguilar, 783 F. Supp. 2d 1108 (C.D. Cal. 2011), the court considered various characteristics of government agencies and departments to assist it in understanding whether a state-owned company is an “instrumentality.” 783 F. Supp. 2d at 1115. In addition to several of the factors identified by the Carson court, the Aguilar court also looked at whether the entity provides a service to the citizens of the jurisdiction; whether key officers and directors are, or are appointed by, government officials; and whether the entity is perceived and understood to be performing official government functions. Id.

In practice, however, companies who come under investigation for alleged FCPA violations cannot necessarily rely on the standard that has been articulated by the Court. Looking at recent settlements announced by the Department of Justice and the Securities and Exchange Commission, the entities tasked with investigating FCPA violations, take a more bright-line stance that government ownership is the determinative factor for FCPA purposes. For example, in March 2012, the SEC and DOJ announced a settlement with Biomet, which had been charged with bribing doctors in Argentina, Brazil, and China in order to secure business with state-owned and operated hospitals. Similarly, in April 2011, the SEC and DOJ reached a settlement with Comverse Limited over payments to employees of Hellenic Telecommunications Organisation S.A., a telecommunications company in Greece. The Greek government owned one-third of the company’s issued share capital, making it the company’s largest single shareholder.

Given that many companies under investigation by the DOJ and SEC for FCPA violations reach settlements rather than litigating charges in court, companies doing business abroad are left with considerable uncertainty about whether the DOJ and SEC’s broad definition of an instrumentality (and thus a “foreign official”) or the court’s fact-specific inquiry set the standard for FCPA liability. Until the courts definitively settle the issue, companies seeking to limit potential FCPA liability should err on the side of caution and consider all employees of any company owned in whole or in part by a foreign state to be “foreign officials” for purposes of the FCPA.

SEC Staff Issues Report on the Cross-Border Scope of Private Rights of Action for Securities Fraud

Sheppard Mullin — Wed, 09 May 2012 09:35:05 -0800

The staff of the Securities and Exchange Commission (“SEC”) recently released a study on the cross-border scope of the private right of action under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. The study, mandated by Congress following the United States Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010), outlines a number of legislative options for extending the scope of private actions for international securities fraud that may provide a roadmap for future Congressional action.

Background

While courts have long recognized a private right of action for securities fraud under Section 10(b) of the Exchange Act, the Supreme Court held in Morrison that Section 10(b) does not apply to the purchase or sale of non-U.S.-listed securities outside the United States. Prior to Morrison, federal courts applied Section 10(b) to transnational securities fraud if a sufficient level of conduct occurred in the United States (the “conduct test”) or conduct occurring outside the United States had a foreseeable and substantial effect within the Untied States (the “effects test”). In Morrison, the Supreme Court rejected these tests in favor of a “transactional test,” which limited Section 10(b) to fraud in connection with the purchase or sale of a security listed on a U.S. exchange and the purchase or sale of any other security in the United States.

In response to Morrison, Congress added Section 929P(b) to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), which restored the conduct and effects tests for civil and criminal actions brought by the SEC and the Department of Justice (“DOJ”), respectively. With respect to private rights of action, however, Section 929Y of the Dodd-Frank Act required the SEC to solicit public comment and conduct a study to determine the extent to which the conduct and effects tests should apply in such cases.

The Study

The study outlines three legislative options for applying the conduct and effects tests to private rights of action for transnational securities fraud. The first is to apply the SEC and DOJ versions of the tests, which (according to the study) “would involve policy trade-offs that could carry significant implications” for investor protection and international comity — a principle of customary international law that recognizes the validity of foreign law.

An alternative approach (and one that the SEC advocated in Morrison) is to narrow the conduct test by imposing a “direct injury requirement,” which would require the plaintiff to show that the injury resulted directly from conduct within the United States. A disadvantage of this approach is that it could pose challenges for international comity because it would allow “foreign investors [to] receive remedies that their governments have determined not to provide . . . .” A second alternative is to limit the conduct and effects tests to U.S. investors, though this would permit “application of Section 10(b) to securities transactions that occur on foreign securities exchanges, which a number of foreign governmental authorities have opposed.”

The study also outlines four options for supplementing and clarifying the transactional test adopted by the Supreme Court in Morrison. The first option is to allow private actions for the purchase or sale of any security that is of the same class of securities registered in the United States. This would provide a bright-line standard based on U.S. registration, but could have the unintended consequence of discouraging foreign issuers from registering in the United States.

A second option is to allow private actions against securities intermediaries (e.g., broker-dealers and investment advisors) that engage in securities fraud while purchasing or selling securities overseas for U.S. investors. District courts interpreting the transactional test under Morrison have held that Section 10(b) no longer applies to such transactions, even in cases where the securities intermediary resided in and engaged in fraudulent conduct in the U.S. or traveled to the U.S. frequently to meet with the U.S. investor.

A third option is to allow private actions for investors who can demonstrate that they were induced to engage in the transaction while in the United States. According to the study, such a “fraud in the inducement” test would not raise international comity concerns because it would require a showing of actual reliance and would therefore preclude use of the “fraud on the market” theory, which “has been a source of criticism from foreign government authorities when it is applied to transnational securities frauds involving overseas transactions.”

A fourth option is to allow private actions if either party to the transaction made or accepted the offer to sell or purchase the securities while in the United States. This would further Morrison’s goal of establishing a bright-line standard for liability by clarifying when an off-exchange transaction takes place.

Criticism

Apart from noting in passing that the SEC “has not altered its view in support of” the direct injury requirement, the study offers little in terms of specific recommendations. In a sharply worded dissenting statement, SEC Commissioner Luis Aguilar argued that the study “fails to satisfactorily answer the Congressional request, contains no specific recommendations, and does not portray a complete picture of the immense and irreparable investor harm that has resulted” from Morrison.

Although the study identifies a number of policy considerations that Congress may consider in determining whether to enact legislation extending the transnational scope of private actions under Section 10(b), the reluctance of the SEC staff to provide explicit recommendations renders the immediate impact of the study unclear. As noted in the study, “a final option would be for Congress to take no action” at all, in which case lower federal courts would continue to interpret and refine the transactional test under Morrison.

For further information, please contact John Stigi at (310) 228-3717 or Dan Brooks at (202) 469-4916.

Opportunities in the Upcoming U.S.-Colombia Free Trade Agreement

Sheppard Mullin — Tue, 08 May 2012 09:02:02 -0800

By Curt Dombek and Mark Jensen

President Obama’s visit to the Summit of the Americas produced an important development for business in the United States and Colombia. During an April 15 press conference, President Obama and Colombian President Juan Manuel Santos jointly announced that the U.S.-Colombia Free Trade Agreement (CFTA) will enter into force on May 15, 2012. The enactment of the CFTA creates significant opportunities for both U.S. and Colombian businesses involved in international transactions. In order to take advantage of these opportunities, it will be important for parties to understand key parameters of the agreement, including what qualifies goods as originating in the United States or Colombia.

Economic Background. The United States is currently Colombia’s leading trade partner for both imports and exports, while Colombia is the 20th largest export market for products from the United States and the 25th largest foreign exporter of goods to the United States. See Congressional Research Service, the U.S.-Colombia Free Trade Agreement: Background and Issues (Dec. 20, 2011). U.S. Exports to Colombia in 2011 were $14.3 billion, which the U.S. International Trade Commission estimates will grow by more than $1.1 billion under the CFTA. Colombia exported $15.6 billion worth of goods to the United States in 2010. Office of the U.S. Trade Representative (USTR), Colombia, http://www.ustr.gov/countries-regions/americas/colombia.

The CFTA will make over 80 percent of U.S. exports of consumer and industrial products to Colombia duty free immediately, while most other tariffs will be phased out over a 10-year period. USTR, Benefits of the U.S.-Colombia Trade Promotion Agreement: More American Exports, More American Jobs, http://www.ustr.gov/about-us/press-office/fact-sheets/2012/april/benefits-us-colombia-trade-promotion-agreement-more-ame. For agricultural products, more than half of current U.S. farm exports to Colombia will become duty free immediately; virtually all other tariffs will be eliminated in 15 years. Id. Colombia will provide substantial market access across its services sector by eliminating measures preventing firms from hiring U.S. professionals, and phasing out restrictions in cable television. Id. Colombia will also join the World Trade Organization’s Information Technology Agreement, thereby removing barriers on Information Technology products. Id.

Origination under the CFTA. As with other free trade agreements involving the United States, the origin of items under the agreement will be determined by rules related to tariff-shifts and regional value content. Specific tariff-shift or regional content requirements apply based on the item’s Harmonized Tariff Schedule (HTS) number, and requirements may differ from item to item; some items may require regional value content calculations, for example, while others will not. Under the tariff shift rules, a product that is processed to become a different product in either the United States or Colombia will be considered of U.S. or Colombian origin, respectively, so long as it meets the tariff-shift requirements for its HTS number. See generally CFTA, Ch. 4, U.S.-Colom., Nov. 22, 2006. Under the regional value calculations, a product must be manufactured or processed using a certain amount of underlying materials originating in the country, according to specific formulas provided in the CFTA. See id. Special categories of goods such as textiles and autos are subject to specific origination requirements, such as an exception where underlying materials are not available in the territory (e.g. textiles) or a unique regional value content formula (e.g. autos).

The CFTA also provides for verification procedures related to origination claims, which may be made by written requests for information or questionnaires, visits to the premises to observe production of goods, and other mutually-agreed upon procedures. The CFTA allows parties to deny preferential treatment to an imported good where the verification request is not responded to within a reasonable period of time under the importing Party’s law, where a request for a visit is not granted within a reasonable period, or where the Party finds a pattern of conduct indicating that an importer, exporter, or producer has provided false or unsupported declarations that a good imported into a territory is originating.

Conclusions. The CFTA provides significant opportunities for the development or expansion of cross-border markets in the United States and Colombia. In order to take full advantage of these opportunities, it will be important for businesses to understand laws regarding origination, obligations related to verification procedures, and other aspects of the law.

IRS Issues Final Regulations Requiring Reporting by Financial Institutions of Interest Payments Made on U.S. Accounts of Non-Resident Individuals

Sheppard Mullin — Tue, 24 Apr 2012 12:55:02 -0800

By Keith Gercken and Danica Dodds

Summary

On April 17, 2012 the Treasury Department and the Internal Revenue Service issued final regulations requiring information reporting by a broad range of banks and other financial institutions of interest paid to certain nonresident alien individuals on funds held in U.S. accounts. These reporting requirements are generally applicable for payments of interest made on or after January 1, 2013, and are intended to enhance the ability of the IRS to effectively exchange tax information with foreign revenue authorities under the existing network of tax information exchange agreements, thereby bolstering its ability to combat offshore tax evasion by U.S. taxpayers.

General Rules

In general, the rules are only applicable to interest payments that are

Made with respect to deposits maintained at offices of banks and other financial institutions that are located in the United States;
Made to non-resident individuals (i.e., and not interest payments made to companies, partnerships or other legal entities); and
Made to non-resident individuals that reside in certain countries with which the U.S. has entered into certain tax information and exchange agreements (listed below).

Determining Residency

In order to determine the non-resident alien's country of residence, a financial institution may rely on the permanent residence address provided on Form W-8BEN, unless it knows or has reason to know that such documentation is not reliable.

Alternatively, financial institutions subject to this reporting requirement are given the option to report interest payments made to all non-resident individuals regardless of country of residence. According to the IRS, this election is intended to make it easier for financial institutions to comply with the new reporting requirements – presumably because they would not need to make any individual determinations regarding whether a depositor resides in one of the listed countries.

Reporting

The paying financial institution is required to file a Form 1042-S with the IRS for each calendar year in which the interest is paid.

Automatic Information Exchange

With the exception of Canada, the information collected under this regime will not automatically be reported to the depositor's home jurisdiction. While this information may be provided to tax authorities in other jurisdictions upon request, the IRS is not compelled to exchange information if it believes that there is concern regarding the use of the information or other factors exist that would make the exchange inappropriate – for example, if the IRS believes that the foreign jurisdiction may not comply with its obligations of confidentiality under the applicable tax information and exchange agreement, or if the information may be used for some non-tax related purpose. Several other countries are currently discussing an automatic exchange of information with the U.S. so the number of countries with which the U.S. automatically exchanges information is likely to increase.

Applicable Countries (subject to change)

Antigua & Barbuda	Guemsey	Netherlands Island territoties: Bonaire, Saba, St. Eustatius and the countries Curacao, and St. Maarten (Dutch part)
Aruba	Guyana	New Zealand
Australia	Honduras	Norway
Azerbaijan	Hungary	Pakistan
Bangladesh	Iceland	Panama
Barbados	India	Peru
Belgium	Indonesia	Philippines
Bermuda	Ireland	Poland
British Virgin Islands	Isle of Man	Portugal
Bulgaria	Israel	Romania
Canada	Italy	Russian Federation
China	Jamaica	Slovak Rep.
Costa Rica	Japan	Slovenia
Cyprus	Jersey	South Africa
Czech Republic	Kazakhstan	Spain
Denmark	Korea (South)	Sri Lanka
Dominica	Latvia	Sweden
Dominican Republic	Liechtenstein	Switzerland
Egypt	Lithuania	Thailand
Estonia	Luxembourg	Trinidad and Tobago
Finland	Malta	Tunisia
France	Marshall Islands	Turkey
Germany	Mexico	Ukraine
Gibraltar	Monaco	United Kingdom
Greece	Morocco	Venezuela
Grenada	The Netherlands

Contact

For further information, please contact Keith Gercken at (415) 774-3207 or Danica Dodds at (310) 228-2274.

Disclaimer

This update has been prepared by Sheppard, Mullin, Richter & Hampton LLP for informational purposes only and does not constitute advertising, a solicitation, or legal advice, is not promised or guaranteed to be correct or complete and may or may not reflect the most current legal developments. Sheppard, Mullin, Richter & Hampton LLP expressly disclaims all liability in respect to actions taken or not taken based on the contents of this update.

Mexico Continues to Entice Private Investment in Infrastructure With a New Public-Private Partnership Act

Sheppard Mullin — Tue, 10 Apr 2012 10:45:23 -0800

By Bram Hanono

On January 16, 2012, Mexico enacted the Law on Public-Private Partnerships (Ley de Asociaciones Público Privadas) ("PPP Law"). The new PPP Law is intended to regulate the formation of partnerships between the public and private sectors in an effort to provide services and build infrastructure to improve social welfare and increase investment levels in Mexico.

Since assuming office in 2006, President Felipe Calderon has aggressively lobbied for increased investment in infrastructure in Mexico. In 2007, President Calderon launched the National Infrastructure Program ("NIP") to increase the competitiveness of Mexico's infrastructure. For President Calderon, investing in infrastructure is the way to economic and social development. In November 2009, President Calderon proposed the PPP Law as a compliment to NIP. It took two years for the Mexican Congress to approve the law. We reported on NIP and President Calderon's proposal for the PPL Law here.

The PPP Law implements a framework for public-private partnerships to allow better cooperation between the Mexican government and the private sector regarding the construction of infrastructure. The PPP Law is limited to new projects and implementation of its methods are optional. However, it cannot be applied to certain projects and activities reserved for the government, such as the oil industry.

Under the PPP Law, the private sector is permitted to submit its own proposals to relevant government agencies, either when opportunities are identified by the private sector or in response to a government agency's identification of the types of proposals it is willing to receive. The proposed project may not be awarded directly to the proposing party without undergoing customary tender procedures. However, in order to generate interest in the private sector, when a proposal leads to a tender offer, the promoter is reimbursed for the costs of project feasibility studies and is afforded a premium of up to 10 percent in the evaluation of the offer.

The PPP Law allows the government to enter into contracts with a private company for up to 40 years. In order for a private company to enter into a public-private partnership agreement, its sole corporate purpose must be to carry out the activities necessary to fulfill the agreement and develop the corresponding infrastructure project.

The PPP Law provides more legal certainty for private investors. It contemplates equal distribution of risk, access to financing, step-in rights of the government agency involved, the circumstances under which an agreement may be amended, and contractual penalties and sanctions in the case of default by one of the parties to the public-private agreement. Finally, under the PPP Law it is foreseen that disputes concerning a public-private agreement, as well as the permits and approvals necessary for the development of the project, will be resolved by arbitration.

With the implementation of the PPP Law, President Calderon anticipates that Mexico will be able to increase development of its infrastructure by enticing private investment with improved legal protections. The PPP Law is intended to address the need for schools, hospitals, and other infrastructure projects which will be developed with better quality and in areas that the government has been unable to fulfill.

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Sheppard, Mullin, Richter & Hampton LLP has been at the forefront in representing developers and investors in "public/private partnership" projects. There is a wide variety of potential forms of public/private ventures so it is essential to retain a law firm with the actual experience to address every issue that arises in the course of implementing a successful project. We have negotiated, documented and implemented transactions pertaining to developments ranging from malls and shopping centers, stadium and convention centers, theme parks and manufacturing and industrial complexes to the development of infrastructure including roads, sea and airports, marina complexes, bridges and low income or senior housing projects, among others. We understand what it takes to negotiate, document and close public/private ventures, making us a leader in this area of the law.

The Chevron Ecuador Saga Continues as Second Circuit Overturns Anti-Enforcement Injunction

Sheppard Mullin — Mon, 12 Mar 2012 10:11:06 -0800

By Neil A.F. Popović and Rachel Tarko Hudson

In the latest U.S. chapter of the long and hard-fought battle over claims of pollution and adverse health effects from oil development in the Ecuadorian rain forest by Texaco (acquired by Chevron in 2001), a potentially important court victory has gone to the so-called Lago Agrio plaintiffs. On January 26, 2012, the Second Circuit Court of Appeals issued an opinion in Chevron Corp. v. Naranjo, ___ F.3d ___, 2012 WL 232965 (2d Cir. Jan. 26, 2012), ordering vacation of a preliminary injunction that prohibited the Lago Agrio plaintiffs from enforcing or preparing to enforce a potential Ecuadorian judgment against Chevron anywhere in the world outside Ecuador.

Background

The Chevron-Ecuador controversy first arrived in U.S. courts in 1993, when a group of Ecuadorian residents filed suit in the Southern District of New York, alleging a variety of environmental, health and other tort claims related to Texaco's oil extraction activities in Ecuador. As described by the Second Circuit, "the conflict between Chevron and residents of the Lago Agrio region of the Ecuadorian Amazon must be among the most extensively told in the history of the American judiciary." 2012 WL 232965 at *1 & n.1 (noting that an "underinclusive" Westlaw search yielded 56 results dealing directly with the litigation). (See our prior coverage here.)

In the recent episode addressed here, Chevron sued the Lago Agrio plaintiffs under New York's Uniform Money-Judgments Recognition Act (the "Recognition Act") seeking a global anti-enforcement injunction against the Lago Agrio plaintiffs and their counsel, New York attorney Steven Donziger. Chevron sought to prevent enforcement of a $17.2 billion judgment awarded to the Lago Agrio plaintiff's by the Ecuadorian trial court where the underlying case was litigated, after being dismissed from U.S. courts based on forum non conveniens. The Ecuadorian court awarded plaintiffs $8.6 billion in damages plus $8.6 billion in punitive damages to be awarded if Chevron did not apologize within fourteen days of the issuance of the opinion, which Chevron did not.

Chevron included its claim for injunctive relief in a February 1, 2011 complaint that also asserted claims based on RICO, extortion, mail fraud, and money laundering. On April 15, 2011, the district court severed the injunctive relief claim under the Recognition Act from the other claims and thus its decision and the Second Circuit's decision address only that single claim.

Chevron offered three arguments in support of injunctive relief: (1) that the Ecuadorian judgment was fraudulently procured; (2) that Ecuador lacks impartial tribunals; and (3) that domestic and international due process were violated in procuring the judgment. At the time of Chevron's complaint and the District Court's opinion, the Ecuadorian judgment was on appeal in Ecuador, and thus was not yet final. On January 3, 2012, while the Second Circuit appeal was pending, the appeals court in Ecuador affirmed the trial court's decision and the $17.2 billion judgment. Chevron appealed that decision to Ecuador's Supreme Court, the National Court of Justice, but the Ecuadorian high court rejected Chevron's request for a waiver of the obligation to post a bond to stay enforcement of the judgment while the appeal is pending. Chevron did not post a bond, so the judgment is or should soon be enforceable in Ecuador.

The Second Circuit's Opinion

Back in the United States, the Second Circuit based its opinion on two lines of reasoning. First, the court held that the Recognition Act was not enacted as a tool to preemptively prevent or impede the enforcement of foreign judgments, but rather as a tool to facilitate recognition and enforcement of final foreign judgments. At the time the District Court opinion issued its preliminary injunction, there was neither a final judgment nor an enforcement action initiated by the Lago Agrio plaintiffs, in New York or elsewhere. The court of appeals reasoned that the provisions of the Recognition Act on which Chevron relied in support of its injunction claim provide potential defenses in an action for recognition of a foreign judgment in New York, but they do not create affirmative causes of action to enjoin enforcement. The court distinguished the one out-of-circuit case where a pre-enforcement injunction was issued under another state's Recognition Act on the grounds that in the other case, the judgment holders had already attempted, but failed, to enforce the judgment in another U.S. court. In any event, the Second Circuit stated that even if the reasoning of the other case did allow for an injunction to issue, the court declined to follow it.

The court also reasoned that the procedural requirements of the Recognition Act are motivated by an interest in facilitating the recognition and enforcement of foreign judgments, not preventing it. The exceptions to recognition exist to facilitate trust among nations by preventing one country from selling justice to the highest bidder and then tying the hands of foreign courts from not enforcing their judgments. To the extent Chevron believes the proceedings in Ecuador were tainted by corruption, it can raise such arguments if and when the Lago Agrio plaintiffs attempt to enforce their judgment in the U.S.

The Second Circuit found additional reasons to reverse the preliminary injunction based on considerations of international comity. The court noted that the New York legislature enacted the Recognition Act to provide a ready means for foreign judgment creditors to secure enforcement in New York courts, in order for New York to act as a responsible participant in the international system of justice. The Recognition Act was not enacted to enable New York courts to pass judgment on the justice systems of the world. The court distinguished cases involving anti-foreign-suit injunctions, emphasizing that contrary to the characterization of both sides, an attempt to obtain an anti-enforcement injunction was not governed by the same standards and concerns.

An anti-suit injunction is a procedural tool to prevent a litigant from subjecting a party to defending the same suit in multiple jurisdictions. In contrast to that scenario, the underlying litigation in Ecuador and the claims brought by Chevron in New York encompassed "two distinct disputes," and they were sequential as well. The factors that apply to anti-suit injunctions simply do not apply.

As for comity, the court noted that it is "a particularly weighty matter for a court in one country to declare that another country's judicial system is so corrupt or unfair that its judgments are entitled no respect from the courts of other nations." That determination may be unavoidable when a party seeks to enforce an actual foreign judgment, but that is very different from a court in one country attempting to preclude the courts of every other nation in the world from ever recognizing a foreign judgment.

To take such sweeping action would potentially disrespect those other courts by implying that they are not to be trusted to make the determination for themselves. Accordingly, Chevron's request for injunctive relieve raises "far graver" comity concerns than a request that courts in New York decline to recognize and enforce a particular judgment from the courts of Ecuador.

Having found that the New York Recognition Act did not authorize a preemptive anti-enforcement injunction, the Second Circuit did not need to reach the issue of international comity. The court seemed deeply troubled, though, by the global aspect of the injunction, over and above its stern rejection of the underlying procedure itself. Perhaps the court meant to signal to the parties that if and when the Ecuadorian judgment became final, comity concerns will remain an issue. In that respect, the court drew a clear distinction between the defenses that may be available in an action for recognition of a particular foreign judgment, on the one hand, and a preemptive request to prevent recognition and enforcement, in New York Courts and elsewhere. As the Second Circuit noted, parties on the losing end of a foreign judgment are not without recourse; they may use the exceptions of the Recognition Act to defeat an action for recognition and enforcement once it is filed; but they may not jump the gun.

The Next Steps

Moving forward, Chevron may seek further (en banc) review by the Second Circuit and/or petition the Supreme Court for certiorari. In the meantime, the court of appeals remanded the case to the district court to litigate the remaining severed claims. On February 16, 2012, District Judge Kaplan lifted the stay he had imposed on the rest of the case, and litigation resumed.

With a final judgment from Ecuador in hand, the Lago Agrio plaintiffs may seek recognition of their judgment in U.S. courts, and/or in other jurisdictions where Chevron might have attachable assets. In the meantime, Chevron continues to pursue its arbitration claim under the U.S.-Ecuador Bilateral Investment Treaty. On February 16, 2012, the Hague-based tribunal in the arbitration proceedings issues a Second Interim Award on Interim Measures, in which it directed the Republic of Ecuador "(whether by its judicial, legislative or executive branches) to take all measures necessary to suspend or cause to be suspended the enforcement and recognition within and without Ecuador" of the Lago Agrio judgment. And on February 17, 2012, the Ecuadorian Provincial Court of Justice in Sucumbios held that it lacked the power under Ecuadorian law to suspend enforcement. The only thing certain, is that Chevron, Ecuador and the Lago Agrio plaintiffs will continue to litigate their respective rights in the courts of Ecuador and the United States, as well as international arbitration in the Hague. Further enforcement litigation in New York will be guided by the decision of the Second Circuit.

Argentina's Parliament Approves A Measure Limiting Amount Of Land That Can Be Purchased By Foreigners

Sheppard Mullin — Fri, 10 Feb 2012 15:35:31 -0800

By Alejandro E. Moreno

Fluctuating commodity prices, particularly with respect to the price of food and basic staples, have created a significant demand for arable land. The demand for arable land has, in turn, boosted the price Argentina's rural land and caused a flurry of foreign investment. In response to acquisition of land by foreigners, Argentina recently passed a law that imposes several restrictions on the foreign ownership of rural lands.

On December 22, 2011, Argentina's parliament approved a law limiting the amount of rural land foreigners can purchase in Argentina (the "Law"). Parliament established the "Consejo Interministerial de Tierras Rurales" (roughly, the Ministerial Council of Rural Lands) to implement the Law. "Rural land" is defined as all land that is outside of an urban area. An "urban area" is any an area with 2000 or more inhabitants. Under this definition, most of Argentina's land mass will be classified as rural land. Total foreign ownership of rural land cannot exceed 15% of Argentina's total land mass. No more than 15% of the 30% (e.g. 4.5% of Argentina's total land mass) can be acquired by persons and/or entities of the same nationality. Any particular individual or entity is limited to no more than 1000 hectares (2,470 acres) of rural land.

The Law will not be applied retroactively and does not affect existing foreign landowners. The acquisition of land in certain areas designated as "security areas" (near Argentina's borders) will require an additional approval by Argentina's Ministry of the Interior.

Currently, Argentina's government has not conducted a survey to determine the exact proportion of Argentina's land in foreign hands. To that effect, the Law provides for a census of Argentinean land belonging to foreigners. Foreign owners of rural land are required to report their ownership to the National Registry of Rural Land within 180 days of the Law's enactment. Any foreign legal entities owning rural lands will now be required to report any modification in their corporate structure within 30 days of such a modification.

The Ministerial Council of Rural Lands is charged with enforcing the Law. Any action infringing the law will be deemed null and void. Moreover, any infringing party will have no right to seek compensation for the voided transaction.

There are several issues a foreign company or individual should keep in mind regarding this Law. First, the Law does not regulate or restrain lease agreements. Companies are permitted to enter into lease agreements for rural land without limitations on the amount of land leased. Second, the Law does not specify how to determine the nationality of an entity with shareholders of diverse nationalities. As certain foreign nationalities approach the 4.5% limit on foreign ownership by a particular nationality, this ambiguity will become more important. Third, Argentinean corporate entities that are controlled by foreigners or have over 50% of their capital stock owned by foreigners will be subject to the Law.

To avoid problems, foreign entities contemplating the purchase of land in Argentina should seek legal counsel to ensure that their purchase complies with the Law.