Private Mergers and Fast Track Acquisitions of Startups: A Detailed Guide

 

(The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) so as to get legal advice specific to your business needs).

Private Mergers and Acquisitions (Private M&A) stand at the intersection of law and commerce, driving significant change and innovation in the corporate world. These transactions involve the sale or purchase of private companies, not publicly traded on stock exchanges, and they play a pivotal role in reshaping industries, fostering growth, and enabling business expansion. Understanding the nuances of Private M&A is essential for corporate lawyers as they navigate the dynamic landscape of the business world. 

Significance of Private Mergers & Acquisitions (M&A) in the Corporate World: 

Private M&A is not just a financial transaction; it’s a strategic move that can transform the fortunes of both acquiring and target companies. The significance of Private M&A in the corporate world is multifaceted: 

Expansion and Diversification: Companies use Private M&A to expand their operations into new markets or diversify their existing portfolios. This strategic growth allows corporations to capitalize on synergies, increase market share, and achieve economies of scale.  

Access to Innovation: In today’s fast-paced business environment, startups often represent innovation hubs. Acquiring startups can provide established companies access to cutting-edge technologies, intellectual property, and fresh talent. 

Competitive Advantage: Private M&A can create a competitive edge by consolidating resources, eliminating rivals, and securing valuable assets. It can also serve as a defensive move to prevent competitors from gaining the upper hand. 

Wealth Creation: For business owners and entrepreneurs, Private M&A can be a vehicle for wealth creation. It allows them to exit their ventures while realizing the value they’ve built over the years. 

Job Creation: Successful Private M&A transactions can lead to job creation, investment, and economic growth, benefiting the local and global workforce. 

 

The Increasing Trend of Fast-Track Acquisitions, Especially Targeting Startups: 

The corporate world is witnessing a notable surge in the trend of fast-track acquisitions, with startups emerging as prime targets. Several factors contribute to this phenomenon: 

Agility and Innovation: Startups are known for their agility and innovative spirit. Fast-track acquisitions of startups allow larger corporations to swiftly incorporate these attributes into their existing structures. 

Time-to-Market: In a highly competitive environment, reducing time-to-market is crucial. Fast-track acquisitions expedite the process, enabling companies to seize opportunities and stay ahead of the curve. 

Tech-Driven Disruption: With technology at the forefront, industries face rapid disruption. Startups are often disruptors themselves. Acquiring them quickly can help established companies adapt to market changes more effectively. 

Access to Niche Markets: Startups often operate in niche markets or cater to specific customer segments. Fast-track acquisitions can provide immediate access to these markets, saving time and resources. 

Talent Acquisition: Beyond products and technology, startups offer access to a pool of skilled and motivated talent. Fast acquisitions help secure these resources, ensuring a seamless integration. 

Importance of Understanding Private M&A from a Corporate Legal Perspective: 

For the clients of corporate lawyers, understanding Private M&A and fast-track acquisitions, especially when involving startups, is of paramount importance. Here’s why: 

Legal Complexity: M&A transactions are legally intricate. They involve due diligence, negotiations, contract drafting, regulatory compliance, and dispute resolution. A misstep can lead to legal and financial consequences.  

Risk Mitigation: Lawyers play a crucial role in identifying and mitigating risks associated with M&A. Understanding the unique aspects of startups, including intellectual property and equity structures, is vital. 

Deal Structuring: Lawyers help structure M&A deals to align with the client’s objectives. This includes determining the purchase price, assets, liabilities, and post-acquisition operations. 

Regulatory Compliance: Navigating the regulatory landscape is critical. Corporate lawyers ensure that transactions comply with Indian Company Law and other relevant regulations. 

Protection of Interests: Lawyers protect the interests of their clients in M&A, whether they are buyers or sellers, by negotiating favourable terms and safeguarding assets. 

 

The Burgeoning Startup Ecosystem in India: 

The startup landscape in India has witnessed a remarkable transformation in recent years. It’s characterized by: 

Entrepreneurial Spirit: India has seen a surge in entrepreneurial zeal, with a growing number of individuals venturing into various sectors, from technology to e-commerce and beyond. 

Government Initiatives: The Indian government has introduced initiatives like “Startup India” to promote entrepreneurship, ease regulatory compliance, and provide funding opportunities, contributing to the growth of startups. 

Venture Capital Inflow: India has become a hotbed for venture capital investments, with both domestic and international investors keen on supporting promising startups.  

Tech Innovation: Startups are at the forefront of technological innovation, with many leveraging AI, blockchain, IoT, and other emerging technologies to create disruptive solutions. 

Why Startups Are Prime Targets for Private Mergers and fast-Track Acquisitions? 

Startups have become highly attractive targets for acquisitions due to several compelling reasons: 

Innovation and Technology: Startups often pioneer cutting-edge technologies and business models, making them desirable for established companies looking to stay competitive and evolve. 

Speed to Market: Acquiring a startup allows established corporations to expedite their entry into a specific market or industry niche, saving time and resources. 

Talent Pool: Startups typically employ a young and talented workforce, which can be a valuable asset for larger corporations seeking fresh perspectives and specialized skills. 

Market Disruption: Many startups disrupt traditional business models, and acquiring them can help incumbents stay ahead in a rapidly changing landscape. 

Product Portfolio Enhancement: Acquisitions enable established companies to diversify their product or service offerings, serving a wider range of customers. 

Innovative and Technological Aspects Driving These Acquisitions: 

Innovation and technology are at the core of startup acquisitions. These aspects drive the process for several reasons: 

Access to Intellectual Property: Many startups possess valuable intellectual property, such as patents, copyrights, and proprietary software, which can enhance a corporation’s product portfolio. 

Market Disruption: Startups often introduce disruptive technologies or business models that can reshape entire industries, making them attractive targets for acquisition. 

Data and Analytics: With data-driven decision-making becoming crucial, startups specializing in analytics, big data, and machine learning are in high demand. 

Customer Insights: Startups often have an in-depth understanding of specific customer segments, which can be used by acquiring companies to refine their marketing and product strategies. 

Incorporating Innovation: Acquiring startups allows established companies to incorporate innovation without the lengthy development process, positioning them as market leaders. 

 

Fast Track Acquisitions in Corporate Law: 

Fast-track acquisitions involve expeditious purchase or merger of companies, often requiring streamlined processes to meet business objectives promptly. Key points include: 

Rapid Timeline: These acquisitions are characterized by accelerated timelines, necessitating efficient legal procedures to meet tight schedules. 

Negotiation and Due Diligence: Negotiations and due diligence must be swift, focusing on essential aspects to ensure that critical information is not overlooked.  

Legal Framework: Corporate lawyers need to work within the legal framework to ensure that the transaction is conducted in accordance with all relevant laws and regulations. 

 

Legal Challenges and Due Diligence for Quick Acquisitions: 

Fast-track acquisitions present specific legal challenges, including:  

Incomplete Due Diligence: Due diligence can be expedited but may not cover every detail. Lawyers must prioritize critical issues to mitigate risk. 

Regulatory Compliance: Fast acquisitions should still adhere to regulatory requirements, which can vary based on the industry and jurisdiction. 

Integration Risks: The speed of acquisition can lead to integration challenges, which lawyers must anticipate and address. 

 

Insights into How Corporate Lawyers Navigate M&A Challenges: 

Corporate lawyers play a pivotal role in ensuring that fast-track acquisitions proceed smoothly: 

Focused Due Diligence: Lawyers must conduct due diligence efficiently, identifying high-risk areas and addressing them promptly. 

Legal Expertise: Lawyers leverage their knowledge of corporate law and M&A regulations to facilitate quick acquisitions while safeguarding their clients’ interests. 

Agile Negotiation: Negotiation skills become crucial in expedited deals, with lawyers acting as key intermediaries. 

Rapid Response: Corporate lawyers maintain constant communication with their clients and counterparties to ensure any issues are resolved swiftly. 

 

Private Mergers & Fast-Track Acquisitions Case Studies: 

Disney’s Acquisition of Pixar (2006) 

Disney’s acquisition of Pixar, the renowned animation studio, for $7.4 billion is a prime example of a successful Private M&A deal involving a startup. While Pixar had matured by this point, its innovative and creative culture aligned with the startup ethos. 

Legal Strategies: Disney’s legal team navigated complex intellectual property issues, ensuring that the valuable characters and technology developed by Pixar would seamlessly integrate with Disney’s existing portfolio. The deal included a unique arrangement with key creative leaders. 

Challenges: Ensuring a smooth transition of creative talent and addressing intellectual property rights were significant legal challenges. Maintaining Pixar’s culture and innovation post-acquisition was another critical aspect. 

 

Microsoft’s Acquisition of LinkedIn (2016) 

Microsoft’s acquisition of LinkedIn for $26.2 billion exemplifies Private M&A in the tech sector. LinkedIn, a professional networking platform, had grown into a prominent startup with a vast user base. 

Legal Strategies: The legal team at Microsoft had to consider data privacy and regulatory issues concerning user data. They focused on integrating LinkedIn’s services with Microsoft’s suite of products while respecting the platform’s unique nature. 

Challenges: Addressing data privacy concerns and obtaining regulatory approvals were substantial challenges. Ensuring a smooth transition for LinkedIn’s user base while aligning it with Microsoft’s business goals was a complex task. 

Uber’s Acquisition of Postmates (2020)  

Uber’s acquisition of Postmates, a food delivery startup, for $2.65 billion illustrates the role of Private M&A in the fast-growing gig economy and delivery sector. 

Legal Strategies: Uber’s legal team worked on regulatory compliance, as the acquisition involved merging two prominent food delivery platforms. They also negotiated terms to incorporate Postmates’ assets and technology seamlessly. 

Challenges: Addressing regulatory concerns, competition issues, and potential antitrust scrutiny posed challenges in this acquisition. Uber had to ensure a smooth transition for Postmates’ users and delivery partners. 

 

Best Ways to Approach Private M&A Challenges:  

In the context of Private M&A, corporate lawyers should take away the following key points: 

Holistic Approach: Private M&A involves not only legal intricacies but also business strategies and cultural integration. Corporate lawyers should collaborate closely with their clients to align legal strategies with business objectives. 

Regulatory Expertise: Staying well-versed in the regulatory landscape is essential, especially in cross-border or industry-specific deals. Being proactive in addressing regulatory challenges can save time and resources. 

Cultural Considerations: Startups often have unique cultures and innovation-driven environments. Preserving these cultures post-acquisition can be challenging but crucial for the success of the deal. 

Data Privacy Awareness: In the age of data-driven business models, understanding data privacy and compliance is paramount. Lawyers must ensure that sensitive user data is handled appropriately in acquisitions. 

Constant Learning: The field of M&A evolves, and corporate lawyers must stay informed about legal developments and challenges. Continuing education and staying up-to-date with industry trends are vital. 

Proactivity: Encourage corporate lawyers to be proactive in adapting to the ever-evolving landscape of M&A. This includes embracing new technologies, understanding emerging business models, and being agile in the face of change. 

Conclusion 

Private M&A deals, especially those involving startups, present a dynamic and challenging landscape for corporate lawyers. By taking a holistic approach, staying informed, and proactively adapting to changing circumstances, lawyers can successfully navigate these complex transactions, providing value to their clients and contributing to the growth of businesses in the ever-evolving corporate world. 

 

We are well experienced in handling legal issues pertinent to tax filings and wealth management. Please email me at chetana@legalcornerllp.com to get a nuanced understanding of your legal issues or if you wish to set up a free consultation. 

 

Deciphering The Digital Personal Data Protection Act, 2023

 

(The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) so as to get legal advice specific to your business needs).

On August 11, 2023, the “Digital Personal Data Protection Act” (the “Act”) came into being as the President officially enacted it after receiving approval from both houses of the Indian Parliament. This momentous development heralds the establishment of a distinct legal framework within India. It signifies a landmark achievement, representing India’s inaugural privacy legislation designed to protect the digital personal data of its citizens. This event shines a spotlight on the introduction and significance of the Data Protection Board of India, the core elements of the Act, and the responsibilities and privileges it imparts to both participatory organizations and individuals.

 

Citizens’ Rights for Personal Data Protection 

The Act will empower the citizens of the country as the data principal rights specifically allow: 

• Right to information: Individuals will have the right to seek more information on how their data is processed, and the data fiduciary will make this information available in a clear and understandable way.
• Right to correction and erasure: Individuals shall have the right to correct inaccurate/ incomplete data and erase data that is no longer required for processing.
• Right to nominate: Individuals can nominate any other individual to exercise these rights in the event of death or incapacity.
• Right to grievance redressal: Individuals shall have the right to use readily available means of registering grievances with a data fiduciary.

Key Provisions of The Digital Personal Data Protection Act, 2023

Applicability: If digital personal data is processed in India and is either (i) gathered online or (ii) collected offline and converted to digital form, the Act is applicable. If processing is done to provide goods or services in India, it also applies to processing done outside of India. Any information on a person who may be identified from or in connection with that information is referred to as personal data. The term “processing” refers to any fully or partially automated action taken on digitally stored personal data. It comprises gathering, keeping, using, and sharing. 

Consent: Only with the individual’s consent and for a legal purpose may personal data be used. Before requesting consent, notice must be given. Information about the personal data to be gathered and the processing goal should be included in the notice. The ability to withdraw consent is always available. For “legitimate uses”, which include (i) the specific purpose for which data has been willingly submitted by an individual, (ii) the government’s supply of a benefit or service, (iii) a medical emergency, and (iv) employment, consent won’t be necessary. The parent or the legal guardian must give consent on behalf of minors under the age of 18. 

Rights and duties of data principal: A person whose data is being processed (the “data principal”) is entitled to the following rights: (i) information about processing; (ii) deletion of personal data; (iii) designating a substitute for themselves to exercise rights in the case of death or incapacity; and (iv) grievance redressal. Certain obligations will fall on data principals. They may not (i) file a fictitious or baseless complaint, (ii) provide any false information, or (iii) impersonate another individual in certain circumstances. Duty violations are penalized by fines of up to Rs 10,000. 

Obligations of data fiduciaries: The entity responsible for deciding the purpose and method of processing, or “data fiduciary,” is required to (i) take reasonable steps to ensure the accuracy and completeness of the data; (ii) put in place reasonable security measures to prevent a data breach; (iii) notify the Data Protection Board of India and any affected individuals in the event of a breach; and (iv) erase personal data as soon as the purpose has been satisfied and retention is no longer required for legal purposes (storage limitation). Government organizations are exempt from storage restrictions and the data principal’s right to erasure. 

Exemptions: In certain circumstances, the rights of the data principal and the duties of the data fiduciaries (aside from data security) do not apply. These consists of (i) crime prevention and investigation, and (ii) the upholding of legal rights or claims. Certain activities may be exempted by the central government from the Act’s application through notification. These consist of (i) processing by government agencies for the sake of state security and public order, and (ii) gathering information for research, archiving, or statistical purposes. 

Data Protection Board of India: The Data Protection Board of India will be established by the central government. The Board’s main duties include (i) enforcing penalties for noncompliance, (ii) directing data fiduciaries to take appropriate action in the event of a data breach, and (iii) listening to grievances brought forth by impacted parties. Members of the board will be appointed for two years with the possibility of reappointment. The number of Board members and the procedure for choosing them will be specified by the central government. 

Penalties: Penalties for various offenses are outlined in the schedule to the Act, including up to (i) Rs 200 crore for failing to fulfill obligations to children and (ii) Rs 250 crore for failing to take security precautions to prevent data breaches. The Board will impose penalties following an investigation. 

Importance of The Digital Personal Data Protection Act, 2023 

The enactment of the Digital Personal Data Protection Act of 2023 in India marks a significant milestone in the realm of data privacy and protection. This legislation not only establishes a robust legal framework but also underscores the nation’s commitment to safeguarding the personal data of its citizens. With its comprehensive provisions, the Act empowers individuals by granting them certain fundamental rights in the digital landscape. 

Under this Act, citizens are endowed with crucial rights that give them control over their personal data. These rights include the right to seek information about how their data is processed, the right to rectify inaccurate or incomplete data, and the right to erase data that is no longer necessary for processing. Furthermore, individuals can nominate trusted representatives to act on their behalf in case of incapacity or demise, ensuring the continued protection of their data. The Act also facilitates the grievance redressal process, allowing individuals to voice their concerns and seek resolution through accessible means. 

Consent plays a pivotal role in data processing under this legislation. Personal data can only be processed with the individual’s explicit consent and for a lawful purpose. The Act mandates the provision of prior notice to individuals, detailing the data to be collected and the purpose of processing. Importantly, individuals have the right to withdraw their consent at any time. However, there are exceptions for legitimate uses, such as data submitted voluntarily, government services, medical emergencies, and employment, where consent may not be required. For minors under the age of 18, parental or legal guardian consent is mandatory. 

In conclusion, the Digital Personal Data Protection Act of 2023 ushers in India’s new era of data protection, compelling organizations to safeguard sensitive data with the utmost diligence. Compliance with this legislation is not only a legal obligation but also a moral imperative, as it upholds the fundamental rights of individuals in an increasingly digitized world. This Act underscores India’s commitment to data privacy and is a significant step towards ensuring the security and integrity of personal information for its citizens. 

 

We are well experienced in handling legal issues pertinent to tax filings and wealth management. Please email me at chetana@legalcornerllp.com to get a nuanced understanding of your legal issues or if you wish to set up a free consultation. 

 

Choosing the Right Legal Structure: Business Formation Strategies

By Himanshu Joshi, for Legal Corner LLP. Himanshu is a 2021 graduate from NALSAR University of Law, Hyderabad.

(The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) so as to get legal advice specific to your business needs).

 

Embarking on a business venture is an exciting journey that requires careful consideration of various aspects, including one of the most crucial decisions: selecting the right legal structure. The legal structure not only impacts how your business operates but also influences taxation, liability, and overall growth prospects. In this blog post, we will explore the key factors to consider and the available options when choosing the legal framework for your business.

 

How to Choose the Right Legal Structure: Top 8 Business Formation Strategies

Understanding Legal Structures:

Before delving into the decision-making process, it’s essential to understand the primary legal structures available for businesses. These typically include sole proprietorships, partnerships, limited liability companies (LLCs), corporations, and more. Each structure comes with its own set of benefits, drawbacks, and implications that need to be carefully evaluated. Google’s parent company, Alphabet Inc., is a prime illustration of understanding legal structures. Google’s core search engine and related businesses are now part of Alphabet, which serves as a holding company for various subsidiaries, each focusing on distinct ventures.

Consideration of Liability:

One of the most significant factors influencing the choice of legal structure is liability protection. Sole proprietorships and partnerships expose owners to personal liability for business debts and legal obligations. Conversely, forming an LLC or corporation can shield personal assets from business-related liabilities, limiting individual risk. After the 2010 oil spill, BP established a separate legal entity, BP America Production Company, to manage offshore drilling operations. This approach aimed to limit potential liabilities associated with the oil spill, illustrating the importance of liability protection. ” 

Taxation Implications:

Taxation is another critical consideration. Different legal structures have varying tax implications. For instance, sole proprietorships and partnerships often have pass-through taxation, where business income is reported on personal tax returns. Corporations, on the other hand, may be subject to double taxation, as both the corporation and shareholders are taxed separately. Starbucks faced public scrutiny for its tax structure in the UK, which allowed it to report minimal profits and pay relatively low taxes. The case highlights the varying tax implications of different legal structures and their potential public perception.

Ownership and Management Flexibility:

Legal structures also dictate ownership and management flexibility. Partnerships and LLCs offer more freedom in terms of ownership distribution and management structures. Corporations, especially larger ones, may have more complex management hierarchies. The online shoe retailer Zappos, now a subsidiary of Amazon, has been known for its unique management culture. Zappos’ legal structure allowed it the flexibility to prioritize its distinctive organizational culture even after the acquisition.

Funding and Investment Opportunities:

The legal structure can also impact a business’s ability to secure funding and attract investors. Corporations, for example, can issue different classes of shares, making it easier to attract various types of investors. This can be crucial for businesses aiming to scale quickly. Tesla’s legal structure facilitated its ability to attract investors. The company’s innovative electric vehicle technology and ambitious growth plans attracted significant investment, fuelling its expansion and technological advancements.  

Regulatory and Administrative Requirements: 

Different legal structures come with varying regulatory and administrative requirements. Corporations typically have more extensive reporting obligations than sole proprietorships or partnerships. Understanding these requirements is essential for maintaining compliance. Airbnb’s global expansion involved adapting to diverse regulatory landscapes. The company had to navigate various legal and regulatory requirements in different cities and countries to ensure compliance and sustainable growth. 

Long-Term Goals: 

Ultimately, the choice of legal structure should align with your business’s long-term goals. If you envision significant growth and seeking external investment, a corporation might be suitable. If you prioritize simplicity and flexibility, an LLC might be a better fit. Microsoft’s transformation from a software-focused company to a broader technology provider aligns with long-term goals. This evolution influenced its legal structure and diversification into areas like cloud computing and artificial intelligence. 

Seek Legal and Financial Advice: 

Given the complexity of legal structures and their implications, seeking professional advice is highly recommended. Consulting with legal and financial experts can provide valuable insights tailored to your specific situation, helping you make an informed decision. Uber’s legal battles worldwide highlight the complexities that can arise from misunderstanding legal structures. 

The company faced regulatory and legal challenges in multiple jurisdictions, emphasizing the need for expert guidance. 

Conclusion: 

Selecting the right legal structure is a pivotal decision that shapes the foundation of your business. By understanding the factors discussed above and seeking expert guidance, you can make a well-informed choice that aligns with your business’s goals, operations, and circumstances. Remember that the legal structure you choose now will influence various aspects of your business journey, so take the time to weigh your options carefully and chart a path to success. These real-world examples illustrate the practical implications of understanding legal structures for businesses. Each business’s choice of legal structure has a direct impact on its operations, growth, risk mitigation, and interaction with the legal and regulatory environment. 

We are well experienced in handling legal issues pertinent to tax filings and wealth management. Please email me at chetana@legalcornerllp.com to get a nuanced understanding of your legal issues or if you wish to set up a free consultation.

 

Top 10 Legal Challenges for International Business Expansion

By Himanshu Joshi, for Legal Corner LLP. Himanshu is a 2021 graduate from NALSAR University of Law, Hyderabad.

(The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) so as to get legal advice specific to your business needs).

 

Expanding a business into international markets offers immense growth potential, but it also introduces a myriad of legal complexities that require careful consideration. From trade regulations to intellectual property protection, understanding and addressing these legal considerations are essential for a successful and compliant global expansion.

 

10 Major Legal Challenges for International Business Expansion

Regulatory Compliance and Market Entry:

Navigating foreign regulatory frameworks is a crucial starting point. Each country has its own set of laws governing business operations, trade, and market entry. Ensuring compliance with these regulations is vital to avoid legal roadblocks and penalties. Airbnb had to navigate a patchwork of regulations and laws as it expanded globally. In Barcelona, Spain, the company faced strict regulations on short-term rentals, leading to legal battles and hefty fines. 

Trade Regulations and Tariffs: 

Understanding trade regulations and tariffs is essential, especially for industries with high import and export components. Businesses need to grasp the intricacies of import duties, quotas, and trade agreements to plan their operations effectively. The ongoing trade dispute between the United States and China saw tit-for-tat tariffs imposed on various goods. Apple, heavily reliant on manufacturing in China, faced uncertainty due to changing trade regulations, impacting its global supply chain and pricing strategy. 

Tax Implications: 

International expansion often comes with complex tax implications. Businesses need to be aware of local tax laws, transfer pricing regulations, and potential double taxation treaties to optimize tax planning. Starbucks faced criticism for its tax practices in the UK, as it reported minimal profits and paid relatively low taxes. This raised questions about international tax avoidance and highlighted the significance of understanding local tax laws to optimize tax planning. 

Intellectual Property Protection: 

Protecting intellectual property (IP) rights is critical when expanding internationally. Companies must understand how to safeguard trademarks, patents, copyrights, and trade secrets in each new market. Tech giant Apple has been actively protecting its intellectual property worldwide. In China, it faced challenges with counterfeit Apple stores and knock-off 

products. Apple’s legal actions in China demonstrated the importance of safeguarding IP rights across borders. 

Contract Negotiations and International Contracts: 

Negotiating contracts across borders requires a deep understanding of contract law and cultural nuances. International contracts must account for language differences, dispute resolution mechanisms, and enforceability across jurisdictions. The failed merger between Renault and Fiat Chrysler (FCA) illustrates the complexities of international contracts. The deal fell apart due to concerns from the French government and other factors, showing how cross-border negotiations can be impacted by diverse legal and cultural considerations. 

Employment and Labor Laws: 

Complying with employment and labor laws is essential to avoid legal disputes in a foreign country. Understanding regulations related to hiring, termination, benefits, and working conditions is crucial. Uber faced legal battles regarding driver classification in various countries, including the UK. In the UK Supreme Court ruling, drivers were classified as workers entitled to benefits, highlighting the necessity of understanding and complying with foreign labor laws. 

Foreign Investment Regulations: 

Many countries have specific regulations regarding foreign direct investment (FDI). Businesses must be aware of these regulations and obtain necessary approvals before establishing a presence in a new market. Walmart’s entry into India involved compliance with strict foreign investment regulations. To navigate these regulations, Walmart entered into a joint venture with a local partner to establish its presence and adhere to India’s FDI norms. 

Cultural Awareness: 

Cultural differences can impact business operations and negotiations. Being culturally aware and sensitive ensures smoother interactions and fosters better relationships with local partners and stakeholders. McDonald’s adapts its menu to cater to local tastes and cultural preferences. For instance, McDonald’s outlets in India offer a range of vegetarian options to cater to the largely vegetarian population, showcasing the importance of cultural awareness in business operations. 

Licensing and Permits: 

Certain industries require licenses or permits to operate in foreign markets. Identifying the required licenses and navigating the application process is essential to avoid delays. Tesla’s entry into China required securing the necessary licenses and permits for its Shanghai Gigafactory. Navigating China’s regulatory landscape was crucial for Tesla’s operations and manufacturing expansion in the country. 

Risk Management: 

Risk assessment and mitigation strategies play a pivotal role in international expansion. Businesses should be prepared for unforeseen legal challenges and have plans in place to address them. BP’s Deepwater Horizon oil spill disaster serves as a sobering reminder of risk management in international operations. The incident led to extensive legal battles, environmental damage, and financial liabilities, highlighting the significance of robust risk mitigation strategies. 

Conclusion: 

Expanding a business internationally is an exciting journey that presents both opportunities and challenges. Navigating the complex landscape of legal considerations is vital for a successful global expansion. By understanding and addressing regulatory compliance, trade regulations, taxation, IP protection, contract negotiations, employment laws, and cultural nuances, businesses can position themselves for growth while minimizing legal risks. Seeking expert legal counsel and being proactive in compliance efforts are key steps toward ensuring a smooth and legally sound international business expansion. Each case demonstrates how a deep understanding of regulatory compliance, trade regulations, taxation, IP protection, contract negotiations, employment laws, foreign investment regulations, cultural nuances, licensing, and risk management is essential for successful and sustainable global growth. 

We are well experienced in handling legal issues pertinent to tax filings and wealth management. Please email me at chetana@legalcornerllp.com to get a nuanced understanding of your legal issues or if you wish to set up a free consultation.

 

Understanding Non-Fungible Tokens/ NFT

By Himanshu Joshi, for Legal Corner LLP. Himanshu is a 2021 graduate from NALSAR University of Law, Hyderabad.

(The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) so as to get legal advice specific to your business needs).

 

Non fungible tokens (NFTs) are digital assets ranging from toilet papers and tacos to art and music.  These new assets are generally encoded with the same underlying software as many cryptocurrencies. Besides they are connected to the cryptocurrency because they’re bought and sold online using cryptocurrency. These started to work in 2014 but have gained much popularity now because people have now understood its usage and bought multiple artworks online. Once you’ve got your wallet set up, you can carry out this digital activity after your wallet is funded. After managing your wallet, there’s no shortage of NFT sites to shop. Currently, the largest NFT marketplaces are:

 

1. i) Rarible. It is called a democratic and free marketplace that gives opportunities to the sellers and art creators to use NFT for their marketing. The RARI tokens are issued on this marketing platform

that enables the holders to weigh in on features like fees and community rules.

 

1. ii) Foundation. This is a marketplace where artists receive “upvotes”. It is an invitation from fellow creators to post their art.

 

Glimpse on the present and future of NFTs

 

In November, GuradianLink.io had raised Series A of $12 million led by Kalaari Capital. It recently sold Bachchan’s NFT collection worth $966,000 (Rs 7.18 crore).

 

Regulating NFTs and their Cross-Border Transactions in India

As of today, there exists no explicit regulation or legislation by the Government of India that prohibits or restricts an Indian resident from buying and/or selling NFTs. This is partly due to the fact that the treatment of NFTs in the eyes of the law would depend on how the underlying digital or physical asset is classified. For now, NFTs may be regarded as a “digitally-signed certificate for the underlying asset”. 

 

However, the regulatory status of NFTs might potentially change with the introduction of the long-awaited cryptocurrency bill (“Cryptocurrency Bill”). The draft of the Cryptocurrency Bill of 2019 has been titled “Banning of Cryptocurrency & Regulation of Official Digital Currency Bill” and Section 2(a) of the Cryptocurrency Bill defines “cryptocurrency” as: 

 

“Any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account…” 

 

The above definition of “cryptocurrency” might encompasses NFTs as NFTs could potentially “be considered to be both a representation of value that is exchanged on the basis of having an inherent value in business activity”. On the other hand, Section 3(3) of the Cryptocurrency Bill seemingly lays down a proviso to Section 2(a) as it stipulates that the use of Distributed Ledger Technology would be permissible in instances of “creating a network for delivery of any financial or other services or for creating value, without involving any use of cryptocurrency, in any form whatsoever, for making or receiving payment.” Ultimately, there is still ambiguity as to whether NFTs would fall under the scope of ‘services’ as laid out in Section 3(3). Experts question whether NFTs are cryptocurrencies or virtual currencies, and if they would be affected by any future law restricting or prohibiting crypto-asset transactions? If an all-inclusive definition of cryptocurrencies and/or virtual currencies includes NFTs, it is argued that NFTs should be excluded from this all-inclusive definition as NFTs are non-fungible in contrast to both traditional and crypto currencies which are fungible in nature. Furthermore, crypto-assets like Bitcoin are primarily used as tradable assets and means of exchange whereas NFTs being unique are generally used to “collect” and retain specific digital or physical assets. 

 

Ambiguities in relation to the nature of NFTs might also arise under the Foreign Exchange Management Act, 1999 (“FEMA”). The treatment under the current FEMA regime would largely depend on the classification of the underlying asset, physical or digital, being exchanged via the NFT. In the currently operational Indian NFT marketplaces, it is observed that even though FEMA governs cross-border transactions vis-à-vis India, the country’s central bank, Reserve Bank of India (“RBI”) remains silent on the issues and ambiguities pertaining to digital assets such as NFTs and cryptocurrencies. Experts have stipulated that upon extrapolation of the provisions under the existing FEMA regime, crypto-assets and NFTs may be classified as intangible assets, for instance, like intellectual property.

 

Intellectual Property and NFTs

Legal professionals across India and throughout the world are contemplating the issues pertaining to intellectual property rights (“IPR”) and obligations in relation to NFTs. IPR protection strategies are needed to holistically secure the digital asset, inter alia, the licensing, assignment and transfer of holding rights of IPR of the digital asset. This new shift towards innovative IPR protection strategies is the result of the non-fungible nature or uniqueness of NFT technology. IPR professionals state that these strategies are pre-emptively necessary as they expect potential infringement issues to increase once third-party IPR are at a crossroads with the first creator of the NFT. Furthermore, it might be necessary to establish and develop a framework for the possession rights and first holding terms of NFTs as “the rights granted by an associate NFT marketer depend upon whether the rights were transferred via a license or an assignment, and these will vary with each NFT”.

 

Depending upon the underlying agreement, the mere ownership of the NFT may not grant the ownership of the underlying content/art or the associated IPR which would result in a scenario where the NFT “owner” may not be permitted to “breed, distribute copies, publicly perform, display, or build by-product works of the first work” as the owner of the copyright may exclusively retain such rights. The NFT industry might propose solutions pertaining to these issues, however, stakeholders have not settled on a standardized “best practice” making it difficult for buyers of NFTs to assess which NFTs safely store data in the long term.

 

NFTs and Taxation

It is a plausible contention that under India’s taxation system, the tax classification of NFTs would be based on the nature and characteristics of the underlying asset. For example, a NFT of digital art could potentially be classified as an “intangible asset” or “good” in terms of income tax and goods and services tax (“GST”). The cross-border and digital nature of transactions involving NFTs leads to the contention that there may exist additional tax issues along the way. For instance, sales of NFTs by offshore sellers through an offshore NFT marketplace to Indian buyers may be subject to a 2% equalization levy on the gross value of the NFT and the income of the marketplace from Indian customers. Furthermore, sales of NFTs by Indian resident sellers through foreign platforms may get excluded from the equalization levy and additional questions in relation to the platform’s income/commission exclusion in such scenarios are still unanswered.

 

The American Regime

Regulators, as of yet, have not provided explicit official guidance in relation to NFTs, however, there is a contention that it may be possible that NFT might be classified as a “commodity” under the Commodity Exchange Act (“CEA“), which defines the term to include several enumerated items and a catch-all for “all other goods and articles”. The Commodity Futures Trading Commission (“CFTC“) has also confirmed that the expression “commodity” includes cryptocurrencies, in addition to renewable energy credits, emission allowances, and other intangible items. technology. If NFTs are classified as commodities, the CEA may apply in one of two possible ways. Firstly, the CEA’s general prohibitions on deceptive and manipulative trading may apply to NFT transactions, which are affected on a “spot” basis, i.e., fully-funded, unleveraged transactions. However, if NFTs are offered on a margined or leveraged basis, additional requirements may apply which include the requirement to trade the NFT solely on registered derivatives exchange unless the transaction results in the “actual delivery” of the NFT within 28 days. 

 

It is argued by some that numerous NFTs available on the market may not be deemed as “securities” under the American Federal securities laws. NFTs may be considered as securities, “if it was designed to provide an expectation of profit to the buyer based on the efforts of others and were marketed as such”.  One potential example of such an arrangement could be a “fractional” NFT (“f-NFT”), where an investor would share a partial interest in an NFT with others. If an NFT (or f‑NFT) is considered a security, then the common securities law issues would exist including, the registration or exemption of the offerings, sellers, marketplace, the securities law liability for material omissions or misstatements and insider trading; the restrictions on short sales and market stabilization around an initial offering among others. 

 

The Financial Crimes Enforcement Network (“FinCEN“), the regulatory authority tasked with the responsibility of combating money laundering under the Bank Secrecy Act (“BSA“), is yet to issue guidance specific to NFTs and has only published general guidance with reference to virtual currencies (that may or may not apply to NFTs). It needs to be considered whether FinCEN sees NFTs as “value that substitutes for currency.” If this indeed is the view and NFTs are considered substitutes for currency, then the FinCEN may direct that NFTs shall be subject to the BSA and FinCEN regulations. Since many NFTs are more like digital representations of ownership in unique assets than a value that substitutes for currency, however, it seems that many NFTs available on the market should not be subject to FinCEN’s oversight. 

 

Conclusion

 

Keeping in view the regulation of NFTs in the global marketplace, it can be argued that NFTs are here to stay as considering that the current transfer of real estate ownership is labor-intensive and expensive, it is likely that NFTs will be applied to solve these transfers. The concept of “tokenizing” property rights will facilitate the sale and maintenance of NFTs in the long run. In the Indian context, laws and regulatory authorities such as RBI will need to address the issues in relation to permitting fungible and non-fungible digital assets to provide censorship resistance, worldwide participation, and the elimination of trusted third parties within the decentralized ecosystem. Furthermore, it is stated that as the system matures, the underlying blockchain infrastructure applied to NFTs will provide “performant, inexpensive transactions/settlement, immutability of contracts, and execution of smart contracts to handle ownership, authenticity, certification, governance, royalty payments, and a host of other ecosystem functionality”. The decentralized ecosystem transparency would support and provide for price and market efficiency. Furthermore, decentralization will grow via the network effect, as the rise of innovation, performance and resulting participation will elevate a vibrant global ecosystem of applications. However, the negative associations such as the climate controversies with respect to NFTs still remain unanswered. 

 

Lastly, it is suggested that the legal challenges in relation to NFTs are likely to become more pronounced over the coming months or years as the regulators and media increasingly focus and divert their attention into the fintech space. It is important to understand that the NFT or even digital assets regulatory framework is in its fetal stages and is to evolve and mature over time. As the number of Indian buyers and sellers of NFTs increases over the years, the legal regime addressing the myriad issues (discussed above) including anti-money laundering regulations, tax implications, financial regulations, intellectual property issues, etc. shall gradually emerge. India can take learnings from the evolving legal regimes pertaining to NFTs in countries like US, UK, China, etc. while drafting its own set of regulations for the same. For e.g., introduction of licensing obligations for services related to NFTs as done under the current German Banking Act classification of NFTs (like in Russia and UK) in various categories on a case-by-case basis to analyze the related regulatory, legal and tax implications; protection of investors from multiple originals of a work by modifying the copyright laws and supplementing the contracts with suitable clauses specifically drafted for NFTs, etc. can make NFTs more secure and regulated.

We are well experienced in handling legal issues pertinent to tax filings and wealth management. Please email me at chetana@legalcornerllp.com to get a nuanced understanding of your legal issues or if you wish to set up a free consultation.

 

Future of Cryptocurrency and Implications of a National ban(India)

By Himanshu Joshi, for Legal Corner LLP. Himanshu is a 2021 graduate from NALSAR University of Law,

Hyderabad.

(The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal
advice. You should reach out to me (chetana@legalcornerllp.com) so as to get legal advice specific to your

business needs).

An overview of the proposed legislation in India
In July, a Committee set up by the Ministry of Finance to study issues related to virtual currencies,
submitted its report. The Committee recommended that all private cryptocurrencies should be
banned in India. Correspondingly, the Committee proposed a draft Bill banning cryptocurrency
in the country. In this blog, we explain cryptocurrencies and how they are used, recommendations
of the Committee with respect to cryptocurrencies and the regulatory framework for
cryptocurrencies in India and other countries.
What are virtual currencies and what is their use?
Virtual currency is a digitally tradable form of value, which can be used as a medium of exchange,
or a stored value which can be utilised later. It does not have the status of a legal tender. A legal
tender is guaranteed by the central government and all parties are legally bound to accept it as a
mode of payment.
Cryptocurrency is a specific type of virtual currency, which is decentralised and protected by
cryptographic encryption techniques. Bitcoin, Ethereum, Ripple are a few notable examples of
cryptocurrencies. Decentralisation implies that there is no central authority where records of
transactions are maintained. Instead, anyone can create a transaction.
Key Regulatory Concerns

• Investor protections: Investor protection has been a top priority for Indian regulators.
  Crypto assets are seen as high-risk, speculative assets. Investor education, guidelines
  against mis-selling and other safeguards are needed.
• Crypto assets are now better understood as digital assets, instead of as digital currencies.
• Regulating them like commodities and clarifying their tax treatment is a win-win. The
  government’s tax revenues can go up.
• It can also increase the number of tax filers (only 64 million in FY20) and the number of
  taxpayers (14 million).
• Sidestepping current regulations: Some crypto assets may allow individuals to bypass
  securities issuance laws. That’s a potential risk to economic stability.
• If crypto holders have to declare their holdings above a particular level in their tax forms,
  such concerns can be mitigated.
• Illicit transfers: Anonymous transfers of crypto assets may weaken anti-money laundering
  laws or combating the financing of terrorism rules. That’s a potential national security
  issue.
  What are the present regulations in India with respect to Cryptocurrencies?
  In the last few years, the Reserve Bank of India (RBI) has notified the potential financial,
  operational, legal and security risks related to cryptocurrencies on multiple occasions (December
  2013, February 2017 and December 2017). In December 2017, the Ministry of Finance issued a
  statement which clarified that virtual currencies are not legal tender and do not have any regulatory
  permission or protection in India. Further, the investors and participants dealing with them are
  doing so entirely at their risk and should best avoid participating. In the 2018-19 budget speech,
  the Finance Minister announced that the government does not consider cryptocurrencies as legal
  tender and will take all measures to eliminate their use in financing illegitimate activities or as a
  part of payment system. In April 2018, RBI notified that entities regulated by it should not deal
  in virtual currencies or provide services for facilitating any person or entity in dealing with or
  settling virtual currencies.
  How does the draft Bill proposed by the Committee change these regulations?

Currently, only the entities regulated by the central bank are prohibited from dealing in, or
providing services for dealing in virtual currencies. The draft Bill prohibits any form of mining
(creating cryptocurrency), issuing, buying, holding, selling or dealing in cryptocurrency in the
country. Further, it provides that cryptocurrency should not be used as legal tender or currency in
India. The Bill allows for the use of technology or processes underlying cryptocurrency for the
purpose of experiment, research or teaching.
The Bill also provides for offences and punishments for the contravention of its provisions. For
instance, it states that mining, holding, selling, issuing or using cryptocurrency is punishable with
a fine, or imprisonment up to 10 years, or both. For individuals who might be in possession of
cryptocurrencies, the Bill provides for a transition period of 90 days from the commencement of
the Act, during which a person may dispose of any cryptocurrency in their possession, as per the
notified rules.
Cryptocurrencies as Property in the United States of America
One of the most critical legal considerations for any cryptocurrency investor has to do with the
way that central authorities view cryptocurrency holdings. In the U.S., the IRS has defined
cryptocurrencies as property rather than currencies. This means that individual investors are
beholden to capital gains tax laws when it comes to reporting their cryptocurrency expenses and
profits on their annual tax returns, regardless of where they purchased digital coins.
This aspect of the Cryptocurrency space adds layers of confusion and complexity for U.S.
taxpayers, but the difficulty does not end there. Indeed, it remains unclear whether digital currency
investors who have purchased their holdings on foreign exchanges must face additional reporting
measures come tax time. According to a report by CNBC, “anyone with more than $10,000 abroad
usually needs to fill out the Report of Foreign Bank and Financial Accounts (FBAR)… with the
Treasury Department each year. Another law—the Foreign Account Tax Compliance Act, or
FATCA—requires certain U.S. taxpayers to describe their overseas accounts on Form 8938, when
they file their taxes with the IRS.
The Way Forward

• Regulation is the Solution: Regulation is needed to prevent serious problems, to ensure that
cryptocurrencies are not misused, and to protect unsuspecting investors from excessive
market volatility and possible scams. The regulation needs to be clear, transparent, coherent
and animated by a vision of what it seeks to achieve.
• Clarity on Crypto-currency definition: A legal and regulatory framework must first define
crypto-currencies as securities or other financial instruments under the relevant national
laws and identify the regulatory authority in charge.

• Strong KYC Norms: Instead of a complete prohibition on cryptocurrencies, the government
shall rather regulate the trading of cryptocurrencies by including stringent KYC norms,
reporting and taxability.

• Ensuring Transparency: Record keeping, inspections, independent audits, investor
grievance redressal and dispute resolution may also be considered to address concerns
around transparency, information availability and consumer protection.

• Igniting the Entrepreneurial Wave: Cryptocurrencies and Blockchain technology can
reignite the entrepreneurial wave in India’s startup ecosystem and create job opportunities
across different levels, from blockchain developers to designers, project managers,
business analysts, promoters and marketers.
Conclusion
In summary, a smart regulatory approach should consider both the potential upside and downside.
It fosters financial innovation, safeguards investors and unshackles the Indian crypto ecosystem.
However, one quick look on the description may give us the initial impression that all may not be
well:
“To create a facilitative framework for creation of the official digital currency to be issued by the
Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India,
however, it allows for certain exceptions to promote the underlying technology of cryptocurrency
and its uses.”

In this momentous occasion, we could ask which side would the Government of India swing
We are well experienced in handling legal issues pertinent to tax filings and wealth
management. Please email me at chetana@legalcornerllp.com to get a nuanced understanding
of your legal issues or if you wish to set up a free consultation.