Research has found that companies are increasingly looking to set up operations in new markets. But In-House Perspective finds that for counsel, trying to facilitate the legal operations to help realise corporate strategy can be daunting.

According to compliance solutions provider CSC’s General Counsel Barometer 2024, companies worldwide are increasingly looking to expand beyond their domestic markets to achieve further growth. The survey of 300 general counsel and legal compliance officers found that nearly two-thirds (62 per cent) of multinational companies aim to grow their presence in a similar number of markets as they did in 2023, with a third (35 per cent) planning to expand into additional territories over the year.

The most popular destination is North America – largely due to its huge consumer market, skilled workforce, easy access to capital and relatively low barriers for entry – with the Asia Pacific region, Europe and the UK not far behind. South America, meanwhile, attracted the largest proportion of multinationals seeking entry into a new market for the first time in the survey’s history. Key benefits cited here include the region’s abundant natural resources, a growing number of English-speaking professionals and its proximity to the US.

The associated benefits of expanding overseas are obvious. However, the increased strain on in-house legal functions may be less so. In-house counsel face a formidable challenge trying to understand, comply and get ahead of a range of laws and regulations – including rules that are still developing and/or are in the process of being amended – as their organisations set up operations in more and more jurisdictions.

Nearly two-thirds (61 per cent) of respondents said they faced challenges when putting new infrastructure in place quickly, while a third found it difficult to understand the local legal system. Meanwhile, nearly a third (31 per cent) admitted to experiencing issues with local privacy laws, and a quarter (26 per cent) said they weren’t confident in their ability to verify data across jurisdictions.

Legislation overload

In-house counsel are also acutely aware of the dangers of getting it wrong. Survey respondents noted the need to halt plans for further expansion as the main consequence of inadvertent non-compliance with local laws and regulations, followed by fines, a postponed or suspended ability to trade in that jurisdiction and reputational damage.

‘Multinationals are setting up and managing a growing number of entities in both existing and new markets, and this is increasing the pressure on their in-house legal teams to rapidly deliver local market know-how and operational readiness,’ says Thijs van Ingen, Global Market Leader of Corporate and Legal Services at CSC. Yet, he highlights, the process of opening and managing subsidiaries in multiple jurisdictions has become highly complex as companies ‘contend with a patchwork quilt of global regulatory structures and different legal frameworks, and supervising those operations in an effective way can be really challenging’.

Companies face challenges in trying to identify, prioritise, manage and comply with a wide range of legislation from country to country. The difficulties are exacerbated in some cases as attitudes to enforcement and the level of commitment jurisdictions need to see from corporates to demonstrate compliance and best practice may vary significantly.  

Fabrizio Carpanini, a partner and London office co-head at law firm Dorsey & Whitney, says different legal issues can have an impact on companies depending on their industry sector. For example, Dorsey was recently involved in advising a leading spirits brand on its plans to expand from its European base into the US. In doing so the drinks company was faced with numerous regulatory challenges around not only the makeup and ingredients of its products, but also how alcohol is distributed throughout the US.

However, Carpanini believes more general challenges relate to competition or antitrust matters. Most countries now have relatively sophisticated regulations, he says, which require a great deal of forethought and planning, particularly if the proposed expansion is by way of acquisition in the new territory.

Many countries – particularly post-Covid – have introduced national security legislation protecting domestic businesses from foreign ownership. In the UK, for example, this legislation is embodied within the National Security and Investment Act 2021, which gives the UK government powers to scrutinise and intervene in business transactions, such as takeovers, to protect national security.

‘Navigating competition and antitrust legislation, as well as national security legislation, can be particularly time-consuming and challenging to resolve, depending upon the size and complexity of the proposed transaction. Getting to know and understand local regulations specific to a certain industry can also be very time-consuming,’ says Carpanini. ‘There will undoubtedly be complexities in situations where local stock markets are in some way also involved, given that each national stock market will have its own specific rules and regulations.’

Boots on the ground

Zain Ali, co-founder and Chief Executive Officer of human resources (HR) solutions company Centuro Global, says that when companies expand abroad, immigration laws are often the biggest sticking point and breaching them can result in severe penalties, including fines and restrictions on future business operations in that jurisdiction. ‘If your employees don’t have the correct visas and work permits, it’s not just your operational efficiency on the line – it’s your reputation,’ he says.

Rules concerning the distinction between hiring someone as a contractor versus an employee can also potentially put companies at legal risk. For instance, in the US, ‘at-will’ employment – which enables employers to dismiss an employee for any reason, without having to establish ‘just cause’ for termination – allows for more flexibility in hiring and termination. In France, on the other hand, dismissing an employee can be a long and intricately regulated process, says Ali.

Selecting the right company structure is another area where companies can really go wrong, he says. ‘This goes beyond compliance: it’s a question of strategy. Effective entity setup isn’t just a case of choosing from the legally available options but identifying the most appropriate one for your specific business model and objectives. Making the wrong choice can hamper your growth and limit your room to manoeuvre,’ he says.

Ali says in-house legal teams, whether in large or small companies, will generally require external support to handle the breadth and specificity of work involved in international business operations. ‘Even in large companies, legal teams tend to work as generalists. They’ll normally need to engage external experts for the specialised, knotty legal questions that arise in global work,’ he says.

For smaller companies the situation is even more challenging. ‘Their legal teams are already stretched thin by the demands of day-to-day business operations,’ adds Ali. They may also lack the resources and specialised expertise needed to make informed decisions about foreign legislation or to manage the increased workload that comes with expanding into new markets. ‘External support can make the difference between smooth compliance and accidental, but disruptive, legal violations,’ says Ali.  

Erika Collins, a partner at law firm Faegre Drinker in New York, says the biggest legal, compliance and regulatory priorities facing a company when it expands abroad depends on what the nature of the company’s business is. ‘Companies need to think about whether they are ready to open a branch or subsidiary. If they are not, then they must know whether the law permits a foreign company to hire employees directly without being registered to do business,’ says Collins.

‘Often local law will permit this, but the company will still need to register with the tax authorities and social security. This can be very complicated, which is why many companies will elect to hire an independent contractor or go through a third party. Often the “independent contractor” is really a de facto employee so there are inherent risks of taking this approach which will reveal themselves inevitably when the company goes to terminate the individual’, she explains.

Collins highlights that companies also need to consider whether the employee/independent contractor’s activities will rise to the level of ‘doing business’ in the country, thereby creating a ‘permanent establishment’ and subjecting the parent company to corporate taxes. The situation differs according to jurisdiction, however. ‘Whether a foreign company may hire employees directly without being registered to do business is a matter of local law,’ says Collins. ‘The law […] needs to be analysed locally.’

Other issues that can prove challenging – as well as time-consuming – relate to employee compensation. ‘For example, if a company has a long-term incentive plan that includes restrictive covenants, these can be very difficult to roll out globally as they need to be localised for each jurisdiction,’ says Collins. 

She believes that the chances of the in-house legal team meeting the demands of the company depends on how the legal function is set up. ‘If the legal department is structured such that there are “boots on the ground” in many countries, then in-house lawyers may have the skills and resources at their own company,’ she says. ‘But a smaller company or a company with a small in-house legal department should have a good network of lawyers with whom to consult.’

Joe Collingwood, a corporate partner at law firm Dentons, in London, says when companies expand abroad, the biggest legal and compliance priorities typically include understanding and adhering to local regulatory requirements, employment laws and tax obligations. The nature and extent of these challenges differs by geographic location, he adds. For example, countries in Asia may have more complex foreign investment regulations and/or other unusual or bespoke regulatory frameworks, while European and North American countries often have stringent data protection laws such as the EU General Data Protection Regulation and the California Consumer Privacy Act. ‘Each jurisdiction presents unique challenges that require tailored legal strategies,’ he says.

Collingwood explains employment laws can be highly detailed and vary significantly between jurisdictions, requiring careful navigation to avoid issues with workforce, disputes and penalties. Regulatory approvals in some jurisdictions can also be cumbersome, he warns, and in many instances ‘can involve multiple layers of bureaucracy, extensive documentation and delays beyond the company’s control’.

As a result, in-house functions might partner with locally-based law firms to feel confident that their work is compliant. Collingwood recommends planning ahead by engaging with experienced international legal and tax advisers at an early-stage to help plan the expansion, assist with any ‘issue-spotting’ exercise and, depending on the nature and complexity of the expansion, act as a conduit to local legal experts in the relevant jurisdiction(s).

Getting a sense of place

Mark Hunting, a partner in the UK office of law firm Bracewell, says there are ‘myriad’ challenges to conducting business in new markets, and the risks of getting it wrong can be costly – in money, time and shareholder value. He says in-house lawyers will want to think about three key areas: understanding the jurisdiction and the risks it poses; building a compliance programme that effectively manages these risks; and managing the specific risks posed by third parties.

An important first step for in-house lawyers assisting with new market entries is to understand the market and build a select group of advisors in advance of issues arising, says Hunting. ‘We would generally recommend commissioning reports or advice that address key political, cultural, compliance, and legal risks. These should cover the political system, and key players including incumbents and opponents. A short summary of regional history can help understand key internal civil or tribal issues too.’

Understanding the legal system and key issues here can help legal teams navigate obvious initial challenges, adds Hunting. ‘When considering advisers, in-house counsel will want to identify individuals with real life, practical experience on the ground in difficult jurisdictions,’ he says.

Carpanini says the importance of thorough research before entering a new market ‘cannot be overstated’. Depending upon the complexity and sophistication of the business, he says, counsel could start by speaking with local consulates who can direct companies to specific consultants or other advisers whose job it is to assist with inbound investment. Such advisers can also help with obtaining local and national grants.

Carpanini gives the example of recent advice his firm gave to a significant Italian company in regard to its expansion across the US. Part of the expansion programme involved an acquisition of an existing manufacturing site in the US. Due to its location, the company was able to take advantage of a number of advantageous grants and subsidies, available at both state and local level, were identified through research and an understanding of the local environment.

Once the new jurisdiction is well understood, the best in-house lawyers will develop a compliance framework that matches the risks identified in the research, says Hunting. There are some general compliance themes that often repeat, he says: obtaining government licences and approvals; moving people and goods across borders; dealing with local partners and local content requirements; and trade restrictions, such as controls and sanctions.

When dealing with government approvals and licensing, in-house counsel will want to think carefully about who should do that work. ‘Often there is a tendency to use local partners who may know the individuals involved better,’ says Hunting. ‘However, in higher-risk situations, you may want your own people in the room, even if only in a supporting role. This will assist with keeping such meetings compliant with the company’s other legal obligations and can normally be presented as demonstrating commitment to the new country.’

In these preliminary conversations it is important to set boundaries early, particularly in relation to the provision of gifts and entertainment – for example, ensuring they will not be excessive – local investment, training, local content and so on. ‘Setting these boundaries early can help avoid aggressive rent seeking and other extortionist practices which might fall foul of legal obligations the company owes in other jurisdictions,’ says Hunting.

He also suggests that in-house lawyers will want to keep a close eye on third party risks as they enter new jurisdictions. ‘Effective due diligence or screening to understand partners, employees, suppliers and service providers can help minimise legal, compliance and political risk,’ says Hunting. ‘Where issues are identified, it may not be preferable (or even possible) to identify an alternative counterparty. In these situations, having a tool kit of mitigations and protections is important.’

Hunting advises in-house lawyers to consider having some kind of contractual protections that are ideally tied to some form of ‘penalty’, as well as to think about how the counterparty is to be remunerated – for example, using an hourly rate compared to success fees – and the conduct that might incentivise. Other issues, he says, include the robustness of the control systems belonging to counterparties, and how expectations in the relationship will be clearly set and monitored.

Franchisors must look before leaping

Ryan Whitfill, a partner at CM Law in Texas, says franchisers can face various difficulties when they try to move into new markets, too. ‘Expanding a franchise system into foreign countries is a challenging venture that raises a myriad of legal compliance issues, so it is important for any franchisor contemplating international expansion to look before they leap,’ he says.

Initially, some of the most important legal concerns include the registration of the franchisor’s trademarks in the foreign country and determining the franchise disclosure law requirements, if any, that are applicable in the foreign country, he says. Once a franchisor has addressed those two threshold issues, then they need to understand if there are any other laws that will affect their ability to successfully operate a franchise system. ‘For example, some countries require time-consuming government filings with financial regulators or other government bodies before beginning any operations, and some countries place limitations on how a franchisor or its franchisees conduct basic business operations, including restrictions on payments to foreign entities or costly taxes or tariffs on payments sent out of the country,’ says Whitfill.

Further, some countries have laws that give the franchisee(s) special protections against termination of franchise agreements or other perceived negative actions by the franchisor, and some countries – especially in Europe – have much stronger privacy laws restricting the use of customer information. ‘Understanding all local laws and their impact on the franchisor’s rights and obligations is a key part of successfully entering into a foreign country,’ says Whitfill.

The work doesn’t stop

There’s often no ‘shortcut’ to ensuring cross-jurisdictional compliance: in-house functions simply need to understand what’s required and ensure they keep the company on the right side of the law and out of the crosshairs of regulators. Understanding the market and being open with tax authorities, regulators and enforcement agencies will help the process, while forging good working relationships with local law firms, HR and tax specialists will also prove beneficial.

Collins says her number one piece of advice ‘is to ask questions’. Often, ‘when in-house lawyers get into the international space, they do not know what they don’t know. This makes it hard to issue-spot. Don’t ever assume the answer – things can be so different in different countries, so ask questions,’ she says.

Once a company has expanded abroad, there’s still work to be done. Annie Lespérance, Head of Americas at legal intelligence company Jus Mundi, advises in-house counsel to establish a framework for ongoing compliance that includes regular audits and employee training programmes, as well as ongoing monitoring to keep pace with the ever-changing legal and regulatory environment. She also recommends that in-house functions ensure there is a reporting tool – such as a whistleblowing programme or a speak-up mechanism – for issues relating to non-compliance.

Ali believes that companies should also consider investing in artificial intelligence (AI) technology to help manage legal cases and reduce routine administrative work. ‘An automated system is the best way to stay on top of any changes,’ in Ali’s view. ‘Automation can help streamline routine tasks and free up time for your team to focus on bigger decisions. Your strategy is only as effective as the information it's built on, and you really don’t want to risk the consequences of acting on obsolete market intelligence. You don’t want your strategy to get lost in paperwork.’