In-House Counsel Summit Successor Liability: Export & Import Considerations September 12, 2013

1. In-House Counsel SummitSuccessor Liability:Export & Import ConsiderationsSeptember 12, 2013 • Ashley McCauley, Attorney • www.BraumillerSchulz.com

2. CUSTOMSAND BORDER PROTECTION • “Policemen” to Enforce Regulations • 19 CFR Export Controls • DEFENSE ITEMS • Directorate of Defense Trade Controls • International Traffic in Arms Regulations • (ITAR) • 22 CFR • “DUAL USE” ITEMS • Bureau of Industry & Security • Export Administration Regulations • (EAR) • 15 CFR • OTHERAGENCIES • OFAC, Census Bureau

3. Export Controls (cont’d) • BIS, DDTC, OFAC, and other agencies regulate the export, reexport, and transfer of: • U.S. origin commodities, software, technology, and services • Certain foreign-origin commodities, software, technology, and services • Even purely foreign activities of U.S. subsidiaries or affiliates abroad • All agencies have a strict policy of enforcement. • Most agencies also have procedures for voluntary disclosures.

4. Basic Compliance Issues • Some situations that can result in export compliance liability. For example: • Failure to obtain and use appropriate export licenses • Failure to properly declare export transactions • Incorrect license jurisdiction • Deemed exports – foreign national employees, visitors, contractors • Failure to maintain records • And of course, intentional or fraudulent conduct.

5. Successor Liability In An Export Situation • The basic rule: By acquiring the company, you are acquiring its export compliance liabilities. • If the acquired company is found to have export compliance liabilities, the acquiring company will be held responsible for them. • This can occur after the acquisition is complete. • This rule has been upheld in the courts. • The basic strategy: Conduct full due diligence prior to acquisition and voluntarily disclose any compliance issues. • Sometimes disclosure does not occur until after closing.

6. Definition • Successor liability means the potential liability of the acquiring company for violations committed by the acquired company. • Typically triggered via a merger or acquisition. • Certain exceptions where an asset sale could generate the same successor liability as a merger or acquisition. • i.e., a de facto merger or a continuation of the business. • Not codified in customs and export laws. • Authority extrapolated from federal court or common law, and from rules of constitutional construction. • Liability includes: -Audits -Investigations -Disclosures -Liquidated damages -Penalties -Additional duties, taxes, fees.

7. Seminal Export Cases • Export: • Sigma-Aldrich, 2002 • Hughes Electronics/Hughes Aircraft and Boeing, 2003

8. Hypothetical Transaction #1 • Giant Corporation (Giant) is in the process of acquiring Little Corporation (Little). • Little sells in the domestic market and for export. • Little’s products and technology are subject to US export controls. • After acquisition, Little will be merged into Giant as an operating division. • Does Giant have any concerns? • What should Giant do to mitigate those concerns?

9. Due Diligence and Disclosure • Examples of due diligence that should be performed: • Export policies, procedures and internal structure • Review past 5 years of export records and licenses • Obtain a report from Census containing export data • Export violations, disclosures penalties • Export compliance training given and received • Anything discovered needs to be disclosed.

10. Customs & Import Controls • US Customs & Border Protection (CBP) enforces the Tariff Act of 1930 (Title 19 USC), the Customs Regulations (19 CFR), and the Harmonized Tariff Schedule of the US. • CBP has broad authority to examine goods, review transactions, conduct audits, and investigate violations. • CBP can also assess penalties and liquidated damages for violations.

11. Basic Compliance Issues • Some import and Customs compliance issues: • Undeclared assists, • Tariff classification errors, • Use of free trade agreements, • Dumping and countervailing duties, • Use of duty free exemptions, and • Recordkeeping errors. • And of course, deliberate or fraudulent activity.

12. Seminal Import Cases • Import: • Shields Rubber Co., 1989 • Ataka America, 1993

13. Hypothetical Transaction #2 • Acme Corporation (Acme) is acquiring ABC Company (ABC), a US importer and distributor. • ABC has been importing for several years and takes advantage of free trade agreements. • After acquisition, ABC’s business and assets will be incorporated into Acme and ABC itself will be dissolved. • Does Acme have any concerns? • What should Acme do to mitigate those concerns?

14. Successor Liability In An Import Situation • If the acquiring company maintains the acquired company as a separately incorporated subsidiary, the liability remains with the subsidiary. • If the acquired company is merged into the acquiring company and is dissolved as a separate corporation, the liability is typically dissolved - but there are exceptions. • There are many other things that may need to be done or fixed – but that is another discussion.

15. Latest Update • Decision of the US Court of International Trade (USCIT) in United States v. Adaptive Microsystems LLC, Slip Op. 13-50, Apr. 10, 2013 • Adaptive Microsystems’ predecessor company had alleged Customs violations. • Adaptive Microsystems went into receivership, then was acquired. • New company also named Adaptive Microsystems. • A corporate officer of new company was also officer of predecessor company. • A substantial number of employees were transferred to new company.

16. Latest Update (cont’d) • A Wisconsin court had authorized the acquisition and said that the new company would not assume any of the predecessor’s liabilities. • The USCIT did not agree with the Wisconsin court. • The USCIT cited Wisconsin law on continuation of liability and that the Court may not have been aware of the Customs liability. • The USCIT cited the continuation of officer and employees, the use of a very similar name, and Adaptive Microsystems’ own representations that it was the same company.

17. Latest Update (cont.) • Based on this, the new Adaptive Microsystems was responsible for the liabilities of the predecessor company. • This ruling may be subject to appeal to the Court of Appeals for the Federal Circuit, so may be subject to change.

18. Due Diligence and Disclosure • Import and Customs compliance issues to review in an acquisition: • Compliance policies and procedures, • ITRAC report covering 5 years of imports, • Use of free trade agreements and duty free exemptions, • Last 5 years of import records – if they exist, • Tariff classification database, • Purchasing records for assists and separate payments, and • Products subject to dumping and countervailing duty. • File a prior disclosure for any issues discovered.

19. Why It Matters: Penalties • EAR • Civil penalties up to $250,000 per violation • Criminal penalties up to $1,000,000 • ITAR • Civil penalties up to $500,000 per violation • Other penalties: • Imprisonment, loss of export privileges, seizure of goods, damage to reputation

20. Takeaways • This is a subject frequently overlooked in an acquisition but may be dangerous. • The regulating agencies may be vigilant in enforcement, but also have generous prior disclosure procedures. • Find and fix the problems before the acquisition is final. • Due diligence and voluntary disclosures will help to prevent successor liability issues. • Get expert assistance if you don’t have it in-house.

21. Contact Information Ashley McCauley Associate Braumiller Schulz PLLC International Trade Law 5220 Spring Valley Rd Suite 200 Dallas, TX 75254 214-348-9306 ashley@BraumillerSchulz.com www.BraumillerSchulz.com