Posted: November 8th, 2023
DOING BUSINESS IN THE UNITED STATES: SAMARIUM CASE STUDY
DOING BUSINESS IN THE UNITED STATES: SAMARIUM CASE STUDY
Benjamin and Buch Associates
6th Dec. 2022
CONFIDENTIAL: ATTORNEY – CLIENT COMMUNICATION
To: Alexandria Mountain and Team
Address: 1265, Buxton Brdige, Ohio
Re: Potential Business Transaction with Rare Earth China
Dear Mrs. Alexandria Mountain,
Today’s economy is global, meaning there is no other way for an enterprise to expand sustainably without integrating foreign elements and partners in everyday operations. You undoubtedly provide a compelling case for Samarium Processing Corporation to engage in business with Rare Earth China. Collaboration between the two firms guarantees access to depleting mineral ores while providing a gateway into Asia. Unfortunately, global politics is a significant impediment to neoliberal capitalism. An initial look into the case highlights that several reasons might warrant the U.S. government to restrict the firm from entering into any binding agreement with Rare Earth China. I take this opportunity to provide you with a brief analysis of the alternatives open to you and which has the least risks to the U.S.A.’s national defense. The memo reports on (1) applicable business models for Samarium as it works with Rare Earth China, (2) issues pertaining to intellectual property, and (3) if Samarium can use offshore banking to boost its financial capital.
Trade between the United States and China has exploded in recent decades. The U.S.A. might be China’s biggest export market. The trade has greatly benefited U.S. and Chinese consumers and corporations. However, China’s state-led economic growth creates an array of problems for foreign companies seeking to operate in the country. China represents a growing economic and military threat to the U.S. The Asian republic also represents an ideological threat to the west due to its Confucian principles. In recent years, China has been seeking to bring down the economic and ideological status quo by becoming the biggest economy. The goal the country has set for itself in the international arena is reason enough why the U.S. government will be apprehensive of any of its domestic corporations working with the Chinese.
The problem is China and state-led development, not Rare Earth China. According to the information provided to our offices, Samarium Processing has patented several ore-extracting and processing technologies with paramilitary applications. The innovation can be manipulated to have military use, which can give China an advantage over the U.S. You can be very sure that the federal government will do anything in power to prevent China from accessing these intellectual properties. Important to recall is the Chinese government cannot be considered honest or full of integrity. The country has been known to cyber-attack critical infrastructures to promote nationalistic agendas. Global news reports of the Chinese bombing the Taiwanese strait to impact its exports and imports. Such an attack on a country’s sovereignty shows why Samarium has to be extra cautious while considering its alternatives with Rare Earth China. The Chinese government will leverage the corporation whenever possible to gain access to your patented technologies.
2.1 Technology License
Samarium Processing understands that it has patented technologies that Rare Earth China is desperate to access to improve its productivity. Using a technology license is perhaps the most effective way to lure the Chinese government into a binding agreement. The business model grants Samarium immense bargaining power, making it likely that Rare Earth China will over-commit if promised access to the extraction technology. If Samarium Processing was very desperate to enter the Asian market, this would have been the best option because it ensures the local partner has a more vested interest in the business transaction.
However, granting Rare Earth China a technology license agreement would come at a grave cost for Samarium and the United States. There is reason to believe that Rare Earth China is only entering into the transaction to benefit the Chinese government. While the business is family owned and managed, the C.E.O., Jun Xiaoyang, is a retired army general. The former Colonel Commandant is bound to have extensive connections and friendships with individuals deep inside the Chinese government. Therefore, the corporate leader could have ulterior objectives. No matter Samarium’s business or financial hole, trading using a technology license would be synonymous with sinking deeper.
A supply agreement would ensure Samarium Processing benefits from China’s vast samarium ores. Rare Earth China will also provide access to cheap raw materials, including the chemicals used in extraction. Of primary concern to Samarium, according to the information provided, is long-term access to inputs. A supply agreement is a feasible business model that our legal agency advocates Samarium Processing initiate. However, to do so, Samarium might first need to get out of its binding contract with domestic suppliers. The company included an additional clause in its agreement with its suppliers that allowed them to stop making supplies if Samarium ever sought to enter into a new supply contract. If the suppliers were to ever use this release clause, Samarium would record substantial losses and the potential disruption of its supply chain. Samarium has to find ways to remove the release clause or get out of the contract with its suppliers before proposing a supply agreement with Rare Earth China.
While the conditions and provisions for a teaming partnership are unclear, it is assumed that the business transaction involves the formation of teams comprising employees from both Samarium and Rare Earth China. The business model seeks to take advantage of the skill, expertise, and experience of human capital to improve productivity in both mining firms. Such a business proposal allows Samarium to maintain control over its intellectual property while providing access to China’s raw minerals. There is no exchange of technologies, and Samarium’s employees can guarantee the safety of the patents if they ever get used in the production process. On the other hand, Rare Earth China will benefit from Samarium’s human expertise, translating into improved production.
Unfortunately, Samarium cannot engage in employee exchanges or transfers outside the United States. The company cannot contribute towards such a venture because of its binding agreement with United Mine Workers (U.M.W.). The case brief informs that 60% of your workforce are active members of the union. Samarium and U.M.W. have a labour agreement preventing the former from sending any member employees to work outside the country. Instructing an employee to go to China to work with Rare Earth China is a breach of contract that will make Samarium liable to punitive financial measures, including payments for lost wages and legal fees. I advise against a teaming partnership.
2.4.1 A Limited Liability Company
A joint venture promises the least risk to Samarium’s financial future and U.S.A.’s national security. The business model is the only option available where the two companies can engage with each other without introducing complexities in asset management. Samarium Processing and Rare Earth China can each contribute substantial financial capital to establish a new corporation. Samarium will be able to transfer its patented technology to the novel firm with Rare Earth China accessing it. Samarium will still maintain its control of how the intellectual property is used. However, two legal issues will arise from the formation of a joint business venture. Firstly, Samarium Processing must be financially liquid to enter into the arrangement. I have doubts about the company’s fiscal position, given its performance in past years. Secondly, the use of the patented technology might result in other innovations created under the new firm. Samarium Processing and Rare Earth China will need clear conditions on ownership and use of the innovations born out of the joint venture.
2.4.2 A Unlimited Liability Company
An unlimited liability of general partnership will require Samarium to share some of its assets, profits, and financial liabilities. The sharing would provide Rare Earth China access to Samarium’s patented technologies. Moreover, in the event that Samarium is unable to fulfil its contractual obligations, Rare Earth China can acquire the IP as part of the seizures meant to pay the liabilities. Such a strategic move would be detrimental to Samarium and the United States. Depending on state law, an unlimited liability company can exist or perpetuity or be dissolved upon the death of its founding members. Samarium has to selective with the choice of board members and executives to prevent the LLC from being overrun by the family mananging Rare Earth China.
Samariu Processing can opt to merge or acquire Rare Earth China to employ its operations to gain access to the Asian market and Chinese raw materials. An acquisition would not allow Samarium to maintain control over its intellectual property as all operational functions will be shared between the two firms. Samarium will have to transfer its technologies to ensure Rare Earth China performs to boost its financial portfolio. On the other hand, a merger will result in the development of an entirely new organization. However, since Rare Earth China will own half of the new company, it will have access to Sasmarium Processing’s extraction technologies. Mergers and acquistions entail a significant degree of technology transfer that would result in national security risks for the United States. Mergers and acquistions should not be an expansion option for Samarium Processing. Moreover, it is unclear that Samarium has the necessary financial juice to pull off a merger or an acquisition.
Any Other Potential Legal Issue
Samarium needs to be able to access financial loans to raise funds for a joint business venture. The need for urgency to penetrate China and the Asian markets would suggest that Samarium Processing is not in a good financial position. The lack of monetary viability poses a risk to the sustainability of the business venture. Moreover, if Rare Earth China was to own the majority shares in the new company, Samarium would lose its managerial influence. One of your internal employees let it slip that the company might be pursuing offshore banking as an alternative to getting loans. An offshore account for a holding company would benefit Samarium Processing with royalties. The manufacturer can employ the positive business performance to secure loans for its expansion into China.
Offshore banking is a feasible alternative for Samarium since the transaction method is legal. However, Samarium Processing has to meet certain guidelines to ensure the legality of the transactions. First, the company has to register the holding company with the U.S.A. to meet its taxation obligations. The approach would increase the firm’s annual operational expenses because it will pay taxes for two companies. Secondly, loans granted to offshore accounts appear as debt. Therefore, it will not be earning the company royalties. In my professional experience, while offshore banking is a legal and feasible business option, it increases operational risks.
Our Professional Response
Even though Samarium needs to expand and enter China to secure its future, it cannot do so half-haphazardly. The mining and manufacturing company has more to lose in its intellectual properties. Samarium also needs to ensure it maintains its good relations with U.S. officials by not providing China with means to gain an economic and military advantage over the country. A licensing agreement does not provide any I.P. protections. The company cannot enter into a teaming partnership or supplier agreement due to its binding obligations to U.M.W. and its domestic suppliers. The remaining option is to establish a joint venture. Samarium should ensure its I.P. is not part of the new business. More so, it should clarify the ownership structure of any innovations built from the partnership. It would be better to consider markets other than China before making the final decision. Feel free to communicate for any further clarifications.
Very Truly Yours,
Benjamin and Buch Associates
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