99. Operational Exposure

The extent to which a company is exposed to exchange risk and inflation risk. That is, operating exposure is the exposure to the risk that a change in an exchange rate or the inflation rate will negatively impact a company's revenue.

For both in-house and retained international counsel, a thorough knowledge of international risk exposure techniques can serve as an effective way to supplement legal strategies for clients involved in international business transactions. While creative and thorough legal drafting can go a long way to reduce some international transactions risks, the financial markets can obviate many business risks in whole or in part. One such area of particular risk is known as transaction risk and is associated with foreign exchange rates.

100.(И.Р.)Foreign Direct Investments: Joint Ventures, wholly owned Subsidiaries

Foreign direct investment (FDI) is direct investment by a company in production located in another country either by buying a company in the country or by expanding operations of an existing business in the country. Foreign direct investment is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region. Foreign direct investment is in contrast to portfolio investment, which is a passive investment in the securities of another country such as stocks and bonds.

It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares.

A JV on a continuing basis is the normal business undertaking. It is similar to a business partnership with two differences: the first, a partnership generally involves an ongoing, long-term business relationship, whereas an equity-based JV comprises a single business activity. Second, all the partners have to agree to dissolve the partnership whereas a finite time has to lapse before it comes to an end (or is closed by the Court due to a dispute).

The term JV refers to the purpose of the entity and not to a type of entity. Therefore, a joint venture may be a corporation, a limited liability enterprise, a partnership or other legal structure, depending on a number of considerations such as tax and tort liability. JVs are normally formed both inside one's own country and between firms belonging to different countries. JVs are usually formed in order to combine strengths or to bypass legal restrictions within a country; for example an insurance company cannot market its policies through a banking company.

A subsidiary, in business matters, is an entity that is controlled by a separate higher entity. The controlled entity is called a company, corporation, or limited liability company; and in some cases can be a government or state-owned enterprise, and the controlling entity is called its parent (or the parent company). The reason for this distinction is that a lone company cannot be a subsidiary of any organization; only an entity representing a legal fiction as a separate entity can be a subsidiary. A parent company does not have to be the larger or "more powerful" entity; it is possible for the parent company to be smaller than a subsidiary, or the parent may be larger than some or all of its subsidiaries (if it has more than one). The parent and the subsidiary do not necessarily have to operate in the same locations, or operate the same businesses, but it is also possible that they could conceivably be competitors in the marketplace. Also, because a parent company and a subsidiary are separate entities, it is entirely possible for one of them to be involved in legal proceedings, bankruptcy, tax delinquency, indictment and/or under investigation, while the other is not.

The most common way that control of a subsidiary is achieved, is through the ownership of shares in the subsidiary by the parent. These shares give the parent the necessary votes to determine the composition of the board of the subsidiary, and so exercise control. This gives rise to the common presumption that 50% plus one share is enough to create a subsidiary. There are, however, other ways that control can come about, and the exact rules both as to what control is needed, and how it is achieved, can be complex (see below). A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of their own.

Subsidiaries are separate, distinct legal entities for the purposes of taxation and regulation. For this reason, they differ from divisions, which are businesses fully integrated within the main company, and not legally or otherwise distinct from it.