Lessons Learned – How to Avoid Common Mistakes

Over the past 20 years of representing Finnish companies in the U.S., we have noticed a dramatic improvement in the sophistication of these companies not only in U.S. dealings but globally as well. Although our Finnish clients, which include a broad spectrum of entities from manufacturers to service providers, have been for the most part successful, all too often these companies have made choices or taken actions that have been counterproductive for the desired timetable and objectives. Significant reworking and undoing of various steps in the process has led to disappointment particularly with respect to the performance of the U.S. party in the deal. In commenting upon common mistakes which we have noticed, we do not purport to be business experts but have been positioned to observe numerous Finnish companies approach the U.S. market through such activities as forming U.S. subsidiaries to handle U.S. sales to the acquisition of U.S. operations of third parties.

In order to avoid the major missteps we’ve noticed, we suggest Finnish companies keep the following in mind:

1. Choice of Partners: Don’t Believe the Hype! One of the great attributes of Finns is their trusting nature. Finns only make statements that are totally true and supportable and for that reason I have thoroughly enjoyed conducting business with the Finns. While Americans are generally trustworthy, they are more likely to make misleading statements or implications. The Finns’ trust in contrast with the American propensity to exaggerate – particularly with respect to their own accomplishments — has led many Finnish companies to a disappointing selection of U.S. partners or key employees. Americans are by far the greatest experts in the world in one matter — self promotion. When a Finnish company solicits joint venture partners, distributors or key employees, it is often “surprised” with the “high quality” of responses. This reaction is often based solely upon the hyperbolic resume of the prospective U.S. partner. We advise the Finns to look skeptically at resumes of individuals and capability statements of potential partners. We do not suggest that you assume Americans are untrustworthy, but we recommend a thorough review and examination — including reference checks — of the capabilities of those involved. We have all too often received word from our Finnish clients that they have found the “perfect” person to fit their needs based simply upon what was told to them by the potential applicant. A closer analysis of the applicant with our help has most often led our Finnish clients to realize the significant background checking and thorough analysis that this selection requires.

2. Focus On Due Diligence. Finns seem to value engineering and production know-how as more respectable and necessary toward the task at hand than those services offered by accountants, attorneys, consultants, public relations firms and marketing experts. Americans in dealing with potential Finnish partners more often focus on the promotional aspects of their proposed operations and engage consultants in this regard. The Finns often minimize and in many cases ignore entirely, potential benefits that could be gained by engaging experts to conduct preliminary market studies, tax analysis, legal review and related matters. When I discuss these issues with Finns, they often feel such services are unnecessary. Instead, they choose to rely on their own business experience and assume that the U.S. business climate resembles that of Finland. The Finns I have encountered also believe that since their products are “superior” to those of their U.S. competitors and since these products sell well in home markets, these products will therefore “sell themselves” in the U.S. We constantly receive such a reaction upon the suggestion that the Finnish client engage experts to help to promote a product, conduct market studies or evaluate business ideas targeted at the U.S. market. As a result, Finnish companies often move boldly without adequate preparation and end up losing money or refocusing business plans following an initial entrance into the U.S. market.

3. Localize the Target Market. The U.S. population is around 280,000,000, or more than 50 times that of Finland. Coupled with Canada, the population of the “North American” market exceeds 300,000,000. Despite the sheer mass of this market, many Finns target the entire U.S. and in turn dilute their penetration by spreading resources much too thin. If the Southeast U.S. was a target market through a localized approach it would encompass some 40,000,000 people, or a size comparable to large areas of Europe.

4. Documentation: Brevity is the Root of Liability. The Finnish legal system, as with most legal systems in continental Europe, is based upon legal codes (such as the Napoleonic Code) rather than the common law system. These codes include statutory safeguards and other provisions that allow abbreviated documents. In common law jurisdictions such as the U.S., certain protections provided by code-based legal systems are not present. As a result of this difference, legal documentation in the U.S., whether it be of a contract or joint venture agreement, tends to be extremely long compared to those for similar transactions in Finland. The Finns, conditioned by the business atmosphere in Finland, insist that U.S. documentation be abbreviated. Although the Finns do not intend to overlook any substantial or major business issue, they clearly prefer that agreements merely document what is agreed as briefly as possible. By not focusing on appropriate legal provisions to treat matters such as indemnification, termination, exit strategy, limitation of liability and other issues, many Finnish companies have been exposed to often significant liability. A good example of this relates to provisions limiting liability. It is very common for attorneys in the U.S. to minimize statutory warranties and remedies in transaction documents. We generally provide that our clients, if selling manufacturers, have no exposure for lost profits or consequential damages due to defective products. Without such a limitation, the client would have unlimited exposure for all consequential damages resulting from a breach of warranty or other manufacturing defect. The result can be a serious liability. Often the Finns’ request to prepare a short agreement simply cannot be fulfilled if the agreement is to provide adequate safeguards. Finnish clients choose not to present a lengthy document out of an unfounded concern for the reaction from the American counterpart.

Again due to their trusting nature, the Finns often feel it is unnecessary to document every understanding as they are comfortable that the American side “understands” the deal. When difficulties arise, this often leaves the American counterpart in a position to take advantage of the loose or brief documents and ignore any sort of understanding that may have been reached on an oral basis. Further, the Finns reluctantly approach difficult issues such as exit strategies. For example, agreements should generally provide the circumstances for termination and detail respective liabilities and remedies in such event. Finns often request that we do not raise those issues in negotiations as in their view it may discourage or upset the American counterpart. To the contrary, American businessmen are used to dealing with these types of issues and have no negative response in that regard. They understand the role of attorneys in the U.S. common law system. Accordingly, we strongly recommend that Finns adopt the American business attitude and thoroughly document the parties’ understanding to prevent future misunderstandings. If Americans understand, for example, that their remedies have been limited, they are more likely to work on the relationship intended by the document rather than seek legal recourse as a result of a poorly drafted agreement.

5. Don’t Avoid the Courts. The huge and often highly publicized verdicts of the U.S. litigation system horrifies Finnish business. American businesses share this concern. Liabilities can be managed through contractual provisions as mentioned above, through insurance and by doing business through subsidiaries to insulate current company liabilities and other techniques. The Finns carry into the U.S. their Finnish view of litigation as a process of last resort in which the courts intervene only when parties involved are acting unreasonably or in bad faith. In Finland the commencement of a lawsuit sends a signal to society in general and to other businesses that the entity bringing the lawsuit somehow has not acted in a fair and reasonable manner to resolve a dispute. In the U.S., the courts are viewed as the resolver of disputes; it is no stigma or concern if an entity is involved in a lawsuit. One of our Finnish clients, when named as a defendant in a groundless lawsuit by a former partner, asked whether the officials of the State of Georgia would view the Finnish company harshly since it was being sued. Recently a client was reviewing the credentials of a potential key executive and noted that involvement in a lawsuit made the candidate possibly unsuitable. The lawsuit turned out to be a legitimate claim in which the potential partner was trying to preserve agreed-upon rights. If Americans feel their Finnish joint venture partner will settle any lawsuit at all costs, they will be much more aggressive in attacking such Finnish partner with the hope of reaching an inflated settlement. Finns should realize that the U.S. courts should be used to proceed against persons who have violated contracts or other agreements. Lawsuits often are a legitimate undertaking and should be pursued. Finnish companies should be prepared to litigate so that those doing business with the Finnish company will realize that the Finnish company will pursue claims in court if there is a default or breach of agreement.

Conclusion

When we provide the foregoing advice on an informal basis, our clients are often skeptical that as attorneys we are simply trying to inflate the need for associated professionals and front-end legal work. We are quite confident, however, that an investment with associated professionals in the pre-start up stage can help avoid serious liability and costly mistakes.

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