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Negotiating Technology Transactions With US Businesses

UKTI Trade Services

www.ukti.gov.uk

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Contents01 About the Author

01 Introduction

02 All US laws are not created equal

03 Indemnificationisexpected

04 Ensureappropriateconfidentialityprotection

04 Bewareofjointownership

05 Avoidthepotentialtrapsof“workmadeforhire”

06 Usethepresenttense

07 Protectagainstyourpartner’sbankruptcy

08 Pay attention to source code escrows

08 Anticipatepotentialacquisitions

09 Anticipatepotentialsales

09 Conclusion

10 Other Sources of Information

Caveat:Thisarticleisforgeneralinformationalpurposesonly.Itisnotintendedasasubstitutefortheadviceofcompetentlegalorotheradvisersinconnectionwithanyparticularmatterorissue,andshouldnotbeusedasasubstitute.Opinions,interpretationsandpredictionsexpressedinthisarticlearethewriter’sownanddonotnecessarilyrepresenttheviewsofFried,Frank,Harris,Shriver&JacobsonLLP.Whilethewriterhasmadeeffortstobeaccurateinhisfactualstatementscontainedinthisguide,neitherhenorhislawfirmoranyoneconnectedwithitmakeanyrepresentationorwarrantyinthisregard.

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1 Negotiating Technology Transactions With US Businesses

DanielGlazerisapartnerintheTechnologyTransactionsGroupat Fried,Frank,Harris,Shriver&JacobsonLLP.Hispracticefocuseson domesticandcross-borderintellectualpropertyandinformationtechnologytransactions,suchaslicensing,outsourcing,distribution,development,consulting,manufacturing,supply,sponsorship,marketingandtransferarrangements,aswellastheIP/ITaspectsofmergersandacquisitions,jointventures,securitizations,creditarrangementsandothercomplexcorporatetransactions.HeisagraduateofHarvardLawSchoolandDartmouthCollege.

Hisprofessionalbiographyisavailablehere,andyoucandownloadhiscontactVcard here.

Dan can be reached at [email protected],onLinkedinhere,atthefirm’sNewYorkofficeat+1.212.859.8674,orthroughthefirm’sLondonofficeat+44.20.7972.9600.

About the Author

Author: Daniel Glazer

Fried, Frank, Harris, Shriver & Jacobson LLPTel (NY) +1.212.859.8674Tel (UK) [email protected]

YourUK-basedtechnologycompanyhasreachedadealwithaUS-basedbusinesspartner,subjecttofinalizingthecontract.TheUScompanyinsistsonusingitsformagreement,whichcontainsnumerousunfamiliartermsandconcepts.Youdon’twanttorisklosingthedealbytakingaheavyhandtothecontract,butlikewisewanttoavoidexposingyourcompanytoneedlessrisk.

ThispublicationaimstohighlighttenpitfallsUKcompaniesshouldavoidwhenenteringintoagreementswithUS-basedcompaniesforthelicensingordevelopmentofsoftwareandothertechnology.Theseriskscanbemitigated,butonlyifyourcompanyissensitivetotheseconsiderationswhennegotiating the contract.

Introduction

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All US laws are not created equal

Althoughforsimplicity’ssakethisarticlewillreferto“USlaw,”forthemostpartthereisnosinglebodyofUScontractlaw.Rather,eachofthe50USstateshasitsowncontractlaw,andyourUSpartnerlikelywillinsistthatthecontractbegovernedbythelawsofaUSstatewithwhichthatcompanyisfamiliar.ThelargerUScommercialcenters,suchasthestatesofNewYorkandCalifornia,tendtohavebetter-developedcontractlaws.

Thecontractlawsofthevariousstatesgenerallyadheretocommonthemes,buteachstate’slawshavetheirownidiosyncracies.Forexample,NewYorkstatelawallowspartiestoselectNewYorklawtogoverncommercialcontractsthatbearnorelationtoNewYork,butonlyifthecontractisworthmorethanUS$250,000.Asanotherexample,Californiastatelawoffersbroadprotectiontotechnologydevelopers,insomecircumstancesinterpretingIPtransferlanguageinamannerthatrecognizesapotentiallyunintendedemploymentrelationshipbetweenCaliforniatechnologydevelopersandcompaniescommissioningtechnologydevelopment.

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Indemnificationisexpected

UScommerciallitigationisrelativelycommon,inpartbecauseunsuccessfulUSlitigantsusuallyarenotrequiredtopaytheprevailingparty’slegalcosts.Accordingly,thereisaparticularfocusinUScontractsonobtainingfinancialprotectionintheeventoflitigationclaims.

WhencontractingwithaUScompany,yourcompanymostlikelywillbeaskedtodefendtheUScompanyagainstcertaintypesofclaimsandindemnifyitforrelatedlosses.Everycontractisdifferent,butcommontopicsforindemnificationincludebreachofconfidentialityobligations,violationsofapplicablelaw,damagetotangibleproperty,andpersonalinjuryordeath.

Indemnificationforintellectualpropertyinfringementclaimsassertedbythirdpartiesisakeyprovisionintechnologycontracts,asUSintellectualpropertylitigationisparticularlywidespreadandcostly.TechnologyrecipientstypicallywillaskforanIPinfringementindemnityfromtheirproviders,buttheprovidermayseektolimit,eliminateorevenreversetheindemnityobligationwhentheallegedinfringementwastherecipient’sfault(suchaswheretheallegedinfringementwascausedbytherecipient’sunauthorizeduseormodificationsoftheprovider’stechnology,therecipient’sfailuretoimplementawork-around,ortheprovider’scompliancewithrecipient’sinstructions).

Inallevents,thetechnologyprovidershouldconsiderreservingtherighttoreplace,modify,orobtainalicensefortherecipienttousetheallegedlyinfringingtechnology,aswellastherighttoterminatetherecipient’srighttousetheallegedlyinfringingtechnologyasan“optionoflastresort.”

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Ensureappropriateconfidentialityprotection

USlawsgoverningconfidentialityobligationscanbetricky.Yourcompanyshouldcarefullyconsidertheramificationsofanyproposedlimitonthedurationofyourpartner’sobligationtoprotectyourvaluableconfidentialandproprietaryinformation(characterizedas“tradesecrets”underUSlaw).TradesecretprotectionexistsindefinitelyunderUSlawunlesstheinformationisdisclosedwithoutadutyofconfidentialityorindependentlydiscovered;thelong-secretCoca-Colaformulaisperhapsthebest-knownexample.Agreeingtoterm-limitedconfidentialityobligationsforyourcompany’stradesecretscreatesasignificantriskthatyourcompanywilllosetheabilitytoprotecttheinformation.

However,attemptstoextendperpetualconfidentialityobligationstoconfidentialinformationthatdoesnotqualifyasatradesecretmaybeunenforceableunderthelawsofsomeUSstates.Further,somecompaniesobjecttoperpetualconfidentialityobligationsasamatterofcorporatepolicy.

Accordingly,itmaybeappropriatetodraftyourcompany’sagreementinamannerthataccountsforbothconsiderations;forexample,theconfidentialityobligationscouldremaininforceforapre-determinednumberofyears,exceptthatobligationswithrespecttotradesecretssurviveindefinitely.Ifthecounter-partywillnotagreetoanyconfidentialityobligationsthatareperpetual,yourcompanywillneedtoconsidertheriskofdisclosingitstradesecretstoacompanythateventuallymayhavenolegalobligationtoprotectthem.

Bewareofjointownership

Jointownershipoftechnologycommonlyisviewedasanefficientwaytoavoiddifficultnegotiationsoverintellectualpropertyrights.However,jointownershipcanresultinuncertaintyasbestand,atworst,hinderyourcompany’sabilityto use and commercialize the jointly-owned technology.

Therulesofjointownershipvarynotonlyamongthedifferenttypesofintellectualproperty(e.g.,patents,copyrights,tradesecretsandtrademarks),butalsoamongvariouscountries.UnderUSlaw,eachjointcopyrightownermaycommercializethecopyrightedworkwithouttheotherjointowners’consent,butmustaccountforlicensingroyaltiesreceivedandmaynotdestroythevalueofthework.ThisisdifferentthanEnglishlaw,whichstatesthatjointcopyrightownerscannotexploittheirrightsintheworkwithouttheotherjointowners’consent.ItalsoisdifferentthantheUSruleonjointpatentownership,whichisthatjointpatentownershavenodutytoaccounttotheotherjointownersforlicensing royalties.

Jointownerscanagreetomodifytheserulesintheircontract,buttheylikelywillapplybydefaultifthecontractspecifieswithoutfurtherelaborationthatthepartiesare“jointowners”ofdevelopedtechnology.

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Avoidthepotentialtrapsof“workmadeforhire”

UnderUSlaw,the“workmadeforhire”conceptisacommonmeansofvestingcopyrightownershipinapartycommissioningtechnologydevelopmentfromitsemployeesorindependentcontractors.Thecopyrightina“workmadeforhire”isownednotbythecreatorofthework,butratherbythecreator’semployerorotherpartythatcommissionedit.Thedoctrineisquitenuancedwhenappliedtonon-employeecontractors,andthefailuretogetitrightcanprovidethebasisforaneventualinfringementsuitagainstthecommissioningpartyoritscustomers.

Evenifpartiesstateinanagreementthatalldeliverablesare“worksmadeforhire,”onlycertainworksqualifyifcreatedbyanon-employeecontractor.Cruciallyforcompaniescommissioningtechnologydevelopment,softwarecodegenerallycannotbea“workmadeforhire”whencreatedbyacontractor.

ToensureyourcompanyobtainsallrightsindeliverablesitcommissionsfromUScontractors,prudentdraftersshouldconsiderusingadditionallanguagethatassignstoyourcompanyallofthecontractor’srightsinthosedeliverables.However,thereareincentivesunderUSlawtocharacterizeasmuchtechnologydevelopmentaspossibleasa“workmadeforhire.”Inparticular,“worksmadeforhire”areexceptionstoadeveloper’sirrevocablerightunderUSlawtoterminateanassignmentofcopyrightinsoftwarecodeafter35years.

Asaresult,itmaybeappropriatetoincludetransferlanguagestatingthatalltechnologythecontractordevelopsisa“workmadeforhire”totheextentitqualifiesunderUSlaw,andthatthecontractor’srightsinthattechnologyareassignedtothecommissioningpartytotheextenttheworkdoesnotqualify.

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Usethepresenttense

Languageintendedtoassignrightstoyourcompanyshouldreflectapresenttransferofrights(thedeveloper“herebyassigns”itsrights),notafuturepromisetotransfer(e.g.,“willassign”or“agreestoassign”).Underthelatterformulation,yourUSpartner’sfailuretodeliverthepromisedassignmentmayresultinabreachofcontractclaim,butnotnecessarilyownershipoftherelevantcopyrightorotherIPrights.

ThisdistinctionfiguredprominentlyinacaserecentlydecidedbytheUSSupremeCourt,wherebyaStanfordUniversityresearchfellowsignedanagreementinwhichhe“agreedtoassign”toStanfordhisrightsinanysubsequentlydevelopedinventions.Aspartofhisresearchactivities,hebeganvisitingthelaboratoriesofCetusCorp.,wherehesignedanagreementinwhichhe“didherebyassign”toCetusanyinventionshecreatedasaconsequenceofhisaccesstoCetus’facilities.

InJune2011,theUSSupremeCourtaffirmedalowercourt’srulingthatStanford’s“agreetoassign”languagewasmerelyapromisetoassign–apromisethattheresearchfellowcouldnotkeepasaresultofhissubsequentassignmentofrightstoCetus.Althoughthisisclearlyaworst-casescenario,ithighlightstheimportanceofdraftingthe transfer of rights in a manner that will withstand scrutiny under US law.

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Protectagainstyourpartner’sbankruptcy

USlawoffersprotectionagainstatechnologylicensor’sattemptstoterminatealicensee’srightsfollowingthelicensor’sbankruptcyfiling.UnderUSbankruptcylaw,technologylicenseestypicallycanretaintheirrightsinthelicensedtechnology,aslongastheycontinuetopaywhendueallapplicablelicensefeesandotherwisecomplywiththetermsoftheagreement.TherelevantprovisionoftheUSbankruptcycode(Section365(n))omitstrademarklicenseesfromthisprotection,althoughsomecourtshaverefusedtoallowlicensorstoterminatelicensees’rightswhenlicensesoftechnologyandtrademarksareinextricablybundledinthesameagreement.

YouragreementswithUStechnologylicensorsshouldincludeanacknowledgementthatSection365(n)appliestoalllicensesgrantedintheagreement,andthatyourcompanymayelecttoretainitsrightsinalllicensedintellectualpropertyandtechnologyintheeventofthelicensor’sbankruptcy.Ifthatbankruptcyactuallyoccurs,yourcompanyshouldconsultaUS-qualifiedbankruptcylawyertoensureappropriateandtimelyfilingsaremadewiththerelevantbankruptcycourt.

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Pay attention to source code escrows

Fromtimetotime,itmaybenecessaryforyourcompanytoensurethatsourcecodeandrelateditemsforcertainkeyin-licensedsoftwareareplacedinescrow.Oneofthetypicaleventstriggeringreleaseoftheescrowmaterialsislicensor’sbankruptcyorinsolvency.WhileescrowarrangementsgenerallyareenforceableunderUSlaw,thenuancesofUSbankruptcylawrequirespecialattentionwhencontractingwithaUSlicensor.

Somesourcecodeescrowagreementspurporttograntalicensetosourcecodethatiseffectiveonlyifthereleaseconditionoccurs.However,USbankruptcycourtsmaycharacterizesuchalicensegrant,whichiscontingentonthelicensor’sbankruptcy,asanunenforceabletransferofassetsfromabankruptentity.

Tobetterensuretheeffectivenessoftheescrowarrangement,theescrowagreementshouldincludeapresentgrantoflicensetothesourcecode.Thelicensormayobjectonthebasisthatithasnointentionofallowingyourcompanytousethesourcecodeunlessabankruptcyorotherreleaseeventoccurs,butofcourseyourcompanycannotobtainthecode(andthusreceivethebenefitofthelicensegrant)untiltheescrowagentreleasesit.

AnotherwaytoaddresstheconcernspresentedbyUSbankruptcylawistoavoidtheimpactofbankuptcyaltogether,typicallybyexpandingthescopeofreleaseeventstoinclude“pre-bankruptcy”warningsignsoffinancialdistress,suchaslicensor’sfailuretopaybillsastheycomedueorconcernsexpressedbyindependentfinancialauditors.

Finally,yourcompanyshouldconsiderwhetherbankruptcyandotherreleaseeventsshouldbeexceptionstoanyagreementtonothireorcontractwiththelicensor’ssoftwaredevelopersandprogrammers.Thesourcecodemaybequitedifficulttoutilizeinpracticewithouttheabilitytoconsulttheindividualswhoknowitbest.

Anticipatepotentialacquisitions

Maintainingthetransferabilityofthird-partycontractsallowsforflexibilityinbusinessplanningandcanhelpyourcompanybecomeamoreattractivetargetforpotentialinvestorsandacquirors.Whileagreeingtocertainprohibitionsonassignmentmaybeunavoidable,UKcompaniesshouldbeawareofcertainrestrictionsontheassignabilityoftechnologylicensesunderUSlawthatmaybeunexpected.

Forexample,someUScourtsviewmergersandsimilarbusinesscombinationsasviolatingassignmentprohibitionsintechnologylicenseagreements,butnotinothertypesofcommercialcontracts.Further,underUSlawanon-exclusivetechnologylicenseegenerallymaynotassignitsrightswithoutthelicensor’sconsentifthelicenseagreementissilentontransferability;severalUScourtshaveextendedthisruletoexclusivetechnologylicenses.Bycontrast,ifthelicenseagreementissilentatechnologylicensortypicallymayassignitsrightswithoutthelicensee’sconsent.

Accordingly,toavoidfutureuncertaintyandpotentiallycostlyconsentrightsorlitigation,itisadvisabletospecifyintheagreementthetypesofbusinesscombinationsthatarepermissible.

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Anticipatepotentialsales

Largecompaniesoftenrequiretheirtechnologyproviderstoassisttheminplanningfortheirpotentialfuturedivestitureofsubsidiariesandotheraffiliates.So-called“divestedentity”provisionsarebecomingincreasinglycommoninUSagreements,wherebyalargecompanyreceivestherighttousecertaintechnologyorservicesonbehalfofdivestedaffiliates,orfordivestedaffiliatesthemselvestocontinuetousethelicensedtechnologyorservicesfollowingasale.Thecontractingcompanyalsomayrequestcommitmentsfromitstechnologyproviderstoenterintonegotiationsfornewagreementswithdivestedaffiliates.

Ifyourcompanyisaskedtoprovidethisflexibility,makesurethecompanywithwhichyouarecontractingremainsresponsibleforthedivestedaffiliate’sandtheacquiror’sactions;youalsomayconsiderretainingtherighttoaudittheircompliancewiththeagreement.Perhapsmoreimportantly,ensureyourcompanywillbeadequatelycompensatedfortheadditionalbenefitsthisarrangementwillprovidetoyourpartner,itsdivestedaffiliateandtheacquiror.

Conclusion

Businessmovesquicklyinthedigitalage,andthereisunderstandablereluctancetopotentiallyloseadealduetoanexcessofcautionoverlegalterms.However,asthesayinggoes,anounceofpreventionisworthapoundofcure.Havingaqualifiedtechnologylawyerconductatleastabriefreviewofyourcompany’sagreementultimatelycanmakeallthedifference.

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Other sources of information

UKTrade&InvestmentUKTrade&InvestmentistheGovernmentDepartmentthathelpsUK-basedcompaniessucceedintheglobaleconomy.Wealsohelpoverseascompaniesbringtheirhigh-qualityinvestmenttotheUK’sdynamiceconomy,acknowledgedasEurope’sbestplacefromwhich to succeed in global business. UK Trade &InvestmentoffersexpertiseandcontactsthroughitsextensivenetworkofspecialistsintheUK,andinBritishembassiesandotherdiplomaticofficesaroundtheworld.Weprovidecompanieswiththetoolstheyrequiretobecompetitiveontheworldstage.

Forinformationontheservicesavailabletoyou,or to locate your nearest International Trade Team,pleasevisitourwebsite:www.ukti.gov.uk

UKTrade&InvestmenthasteamslocatedintheBritish Embassy in Washington DC and eight BritishConsulatesaroundtheUnitedStates.Formoreinformationonouroffices,pleasevisit: www.ukinusa.fco.gov.uk

U.S. StatesIf you are looking for advice on establishing apresenceintheUnitedStates,SelectUSAisaprogrammeundertheUSDepartmentofCommercethatexplainsthebenefitsandputsyouintouchwithrelevantUSEconomicDevelopmentAgency contacts: selectusa.commerce.gov

Inaddition,manyUSStatesmaintainofficesintheUKorelsewhereinEurope.TheUSstategovernments are a good source of advice and information about business conditions in their states. Please visit the Council of the American StatesinEuropewebsiteformoreinformation:www.case-europe.com

U.S.LawyersA list of American attorneys based in the UK is available on the US Embassy website: www.usembassy.org.uk

TheAmericanBarAssociationwebsiteprovidesextensivelistsoflawfirmsacrosstheUnitedStates.Youcansearchbygeography,areaofpracticeorjustbrowsethelistoflawfirmstosearchforABA-certifiedlawyersbystateandbyspecialty: apps.americanbar.org/legalservices/lris/directory

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Select U.S. Government Resources

All US federal agencieswww.usa.gov/directory/federal/index.shtml

AlcoholandTobaccoTaxandTradeBureau(TTB)www.ttb.gov/index.shtmlRegulatesAlcohol&Tobacco

AmericanEmbassy,Londonlondon.usembassy.govRepresentsUSdiplomaticinterestsabroad

ConsumerProductSafetyCommission(CPSC)www.cpsc.govRegulates Consumer Products

Customs&BorderProtection(CBP)www.cbp.govRegulatesandfacilitatesinternationaltrade,collectingimportduties,andenforcingUSregulations,includingtrade,customsandimmigration

FederalTradeCommission(FTC)www.ftc.govPresides over Dissatisfaction with Business Practices

FedWorldwww.fedworld.gov OnlinelocatorserviceforacomprehensiveinventoryofinformationdisseminatedbytheUSFederalGovernment

Food&DrugAdministration(FDA)www.fda.govRegulatesCosmetics&Drugs,Food,MedicalDevices,VeterinaryMedicines&ElectronicProductRadiation

InternalRevenueService(IRS)www.irs.gov Responsiblefortaxcollectionandtaxlawenforcement

NationalInstituteofStandardsandTechnology(NIST)www.nist.govPromotesUSinnovationandindustrialcompetitivenessbyadvancingmeasurementscience,standards,andtechnology in ways that enhance economic security andimprovequalityoflife

OccupationalSafety&HealthAdministration(OSHA)www.osha.gov Assures safe and healthful working conditions by settingandenforcingstandardsandbyprovidingtraining,outreach,educationandassistance

SmallBusinessAdministration(SBA)www.sba.govProvidessupporttoentrepreneursandsmallbusinesses

UnitedStatesInternationalTradeCommission(USITC)www.usitc.gov Provides international trade statistics and the HarmonisedTariffSchedule

UnitedStatesPatentandTrademarkOffice(USPTO)www.uspto.govIssuespatentstoinventorsandbusinessesfortheirinventions,andtrademarkregistrationforproductandintellectualpropertyidentification

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UKExportandInternationalBusinessDevelopmentResources

BritishAmericanBusiness,Inc.www.babinc.orgLeadingtransatlanticbusinessorganization,dedicatedtohelpingcompaniesconnectandbuildtheirbusinesson both sides of the Atlantic

British Standards Institutewww.bsigroup.com/enMultinationalbusinessservicesproviderthatadvisesonhowtomeettechnicalstandardsandapprovalsprocedures

BusinessLink www.businesslink.gov.uk UKgovernment’sonlineresourceforbusinesses,providingguidanceonregulationsandtoaccessgovernment services.

DepartmentforBusinessInnovationandSkills(BIS)www.bis.gov.ukUKdepartmentthatsupportssustainedgrowthandhigher skills across the economy

ExportControlOrganisation www.businesslink.gov.uk/exportcontrolHelpsbusinessesregardingexportproceduresanddocumentation.

ExportforGrowthGuide(Clickhere forPDFGuide)SMEexportguideproducedbyForumofPrivateBusinessinconjunctionwithUKTrade&Investment

HMRevenue&Customswww.hmrc.gov.ukUKdepartmentresponsibleforthecollectionoftaxes

UKExportFinancewww.ukexportfinance.gov.ukExportcreditagencythatprovideassistancewithcreditinsuranceandfinancingproducts

CompanyInformation

Better Business Bureauwww.bbb.org

Dun and Bradstreetwww.dnb.com

Oanda www.oanda.com Foreignexchangerates,currentandhistorical.

Nasdaqwww.nasdaq.com

USSecuritiesandExchangeCommissionwww.sec.gov

ForbesMagazinewww.forbes.com/forbes

USNews&WorldReportwww.usnews.com

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UKTrade&InvestmentistheGovernmentDepartmentthathelps UK-basedcompaniessucceedintheglobaleconomy.Wealsohelpoverseascompaniesbringtheirhigh-qualityinvestmenttotheUK’sdynamiceconomyacknowledgedasEurope’sbestplacefromwhichtosucceedinglobal business.

UKTrade&InvestmentoffersexpertiseandcontactsthroughitsextensivenetworkofspecialistsintheUK,andinBritishembassiesandotherdiplomaticofficesaroundtheworld.Weprovidecompanieswiththetoolstheyrequire tobecompetitiveontheworldstage.

UK Trade & Investment is responsible for the delivery of the Solutions for Business product “Helping Your Business Grow Internationally.” These “solutions” are available to qualifying businesses, and cover everything from investment and grants through to specialist advice, collaborations and partnerships.

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