Presentation on theme: "Panel Introduction."— Presentation transcript:
0 26th Annual Tulane Corporate Law Institute Cross-Border TransactionsPresented byRobert Spatt, Co-ModeratorPartner, Simpson Thacher & BartlettGeorge R. Bason, Jr., Co-ModeratorPartner, Davis Polk & WardwellMichael CarrManaging Director and Head of M&A, Americas, Goldman SachsMatthew F. HermanPartner, Freshfields Bruckhaus DeringerPeter ThomasRobert TownsendPartner, Morrison & FoersterMarch 27, 201426th Annual Tulane Corporate Law InstituteCopyright All rights reserved.
2 Cross-Border Transactions DISCUSSION OVERVIEW Banker Overview of Cross-Border ActivityInbound TransactionsCFIUS: Navigating Inbound Investments Through National Security ReviewsEnforceability Issues in Public Cross-Border SalesCross-Border Lessons from Softbank/Sprint/ClearwireThe Inbound/Outbound BridgeOutbound Transactions“Regular Way”To Other Parts of the WorldInversionsForeign Corrupt Practices Act / UK Bribery ActWhere Is It Best to Be a Seller?
3 Twenty-Sixth Annual Corporate Law Conference Cross-Border TransactionsTwenty-Sixth Annual Corporate Law ConferenceMichael CarrGoldman, Sachs & Co.March 27, 20143
4 Banker Overview INTRA-REGIONAL M&A VOLUME: 2013 THROUGH 2014 YTD EMEA1$29bn$57bn$76bnNorth America$112bn$56bnAsia (including Japan)1$5bn$19bn$38bn$13bn$18bn$0bnLatin America$10bnSource: Thomson Reuters (as of March 18, 2014) Note: Global M&A volume includes transactions greater than $250m; excludes intra-region activity, spinoffs and leveraged buyouts EMEA includes Europe, Middle East and Africa; Asia includes India, Japan and Australia4
5 Banker Overview (cont.) ANNOUNCED OR COMPLETED 2013 THROUGH 2014 YTD YearAcquirorTargetIndustryAcquiror RegionTarget RegionTransaction TypeAmt ($bn)2014Actavis PLCForest Laboratories IncPharmaEMEANorth AmericaCash / Stock$23.32013SoftBank CorpSprint Nextel CorpTelecomAsia21.6Publicis Groupe SAOmnicom Group IncMediaMerger of Equals19.3Anheuser-Busch InbevGrupo Modelo SAB de CVConsumer / BeverageLatin AmericaCash Acquisition18.0CNOOCNexen IncOil & Gas17.7Suntory Holdings LtdBeam Inc15.7Oi SAPortugal Telecom SGPS SAStock15.3Applied Materials IncTokyo Electron LtdTechnology7.0Shuanghui Intl HoldingSmithfield Foods IncConsumer / FoodMcKesson CorpCelesio AGHealthcareSource: Thomson Reuters (as of March 18, 2014) Note: Global M&A volume includes transactions greater than $250m; excludes intra-region activity, spinoffs and leveraged buyouts EMEA includes Europe, Middle East and Africa; Asia includes India, Japan and Australia5
6 Banker Overview (cont.) REGIONAL INFLOWS AND OUTFLOWS EMEANorth AmericaNet$16($68)$57$48$24($42)Net($34)$76($27)$10$5$51AsiaLatin AmericaNet($1)($66)($75)($98)($45)($11)Net$19$59$44$40$16$2Source: Thomson Reuters (as of March 18, 2014) Note: Global M&A volume includes transactions greater than $250m; excludes intra-region activity, spinoffs and leveraged buyouts EMEA includes Europe, Middle East and Africa; Asia includes India, Japan and Australia6
7 Banker Overview (cont.) ACTIVITY BY INDUSTRY | 2009-2014 YTD EMEANorth AmericaAsiaLatin AmericaSource: Thomson Reuters (as of March 18, 2014) Note: Global M&A volume includes transactions greater than $250m; excludes intra-region activity, spinoffs and leveraged buyouts EMEA includes Europe, Middle East and Africa; Asia includes India, Japan and Australia7
8 Banker Overview (cont.) M&A VOLUME BY INDUSTRY SECTOR 2009 – 2014 YTD2013 – 2014 YTDSource: Thomson Reuters (as of March 18, 2014) Note: Global M&A volume includes transactions greater than $250m; excludes spinoffs and leveraged buyouts8
10 Inbound Transactions CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS CFIUS Statistics114 covered transactions were notified to CFIUS in 2012, divided among the following industries:45 (39%) Manufacturing (primarily Computer and Electronics);38 (33%) Finance, Information, and Services;23 (20%) Mining, Utilities, and Construction (primarily Utilities);8 (7%) Wholesale, Retail, and Transportation.Investigations have steadily increased over the last five years.8 transactions notified in 2012 resulted in mitigations measures.Source: 2012 CFIUS Annual Report to Congress
11 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCFIUS StatisticsCFIUS notifications involved buyers from 21 countries in The largest number of notifications by country were:China: 23 transactions;UK: 17 transactions;Canada: 13 transactions;Japan: 9 transactions;France: 8 transactions.The number of notified transactions involving Chinese buyers has increased from just 6 in 2010 to 23 in 2012.Source: 2012 CFIUS Annual Report to Congress
12 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCFIUS — Statutory and Regulatory BackgroundPursuant to Section 721 of the Defense Production Act of 1950, as amended, the U.S. President is authorized to investigate the impact on U.S. national security of mergers, acquisitions and takeovers by or with foreign persons that could result in foreign control over persons engaged in interstate commerce in the United States.The President is authorized to take a number of measures to protect national security, including:Suspending or prohibiting a transaction;Ordering a completed transaction to be unwound; orOrdering divestiture of assets or entities.The President’s investigative authority is delegated to CFIUS.
13 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCFIUS — Statutory and Regulatory BackgroundThe Committee on Foreign Investment in the United States (“CFIUS”) is a multi-agency committee chaired and staffed by the Department of Treasury.Its members are the heads of the Departments of Treasury, Justice, Homeland Security, Commerce, Defense, State, Energy and the Offices of the U.S. Trade Representative and Science and Technology Policy.The Director of National Intelligence and the Secretary of Labor are non- voting, ex-officio members of CFIUS, and other executive offices observe and participate as appropriate.
14 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCFIUS — Statutory and Regulatory BackgroundCFIUS’s duties and powers are defined by regulations, which set out the requirements for a CFIUS notification and define key terms like “U.S. business,” “foreign person,” and “control.”CFIUS notifications are technically voluntary, and unlike most antitrust/merger control regimes, a CFIUS filing is not suspensory.However, CFIUS can initiate its own investigation of a covered transaction, and the President can unwind a transaction post-closing.Most parties will defer closing until CFIUS approval.The entire CFIUS review process is confidential, including the CFIUS notification, additional information provided by the parties to CFIUS, and the results of CFIUS’s review and investigation.The parties themselves, however, may choose to disclose information regarding the CFIUS process to the public.Public companies involved in large scale transactions will typically disclose material developments in process.
15 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCFIUS — Review ProcessPrepare Joint NotificationIn addition to providing the particulars of the transaction and parties, the notification responds to a detailed questionnaire about the U.S. business being acquired and foreign persons party to the transaction.Information required for the U.S. business includes:Disclosure of classified and priority rated U.S. government contracts and contracts with national security-related agencies;Information on all products and services provided to the U.S. government (either directly or indirectly); andDetails on possession and trading of export-controlled items, certain Agents and Toxins, and items with military applications.
16 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCFIUS — Review ProcessInformation required for foreign persons party to the transaction includes:Disclosure of equity or voting interests held, directly or indirectly, by foreign governments;Analysis of whether any foreign government controls the foreign person party to the transaction;Future plans for the U.S. business being acquired, including with respect to eliminating R&D, shutting down facilities in the U.S., modifying or terminating contracts with the U.S. Government, or eliminating domestic supply; andPersonal Identifier Information (“PII”) of board members, officers, and ultimate beneficial owners of the foreign person and its intermediate and ultimate parents.Gathering PII is often time-consuming and burdensome, especially if sovereign wealth funds or state owned enterprises are in the foreign person’s ownership chain.
17 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCFIUS — Review ProcessSubmit NotificationCFIUS strongly encourages that parties submit a draft notification 5-10 business days prior to submitting a “final” notification; this allows CFIUS to review the draft and provide any comments.30-Day Review Period (“Phase 1”)Once CFIUS determines that the notification is “complete,” it will initiate the 30-day review period.Parties can expect to receive requests for additional information during this time, and are required to respond within 3 business days to avoid stopping the clock.45-Day Investigation Period (“Phase 2”)CFIUS will initiate a 45-day investigation if a CFIUS member agency advises the CFIUS Staff Chair that it believes the transaction could threaten national security or if the agency (or one of several agencies) tasked with taking the lead on the 30-day review recommends that an investigation should be undertaken.Additional information requests are usually made by CFIUS, again with a 3 business day deadline.
18 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCFIUS — Review ProcessRecommendation to the President:CFIUS may terminate a 45-day investigation at its own initiative without referring the matter to the President for action.CFIUS will refer the matter to the President only if it decides the transaction should be suspended, blocked, or unwound, cannot decide on a recommendation, or requests that the President make the determination.The President then has 15 days to make a decision, which is final and cannot be appealed.
19 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCFIUS — Practice PointsThere is a presumption in favor of a 45-day investigation when the acquiring foreign person represents or is controlled by a foreign government or when the transaction involves “critical infrastructure.”As a practical matter, CFIUS prefers not to elevate matters to the President, and parties will usually withdraw a notice and abandon the transaction when CFIUS signals its intent to oppose the deal.CFIUS will also enter into mitigation agreements with the parties to alleviate national security concerns, rather than recommend that the President take action. Mitigation agreements can include, for example:Restricted information access or control rights for certain individuals;Assurances that the U.S. business will continue supplying certain products and services to the U.S. Government; orEnsuring that U.S. government agencies will have continued access to certain information in the possession of the target or certain of the target’s systems.
20 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCFIUS — Hot Button IssuesProximity to Sensitive Facilities/Restricted AirspaceIn December 2009, the Chinese firm Northwest Nonferrous International Investment Corp., a subsidiary of China’s largest aluminum producer, attempted to acquire U.S.-based Firstgold. The transaction was withdrawn due to CFIUS’s concerns about the proximity of Firstgold assets to sensitive military bases.In 2012, CFIUS contacted Ralls Corp., which is owned by Chinese nationals, and requested a notification of Ralls’ investment in wind farm assets. After reviewing the acquisition, CFIUS recommended that Ralls stop operations until a complete investigation could be conducted as a result of objections by the U.S. Navy over wind turbines located near or within restricted Naval Weapons Systems Training Facility airspace. President Obama ordered Ralls to divest itself of the wind farm project.Proximity analysis can be challenging because the parties cannot know in many cases whether a particular U.S. Government facility is sensitive.
21 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCFIUS — Hot Button IssuesPerceived Scrutiny of Chinese AcquirersThere is a perception that some within CFIUS or its constituent agencies are suspicious of Chinese investment in the U.S.; these concerns may be exacerbated when parties notify CFIUS only after being contacted by CFIUS post-transaction.Huawei elected not to notify CFIUS before consummating a $2 million acquisition of technology and employees from 3Leaf Systems, a small server technology firm located in Santa Clara, California.CFIUS reviewed the transaction and informed Huawei that it would have to divest the 3Leaf assets and employees. After initially indicating it would reject CFIUS’s findings and press its case with President Obama, Huawei ultimately agreed to divestment.Public and high profile transactions involving Chinese acquirers can also draw scrutiny from China Hawk members of Congress, the media, or third-parties, which can in turn exert pressure on CFIUS
22 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCase Study — Smithfield FoodsIn May 2013, Shuanghui International, the controlling shareholder of China’s largest meat processor, announced the signing of an agreement to purchase U.S.-based pork producer Smithfield Foods in a transaction valued at $7.1 billion, inclusive of debt.The parties filed a notification with CFIUS, and CFIUS undertook an investigation of the transaction.Ultimately, CFIUS concluded its investigation without recommending that the President take any action.
23 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCase Study — Smithfield FoodsDuring the course of the review and investigation, members of Congress the press, and third-parties raised a number of issues, some arguably more meritorious than others. The U.S. Senate Committee of Agriculture, Nutrition and Forestry, held publicly televised hearings regarding the transaction addressing many of these issues.Issues Raised:Proximity: Smithfield owns dozens of processing and distribution facilities, and hundreds of hog farms, throughout the U.S. Many properties are located in areas with a significant military presence, including the Hampton Roads area of Virginia, eastern North Carolina, and the Western U.S.U.S. Government Contracts: As a major supplier of pork products, Smithfield Foods is a significant supplier of food products to the U.S. Government, including to the U.S. military.Supply of By-Products: Certain hog by-products are used in the production of Heparin and other drugs, and some expressed concern that Shuanghui would control a significant and important pharmaceutical source material that could be subject to shortage.
24 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCase Study — Smithfield FoodsIssues Raised (cont.):Food Safety: Concerns were raised over the safety record of Shuanghui and other Chinese companies, though in reality the business thesis of the transaction was entirely to export pork from the U.S. to China, not import pork from China, and in any event the USDA would continue to ensure that Smithfield products met applicable food safety standards post-transaction.Tax-Payer Funded Research: Some complained that U.S. tax-payer funds used to research breeding and pork processing technology would now be benefiting China and contributing to China’s competitive advantage.Reciprocity: Certain members of Congress complained about the fairness of allowing an inbound Chinese investment of this magnitude, while a reciprocal investment by a U.S. company in a Chinese company would not be allowed by the Chinese government.
25 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCFIUS — Review of Minority InvestmentsA key issue in considering whether to notify a transaction involving a minority investment by a foreign investor in a U.S. business is whether the deal involves acquisition of control over the U.S. business.CFIUS regulations include a safe harbor for “purely passive” investments of 10% or less.An investment would not be passive, and thus not meet the safe harbor, if the foreign acquirer negotiated rights to determine, direct, decide, take, reach, or cause decisions regarding important matters affecting the U.S. business.Also, an investment is not “purely passive” if it entitles the investor to hold or control even one board seat.
26 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCFIUS — Review of Minority InvestmentsNevertheless, even outside the safe harbor, parties can get comfortable with not filing if they are confident that CFIUS would agree that there is no control.The CFIUS regulations include a list of customary negative consent rights that do not constitute control such as:The power to prevent the sale or pledge of all or substantially all of the assets of an entity or a voluntary filing for bankruptcy or liquidation;The power to enter contracts with or guarantee obligations of majority investors and their affiliates;The power to purchase a pro rata interest to prevent dilution;The power to prevent changes to the rights of a class of stock;The power to prevent the alteration of corporate organizational documents in relation to the above permissible negative consent rights.
27 Inbound Transactions (cont Inbound Transactions (cont.) CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWSCFIUS — Review of Minority InvestmentsHowever, other special governance rights and negative control rights can, alone or in tandem with each other, convey control. These include:Board representation by the foreign acquirer;The right to veto the hiring or firing of corporate officers;The right to veto acquisitions or divestitures of assets by the U.S. business (unless limited to transactions above a truly extraordinary amount);The right to veto the entry or renewal of contracts, or to control whether contracts are performed.The greater the investment is above 10%, the more likely that CFIUS will consider one or more of these rights to convey control.
28 Inbound Transactions (cont Inbound Transactions (cont.) ENFORCEABILITY ISSUES IN PUBLIC CROSS-BORDER SALESUtilizing the Smithfield Foods Reverse-Breakup Fee/Escrow Paradigm for Public Deals to Potentially Manage Cross-Border Enforcement and Regulatory RiskIssue: How to provide in a public deal sufficient enforceability comfort with foreign buyer with no meaningful U.S. assets and significant U.S. and foreign regulatory approvals and inherent financing risk (albeit no “financing out”)?Solution:Strong covenant on required efforts to obtain regulatory approvals, etc. (everything short of a “MAC”)Limit deal conditions (no financing condition, only selected foreign regulatory approvals are conditions to deal, etc.)Significant reverse-breakup fee ($275 million (≈6% of equity value)) paid by buyer if the deal fails due to:willful breach by buyer (non-exclusive remedy)failure of regulatory approvals (other than CFIUS)failure of financing sourcesReverse-breakup fee put in escrow in New YorkMore tailored than the “deposit” structure seen in occasional private deals in certain regions/sectors
29 Inbound Transactions (cont.) SOFTBANK/SPRINT/CLEARWIRE – Introduction SoftBank is entrepreneurial, aggressive and global – not a typical Japanese (or foreign) buyerFounded in 1981 by Masayoshi Son, invests in telecom and internet businesses around the world. TSE listed. Market cap: ~$90 billionMr. Son is the Chairman and CEO – has a “300-year plan” for developing SoftBank’s businessSoftBank has a diverse portfolio of cross-border investments dating back over 15 years, including:Early investor in Yahoo! and E-TradeSingle largest shareholder in Alibaba, with an investment dating from 2000And of course its control stake (currently 80%) in Sprint – largest US acquisition by an Asian buyer, and largest Japanese acquisition of a foreign companySoftBank’s acquisition of Sprint and indirectly ClearwireOctober 15, 2012: SoftBank announces acquisition of control of Sprint, including $3.1B investment at signingDecember 17, 2012: Sprint announces acquisition of ~50% of Clearwire it did not already ownJanuary 8, 2013: DISH announces unsolicited offer for Clearwire spectrum and sharesApril 15, 2013: DISH launches unsolicited bid for SprintJuly 9, 2013: Sprint closes Clearwire take-private, valuing Clearwire at $14BJuly 10, 2013: SoftBank closes acquisition of 78% of Sprint for $21.6B total investment
30 Inbound Transactions (cont Inbound Transactions (cont.) SOFTBANK/SPRINT/CLEARWIRE – Some ObservationsLarger foreign buyers have been more willing than US buyers to leave in place a public minorityDeals for <100% of US public companies are very rare; ~20 in the past 15 years, a majority with foreign buyersPerhaps because foreign buyers come from less litigious environments and instead focus on the upside of a public stubInterestingly, our two transactions involved the contemporaneous creation of a public minority at Sprint and the elimination of a public minority at ClearwireForeign buyers give rise to additional regulatory complications, particularly in regulated industriesCFIUS required a National Security Agreement addressing certain national security concerns, including:appointment of National Security Director on Sprint Board as liaison with USG agencies on security issues;USG one-time right to require Sprint to remove and decommission certain equipment deployed in the Clearwire network; andUSG right to review and approve certain network equipment vendors and managed services providers of Sprint.Prominence of Huawei concerns in the US prior to and unrelated to the Sprint acquisitionIssues raised (unsuccessfully) by competing bidder DISHState regulators may favor a home state competing bidderFCC limitations on foreign ownership affected deal structure and charter documentsFCC approval process became politicized (also unsuccessfully) because of competing bidder
31 Inbound Transactions (cont Inbound Transactions (cont.) SOFTBANK/SPRINT/CLEARWIRE – Some Observations Foreign buyer’s financing sources may have requirements that affect the dealClose ties to “house bank” and low interest rates are a strategic advantage for Japanese buyersBut there were challenges:Long-term commitment letters are not common in Japan and unwillingness to leave outstanding for full pre-closing period led to unusual termination rights by SprintLack of familiarity of Japanese banks with US M&A processes and complexity of two simultaneous public dealsInvolvement of large groups in the credit approval process – increased susceptibility to leaksYen-denominated borrowing for US deal created lengthy currency risk in regulated industry deal – SoftBank hedge ultimately saved $2 billionConflicting disclosure norms required strategic planning and schedulingTSE requires prompt disclosure of a board’s approval of a transaction, and Japanese boards often want to approve based on final language in all respects – limiting flexibility on timingTSE has discretion to require explanation of rumors (or not) – requiring coordinationReversal of prior track record of market impact of US acquisitions on Japanese buyersIn the 10 largest overseas purchases by Japanese companies from 2000 through 2011, the acquirers lost an aggregate of $330B in market value within 12 months after deal announcementIn contrast, SoftBank stock increased by over 150% in the 12 months following deal announcementStay tuned for future developments
32 Inbound Transactions (cont.) THE INBOUND/OUTBOUND BRIDGE A Reminder of Certain Issues With Implications to Both DirectionsNon-U.S. Disclosure ObligationsIn addition to U.S. disclosure requirements (that often let you “no comment” in response to leaks, rumors, etc.), be sensitive that certain foreign jurisdictions, most notably the UK for its listed companies, have disclosure obligations that are more hair-trigger and do not allow “no comment” when the U.S. might.This can result in earlier public confirmation of a deal prior to the intended announcement if acquiring a foreign company or if, for example, a UK buyer is looking at making a U.S. purchase.Cultural DifferencesNever forget to be sensitive to—and plan for—the cultural differences between the parties and the other affected players, like employees, communities and local officials and regulatorsIt can be the difference between a smooth and a rocky road (or even deal failure)
34 Outbound Transactions “REGULAR WAY” To “Traditional” JurisdictionsUS Lawyer’s FunctionActing as a bridge to local counselLocal counsel far and away taking the laboring oar“Market Practice” and Relation to Deal Structure and DocumentationDoes it matter where the center of gravity is?Governing law likely to be that of the jurisdiction in question (e.g. UK, Germany, Sweden, France and Japan)What will be the standard for the deal?Buyer “Anxiety” With Respect to Key Legal/Due Diligence PointsTypical at a lower level, insofar as the following are concerned:Basic business due diligence, including related to corruption (e.g. FCPA, UK Bribery Act issues)Rule of law—predictability of outcomes, ability to realize legal outcomes on a timely basis, ability to enforcePolitical risk more generally, e.g.:Regulatory environmentExchange control riskExpropriation risk
35 Outbound Transactions (cont.) TO OTHER PARTS OF THE WORLD BRICS and MINT countriesUS Lawyer’s FunctionRole is more activeOften local counsel, however thoughtful and able, will not have depth of experience and sophistication needed to act capably and autonomously on complex M&A transactions“Market Practice”Local practice likely to be less compelling than in “traditional” jurisdictionsTemplate more likely to be “international standard” (but what is it?)Governing law less likely to be local lawMore likely to be law of a neutral jurisdiction (New York or UK)Intense focus likely on:Business due diligence, including corruption issues (both on status quo, and ability to operate going forward)Rule of law issuesPolitical risk and what, if anything, can be done about it
36 Outbound Transactions (cont.) TO OTHER PARTS OF THE WORLD Hybrid Structures Are PopularJoint VenturesRationalesLower amount invested and at riskExperience of the local partiesActual or perceived “shield” deriving from alliance with local partiesDownsides to Joint VenturesLocal partiesInherently temporary natureTrack record of most joint ventures
37 Outbound Transactions (cont.) INVERSIONS Some outbound transactions by US corporations may offer the opportunity to create so called corporate inversionsThis allows for a redomestication of a US corporate taxpayer to a foreign law tax jurisdiction by avoiding the rules which would otherwise generally prevent the US corporate taxpayer from redomesticating on its ownTo avoid these rules, the foreign target’s shareholder must end up with > 20% of the stock of the combined company (the Obama Administration has proposed increasing the threshold to 50%)Structure (“Double Dummy Dropdown”)Merger parties set up offshore holding companyOffshore holding company sets up two acquisition subsidiariesEach of the two merger parties is acquired by the respective acquisition subsidiaryHost of details lurking in the aboveIRS rules for redomestication away from the US are complex
38 Outbound Transactions (cont Outbound Transactions (cont.) FOREIGN CORRUPT PRACTICES ACT / UK BRIBERY ACTThe Hot Button Topic: Due Diligence on Corruption IssuesViolations of the Foreign Corrupt Practices Act (“FCPA”), the law banning corrupt payments to foreign government officials, broadly defined, can lead to significant penalties for both firms and individuals, as well as “tag along” civil suits by shareholdersThe UK Bribery Act (“UKBA”) is similarly severe and extra-territorial. It covers commercial bribery in addition to bribery of government officials, though US private bribery may be prosecuted under US legislation (e.g., Travel Act). In addition, the UKBA has the affirmative defense that the organization has “adequate procedures” in place designed to prevent bribery (no express FCPA equivalent)There can be successor liability for FCPA violations: In other words, a company could be liable for FCPA violations by an acquired company that occurred before the acquisition, particularly if the acquiring company knew or should have known about the violations at the time of its investmentIt is critical that companies perform due diligence prior to commencing an acquisition or JV partnership—Nearly 90% of recent cases involve conduct of third parties (e.g., distributors, joint venture partners and foreign-based subsidiaries)In many circumstances, it is appropriate to obtain further protection through inclusion of provisions in the relevant purchase agreement, investment agreement, stockholders’ agreement, or other transaction documentation
39 Where Is It Best to Be a Seller? Where the center of gravity of a transaction is not pre-ordained, there is opportunity for sellers to benefit from market arbitrage
40 Where Is It Best to Be a Seller? REGIONAL PRACTICE ARBITRAGE USEuropeConditionalityBuyer has a bring down of reps as a condition to MAC standard and/or MACDelaware law application to interpretation of a MAC results in clear judicial precedent and high thresholdShift towards MAC (around 1/3 of deals)Generally on the increaseLegal vendor due diligenceNot common and, to the extent given, typically on a non-reliance basisIncreasing buyer nervousness leading to ABC investigations as part of diligenceIncreasingly seen (and standard in private equity deals)General market shift to more buyer diligence (not just legal)Reps and warrantiesMore buyer friendly in scope, including no undisclosed liabilities repBuyer expects business reps even on a private equity saleMore seller friendly; often no business reps from private equity sellerSignificant move (primarily in UK) towards warranty insuranceDisclosureSpecific disclosure onlyDisclosure of full data room more common
41 Where Is It Best to Be a Seller? (cont.) REGIONAL PRACTICE ARBITRAGE USEuropeFinancingReverse termination fee/limited conditionality around financingCertain funds increasingly under threat, especially given move towards US financing of certain European dealsLiabilityLower caps; deductibles more common (this is the exception to the buyer-friendly rule)Higher caps; deductibles less common (though a different overall regime, as fewer items are generally indemnified)PricingLocked box less commonLocked box more common, and spreading to asset sales and carve-outsAnti-sandbaggingOccasionally seen but more usual for agreement to be silentSeen regularly (usually by reference to actual awareness of the deal team)DepositsDeals in real estate, privatization, bankruptcy (§363 deals) and in the energy sector, as well as those in China, Russia and MENABreak FeesSeller break fees unusual. More common in UK, Russia and HK on larger deals requiring shareholder approvalPurchaser break fees accompany US-style financing and antitrust/regulatory concerns