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International Private M&A The Differences That Can Become Deal Breakers A Briefing by Dechert LLP in cooperation with the Association of Corporate Counsel.

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Presentation on theme: "International Private M&A The Differences That Can Become Deal Breakers A Briefing by Dechert LLP in cooperation with the Association of Corporate Counsel."— Presentation transcript:

1 International Private M&A The Differences That Can Become Deal Breakers A Briefing by Dechert LLP in cooperation with the Association of Corporate Counsel June 16, 2004 Copyright © 2004 Dechert LLP. All rights reserved. This presentation is for educational and illustrative purposes only and should not be construed as legal advice. Materials should not be considered as legal opinions on specific facts or as a substitute for legal counsel.

2 U.K. Corporate Law Issues James M. Croock © 2004 Dechert LLP

3 International Private M&A Seminar—June 16, Key Issues No statutory mergers, transfer taxes, and disclosure Warranties, representations, and indemnities Financial assistance Offers for unlisted companies Use of legal opinions

4 © 2004 Dechert LLP International Private M&A Seminar—June 16, Statutory Mergers, Transfer Taxes, and Disclosure No statutory mergers Transfer taxes  Share transfers – 0.5% of the consideration  Land transfer – up to 4% of the consideration Disclosure

5 © 2004 Dechert LLP International Private M&A Seminar—June 16, Warranties, Representations, and Indemnities Warranties  Sole remedy for breach is damages  Measure of damages for a contractual breach of warranty is obligation to put buyer in the same position as if contract had been properly performed. For example: Purchase price is $10,000. Company is worth $8,000 Had warranty been true, Company would have been worth $9,000. Measure of damages is $1,000

6 © 2004 Dechert LLP International Private M&A Seminar—June 16, Warranties, Representations, and Indemnities Warranties (cont.)  Three elements are required to bring a warranty claim: Warranty was untrue; Quantifiable loss has resulted; and Loss is not too remote from breach  Duty to mitigate the loss

7 © 2004 Dechert LLP International Private M&A Seminar—June 16, Warranties, Representations, and Indemnities Representations  Fraudulent Misrepresentation Made recklessly or knowingly, without belief in its truth Remedy—recission and/or damages  Negligent Misrepresentation Made carelessly or without reasonable grounds for believing it was true Reverses burden of proof Remedy—recission and/or damages

8 © 2004 Dechert LLP International Private M&A Seminar—June 16, Warranties, Representations, and Indemnities Representations (cont.)  Innocent Misrepresentation Made entirely without fault and party had reasonable grounds for believing it was true Remedy—either recission or damages, at court’s discretion  Under certain circumstances right to rescind may be lost  Measure of Damages for Misrepresentation Tortious basis—obligation to put buyers in the position they would have been had representations not been made (i.e., had they not entered into the contract). For example:  Purchase price is $10,000. Company is worth $8,000  Measure of damages is $2,000

9 © 2004 Dechert LLP International Private M&A Seminar—June 16, Warranties, Representations, and Indemnities Representations (cont.)  Measure of Damages for Misrepresentation (cont.) Contractual basis—obligation to put buyers in the position they would have been had representations been true. For example:  Purchase price is $10,000. Company is worth $8,000, or if representation had been true, $9,000  Measure of damages is $1,000

10 © 2004 Dechert LLP International Private M&A Seminar—June 16, Warranties, Representations, and Indemnities Indemnities  “Pound for pound” measure of damages  No need to establish that loss stems from a breach  No duty to mitigate  Seller may object and limit its liability by: Buyer having obligation to mitigate loss Ensuring damages are not calculated on a multiple basis Excluding consequential indirect losses

11 © 2004 Dechert LLP International Private M&A Seminar—June 16, Financial Assistance (s.151 Companies Act 1985) Prohibits provision by a company (or its subsidiaries) of financial assistance for the purpose of acquiring shares in that company or for the purpose of reducing or discharging a liability incurred for purpose of such acquisition Company that contravenes is liable to a fine. May cause cross default and/or acceleration of loans

12 © 2004 Dechert LLP International Private M&A Seminar—June 16, Financial Assistance (s.151 Companies Act 1985) Officers in default are liable upon conviction on indictment to imprisonment for up to 2 years, an unlimited fine or both, and on summary conviction to imprisonment for up to 6 months, a fine up to the statutory maximum (at present £2,000), or both For a bank, guarantees and security granted may be invalid Public companies (“plcs”) are prohibited from providing financial assistance. Certain relaxations apply to private companies

13 © 2004 Dechert LLP International Private M&A Seminar—June 16, Financial Assistance (s.151 Companies Act 1985) Example P Limited proposes to acquire A Limited, which has subsidiaries B Limited and C Limited. P Limited borrows money from a bank to finance the acquisition. Bank requires P Limited and its newly acquired subsidiaries to give guarantees of this debt and provide security in support before it will lend money. P Limited A Limited B Limited C Limited Bank Intra Group loan Guarantee and security Acquisition debt Guarantee and security

14 © 2004 Dechert LLP International Private M&A Seminar—June 16, Financial Assistance (s.151 Companies Act 1985) Financial assistance rules apply to companies incorporated in England and Wales, but do not apply to giving of assistance by English companies for acquisition of shares in their overseas holding companies Uncertainty as to whether “subsidiary” includes an overseas subsidiary. Case law indicates only applies to U.K. subsidiaries Must be a subsidiary on date of financial assistance Includes non-cash assistance

15 © 2004 Dechert LLP International Private M&A Seminar—June 16, Financial Assistance (s.151 Companies Act 1985) May be by means of (i) gift; (ii) guarantee, security, indemnity, etc.; (iii) loan; and (iv) by other means such that it materially reduces net assets of company Exemptions and relaxations—Whitewash Procedure (s.155)  Each “plc” giving assistance must convert to a private company  Statutory declarations must be sworn by directors of company and each subsidiary, declaring company was “solvent” in the 12 months before giving of assistance and will be in the 12 months after

16 © 2004 Dechert LLP International Private M&A Seminar—June 16, Financial Assistance (s.151 Companies Act 1985) Exemptions and relaxations—Whitewash Procedure (s.155) (cont.)  Auditors’ report must be annexed to statutory declaration stating that they are not aware of anything that would make directors’ opinion unreasonable  Net assets must not be reduced  With the exception of wholly owned subsidiaries, giving of assistance must be approved in general meeting by special resolution by (i) company giving assistance, (ii) target company, and (iii) any intermediate holding company

17 © 2004 Dechert LLP International Private M&A Seminar—June 16, Offers for Unlisted Companies Offer may be required if:  City Code on Takeovers and Mergers (the “Code”) applies  Compulsory acquisition procedures apply (s.428 to 430 of the Companies Act)  There is a large number of target shareholders Restrictions on financial promotion contained in the Financial Services and Markets Act 2000 (“FSMA”)

18 © 2004 Dechert LLP International Private M&A Seminar—June 16, Offers for Unlisted Companies Offer must usually be made or approved by person authorised by the Financial Services Authority  “Authorised” person need not make offer if exemption applies—(i) one off communication, (ii) certified net worth individuals, (iii) sale of a body corporate, (iv) takeovers, and (v) members of certain bodies corporate Consideration comprising securities  Obligation to publish a prospectus where securities are offered to the public in the U.K. for the first time

19 © 2004 Dechert LLP International Private M&A Seminar—June 16, Offers for Unlisted Companies Exemptions  Transactions falling within the exemptions are deemed not to constitute an offer to the public and do not require a prospectus. Those of particular significance include: “professionals’ exemption” no more than 50 offerees exemption anti-avoidance provisions in relation to “50 persons exemption” Restricted Circle of sufficiently knowledgeable persons “underwriting” exemption securities offered in connection with a takeover offer  Combination of exemptions

20 International Private M&A Transactional Labor Law Issues Charles Wynn-Evans © 2004 Dechert LLP

21 International Private M&A Seminar—June 16, Key Issues Share sale or business sale Which employees are acquired and on what terms Information and consultation obligations Employment protection liabilities

22 © 2004 Dechert LLP International Private M&A Seminar—June 16, Employees and Terms (1) Due Diligence  Key executive service agreements  Full employee details—anonymous for data protection reasons  Pension/benefit/bonus rules  Outstanding claims  Union recognition and relations

23 © 2004 Dechert LLP International Private M&A Seminar—June 16, Employees and Terms (2) Warranties  Full particulars disclosed of contracts benefits, etc.  No changes  Contracts all terminable by specific maximum notice  No claims  Compliance with law and bargaining  No outstanding offers  No resignations/dismissals  No change of control provisions

24 © 2004 Dechert LLP International Private M&A Seminar—June 16, Transfer Of Undertakings Protection of Employment Regulations 1981 (TUPE) What is a transfer of an undertaking? Seller’s employees inherited—“wholly or mainly assigned” test Consultation with unions or employee representatives Dismissals in connection with a TUPE transfer automatically unfair save in specified circumstances Transfer indemnities

25 © 2004 Dechert LLP International Private M&A Seminar—June 16, TUPE Problems Appropriate representatives Duty to inform Consult if “measures” envisaged: with a view to seeking agreement Timing of consultation and impact on acquisition/ reorganisation timetable Transfer-related dismissals and changes to terms and conditions

26 © 2004 Dechert LLP International Private M&A Seminar—June 16, U.K. Employment Protection (1) No employment at will  Notice periods/reasonable notice Unlawful discrimination  Sex, race, disability, orientation, religion/belief, part-time status, age (from 2006)  Unlimited compensation for financial loss; injury to feelings

27 © 2004 Dechert LLP International Private M&A Seminar—June 16, U.K. Employment Protection (1) Unfair dismissal  One year’s service required  £55,000 maximum compensation  Misconduct/capability/redundancy are fair reasons  Need fair procedure  Exceptions—no eligibility threshold or compensation limited

28 © 2004 Dechert LLP International Private M&A Seminar—June 16, Employment Protection (2) Redundancy payments Redundancy consultation  With appropriate representatives  If 20 or more employees in 90 days  Penalty: 13 weeks, pay per employee

29 © 2004 Dechert LLP International Private M&A Seminar—June 16, Employment Protection (2) Family-friendly legislation  Maternity leave  Paternity leave  Time off for dependants  Right to request flexible working Trade Unions  Statutory right to trade union recognition  Prosecution for lawful industrial action

30 French Law Considerations Jonathan A. Schur © 2004 Dechert LLP

31 International Private M&A Seminar—June 16, Yes is no. Up is down. Right is left Corporate and contract law and business organization are quite different Your instincts will lead you astray Vive la différence — a beautiful system if you play by its rules A Few Simple Guidelines

32 © 2004 Dechert LLP International Private M&A Seminar—June 16, French Companies: Key Differences Legal and cultural Not always true, but more often than not

33 © 2004 Dechert LLP International Private M&A Seminar—June 16, Le patron—corporate royalty, not corporate democracy Single officer in a traditional French stock corporation—the président Limited exception that proves the rule: a general manager (directeur general) who has the powers of the president in his absence Corporate Law— The Boss Syndrome

34 © 2004 Dechert LLP International Private M&A Seminar—June 16, Corporate Law: The Absence of Corporate Loyalty There are often duchies within the kingdom: powerful managers with mini-kingdoms Loyalties are often to the boss or the duke, not the company and not the shareholders The solution? Revolution. Clean them out to clean it up

35 © 2004 Dechert LLP International Private M&A Seminar—June 16, Corporate Law: Archaic Procedures and Their Dangers Archaic corporate law procedures. Required meetings, formalities, reports Home field advantage for local managers Risks of non-compliance: transactions may be void, criminal penalties may apply An outsider is often watching (the statutory auditor), with a duty to report violations of the law A (partial) solution: change entities to SAS (simplified stock corporations)

36 © 2004 Dechert LLP International Private M&A Seminar—June 16, Company and Business Records: Hiding The Truth To live well, live in hiding No real discovery in French litigation No sense of danger to the company in documents: create and keep them for one’s own protection Files kept at home; memoranda prepared for the home file Interviews, particularly informal ones, can be more effective than document reviews

37 © 2004 Dechert LLP International Private M&A Seminar—June 16, Corporate Finance: The Triumph of Form French law is law without equity Practical results are less important than theory. How does it work in theory? An example: the mystical importance of capital

38 © 2004 Dechert LLP International Private M&A Seminar—June 16, Corporate Law: The Criminal Law Aspects Protecting the underdog by making everything criminal Risk: transactions can be voided, litigation delayed by criminal proceedings Someone is always watching: the statutory auditor/special auditors

39 © 2004 Dechert LLP International Private M&A Seminar—June 16, Accounting: Impact on Acquisitions Differences in presentation Differences in supporting documentation Impact: If U.S. GAAP statements are required, expect a great deal of work, and expect to pay for it

40 © 2004 Dechert LLP International Private M&A Seminar—June 16, Due Diligence Traps Areas where you can be led astray Areas where targeted, non-traditional due diligence is needed

41 © 2004 Dechert LLP International Private M&A Seminar—June 16, Contract Drafting Practices Legal departments are often under control of finance department Little rigor in corporate drafting: napkin contracts, drafted over lunch Life in a small country: reliance on relations. Indemnities par le barbichette

42 © 2004 Dechert LLP International Private M&A Seminar—June 16, The heavy hand of justice will change your deal Examples: statutory protections and liquidated damages Contract Law: Going Beyond the Letter of the Contract

43 © 2004 Dechert LLP International Private M&A Seminar—June 16, Contract Law: Statutory Protections An example: termination of established commercial relations Article L.422-6(I)(5) of the Code de commerce All established commercial relations covered, whether relating to goods or services Overrides contract provisions

44 © 2004 Dechert LLP International Private M&A Seminar—June 16, Contract Law: Statutory Protections Liability if relationship terminated “brutally,” without written notice or with insufficient notice “Brutally” is in the eye of the beholder: insufficient in light of length of prior relations, commercial custom, industry agreements Impact on pre-acquisition contract due diligence: need to identify high-risk relations

45 © 2004 Dechert LLP International Private M&A Seminar—June 16, Liquidated damages can be increased or decreased by the court if “manifestly excessive or insufficient” Code civil 1152 Considered objectively, by comparing the damage suffered and the agreed amount The court’s discretion is (almost) absolute Contract Law: Liquidated Damages Clauses

46 © 2004 Dechert LLP International Private M&A Seminar—June 16, Reductions in force are difficult, time-consuming, and costly Costs are difficult to predict Legal standard: push the company to the brink of bankruptcy—not “interest of the company” or “profitability,” but “preserving the ability of the company to compete” Solution: hire someone who knows what s/he is doing, and expect the fog of war Labor Law: Economic Dismissals

47 © 2004 Dechert LLP International Private M&A Seminar—June 16, Controlling staffing levels by outsourcing can be dangerous Issue: who gives orders:—“lien de subordination” Criminal penalties (Code du Travail, Art. L125-3) Labor Law: Lending Employees

48 © 2004 Dechert LLP International Private M&A Seminar—June 16, Employees may have statutory rights to royalties on inventions Three categories: inventive mission; non-work inventions; inventions using employer facilities or technology or within employer’s field. Must give additional compensation Copyright and its problems: employee moral rights, assignment language must be specific, and future works cannot be assigned IP Ownership: Employee Inventions and Creations

49 © 2004 Dechert LLP International Private M&A Seminar—June 16, Competition Law: Its Absence Competition law focuses on administrative control Public policy favors creation of national champions Pre-acquisition notification of acquisitions now required

50 © 2004 Dechert LLP International Private M&A Seminar—June 16, Final Suggestions Focus on acquisition contract structure Real due diligence is often post-acquisition Negotiate price adjustment clauses Control the post-acquisition audit process

51 Practical Considerations in U.S.-U.K. Cross-Border Transactions Lisa M. Palumbo © 2004 Dechert LLP

52 International Private M&A Seminar—June 16, Client must balance comfort level with known quantity against relationship considerations Choice has financial and operational effect on the client Understand the impact before making the choice Language and concept differences must be timely addressed with client to avoid bumps in negotiations Transaction Style British vs. American

53 © 2004 Dechert LLP International Private M&A Seminar—June 16, Representations and Warranties  Contractual as opposed to indemnity basis  Limitation on rescission rights and tort remedies Warranties are specific; disclosures are general Legal opinions are not exchanged U.K. Agreement Format

54 © 2004 Dechert LLP International Private M&A Seminar—June 16, Due Diligence and Disclosures Due Diligence Report  Extensive  Warranted to client Disclosure Letter: Caveat Emptor General Disclosures—that which Buyer should have requested or discovered in due diligence process or from public records is deemed disclosed Disclosures are not specifically called out against particular warranties

55 © 2004 Dechert LLP International Private M&A Seminar—June 16, Substantive Issues Dilapidations  Requirement to put property back into condition as at time of lease Compensation Schemes U.S. Export Control (AECA/ITAR application)  Technology Assistance Agreement and/or Export License may be required if cross-border discussions of technologies used or useful in defense applications are held

56 © 2004 Dechert LLP International Private M&A Seminar—June 16, Post-Acquisition Planning Management of the acquired entity  Consider level of control desired  Articles of Association should reflect that level of control Employee Stock Ownership Blanket visas for visiting U.K. executives Technology control plans

57 Practical Considerations in U.S.-France Cross-Border Transactions John E. Osborn © 2004 Dechert LLP

58 International Private M&A Seminar—June 16, Cephalon Acquisition of Laboratoire L. Lafon (2001) Business Rationale Alternatives to Acquisition French Cultural/Social Environment Specific Challenges  Financial Due Diligence/Reports  Human Resources  Corporate Structure  Tax Liability  Environmental Liability Possible Approaches


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