Cross-border mergers and acquisitions, although presenting many of the same issues as domestic deals, are usually more complex and rife with surprises and other pitfalls. In recent years this complexity has grown along with the pace of globalization. The sheer range of concerns has expanded as the speed and volume of international deals have increased.
Such complexity puts a heavy burden on both inside and outside counsel. Not only must both groups of lawyers know what is going on at any given moment around the globe (or be able to find out quickly), they must be able to prioritize and elicit the actions necessary to move the whole process forward. Above all, they will want to be in position to answer every CEO's most pressing question: How do we close this deal on time and on budget?
In arriving at an answer, counsel will want to look closely at the three critical components that most often determine the success of an international transaction:
- Transaction management
- Deal structure
- Antitrust compliance
Transaction Management. The acquisition of a large global enterprise requires the support of a large global legal team - outside and inside counsel working together. This team must, first of all, have connections (real "feet on the ground") in key locations around the world. Only a critical mass of local lawyers who understand local languages, local customs and local legal nuances can lead the buyer or the seller through the maze of competition, environmental, employee relations and other issues that most deals entail. The question "what must I do to get title to the share or assets?" has widely different answers - and time frames - in South Korea, in Germany and in Mexico.
Even more important, this team must be truly integrated. Only sophisticated, well-thought-out integration can create the rapport and clear organizational assumption of responsibility that lead to successful deal execution in the international context, where pure deal "mechanics" and execution assume a role equal to that of overall legal strategy.
Deal managers should maintain strong enough lines of communication to international locations to identify potential sticking points ahead of time. Similarly, they must know how to prevent a foreign affiliate from pursuing a line of inquiry that, while in itself valid, is of relatively less importance within the overall context of the deal. Without strong central control, the result can be too many billed hours for too little ultimate value.
Well-integrated global legal teams typically head off such problems before they occur by holding regular or as-needed global conference-call meetings with all affiliates from the start of the transaction. Such meetings should establish clear priorities, and communicate the relative importance of each jurisdictional group's contribution, while keeping the team updated on progress and critical next steps. At the same time, meeting leadership needs to be sensitive to making the most of the time for all parties involved - particularly with larger groups - to maximize client investments in these discussions.
In between calls, local teams should maintain frequent communication with the deal manager as they work through the details of the transaction. Depending on the scope of the transaction, outside counsel may even assign one person to oversee activity in a particular time zone. The US-based lawyer managing relationships in Asian time zones, for example, will often work on a schedule that overlaps with Asian time.
Skill at eliciting quick responses from far-flung international locations is critical. Key is the ability to draw upon relationships, whether at branch offices or affiliates of outside counsel's firm or with other lawyers who have proven their ability to deliver.
When recently, for example, a low-level Canadian bureaucrat held up a tax clearance certificate, threatening to cost the client an additional US$40 million, a US-based associate drew upon her firm's strong relationship with a local affiliate's counsel for help. Canadian counsel was able to persuade a higher government office to overrule the low-level bureaucrat just before the deal was scheduled to close. Time elapsed resolving the issue and saving the eight-figure price tag: just seven hours.
Deal Structure. What is the deal? The question of how the deal will be structured is central to every transaction. In the cross-border context, hidden issues can take time to uncover. An early focus on examining the proposed structure of a cross-border deal from all angles can make a difference in both closing the deal on time and positioning for overall business success.
Since tax planning is a key determinant of deal structure, the early involvement of international tax counsel is essential. In the recent acquisition of a Mexican operating company and the US LLC that owned 50 percent of its shares, tax counsel unearthed a "hidden tax" inherent in the LLC's structure and likely to arise for the buyer post-closing. This tax would have been sufficient to make the overall deal unattractive to the buyer, and would not have been indemnifiable under the purchase agreement. Working with Mexican partners, tax counsel was able to formulate a plan to eliminate this tax for the buyer without adversely affecting the seller's own tax objectives.
Early involvement of tax advisers can also maximize tax efficiencies throughout the structure of an international transaction. Although financing of a domestic deal might permit negotiation in relative isolation from its acquisition structure, a cross-border transaction may gain by dovetailing all components of the deal. "Pushing down" financing to the level of the foreign operating company is a common strategy for reducing local taxes on corporate profits and repatriating cash tax-efficiently.
To implement such a strategy, tax counsel needs to chart the logistics early enough to accommodate execution requirements that may be more formal than in the US. For instance, a loan from a US parent company to a Brazilian subsidiary may require that funds be physically transferred into the subsidiary's bank account. This takes longer to execute than the mere bookkeeping entry that may be possible in other jurisdictions.
Similarly, a tax lawyer on the deal team during the due diligence phase may note that a foreign target company owns significant intellectual property. In such cases, counsel can recommend - early enough to make a difference - that the IP be bought by a distinct acquirer, thus permitting tax-efficient licensing and repatriation structures.
Beyond tax planning, the translation of other business objectives into elements of the deal structure may involve some surprises in the cross-border context.
Labor relations. In some countries, particularly in Western Europe, the labor force has the power, via "works councils," to stop significant transactions. Such a concept, alien to most US CEOs, requires full explanation of the transaction up front. More broadly, the transaction planning timetable needs to accommodate a process of interaction with the works council, taking full account of statutory notice mechanics and waiting periods.
First, the legal team needs to sit down with management and talk through its post-acquisition plans for specific plant locations. Once those plans are clear, a typical approach is to appear before worker representatives and assure them that new ownership intends to grow the business. Representatives may ask for assurances about the plan and specific employment targets for the coming year. These requests are typically met with "soft," non-binding letters combined with additional in-person meetings. When convinced, worker representatives then usually seek the support of rank-and-file employees for the transaction.
If, however, the acquirer's strategy is to realize synergies by consolidating manufacturing in fewer facilities, candor with works councils and up-front resolution of differences will be essential. The alternative - protracted and very public protests impugning the acquirer's integrity, backed by labor's significant leverage - will usually prove far more difficult to overcome.
Environmental regulation. Until the last few years, US businesses faced significantly fewer environmental regulations abroad than they did at home. That is changing. The European Union is on a path to institute its REACH regulations, which, in a few years, will make European environmental laws as uniformly stringent as any in the world. Other regions and countries are far less predictable, though the worldwide trend is toward more environmental regulation. Local counsel partners attuned to local political environments and the nuances of environmental regulation application are crucial in this area.
Financial reporting requirements. Translating different financial reporting standards from one country to another is usually excruciating. However, the problem seems most painful when foreign companies try to access US capital markets by going public via a US acquisition. Recent Sarbanes-Oxley legislation, which, among other things, requires CEO sign-off on financial results under threat of prison, adds still more pain.
This is where severe culture shock in all its difficult-to-manage manifestations is likely to arise. The CEO of a foreign company making a US public offering via an acquired subsidiary may nod his head in agreement when he hears of his company's new financial reporting requirements. But deep cultural understanding is necessary to determine whether that nod of agreement is the same in Italy or Japan as it is in the US. The test will come when it comes time to persuade middle management to actually institute the proper controls and methodologies for real-time disclosure to the Securities & Exchange Commission. The initial client reaction may well be one of "We know how to manage our own business."
Outside counsel (along with outside accountants) must be prepared to push back on such attitudes and to help train employees to create a whole new internal reporting infrastructure.
Antitrust Compliance. Globalization has brought with it a proliferation of merger review legislation. A transaction often may require notification to and approval from multiple jurisdictions before it can proceed. These requirements have significant implications for the deal, both substantive and logistical. They generally affect the timing of closing and sometimes, more fundamentally, lead to a modification of the transaction to alleviate regulatory concerns. On rare occasions, they may lead to an outright prohibition of the transaction.
There can be important differences in how the same transaction is viewed in different jurisdictions, either because the conditions of supply and demand for certain goods or services vary from region to region or because jurisdictions apply different substantive tests when reviewing transactions. A landmark event that signaled heightened foreign concern about competition and corporate dominance occurred in 2001, when the European Union ruled against the merger of General Electric and Honeywell International. At the time, the Europeans listened more closely to the complaints of European competitors to the two companies and saw a threat that the US Department of Justice did not.
However, instances of significant substantive divergence between the larger jurisdictions in cases involving international markets are relatively rare, and worldwide theories of competition are converging. Such convergence has been fostered by a growing international dialogue on the subject such as that organized by the International Competition Network, whose biannual meetings and working groups bring together competition experts from around the world. And new antitrust regulations adopted by the EU in May 2004, while still employing somewhat different wording than US law, are clearly emphasizing a trans-Atlantic consensus.
EU and US authorities increasingly cooperate. Antitrust representatives from both jurisdictions are likely to be present at oral hearings in major cases, and parties typically grant waivers so that both authorities can exchange information. Moreover, both jurisdictions may require similar kinds of commitments from the parties to remedy concerns they have. The result is that the analysis and outcome of the reviews in the EU and US are, in most cases, substantially similar.
Although substantive convergence makes managing multi-country review processes easier, the proliferation of legislation has created significant logistical barriers that may have the effect of delaying closing.
The first difficulty is in actually identifying whether and where obligations to notify the transaction exist. Individual national regulations have created widely varying thresholds as to when notification of merger must be made. In Germany and Brazil, for example, the threshold is overall sales. In Taiwan and Turkey, by contrast, it is, inter alia, market share of the products concerned. In some jurisdictions, very broad requirements for notification may be, to the cynical observer, little more than attempts to generate revenue from filing fees. Other thresholds are more focused and reflect genuine concern to protect competition in the jurisdiction.
Time limits and procedures for approval also differ considerably among jurisdictions. Thus, detailed, country-by-country merger analysis of the obligations and timing involved in national processes is of crucial importance when drawing up the timetable of an international merger or acquisition transaction. The wide variations in national and regional requirements necessitate a high degree of international coordination to optimally choreograph all notification and filing. Counsel, for example, will usually find it useful in speeding approval for a merger in Turkey to have already won approval from the European Union. Other regulatory requirements are notable primarily for the amount of time they consume in preparation of the filing. Ukraine, for example, requires (in addition to passport numbers of company directors) corporate documents to be notarized, legalized and translated into Ukrainian. All this must be factored into the timetable.
For antitrust-as for all other cross-border issues-it is essential that one deal manager coordinate all local interaction to ensure coherence and consistency of advocacy through all filings. This is particularly the case in light of inter-jurisdictional cooperation and the increased likelihood that any complainants will mount any opposition on a multinational basis.
Managing a cross-border transaction requires extraordinary attention both to overall business strategy and to myriad regulatory and cultural details. This can be achieved only by clear, centralized legal management working from a complete timetable tied to clearly assigned duties for a broad network of well-connected, culturally astute and responsive local participants.