Why all the fuss about "international" transactions? No two deals are the same, even when the parties speak the same language, live next door to each other and are doing a "cookie-cutter" transaction, such as a simple share purchase agreement.
Even in domestic transactions, we often face challenges that are the direct result of the different needs of clients and the ways in which they approach transactions-not to mention obstacles presented by the negotiating tactics of the lawyers.
Do international transactions present their own unique difficulties and challenges? Are they really any different than those transactions that are "local" in nature with their own unique characteristics? If the international deals are in fact different, how should they be managed so as to ensure their conclusion in a cost-effective, efficient and professional manner? The reader will hopefully find the answers to these questions by reading on.
First, what do we mean by an "international transaction"? If we reduce the term to its lowest common denominator, we are talking about a commercial transaction, the object of which (i.e., the shares or assets being acquired) is located in a foreign jurisdiction and where the parties are often, although not necessarily, located in different jurisdictions.
Accordingly, for example, from a Canadian lawyer's perspective, the purchase of a business in Canada by a foreign (i.e., non-Canadian) acquiror would not be an international transaction, even where the seller is non-Canadian. On the other hand, from the Canadian lawyer's perspective, the acquisition by a Canadian acquiror of a business in a foreign jurisdiction would qualify as an international transaction even if the seller is Canadian.
As the tentacles of our clients reach farther and farther afield, it is not uncommon for Canadian lawyers to represent clients (both Canadian and non-Canadian) who are making multi-jurisdictional acquisitions (which may not even involve Canada). For example, who would ever have thought that a Canadian law firm could represent the U.K. subsidiary of an Australian parent acquiring from a German seller 58 subsidiaries located in 26 different countries (none in Canada)?
As North American-trained Canadian lawyers, particularly those lawyers trained in both common and civil law and able to work in more than one language, we have a unique capability to accept and carry out large international transactions at least as well as lawyers in such major international business centers as New York and London (not to mention the added value resulting from our lower Canadian currency as compared to major currencies such as U.S. dollars, euros and pounds sterling).
So, what is different about managing an international transaction and what lessons can be learned in order to facilitate the process? The following is a list of distinguishing characteristics which will serve as a useful guide:
- selection of local counsel
- understanding unique aspects of local law
- conducting due diligence
- effective tax and other structuring issues
- competition law issues
- purchase price issues
- choice of law/dispute resolution
- master/local agreements
- language and cultural issues
- managing the task
Selecting Local Counsel
Local counsel will be required in each jurisdiction where the target (shares or assets) of the transaction is located; it will likely also be necessary to engage local counsel in the jurisdiction of the seller. The importance of choosing the right firm cannot be overstated. Quite aside from competence, issues such as confidentiality, trust and commitment are critical. It is also crucial that local counsel clear conflicts (and, in this regard, it is important to ensure that conflicts are cleared under Canadian standards, which are often more onerous than the standards in the local jurisdiction).
In many jurisdictions, information is a valuable currency, and it should not be assumed that foreign lawyers will adhere to the same ethical strictures as do Canadian lawyers. For this reason, a safe practice is to provide information only on a need-to-know basis. To provide additional protection, some clients may require all of their advisers (including lead counsel) to sign confidentiality agreements. This is not an unfair request, provided the covenants and undertakings are reasonable.
Unless the client already has an existing relationship with a particular local firm, the responsibility of selecting local counsel will normally lie with lead counsel. Accordingly, the lead counsel's firm should have extensive international experience and be able to identify and engage local counsel based upon an existing professional relationship.
Lead counsel must ensure that local counsel has all the required expertise. In certain instances, it may be necessary to engage more than one firm in a local jurisdiction, such as where the client already has an existing relationship with one firm which is familiar with the business and affairs of the target company but which does not have significant expertise in certain specialty areas, such as competition law. For example, serious problems could ensue should local counsel not be aware that the European Commission does not recognize privilege between in-house counsel and the client, nor does it recognize privilege between non-European counsel and the client.
Aspects of Local Law
Once local counsel has been selected, lead counsel will require the answers to many legal questions pertaining to the local jurisdiction, such as the following:
- Will the transaction affect previously-issued government permits, licenses, tax holidays, etc.?
- What governmental or regulatory consents are required?
- Are there any particular local securities law issues?
- Are minority shareholders granted any rights (e.g., rights of first refusal) under the local law and, if so, what are the relevant delays?
- Are there stamp, transfer or other similar duties?
- Are there foreign exchange controls?
- Are there pension and employment law issues?
- Can the purchaser sever the employees and, if so, what are the severance obligations?
- Can the purchaser modify the terms of employment and benefit plans?
- Is there a works council or other similar body, and is its consent to the transaction required?
- Are there particular environmental issues?
- Are there particular intellectual property issues?
- Is there a legal requirement for companies in the particular jurisdiction to have local shareholders/directors/managers, etc.?
- Is there a legal requirement in the particular jurisdiction concerning who can own real property?
- Will a contractual provision prohibiting an assignment of the contract be breached by a change of control?
- Is an existing noncompete of the seller binding upon the purchaser of the seller's assets?
- Is a noncompete covenant by the seller enforceable?
It is important that these and other similar questions be raised immediately following the engagement of local counsel, since the answers can have a material effect on the transaction, including negotiations and timing.
While most lawyers have their standard due diligence questionnaires, it will be necessary to adapt the questions so as to ensure that they focus on issues that are of a particularly local nature, including those mentioned above. In addition, language proficiency will very often become an issue in multi-jurisdictional transactions. It is not uncommon for the underlying documents in an international transaction to be in various languages in addition to English. Since there is a definite advantage for all legal due diligence to be carried out by lead counsel rather than at the local level, having lawyers in the office of lead counsel who possess the required language skills is a definite plus.
The due diligence review of contracts and related documents will normally focus on the commercial terms; in other instances (such as regards pension plans, government subsidies, etc.), however, it is essential that this material be reviewed by local counsel.
On large multi-jurisdictional transactions, we have found it very effective and cost-efficient to divide the world by geographic location and language, and then assign members of our due diligence team accordingly. This maximizes the output of our resources by having different team members working at different hours so as to facilitate communication with local counsel around the world both from a time and language perspective.
Effective Tax and Other Structuring Issues
Whenever you cross borders with money, tax and other structuring considerations come right to the forefront. It is the responsibility of lead counsel in an international transaction to determine the most tax-efficient way to have the money flowing both into a jurisdiction and flowing back out. This may involve critical issues associated with the repatriation of capital. In addition, consideration should be given to the possibility of flowing the money through various jurisdictions in order to minimize or eliminate taxes. By understanding how to weave together the tax treaties of various jurisdictions, it is remarkable how an experienced tax professional can significantly improve the after-tax effect of a transaction. Tax and structuring expertise in an international transaction will also be key when dealing with issues such as interest deductibility, withholding taxes, regulatory matters and the like.
Competition Law Issues
It is important to understand the transaction in its entirety in order to be sensitive to all of the competition law issues and potential pitfalls. Accordingly, it is imperative that the lead counsel team have significant international competition law experience, even though in many instances filings will be coordinated with local counsel. It is also important to involve lead and local competition counsel at an early stage. For example, does a signed letter of intent trigger filing delays in any of the affected jurisdictions (as may be the case in Brazil)? Can an acquisition of shares in Spain by a U.K. purchaser require competition law approval in a South American country? What are the thresholds for a competition law filing in each local jurisdiction? Does the target company have published literature or information on its Web site that defines the relevant market in a manner that is inconsistent with and potentially prejudicial to the manner in which the purchaser's relevant market is defined?
If the transaction will require the filing of a Hart-Scott-Rodino form in the U.S., competition counsel should advise all parties at a very early stage about the requirements regarding the documents, drafts, communications, reports, etc., that must be filed with the HSR form and the resulting sensitivities that this entails.
A clear and complete overview of the entire transaction from a competition law perspective can often represent the difference between the success and failure of an international transaction.
Purchase Price Issues
The purchase price allocation among the various countries in an international transaction can be a major source of contention between the parties. For example, the seller will normally want the purchase price to be allocated to jurisdictions where the seller will be paying a lower tax rate or can achieve other tax advantages, whereas the foregoing might not fit the buyer's plan. This will often lead to significant negotiations because the proposed purchase price allocation does not necessarily reflect the true value of the acquisition, in which case it will be very important to ensure that the indemnification provisions are not linked to the value allocated to specific jurisdictions. While the allocation of the purchase price among assets in a domestic transaction is also an important consideration, the situation becomes far more complicated when dealing with allocations between countries in an international transaction.
Choice of Law/Dispute Resolution
Parties from different jurisdictions will more often than not try to insist that the law of their particular jurisdiction be the governing law. And if the parties don't make a big issue of this, the lawyers probably will! It is obviously impossible for both parties to win this battle in an international transaction; accordingly, the parties and their lawyers should be practical and willing to compromise. Often, the decisive issue boils down to money: one party doesn't want to pay the cost of local counsel to review the contract because the other party is able to avoid this cost. When an issue can be resolved with money, there is always a solution. For that matter, it is often possible to agree on the laws of a third jurisdiction. New York law, for example, provides that even where the parties and the object of the transaction are not in New York, New York law is a valid choice as the governing law and the courts of New York will have jurisdiction where the value of the transaction is at least US$1 million. U.K. law is also very often an acceptable alternative.
The parties should ensure, however, that they are aware of any particularities that pertain to a specific jurisdiction. For example, in a recent negotiation involving a debate over whether the governing law in an international transaction would be Delaware or New York, the decision of the purchaser to insist upon New York law was based on the fact that New York courts are more likely than are the courts in Delaware to permit a purchaser to sue on a breach of a representation even where the purchaser was aware of the breach at the time of signing the contract.
It is very common for contracts dealing with international transactions to contain a dispute resolution mechanism. While numerous alternatives are available, neutrality is a fair and logical compromise. For example, in a transaction involving Chinese and American parties, the Chinese party will likely want to avoid the American Arbitration Association and instead settle on the London-based London Court of International Arbitration or the Paris-based International Chamber of Commerce. Whether the "home field" advantage is real or perceived, it is often a factor in determining which arbitration mechanism is to apply.
Even in a transaction involving acquisitions in a multiplicity of jurisdictions, it is preferable that there only be one master agreement which is negotiated and which contains all the terms and conditions of the entire transaction regarding all of the jurisdictions. Specific agreements dealing with a local component of the transaction should only be prepared when it is legally required. For example, in certain jurisdictions, such as Spain, it is necessary for the contract providing for a transfer of shares to be in Spanish and for it to be signed before a notary and then registered. In such instances, this "local" agreement should contain only the bare essentials and should rely on the representations, warranties, covenants, indemnities, etc., that are dealt with in the "master" document.
It is also not uncommon in a large multi-jurisdictional transaction for a condition of the transaction relating to a particular jurisdiction to be incomplete at closing. Where the missing component (such as a government approval) is not material to the transaction and the purchaser still wishes to close, the missing element notwithstanding, a separate agreement should be prepared to deal with the local problem, which would normally include a holdback of a portion of the purchase price, whereupon the parties will deal in the local agreement with the appropriate contingencies and relevant matters (such as who gets the profit and bears the losses of the local business during the interim period and what happens if the approval is never obtained).
Language and Cultural Issues
Sometimes the biggest hurdle to overcome in an international transaction are the language and cultural differences. During intense negotiations, one group may break into a foreign language, which leads the other party to suspect devious actions and bad faith. Cultural differences can often produce similar concerns: one side invites the other to join it for social activities during the negotiation process, whereas the other party prefers to remain alone. The problem is that by refusing the invitation, the party extending the invitation views the refusal as a supreme insult.
As lawyers and lead counsel, it is of paramount importance that non-divisive issues be dealt with at the outset of the negotiation process in the hope that this will create positive momentum. At the same time, lead counsel should try to establish a relationship with the "adversary" so as to break down as many barriers as possible at the commencement of the transaction. By so doing, there is a better chance that problems resulting from language and cultural differences will be minimized. We must never forget that in no event should personal differences among the lawyers be permitted to jeopardize the conclusion of a transaction.
Managing the Task
The larger the transaction-and the greater the number of jurisdictions-the greater the burden on lead counsel to maintain control over all key aspects and major developments regarding the deal. The client does not want to have to communicate with a large number of lawyers to ascertain how each aspect of the transaction is progressing. Accordingly, lead counsel must "quarterback" all aspects of the transaction and establish a mechanism whereby all material information resulting from the due diligence process flows to him/her quickly and efficiently. An effort should also be made to designate counterparts at the client to whom material information will be communicated on a regular ongoing basis by means of a critical issues log or other similar mechanism.
The successful conclusion of the international transaction is more likely to be assured by establishing at the outset a team whose responsibilities are clearly defined and by collaborating closely with the client so as to ensure efficient, cost-effective communication. At the same time, one cannot lose sight of the objective of the exercise, or of the need to deal with problems as they arise in a creative, flexible manner.