Proskauer Rose International Practice Guide Proskauer Rose LLP |
      Proskauer on International Litigation and Arbitration:
       Managing, Resolving, and Avoiding Cross-Border Business or Regulatory Disputes
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  1. Transaction Structure: Transaction structure is driven by tax, accounting, reporting, corporate, labor and other considerations.
    1. Structure covers many aspects including the following:
      1. Assuming a purchase transaction, whether the transaction will be structured as a merger or an asset or stock deal;
      2. What kind of legal entities would be doing the transaction and who would its/their ultimate owners be;
      3. Where would the entities participating in the transaction be incorporated and/or operated from; and
      4. What would be the sequence of the transactions.
    2. Typical cross-border issues that affect structure include the following:
      1. Regulatory compliance of the proposed transactions. These include antitrust and local tender offer rules as well as other regulatory frameworks that may require licensing or qualifications of various kinds.
      2. Regulatory compliance of the operation of the acquired business by the new buyer post acquisition. This is particularly true in regulated industries and needs to be considered in the acquirer’s jurisdiction as well as the jurisdiction of the target. These considerations could affect the type of entity that will do the acquiring and the jurisdiction where it is incorporated. If public companies are involved the relevant securities laws of the different entities involved may also be a factor.
      3. Tax implications including the interaction of the tax regimes of relevant jurisdictions. The analysis may result in adding entities in additional jurisdiction(s) because of its/their beneficial tax treatment.
      4. Other transaction costs. In addition to taxes, there are other transaction costs that can be minimized or eliminated by proper structuring of the transaction.
      5. Corporate approval required. For example, in certain jurisdictions a transaction may not require shareholder approval if structured as an asset deal but would require such approval is structured as a stock deal.
      6. Accounting rules: Accounting rules in different jurisdictions may treat a similar transaction in different ways, causing the parties to design the structure that best fits their needs. Currently, in the U.S. most companies use US GAAP, or US generally accepted accounting principles whereas internationally more and more companies are using IFRS, or International Financial Reporting Standards. While there is much talk about the possible convergence of these standards, at this point they are different and can cause some real headaches to the financial people on transactions and drive the structure to work around issues raised by the accounting treatment in one or more jurisdictions.
      7. Reporting. Reporting obligations, particularly for public companies, can be different depending on the structure of the transaction and can thus drive the structure depending on the parties’ desires as to how much and when to disclose information.
      8. Issues related to the financing of the transaction. Certain types of financing or certain lenders may be more or less comfortable with lending to different structures.
      9. Required consents. Structuring a transaction in certain ways may help minimize or eliminate the need for third party approvals.
      10. Required consultation of the works councils. In some countries (for example, in Europe) labor laws provide for mandatory information and consultation of the works councils of both the buyer and the seller before closing of the deal. Failure to properly inform and consult may lead to a suspension of the deal until completion of the consultation.
  2. Transaction Management: Transaction management issues while relevant to any transaction, in a cross-border transaction situation that involves multiple time zones, languages and cultures are significant.
    1. Effective management of a transaction is key to successful and timely completion. This requires:
      1. Assembling the appropriate team(s) to address issues. This includes legal and accounting counsel in the various jurisdictions as well as special counsel and consultants for specific items.
      2. Compiling the information received from all parties and understanding the different issues involved.
      3. Budgeting for the process. Typically, the more complicated a transaction becomes the more expensive it becomes. Transaction costs need to be considered in advance in evaluating the different structuring options.
      4. Creating a timetable and an effective mechanism for meeting that timetable.
      5. Creating a process for interacting with all related advisers and consultants, both on each party’s side and collectively.
      6. Facilitating an effective communications protocol, both internally and with the other parties. E-mail can be a very useful tool to disseminate necessary information, but can slow the efforts of individuals who receive more than is relevant to their respective pieces of the transaction.
  3. Governing Law: Choice of governing law is important for several reasons.
    1. Parties are allowed to address any issues specific to the chosen law and to assemble their legal team;
    2. It may affect the documentation of certain issues depending on the particularities of the law chosen; and
    3. It affects the documentation in general.
      1. Choice of U.S. or English law will usually result in a much more extensive document, primarily due to the “caveat emptor” tradition of the Anglo—American legal system that relies heavily on representations and warranties.
      2. Civil law governed documents tend to be much shorter due to the obligation to negotiate in good faith which is inherent in these legal systems and results in considerably less space and ink devoted to representations and warranties.
      3. In general, there is a growing tendency to adopt New York State law and the U.S. style documentation. New York State law is often chosen given the extensive body of case law the State has produced that relates to international transactions. Because New York State case law is sophisticated and impartial to plaintiffs from different countries it has wide international acceptance so that, even if the chosen forum is not New York State courts, choice of New York State law is a relatively good compromise.
  4. Enforceability: A good agreement is useless without the ability to enforce it. Acquiring a business in jurisdictions where the legal system is not developed or that are subject to an unstable political system requires the purchaser to evaluate not only the content of the local law but also the strength of the local legal system. If it is not possible to enforce a contract (or a portion of it) and/or a non-U.S. judgment concerning such contract in the relevant jurisdiction then the purchaser must do a different risk/benefit analysis.
    1. The parties’ legal and business due diligence will then be more important;
    2. The parties may seek other ways to structure the deal
      1. Requiring the posting of a letter of credit; or
      2. Making available as security a different asset which is located outside of the specific jurisdiction so that such party has confidence it can enforce its agreement, or at least have effective remedies for breaches.
  5. Negotiating the Preliminary Agreement: An early choice of governing law is particularly important due to differences in jurisdictions’ substantive law regarding preliminary agreements. In the U.S. it is customary to negotiate some type of preliminary agreement that sets out the basic terms of the deal. Typically, courts will find binding only those provisions of the agreement that purport to be binding. In other jurisdictions, however, this may not be so simple. Careful diligence is necessary to inform the parties of all of the obligations they might find themselves bound to under particular choices of law.
    1. Some jurisdictions may not recognize the binding nature of those provisions the parties intend to be binding without some formal act, such as notarizing.
    2. In some civil law jurisdictions, a court may read into a preliminary agreement or even the negotiation of the preliminary agreement, an obligation to negotiate the definitive agreement in good faith and could impose damages upon a party failing to do so.
    3. Enforceability of conditions precedent. Though customary in the U.S., in France and other European jurisdictions, a condition precedent, the satisfaction of which is determined at the discretion of the party whom the condition benefits, is not enforceable. Thus, while a typical clause in an American context that states that the transaction is conditioned upon completion of satisfactory due diligence at the purchaser’s sole discretion is not enforceable in a French court.
  6. Financing: Financing has been and continues to become an increasingly important factor of any significant transaction. Typically, an acquiring company in a cross-border transaction will have equity, senior debt, mezzanine and other forms of financing in the same manner that these are used domestically. However, financing decisions may be constrained by the laws of non-U.S. jurisdictions.
    1. Many countries limit deductions for interest expense for loans from related parties once certain debt levels are reached. Such rules limit the parties’ ability to use debt to shift tax charges from the jurisdiction where the investment is made to the jurisdiction of the investor.
    2. Another constraint may have to do with certain limitations on “financial assistance” where the target company (directly or through its subsidiaries) finances the acquisition of its own shares. While permissible in the U.S., other jurisdictions limit or prohibit this practice.
    3. There may be differences in perfecting security interests in collateral.
    4. In addition to arranging financing, lenders typically demand that the borrower’s counsel provide opinion letters as to the validity of the financing documentation and other matters. This task can become complicated when multiple jurisdictions and substantive laws are involved and will require local attorneys to complete the necessary investigations and perhaps provide portions of the opinions.
  7. Governmental Approvals: Often, the actual completion of a transaction or the operation of the acquired business post transaction require non-U.S. governmental approvals. These can be expensive and time consuming and may affect the basics of the deal. It is important to review these requirements in advance in order to structure the transaction appropriately as well as develop a realistic timetable. Local practice and cultural differences may result in significant differences. While in certain jurisdictions the letter of the law describes the procedures to be followed, in others it may be possible to expedite or do away with some requirements by more or less official communications with the relevant governmental authority. Two kinds of governmental approvals are worth highlighting.
    1. Governmental approvals that deal with competition related issues, which is addressed in more detail below.
    2. Governmental approvals that are triggered by the fact that significant ownership of a business is being acquired by a non-U.S. owner and may also relate to the type of business the target is engaged in (e.g., transactions with or for the local government) and the identity of buyer (e.g., buyers located in countries that are on a restricted list)
  8. Due Diligence and Disclosure Standards: A due diligence investigation is an important part of any transaction. A purchaser’s ability to inquire into the vitality of a potential target and the accuracy of its financial statements will test the effectiveness with which purchaser and its advisers have succeeded in coordinating the transaction. It must carefully assign the many tasks to be completed to appropriate advisors and assemble the resulting data in a useful fashion.
    1. The importance of due diligence increases as the comfort level of the purchaser with its ability to rely on legal documentation diminishes. Thus, due diligence is often a significantly more important and complex part of cross-border transactions and it is critical to have competent and reliable local counsel and other advisors.
    2. The complexity of due diligence in cross-border transactions is further increased by cultural differences. Whether in public securities filings or in private transactions, U.S. based parties tend to expect a significantly higher level of disclosure than those available in other jurisdictions. In part due to the good faith obligation in other systems and in part a result of tradition, this creates significant differences in expectations as to the time and attention that is devoted to the due diligence process and expectations as to the resulting product.
    3. To a large extent, the due diligence inquiry will resemble diligence on a domestic deal. Purchaser’s counsel must evaluate operations in various areas, probing for circumstances that are beyond the client’s taste for risk. There are, however, a few areas that warrant particular caution in non-U.S. jurisdictions.
      1. Transfers of title, particularly real estate and intellectual property, can be time consuming and tricky;
      2. Dealings with non-U.S. employment laws can be very different than those to which the purchaser is used to and purchaser would need to understand both the implications of the transaction itself (e.g., change of control payments, etc.) and its obligations to employees going forward;
      3. Diligence is necessary regarding matters that will affect the purchaser’s operation and reporting requirements post transaction.
        1. If purchaser is a U.S. entity, it would need to diligence if that target is complying and has complied in the past with the Foreign Corrupt Practices Act of 1977; and
        2. If purchaser is publicly traded in the U.S. it should investigate target’s compliance with the Sarbanes-Oxley Act of 2002, as once the target is acquired, purchaser’s reports would apply to the target business as well.
      4. Differences in practice
        1. In the UK, it is customary practice for a law firm to permit third-party reliance on a due diligence report prepared by the firm for its own client. In other words, the firm provides the report to parties other than its client and expressly permits the third parties to rely on it. This is most often done in the context of obtaining financing for an M&A transaction in order to expedite the due diligence review by the financing source. Third-party reliance is expressly permitted, but subject to an explicit cap on the issuing firm’s liability, which cap is enforceable in the UK.
        2. Also, in the UK, there is an emerging practice involving vendor due diligence reports, where the seller in an auction expressly commissions due diligence reports from one or more law firms to be provided to potential bidders in the auction on a non-reliance basis and, often, the winning bidder is expressly permitted to rely on the vendor due diligence reports (again, subject to a cap on the issuing firm’s liability). This practice is not customary in the U.S. and if such reports are provided to third parties they are typically provided only on a non-reliance basis.
  9. Closing the Transaction: Closing a cross-border transaction brings together many of the issues discussed above. In addition to completing all the substantive issues, closing the transaction represents a significant task of organization. While each act by itself may appear trivial, they all need to come together to move enormous amounts of money in a relatively short period of time. Some items to think about:
    1. Need for original signatures and notarization. The need for a notary by itself could complicate matters. The issue is further complicated by the fact that where in the U.S. many attorneys and their assistants are notaries, in some jurisdictions the notarization of a document is a much more formal act and requires more time (and expense).
    2. Scheduling one central or multiple local closings. This depends on what is being transferred and local laws related to registration. The issue is not simply one of coordinating different time zones and multiple filings but has other implications that need to be considered such as press announcements, regulatory filings, etc. Using direction letters which allow some money to be moved directly to its intended ultimate recipient could eliminate some steps in the transfer of funds but is not always possible. In India, for example, the selling party must actually receive the funds before they are transferred to a third party.
    3. Moving funds. Because funds transfer is limited by the banking hours of the relevant jurisdiction, multi-jurisdiction, multi-step , multi-time zone transactions deal with the issue of moving funds by depositing funds in escrow in advance in order to avoid a partially closed transaction. The parties must pay careful attention to arrangements relating to the escrowed funds and related interest (which could be significant in large deals) pre-closing as well as for arrangements if problems arise between the time one or more parties wire the funds into escrow and the time a closing is scheduled.
  10. Formalities and Procedures: In different jurisdictions, the formal act required to effect something may be completely different.
    1. Transferring stock in a private corporation in the U.S. requires a transfer document between the two parties and registration in the company’s transfer ledger. In other countries, such as in the Netherlands, it requires the involvement of a notary, which, as noted above, is a formal process before a third party that may have his own set of procedures.
    2. Similarly, in some jurisdictions it may be required or more practical to create specific documents such as share transfer deeds, bills of sales or even a short form purchase agreement to effect the transaction or to satisfy certain filing requirements, thus creating additional documents. Typically these documents and sometimes even the main document would need to be in the local language, which creates the possibility of having two official documents that are not exactly the same, due to the differences that are inherent in translation.
  11. Accounting: Accounting in cross-border transactions is complicated by varied accounting standards employed in different countries. Differences in accounting standards can affect reporting going forward and could also affect the purchaser’s ability to report the target’s results post acquisition.
    1. While recent pronouncements indicate that the U.S. may be moving to adopt the International Financial Reporting Standards, this is currently not the case.
  12. Securities Regulation and Reporting Requirements:
    1. Different jurisdictions may have differing securities rules. Thus, a valid private placement in one country may not be so in others.
    2. Local tender offer rules which can vary significantly from one jurisdiction to the other may affect timing and financing of a deal as well as its structure.
    3. Disclosure obligations are significantly different in different jurisdictions.
      1. Executives of a non-U.S. company that becomes subject to U.S. disclosure obligations may not be prepared for the level of disclosure required and the related costs and will need to prepare in advance for some of the required items.
      2. Similarly, the Sarbanes-Oxley Act requirement that management personally certify reports concerning internal controls over financial reporting are unique and could be an unexpected surprise.
  13. Competition Regulation: Many nations review transactions for potential anticompetitive effects and have different reporting standards.
    1. In the U.S. and many other countries, one needs to file a notice with the applicable governmental authority and cannot complete the transaction until such approval (or deemed approval by passage of time) is received. In Mexico; however, the filing is done post closing of the transaction and the parties have to take the risk that the transaction would be undone.
    2. Reporting statutes typically apply to a transaction in excess of a designated size and even relatively small transactions can result in a filing requirement. While the obligation to file is typically triggered by the acquisition of a business that conducts business in a jurisdiction, in certain jurisdictions it is triggered by the acquisition of any business that sells products or provides services in excess of the triggering amount. Thus, the parties may face the obligation to make a filing in a country where neither has any operations.
    3. Filings may be required in more than one jurisdiction. The parties need to make sure that the reports are coordinated or consistent to avoid needless delays in receiving all relevant approvals.
    4. An additional layer of complexity exists when acquiring a competitor. Many countries, including the U.S., limit the information that can be shared (and when it can be shared) as part of the due diligence period. This is another area where knowledge of local laws and familiarity with customs and practice are critical when making the many judgment calls required by the deal team.
  14. Environmental Regulation: Environmental regulation is becoming an increasingly important issue. While some countries have a very developed body of rules on certain aspects, others may have less or emphasize others (e.g., rules related to release of hazardous substances as opposed to rules focused on health and safety). However, if the business acquired is likely to involve hazardous materials or pose other environmental risks, it would be advisable to talk with local counsel to determine what the applicable (or proposed) rules would look like.
  15. Employee Matters: Different jurisdictions have different approaches to handling employees of the target.
    1. In the U.S., employees do not transfer, and there is no requirement that a buyer hire seller’s employees in an asset purchase.
    2. In France and other European countries employees automatically transfer to the buyer upon the sale of assets to which they are associated if the business is sold as a going concern. In such “automatic transfer” jurisdictions, the terms of workers’ employment must generally remain the same.
    3. In addition, some automatic transfer jurisdictions require that employees approve or be notified of the purchase and sale agreements and if the purchaser fires workers following a transaction, it may be liable to make considerable severance payments. Furthermore, in the EU legislation provides that the works councils must be informed and consulted before the transfer takes place.
  16. Dispute Resolution and Forum Choice Clause: Other chapters of this Guide address the force and effect of contractual clauses that anticipate and provide for the resolution of disputes under a contract, such as arbitration, choice of law, and choice of forum clauses. In addition to the aspects that are indigenous to choosing a different substantive law and legal system, these provisions have other effects.
    1. Expense. Clearly, traveling to and hiring lawyers in a different jurisdiction could add up to a considerable expense. If the effect is not similar on both parties it could give one party an advantage on the others.
    2. Home Court Advantage. While this may not be always the case, a party should always be wary of litigating in the other party’s home court.
  17. Extraterritorial Statutes: Doing a transaction offshore and/or choosing a law does not always mean that a company’s home country laws do not apply to it. These rules are relevant not only in a company’s operations but also when it acquires any company that has international operations as it will need to confirm that the purchased entity does not violate any of these rules.
    1. The U.S. has certain laws with extraterritorial reach that a U.S. company must abide in its operations or transactions abroad. Thus, a U.S. based corporation must comply with rules established by the Office of Foreign Asset Control which prohibit transactions with certain individuals or companies based in certain countries. For a discussion of the extraterritorial reach of U.S. laws, please refer to Chapter 25 of this Guide.
    2. The Patriot Act also is intended to strengthen U.S. measures to prevent, detect, and prosecute international money laundering and the financing of terrorism, and to that end imposes currency controls and other strictures that may affect the banking, financial, and investment communities in their efforts to structure and finance cross-border transactions.

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