Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • CapitaLand Limited
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • Bank of America Merrill Lynch
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek Holdings
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • China Ocean Shipping Group Company (COSCO)
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • Royal Ahold (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • Nishimura & Asahi (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Mannheimer Swartling (Stockholm)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Rolf Watter
  • Bär & Karrer AG (Zürich)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Monthly Archives: November 2013

SOUTH AFRICAN UPDATE – Public Interest a Key Factor in Merger Analysis

Editors’ Note: This article was contributed by Michael Katz, chairman and senior partner of Edward Nathan Sonnenbergs and a member of XBMA’s Legal Roundtable. It was authored by Edward Nathan Sonnenbergs director Ryan Goodman and associates Tebogo Hlafane and Kirsty van den Bergh.

Executive Summary:  Recently, public interest considerations (with particular reference to employment) in merger proceedings have become a focus area such that it is now common practice that the competition authorities are required to consider the effect which a proposed transaction will have on (i) a particular industrial sector or region, (ii) employment, (iii) the ability of small businesses or those controlled or owned by historically disadvantaged persons to become competitive, and (iv) the ability of national industries to compete in international markets.  While public interest considerations have frequently been viewed as a constraint to merger implementation, the tribunal’s expedited favorable ruling in the acquisition by Stefanutti Stocks of the business of Energotec indicates that public interests may, in certain circumstances, possibly provide a basis for an expedited merger approval.

Main Article: 

For a number of years, public interest considerations were considered to be ancillary to the competitive considerations in a merger analysis. Recently, however, public interest considerations (with particular reference to employment) in merger proceedings have become a focus area. It is now common practice that, in addition to establishing whether a proposed transaction will “substantially lessen or prevent competition”, the competition authorities are required, in terms of the Competition Act, to consider the effect which a proposed transaction will have on (i) a particular industrial sector or region, (ii) employment, (iii) the ability of small businesses or those controlled or owned by historically disadvantaged persons to become competitive, and (iv) the ability of national industries to compete in international markets.

The Metropolitan/Momentum merger in 2010 was the first indication of an increased focus on employment considerations in merger analyses. This trend has continued to develop in the cases of Kansai/ Freeworld, MassmartfWalmart and the Glencore/Xstrata merger. This increased focus has translated into the imposition of conditions by the competition authorities concerning the protection of jobs. Since this has generally resulted in increased costs, merging parties are often unhappy with this approach.

Notwithstanding this, recent experience shows that public interest concerns can possibly provide a basis for an expedited merger approval. In this regard, on August 14 2013 the Competition Tribunal heard and “conditionally” approved within four hours of having been provided with a copy of the Competition Commission’s recommendation, an acquisition by Stefanutti Stocks Proprietary Limited (a subsidiary of Stefanutti Stocks Holdings Limited) (Stefanutti Stocks) of all the assets which comprised the business carried out by Energotec, a division of First Strut (RF) Limited t/a the First Tech Group (First Strut) based on public interest considerations.

By way of background, due to severe financial distress, First Strut had, earlier this year, filed resolutions placing itself (and its various subsidiaries) under business rescue. After the appointed business rescue practitioners determined that there were no reasonable prospects for the Group to be rescued, they resolved to place the entire First Strut Group (including its subsidiary, Energotec) under provisional liquidation. In response to First Strut’s financial situation and a notice to the public issued by the liquidators that certain assets/businesses within the First Strut Group were up for sale, Stefanutti Stocks proposed acquiring the failing firm.

In its competitive analysis, the tribunal was comfortable that the proposed transaction was unlikely to result in a substantial prevention or lessening of competition. Importantly, however, the tribunal noted that the proposed transaction was likely to have a positive impact on public interest considerations. In this regard, due to First Strut’s financial distress, failure to speedily approve the transaction by the competition authorities would have resulted in job losses for about 667 Energotec employees.

In light of the foregoing negative impact on employment if the proposed transaction was not implemented, the tribunal conditionally approved it on the basis that Stefanutti Stocks not retrench more than 16 administrative employees as a consequence of the transaction. This has been one of the quickest turnaround times in which the tribunal has made a decision to approve a merger. The proposed transaction, which comprised a large merger, was filed with the commission, which investigated and referred same to the tribunal within three business days. The tribunal then urgently scheduled and conducted a hearing about four hours after receipt of the commission’s recommendation.

It is important to contrast the competition authorities’ prompt approval with the legislated time periods afforded to the commission and tribunal in respect of large merger proceedings. In this regard, the Competition Act allows the commission a 40-business day period within which to assess a proposed transaction and same can be extended by an unlimited number of 15 business day periods. Further, once the commission has made its recommendation, the tribunal is then required to set down a hearing date within 10 business days of receipt thereof. It is therefore clear from the foregoing that the competition authorities are beginning to view the protection of the public interest as one of the top priorities in merger analysis.

Although the commission had, during 2010, done away with its “fast track” procedure, the expedited completion of its investigation and the tribunal’s approval of the current transaction within a matter of hours of receipt of the commission’s recommendation is reflective of the competition authorities’ willingness to go the extra mile in expediting approval of mergers where there are no concerns from a competition law perspective but significant ramifications from a public interest perspective if not approved timeously.

While public interest considerations have frequently been viewed as a constraint to merger implementation, the tribunal’s expedited ruling in this regard indicates that public interests may, in certain circumstances, come as a blessing in disguise for those in need of expedited competition approval. Although it is clear that the competition authorities’ expedited approval of the Stefanutti transaction was as a result of circumstances peculiar to the transaction itself, the tribunal’s decision sparks hope that the competition authorities will give thorough consideration to public interest grounds when required by the facts on hand. Such an approach may be beneficial to merging parties and consumers if a failure to approve the proposed transaction would negatively impact on public interest.

ENS acted for First Strut/ Energotec in the merger proceedings before the commission and the tribunal in this matter.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

JAPANESE UPDATE – Letters Of Intent In Japanese M&A Transactions

Editors’ Note: Masakazu Iwakura is a Senior Partner at Nishimura & Asahi and a member of XBMA’s Legal Roundtable. This paper was co-authored Stephen D. Bohrer, Foreign Law Partner, and Daisuke Morimoto, Partner, of Nishimura & Asahi. As one of Japan’s leading M&A practitioners, Masakazu Iwakura has handled a variety of groundbreaking M&A transactions and serves on the boards of several public companies: COOKPAD Corporation, Imperial Hotel and GMO Internet. Mr. Iwakura is also a Professor at Hitotsubashi University Graduate School of International Corporate Strategy and is a Visiting Professor of Law at Harvard Law School in the 2013-2014 academic year.

Highlights:

  • A letter of intent is especially helpful in a cross-border transaction to memorialize the basic terms of a proposed deal when differences in culture, deal structuring techniques, due diligence styles, and documentation standards can add layers of challenge.
  • Typical provisions in a letter of intent are discussed below. The default rule under Japanese law is that a letter of intent is a binding agreement, unless the letter of intent expressly states that all or a portion of its terms are non-binding.
  • Japanese law provides for a “breach of trust” claim where one party has led the other party to reasonably believe that a definitive agreement between the parties would be subsequently executed. The article sets forth some of the elements of such a claim.
  • A listed company should disclose a letter of intent if (i) the proposed transaction is “material,” and (ii) a decision has been made by a party to proceed with the proposed transaction—this requirement to publicly disclose a transaction as a result of signing a letter of intent could increase interloper risk. It is a standard practice in Japan for a local anti-trust filing to be made only after the execution of an acquisition agreement that has been approved at a meeting of the target’s board of directors.

 

MAIN ARTICLE

Inbound Japanese M&A may have found an unexpected lifeline!  With the introduction of Abenomics and support from the Bank of Japan, from fourth quarter of 2012 through September 24, 2013, the Japanese Yen has depreciated approximately 27% against the U.S. Dollar and approximately 35% against the Euro. While the Nikkei has catapulted in value during this same time period, thereby increasing the trading prices of many publicly traded companies (which softens the greater purchasing power that overseas acquirors could have enjoyed through foreign exchange gains), not all of the quality publicly traded companies have seen their trading prices commensurately increase and the value of privately held Japanese companies does not always correlate to gains in stock exchange indices.

With the value of target Japanese companies potentially lower when expressed in foreign currency terms and Prime Minister Abe’s statement on June 19, 2013 that he is resolved to use all of his political power to double foreign direct investment into Japan to JPY35 trillion by 2020, M&A professionals could soon face a boom in inbound Japanese M&A and commercial transactions not seen for decades.  Should the ice thaw on inbound Japan transactions, then practitioners may need to sharpen their pencils and wipe the dust off their precedents in response to increased deal flow.  This article, provides an information booster shot on issues and drafting tips to consider when preparing a letter of intent for an inbound Japanese M&A transaction.

Why Have a Letter of Intent?

In Japanese M&A transactions, a letter of intent, memorandum of understanding, and term sheet essentially cover the same ground and follow the same practices, though the format and style of each document differs.  For purposes of this newsletter, we collectively refer to each as a “letter of intent.”

The letter of intent is often one of the first transaction documents that deal parties consider when undertaking an M&A transaction, and frequently sets the tone for the rest of the transaction in terms of negotiating style and establishment of trust.  The significance of this document can be heightened in the cross-border context.  While negotiating and documenting a corporate transaction is often a complicated and time consuming process in itself, a cross-border transaction adds further layers of challenge.  Additional hurdles in a cross-border transaction include differences in culture, deal structuring techniques, due diligence styles, and documentation standards.  Thus, a letter of intent is especially helpful in a cross-border transaction as this document memorializes the basic terms of a proposed deal, thereby providing the parties with basic assurances that they have reached a common understanding of the transaction before undertaking costly and time consuming due diligence and deal document preparation.  Of course, if the execution of a comprehensive letter of intent could require a party to publicly disclose the transaction or could expose a party to damages if it fails to execute a definitive agreement (as discussed below), then memorializing specific deal terms in a letter of intent could be counter-productive for a transaction party.

Typical Provisions in a Letter of Intent

There is no one-size-fits-all letter of intent for an inbound Japanese M&A transaction.  The following items could be considered baseline information to include in a letter of intent used in a non-auction context for an acquisition that is not a merger of equals:

  • a description of the structure of the transaction and a valuation of the target, including the purchase price or a purchase price range, and the material assumptions underlying the formulation of the purchase price (e.g., all outstanding stock options being cancelled, all target debt being paid off or assumed at closing, etc.);
  • the expected timetable for due diligence, signing of the definitive agreement and the closing;
  • the key conditions to signing (e.g., completion of due diligence, receipt of board approval, etc.);
  • a mutual confidentiality covenant concerning deal publicity; and
  • binding deal protection devices, such as a covenant by the seller not to engage in discussions with other parties pending the execution of the acquisition agreement, a conduct of business in the normal course covenant, walk-away fee, and other restrictive covenants.

When determining the use and scope of a letter of intent, practitioners also should consider whether the dynamics of the deal and time/expense concerns warrant the parties to (i) verbally agree on the major structuring points for the transaction (as opposed to preparing a written agreement), and thereafter (ii) promptly proceed to the operative agreement preparation stage.

Binding versus Non-Binding Letters of Intent

The default rule under Japanese law is that a letter of intent is a binding agreement, unless the letter of intent expressly states that all or a portion of its terms are non-binding.  While there are a number of ways to distinguish the binding from the non-binding provisions of a letter of intent (such as placing all of the binding provisions in one section of the letter of intent and the non-binding sections in another section), the practice in Japan is to include an express statement that the letter of intent is not intended to be a binding arrangement, except for specified provisions.

The following language could be used to indicate that an entire letter of intent is non-binding (with the understanding that the parties would need to carve out from this statement any provisions that they intend to be binding, such as confidentiality obligations and any walk-away fee payments):

 This letter of intent is for discussion purposes only and does not create or constitute a legally binding obligation between the parties or any of their affiliates.  Unless a definitive [acquisition agreement] is executed by the parties with respect to the matters contemplated by this letter of intent and all subsequently determined matters, none of the parties or any of their affiliates shall be entitled to any damages or other form of relief whatsoever based upon or arising from this letter of intent, the discussions related thereto, or the failure to enter into an [acquisition agreement].

Notwithstanding the inclusion of a provision stipulating that all or a portion of a letter of intent is non-binding, a party that seeks to break off discussions will need to consider whether such withdrawal can lead to liability.

Consequences of Breaking Off Discussions – Breach of Trust

Clearly, where a letter of intent states that it is a binding arrangement, a party withdrawing from discussions could face a breach of contract claim.  The situation is somewhat more complex with a non-binding letter of intent.

On one hand, under Japanese law a party can normally freely break off discussions after the entry into a non-binding letter of intent and refuse to execute a definitive agreement. On the other hand, such party could be exposed to damages under Japanese law if it has led the other party to reasonably believe that a definitive agreement between the parties would be subsequently executed.  Such false signaling by the withdrawing party would constitute a “breach of trust” under Japanese law.  Unlike other jurisdictions, Japanese law does not specifically focus the foregoing analysis on the existence of any express or implied covenant for a contracting party to negotiate in good faith.  Given the elements typically required to support a breach of trust claim, however, the distinction in this context between breaching a covenant to negotiate in good faith versus committing actions that cause a breach of trust to occur is most likely inconsequential.

There is no Japanese statute or other fixed criteria that Japanese courts use to evaluate whether a breach of trust occurred.  The existence of a breach of trust is highly fact specific and possibly influenced by the result that a particular judge considers as fair.  However, the existence of all or most of the following factors immediately before a party unilaterally withdraws from negotiations may likely lead a Japanese court to find the occurrence of a breach of trust:

  • the letter of intent is very detailed, providing an outline of essentially all of the principal terms of the proposed transaction;
  • the withdrawing party did not seriously intend to enter into a definitive agreement and used the letter of intent negotiations for ulterior motives;
  • the withdrawing party delays informing the counter-party of the existence of an event that requires it to withdraw from discussions or does not clearly indicate the non-fulfillment of a condition to proceed to documentation (e.g., the withdrawing party knows that it cannot obtain a third party consent to move forward with the proposed transaction, but it fails to promptly notify the other party of this impossibility or uses unequivocal language about its ability to satisfy such condition);
  • the withdrawing party knew that the counter-party expected that a definitive agreement would be executed; and
  • the non-withdrawing party did not breach any obligations owed to the withdrawing party.

In Advantage Partners KK, et al. v. Minowa Koa KK (2005), the Tokyo District Court provided helpful guidance on the scope and application of the breach of trust doctrine in the M&A context.

In the Advantage Partners case, Minowa Koa and Advantage Partners and other sellers (collectively referred to for ease of reference as “Advantage Partners”) entered into the equivalent of a letter of intent pursuant to which Advantage Partners agreed to sell to Minowa Koa shares that Advantage Partners held in Fuji Kikou Denshi KK.  The recitals in the letter of intent stipulated that the parties had essentially agreed to the Fuji Kikou Denshi share sale, but the share sale was subject to Minowa Koa being able to refinance a specified Fuji Kikou Denshi bank loan.  Shortly before the targeted execution date for a definitive share purchase agreement for the Fuji Kikou Denshi shares, Minowa Koa notified Advantage Partners that it would need to withdraw from the transaction because it could not obtain the requisite bank’s consent to refinance its loan to Fuji Kikou Denshi.  Advantage Partners sued Minowa Koa for damages.

The Tokyo District Court held that even though the letter of intent was a non-binding arrangement and any purchase of the Fuji Kikou Denshi shares by Minowa Koa was subject to the refinancing of a bank loan to Fuji Kikou Denshi, Minowa Koa breached its trust relationship with Advantage Partners by not disclosing for approximately one month that it was encountering difficulties obtaining the requisite bank’s consent to refinance its loan to Fuji Kikou Denshi (and, to the contrary, during this one-month period gave Advantage Partners the impression that obtaining such bank’s consent was a foregone conclusion).  The Tokyo District Court awarded Advantage Partners approximately JPY50,000,000 in damages.

The following are further points to consider when evaluating potential liability under Japanese law arising from breaking off discussions after the execution of a non-binding letter of intent:

  • Delicate balance of detail.  A heavily negotiated non-binding letter of intent that covers all of the essential terms for a proposed transaction will inherently have a higher probability of exposing a party to damages if it refuses to execute the deal (through a breach of trust argument) in comparison to a simple letter of intent negotiated over a short time period.  However, an analysis of potential damage exposure should not be made in isolation when considering the degree of specificity for a letter of intent, since due diligence traditionally commences after the execution of a letter of intent.  Thus, a party may strategically decide to execute a very detailed and highly negotiated letter of intent before it undertakes or permits due diligence even if there is a greater possibility for breach of trust damages as such potential damages may pale in comparison to the immediate costs that would be incurred in connection with a full due diligence exercise that screeches to a grinding halt because the parties subsequently learn that the basic parameters of the deal were not mutually understood.
  • Available damages.  In the Advantage Partners case, despite demonstrating that a breach of trust occurred, the Tokyo District Court awarded Advantage Partners only reliance damages.  Without receiving expectation damages (i.e., diminution in value, coupled with consequential and incidental damages), an aggrieved party may experience only a bittersweet victory.  The range of available damages may not only impact the eagerness of an aggrieved party to pursue an action, but may also influence a party’s calculation whether to walk away from a transaction as it can estimate its potential monetary exposure.
  • Termination Date.  A party may wish to include in a letter of intent a specific termination date for discussions (e.g., “this letter of intent will terminate on the earliest to occur of December 31, 2013 and a date nominated by buyer if it is not satisfied with the results of its due diligence investigation over the company”).  With a built-in termination date, a Japanese court may find that a counterparty could not form a reasonable expectation that a definitive agreement would be executed since a looming termination date always existed.  Of course, a termination date would not be an effective shield if a party simply refuses to negotiate or offers false pretenses in order for the termination date to lapse.

Public Disclosure and Antitrust Filings

A requirement to publicly disclose a transaction as a result of signing a letter of intent could increase interloper risk.  Accordingly, deal publicity is a sensitive issue to transaction parties.  The rules and regulations of the Tokyo Stock Exchange (and not Japanese corporate or securities laws) govern letter of intent disclosure obligations of a public company in Japan (private companies are not subject to mandated disclosure obligations).

Under Tokyo Stock Exchange rules, a listed company should disclose a letter of intent if (i) the proposed transaction is “material,” and (ii) a decision has been made by a party to proceed with the proposed transaction.  The materiality of a proposed transaction is assessed according to Tokyo Stock Exchange rules, a discussion of which is beyond the scope of this newsletter given their length.  As to whether a party has made a decision to proceed with a proposed transaction, factors considered include whether the letter of intent is binding or not, the degree of specificity of the letter of intent, and if the aim of the letter of intent is only to kick-start the due diligence and negotiation process.  Whether the letter of intent has been executed or omits a price or merger ratio will not have an outcome determinative impact on a public company’s disclosure obligations under Tokyo Stock Exchange rules, so long as the public company’s board of directors has reviewed the letter of intent and consented to move forward on the basis of such document.

There is a potential exemption from the requirement to disclose a letter of intent that details a material transaction that a party has decided to pursue.  If the public disclosure of the proposed transaction is likely to jeopardize the ability of the parties to consummate the transaction, then there is room to argue under Tokyo Stock Exchange rules that public disclosure of the letter of intent can be waived.  However, if news of the transaction has leaked to the public, then legal counsel should be consulted as the Tokyo Stock Exchange may more heavily scrutinize the public disclosure obligations of a listed company under such circumstances (and a “no comment to market rumors” response adopted by a listed company to such leak could be viewed by the Tokyo Stock Exchange as an unacceptable communication).

It is a standard practice in Japan for a local anti-trust filing to be made only after the execution of an acquisition agreement that has been approved at a meeting of the target’s board of directors.  Unlike other jurisdictions, an anti-trust filing cannot be submitted to the Japanese regulator merely upon the execution of a letter of intent, regardless of the binding nature of the letter of intent, the level of detail in the letter of intent, or the antitrust sensitivity of the proposed transaction.  The antitrust filing sequence in Japan is primarily due to (i) the requirement under Japanese antitrust laws that a copy of the executed acquisition agreement be furnished to the Japan Fair Trade Commission upon the first antitrust submission to the agency, and (ii) the practice adopted by most boards of directors in Japan that the board must approve the final version (and not a close-to-final version) of a material acquisition agreement.  Thus, a buyer eager to initiate a Japanese antitrust review process upon the execution of a letter of intent may face an impregnable wall.

* * * *

A letter of intent that is ambiguous or not carefully drafted may impose obligations and liabilities that one or both sides did not anticipate, and even serve as an invitation to litigation.  The advice of legal counsel ordinarily should be obtained to determine whether a letter of intent is desirable under the circumstances and, if so, which provisions should be binding and which should be non-binding, and how to effectively shield a party from breach of trust and other claims.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

GLOBAL STATISTICAL UPDATE – XBMA Quarterly Review for Third Quarter 2013

Editors’ Note: The XBMA Review is published on a quarterly basis in order to facilitate a deeper understanding of trends and developments.  In order to facilitate meaningful comparisons, the Review has utilized consistent metrics and sources of data since inception.  We welcome feedback and suggestions for improving the XBMA Review or for interpreting the data.

Executive Summary/Highlights:

  • Deal activity was relatively strong in Q3, with global M&A volume of US$717 billion, marking the second strongest quarter of the past two calendar years.
  • Strong Q3 performance was driven in part by Verizon’s $130 billion acquisition of Vodafone’s 45% interest in Verizon Wireless, the third largest deal in history.  Excluding Verizon/Vodafone, Q3 deal activity showed modest gains over Q2.
  • Cross-border M&A volume in 2013 is on pace to account for just over 30% of global M&A volume, down 6% as compared to 2012.
  • Global M&A activity in 2013 is on track to reach US$2.3 trillion, slightly lower than the annual average volume over the last three years.
  • Private equity deal activity in Q3 maintained pace with Q2 volume.  Private equity deals accounted for 14% of global M&A volume in the first three quarters of 2013, an increase of 16% over the corresponding period in 2012.

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The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

EU Update – European Union and Singapore Initial Free Trade Agreement

Editors’ Note: Geert Potjewijd is a partner at De Brauw Blackstone Westbroek, resident in Beijing, and a member of XBMA’s Legal Roundtable. This paper was authored by Dieter Wolff and Jaap de Keijzer, both partners at De Brauw Blackstone Westbroek. De Brauw Blackstone Westbroek is a leading Dutch law firm with broad expertise in M&A and governance matters.

Highlights:

  • The establishment of a free trade area between the EU and Singapore is expected to have significant benefits for Singapore and EU companies. Annual EU exports to Singapore could rise by EUR 1.4 billion over 10 years and annual exports by Singapore companies (including EU companies based in Singapore) could rise by EUR 3.5 billion.
  • Key arrangements include elimination of customs duties and relaxation or elimination of regulatory and technical requirements and further market liberalization.
  • The agreement also provides for consolidation of existing protection of Intellectual Property, standards of labour and environmental law, promotion of sustainable development and an improved dispute resolution mechanism.
  • This agreement may act as a catalyst for the establishment of more free trade areas between the EU and ASEAN member states, and in the long-term an agreement between the EU and all ASEAN countries.

 

Main Article:

The European Union and Singapore have initialled an agreement to establish a free trade area between the EU and Singapore after several years of negotiations. The EU-Singapore Free Trade Agreement (“EUSFTA”) is expected to enter into force in late 2014 or early 2015 and will give Singapore and EU companies further access to each other’s markets.

The EUSFTA is expected to have significant benefits for Dutch and other EU companies exporting products or services into Singapore, as well as for companies that have operations in Singapore (including Dutch and other EU companies) and import into the EU. The EUSFTA will also benefit the services industry, with improved possibilities to penetrate the Singapore market, re-establishing a level playing field with other foreign industry players.

Under the EUSFTA, there will be enhanced public procurement opportunities which should increase business opportunities in various sectors in which Dutch companies are active around the world. The EUSFTA is also considered an important step towards bilateral free trade agreements between the EU and other ASEAN member states.

This Legal Alert highlights the EUSFTA’s main features.

Trade barriers removed: best treatment approach
Free trade agreements remove trade barriers by eliminating customs duties, relaxing or eliminating regulatory and technical requirements and liberalising markets. The EU and Singapore, under the EUSFTA, are to grant each other favourable arrangements at least on par with comparable free trade agreements. Some of the key arrangements are outlined below.

Elimination of customs duties:

  • The EU is to eliminate virtually all customs duties for imports from Singapore within five years, with 75-80% of the duties being eliminated when the EUSFTA enters into force. Currently, approximately half of the imports from Singapore into the EU are free of customs duties.
  • Singapore is to continue the existing status of no customs duties on most EU imports into Singapore and eliminate remaining customs duties, such as the current customs duties on beer. Singapore, as part of its open economy strategy, already unilaterally applies no duties to most imports. The EUSFTA will provide comfort to EU exporters that this situation will not change.

Relaxation or elimination of regulatory and technical requirements and further market liberalisation:

  • Further access to the services market for both Singapore and the EU, including for the financial and insurance sectors, engineering and maritime transport
  • Mutual recognition of technical standards and certifications in different areas, such as cars, electronics and green technologies; and reduction of technical barriers to trade, including beneficial rules on marking and labelling, reducing the barriers and associated costs
  • Simplification of customs procedures and rules of origin, reducing trade transaction costs, while improving cooperation for the safety and security of legitimate trade
  • Re-evaluation and updating of Singapore’s import approval procedures for raw or processed products of animal and plant origin, in particular meat
  • Greater transparency over the award of licences
  • Improved transparency on pricing of / reimbursement for pharmaceutical products
  • Improvement of level playing field through rules on competition, including antitrust and state aid, and avoidance of detrimental licensing requirements affecting market accessibility and competition
  • Widening of access to public procurement, expanding parties’ existing commitments under the WTO
  • Government Procurement Agreement

The EUSFTA also provides for:

  • Consolidation of existing protection of Intellectual Property, and agreement on the basic rules of (noncriminal) enforcement; and better protection for geographical indications (GI) for European products in Singapore
  • Detailed arrangements regarding standards of law in the area of labour and the environment
  • Promotion of sustainable development including corporate and civil social responsibility
  • An improved dispute resolution mechanism, reducing time required and increasing transparency

Significant economic benefits for EU and Singapore companies
Singapore, with a population of 5.3 million, accounts for approximately one-third of all the trade between the EU and the ASEAN countries, making Singapore the EU’s largest trading partner in ASEAN (which has a consumer base of some 600 million people). There are more than 9,000 European companies established in Singapore. In 2012 the EU was the second largest trading partner of Singapore (after neighboring Malaysia) with an 11% share of Singapore’s total trade.

The Netherlands is an important economic partner to Singapore. Dutch companies in Singapore are involved in a wide range of industries, such as electronics, fast-moving consumer goods, food processing, oil & gas, chemicals, engineering, transport, financial and other services. In 2012, the Netherlands was Singapore’s third largest trading partner in the EU.

An economic analysis prepared by the Chief Economist Unit of the European Commission’s Directorate General for Trade states that as a result of the EUSFTA the annual EU exports to Singapore could rise by EUR 1.4 billion over 10 years and annual exports by Singapore companies (including EU companies based in Singapore) by EUR 3.5 billion.

Expected catalyst for free trade agreements with other ASEAN member states
The EU and ASEAN countries started discussions on a free trade agreement in 2007. Following slow progress the EU abandoned discussions in 2009 and started pursuing bilateral agreements. The EU is currently pursuing negotiations on bilateral free trade agreements with ASEAN members Malaysia, Thailand and Vietnam. The detailed arrangements negotiated between the EU and Singapore can be expected to assist those negotiations, acting as a catalyst for the establishment of more free trade areas between the EU and ASEAN member states, and in the long-term an agreement between the EU and all ASEAN countries.

Next steps
The draft EUSFTA is currently being translated into all official EU languages and will then be submitted for approval / ratification by the relevant authorities of the EU and Singapore.

The EU and Singapore are currently still negotiating arrangements on investment protection. The initialed version of the EUSFTA already includes an empty chapter for this topic and parties intend to include the outcome of these negotiations in the EUSFTA before it enters into force.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

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