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
  • Changi Airport Group
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • BCC Partners
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek International Pte. Ltd.
  • 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
  • Kazakhstan Potash Corporation Limited
  • 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
  • De Brauw Blackstone Westbroek N.V. (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • TMI Associates (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
  • Jurie Advokat AB (Sweden)
  • 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)
  • 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

Protectionism & Constraints

U.S. UPDATE – 2018 Checklist for Successful Acquisitions in the United States

Editors’ Note: This submission updates a checklist co-authored by Messrs. Emmerich and Panovka, members of XBMA’s Legal Roundtable, with their colleagues at Wachtell Lipton David A. Katz, Scott K. Charles, Ilene Knable Gotts, Andrew J. Nussbaum, Joshua R. Cammaker, Mark Gordon, T. Eiko Stange, William Savitt, Eric M. Rosof, Joshua M. Holmes, Emil A. Kleinhaus, Gordon S. Moodie, Edward J. Lee and Raaj S. Narayan.

Global M&A accelerated in the fourth quarter of 2017, driven in part by tech expansion and strong economies in several key markets, and there are many signals pointing to a continued strong pace of transactions, including in the U.S. Overall M&A volume in 2017 continued to be robust, reaching $3.6 trillion, approximately 35% of which involved cross-border deals. Four of the ten largest non-hostile deals announced in 2017 were cross-border transactions.

U.S. targets accounted for approximately $1.4 trillion (approximately 40%) of last year’s deal volume, with approximately 18% of U.S. deals involving non- U.S. acquirors. German, French, Canadian, Japanese and U.K. acquirors accounted for approximately 55% of the volume of cross-border deals involving U.S. targets, and acquirors from China, India and other emerging economies accounted for approximately 6% (down from approximately 15% in 2016). Cross-border deals involving U.S. targets included a number of noteworthy transactions, including Reckitt Benckiser’s $17 billion acquisition of Mead Johnson and JAB’s $7 billion acquisition of Panera Bread.

Based on the current economic environment and recent U.S. tax legislation, we expect the pace of cross-border deals into the U.S. to remain strong. As always, advance preparation, strategic implementation and deal structures calibrated to anticipate likely concerns will continue to be critical to successful acquisitions in the U.S. The following is our updated checklist of issues that should be carefully considered in advance of an acquisition or strategic investment in the U.S.  Because each cross-border deal is unique, the relative significance of the issues discussed below will depend upon the specific facts, circumstances and dynamics of each particular situation.

  • Political and Regulatory Considerations. Investment into the U.S. remains mostly well-received and generally not politicized. But the Trump administration’s periodic policy departures and “America First” rhetoric and policy make it more important than ever that prospective non-U.S. acquirors of U.S. businesses or assets undertake a thoughtful analysis of U.S. political and regulatory implications well in advance of any acquisition proposal or program. This is particularly so if the target company operates in a sensitive industry; if post-transaction business plans contemplate major changes in investment, employment or business strategy; or if the acquiror is sponsored or financed by a foreign government or organized in a jurisdiction where a high level of government involvement in business is generally understood to exist.  The likely concerns of federal, state and local government agencies, employees, customers, suppliers, communities and other interested parties should be thoroughly considered and, if possible, addressed before any acquisition or investment proposal becomes public. It is also essential to implement a comprehensive communications strategy, focusing not only on public investors but also on these other core constituencies, prior to the announcement of a transaction so all of the relevant constituencies may be addressed with appropriately tailored messages. It will often be useful, if not essential, to involve experienced public relations firms at an early stage in the planning process of any potentially sensitive deal. Similarly, potential regulatory hurdles require sophisticated advance planning. In addition to securities and antitrust regulations, acquisitions may be subject to CFIUS review (discussed below), and acquisitions in regulated industries (e.g., energy, public utilities, gaming, insurance, telecommunications and media, financial institutions, transportation and defense contracting) may be subject to an additional layer of regulatory approvals. Regulation in these areas is often complex, and political opponents, reluctant targets and competitors may seize upon perceived weaknesses in an acquiror’s ability to clear regulatory obstacles as a tactic to undermine a proposed transaction. High- profile transactions may also result in political scrutiny by federal, state and local officials. Finally, depending on the industry involved and the geo- graphic distribution of the workforce, labor unions will continue to play an active role during the review process. Pre-announcement communications plans must take account of all of these interests.
  • Transaction Structures. Non-U.S. acquirors should consider a variety of po- tential transaction structures, particularly in strategically or politically sensi- tive transactions. Structures that may be helpful in sensitive situations to overcome potential political or regulatory resistance include no-governance and low-governance investments, minority positions or joint ventures, possibly with the right to increase ownership or governance rights over time; partnering with a U.S. company or management team or collaborating with a U.S. source of financing or co-investor (such as a private equity firm); utilizing a controlled or partly controlled U.S. acquisition vehicle, possibly with a board of directors having a substantial number of U.S. citizens and prominent U.S. citizens in high-profile roles; or implementing bespoke governance structures (such as a U.S. proxy board) with respect to specific sensitive subsidiaries or businesses of the target company. Use of debt or preferred securities (rather than common stock) should also be considered. Even seemingly more modest social issues, such as the name of the continuing enterprise and its corporate location or headquarters, or the choice of the nominal legal acquiror in a merger, can affect the perspective of government and labor officials.
  • CFIUS. Under current U.S. federal law, the Committee on Foreign Investment in the United States (CFIUS) – a multi-agency governmental body chaired by the Secretary of the Treasury, the recommendations of which the President of the United States has personal authority to accept or reject – has discretion to review transactions in which a non-U.S. acquiror could obtain “control” of a U.S. business or in which a non-U.S. acquiror invests in U.S. infrastructure, technology or energy assets, in order to evaluate whether such transactions could pose a risk to U.S. national security. That authority was notably used in 2016 to block the Aixtron and Lumileds transactions, and in 2017 reportedly to cause the abandonment of transactions including U.S. electronics maker Inseego’s sale of its MiFi business to TCL Industries; HNA Group’s proposed investment in Global Eagle Entertainment, a U.S.- based in-flight services company; and Canyon Bridge Capital Power’s acquisition of Lattice Semiconductor (following President Trump’s issuance of an executive order to block the transaction). Although filings with CFIUS are voluntary, CFIUS also has the ability to investigate transactions at its discretion, including after the transaction has closed. While it is still not clear if and how CFIUS’s review of cross-border transactions will change during the Trump administration, the last year has been marked by a greater number of CFIUS filings, resulting in longer overall review periods for most transactions. Moreover, pending U.S. congressional legislation would expand CFIUS’s review period, increase the scope of transactions subject to CFIUS’s jurisdiction, make certain notifications mandatory and allow for expedited review and approval of certain transactions. This legislation, if enacted, would heighten further the potential role of CFIUS and the need to factor into deal analysis and planning the risks and timing of the CFIUS re- view process.

We recommend three rules of thumb in dealing with CFIUS:

  1. In general it is prudent to make a voluntary filing with CFIUS if an investigation is reasonably likely or if competing bidders are likely to take advantage of the uncertainty of a potential investigation.
  2. It is often best to take the initiative and suggest methods of mitigation early in the review process in order to help shape any remedial measures and avoid delay or potential disapproval.
  3. It is often a mistake to make a CFIUS filing before initiating discussions with the U.S. Department of the Treasury and other officials and relevant parties. In some cases, it may even be prudent to make the initial contact prior to the public announcement of the transaction. CFIUS is not as mysterious or unpredictable as some fear – consultation with the U.S. Department of the Treasury and other officials(who, to date, have generally been supportive of investment in the U.S. economy) and CFIUS specialists will generally provide a good sense of what it will take to clear the CFIUS process. Retaining advi- sors with significant CFIUS expertise and experience is often crucial to successful navigation of the CFIUS process. Transactions that may require a CFIUS filing should have a carefully crafted communications plan in place prior to any public announcement or disclosure. In addition, given that CFIUS will require a draft filing in advance of the official filing, building in sufficient lead time is essential.

Although practice varies, some transactions in recent years have sought to address CFIUS-related non-consummation risk by including reverse break fees specifically tied to the CFIUS review process. In some of these transactions, U.S. sellers have sought to secure the payment of the reverse break fee by requiring the acquiror to deposit the amount of the reverse break fee into a U.S. escrow account in U.S. dollars, either at signing or in installments over a period of time following signing. While still an evolving product, some insurers have also begun offering insurance coverage for CFIUS- related non-consummation risk, covering payment of the reverse break fee in the event a transaction does not close due to CFIUS review, at a cost of ap- proximately 10 – 15% of the reverse break fee.

  • Acquisition Currency. Cash is the preponderant form of consideration in cross-border deals into the U.S., with all-cash transactions representing approximately two-thirds of the volume of cross-border deals into the U.S. in 2017 (up from approximately one-half in 2015 and 2016), as compared to approximately 45% of the volume of all deals involving U.S. targets in 2017. However, non-U.S. acquirors should think creatively about potential avenues for offering U.S. target shareholders a security that allows them to participate in the resulting global enterprise. For example, publicly listed acquirors may consider offering existing common stock or depositary receipts (e.g., ADRs) or special securities (e.g., contingent value rights). When U.S. target shareholders obtain a continuing interest in a surviving corporation that had not already been publicly listed in the U.S., expect heightened focus on the corporate governance and other ownership and structural arrangements of the non-U.S. acquiror, including as to the presence of any controlling or large shareholders, and heightened scrutiny placed on any de facto controllers or promoters. Creative structures, such as the issuance of non-voting stock or other special securities of a non-U.S. acquiror, may minimize or mitigate the issues raised by U.S. corporate governance concerns. The world’s equity markets have never been more globalized, and the interest of investors in major capital markets to invest in non-local business never greater; equity consideration, or an equity issuance to support a transaction, should be considered in appropriate circumstances.
  • M&A Practice. It is essential to understand the custom and practice of U.S. For instance, understanding when to respect – and when to challenge – a target’s sale “process” may be critical. Knowing how and at what price level to enter the discussions will often determine the success or failure of a proposal; in some situations it is prudent to start with an offer on the low side, while in other situations offering a full price at the outset may be essential to achieving a negotiated deal and discouraging competitors, including those who might raise political or regulatory issues. In strategically or politically sensitive transactions, hostile maneuvers may be imprudent; in other cases, unsolicited pressure might be the only way to force a transaction. Takeover regulations in the U.S. differ in many significant respects from those in non-U.S. jurisdictions; for example, the mandatory bid concept common in Europe, India and other countries is not present in U.S. practice. Permissible deal protection structures, pricing requirements and defensive measures available to U.S. targets will also likely differ in meaningful ways from what non-U.S. acquirors are accustomed to in their home jurisdictions. Sensitivity must also be shown to the distinct contours of the target board’s fiduciary duties and decision-making obligations under state law. Finally, often overlooked in cross-border situations is how subtle differences in language, communication expectations and the role of different transaction participants can affect transactions and discussions; preparation and engagement during a transaction must take this into account.
  • U.S. Board Practice and Custom. Where the target is a U.S. public company, the customs and formalities surrounding board of director participation in the M&A process, including the participation of legal and financial advisors, the provision of customary fairness opinions and the inquiry and analysis surrounding the activities of the board and financial advisors, can be unfamiliar and potentially confusing to non-U.S. transaction participants and can lead to misunderstandings that threaten to upset delicate transaction negotiations. Non-U.S. participants need to be well advised as to the role of U.S. public company boards and the legal, regulatory and litigation frame- work and risks that can constrain or prescribe board action. These factors can impact both tactics and timing of M&A processes and the nature of communications with the target company.
  • Distressed Acquisitions. Distressed M&A is a well-developed specialty in the U.S., with its own subculture of sophisticated investors, lawyers and financial advisors. The U.S. continues to be a popular destination for restructurings of multinational corporations, including those with few assets or operations in the U.S., because of its debtor-friendly reorganization laws. Among other advantages, the U.S. bankruptcy system has expansive jurisdiction (such as a worldwide stay of actions against a debtor’s property and liberal filing requirements), provides relative predictability in outcomes and allows for the imposition of debt restructurings on non-consenting creditors, making reorganizations more feasible. In recent years, court-supervised “Section 363” auctions of a debtor’s assets (as opposed to the more tradi- tional Chapter 11 plan of reorganization) have become more common, in part because they can be completed comparatively quickly, efficiently and cheaply. Additionally, large non-U.S. companies have increasingly turned to Chapter 15 of the U.S. Bankruptcy Code, which accords debtors that are already in insolvency proceedings abroad key protections from creditors in the U.S. and  has facilitated restructurings and asset sales approved outside the U.S. Firms evaluating a potential acquisition of a distressed target based in the U.S. should consider the full array of tools that the U.S. bankruptcy process makes available, including acquisition of the target’s fulcrum debt securities that are expected to be converted into equity through an out-of- court restructuring or plan of reorganization, acting as a plan investor or sponsor in connection with a plan of reorganization, backstopping a plan- related rights offering or participating as a bidder in a “Section 363” auction. Transaction certainty is critical to success in a transaction in bankruptcy, and non-U.S. participants accordingly need to plan carefully (particularly with respect to transactions that might be subject to CFIUS review, as discussed above) to ensure they will be on a relatively level playing field with U.S. bidders. Acquirors must also be aware that they will likely need to address the numerous constituencies involved in a bankruptcy case, each with its own interests and often conflicting agendas, including bank lenders, bond- holders, distressed-focused hedge funds and holders of structured debt securities and credit default protection, as well as landlords and trade creditors.
  • Debt Financing. While recent trends that have influenced acquisition financing seem positioned to continue in 2018, the recent U.S. tax legislation could alter the course of these trends in significant ways. Modestly rising interest rates and generally strong reception for acquisition financings in both the investment grade and high-yield markets continue to provide oppor- tunity to lock in attractive long-term fixed rates to finance acquisitions. Moreover, as anticipated in our 2017 memo, U.S. regulatory oversight of banks that led to leveraged lending constraints appears to be relaxing in practice, with banks providing acquirors more flexibility to finance acquisitions at higher leverage levels.The recently enacted U.S. tax legislation, described in greater detail below, could influence these trends in a number of ways. First, the new law vastly reduces the incentives for U.S. parented multinationals to hold cash off- shore, which cash will now be available for U.S. parent corporations to repay debt or for alternative purposes (e.g., share buybacks or M&A) that oth- erwise may have necessitated incremental borrowings in the U.S. Second, the new law limits deductions for net business interest expense, imposes additional limitations on deductible payments to non-U.S. affiliates and denies deductions for amounts paid or accrued in respect of certain “hybrid” arrangements. The potential limitations on interest expense deductibility aris- ing from these rules need to be carefully considered in connection with any potential acquisition of a U.S. target. In addition, financing-related market trends and developments generally should be monitored in planning acquisitions in the U.S.Important questions to ask when considering a transaction that requires debt financing include: what the appropriate leverage level for the resulting business is; where financing with the most favorable after-tax costs, terms and conditions is available; what currencies the financing should be raised in; how fluctuations in currency exchange rates can affect costs, repayment and covenant compliance; how committed the financing is or should be; which lenders have the best understanding of the acquiror’s and target’s businesses; whether there are transaction structures that can minimize financing and refinancing requirements; and how comfortable a target will feel with the terms and conditions of the financing.
  • Litigation. Shareholder litigation accompanies many transactions involving a U.S. public company but generally is not a cause for concern. Excluding situations involving competing bids – where litigation may play a direct role in the contest – and going-private or other “conflict” transactions initiated by controlling shareholders or management – which form a separate category requiring special care and planning – there are very few examples of major acquisitions of U.S. public companies being blocked or prevented due to shareholder litigation or of materially increased costs being imposed on arm’s-length acquirors. In most cases, where a transaction has been proper- ly planned and implemented with the benefit of appropriate legal and in- vestment banking advice on both sides, such litigation can be dismissed or settled for relatively small amounts or other concessions. Moreover, the rate of such litigation (and the average number of lawsuits per deal) has declined in recent years, due in part to changes in the law that reduced the incentives for shareholder plaintiffs’ attorneys to bring such suits. Sophisticated counsel can usually predict the likely range of litigation outcomes or settlement costs, which should be viewed as a cost of the deal.While well-advised parties can substantially reduce the risk of U.S. share- holder litigation, the reverse is also true: the conduct of the parties during negotiations can create an unattractive factual record that may both encourage shareholder litigation and provoke judicial rebuke, including significant monetary judgments. Sophisticated litigation counsel should be included in key stages of the deal negotiation process. In all cases, the acquiror, its di- rectors and shareholders and offshore reporters and regulators should be conditioned in advance (to the extent possible) to expect litigation and not to view it as a sign of trouble. In addition, it is important to understand that the U.S. discovery process in litigation is different, and in some contexts more intrusive, than the process in other jurisdictions. Here again, planning is key to reducing the risk.Likewise critical is careful consideration of the litigation aspects of a cross- border merger agreement. The choice of governing law and the choice of forum to govern any potential dispute between the parties about the terms or enforceability of the agreement will substantially affect the outcome of any such dispute and may be outcome-determinative. Parties entering into cross- border transactions should consider with care whether to specify the remedies available for breach of the transaction documents and the mechanisms for obtaining or resisting such remedies.
  • Tax Considerations. President Trump recently signed into law sweeping changes to business-related U.S. federal income tax rules that are expected to have far-reaching implications for U.S. domestic and multinational busi- nesses, as well as domestic and cross-border transactions. Among other things, the new law significantly reduces corporate tax rates, permits full expensing of certain property, adopts features of a “territorial” tax regime and imposes additional limitations on the deduction of business interest and various related-party payments. By reducing the “headline” corporate tax rate below that of many Organisation for Economic Co-operation and Develop- ment (OECD) countries, the new law makes conducting business in the U.S. more attractive. But, to pay for the reduced rates and migration to a “territorial” tax regime, the new law contains numerous revenue raising provisions as well. While a comprehensive summary is beyond the scope of this check- list (for more detail, see our memo of December 23, 2017), key changes inU.S. business taxation include the following:
    • A permanent reduction of the corporate federal income tax rate to 21%, and full expensing of depreciable tangible assets placed in service during the next five years.
    • A move toward a “territorial” tax system that generally eliminates tax on dividends received by a domestic corporation from a 10% owned non-U.S. corporation (and that may also eliminate tax on gain recog- nized upon a sale or disposition of such stake in a non-U.S. corpora- tion). The new law mandates a one-time income inclusion by 10% U.S. shareholders of the historic earnings of a non-U.S. subsidiary, generally at a tax rate of 15.5% or 8%, depending on whether such earnings were invested in cash or other assets. The international tax regime also includes new rules that are intended to deter U.S. corporations from shifting profits out of the U.S. and, to this end, taxes 10% U.S. shareholders on the “global intangible low-taxed income” of a non-U.S. subsidiary (generally, the non-U.S. subsidiary’s earnings in excess of a deemed 10% return on tangible assets), and provides a favorable deduction relating to income deemed attributable to sales of property for non-U.S. use or services provided to a person outside the U.S.
    • The new law limits deductions for net business interest expense to 30% of an amount that approximates EBITDA (and, beginning in 2022, EBIT), limits deductible payments made from U.S. to non-U.S. affiliates in multinational groups by way of a “base erosion” tax and prohibits deductions for certain interest and royalty payments to relat- ed non-U.S. parties pursuant to “hybrid” arrangements. In addition, the use of a corporation’s net operating loss carryforwards in any par- ticular year will be limited to 80% of taxable income.
    • The new law includes additional rules intended to deter “inversion” transactions.

The totality of these changes may shift transaction dynamics in complex and potentially unanticipated ways that will unfold over time. Specifically, we anticipate that (i) eliminating the incentives for U.S. parented multinationals to hold cash offshore could free up a significant portion of such cash for domestic and cross-border acquisitions by U.S. corporations, (ii) in cross- border transactions involving the receipt of acquiror stock, the identity of the acquiring entity will continue to be affected by the U.S. anti-“inversion” rules, and (iii) the changes to the U.S. international tax regime are unlike to establish the U.S. as an attractive holding company jurisdiction due to the retention and expansion of complex “controlled foreign corporation” rules.

Potential acquirors of U.S. target businesses will need to carefully model the anticipated tax rate of such businesses, taking into account the benefits of the reduced corporate tax rate, immediate expensing and, if applicable, the fa- vorable deduction for export-related activities, but also the impact of the new limitations on interest expense deductions and certain related-party payments, as well as the consequences of owning non-U.S. subsidiaries through an intermediate U.S. entity.

  • Disclosure Obligations. How and when an acquiror’s interest in the target is publicly disclosed should be carefully controlled and considered, keeping in mind the various ownership thresholds that trigger mandatory disclosure on a Schedule 13D under the federal securities laws and under regulatory agency rules such as those of the Federal Reserve Board, the Federal Energy Regulatory Commission (FERC) and the Federal Communications Commis- sion (FCC). While the Hart-Scott-Rodino Antitrust Improvements Act (HSR) does not require disclosure to the general public, the HSR rules do require disclosure to the target before relatively low ownership thresholds may be crossed. Non-U.S. acquirors should be mindful of disclosure norms and timing requirements relating to home jurisdiction requirements with respect to cross-border investment and acquisition activity. In many cases, the U.S. disclosure regime is subject to greater judgment and analysis than the strict requirements of other jurisdictions. Treatment of derivative securities and other pecuniary interests in a target other than common stock holdings can also vary by jurisdiction.
  • Shareholder Approval. Because most U.S. public companies do not have one or more controlling shareholders, public shareholder approval is typically a key consideration in U.S. transactions. Understanding in advance the roles of arbitrageurs, hedge funds, institutional investors, private equity funds, proxy voting advisors and other market players – and their likely views of the anticipated acquisition attempt as well as when they appear and disappear from the scene – can be pivotal to the success or failure of the transaction. These considerations may also influence certain of the substan- tive terms of the transaction documents. It is advisable to retain an experienced proxy solicitation firm well before the shareholder meeting to vote on the transaction (and sometimes prior to the announcement of a deal) to implement an effective strategy to obtain shareholder approval.
  • Integration Planning. Post-acquisition integration is often especially chal- lenging in cross-border deals where the integration process may require translation across multiple cultures, languages and historic business methods. If possible, the executives and consultants who will be responsible for integration should be involved in the early stages of the deal so that they can help formulate and “own” the plans that they will be expected to execute. Too often, a separation between the deal team and the integration/execution teams invites slippage in execution of a plan that in hindsight is labeled by the new team as unrealistic or overly ambitious. Integration planning should be carefully phased in as implementation may not occur prior to the receipt of certain regulatory approvals.
  • Corporate Governance and Securities Law. Current U.S. securities and corporate governance rules can be troublesome for non-U.S. acquirors who will be issuing securities that will become publicly traded in the U.S. as a result of an acquisition. SEC rules, the Sarbanes-Oxley and Dodd-Frank Acts and stock exchange requirements should be evaluated to ensure compatibility with home jurisdiction rules and to be certain that a non-U.S. acquiror will be able to comply. Rules relating to director independence, internal control reports and loans to officers and directors, among others, can frequently raise issues for non-U.S. companies listing in the U.S. Non-U.S. acquirors should also be mindful that U.S. securities regulations may apply to acquisitions and other business combination activities involving non-U.S. target companies with U.S. security holders. Whether the Trump administration, U.S. Congress and new commissioners of the U.S. Securities and Exchange Commission will significantly alter the regulatory landscape for public companies and transactions will be a subject of keen interest not only to non- U.S. acquirors, but to all public companies, acquirors and investors. Sweeping change has been promised and may be delivered.
  • Antitrust Issues. To the extent that a non-U.S. acquiror directly or indirectly competes or holds an interest in a company that competes in the same indus- try as the target company, antitrust concerns may arise either at the U.S. fed- eral agency or state attorneys general level. Although less typical, concerns can also arise if a non-U.S. acquiror competes either in an upstream or downstream market of the target. As noted above, pre-closing integration efforts should also be conducted with sensitivity to antitrust requirements that can be limiting. Home jurisdiction or other foreign competition laws may raise their own sets of issues that should be carefully analyzed with counsel. The change in the leadership of the U.S. antitrust agencies is not likely to affect the review process in most transactions because the administration of the antitrust laws in the U.S. is carried out by professional agencies relying on well-established analytical frameworks. Accordingly, the outcomes of most transactions can generally be easily predicted. Deals that will be viewed by the agencies as raising substantive antitrust concerns, and the degree of difficulty in overcoming those concerns, can also be confident- ly identified in advance. In such situations, careful planning is imperative and a proactive approach to engagement with the agencies is generally advisable. In addition, the Trump administration is likely to continue to scru- tinize the remedies offered by transaction parties, and to prefer (1) divesti- tures in lieu of conduct remedies that require ongoing oversight to ensure compliance and (2) acquirors of the divestiture assets to be approved prior to closing rather than permitting divestiture acquirors to be identified by the parties and approved by the agency after closing.
  • Due Diligence. Wholesale application of the acquiror’s domestic due diligence standards to the target’s jurisdiction can cause delay, waste time and resources or result in missing a problem. Due diligence methods must take account of the target jurisdiction’s legal regime and, particularly important in a competitive auction situation, local norms.  Many due diligence requests are best channeled through legal or financial intermediaries as opposed to being made directly to the target company. Due diligence requests that ap- pear to the target as particularly unusual or unreasonable (which occurs with some frequency in cross-border deals) can easily create friction or cause a bidder to lose credibility. Similarly, missing a significant local issue for lack of local knowledge can be highly problematic and costly. Prospective acquirors should also be familiar with the legal and regulatory context in the U.S. for diligence areas of increasing focus, including cybersecurity, data privacy and protection, Foreign Corrupt Practices Act (FCPA) compliance and other matters. In some cases, a potential acquiror may wish to investigate obtaining representation and warranty insurance in connection with a potential transaction, which has been used with increasing frequency as a tool to offset losses resulting from certain breaches of representations and warranties.
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.

U.S. UPDATE – 2017 Checklist for Successful Acquisitions in the United States

Editors’ Note: This submission updates a checklist co-authored by Messrs. Emmerich and Panovka, members of XBMA’s Legal Roundtable, with their colleagues at Wachtell Lipton David A. Katz, Scott K. Charles, Ilene Knable Gotts, Andrew J. Nussbaum, Joshua R. Cammaker, Mark Gordon, Eric M. Rosof, Joshua M. Holmes, T. Eiko Stange, Gordon S. Moodie, Edward J. Lee, Raaj S. Narayan and Carmen X.W. Lu.

Highlights:

  • Global M&A volume in 2016 continued to be robust, reaching $3.7 trillion, approximately 40% of which involved cross-border deals, as compared to one-third in 2015.  Five out of the ten largest deals of the year were cross-border transactions.  The pace of deals grew during the second half of the year, especially in the U.S., and there are many signals pointing to a continued strong pace of transactions.  The big wild card, of course, is the extent to which recent political upheaval both in the U.S. and around the world will translate into increased protectionism or other upheaval in taxation, regulation or finance.  So far, the deal market is largely unfazed, and rising U.S. equity valuations provide plenty of dry powder for stock deals.
  • U.S. targets accounted for approximately $1.7 trillion of last year’s deal volume, with approximately 30% of U.S. deals involving non-U.S. acquirors.
  • We would be surprised, even in the face of significant change and uncertainty, were robust levels of cross-border M&A not to continue to be a prominent feature of the international business landscape.  Both U.S. sellers and non-U.S. buyers will remain interested in the opportunities presented by investment in the U.S., and perhaps more so in a world where economic nationalism is on the rise.
  • This post updates our checklist of issues that should be carefully considered in advance of an acquisition or strategic investment in the U.S.

MAIN ARTICLE

Global M&A volume in 2016 continued to be robust, reaching $3.7 trillion, approximately 40% of which involved cross-border deals, as compared to one-third in 2015. Five out of the ten largest deals of the year were cross-border transactions. The pace of deals grew during the second half of the year, especially in the U.S., and there are many signals pointing to a continued strong pace of transactions. The big wild card, of course, is the extent to which recent political upheaval both in the U.S. and around the world will translate into increased protectionism or other upheaval in taxation, regulation or finance. So far, the deal market is largely unfazed, and rising U.S. equity valuations provide plenty of dry powder for stock deals.

U.S. targets accounted for approximately $1.7 trillion of last year’s deal volume, with approximately 30% of U.S. deals involving non-U.S. acquirors. German, French, Canadian, Japanese and U.K. buyers accounted for approximately 65% of the volume of cross-border acquisitions into the U.S., and acquirors from China, India and other emerging economies accounted for approximately 15%. Cross-border deals involving U.S. target companies included a number of noteworthy transactions, including Bayer AG’s $66 billion acquisition of Monsanto, the $28 billion merger between Enbridge and Spectra Energy, Danone S.A.’s $12.5 billion acquisition of Whitewave Foods, and Samsung’s $8 billion acquisition of Harman International.

Predictions – as has been famously and variously attributed to Niels Bohr, Yogi Berra and others – are tough, especially about the future. What we can expect in 2017, as a Trump administration takes up the reins of power in the U.S., the U.K. inches and lurches toward Brexit, Italy regroups, France and Germany hold elections, and Chinese signals on outbound investment (which surged more than 350% for 2016 U.S. deals as compared to 2015 levels) and outbound capital movement are both mixed and opaque, is beyond our powers of prediction, however ex-cited the U.S. equity markets may currently be.

That said, we would be surprised, even in the face of significant change and uncertainty, were robust levels of cross-border M&A not to continue to be a prominent feature of the international business landscape. Both U.S. sellers and non-U.S. buyers will remain interested in the opportunities presented by investment in the U.S., and perhaps more so in a world where economic nationalism is on the rise.

What won’t change is that advance preparation, strategic implementation and sophisticated deal structures that anticipate likely concerns will continue to be critical to successful acquisitions in the U.S. It will remain the case that cross-border deals involving investment into the U.S. are more likely to fail because of poor analysis, planning and execution than fundamental legal or political restrictions.

The following is our updated checklist of issues that should be carefully considered in advance of an acquisition or strategic investment in the U.S. Because each cross-border deal is unique, the relative significance of the issues discussed below will depend upon the specific facts, circumstances and dynamics of each particular situation.

  • Political and Regulatory Considerations. Even if investment into the U.S. remains mostly well-received and generally not politicized or made a pawn in broader global economic and other confrontations (an assumption that will be monitored very closely in M&A circles and more broadly), prospective non-U.S. acquirors of U.S. businesses or assets should undertake a thoughtful analysis of U.S. political and regulatory implications well in advance of any acquisition proposal or program, particularly if the target company operates in a sensitive industry, if post-transaction business plans contemplate major changes in investment, employment or business strategy, or if the acquiror is sponsored or financed by a foreign government, or organized in a jurisdiction where a high level of government involvement in business is generally understood to exist. It is imperative that the likely concerns of federal, state and local government agencies, employees, customers, suppliers, communities and other interested parties be thoroughly considered and, if possible, addressed prior to any acquisition or investment proposal becoming public. It is also essential that a comprehensive communications plan, focusing not only on public investors but also on all these core constituencies, be in place prior to the announcement of a transaction so that all of the relevant constituencies can be addressed with the appropriate messages. It will often be useful, if not essential, to involve experienced public relations firms at an early stage in the planning process. Similarly, potential regulatory hurdles require sophisticated advance planning. In addition to securities and antitrust regulations, acquisitions may be subject to CFIUS review (discussed below), and acquisitions in regulated industries (e.g., energy, public utilities, gaming, insurance, telecommunications and media, financial institutions, transportation and defense contracting) may be subject to an additional layer of regulatory approvals. Regulation in these areas is often complex, and political opponents, reluctant targets and competitors may seize on perceived weaknesses in an acquiror’s ability to clear regulatory obstacles. High-profile transactions may also result in political scrutiny by Congress, state and local officials.

    Finally, depending on the industry involved and the geographic distribution of the work-force, labor unions will continue to play an active role during the review process. Pre-announcement communications plans must take account of all of these interests.

  • Transaction Structures. Non-U.S. acquirors should be willing to consider a variety of potential transaction structures, especially in strategically or politically sensitive transactions. Structures that may be helpful in sensitive situations include no-governance and low-governance investments, minority positions or joint ventures, possibly with the right to increase ownership or governance over time; partnering with a U.S. company or management team or collaborating with a U.S. source of financing or co-investor (such as a private equity firm); utilizing a controlled or partly controlled U.S. acquisition vehicle, possibly with a board of directors having a substantial number of U.S. citizens and prominent U.S. citizens in high-profile roles; or implementing bespoke governance structures (such as a U.S. proxy board) with respect to specific sensitive subsidiaries or businesses of the target company. Use of debt or preferred securities (rather than ordinary common stock) should also be considered. Even more modest social issues, such as the name of the continuing enterprise and its corporate location or headquarters, or the choice of the nominal legal acquiror in a merger, can affect the perspective of government and labor officials.
  • CFIUS. Under current U.S. federal law, the Committee on Foreign Investment in the United States (CFIUS) – a multi-agency governmental body chaired by the Secretary of the Treasury, the recommendations of which the President of the United States has personal authority to accept or reject – has discretion to review transactions in which non-U.S. acquirors could obtain “control” of a U.S. business or in which a non-U.S. acquiror invests in U.S. infrastructure, technology or energy assets. That authority was notably used in 2016 to block the Aixtron and Lumileds transactions. Although filings with CFIUS are voluntary, CFIUS also has the ability to investigate transactions at its discretion, including after the transaction has closed. While it is not clear if and how CFIUS’s review of cross-border transactions will change in a Trump administration, we believe three useful rules of thumb in dealing with CFIUS will continue to be useful:
    • first, in general it is prudent to make a voluntary filing with CFIUS if the likelihood of an investigation is reasonably high or if competing bidders are likely to take advantage of the uncertainty of a potential investigation;
    • second, it is often best to take the initiative and suggest methods of mitigation early in the review process in order to help shape any remedial measures and avoid delay or potential disapproval; and
    • third, it is often a mistake to make a CFIUS filing prior to initiating discussions with the U.S. Department of the Treasury and other officials and relevant parties. In some cases, it may even be prudent to make the initial contact prior to the pub-lic announcement of the transaction. CFIUS is not as mysterious or unpredictable as some fear – consultation with Treasury and other officials (who – to date – have generally been supportive of investment in the U.S. economy) and CFIUS specialists will generally provide a good sense of what it will take to clear the process. Retaining advisors with significant CFIUS expertise and experience is often crucial to successful navigation of the CFIUS process. Transactions that may require a CFIUS filing should have a carefully crafted communications plan in place prior to any public announcement or disclosure. In addition, given that CFIUS will require a draft filing in advance of the official filing, building in sufficient lead time is essential.

    While still an evolving product, in the past year some insurers have begun offering insurance coverage for CFIUS-related non-consummation risk, covering payment of the re-verse break fee in the event a transaction does not close due to CFIUS review, at a cost of approximately 10-15% of the reverse break fee.

  • Acquisition Currency. While cash remains a common form of consideration in cross-border deals into the U.S., non-U.S. acquirors should think creatively about potential avenues for offering U.S. target shareholders a security that allows them to participate in the resulting global enterprise. For example, publicly listed acquirors may consider offering existing common stock or depositary receipts (e.g., ADRs) or special securities (e.g., contingent value rights). When U.S. target shareholders obtain a continuing interest in a surviving corporation that had not already been publicly listed in the U.S., expect heightened focus on the corporate governance and other ownership and structural arrangements of the non-U.S. acquiror, including as to the presence of any controlling or large shareholders, and heightened scrutiny placed on any de facto controllers or promoters. Creative structures, such as the issuance of non-voting stock or other special securities of a non-U.S. acquiror, may minimize or mitigate the issues raised by U.S. corporate governance concerns. As we have said previously, the world’s equity markets have never been more globalized, and the interest of investors in major capital markets to invest in non-local business never greater; equity consideration, or equity issuance to support a transaction, should be considered in appropriate circumstances.
  • M&A Practice. It is essential to understand the custom and practice of U.S. M&A trans-actions. For instance, understanding when to respect – and when to challenge – a target’s sale “process” may be critical. Knowing how and at what price level to enter the discussions will often determine the success or failure of a proposal; in some situations it is prudent to start with an offer on the low side, while in other situations offering a full price at the outset may be essential to achieving a negotiated deal and discouraging competitors, including those who might raise political or regulatory issues. In strategically or politically sensitive transactions, hostile maneuvers may be imprudent; in other cases, unsolicited pressure might be the only way to force a transaction. Takeover regulations in the U.S. differ in many significant respects from those in non-U.S. jurisdictions; for example, the mandatory bid concept common in Europe, India and other countries is not present in U.S. practice. Permissible deal protection structures, pricing requirements and defensive measures available to U.S. targets will also likely differ in meaningful ways from what non-U.S. acquirors are accustomed to in deals in their home countries. Sensitivity must also be given to the distinct contours of the target board’s fiduciary duties and decision-making obligations under state law. Finally, often overlooked in cross-border situations is how subtle differences in language, communication expectations and the role of different transaction participants can impact transactions and discussions; advance preparation and ongoing engagement during a transaction must take this into account.
  • U.S. Board Practice and Custom. Where the target is a U.S. public company, the customs and formalities surrounding board of director participation in the M&A process, including the participation of legal and financial advisors, the provision of customary fairness opinions and the inquiry and analysis surrounding the activities of the board and the financial advisors, can be unfamiliar and potentially confusing to non-U.S. transaction participants and can lead to misunderstandings that threaten to upset delicate transaction negotiations. Non-U.S. participants need to be well-advised as to the role of U.S. public company boards and the legal, regulatory and litigation framework and risks that can constrain or prescribe board action. These factors can impact both tactics and timing of M&A processes and the nature of communications with the target company.
  • Distressed Acquisitions. Distressed M&A is a well-developed specialty in the U.S., with its own subculture of sophisticated investors, lawyers and financial advisors. The U.S. continues to be a popular destination for restructurings of multinational corporations, including those with few assets or operations in the country, because of its debtor-friendly reorganization laws. Recently, this trend has been most evident in the bankruptcy filings of non-U.S. based companies in the energy and shipping sectors. Among other ad-vantages, the U.S. bankruptcy system has expansive jurisdiction (such as a world-wide stay of actions against a debtor’s property and liberal filing requirements), provides relative predictability in outcomes and allows for the imposition of debt restructurings on non-consenting creditors, making reorganizations more feasible. In recent years, court-supervised “Section 363” auctions of a debtor’s assets (as opposed to the more traditional Chapter 11 plan of reorganization) have become more common, in part because they can be completed comparatively quickly, efficiently and cheaply. Additionally, large foreign companies have increasingly turned to Chapter 15 of the U.S. Bankruptcy Code, which accords debtors that are already in foreign insolvency proceedings key protections from creditors in the U.S. and has facilitated restructurings and asset sales approved abroad. Firms evaluating a potential acquisition of a distressed target based in the U.S. should consider the full array of tools that the U.S. bankruptcy process makes available, including acquisition of the target’s fulcrum debt securities that are expected to be converted in-to equity through an out-of-court restructuring or plan of reorganization, acting as a plan investor or sponsor in connection with a plan of reorganization, backstopping a plan-related rights offering or participating as a bidder in a “Section 363” auction. Transaction certainty is of critical importance to success in a transaction in bankruptcy, and non-U.S. participants accordingly need to plan carefully (especially with respect to transactions that might be subject to CFIUS review, as discussed above) to ensure that they will be on a relatively level playing field with U.S. bidders. Acquirors also need to be aware that they will likely need to address the numerous constituencies involved in a bankruptcy case, each with its own interests and often conflicting agendas, including bank lenders, bondholders, distressed-focused hedge funds and holders of structured debt securities and credit default protection, as well as landlords and trade creditors.
  • Financing. Heading into 2017, recent trends that have influenced acquisition financing may be reversing. Rising interest rates deserve a moment of reflection, including in terms of the still-available opportunity to lock in long-term fixed rates to finance acquisitions, and in the challenges to de-lever post-acquisition so as to best position the company for future refinancings that may be in a higher-rate environment. On the other hand, the U.S. regulatory oversight of banks that led to leveraged lending constraints may be relaxed by the new administration, allowing banks more flexibility to finance acquisitions at higher leverage levels. Moreover, acquisition financing commitments that had been constrained, particularly for acquisitions requiring long regulatory approval periods be-tween signing and closing, may become less so. Additionally, if tax-related costs to repatriate offshore cash of U.S. corporations are reduced, the result may be new tax-efficient structures for financing deals. None of this is assured, of course, and therefore careful consideration of financing-related market trends and developments is more important than ever in planning acquisitions.

    Important questions to ask when considering a transaction that requires debt financing include: what is the appropriate leverage level for the resulting business; where financing with the most favorable costs, terms and conditions is available; what currencies the financing should be raised in; and how fluctuations in currency exchange rates can affect costs, repayment and covenant compliance; how committed the financing is or should be; which lenders have the best understanding of the acquiror’s and target’s businesses; whether there are transaction structures that can minimize financing and refinancing requirements; and how comfortable a target will feel with the terms and conditions of the financing.

  • Litigation. Stockholder litigation accompanies many transactions involving a U.S. public company but generally is not a cause for concern. Excluding situations involving competing bids – where litigation may play a direct role in the contest – and going-private or other “conflict” transactions initiated by controlling shareholders or management – which form a separate category requiring special care and planning – there are very few examples of major acquisitions of U.S. public companies being blocked or prevented due to shareholder litigation or of materially increased costs being imposed on arm’s-length acquirors. In most cases, where a transaction has been properly planned and implemented with the benefit of appropriate legal and investment banking advice on both sides, such litigation can be dismissed or settled for relatively small amounts or other concessions. Moreover, the rate of such litigation (and the average number of lawsuits per deal) declined in 2015 and 2016, due in part to a seminal case in a key jurisdiction for such litigation (Delaware) that reduced the incentives for the stockholder plaintiffs’ attorneys to bring such suits by signaling that disclosure-only settlements (and the attorneys’ fees they generated) would face significantly more scrutiny. Some, but not all, other courts have followed Delaware’s lead in this regard. In any event, sophisticated counsel can usually predict the likely range of litigation outcomes or settlement costs, which should be viewed as a cost of the deal.

    While well-advised parties can substantially reduce the risk of U.S. stockholder litigation, the reverse is also true – the conduct of the parties during negotiations can create “bad facts” that in turn may both encourage stockholder litigation and provoke judicial rebuke, including significant monetary judgments. Sophisticated litigation counsel should be included in key stages of the deal negotiation process. In all cases, the acquiror, its directors, shareholders and offshore reporters and regulators should be conditioned in advance (to the extent possible) to expect litigation and not to view it as a sign of trouble. In addition, it is important to understand the U.S. discovery process in litigation is significantly different than the process in other jurisdictions and, even in the context of a settlement, will require the acquiror to provide responsive information and documents (including emails) to the plaintiffs.

  • Tax Considerations. With Republicans in control of the White House, the Senate and the House of Representatives, comprehensive tax reform is likely to be enacted in 2017. It is anticipated that such reform will be based on the House GOP plan and the Trump plan which, despite their differences, are aligned on a number of key issues, including significant reduction in tax rates, deduction of capital expenditures, potential limitations on the deductibility of interest expense, and repatriation relief. While the specific outcome of this process remains to be seen, such tax reform is anticipated to increase the attractiveness of investing in the U.S.

    U.S. tax issues affecting target shareholders or the combined group may be critical to structuring a cross-border transaction. In transactions involving the receipt by U.S. target shareholders of non-U.S. acquiror stock, the potential application of so-called “anti-inversion” rules, which could render an otherwise tax-free transaction taxable to exchanging U.S. target shareholders and also result in potentially significant adverse U.S. tax consequences to the combined group, must be carefully evaluated. Non-U.S. acquirors frequently will need to consider whether to invest directly from their home jurisdiction or through U.S. or non-U.S. subsidiaries, the impact of the transaction on tax at-tributes of the U.S. target (e.g., loss carryforwards), the deductibility of interest expense incurred on acquisition indebtedness and eligibility for reduced rates of withholding on cross-border payments of interest, dividends and royalties under applicable U.S. tax treaties. In particular, non-U.S. acquirors should carefully review the impact of recently finalized debt/equity regulations on related-party financing transactions. Because the U.S. presently does not have a “participation exemption” regime that exempts dividend in-come from non-U.S. subsidiaries, a non-U.S. acquiror of a U.S. target with non-U.S. sub-sidiaries should analyze the tax cost of extracting such subsidiaries from the U.S. group. Parties to a potential transaction should carefully monitor how their transaction may be affected by U.S. tax reform.

  • Disclosure Obligations. How and when an acquiror’s interest in the target is publicly disclosed should be carefully controlled and considered, keeping in mind the various ownership thresholds that trigger mandatory disclosure on a Schedule 13D under the federal securities laws and under regulatory agency rules such as those of the Federal Re-serve Board, the Federal Energy Regulatory Commission (FERC) and the Federal Communications Commission (FCC). While the Hart-Scott-Rodino Antitrust Improvements Act (HSR) does not require disclosure to the general public, the HSR rules do require disclosure to the target before relatively low ownership thresholds can be crossed. Non-U.S. acquirors have to be mindful of disclosure norms and timing requirements relating to home country requirements with respect to cross-border investment and acquisition activity. In many cases, the U.S. disclosure regime is subject to greater judgment and analysis than the strict requirements of other jurisdictions. Treatment of derivative securities and other pecuniary interests in a target other than common stock holdings can also vary by jurisdiction.
  • Shareholder Approval. Because few U.S. public companies have one or more controlling shareholders, obtaining public shareholder approval is typically a key consideration in U.S. transactions. Understanding in advance the roles of arbitrageurs, hedge funds, institutional investors, private equity funds, proxy voting advisors and other market players – and their likely views of the anticipated acquisition attempt as well as when they appear and disappear from the scene – can be pivotal to the success or failure of the transaction. It is advisable to retain an experienced proxy solicitation firm well in advance of the shareholder meeting to vote on the transaction (and sometimes prior to the announcement of a deal) to implement an effective strategy to obtain shareholder approval.
  • Integration Planning. One of the reasons deals sometimes fail is poor post-acquisition integration, particularly in cross-border deals where multiple cultures, languages and historic business methods may create friction. If possible, the executives and consultants who will be responsible for integration should be involved in the early stages of the deal so that they can help formulate and “own” the plans that they will be expected to execute. Too often, a separation between the deal team and the integration/execution teams invites slippage in execution of a plan that in hindsight is labeled by the new team as unrealistic or overly ambitious. However, integration planning needs to be carefully phased in as implementation cannot occur prior to the receipt of certain regulatory approvals.
  • Corporate Governance and Securities Law. Current U.S. securities and corporate governance rules can be troublesome for non-U.S. acquirors who will be issuing securities that will become publicly traded in the U.S. as a result of an acquisition. SEC rules, the Sarbanes-Oxley and Dodd-Frank Acts and stock exchange requirements should be evaluated to ensure compatibility with home country rules and to be certain that the non-U.S. acquiror will be able to comply. Rules relating to director independence, internal control reports and loans to officers and directors, among others, can frequently raise issues for non-U.S. companies listing in the U.S. Non-U.S. acquirors should also be mindful that U.S. securities regulations may apply to acquisitions and other business combination activities involving non-U.S. target companies with U.S. security holders. Whether the Trump administration, Congress and a new chairman of the U.S. Securities and Exchange Commission will significantly alter the regulatory landscape for public companies and transactions will be a subject of keen interest not only to non-U.S. acquirors, but to all public companies, acquirors and investors. Sweeping change has been promised and may be delivered.
  • Antitrust Issues. To the extent that a non-U.S. acquiror directly or indirectly competes or holds an interest in a company that competes in the same industry as the target company, antitrust concerns may arise either at the federal agency or state attorneys general level. Although less typical, concerns can also arise if the foreign acquiror competes either in an upstream or downstream market of the target. As noted above, pre-closing integration efforts should also be conducted with sensitivity to antitrust requirements that can be limiting. Home country or other foreign competition laws may raise their own sets of issues that should be carefully analyzed with counsel. The administration of the antitrust laws in the U.S. is carried out by highly professional agencies relying on well-established analytical frameworks. The outcomes of the vast majority of transactions can be easily predicted. In borderline cases, while the outcome of any particular proposed transaction cannot be known with certainty, the likelihood of a proposed transaction being viewed by the agencies as raising substantive antitrust concerns and the degree of difficulty in over-coming those concerns can be. In situations presenting actual or potential substantive is-sues, careful planning is imperative and a proactive approach to engagement with the agencies is generally advisable.
  • Due Diligence. Wholesale application of the acquiror’s domestic due diligence standards to the target’s jurisdiction can cause delay, waste time and resources or result in missing a problem. Due diligence methods must take account of the target jurisdiction’s legal re-gime and, particularly important in a competitive auction situation, local norms. Many due diligence requests are best channeled through legal or financial intermediaries as op-posed to being made directly to the target company. Making due diligence requests that appear to the target as particularly unusual or unreasonable (not uncommon in cross-border deals) can easily create friction or cause a bidder to lose credibility. Similarly, missing a significant local issue for lack of local knowledge can be highly problematic and costly. Prospective acquirors should also be familiar with the legal and regulatory context in the U.S. for diligence areas of increasing focus, including cybersecurity, data privacy and protection, Foreign Corrupt Practices Act (FCPA) compliance and other matters. In some cases, a potential acquiror may wish to investigate obtaining representation and warranty insurance in connection with a potential transaction, which has been used with increasing frequency as a tool to offset losses resulting from certain breaches of representations and warranties.
  • Collaboration. More so than ever in the face of the current U.S. and global uncertainties, most obstacles to a deal are best addressed in partnership with local players whose interests are aligned with those of the acquiror. If possible, relationships with the target company’s management and other local forces should be established well in advance so that political and other concerns can be addressed together, and so that all politicians, regulators and other stakeholders can be approached by the whole group in a consistent, collaborative and cooperative fashion.

*  *  *  *  *

As always in global M&A, results, highpoints and lowpoints for 2017 are likely to include many surprises, and sophisticated market participants will need to continually refine their strategies and tactics as the global and local environment develops. However, the rules of the road for successful M&A transactions in the U.S. remain well understood and eminently capable of being mastered by well-prepared and well-advised acquirors from all parts of the globe.

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.

U.S. UPDATE – 2015 Checklist for Successful Acquisitions in the U.S.

Editors’ Note:  This submission updates a checklist co-authored by Messrs. Emmerich and Panovka, members of XBMA’s Legal Roundtable, with their colleagues at Wachtell Lipton David A. Katz, Scott K. Charles, Ilene Knable Gotts, Andrew J. Nussbaum, Joshua R. Cammaker, Mark Gordon, Eric M. Rosof, Joshua M. Holmes, T. Eiko Stange, Gordon S. Moodie, Raaj Narayan and Francis J. Stapleton.

Highlights:

  • M&A was robust in 2014, hitting several noteworthy post-crisis high-water marks: total global volume reached US$3.5 trillion, cross-border volume reached US$1.3 trillion (37% of the total) and cross-border M&A involving U.S. companies reached US$770 billion (45% of which was incoming).
  • We expect current trends to continue in 2015, driven, in several key regions, by strong corporate earnings, large corporate cash balances in search of yield, continued availability of highly attractive financing to well-capitalized borrowers and generally high stock prices. A focus on industry consolidation in a number of sectors and a thirst for technology and brands in growing economies similarly are expected to continue to motivate cross-border deals.
  • Even in a world that is increasingly fractured by international tensions and profound disagreements on politics and policy, U.S. deal markets continue to be relatively hospitable to offshore acquirors and investors.
  • This post updates our checklist of issues that should be considered in advance of an acquisition or strategic investment in the U.S.

MAIN ARTICLE

M&A was robust in 2014, hitting several noteworthy post-crisis high-water marks: total global volume reached US$3.5 trillion, cross-border volume reached US$1.3 trillion (37% of the total) and cross-border M&A involving U.S. companies reached US$770 billion (45% of which was incoming).  Acquirors from Germany, France, Canada, Japan and the United Kingdom accounted for 67% of the incoming acquisitions into the U.S., and acquirors from China, India and other emerging economies accounted for approximately 7%.  Cross-border deals announced in 2014 included some of the year’s largest, including many above US$10 billion and a number of real blockbusters.

We expect current trends to continue into 2015, driven, in several key regions, by strong corporate earnings, large corporate cash balances in search of yield, continued availability of highly attractive financing to well-capitalized borrowers and generally high stock prices.  A focus on industry consolidation in a number of sectors and a thirst for technology and brands in growing economies similarly are expected to continue to motivate cross-border deals.

Even in a world that is increasingly fractured by international tensions and profound disagreements on politics and policy, often violently so, U.S. deal markets continue to be relatively hospitable to offshore acquirors and investors.  With careful advance preparation, strategic implementation and sophisticated deal structures that anticipate likely concerns, most acquisitions in the U.S. can be successfully achieved.  Cross-border deals involving investment into the U.S. are more likely to fail because of poor planning and execution than fundamental legal or political restrictions.

The following is our updated checklist of issues that should be carefully considered in advance of an acquisition or strategic investment in the U.S.  Because each cross-border deal is unique, the relative significance of the issues discussed below will depend upon the specific facts, circumstances and dynamics of each particular situation:

  • Political and Regulatory Considerations. Even though non-U.S. investment in the U.S. remains generally well-received and is generally not politicized, prospective non-U.S. acquirors of U.S. businesses or assets should undertake a thoughtful analysis of U.S. political and regulatory implications well in advance of any acquisition proposal or program, particularly if the target company operates in a sensitive industry or if the acquiror is sponsored or financed by a foreign government, or organized in a jurisdiction where a high level of government involvement in business is generally understood to exist.  It is imperative that the likely concerns of federal, state and local government agencies, employees, customers, suppliers, communities and other interested parties be thoroughly considered and, if possible, addressed prior to any acquisition or investment proposal becoming public.  It is also essential that a comprehensive communications plan be in place prior to the announcement of a transaction so that all of the relevant constituencies can be addressed with the appropriate messages.  It will often be useful, if not essential, to involve local public relations firms at an early stage in the planning process.  Similarly, potential regulatory hurdles require sophisticated advance planning.  In addition to securities and antitrust regulations, acquisitions may be subject to CFIUS review (discussed below), and acquisitions in regulated industries (g., energy, public utilities, gaming, insurance, telecommunications and media, financial institutions, transportation and defense contracting) may be subject to an additional layer of regulatory approvals.  Regulation in these areas is often complex, and political opponents, reluctant targets and competitors may seize on perceived weaknesses in an acquiror’s ability to clear regulatory obstacles.  While we expect to see continuity in the enforcement policies at the federal level for the foreseeable future, it will be particularly important during the final phase of the Obama administration to pay careful attention to the perspectives of both parties and the political dynamics at work in Washington.  Finally, depending on the industry involved and the geographic distribution of the workforce, labor unions will continue to play an active role during the review process.
  • Transaction Structures. Non-U.S. acquirors should be willing to consider a variety of potential transaction structures, especially in strategically or politically sensitive transactions.  Structures that may be helpful in sensitive situations include no-governance and low-governance investments, minority positions or joint ventures, possibly with the right to increase ownership or governance over time; partnering with a U.S. company or management or collaborating with a U.S. source of financing or co-investor (such as a private equity firm); or utilizing a controlled or partly controlled U.S. acquisition vehicle, possibly with a board of directors having a substantial number of U.S. citizens and a prominent U.S. citizen as a non-executive chairman.  Use of preferred securities (rather than ordinary common stock) or structured debt securities should also be considered.  Even more modest social issues, such as the name of the continuing enterprise and its corporate location or headquarters, or the choice of the nominal acquiror in a merger, can affect the perspective of government and labor officials.
  • CFIUS. Under current U.S. federal law, the Committee on Foreign Investment in the United States (CFIUS) — a multi-agency governmental body chaired by the Secretary of the Treasury, and the recommendations of which the President of the United States has personal authority to accept or reject — has discretion to review transactions in which non-U.S. acquirors could obtain “control” of a U.S. business or in which a non-U.S. acquiror invests in U.S. infrastructure, technology or energy assets.  Although filings with CFIUS are voluntary, CFIUS also has the ability to investigate transactions at its discretion, including after the transaction has closed.  Three useful rules of thumb in dealing with CFIUS are:
    • first, in general it is prudent to make a voluntary filing with CFIUS if the likelihood of an investigation is reasonably high or if competing bidders are likely to take advantage of the uncertainty of a potential investigation;
    • second, it is often best to take the initiative and suggest methods of mitigation early in the review process in order to help shape any remedial measures and avoid delay or potential disapproval; and
    • third, it is often a mistake to make a CFIUS filing prior to initiating discussions with the U.S. Department of the Treasury and other officials and relevant parties. In some cases, it may even be prudent to make the initial contact prior to the public announcement of the transaction.  CFIUS is not as mysterious or unpredictable as some fear — consultation with Treasury and other officials (who generally want to be supportive and promote investment in the U.S. economy) and CFIUS specialists will generally provide a good sense of what it will take to clear the process.  Retaining advisors with significant CFIUS expertise and experience is often crucial to successful navigation of the CFIUS process.  Transactions that may require a CFIUS filing should have a carefully crafted communications plan in place prior to any public announcement or disclosure of the pending transactions.
  • Acquisition Currency. While cash remains the predominant (although not exclusive) form of consideration in cross-border deals, non-U.S. acquirors should think creatively about potential avenues for offering U.S. target shareholders a security that allows them to participate in the resulting global enterprise.  For example, publicly listed acquirors may consider offering existing common stock or depositary receipts (g., ADRs) or special securities (e.g., contingent value rights).  When U.S. target shareholders obtain a continuing interest in a surviving corporation that had not already been publicly listed in the U.S., expect heightened focus on the corporate governance and other ownership and structural arrangements of the non-U.S. acquiror, including as to the presence of any controlling or large shareholders, and heightened scrutiny placed on any de facto controllers or promoters.  Creative structures, such as the issuance of non-voting stock or other special securities of a non-U.S. acquiror, may minimize or mitigate the issues raised by U.S. corporate governance concerns.  However, the world’s equity markets have never been more globalized, and the interest of investors in major capital markets to invest in non-local business never greater, and equity consideration, or equity issuance to support a transaction, should be carefully considered in appropriate circumstances.
  • M&A Practice. It is essential to understand the custom and practice of U.S. M&A transactions.  For instance, understanding when to respect — and when to challenge — a target’s sale “process” may be critical.  Knowing how and at what price level to enter the discussions will often determine the success or failure of a proposal; in some situations it is prudent to start with an offer on the low side, while in other situations offering a full price at the outset may be essential to achieving a negotiated deal and discouraging competitors, including those who might raise political or regulatory issues.  In strategically or politically sensitive transactions, hostile maneuvers may be imprudent; in other cases, unsolicited pressure might be the only way to force a transaction.  Takeover regulations in the U.S. differ in many significant respects from those in non-U.S. jurisdictions; for example, the mandatory bid concept common in Europe, India and other countries is not present in U.S. practice.  Permissible deal protection structures, pricing requirements and defensive measures available to U.S. targets also may differ from what non-U.S. acquirors are accustomed to in deals in their home countries.  Sensitivity must also be given to the distinct contours of the target board’s fiduciary duties and decision-making obligations under U.S. law.
  • U.S. Board Practice and Custom. Where the target is a U.S. public company, the customs and formalities surrounding board of director participation in the M&A process, including the participation of legal and financial advisors, the provision of customary fairness opinions and the inquiry and analysis surrounding the activities of the board and the financial advisors, can be unfamiliar and potentially confusing to non-U.S. transaction participants and can lead to misunderstandings that threaten to upset delicate transaction negotiations.  Non-U.S. participants need to be well-advised as to the role of U.S. public company boards and the legal, regulatory and litigation framework and risks that can constrain or prescribe board action.  These factors can impact both tactics and timing of M&A processes and the nature of communications with the target company.
  • Distressed Acquisitions. Distressed M&A is a well-developed specialty in the U.S., with its own subculture of sophisticated investors, lawyers and financial advisors.  The U.S. continues to be a popular destination for restructurings of multinational corporations, including those with few assets or operations in the country, because of its debtor-friendly reorganization laws, expansive bankruptcy jurisdiction and relative predictability.  In addition, large foreign companies that file insolvency proceedings outside of the U.S. have increasingly turned to Chapter 15 of the United States Bankruptcy Code, which accords foreign debtors key protections from creditors in the U.S. and has facilitated restructurings and asset sales approved abroad.  Firms evaluating a potential acquisition of a distressed target in a U.S. bankruptcy should consider the full array of tools that may be available, including acquisition of the target’s fulcrum debt securities that are expected to become the equity through an out-of-court restructuring or plan of reorganization, acting as a plan investor or sponsor in connection with a plan, backstopping a plan-related rights offering or participating as a bidder in a court-supervised “Section 363” auction process, among others.  Transaction certainty is of critical importance to success in a “Section 363” sale process or confirmation of a Chapter 11 plan, and non-U.S. participants accordingly need to plan carefully (especially with respect to transactions that might be subject to CFIUS review, as discussed above) for transaction structures that will result in a relatively level playing field with U.S. participants.  Acquirors also need to consider the differing interests and sometimes conflicting agendas of the various constituencies, including bank lenders, bondholders, distressed-focused hedge funds and holders of structured debt securities and credit default protection.
  • Financing. Volatility in the global credit markets in 2014 was more pronounced than in the immediate past, which resulted in more frequent closings of the “windows” in which particular sorts of financing are available, particularly for non-investment grade issuers.  While the volume of financing and the rates at which financing has been available for investment grade issuers continues to be favorable and has facilitated acquisitions, a divergence has emerged for high-yield issuers looking for acquisition financing, where the availability of committed financing, particularly for deals requiring a long closing period or a substantial amount of financing, has become constrained and more costly.  This has resulted in part from activities of regulators worldwide, and particularly in the U.S., to reduce financing activity for highly leveraged deals – a trend that may continue for some time.  Important questions to consider when financing a transaction include where financing with the most favorable terms and conditions is available; how committed the financing is; which lenders have the best understanding of the acquiror’s and target’s businesses; whether to explore alternative, non-traditional financing sources and structures, including seller paper; whether there are transaction structures that can minimize refinancing requirements; and how comfortable the target will feel with the terms and conditions of the financing.
  • Litigation. Shareholder litigation accompanies virtually every transaction involving a U.S. public company but is generally not a cause for concern.  Excluding the context of competing bids in which litigation plays a role in the contest, and of going-private transactions initiated by controlling shareholders or management, which form a separate category requiring special care and planning, there are virtually no examples of major acquisitions of U.S. public companies being blocked or prevented due to shareholder litigation, nor of materially increased costs being imposed on acquirors.  In most cases, where a transaction has been properly planned and implemented with the benefit of appropriate legal and investment banking advice on both sides, such litigation can be dismissed or settled for relatively small amounts or other concessions, with the positive effect of foreclosing future claims and insulating the company from future liability.  Sophisticated counsel can usually predict the likely range of litigation outcomes or settlement costs, which should be viewed as a cost of the deal.  In all cases, the acquiror, its directors, shareholders and offshore reporters and regulators should be conditioned in advance (to the extent possible) to expect litigation and not to view it as a sign of trouble.  In addition, it is important to understand the U.S. discovery process in litigation as it is significantly different than the process in other jurisdictions and, even in the context of a settlement, will require the acquiror to provide responsive information and documents (including emails) to the plaintiffs.
  • Tax Considerations. U.S. tax issues affecting target shareholders or the combined group may be critical to structuring the transaction. In transactions involving the receipt by U.S. target shareholders of non-U.S. acquiror stock, the potential application of so-called “anti-inversion” rules, which could render an otherwise tax-free transaction taxable to exchanging U.S. target shareholders and result in potentially significant adverse U.S. tax consequences to the combined group, must be carefully evaluated.  Non-U.S. acquirors frequently will need to consider whether to invest directly from their home jurisdiction or through U.S. or non-U.S. subsidiaries, the impact of the transaction on tax attributes of the U.S. target (e.g., loss carryforwards), the deductibility of interest expense incurred on acquisition indebtedness, and eligibility for reduced rates of withholding on cross-border payments of interest, dividends and royalties under applicable U.S. tax treaties.  Because the U.S. does not have a “participation exemption” regime that exempts dividend income from non-U.S. subsidiaries, a non-U.S. acquiror of a U.S. target with non-U.S. subsidiaries may wish to analyze the tax cost of extracting such subsidiaries from the U.S. group.
  • Disclosure Obligations. How and when an acquiror’s interest in the target is publicly disclosed should be carefully controlled and considered, keeping in mind the various ownership thresholds that trigger mandatory disclosure on a Schedule 13D under the federal securities laws and under regulatory agency rules such as those of the Federal Reserve Board, the Federal Energy Regulatory Commission (FERC) and the Federal Communications Commission (FCC).  While the Hart-Scott-Rodino Antitrust Improvements Act (HSR) does not require disclosure to the general public, the HSR rules do require disclosure to the target’s management before relatively low ownership thresholds can be crossed.  Non-U.S. acquirors have to be mindful of disclosure norms and timing requirements relating to home country requirements with respect to cross-border investment and acquisition activity.  In many cases, the U.S. disclosure regime is subject to greater judgment and analysis than the strict requirements of other jurisdictions.  Treatment of derivative securities and other pecuniary interests in a target other than common stock holdings also varies by jurisdiction and such investments have received heightened regulatory focus in recent periods.
  • Shareholder Approval. Because few U.S. public companies have one or more controlling shareholders, obtaining public shareholder approval is typically a key consideration in U.S. transactions.  Understanding in advance the roles of arbitrageurs, hedge funds, institutional investors, private equity funds, proxy voting advisors and other important market players — and their likely views of the anticipated acquisition attempt as well as when they appear and disappear from the scene — can be pivotal to the success or failure of the transaction.  It is advisable to retain a proxy solicitation firm to provide advice prior to the announcement of a transaction so that an effective strategy to obtain shareholder approval can be implemented.
  • Integration Planning. One of the reasons deals sometimes fail is poor post-acquisition integration, particularly in cross-border deals where multiple cultures, languages and historic business methods may create friction.  If possible, the executives and consultants who will be responsible for integration should be involved in the early stages of the deal so that they can help formulate and “own” the plans that they will be expected to execute.  Too often, a separation between the deal team and the integration/execution teams invites slippage in execution of a plan that in hindsight is labeled by the new team as unrealistic or overly ambitious.  However, integration planning needs to be carefully phased in as implementation cannot occur prior to the receipt of certain regulatory approvals.
  • Corporate Governance and Securities Law. U.S. securities and corporate governance rules can be troublesome for non-U.S. acquirors who will be issuing securities that will become publicly traded in the U.S. as a result of an acquisition.  SEC rules, the Sarbanes-Oxley and Dodd-Frank Acts and stock exchange requirements should be evaluated to ensure compatibility with home country rules and to be certain that the non-U.S. acquiror will be able to comply.  Rules relating to director independence, internal control reports and loans to officers and directors, among others, can frequently raise issues for non-U.S. companies listing in the U.S.  Non-U.S. acquirors should also be mindful that U.S. securities regulations may apply to acquisitions and other business combination activities involving non-U.S. companies with U.S. security holders.
  • Antitrust Issues. To the extent that a non-U.S. acquiror directly or indirectly competes or holds an interest in a company that competes in the same industry as the target company, antitrust concerns may arise either at the federal agency or state attorneys general level.  Although less typical, concerns can also arise if the foreign acquiror competes either in an upstream or downstream market of the target.  As noted above, pre-closing integration efforts should also be conducted with sensitivity to antitrust requirements that can be limiting.  Home country competition laws may raise their own sets of issues that should be carefully analyzed with counsel.  The administration of the antitrust laws in the U.S. is carried out by highly professional agencies relying on well-established analytical frameworks.  The outcomes of the vast majority of transactions can be easily predicted.  In borderline cases, while the outcome of any particular proposed transaction cannot be known with certainty, the likelihood of a proposed transaction being viewed by the agencies as raising substantive antitrust concerns and the degree of difficulty in overcoming those concerns can be.  In situations presenting actual or potential substantive issues, careful planning is imperative and a proactive approach to engagement with the agencies is generally advisable.
  • Due Diligence. Wholesale application of the acquiror’s domestic due diligence standards to the target’s jurisdiction can cause delay, waste time and resources or result in missing a problem.  Due diligence methods must take account of the target jurisdiction’s legal regime and, particularly important in a competitive auction situation, local norms.  Many due diligence requests are best channeled through legal or financial intermediaries as opposed to being made directly to the target company.  Making due diligence requests that appear to the target as particularly unusual or unreasonable (not uncommon in cross-border deals) can easily cause a bidder to lose credibility.  Similarly, missing a significant local issue for lack of local knowledge can be highly problematic and costly.
  • Collaboration. Most obstacles to a deal are best addressed in partnership with local players whose interests are aligned with those of the acquiror.  If possible, relationships with the target company’s management and other local forces should be established well in advance so that political and other concerns can be addressed together, and so that all politicians, regulators and other stakeholders can be approached by the whole group in a consistent, collaborative and cooperative fashion.

*            *            *            *            *

As always in global M&A, results, highpoints and lowpoints for 2015 are likely to include many surprises, and sophisticated market participants will need to continually refine their strategies and tactics as the global and local environment develops.  However, the rules of the road for successful M&A transactions in the U.S. remain well understood and eminently capable of being mastered by well-prepared and well-advised acquirors from all parts of the globe.

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.

U.S. UPDATE – 2014 Checklist for Successful Acquisitions in the U.S.

Editors’ Note: This submission updates a checklist co-authored by Messrs. Emmerich and Panovka, members of XBMA’s Legal Roundtable, with their colleagues at Wachtell Lipton David A. Katz, Scott K. Charles, Ilene Knable Gotts, Andrew J. Nussbaum, Joshua R. Cammaker, Mark Gordon, Eric M. Rosof, Joshua M. Holmes, T. Eiko Stange, Gordon S. Moodie, Raaj Narayan and Francis J. Stapleton.

Highlights:

  • More than 30% of global M&A in 2013 involved acquirors and targets in different countries, including $134.5 billion of acquisitions in the U.S. by non-U.S. acquirors (a growing 15% of which involved acquirors from emerging economies).
  • Noteworthy cross-border deals in 2013 included Verizon’s $130 billion acquisition of the remaining interest in Verizon Wireless from Vodafone, the second largest cross-border transaction in history, Applied Materials’ $9 billion acquisition of Tokyo Electron, and Shuanghui International’s $7 billion acquisition of Smithfield Foods.
  • U.S. deal markets continue to be relatively hospitable to off-shore acquirors and investors.
  • The checklist included in the Main Article below covers issues that should be carefully considered in advance of any acquisition or strategic investment in the U.S.

MAIN ARTICLE

More than 30% of global M&A in 2013 involved acquirors and targets in different countries, including $134.5 billion of acquisitions in the U.S. by non-U.S. acquirors.  Noteworthy cross-border deals in 2013 included Verizon’s $130 billion acquisition of the remaining interest in Verizon Wireless from Vodafone, the second largest cross-border transaction in history, Applied Materials’ $9 billion acquisition of Tokyo Electron and Shuanghui International’s $7 billion acquisition of Smithfield Foods.  Notably, 15.1% percent of the acquisitions in the U.S. by non-U.S. acquirors in 2013 were made by companies from emerging economies, up from 8.4% in 2012.  We expect this trend to continue.

U.S. deal markets continue to be relatively hospitable to off-shore acquirors and investors.  With careful advance preparation, strategic implementation and sophisticated deal structures that anticipate likely concerns, most acquisitions in the U.S. can be successfully achieved.  Cross-border deals involving investment into the U.S. are more likely to fail because of poor planning and execution than fundamental legal or political restrictions.

The following is our updated checklist of issues that should be carefully considered in advance of an acquisition or strategic investment in the U.S.  Because each cross-border deal is unique, the relative significance of the issues discussed below will depend upon the specific facts, circumstances and dynamics of each particular situation:

  • Political and Regulatory Considerations.  Even though non-U.S. investment in the U.S. remains generally well-received and is rarely politicized, in the context of specific transactions, prospective non-U.S. acquirors of U.S. businesses or assets should undertake a comprehensive analysis of U.S. political and regulatory implications well in advance of any acquisition proposal or program, particularly if the target company operates in a sensitive industry or if the acquiror is sponsored or financed by a foreign government, or organized in a jurisdiction where a high level of government involvement in business is generally understood to exist.  It is imperative that the likely concerns of federal, state and local government agencies, employees, customers, suppliers, communities and other interested parties be thoroughly considered and, if possible, addressed prior to any acquisition or investment proposal becoming public.  It is also essential that a comprehensive communications plan be in place prior to the announcement of a transaction so that all of the relevant constituencies can be addressed with the appropriate messages.  It may be useful to involve local public relations firms at an early stage in the planning process.  Similarly, potential regulatory hurdles require sophisticated advance planning.  In addition to securities and antitrust regulations, acquisitions may be subject to CFIUS review (discussed below), and acquisitions in regulated industries (e.g., energy, public utilities, gaming, insurance, telecommunications and media, financial institutions, transportation and defense contracting) may be subject to an additional layer of regulatory approvals.  Regulation in these areas is often complex, and political opponents, reluctant targets and competitors may seize on any perceived weaknesses in an acquiror’s ability to clear regulatory obstacles.  We expect to see continuity in the enforcement policies at the federal level for the foreseeable future.  Finally, depending on the industry involved and the geographic distribution of the workforce, labor unions will continue to play an active role during the review process.
  • Transaction Structures.  Non-U.S. acquirors should be willing to consider a variety of potential transaction structures, especially in strategically or politically sensitive transactions.  Structures that may be helpful in particular circumstances include no-governance and low-governance investments, minority positions or joint ventures, possibly with the right to increase ownership or governance over time; partnering with a U.S. company or management or collaborating with a U.S. source of financing or co-investor (such as a private equity firm); or utilizing a controlled or partly controlled U.S. acquisition vehicle, possibly with a board of directors having a substantial number of U.S. citizens and a prominent U.S. citizen as a non-executive chairman.  Use of preferred securities (rather than ordinary common stock) or structured debt securities should also be considered.  Even more modest social issues, such as the name of the continuing enterprise and its corporate location or headquarters, or the choice of the nominal acquiror in a merger, can affect the perspective of government and labor officials.
  • CFIUS.  Under current U.S. federal law, the Committee on Foreign Investment in the United States (CFIUS) — a multi-agency governmental body chaired by the Secretary of the Treasury, and the recommendations of which the President of the United States has personal authority to accept or reject — has discretion to review transactions in which non-U.S. acquirors could obtain “control” of a U.S. business or in which a non-U.S. acquiror invests in U.S. infrastructure, technology or energy assets.  Although filings with CFIUS are voluntary, CFIUS also has the ability to investigate transactions at its discretion, including after the transaction has closed.  Three useful rules of thumb in dealing with CFIUS are:
    • first, in general it is prudent to make a voluntary filing with CFIUS if the likelihood of an investigation is reasonably high or if competing bidders are likely to take advantage of the uncertainty of a potential investigation;
    • second, it is often best to take the initiative and suggest methods of mitigation early in the review process in order to help shape any remedial measures and avoid delay or potential disapproval; and
    • third, it is often a mistake to make a CFIUS filing prior to initiating discussions with the U.S. Department of the Treasury and other officials and relevant parties.  In some cases, it may even be prudent to make the initial contact prior to the public announcement of the transaction.  CFIUS is not as mysterious or unpredictable as some fear — consultation with Treasury and other officials (who generally want to be supportive and promote investment in the U.S. economy) and CFIUS specialists will generally provide a good sense of what it will take to clear the process.  Retaining advisors with significant CFIUS expertise and experience is often crucial to successful navigation of the CFIUS process.  Transactions that may require a CFIUS filing should have a carefully crafted communications plan in place prior to any public announcement or disclosure of the pending transactions.
  • Acquisition Currency.  While cash remains the predominant (although not exclusive) form of consideration in cross-border deals, non-U.S. acquirors should think creatively about potential avenues for offering U.S. target shareholders a security that allows them to participate in the resulting global enterprise.  For example, publicly listed acquirors may consider offering existing common stock or depositary receipts (e.g., ADRs) or special securities (e.g., contingent value rights).  When U.S. target shareholders obtain a continuing interest in a surviving corporation that had not already been publicly listed in the U.S., expect heightened focus on the corporate governance and other ownership and structural arrangements of the non-U.S. acquiror, including as to the presence of any controlling or large shareholders, and heightened scrutiny placed on any de facto controllers or promoters.  Creative structures, such as the issuance of non-voting stock or other special securities of a non-U.S. acquiror, may minimize or mitigate the issues raised by U.S. corporate governance concerns.
  • M&A Practice.  It is essential to understand the custom and practice of U.S. M&A transactions.  For instance, understanding when to respect — and when to challenge — a target’s sale “process” may be critical.  Knowing how and at what price level to enter the discussions will often determine the success or failure of a proposal; in some situations it is prudent to start with an offer on the low side, while in other situations offering a full price at the outset may be essential to achieving a negotiated deal and discouraging competitors, including those who might raise political or regulatory issues.  In strategically or politically sensitive transactions, hostile maneuvers may be imprudent; in other cases, unsolicited pressure might be the only way to force a transaction.  U.S. takeover regulations differ in many significant respects from those in non-U.S. jurisdictions; for example, the mandatory bid concept common in Europe, India and other countries is not present in U.S. practice.  Permissible deal protection structures, pricing requirements and defensive measures available to U.S. targets also may differ from what non-U.S. acquirors are accustomed to in deals in their home countries.  Sensitivity must also be given to the distinct contours of the target board’s fiduciary duties and decision-making obligations under U.S. law.
  • U.S. Board Practice and Custom.  Where the target is a U.S. public company, the customs and formalities surrounding board of director participation in the M&A process, including the participation of legal and financial advisors, the provision of customary fairness opinions and the inquiry and analysis surrounding the activities of the board and the financial advisors, can be unfamiliar and potentially confusing to non-U.S. transaction participants and can lead to misunderstandings that threaten to upset delicate transaction negotiations.  Non-U.S. participants need to be well-advised as to the role of U.S. public company boards and the legal, regulatory and litigation framework and risks that can constrain or prescribe board action.  These factors can impact both tactics and timing of M&A processes and the nature of communications with the target company.
  • Distressed Acquisitions.  Distressed M&A is a well-developed specialty in the U.S., with its own sub-culture of sophisticated investors, lawyers and financial advisors.  When evaluating a distressed target, acquirors should consider the full array of tools that may be available, including acquisition of the target’s fulcrum debt securities that are expected to become the equity through an out-of-court restructuring or plan of reorganization, acting as a plan investor or sponsor in connection with a plan, backstopping a plan-related rights offering or participating as a bidder in a court-supervised “Section 363” auction process, among others.  Transaction certainty is of critical importance  to success in a “Section 363” sale process or confirmation of a Chapter 11 plan, and non-U.S. participants accordingly need to plan carefully (especially with respect to transactions that might be subject to CFIUS review, as discussed above) for transaction structures that will result in a relatively even playing field with U.S. participants.  Acquirors also need to consider the differing interests and sometimes conflicting agendas of the various constituencies, including bank lenders, bondholders, distressed-focused hedge funds and holders of structured debt securities and credit default protection.
  • Financing.  There has been less volatility in the global credit markets this year than in the immediate past, which resulted in fewer closings of the “windows” in which particular sorts of financing are available.  Overall, the recent volume of financing and the rates at which financing has been available is unprecedented and has facilitated acquisitions, particularly by larger, well-established corporates and sovereign-affiliated borrowers.  Important questions to consider when financing a transaction include where financing with the most favorable terms and conditions is available; how committed the financing is; which lenders have the best understanding of the acquiror’s and target’s businesses; whether to explore alternative, non-traditional financing sources and structures, including seller paper; whether there are transaction structures that can minimize refinancing requirements; and how comfortable the target will feel with the terms and conditions of the financing.  Note that under U.S. law, unlike the laws of some other jurisdictions, non-U.S. acquirors are not prohibited from borrowing from U.S. lenders, and they generally may use the assets of U.S. targets as collateral.  There may be adverse tax consequences for U.S. borrowers on using property of non-U.S. entities to secure their loans and that would include pledging stock of a non-U.S. entity to secure U.S. borrowings.  Likewise, the relative ease of structured financing in the U.S. market should benefit an offshore acquiror, with both asset-based and other sophisticated securitized lending strategies relatively easy to implement and available in the market.
  • LitigationShareholder litigation accompanies virtually every transaction involving a U.S. public company but is generally not a cause for concern.  Excluding the context of competing bids in which litigation plays a role in the contest, and of going-private transactions initiated by controlling shareholders or management, which form a separate category requiring special care and planning, there are virtually no examples of major acquisitions of U.S. public companies being blocked or prevented due to shareholder litigation, nor of materially increased costs being imposed on acquirors.  In most cases, where a transaction has been properly planned and implemented with the benefit of appropriate legal and investment banking advice on both sides, such litigation can be dismissed or settled for relatively small amounts or other concessions, with the positive effect of foreclosing future claims and insulating the company from future liability.  Sophisticated counsel can usually predict the likely range of litigation outcomes or settlement costs, which should be viewed as a cost of the deal.  In all cases, the acquiror, its directors, shareholders and offshore reporters and regulators should be conditioned in advance (to the extent possible) to expect litigation and not to view it as a sign of trouble.  In addition, it is important to understand the U.S. discovery process in litigation as it is significantly different than the process in other jurisdictions and, even in the context of a settlement, will require the acquiror to provide responsive information and documents (including emails) to the plaintiffs.
  • Tax Considerations.  U.S. tax issues affecting target shareholders or the combined group may be critical to structuring the transaction.  The receipt by U.S. target shareholders of non-U.S. acquiror stock generally will be tax-free only if the transaction satisfies the U.S. requirements that apply to tax-free transactions generally as well as special rules intended to combat “inversion” transactions.  Non-U.S. acquirors frequently will need to consider whether to invest directly from their home jurisdiction or through U.S. or non-U.S. subsidiaries, the impact of the transaction on tax attributes of the U.S. target (e.g., loss carryforwards), the deductibility of interest expense incurred on acquisition indebtedness, and eligibility for reduced rates of withholding on cross-border payments of interest, dividends and royalties under applicable U.S. tax treaties.  Because the U.S. does not have a “participation exemption” regime that exempts dividend income from non-U.S. subsidiaries, a non-U.S. acquiror of a U.S. target with non-U.S. subsidiaries may wish to analyze the tax cost of extracting such subsidiaries from the U.S. group.
  • Disclosure Obligations.  How and when an acquiror’s interest in the target is publicly disclosed should be carefully controlled and considered, keeping in mind the various ownership thresholds that trigger mandatory disclosure on a Schedule 13D under the federal securities laws and under regulatory agency rules such as those of the Federal Reserve Board, the Federal Energy Regulatory Commission (FERC) and the Federal Communications Commission (FCC).  While the Hart-Scott-Rodino Antitrust Improvements Act (HSR) does not require disclosure to the general public, the HSR rules do require disclosure to the target’s management before relatively low ownership thresholds can be crossed.  Non-U.S. acquirors have to be mindful of disclosure norms and timing requirements relating to home country requirements with respect to cross-border investment and acquisition activity.  In many cases, the U.S. disclosure regime is subject to greater judgment and analysis than the strict requirements of other jurisdictions.  Treatment of derivative securities and other pecuniary interests in a target other than common stock holdings also varies by jurisdiction and such investments have received heightened regulatory focus in recent periods.
  • Shareholder Approval.  Because few U.S. public companies have one or more controlling shareholders, obtaining public shareholder approval is typically a key consideration in U.S. transactions.  Understanding in advance the roles of arbitrageurs, hedge funds, institutional investors, private equity funds, proxy voting advisors and other important market players — and their likely views of the anticipated acquisition attempt as well as when they appear and disappear from the scene — can be pivotal to the success or failure of the transaction.  It is advisable to retain a proxy solicitation firm to provide advice prior to the announcement of a transaction so that an effective strategy to obtain shareholder approval can be implemented.
  • Integration Planning.  One of the reasons deals sometimes fail is poor post-acquisition integration, particularly in cross-border deals where multiple cultures, languages and historic business methods may create friction.  If possible, the executives and consultants that will be responsible for integration should be involved in the early stages of the deal so that they can help formulate and “own” the plans that they will be expected to execute.  Too often, a separation between the deal team and the integration/execution teams invites slippage in execution of a plan that in hindsight is labeled by the new team as unrealistic or overly ambitious.  However, integration planning needs to be carefully phased in as implementation cannot occur prior to the receipt of certain regulatory approvals.
  • Corporate Governance and Securities Law.  U.S. securities and corporate governance rules can be troublesome for non-U.S. acquirors who will be issuing securities that will become publicly traded in the U.S. as a result of an acquisition.  SEC rules, the Sarbanes-Oxley and Dodd-Frank Acts and stock exchange requirements should be evaluated to ensure compatibility with home country rules and to be certain that the non-U.S. acquiror will be able to comply.  Rules relating to director independence, internal control reports and loans to officers and directors, among others, can frequently raise issues for non-U.S. companies listing in the U.S.  Non-U.S. acquirors should also be mindful that U.S. securities regulations may apply to acquisitions and other business combination activities involving non-U.S. companies with U.S. security holders.
  • Antitrust Issues.  To the extent that a non-U.S. acquiror directly or indirectly competes or holds an interest in a company that competes in the same industry as the target company, antitrust concerns may arise either at the federal agency or state attorneys general level.  Although less typical, concerns can also arise if the foreign acquiror competes either in an upstream or downstream market of the target.  As noted above, pre-closing integration efforts should also be conducted with sensitivity to antitrust requirements that can be limiting.  Home country competition laws may raise their own sets of issues that should be carefully analyzed with counsel.  The administration of the antitrust laws in the U.S. is carried out by highly professional agencies relying on well-established analytical frameworks.  The outcomes of the vast majority of transactions can be easily predicted.  In borderline cases, while the outcome of any particular proposed transaction cannot be known with certainty, the likelihood of a proposed transaction being viewed by the agencies as raising substantive antitrust concerns and the degree of difficulty in overcoming those concerns can be.  In situations presenting actual or potential substantive issues, careful planning is imperative and a proactive approach to engagement with the agencies is generally advisable.
  • Due Diligence.  Wholesale application of the acquiror’s domestic due diligence standards to the target’s jurisdiction can cause delay, waste time and resources or result in missing a problem.  Due diligence methods must take account of the target jurisdiction’s legal regime and, particularly important in a competitive auction situation, local norms.  Many due diligence requests are best channeled through legal or financial intermediaries as opposed to being made directly to the target company.  Making due diligence requests that appear to the target as particularly unusual or unreasonable (not uncommon in cross-border deals) can easily cause a bidder to lose credibility.  Similarly, missing a significant local issue for lack of local knowledge can be highly problematic and costly.
  • Collaboration.  Most obstacles to a deal are best addressed in partnership with local players whose interests are aligned with those of the acquiror.  If possible, relationships with the target company’s management and other local forces should be established well in advance so that political and other concerns can be addressed together, and so that all politicians, regulators and other stakeholders can be approached by the whole group in a consistent, collaborative and cooperative fashion.

*            *            *            *            *

As always in global M&A, results, highpoints and lowpoints for 2014 are likely to include many surprises, and sophisticated market participants will need to continually refine their strategies and tactics as the global and local environment develops.  However, the rules of the road for successful M&A transactions in the U.S. remain well understood and eminently capable of being mastered by well-prepared and well-advised acquirors from all parts of the globe.

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.

Canadian Update – Surprise Investment Canada Proposals for Review of Investments by SOEs

Editors’ Note:   This article was contributed by Christopher Murray, a partner of Osler and leader of Osler’s Asia-Pacific initiative whose practice focuses on public company M&A as well as corporate finance principally involving REIT Income Funds, mining and energy businesses.  This article was authored by Osler partners Michelle Lally, Peter Glossop, Peter Franklyn, Shuli Rodal and associate Matthew Anderson in Osler’s highly regarded Competition and Antitrust group.

 

Highlights:

The Canadian Federal government has introduced proposed (and unanticipated) changes to the Investment Canada Act  (“ICA”) to further scrutinize a wider range of state owned enterprise (“SOE”) investments in Canada.  It is proposed that the black letter ICA review threshold rules be replaced by a control in fact examinations in determining if ICA should apply in investments in Canada involving SOEs.

Unexpectedly, Bill C-60 goes further than anticipated by expanding the definition of SOE in the Investment Canada Act (ICA), and empowering the Minister of Industry to determine that:

  • an otherwise Canadian-controlled entity is controlled in fact by one or more SOEs;
  • an entity is or is not controlled in fact by a SOE; or
  • there has or has not been an acquisition of control in fact of an entity by a SOE.

As a result, for certain investments, the proposed amendments could result in an investor being considered a SOE, and would effectively eliminate the current statutory “safe harbour” that an acquisition of less than one third of the voting shares of a corporation, or less than a majority of the voting interests of a partnership or joint venture, does not result in an acquisition of control. The amendments would give the Minister a new ability to scrutinize all investments in which SOEs are involved including minority investments by SOEs to determine whether they confer control in fact on a SOE, and therefore require a net benefit review under the ICA.

Accordingly, Bill C-60 introduces a new level of uncertainty into the Federal Government’s treatment of proposed investments by SOEs which was not anticipated in December 2012.

Main Article:

On April 29, 2013, the Federal Government introduced its 2013 budget implementation bill, Bill C-60,[1] which would also implement announcements made by the Federal Government on December 7, 2012 concerning investments by non-Canadian state-owned enterprises (SOEs).

Unexpectedly, Bill C-60 goes further than anticipated by expanding the definition of SOE in the Investment Canada Act (ICA), and empowering the Minister of Industry to determine that:

  • an otherwise Canadian-controlled entity is controlled in fact by one or more SOEs;
  • an entity is or is not controlled in fact by a SOE; or
  • there has or has not been an acquisition of control in fact of an entity by a SOE.

As a result, for certain investments, the proposed amendments could result in an investor being considered a SOE, and would effectively eliminate the current statutory “safe harbour” that an acquisition of less than one third of the voting shares of a corporation, or less than a majority of the voting interests of a partnership or joint venture, does not result in an acquisition of control. The amendments would give the Minister a new ability to scrutinize all investments in which SOEs are involved including minority investments by SOEs to determine whether they confer control in fact on a SOE, and therefore require a net benefit review under the ICA.

Accordingly, Bill C-60 introduces a new level of uncertainty into the Federal Government’s treatment of proposed investments by SOEs which was not anticipated in December 2012.

OVERVIEW

As expected, Bill C-60 includes amendments to the ICA to implement previously

announced reforms to:

  • define a SOE, including a foreign government or an entity that is controlled or influenced, directly or indirectly, by a foreign government;
  • implement new thresholds for review of acquisitions of control by non-Canadians, other than SOEs, starting at $600 million and eventually increasing to $1 billion based on “enterprise value”;
  • establish a separate indexed threshold for review of SOE acquisitions of control; and
  • permit potentially significant extensions of the periods for national security review.

In addition to implementing previously announced reforms, Bill C-60 also includes amendments to the ICA which extend the Federal Government’s oversight over SOE investments further by:

  • expanding the definition of SOE to include an individual who is acting under the direction or influence of a foreign government;
  • allowing for Ministerial determinations that an otherwise Canadian-controlled entity is controlled in fact by a SOE; and
  • allowing for Ministerial determinations as to whether an entity is controlled by a SOE or whether there has been an acquisition of control by a SOE.

BACKGROUND

In December 2012, following the extended reviews and, ultimately, approvals of acquisitions by the Chinese SOE CNOOC of Nexen Inc. and the Malaysian SOE PETRONAS of Progress Energy Resources Corp., the Federal Government increased its scrutiny of future investments by SOEs with the release of new State-Owned Investor Guidelines along with several policy statements and promises for reform of its process for reviewing SOE investments. (see Osler Update – New Rules for Foreign Investment by State-Owned Enterprises – Do They Strike the Right Balance?). The new State-Owned Investor Guidelines indicated that:

  • the Federal Government will closely monitor SOE investments in all sectors;
  • future acquisitions of control of a Canadian oil sands business by a SOE will be found to be of net benefit to Canada only in exceptional circumstances;
  • following increase of the general review threshold for investments by non-Canadians, control acquisitions of Canadian businesses by SOEs will continue to be subject to the current, lower threshold;
  • the burden of proof is on foreign investors to demonstrate to the satisfaction of the Minister that proposed investments subject to ICA review are likely to be of net benefit to Canada;
  • SOE investors will be expected to address in their business plans and undertakings that they are susceptible to state influence and to demonstrate their strong commitment to transparent and commercial operations; and
  • in assessing whether a proposed control acquisition is of net benefit to Canada, the Minister will also consider the SOE’s adherence to free market principles and the effect of the investment on the level and nature of economic activity in Canada, including the effect on employment, production and capital levels in Canada.

NEW THRESHOLDS

Bill C-60 confirms the Federal Government’s intention to implement an increase in the general review threshold for acquisitions of control by non-Canadians, other than SOEs, to $600 million based on “enterprise value”, eventually increasing to $1 billion over four years. Once in force, this would replace the current threshold for acquisitions of control by non-Canadians based on book value, which is presently set at $344 million for 2013 and indexed annually to nominal GDP growth. Bill C-60 confirms the increases to the threshold but now carves out acquisitions of control by SOEs, implementing the Federal Government’s December 2012 promise to retain the existing lower review threshold for SOE investments.

The amendments to the review thresholds will not come into force until ordered by the Governor in Council. A key matter still not yet resolved is the definition of “enterprise value”. The most recent draft proposal defined “enterprise value” based on a calculation of market capitalization (plus liabilities minus cash) for publicly listed companies and on purchase price for private companies and asset acquisitions. The draft proposals introduced uncertainty in determining whether the threshold would be exceeded, particularly in multiple bidder scenarios, and potentially captured more transactions than under the current book value threshold (see Osler Update – Proposed Changes to the Investment Canada Act and Foreign Investment Review Process – Benefit or Increased Burden for Foreign Investors?). As a result, the impact of the proposed increased threshold on the reviewability of transactions will depend upon the

prescribed definition of “enterprise value”.

DEFINITION OF SOE

The Federal Government’s December 2012 announcement that the definition of a SOE would be revised to include entities that are “influenced directly or indirectly” by a foreign government will be implemented by Bill C-60. However, Bill C-60 expands the SOE definition to include an individual who is acting under the direction or influence, directly or indirectly, of a foreign government.

It is unclear how the Federal Government will assess direct or indirect influence of an entity, or whether an individual is acting under the direction or influence, directly or indirectly, of a foreign government, though this would likely be a lower threshold than the standard that has been applied under “control in fact” tests. The expanded definition of SOE is likely to create significant uncertainty for investors who are nominally private because they are not controlled in law or fact by foreign governments, but which may have minority government investment, commercial relationships with foreign governments or significant relationships with officials within government. The inclusion of individuals introduces additional uncertainty regarding whether appointments of board members by minority investors or board members’ individual relationships with foreign governments result in an individual acting under the direction or influence of a SOE.

MINISTERIAL DETERMINATIONS OF SOE STATUS AND CONTROL BY SOE

The Federal Government’s December 2012 announcements indicated it would carefully monitor SOE transactions throughout the Canadian economy and closely examine the degree of control or influence a SOE would likely exert on a Canadian business being acquired and the industry in which the Canadian business operates, and the extent to which a foreign state is likely to exercise control or influence over the SOE acquiring the Canadian business.

Bill C-60 includes amendments to the ICA which would provide the Minister with new powers to determine that:

  • an otherwise Canadian-controlled entity is controlled in fact by one or more SOEs;
  • an entity is or is not controlled in fact by a SOE; or
  • there has or has not been an acquisition of control in fact of an entity by a SOE.

The Minister could request from an entity information he considers necessary to make his determination and, if the entity refuses or neglects to provide the requested information within a reasonable time, the Minister could declare that the entity is not Canadian controlled, that the entity is or is not controlled in fact by a SOE, or that there has or has not been an acquisition of control in fact by a SOE.

The proposed control in fact amendments introduce a new level of uncertainty into the Federal Government’s treatment of proposed investments by SOEs. For certain investments, the proposed amendments would effectively eliminate the current statutory “safe harbour” that an acquisition of less than one third of the voting shares of a corporation, or less than a majority of the voting interests of a partnership or joint venture, does not result in an acquisition of control. The amendments would give the Minister a new ability to scrutinize all investments in which SOEs are involved including minority investments by SOEs to determine whether they confer control in fact on a SOE, and therefore require a net benefit review under the ICA.

Similar control in fact provisions exist in relation to cultural businesses. Our experience in this sector suggests that it is possible to successfully implement transactions where control in fact may be an issue, but in some cases additional time and complexity may be involved in order to comply with such provisions.

EXTENSIONS OF NATIONAL SECURITY REVIEW TIMELINES

The Federal Government’s December 2012 announcement referred to amendments to the ICA to provide the Minister with flexibility to extend the time available to conduct national security reviews of proposed foreign investments in exceptional circumstances. At the time of the Federal Government’s December 2012 announcement, it was unclear which timelines the Minister would be seeking to extend.

The ICA sets a number of timelines in relation to national security reviews, including: (i) the time within which the Minister may provide notice of and order a national security review; (ii) if a national security review is ordered, the time within which the Minster is to conduct a national security review and may refer an investment to the Governor in Council if he believes or is unable to determine whether the investment would be injurious to national security; and (iii) the time within which the Governor in Council may take any measures advisable to protect national security.

Bill C-60 proposes amendments to extend a number of relatively short five day periods to 30 days, and enable various timelines to be extended on agreement between the Minister and the non-Canadian investor.

While the proposed extensions to the national security review timelines and the ability to negotiate extensions introduce more flexibility into the process, these proposals may result in a protracted review where an investor may feel obliged to consent to the Minister’s request for an extension, in order to avoid rejection of the transaction.

Overall, Bill C-60 would give the Federal Government greater flexibility to investigate SOE investments from every angle, and to take a thorough, lengthy look at a transaction on national security grounds.

For this article in Chinese please click here.

 


[1] An Act to implement certain provisions of the budget tabled in Parliament on March 31, 2013 and other measures.

Full text of Bill C-60 is accessible at: http://www.parl.gc.ca/HousePublications/Publication.aspx?Language=E&Mode=1&DocId=6113748&File=4.

 

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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