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

AUSTRALIAN UPDATE – Deal Landscape, Origin of Bidders and Deal Structures

Editors’ Note: This report was contributed by Philip Podzebenko, a member of XBMA’s legal roundtable. Mr Podzebenko is a partner at Herbert Smith Freehills in the Corporate Group. This paper was based on research conducted by other Herbert Smith Freehills staff, Paul Branston, Partner and Michael Denny, Solicitor.


  • The Australian public M&A market has seen relatively steady activity levels, with a modest increase in number of deals, but lower total deal value, in the 12 months to 30 June 2017 (FY17).
  • Success rates were down on FY16, with 66% of deals announced in FY17 being completed.
  • The level of contested bid activity was also subdued in FY17 with only 3 targets attracting multiple bidders.
  • The consumer and industrials sectors featured more strongly in FY17, with deals in those sectors comprising 38% and 41% of total deal value respectively.
  • Deal activity in the information technology and software services sectors increased notably.
  • Inbound public M&A remained steady, with bid activity originating from Asia dominating deals by value.

Deal landscape

Levels of public M&A activity in FY17 remained relatively steady, with 59 deals announced (up from 50 announced in FY16), but with total deal value decreasing to $23 billion in FY17 from $33 billion committed in the previous 12 months. Consistently with the decline in total deal value, with only 4 deals exceeding $1 billion and deals in this category and deals in this category accounting for 67% of all deal activity by value (down from 6 deals exceeding $1 billion , representing 80% of total deal value in FY16).

Success rates also declined moderately in FY17 to 66% relative to 73% in FY16.

Overall, the proportion of bids launched in FY17 without support from the target board from the outset (34%) was lower than in previous years (FY16, 44%). Of the unsolicited bids, 45% were ultimately successful (as compared with a 79% success rate for friendly deals). All of the unsolicited bids which were successful only 63% were recommended by the target board either in the board’s initial response, or following negotiations (down from 100% in FY16).

The number of contested bids in FY17 was subdued, with only 3 targets the subject of multiple bidders (none involving targets with a value exceeding $1 billion), down from 7 targets attracting competing bids in FY16. A number of targets received non-binding competing proposals, but they did not proceed to a stage where they could be considered by shareholders. In all 3 contested scenarios, the underbidder was unsuccessful. Encouraging competing bids remains an effective means for target boards to defend against undervalued or opportunistic bids.

Success rates in hostile and friendly deals


Merger and acquisition activity in the consumer and industrials sectors featured strongly in FY17, representing 38% and 41% of overall deal value respectively. While there was significant private M&A activity in the energy and resources sectors, public M&A activity volumes in that sector were subdued with most deals involving small-cap targets (average deal size of $27.6 million) and total deal volume of only $606 million (FY16, $1.1 billion).

Private equity participation in public M&A in FY17 was subdued, with only 6 private equity backed deals announced (and only one of them exceeding $1 billion). Of the 6 private equity backed deals, 3 involved targets in the resources sector.

Origin of bidders

Foreign bidders accounted for a majority (53%) of all deals in FY17, by value. Foreign bidders were active across all sectors.

Asia-based bidders were more dominant in FY17, with 11 of the 26 foreign bidders being Asia-based and $9.6 billion committed by bidders based in Asia (representing 41% of deals by value). North American bidders also featured strongly representing 9 of the 26 foreign bidders but only 6% of deal value.

Percentage of deals by origin of bidder


Deal structure

The preference for schemes of arrangement increased moderately in FY17, with 49% of all deals involving schemes, compared with 44% in FY15. The use of schemes continued to dominate transactions exceeding $1 billion, with 75% of deals in this category implemented by scheme.

Cash consideration remained he dominant form of consideration in FY17, and was the sole form of consideration in 64% of transactions (up from 62% in FY15). There was a strong preference for cash consideration in unsolicited deals, with 85% of all unsolicited bids being cash-only or having an all-cash alternative. The form of consideration did not have a marked impact on success rates for deals, other than in relation to hostile bids, where all-cash deals were more likely to succeed than all-scrip deals.

Success rates by consideration offered in hostile deals

 FY17 saw an overall decline in premiums offered by bidders, with an average initial premium offered in FY17 of 22% relative to 36% in FY16. The percentage of deals with an initial premium below 20% markedly increased relative to FY16 for both hostile and friendly deals.

Success rates in FY17 continued FY16’s and FY15’s trend, showing a positive correlation between size of premium and bid success, with bids involving an initial premium in the 20-40% range having a 71% success rate, and those with an initial premium exceeding 40% having a 92% success rate.

The use of conditions in takeover bids requiring a minimum percentage of acceptances to be received by the bidder decreased substantially in FY17 with under 50% of acquisitions conducted by way of takeover bid having a minimum acceptance condition (compared with 80% in FY16).

Consistently with previous practice, material adverse change conditions continued to be included in the majority of public M&A deals. However the continued increase in the use of carve outs from the material adverse change conditions for external factors such as changes in law or accounting policy, general economic conditions, industry conditions and stock markets reflect that bidders continue to be willing to accept commercial risk when making a bid.

Deal protection mechanisms continued to feature in negotiated transactions, with use of deal protection mechanisms in FY17 relatively consistent with previous years. The use of toe-holds (where the bidder has a stake in the target before announcement) and reverse break fees increased moderately relative to previous years. ‘Truth in takeovers’ statements (being public statements of intent to accept or otherwise support a bid by target shareholders) remained the preferred form of lock-up, with 68% of lock-ups taking the form of truth in takeovers statements only.

Consistent with previous years, notification and matching rights remained popular with notification and matching rights being found in 90% and 77% respectively of negotiated deals. Use of break fees decreased moderately with 77% of negotiated deals including a break fee (down from 86% in FY16). The use of reverse break fees increased significantly with 49% of negotiated transactions including a reverse break fee (FY16, 32%).

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.

CHINESE UPDATE – NDRC New Regulation Simplifies its Approval/Filing Procedures over Outbound Investment Projects

Contributed by: Adam Li (Li Qi), Jun He Law Offices (Shanghai)

Editors’ Note: Contributed by Adam Li, a partner at JunHe and a member of XBMA’s Legal Roundtable. Mr. Li is a leading expert in international mergers & acquisitions, capital markets and international financial transactions involving Chinese companies. This article was authored by Mr. Yi Wang, and Ms. Fang He, both partners at JunHe. Fang is also a member of XBMA’s Legal Roundtable.  Mr. Wang has broad experience in capital markets and private equity, and Ms. He is specialized in cross-border M&A, private equity, trust and assets management.


  • NDRC launches new regulations, which indicates further relaxation measures on PRC outbound investment.
  • The controversial “road-pass” requirement has been removed.
  • The NDRC approval and filing requirement has been changed from a condition for effectiveness of the acquisition contract to a condition for closing.

Main Article

On December 26, 2017, the National Development and Reform Commission (“NDRC”) formally promulgated the Administrative Measures for Outbound Investment by Enterprises (“Order No. 11” or the “New Measures”) in lieu of the Administrative Measures for the Verification and Approval and Record-Filing of Outbound Investment Projects promulgated in April 2014 (as amended in December 2014) (“Order No. 9” or the “Old Measures”).  Order No. 11 will come into effect on March 1, 2018.  It largely adopted the provisions of the Administrative Measures for Outbound Investment by Enterprises (Draft for Comments) promulgated by the NDRC on November 3, 2017.

Compared with Order No. 9, Order No. 11 is less regulated in NDRC’s reviews of outbound investment, and has simplified the process and requirements of review. Overall, it will be conducive to outbound investment projects.

In the New Measures, the major simplified procedures include:

1. The “confirmation letter” is no longer required.

The Old Measures provided that the investor of an outbound investment or bidding project with the investment amount reaching or exceeding USD 300 million was required to submit a project information report to and obtain a confirmation letter (also known as “Road-Pass”) from the NDRC. This provision has been removed in the New Measures.  This simplification removal is one of the most welcome signals for market players in the area.  In China’s outbound investment practices, what troubled and concerned overseas sellers the most has been whether the Chinese investors had obtained and when they would obtain the confirmation letters from the NDRC, because the Chinese investor could not submit a binding offer to the overseas seller or sign a binding contract until the confirmation letter was obtained.  The abolishment of confirmation letters will undoubtedly increase the flexibility of Chinese bidders in overseas investment bidding.

2. The verification and approval by or record-filing with the NDRC has changed from a condition for the contract to take effect to a condition precedent to closing.

The Old Measures provided that prior to signing any final and legally binding document with an external party, the Chinese investor should obtain the verification and approval document or the record-filing notice issued by the NDRC; alternatively, the investor could specify in the document signed that it should come into effect on the condition that the verification and approval document or the record-filing notice issued by the NDRC was obtained. It was relatively difficult to meet this requirement in practice.  Sellers are unwilling to accept that provisions on break-up fee, security deposit, and many other seller protection mechanisms ultimately would not take effect until NDRS approves it, so in some projects it was stipulated in the contract that the NDRC’s verification and approval document or record-filing notice was only a condition for closing of the transaction.  However, this is certainly not in line with Order No. 9, and its validity was questionable.  In the New Measures, amendments have been made to only require that Chinese investors shall obtain the verification and approval document or the record-filing notice prior to the implementation of the project (i.e., the actual payment of funds to overseas sellers or the actual investment of funds in overseas projects), which reflects and meets the practical needs of the parties.

3. Making applications via the NDRC’s local counterpart is no longer required, and direct online applications are encouraged.

The Old Measures required investors to submit applications via the NDRC’s local counterpart, which was unnecessary in practice and delayed the review and approval process. The New Measures have removed this requirement and encourage direct online applications.  Previously, although the local counterpart of the NDRC provided great support, some clients had experienced delays before their applications were successfully submitted to the NDRC via its local counterpart.  Now making applications directly to the NDRC is indeed more simplified and takes less time, which will accelerate the response by Chinese investors in overseas bidding procedures.

4. Less time is needed for project assessment.

The New Measures slightly adjusted the time limit for project assessment. As for most projects, the time limit for assessment is reduced from 40 working days to 30 working days, while it can be extended to 60 working days for major projects if it is appropriate.

In general, the New Measures as compared with the old ones have optimized and simplified the NDRC review and filing procedures for outbound investment projects. To a certain extent, they can improve the transparency of the Chinese government’s regulations over outbound investments and reduce the confusion and worries of overseas sellers over the approvals by the Chinese government, so it should be good news for Chinese outbound investment.


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 – 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.

ISRAELI UPDATE – Israel’s Anti-Concentration Law: An Opportunity for New Players

Contributed By: Shirin Herzog, Ron Gazit, Rotenberg & Co.

Editors’ Note: Contributed by Shirin Herzog, head of the Mergers and Acquisitions, Securities and International Transactions Department in the Israeli firm of Ron Gazit, Rotenberg & Co. Ms. Herzog handles a variety of Israeli and cross-border merger and acquisition transactions, for public and private companies, and private equity transactions. This post is based on a recent blog post by Ms. Herzog first published in The Times of Israel on November 30, 2017.

As we conclude the contested law’s first phase, its widespread impact is felt on the Israeli market

Known from ancient times as a land of milk and honey, nowadays the nation of Israel is also a nation of opportunity. The law commonly referred to in Israel as the “Concentration Law,” requires investors deemed to be overly concentrated in the Israeli market to sell or take other actions regarding prime assets. By the same token, these investors may also be restricted from acquiring further Israeli assets. While some existing players in the Israeli market (mostly Israelis) may be harmed by the law, it has created significant opportunity for new players.

In the four years since the law was enacted, we have witnessed a considerable number of transactions driven by its requirements.

The law set up a few milestones, the first is December 10, 2017, by which Israeli conglomerates having multiple layers of publicly-traded subsidiaries (legally existing structures, also known as “pyramids”) must be flattened to a maximum of three layers of public companies; by way of sale, going private, redemption of public debt, merger, etc.

The last conglomerate to comply with this requirement was the IDB Group. On November 22, 2017, just days before the deadline, IDB Development sold its controlling interests (71%) of Discount Investments to a private company held by Eduardo Elsztain, who is also the controlling shareholder of the IDB Group. Accordingly, Discount Investments remained a publicly-traded company, but became a sister company of IDB Development, instead of its subsidiary – removing one public layer at the pyramid’s top.

Those who closely follow the Israeli financial media surely know there’s nothing like IDB to kindle populist debate and criticism of politicians and journalists alike. This deal was no exception. Many argued that the deal’s structure and financing breached the Concentration Law’s letter and spirit, and some even called for legislation of deal-blocking regulations. I have a different take on this situation. A thorough analysis of the Concentration Law (formally, The Law for Promotion of Competition and Reduction of Concentration of 2013), together with its explanatory notes, leads me to conclude that the deal breaches neither the law nor its spirit. The specifics of the analysis deviate from the scope of this piece, but in a nutshell, the provisions relating to pyramid-flattening cover only the number of public layers and they do not restrict transactions within a conglomerate that meet this number of layers criterion. Unlike the other components of the law described below, neither separation of assets held nor concentration considerations apply. Moreover, any legislation restricting the manner of doing business should be interpreted narrowly and should not apply retroactively.

The Concentration Law has already significantly succeeded in reducing the number of layers in many Israeli public-companies’ pyramids. According to a study conducted by the Israel Securities Authority, as of September 2017, only 13 companies kept the third to fifth layers of pyramids, compared to 67 such companies upon commencement of the preparatory process of the Concentration Law’s legislation in 2010. The IDB Group, a perceived catalysator of the law, had seven such companies in September 2017, compared to 27 in 2010. The recent IDB deal reduced a layer at the top of the pyramid, turning four “third-layer companies” into “second-layer companies,” no longer restricted by the Concentration Law. Thereafter, IDB still has three companies in the pyramid’s third layer.

The second milestone under the law is only two years away. By December 10, 2019, pyramid structures should be further flattened to no more than two layers of public companies. By that deadline, another component of the Concentration Law also becomes effective. It relates to separation of cross-holdings of mega Israeli financial companies (generally, companies managing assets exceeding NIS 40 billion; US $11.4 billion) and mega Israeli “real” (namely, non-financial) companies (generally, companies having revenue or debt in Israel exceeding NIS 6 billion; US $1.7 billion).

Two years may seem like a long time, but it is not. Considering the market conditions, the harsh sanctions on a breach (forced sale by a trustee) and the precedents in recent years, especially in the regulated insurance space, selling such assets could take a long time – and no seller wants to resort to a forced sale at the last moment. Much like a game of musical-chairs, no one wants to remain standing when the music stops.

Indeed, we are already seeing many transactions and separation actions in the market. The Delek Group (concentrating on gas, oil and real estate) has attempted to sell its Phoenix Insurance Company several times, as did the IDB Group with its Clal Insurance Company. Alas, the potential buyers did not stand up to the regulator’s standards. Apax Partners sold Tnuva Dairies in a well-orchestrated deal in 2015, ahead of the curve. In another case, Bino Group, the controlling party of both The First International Bank of Israel and Paz Oil Company, was bound by the Concentration Law to choose between these two prime assets, and opted to decrease its holdings in the latter company.

In parallel, seeds of the third component of the Concentration Law are starting to bud. Under that component, overall-market concentration and sectoral competitiveness considerations must be taken into account when government rights or assets, such as telecommunication licenses or exploration concessions, are allocated. A pioneering example was the restriction of The Israel Corporation from entering the emerging field of oil-shale exploration.

The Concentration Law is unprecedented both in its widespread effect over the Israeli economy and in the aggressive remedies it applies to increase competition in the allegedly-concentrated market. The law does not include “grandfather clauses” exempting existing structures and holdings, resulting in Israeli investors being forced to sell or take other actions regarding prime assets within a limited time. All the while, these Israeli investors may also be prohibited from acquiring further Israeli assets, consequently shifting investments and debt out of Israel.

The good news is these restrictions on current players in the Israeli market create opportunities for new players. From the perspective of non-Israeli investors, the Concentration Law constitutes a regulatory springboard, giving them an advantage over existing concentrated players. Opportunity is certainly ripe for newcomers to the Israeli market.

The above does not constitute legal opinion or an investment recommendation.

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.

UK UPDATE – UK Government consults on new powers to control foreign investment

Editors’ Note: Contributed by Nigel Boardman, a partner at Slaughter and May and a founding director of XBMA.  Mr. Boardman is one of the leading M&A lawyers in the UK with broad experience in a wide range of cross-border transactions. The article was co-authored by Lisa Wright, partner, and Ying-Peng Chin, associate, at Slaughter and May (London).  

The UK Government recently published its long awaited green paper on control of foreign investment (the Green Paper).1 It proposes measures to increase Government scrutiny of foreign investment but only in relation to national security and not on the broader political grounds previous public statements have hinted at. Specifically, the Green Paper sets out two proposals: (1) urgent changes to the existing system to allow the Government to intervene in more mergers in the military, dual-use and parts of the advanced technology sectors; and (2) options for more extensive and long-term reform of the existing system. Recognising the importance of foreign investment to the UK – particularly given the UK’s impending departure from the EU – the Green Paper has as one of its central aims the need to ensure that the UK remains attractive to inward investment.

This briefing considers the rationale for increased scrutiny of foreign investment, why and how the Government proposes to reform the existing regime and how the Government is seeking to ensure that it does not deter foreign investment at this critical time for the UK.

Rationale for increased Government scrutiny of foreign investment

Expansion of the Government’s ability to review mergers on non-competition grounds has been mooted since at least 2016 when Theresa May described her desire to develop an industrial strategy that would enable the Government to defend domestic firms against foreign takeover: referring to Pfizer’s aborted takeover of AstraZeneca she said, “A proper industrial strategy wouldn’t automatically stop the sale of British firms to foreign ones, but it should be capable of stepping in to defend a sector that is as important as pharmaceuticals is to Britain”. In doing so, she suggested that the UK might develop a more politically interventionist approach to merger control. Although the industrial strategy green paper published in January 2017 made no such proposals, comments made by the Prime Minister just prior to publication of that green paper suggested that the issue was still on the agenda. There were, however, signs that the focus had shifted from a broad approach to intervention to a focus on national security and particular sectors (“[The Government] will be looking at how we develop ideas I’ve already talked about on national security and critical national infrastructure” (emphasis added)).

This narrower approach is reflected in the Green Paper with the Government stressing that the reforms are designed to increase its ability to scrutinise foreign investment for reasons only of national security (“All reforms that the Government makes in this area will only be the necessary and proportionate steps to protect national security”), albeit that the proposals are not limited to critical national infrastructure. Indeed the Green Paper appears implicitly to criticize the recently published EU proposals for screening foreign investments (the Proposed EC Regulations) for having protectionist motivations.2 This is in addition to the Government’s more explicit denouncement of the Proposed EC Regulations for placing “additional burden and uncertainty on prospective investors, which is at odds with the UK’s stance as an open and liberal investment destination” in an Explanatory Memorandum published on 5 October 2017.

Existing foreign investment regime

The Government can call in foreign investment for review on grounds of national security where: (1) the transaction qualifies for merger control review under the EU Merger Regulation or the UK merger control regime; or (2) where the transaction does not qualify for merger control review under either of the EU or UK regimes but involves a “relevant government contractor” (current and former government contractors holding confidential information relating to defence). Where concerns arise the Government can seek remedies and ultimately can block the transaction.

So why does the Government believe it needs to expand these existing powers and how does it propose to do so?3

Proposal 1: Urgent changes in relation to the military, dual-use and advanced technology sectors

The Government believes the existing regime leaves an enforcement gap in so far as transactions which do not qualify for EU or UK merger control review and do not involve a “relevant government contractor” cannot be called in for review on national security grounds. The Green Paper identifies a particular concern in relation to acquisitions of small UK businesses with products, IP and expertise in key parts of the military and dual-use and advanced technology sectors which it says pose “clear and immediate risks to the UK” and “raise legitimate and significant national security concerns for the country as a whole”.4

To plug this gap the Government proposes to amend the UK merger control rules so as to bring more transactions in these specific sectors within scope and thereby to give itself jurisdiction to review them on national security grounds. Specifically, the Government proposes to reduce the turnover threshold so that mergers in these sectors would qualify for review under the UK merger control rules where the target has over £1m of UK turnover (compared to £70m under the normal rules) and to amend the share of supply test so that mergers in these sectors will qualify for review under the UK merger control rules where the target has a 25% share of supply of goods/services of a particular description in the UK (compared to the normal rules which require the transaction to create or increase a share of supply of 25%).5

Underlining the urgency described in the Green Paper (and considering that these changes are expected to impact only a small number of transactions), the Government has provided for just four weeks (ending 14 November 2017) for the consultation on Proposal 1.6 The Green Paper also makes clear that the Government intends to implement Proposal 1 immediately after consultation. We can therefore expect the new thresholds to apply to mergers in the relevant sectors (i.e. military and dual-use and key parts of the advanced technology sectors) within the next few months.

Beyond these sectors, the Government wishes to consult more extensively (see below) before making any changes.

Proposal 2: Longer term substantive changes

The Green Paper notes that, in contrast with other countries (e.g. Australia, Canada, US and France), the UK’s approach to national security review “appears less well developed […] to deal with the potential risks to national security that we face, and the scale of investment our national infrastructure will require”. In particular, the Government believes the existing regime is ill suited to combat risks of espionage, sabotage or the ability to exert inappropriate leverage.

This is principally because the existing regime is limited to transactions which involve businesses and which qualify for review under the EU or UK merger control regimes. Whereas national security concerns may also arise in relation to transactions which do not involve a business per se – for example, new projects, land sites near sensitive locations and acquisitions of bare assets (non-business entities such as machinery or intellectual property) – or which do not meet the merger control tests. The Green Paper also identifies the voluntary nature of the existing system as a potential risk in that it may mean that the Government is not aware of transactions that could raise national security concerns, as well as a potential source of uncertainty for transaction parties since they cannot be certain which transactions the Government may or may not call in for review.7

The Government proposes to address these concerns by either or both of:

  1. expanding the existing call-in power to capture any acquisition of a UK business entity by any investor which the Government reasonably believes raises national security concerns (i.e. removing the turnover and share of supply tests as limits on the Government’s ability to call in transactions for review on non-competition grounds); and
  2. a mandatory notification regime applicable only to foreign investment in the provision of essential functions in certain parts of key sectors of the economy. Recognising the potential burden on business of a mandatory notification system, the Government aims to “ensure the tightest possible focus” for a mandatory regime: only an identified set of essential functions within the civil nuclear, communications, defence, energy and transport sectors are proposed to be within scope.8
  3. The Green Paper also proposes to bring transactions involving new projects, bare assets and land within the Government’s national security jurisdiction (consistent with the position in overseas regimes).9

Impact on the UK as a destination for foreign investment

Although the Green Paper proposals seek to tighten up regulation of foreign investment, there are reasons to retain some confidence in the UK’s pledge to stay open to foreign investment. Certain features of the UK proposals are aimed at reducing the regulatory burden on investors.

For instance, the Green Paper proposes a well-defined call-in window for intervening in a transaction post-closing (in contrast, CFIUS for example has an indefinite ability to call in unnotified transactions); and, as discussed above, it contemplates the possibility of applying either voluntary or mandatory notification requirements, depending on the sector/type of transaction. This targeted approach should constrain the additional burden on businesses and should facilitate efficient operation of the regime by the

Government, although it is clear that extra public resources will be needed.


The message that the UK remains open for business is repeated often in the Green Paper. The focus on Government intervention on national security rather than broader political grounds is welcome. By incorporating various safeguards – for instance limiting the more interventionist proposals such as mandatory notification to specific activities in specific sectors – and positioning the reforms as aiming to bring the UK regime broadly into line with those operating in other major destinations for foreign investment, the Government hopes to be seen as being genuinely focused on “protect[ing] national security without disrupting or discouraging the vast majority of foreign investment”. It remains to be seen whether the eventual firm proposals, if and as adopted, strike the right balance.


1 See Green Paper published on 17 October 2017 here. Reforms in this area were promised in the Queen’s Speech in June 2017.

2 Concluding a brief discussion of the Proposed EC Regulations, paragraph 70 of the Green Paper states that “screening to prevent [national security threats] merit special treatment but this should not be conflated with screening to control market access for protectionist reasons. The UK is committed to free trade and investment, which must remain a priority for both a successful UK and European economy.

3 The Government has no plans to change its powers to review transactions on grounds of financial stability and media plurality.

4 The dual-use sector refers to the design and production of items that could have both military and civilian uses, and which are on the Strategic Export Control List. The relevant parts of the advanced technology sector are multi-purpose computing hardware and quantum-based technology.

5 The existing UK merger control rules will continue to apply to transactions outside these specific sectors.

6 The Green Paper notes that only around 4% of UK businesses are above the £1m threshold and past public interest interventions for national security purposes have been extremely low (only seven times since the introduction of the existing regime).

7 The merger notification regime in the UK is voluntary (rather than mandatory) so there is no obligation to submit a notification for review even where the transaction meets the relevant thresholds.

8 These essential functions have been narrowed down from amongst the 13 sectors of UK national infrastructure and excludes parts of these sectors that either do not pose national security risks or are already sufficiently protected under existing regulations. The Government also believes that there may be a case for including emergency services and government; but that chemicals, financial services, food, health, space and water should not automatically fall within scope.

9 The Committee on Foreign Investment in the United States (CFIUS) for example takes account of proximity of the target’s assets to sensitive governmental locations when assessing national security risks. The Australian and Canadian regimes capture investments in new businesses and investments in assets.

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.

Subscribe to Newsletter

Enter your Email

Preview Newsletter