Private International M&A: Climate Improves But IP, Tax and Enforcement Trends Can Bring Cloudy Skies

Private International M&A:  Climate Improves But IP, Tax and Enforcement Trends Can Bring Cloudy Skies

The climate for private international mergers and acquisitions (M&A) may be more positive than it has been in recent years, but counsel still need to be sensitive to intellectual property issues as well as differences in taxation law between countries and new enforcement trends, says Raymond Agran of Saul Ewing LLP in Philadelphia.

Agran spends much of his time on significant cross-border elements.  In particular, he draws on his experience in M&A and securities work in the United Kingdom, Canada, Japan, Russia and Eastern Europe.

“International companies are now looking more favorably at making acquisitions in the United States,” said Agran. However, he said that many of these companies must contend with major differences in legal systems.

“They do understand that if you are going to do business in the United States, that generally speaking, you need to ‘lawyer up,’ even more than you do in your home jurisdiction,” said Agran.

“And surprisingly, beyond what you might have expected, the success of businesses in places like China and India means that there isn’t just inbound investment in those countries anymore, but there is increasing outbound business,” he said.

Intellectual Property

Agran said that he has seen many international companies engage in “transfer pricing” in order to protect their foreign intellectual property rights and to avoid transferring the international property outright into the United States.

“That has to do with the fact that what you can’t do is give somebody a right to an intellectual property and then artificially lower the royalty rate, from a high tax jurisdiction to a low tax jurisdiction,” he said.

He said that international companies might try to compensate by licensing their intellectual property to a U.S. entity, which theoretically will pay a royalty to the foreign entity.

For example, Agran said that taxes in France are much higher than U.S. taxes.

“So the French taxing authorities and EU taxing authorities are on the lookout for ‘hey, you licensed that intellectual property at a very low royalty rate,’ so that when your U.S. subsidiary pays royalties, you don’t have to report very high royalty receipts,” he said.

Enforcement Trends

“There’s an increased enforcement trend from taxing authorities, having to do with transfer pricing,” said Agran. “And as a related issue, very often cross-border M&A, has enormous tax components to it.”

As a result of this trend, Agran said he must be more sensitive to ensure he is structuring cross-border M&A deals in a tax-efficient way. 

“Just as an example, there is a notion in U.S. law as to whether or not someone has a permanent establishment in the United States, so called P.E. issues. And there’s also another thing called CFC, controlled foreign corporation. From a structuring point of view, sometimes it’s unavoidable. You are going to have to deal with it, whatever it is. But to be ignorant of it is worse,” he said.

He also said that differences in labor laws create issues in cross-border M&A deals. Many U.S. companies may not understand that it is very difficult to terminate distributors and even ordinary employees under European labor laws.

“And similarly when Europeans are doing business in the United States, they generally don’t know a lot about stock options, how those are structured,” he said.

He also said that Europeans often view a Limited Liability Corporation (LLC) much differently than Americans.

“In many jurisdictions there is not a legal vehicle that is very comparable to our LLC from the standpoint of flexibility and even tax treatment as a pass-through. In many jurisdictions, they view an LLC more like a corporation, than what we view it as, which is sort of an incorporated partnership. I often find that I have to explain to foreign clients why an LLC might be a good idea here, [and] what kind of flexibility you can get from using it, because it is an alien concept to many of them,” Agran said.

Agran said that although the market for international M&A is improving, he observes that many U.S. companies are limiting their acquisitions abroad to English-speaking countries as well as China and India and are ignoring opportunities in Eastern Europe.

He also said that deal certainty is still an important factor in international M&A because of the state of the economy.

“People say, I’m not going to spend the accounting and legal fees that we’re talking about unless I really know that that this deal is going to go through. So I am seeing more intense diligence. I am seeing more extensive negotiations and descriptions in letters of intent,” he said.

Foreign Corrupt Practices

An important trend for in-house counsel who work with international M&A is the recent efforts by the U.S. government to step up its Foreign Corrupt Practices Act enforcement.

“There is an increased sensitivity to [these issues] because the British now have adopted an even more stringent version of the Foreign Corrupt Practices Act. So, I think a lot of in-house lawyers have been sensitized to that issue,” he said. 

“I would also say that, more and more, these deals are taking the form of some kind of joint venture, and I think anybody that’s structuring these deals ought to ask, ‘do we really need a joint venture?’” he said. 

“I often find that business people think, joint venture. They think, ‘we should own something together.’ I think if you’re being thoughtful you would say ‘No, what we really need is just a very detailed contract between the two of us,’” Agran said.