Cross-Border M&A: In-House Counsel Urged to Know the Territory

Cross-Border M&A: In-House Counsel Urged to Know the Territory

The role in-house counsel at private companies plays in an international merger acquisition goes far beyond drafting and reviewing documents. Responsibilities include preparing for the transaction, due diligence, structuring the deal, documentation, and dispute resolution. But in-house counsel also must be prepared for the regulations and culture of the country in which the organization wants to do business to effectively meets those responsibilities.

“At Microsoft, we look at transactions through various lenses,” said Keith Dolliver, Associate General Counsel at Microsoft Corp. “Going global” hinges on what the organization’s goals and priorities are. In-house counsel must focus on why the company is doing the transaction and why is it doing this deal versus another, Dolliver explained. For example, if the transaction is being made to acquire talent, the intellectual property aspect of the deal may take a back seat in the negotiations.

Dolliver shared his insights as moderator of a panel discussion with Alan Klein of Simpson Thacher & Bartlett and Michael O’Bryan of Morrison & Foerster during a webinar titled “Cross-Border M&A: Increasing International Holdings & Ensuring Business Well-Being.” The complimentary CLE session was presented to in-house attorneys by LexisNexis on July 27, 2011.

Due diligence lays the foundation for the entire transaction. Conducting thorough due diligence includes understanding the company’s “value drivers” behind the transaction and the liabilities that must be addressed, as well as any other potential issues that may affect the deal, O’Bryan said.

Counsel must understand the changes that will be necessary in the target company when it goes from local ownership to off-shore ownership, which can bring a whole new set of rules and oversight, said O’Bryan. Keep in mind that your company may have different objectives in different jurisdictions. “You may want to slice and dice the issues a little bit as you go forward,” he added.

A few areas to consider when doing due diligence include:

• Contracts. Assignment, termination and other issues under local law must be reviewed.

• Employees. Transition services may be required.

• Know-how/extra-contractual relationships. Find out who is connected with suppliers, distributors and customers

• Intellectual property validity and strength. How can your company integrate and exploit that IP through its systems and technology?

• Local scrutiny. Determine the potential for increased scrutiny of previously tolerated indiscretions after foreign ownership is completed.

What’s Your Threshold?

When articulating priorities and making plans, remember to keep things in proportion. It can save a lot of time and effort on everyone’s part.

“One important issue to figure out as one is involved with local counsel and local accountants, what are going to be the thresholds for the diligence that are going to be undertaken?” said Klein of Simpson Thacher & Bartlett. “You don’t need to count every pencil on every desk. It’s not going to be economical to do that in a country where there may only be a very small presence by the target business.”

Consistency is also key. Be sure everyone involved in the deal has a consistent understanding of the deal throughout the process. “If every jurisdiction thinks its running its own deal, you have recipe for disaster,” Microsoft’s Dolliver added.

Klein agreed. “As you move into multiple jurisdictions and multiple time zones, that coordination becomes critical.” As a case in point, he described working on a recent international transaction that spanned approximately 30 countries. The business unit in one of the countries was “racing ahead” to move assets around and reorganize, yet the closing was months away, said Klein. The team had to remind the unit that everything needed to happen at the same time.

Local Legal Practices

O’Bryan said due diligence requires getting the legal lay of the land in the targeted country. “In other jurisdictions, there tends to be a lot less focus on the legal details than in the U.S. While that can be a great thing for getting a deal done, it can also lead to some disputes or misunderstandings in the future,” he said. Difficulties also arise when there is not a lot of precedent in the other jurisdictions for the deal you want to make or for resolving a dispute.

Confidentiality may also be an issue in other countries. While counsel can be fairly confident that U.S. lawyers will be discreet once you hire them and heed confidentiality principles and restrictions, O’Bryan said, in other jurisdictions where law is less developed, information leaks may be routine and accepted.

Counsel may find that the role of local counsel differs from U.S. expectations, added Dolliver. For example, in Asia, a lawyer’s job is to provide analysis, but not necessarily advice and problem solving as in the U.S.

Antitrust and Other Regulatory Concerns

A significant hurdle in international M&A is determining what regulatory filings are needed. “You may be acquiring a holding company or one or more intermediate holding companies but, based on the revenue of the target organization, there may be antitrust filings required,” Klein said.

In the U.S., approval needed once the appropriate paperwork has been filed. But keep in mind that in other jurisdiction, approval may not be necessary, Klein pointed out. “There are jurisdictions that seem to view this as an opportunity to get fees,” he said.

It’s up to in-house counsel to determine:

• Applicable laws that apply to the deal, including antitrust, labor, and foreign exchange regulations;

• Regulatory review or approval required before closing;

• Operational licenses needed;

• Rules mandating that outside companies must work with a local partner; and

• Foreign investment review procedures.

Don’t assume the targeted organization and regulators in that country will be forthcoming about everything required of the buyer, Klein cautioned. “We assume, because we are naïve Americans, that all the issues are going to be put on the table and that’s not necessarily the assumptions that some sellers, some cultures or some foreign laws expect.” It also may be that the individuals you are questioning simply don’t know the answers.

The FCPA’s Broad Reach

The Foreign Corrupt Practices Act (FCPA) has an “incredibly broad reach” and covers not just foreign government contracts, but anything of value to your company, O’Bryan said.

The FCPA is an area of increasing enforcement activity in the U.S. The FCPA:

• Prohibits corrupt payments to foreign officials for the purpose of obtaining or retaining business;

• Provides criminal and civil enforcement and penalties possible, as well as possible jail time;

• Holds parent corporations can be liable for conduct of subsidiaries and their agents; and

• Rejects the defense of “common practice” or legality under local law.

Klein noted that many U.S. companies are struggling with the FCPA’s requirements, particularly in countries where bribery is part of the business culture. In fact, the FCPA is so strict that such issues can deter U.S. companies from acquiring foreign businesses, he said. The Middle East, India, and China are particular hotspots because of the way business is done in those countries.

Red flags to look for include:

• Unusual payments;

• Third-party contracts with above-market terms; and

• Multiple year-end accounting adjustments.

Questionable practices in the targeted organization don’t necessarily have to kill a deal, however. A thorough understanding of the target’s internal policies, the implementation of a strong compliance program, and consistent monitoring can go a long way to staying on the right side of the FCPA.

Transaction Structuring

Questions to ask when structuring the transaction itself include:

• Where does target have operations or assets?

• Is target maintained as a cohesive company? Or different lines that operate independently?

• Is stockholder approval required? What are dissenters’ rights?

• Will transaction trigger requirement for a “mandatory offer”?

• How does the buyer want to pay for this? Cash? Stock? Both?

• Will the timing of permit approvals and restructuring affect the deal?

• Is the target organization negotiating with other potential buyers?

• Does your company have or need an exit strategy?

It’s up to in-house counsel to guide the negotiations and interactions with the target company, said Dolliver. Determining up front who should be involved in the negotiations, what negotiation style will be most effective, and if face-to-face meetings are required will help smooth the process.

Employee Relations

International M&A opens the door to myriad employee-related issues. What will the status of the targeted organization’s employees be after the transaction?

For example, “if it’s an asset transaction, you may be hiring all the employees de novo, from scratch, because they are being ‘transferred’ to a new entity,” Klein noted. One of the first things in-house counsel must do is look at the effect of the transaction on employee contracts.

In many countries, companies have “works councils,” a board made up of employee representatives who must be consulted on transactions and reductions-in-force. “They typically can’t actually block a transaction but are empowered to ask questions, obtain additional information,” said Klein. But a period of time must be set aside once a transaction has been agreed to but before the transaction agreement has been signed to accommodate this process.

Human resource issues to address include:

• Whether employees must be formally transferred to the buyer and what employee rights are triggered by the transfer, such as vested rights, acquired rights, transfers of undertaking and deal-triggered “termination by operation of law;”

• The need to reduce the workforce at the targeted organization, how that will be accomplished, and who must be consulted, such as unions and works councils;

• Employee dispute resolution processes, forums, and enforcement;

• The impact of local policies on employee-related actions.

• Securities law, other issues with option grants to foreign employees

Personal information on employees is another issue because privacy laws differ in various jurisdictions. In fact, privacy laws are typically stronger outside the U.S., said Dolliver.

In-house counsel should determine what type of data is gathered on employees, where it is stored, and how it is used at the targeted company. Potential problem areas can include information technology integration and synergy, and cross-border electronic access.