Beyond the language barrier
Getting the deal done
Getting an M&A deal over the line is a big task in any context. The task is even greater when a transaction involves multiple jurisdictions, people and cultures. Understanding the bigger picture and commercial objectives makes it easier to focus on the legal provisions that really matter. This article sets out the main differences and challenges cross-border transactions present and the key factors that determine dealmaking success.
Solutions used in other countries can achieve the same or very similar results in cross-border transactions.
Taking the right approach
Things do not always work the same way as they may in your home country. Sensitivity to different cultures, ways of thinking and doing business goes a long way to bridging gaps in expectations and communication. Issues can often be pre-empted and resolved before they arise.
Greater care than normal needs to be taken with respect to how things are communicated or drafted. For example if a due diligence request list (often seen as a basic, standard form document) is not drafted properly from the outset, then this is likely to have an adverse – and magnifying – knock-on effect for the deal as a whole. A significant amount of time may then be taken up answering questions from multiple jurisdictions which could easily have been pre-empted, or doing work which is not strictly required.
Greater care than normal needs to be taken with respect to how things are communicated or drafted.
Equally, a buyer can spend weeks or months carrying out due diligence, only to find that the insurers (where warranty and indemnity insurance is used) refuse to provide coverage because they are unhappy with the sampling approach taken in due diligence. At that point it may be too late to rectify the issue.
If the target is active in – say – 40 countries, it may be impractical for a buyer to take an excessively detailed approach. In these circumstances a buyer may opt to carry out a light touch due diligence in non-core jurisdictions (or rely only on warranty protection) and/or take a ‘sampling’ approach.
Addressing valuation issues
It is important to check if country risk is factored into the valuation – it often is. This may affect the dynamics of the transaction documents themselves. A mechanism to address currency fluctuations may also be required.
An important consideration is whether the deal is locked-box, where the purchase price is fixed at a point in time in the past – often at the date of the last audited accounts – or based on completion accounts where the valuation is fixed as at the date the shares transfer to the buyer. In riskier countries the buyer may be concerned as to potential leakage of value from the locked box date, and therefore prefer the peace of mind that comes with completion accounts.
In riskier countries the buyer may be concerned as to potential leakage of value from the locked box date.
If capital control rules are in place, then it may be hard, or impossible, to dividend-out cash. A buyer then may argue that ‘trapped cash’ should not be included within the net debt calculations in the usual way.
Defining market practice
‘It is market practice’ is often used in negotiations to justify a particular position. But market varies from country to country and continent to continent. Material adverse change clauses are standard on deals in the US, but not in Europe. Very long claim periods for breach of warranty and penalty clauses are usual in Poland.
Tax covenants and indemnities are standard in the UK and other Western countries, but not always in emerging economies. If a Polish company is acquiring operational assets in Argentina and the deal is implemented at the US level under English law (a real-life example!), then what exactly is market practice?
Protecting rights
The applicable laws may not be sophisticated enough to accommodate all the necessary concepts built into the transaction documents.
In what country does the seller have assets? Can a court award be enforced with relative ease (for breach of the SPA for instance)? Is the country party to the New York Convention, ensuring that arbitral awards can be enforced directly in the country with comparably few grounds for local courts to object?
In either scenario, are the local courts sufficiently transparent, independent, and free from unlawful influence? If not, a buyer should consider structuring the deal at the level of an offshore country with more tried and trusted courts.
Even where courts can be relied on, the applicable laws may not be sophisticated enough to accommodate all the necessary concepts built into the transaction documents. This can be challenging in some emerging economies, but equally in some more established markets too. If you are not satisfied that the concepts can be enforced in a manner that achieves the intended commercial result, then consider structuring the deal at the level of a more tried and tested jurisdiction.
There is also a theoretical risk that a government could nationalise the asset in the future or deprive the owner of its use. In that case, a buyer may have the right to take action against the government itself if the investment is structured through an SPV in a country which has a bilateral investment treaty with the target jurisdiction.
Planning for deal blockers
FDI approval procedures are increasingly common. Although formally put in place to avoid unwanted foreign control over strategic assets and resources, such as in the telecoms, energy and defence sectors, it is not unheard of that local governments use the vague wording of the relevant legislation to block deals in far less sensitive sectors. State interference can also occur in merger approval processes and central bank/currency control permissions may also be required.
