Cross-Border Transactions Handbook

Cross-Border Transactions Handbook
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Cross-Border Transactions Handbook
Baker & McKenzie
Baker & McKenzie 2006 All rights reserved. This publication is copyright. Apart from any fair dealing for the purposes of private study or research permitted under applicable copyright legislation, no part may be reproduced or transmitted by any process or means without the prior permission of the editors. Save where otherwise indicated, law and practice are stated in this volume as at January 2006. IMPORTANT DISCLAIMER: The material in this volume is of the nature of general comment only and is not intended to be a comprehensive exposition of all potential issues arising in the context of a cross-border or multi-jurisdictional transaction, nor of the law relating to such issues. It is not offered as advice on any particular matter and should not be taken as such. The precedent documents included in this volume have not been prepared with any particular transaction in mind. Baker & McKenzie, the editors and the contributing authors disclaim all liability to any person in respect of anything done and the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or part of this volume. Before any action is taken or decision not to act is made, specific legal advice should be taken in light of the relevant circumstances and no reliance should be placed on the statements made or documents reproduced in this volume. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm.
Cross-Border Transactions Handbook Editors Note
EDITORS NOTE
Baker & McKenzie was founded in 1949. For more than 50 years, Baker & McKenzie has provided sophisticated advice and legal services to many of the worlds most dynamic and successful organizations. With a network of more than 3,000 locally qualified, internationally experienced lawyers in 38 countries, Baker & McKenzie has expertise in all of the disciplines that are typically relevant to a cross-border transaction. Working in experienced inter-disciplinary teams to advise on corporate, securities, tax, antitrust/competition, finance, commercial, intellectual property, employment, employee benefits, IT, environmental, real property, trade and other compliance and regulatory matters, Baker & McKenzie is in a unique position to assist companies in planning and implementing cross-border transactions and to deliver integrated solutions which take into account all relevant business and legal factors. This handbook is a product of the efforts of numerous lawyers throughout Baker & McKenzie, including the contributing lawyers listed on the next page. The editors are extremely grateful to these knowledgeable lawyers for their work. It is hoped that this handbook provides readers with a clearer appreciation for the breadth and depth of business and legal considerations associated with cross-border transactions. Related Publications Baker & McKenzies Post-Acquisition Integration Handbook summarizes the issues to be considered when integrating an existing and newly acquired business operating in the same field, to save costs, develop synergies and generate value for shareholders. Baker & McKenzies Rapid Dispositions Handbook summarizes the issues to be considered when selling a business and provides an organized collection of practical know-how, specifically relevant to a situation where a company wishes to dispose of a business or undertake a disposal program. Baker & McKenzies Acquiring Companies and Businesses in Europe provides a country-bycountry introduction to the main legal issues to be considered when contemplating the acquisition of shares in a company or the assets of a business in Europe. Baker & McKenzies Willkommen in Amerika Handbook: A Legal Guide to Doing Business in the United States of America provides an overview of several areas of US law that are of significant interest for German, Austrian or Swiss companies who either plan to enter the US market or already conduct business in the United States. For further details on any of the information contained in this handbook or to obtain copies of any of the related publications listed above, please contact either of the editors, your Baker & McKenzie contact partner or any of the contributing lawyers listed on the next page. Further details on the firm, our people and our practice may be found at www.bakernet.com. John Morrow Partner Senior Editor Baker & McKenzie, Chicago Tel: +1 312 861 8621 john.e.morrow@bakernet.com Lewis Popoff Knowledge ManagerNorth America, M&A Editor Baker & McKenzie LLP Tel: +1 312 861 8160 lewis.d.popoff@bakernet.com
Cross-Border Transactions Handbook Contributing Lawyers
Contributing Lawyers
Editors
John Morrow Partner Senior Editor Baker & McKenzie, Chicago Lewis Popoff Knowledge ManagerNorth America, M&A Editor Baker & McKenzie LLP
Section Contributors
Discrete Financing IssuesSection 4 Jose Moran, Partner Baker & McKenzie, Chicago Preliminary AgreementsSection 5 David Malliband, Partner Baker & McKenzie, Chicago Sarbanes-Oxley ActSection 6 Nathan Dooley, Global Knowledge Officer Securities Baker & McKenzie LLP Foreign Corrupt Practices ActSection 6 Carrie DiSanto, Partner Baker & McKenzie, Chicago Trade, Export and AntiboycottSection 6 Janet Kim, Partner Allison Stafford Powell, Associate Baker & McKenzie, Washington, DC Regulatory FrameworkSection 7 Regine Corrado, Partner Alexandra Lee, Associate Baker & McKenzie, Chicago Employee Transfers and BenefitsSection 8 David Ellis, Partner Baker & McKenzie, Chicago Global Equity CompensationSection 8 Brian Wydajewski, Partner Baker & McKenzie, Chicago and Valerie Diamond, Partner Julia Walk, Associate Baker & McKenzie, San Francisco Documenting the TransactionSection 9 David Chmiel, Associate Baker & McKenzie, London Business Process OutsourcingSection 9 Peter George, Partner Baker & McKenzie, Chicago Closing the TransactionSection 10 Helen Mantel, Associate Baker & McKenzie, Chicago Post-Closing ActionsSection 11 Olivia Tyrrell, Associate Baker & McKenzie, Chicago Dispute ResolutionSection 12 Michael Morkin, Partner Ethan Berghoff, Partner Baker & McKenzie, Chicago
Cross-Border Transactions Handbook Table of Contents
TABLE OF CONTENTS
SECTION 1 INTRODUCTION................................................................ 1 1. Focus of the Handbook ........................................ 2 2. Organization of the Handbook ............................. 3 PROJECT MANAGEMENT ................................................ 7 1. Organizing Principle.............................................. 8 2. Scope of the Project ............................................. 9 3. Assembling the Transaction Team ...................... 9 4. Organizational Meeting ...................................... 12 5. Roles and Responsibilities................................. 16 BUDGETING FOR THE TRANSACTION........................... 19 1. Scope of Diligence.............................................. 19 2. Transaction-Specific Factors.............................. 21 3. Scope of Advisors Roles in the Transaction ......................................................... 24 4. Creating the Budget Template........................... 25 DISCRETE FINANCING ISSUES ..................................... 27 1. Debt vs. Equity Financing................................... 27 2. General Considerations for Lenders in Cross-Border Financings .................................... 30 3. Financial Assistance........................................... 33 4. Security Interests and Subordination Issues.................................................................. 34 5. Cross-Border Legal Opinions.............................. 37 6. Closing Cross-Border Financings ....................... 38 PRELIMINARY AGREEMENTS....................................... 39 1. Confidentiality Agreements ................................ 40 2. Letters of Intent .................................................. 44 DILIGENCE ..................................................................... 51 1. Role of Review .................................................... 51 2. Role of Advisors .................................................. 52 3. Scope of Review ................................................. 53 4. Diligence Requests............................................. 55 5. Nature of the Report .......................................... 56 6. Timely Reporting................................................. 57 7. Specific Matters for Investigation...................... 58 8. Extra-Territorial Reach of Laws .......................... 59 9. Public Record Searches ..................................... 66 10. Privacy and Data Protection Laws ..................... 67
SECTION 2
SECTION 3
SECTION 4
SECTION 5
SECTION 6
11. SECTION 7
Diligence in the Context of Other Forms of Transactions ................................................... 68
REGULATORY FRAMEWORK ........................................ 69 1. Overview ............................................................. 69 2. Competition Analysis.......................................... 71 3. Gun Jumping Issues........................................ 75 4. Exchange of Competition-Sensitive Information ......................................................... 76 5. Foreign Investment Approvals and Notifications........................................................ 80 6. Industry-Specific Regulations ............................ 81 7. Exchange Control Approvals .............................. 82 8. Local Business Rules and Reporting Obligations.......................................................... 83 EMPLOYEE TRANSFERS AND BENEFITS ..................... 85 1. Automatic Transfer vs. Offer/Acceptance ............................................... 86 2. Terms and Conditions ........................................ 89 3. Approvals, Consultations and Notices............... 90 4. Identification of Employees ............................... 91 5. Severance/Termination Indemnities................. 92 6. Employee Benefit Plan Issues ........................... 93 7. Funding Issues ................................................... 94 8. Global Equity Compensation Issues .................. 96 9. Transitional Services ........................................100 DOCUMENTING THE TRANSACTION........................... 103 1. The Governing Law Debate..............................103 2. Cross-Border Acquisition Agreements .............105 3. Business Process Outsourcing ........................112 CLOSING THE TRANSACTION ..................................... 117 1. Availability of Key Personnel............................117 2. Notaries ............................................................119 3. Releases and Third-Party Consents.................120 4. Centralized vs. Local Closings .........................121 5. Listing of Assets ...............................................122 6. Time Differences: Escrow Closing ...................123 7. Moving Funds ...................................................124 POST-CLOSING ACTIONS ............................................ 127 1. Licenses, Permits and Registrations ...............127 2. Bank Accounts..................................................128 3. Payroll ...............................................................129 4. Auditor, Director and Officer Changes.............129 5. Operational Requirements...............................130
SECTION 8
SECTION 9
SECTION 10
SECTION 11
6. 7. 8. SECTION 12
Fiscal Year and Other Corporate Changes ............................................................131 Signage and Letterhead...................................131 Ongoing Compliance ........................................131
DISPUTE RESOLUTION ................................................133 1. Key Initial Questions.........................................133 2. General Options for Dispute Resolution Clauses .............................................................134 3. Litigation vs. Arbitration ...................................136 4. Enforcement of Judgments and Awards .........138 5. Delays ...............................................................139 6. Discovery...........................................................140 7. Costs .................................................................141 8. Confidentiality...................................................142 9. Interim Relief ....................................................143 10. Damages...........................................................144 11. Choice of Law ...................................................144 12. Multiple Parties.................................................145 ACQUISITIONS FLOWCHART.......................................147 BUDGET TEMPLATE ....................................................163 CONFIDENTIALITY AGREEMENT CHECKLIST.............167 LETTER OF INTENT CHECKLIST ..................................169 BUYERS INTERNATIONAL HR CHECKLIST FOR NON-US EMPLOYEE TRANSFERS AND BENEFITS.....................................................................171
APPENDIX 2.1 APPENDIX 3.1 APPENDIX 5.1 APPENDIX 5.2 APPENDIX 8.1
BAKER & McKENZIE OFFICES WORLDWIDE..............................................175
Cross-Border Transactions Handbook Section 1 Introduction
SECTION 1 INTRODUCTION
In looking to realize on the opportunities presented by the expansion of global markets, companies rely on a variety of corporate transactions that are familiar in a strictly domestic context, including mergers, acquisitions, dispositions, joint ventures, strategic alliances and business process outsourcing. Similar to a transaction within a single jurisdiction, the choice of which transaction structure to utilize will depend on a companys overall business strategy. Companies pursuing revenue growth, new technologies, alternative production sites or economies of scale may explore mergers and acquisitions; companies seeking to generate cash or focus on core businesses may explore dispositions; companies looking to gain access to new markets or technologies may explore joint ventures or strategic alliances; and companies looking to control costs or focus on core business capabilities may explore business process outsourcing. Whatever the transaction structure most appropriate for achieving a companys business objectives, there will be goals that are common in carrying out all transactions: (i) achieving certainty of execution; (ii) maximizing the economic benefit of the transaction; (iii) reducing the amount of management time absorbed by the process; (iv) shortening the time frame in which the transaction is completed; (v) controlling the associated transaction costs; (vi) properly identifying and addressing the risks associated with the transaction; and (vii) effectively managing exposure to liabilities. The successful attainment of these goals depends, in large part, on the successful planning, organization and coordination of the internal transaction team and outside advisors. Successful transaction management is challenging in a strictly domestic context: more than half of acquisitions, joint ventures and strategic alliances fail. In the crossborder context, successful transaction management is even more difficult. When we speak in this handbook of cross-border, or multijurisdictional or international transactions, we are referring to
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transactions involving 2 or more countries, often as many as 20 to 30, but in some cases much larger (such as 80 or more). The differences between a purely domestic versus cross-border transaction arise on both a substantive and practical level. Substantively, a cross-border transaction calls for an understanding of local laws in each relevant jurisdiction to ensure that the structuring and implementation of the transaction is legally valid under local law and consistent with local practice. While a cross-border transaction will involve most of the complexities inherent in the domestic context, crossborder transactions raise a set of issues that are specific to the international context, such as exchange control restrictions, foreign investment law approvals and local formalization requirements (e.g., notarial deeds), to name a few. From a practical point of view, a crossborder transaction is essentially a large-scale, global undertaking involving many moving variables. Accordingly, managing a cross-border transaction requires active and experienced coordination to increase the likelihood that the transaction is successfully completed in a cost-efficient and timely manner, with minimal error.
1.
Focus of the Handbook
This handbook focuses on the project management challenge of executing cross-border transactions, discusses various relevant legal issues in a transaction management context and treats these legal issues as risks that should be identified, quantified, addressed in an overall negotiation strategy and reflected in the final transaction documents and procedures. In discussing the project and risk management aspects of cross-border transactions, this handbook highlights the commonalities of the main transaction structures as they pertain to cross-border transactions, with a general focus on acquisitions. For example, an acquisition and a joint venture clearly are differentiated by the extent of the business relationship between the parties required to effect the transaction. In an acquisition, the relationship between the parties terminates for most purposes at the close of the transaction; the
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post-closing relationship is generally limited to managing the mechanics of the short-term transitional arrangements, purchase price adjustments and disputes that arise with respect to indemnification obligations. Joint ventures, on the other hand, depend on an ongoing business relationship that requires a meeting of the minds on the nature of the joint venture business, ongoing financial commitments, management of the venture and the rights of the parties to terminate the venture. Nevertheless, a joint venture may require the parties to contribute existing businesses with assets in multiple jurisdictions, in which case the transaction will involve many of the same actions required in a typical acquisition or disposition: conducting due diligence on the contributed business; allocating the risks of the transaction between the parties via representations and warranties and indemnification provisions; forming special purpose companies to accept local transfers of assets and liabilities; identifying and managing third party consents, employee notification requirements, foreign investment approvals, exchange control obligations and pre-merger competition filings; and assessing and paying transfer tax obligations. Accordingly, this handbook does not attempt to provide a detailed discussion of each major transaction structure. Baker & McKenzie publishes other handbooks, including those listed in the Editors Note under the heading Related Publications, that look at individual transactions in greater depth. Please contact Baker & McKenzie if you would like a copy of the firms other publications.
2.
Organization of the Handbook
This handbook describes and collects best practices in managing crossborder transactions. Each section includes a narrative describing a recommended approach to a major aspect of cross-border transactions. In addition, some valuable know-how and tools for managing crossborder transactions are included as appendices. Materials have been included with the goal of being useful both to companies that conduct most transactions through their in-house legal teams and those companies that rely on outside legal advisors to execute their transactions. For example, Appendix 2.1 contains a flow chart of the decisions,
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information and actions that typically come into play in a cross-border acquisition. For a company with a large in-house legal department, this type of business process tool can be useful in defining and standardizing the in-house teams approach to cross-border acquisitions. For a company that relies heavily on outside advisors, a better understanding of the cross-border acquisition process can help the in-house team to more effectively manage outside counsel and determine how to allocate its scarce legal resources to the transaction. The next two sections of this handbook focus on process. Section 2 (Project Management) focuses on the challenge of assembling and managing an effective transaction team. In the acquisition and disposition context, effective project management is essential for identifying positive and negative value drivers and informing negotiations. Much of the project management effort will be reflected in the final transaction documents, which ultimately may be interpreted by a court or arbitration panel. In the joint venture and strategic alliance context, the project management challenge is more subtle. The transaction team must identify the risks and assure appropriate control and exit opportunities. Nevertheless, the negotiation of the deal is often a very good indicator of how the parties will work together going forward. The ability of the internal transaction team to work together effectively will be a key factor in constructive negotiations and potentially will be a key determinant in the success of the joint venture or strategic alliance. Section 3 (Budgeting for the Transaction) discusses strategies for ensuring that the internal legal team and external legal advisors are on the same page with respect to the legal fees that will be incurred on the transaction. Effective project management is one of several conditions to accurate budget estimates: often, a transaction that takes six months rather than one month to close will be more expensive. Nevertheless, proper communication and a clear understanding of the risk profile, strategic objectives and main cost variables will help to ensure that surprises are kept to a minimum. The next two sections address discrete issues that highlight how common considerations and assumptions in the domestic context should be augmented or modified in the cross-border setting. Section 4 (Discrete Financing Issues) discusses the elements that should be considered in financing a cross-border transaction, including potential regulatory
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obstacles to common financing structures, the characteristics of debt versus equity financing and the challenges of taking secured interests in the cross-border context. Section 5 (Preliminary Agreements) discusses the potential pitfalls of entering into preliminary agreements in the crossborder context, including agreeing to an unfamiliar governing law and enforceability of preliminary agreements. The next three sections focus on identifying the main risks that need to be managed in a cross-border transaction. Section 6 (Diligence) discusses the challenge of conducting a diligence investigation in a multijurisdictional context. In a strictly domestic context, defining the role and scope of the review and the materiality thresholds is critical. In a multi-jurisdictional context, this exercise can become extremely challenging. Section 7 (Regulatory Framework) discusses the main regulatory issues that should be addressed in a cross-border transaction. Failure to identify key regulatory requirements can lead to delay, increased cost or, ultimately, a failed transaction. Section 8 (Employee Transfers and Benefits) discuses the major issues with respect to the transfer of employees and benefit plans that arise in cross-border transactions. This section also addresses the significant issues involved in implementing equity compensation and benefit plans in multiple countries. The final sections discuss the process of documenting and closing a crossborder transaction and the considerations that come into play after the transaction has closed. Section 9 (Documenting the Transaction) discusses how documentation used in a strictly domestic context may need to be modified to properly identify and allocate the risks associated with a cross-border transaction. Section 10 (Closing the Transaction) discusses the challenges of closing transactions with differing local requirements and multiple time zones. Section 11 (Post-Closing Actions) discusses post-closing operational actions that often fall through the cracks as the transaction team focuses on the next transaction. Lastly, Section 12 (Dispute Resolution) discusses the considerations for crafting an appropriate and strategically beneficial dispute resolution mechanism.
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Cross-Border Transactions Handbook Section 2 Project Management
SECTION 2 PROJECT MANAGEMENT

The ability of a company to realize its objectives in any major corporate transaction will depend on effective transaction management, including: (i) clearly defined roles and responsibilities; (ii) appropriate project and communications plans; (iii) efficient access to and management of internal and external know-how; and (iv) risk identification and management. The transaction management challenge in the cross-border setting is exacerbated by the multiple and often unfamiliar legal systems and local practices, which give rise to numerous additional obstacles, considerations and tasks that are absent in the purely domestic context. These additional factors may take the form of: x x x x x x x x Investment approvals; Exchange control approvals or consents; Tax clearances; Clearances under local or international competition laws; Unusual problems arising in the acquisition review (or due diligence) investigation of a foreign target; Language and cultural barriers; The necessity of agreeing on an allocation of the purchase price among assets located in various jurisdictions; or Burdensome or unusual mechanics required to comply with local law or practice relating to the documentation necessary to effect the transaction for local purposes.
The sheer volume of issues and tasks that often arise in the jurisdictions involved in a cross-border transaction elevates the importance of careful organization and planning early on in the transaction in a way not typically encountered in a domestic transaction. This is because poor global coordination of the transaction can easily produce inefficiencies and
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delays that result in costs to both parties of a much greater magnitude than the already significant costs that might arise from the poor management of a typical domestic transaction. The overarching requirement for managing a cross-border transaction is thus an understanding of how each aspect of the transaction relates to every other aspect. Appendix 2.1 (Acquisitions Flowchart) illustrates this, from the naming of the transaction team to the closing of the transaction and thereafter. While this flowchart focuses on the legal aspects and documentation, it also outlines the fundamental progress of the transaction and serves as a useful project management tool for organizing the entire transaction.
1.
Organizing Principle
A major cross-border transaction such as an acquisition, disposition, joint venture, strategic alliance or outsourcing transaction ultimately relates to a legal process or legal document. The legal structure therefore offers a practical organizing principle for all members of the transaction team. Furthermore, at the end of the day, the deal is captured in a set of transaction documents that are typically the responsibility of the legal team. The legal team must therefore ensure that the documents reflect the agreed business arrangements and the level of risk appropriate for their clients bargaining position. Perhaps even more important, while the transaction documents will typically provide a mechanism to claw back a significant portion of the transaction proceeds in the event that issues have not been fully disclosed in the acquisition review process, risks have been misestimated, or assets and liabilities have been defined poorly, the cost and time required to enforce such a mechanism, particularly when multiple jurisdictions are involved, can be considerable. Therefore, it is incumbent on the legal team to not just paper the deal, but also to ensure that adequate deal management is in place so that the documents retain their clients benefit of the bargain. Securing adequate deal management in the cross-border setting can be a tall order for the in-house legal team. Although it may have the ultimate responsibility for documenting the transaction, the in-house legal team
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may not have the overall responsibility for managing it. In addition, inhouse legal departments often are thinly staffed (often with limited personnel outside corporate headquarters) and oriented to serving internal clients, many of whom have strong opinions about how the transaction should be managed and, as revenue generators rather than cost centers, are more influential organizationally. As a result, in crossborder transactions the external legal teams often play a critical role in supplementing the internal legal team with strategies and tools to ensure a smooth transaction.
2.
Scope of the Project
As a threshold matter the parties involved must fully understand the scope of the transaction before they can begin to manage it effectively. For example, what is the strategic rationale for the transaction? Is the deal being done to realize economies of scale or to obtain a particular product line or piece of know-how? Do the parties intend to realize significant synergies as a result of the transaction? Are the parties public or private and of what nationality? What internal and external resources will the parties engage for the transaction? Are 80 countries involved or just 2? Is the target subject to significant political, economic or legal risks in the countries where it operates? Does the target conduct manufacturing or other extensive operations in each country where it has a presence, or does it merely operate sales companies in certain countries? Are the parties involved in highly regulated or highly specialized industries? Has the targets management done a good job running the targets business? Will the buyer need to obtain financing from a third party to do the deal? Is this a negotiated transaction or is it an auction? The answers to these types of questions will dictate how the project should be managed and the particular areas of expertise that should be brought to bear on it.
3.
Assembling the Transaction Team
Perhaps the most critical element in a successful cross-border transaction is the ability to move the entire process forward evenly and in an organized fashion, with free and complete communication among those charged with responsibility for it. The first step, then, is identifying the persons inside and outside the company who will be charged with
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effecting the transaction. Depending on the scope of the transaction, the transaction team is likely to include internal members or groups from the legal department, human resources, finance, tax, business development and regulatory departments, as well as outside advisors such as lawyers, investment bankers, strategic consultants, benefits consultants, environmental consultants and accountants. While the exact participants and the timing of their inclusion in the transaction team will depend on the type, size, structure and timing of the transaction and the parties involved, the key players and their respective roles typically include the following:
Officers/Senior Managers (including General Counsel). The officers and senior managers are often responsible for driving the transaction (e.g., setting the timeline and tone of the process). They are critical to the decision to initiate and proceed with the transaction and often participate in the acquisition review or due diligence process. In the disposition context, they also help gather the information that goes into both the information or offering memorandum and data room, are actively involved in management presentations and may serve as a front-line contact for potential buyers. Once the parties enter into negotiations, senior officers and members of the legal department may also be involved in negotiating particular deal terms. Local Management. It is often helpful to involve the local management of the parties in multi-jurisdictional transactions subject to confidentiality constraints as discussed below in subsection 4 (Organizational Meeting). They may assist with the acquisition review process and coordinate with local advisors as to the implementation of the transaction at the local level. In addition, many buyers will want to include key local managers in the list of those to whom knowledge is ascribed for purposes of the representations and warranties contained in the transaction documentation, thereby making their involvement prior to the execution of the documents all the more crucial.
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Directors and Shareholders. In the disposition context, directors and shareholders of the seller who are also part of senior management may be quite involved in the transaction. Other directors and shareholders may also participate if the seller is a small company or privately held or if the target business represents a significant percentage of the sellers overall enterprise. For example, if the seller is a small, private company, directors and shareholders may be involved in identifying potential buyers. Ultimately, the directors (and possibly the shareholders) will need to approve the transaction. In many jurisdictions, the directors will need to make their decision based on the principle that the transaction is in the best interests of the company and, as such, their involvement and understanding is critical from an early stage. Investment Bankers. Investment bankers usually identify potential transactions and help bring the parties together to consummate the transaction. They often help determine the optimal transaction structure and assist in identifying synergies and with valuations, in addition to providing strategic and other business advice. In the disposition context, they frequently identify appropriate bidders, prepare information memoranda and lead the sales effort. Investment bankers may also be involved in negotiating key deal terms that affect valuation and other financial and strategic aspects of the transaction. Outside Legal Counsel. Given the multiple and often unfamiliar legal systems and local practices at play in crossborder transactions, the role of principal project coordinator often falls upon the legal advisors to the respective parties, although it is not unusual for this role to be assumed (at least in the early stages) by business development personnel in conjunction with the partys financial advisors, particularly in the auction context. Typically, the responsibilities of outside legal counsel will include: reviewing and/or compiling all relevant documents for the acquisition review process; taking the primary role in drafting the principal transaction documents and ancillary agreements and assisting in negotiating these
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agreements; liaising with specialized counsel, local counsel and financial advisors; counseling on specific legal issues, such as corporate and tax structure, environmental concerns, employment/labor law, employee benefits, intellectual property, real estate, antitrust/competition, compliance, trade and other regulatory matters; and coordinating the overall process so that senior management can continue to meet their day-to-day responsibilities. It is imperative in the cross-border setting that the coordinating lawyer have a global view of the law and a degree of familiarity with the legal systems of the significant jurisdictions involved in the deal. Having seen similar problems on previous transactions and knowing the nature of possible resolutions of these problems is indispensable.
Accountants. The accountants main role is to review and analyze the financial statements and tax documents, particularly as they relate to certain compliance issues, the structure of the transaction and the valuation of the target. Sometimes, accountants will work in conjunction with financial advisors and legal counsel to determine the optimal tax structure for the transaction. Other Professional Advisors. In a large cross-border transaction is it also fairly common for the buyer to retain other professional advisors to assist with discreet areas of concern. These may include employee benefits, environmental, human resources, insurance and other industry-specific advisors or consultants.
4.
Organizational Meeting
All core members of the initial transaction team should be included in an organizational meeting as soon as the basic decision is made to proceed with the transaction. Participation by all core team members in the organizational meeting is the first opportunity to give them the full picture of the intended transaction and to get them to buy into it. The specific objectives for the deal should be explained, including expectations as to timing and value. The role of each participant should be clearly defined and communicated, not just in general terms but in
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detail and for each stage of the transaction. One member should be designated as the team leader, with everyone else, inside and outside the company, ultimately reporting to that person. A second person should be designated as the organizer or the coordinator of everyone elses efforts. This person would be charged with making sure that the process is moving forward evenly on all fronts. All members subsequently joining the team should receive similar information. Participants should obviously be given guidelines for preparing for the organizational meeting. If they do prepare, their active participation in the meeting discussions can be very beneficial in getting them to buy into the transaction as a priority. Their participation is also particularly important in analyzing the target business and the likely concerns that may affect the value of the transaction. Identifying these concerns at the outset (even if they are subsequently refined) is vital in determining how to analyze the transactions key value drivers and addressing important issues that arise later in the transaction process.
Communications Plan
The organizational meeting should strongly emphasize the need for clear and complete communication among team members. Managing the information required to document any deal can be challenging, particularly if the members of the transaction team do not fully appreciate that the legal teams charge is far broader than identifying and managing the legal issues associated with the transaction. Therefore, communications among the legal team, the other internal teams and external consultants should complete a virtual circle, with the business team communicating the proposed valuation of the target business and the associated positive and negative value drivers, the legal team and other outside advisors identifying risks that may affect the value drivers and communicating those risks back to the business team, and the business and legal teams developing a negotiation strategy designed to allocate those risks in a manner that preserves the value of the transaction. While not wishing to overwhelm members with irrelevant communications, there should be a presumption that any significant communication would be of interest to and would enhance the performance of other team members. Moreover, all communication
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should be proactive every effort should be made to provide the recipient of a communication with all of the information that the sender knows to be relevant. It is a natural tendency to want to respond only to the question asked, but this attitude leads to miscommunication, not only among the team members but with the counterpart to the transaction, and can even put the entire transaction in jeopardy. This message may be particularly difficult to convey to non-US employees who may not view full disclosure as a basic element of a transaction. Even among US employees, there is a natural tendency to say only what appears to be absolutely necessary. This communications challenge is exacerbated in the cross-border setting by the differing legal and cultural frameworks that come to bear on the transaction, not to mention the sheer number of team members that may be involved in various locations around the globe. The preparation and distribution of a working group list reflecting the names, addresses and contact information of each transaction team member, including outside advisors and local management (subject to any confidentiality constraints) in each country is an important first step in establishing clear and open lines of communication. In addition, technological advances have created opportunities to improve communication and deal management and these advances have changed fundamentally the way in which all transactions, including cross-border transactions, are executed. Email is far and away the predominant form of collaboration on these types of transactions. All members of the transaction team are familiar with email, and communication is almost instantaneous. However, email collaboration has become increasingly challenging given the high volume of email traffic and substantial number of documents involved in the transaction setting. Web-based collaboration platforms and deal rooms are alternative means for collaborating on transactions. In principle, web-based transaction management systems can be used for most aspects of a transaction, including on-line data rooms, acquisition reviews, contractual negotiations and general transaction management. However, in considering whether to utilize a web-based collaboration platform, it is necessary to consider how difficult the platform is to set up and use, what
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the security features are that will ensure confidentiality of information and who is responsible for managing the platform.
Confidentiality
While open communication is essential for the smooth functioning of the transaction team, it is essential that confidential transactions remain confidential. There may also be a desire by a prospective buyer, as well as the seller, to keep the proposed transaction confidential within their respective organizations until definitive documentation is signed. Parties typically enter into confidentiality agreements for this purpose that will limit access to the information concerning the transaction only to those people who need to know it in connection with the deal. Thus, each party should ensure that adequate controls are in place to protect against inadvertent disclosure of the existence of the proposed transaction or the other partys confidential information. The sharing between the parties of competitively sensitive information may also be subject to antitrust or competition rules prohibiting gun jumping. When the internal and external transaction teams are spread throughout many foreign jurisdictions, it is imperative that clear instructions be provided at the outset to the entire transaction team as to the sensitive nature of the transaction and the limits on disclosure. Confidentiality agreements and gun jumping issues are discussed in greater detail in Section 5.1 (Preliminary AgreementsConfidentiality Agreements) and Section 7.3 (Regulatory FrameworkGun Jumping Issues), respectively.
Timeline
Another important element in ensuring that the transaction proceeds efficiently is communicating the intended timeframe to the transaction team. The project manager must see to it that each participant meets deadlines and that information is communicated expeditiously to all relevant members of the team. If instructions are sufficiently clear and communication channels are established, it will be possible for the project manager to coordinate individual efforts and maintain the overall pace of the project. A timetable distributed to all team members at the outset of the transaction serves not only as an organizational tool, but puts pressure on each member to perform in a timely manner.
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5.
Roles and Responsibilities
The organizational meeting also provides a good opportunity to convey the responsibilities for the project in terms of each team member as well as the transaction as a whole. From the individuals point of view, each member should be given a clear concept of what he or she is to accomplish and when he or she is expected to accomplish it. The scope of the project as a whole should also be clearly defined for all participants. Many cross-border transaction are hamstrung by the natural tendency of each person to view the entire transaction solely from the vantage point of his or her function or particular jurisdiction. For example, local counsel in a particular country may insist that specific provisions be included in the transaction agreement to address a jurisdiction-specific risk without realizing that the particular risk is relatively trivial in the scope of the global transaction. Accordingly, it is important to clarify at an early stage who will have decision-making authority initially and from time to time during the transaction as new issues arise or assume greater significance. Since many areas of the transaction overlap, it is also critical to establish the respective responsibilities of each team member with respect to each phase of the transaction. For example, during the diligence phase, the lawyers need to know whether they will be charged with the employee benefits analysis, or whether the parties internal management or external employee benefits consultants will have sole responsibility for those matters. Similarly, the structure of any acquisition financing may involve input from financial advisors, tax specialists and foreign law specialists. Particularly in the cross-border setting with the numerous legal frameworks involved, the responsibilities inherent in these roles require coordination and clear and continuous communication among team members in order to avoid gaps in addressing new issues as they arise during the course of the transaction. Investing time at the outset to establish fundamental parameters for the roles and responsibilities of the members of the transaction team will inevitably reduce the likelihood of miscommunication, error and other significant inefficiencies. Key goals are to prevent runaway services, duplication of efforts and significant matters being overlooked or belatedly and hastily addressed.
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Managing Local Legal Counsel
Likewise, clear instructions should be provided to local legal counsel as to their respective roles in the cross-border transaction. In particular, it is imperative for the principal legal advisors to prepare clear instructions to local legal advisors describing the transaction, timeline and relative roles and responsibilities of all of the local counsel. Procedures regarding the acquisition review process, including the scope and applicable materiality thresholds, should be clearly explained, as should the rules regarding confidentiality and other sensitive issues. Local contact information should be exchanged among the clients local advisors where and when appropriate. There should be a clear feedback loop for any questions or new information from the local legal advisors to the coordinating office. This facilitates project management, and is also critical for managing costs. * * *
Another key factor that influences the project management endeavor and, in particular, the various roles of the individual participants on the project team, is the transaction budget. In the next section, we discuss the key issues to consider in establishing a budget for the transaction.
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Cross-Border Transactions Handbook Section 3 Budgeting for the Transaction
SECTION 3 BUDGETING FOR THE TRANSACTION

While effective project management is critical to keeping the crossborder project under control, a thoughtful budget established at the outset of the transaction also plays a vital role in controlling transaction costs. This section discusses the key variables that effect the budget in the cross-border setting: the scope of diligence, various transaction-specific factors, and the scope of the advisors roles in the transaction. This section concludes with a discussion of a template that serves as a useful tool for setting the budget in a cross-border transaction.
1.
Scope of Diligence
The diligence effort is often a significant component of the buyers budget (and the sellers as well, to the extent of any pre-transaction self-diligence and data room assembly) and it is often at the budgeting phase where the parties agree on the scope of the diligence effort. The key variables that impact the cost of diligence include the partys risk profile, the transaction timetable and the diligence logistics, each of which is discussed below.
Risk Profile
One of the key budget drivers in any transaction is the partys risk profile. A partys tolerance for risk will affect how thoroughly it wants to investigate, negotiate and document the issues that may arise. The more investigation, negotiation and documentation involved in the transaction, the more the transaction will cost. Ultimately, the buyer will need to put a value on the issues uncovered during its diligence and develop a negotiating strategy to use those issues to its advantage in order to complete the transaction with an acceptable level of risk. A buyer who is interested in acquiring a large portfolio of companies knowing that many will fail, but hoping for one or two home runs might have a fairly high tolerance for risk. In that situation, the buyer accepts that many of its investments will fail and might perceive that
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anything but a very cursory diligence effort is not cost-justified. On the other hand, a buyer might be presented with a transformational opportunity that offers a chance to access a significant new market, acquire break-through technology or, in general, revolutionize its business. The price tag for this type of deal is often quite high and, as such, there is generally a higher risk of failure. Accordingly, this buyer would be well-advised to conduct extensive diligence. Although these examples represent two extremes, the buyers risk tolerance nevertheless will greatly impact the amount of resources the buyer is willing to commit to uncovering potential issues.
Transaction Timetable
The time available for completion of the transaction will also significantly impact the scope of the review that can be undertaken. Sometimes the needs of the parties to get the deal done quickly limits the review. Other times, the transaction setting influences the timetable for the review. In the auction setting, for example, the seller often restricts the amount of time potential bidders are allowed to spend in the data room. However, the initial review cycle may be the buyers best opportunity to conduct a detailed review of the target business, which may lead the buyer to expend considerable resources to complete its review in a tight time frame. Section 6.3 (DiligenceScope of Review) discusses in greater detail the tension at play in the auction setting with respect to the buyers diligence exercise.
Logistics of Diligence
The logistics of the diligence itself often impacts the budget. For example, the existence of a well-organized physical or electronic data room appropriately populated with material documents and information can result in a less-costly diligence exercise from the reviewing partys perspective. Similarly, in a large multi-jurisdictional transaction it is often less costly to conduct a review if duplicate data rooms are maintained on a regional basis. The cost to the disclosing party of photocopying, assembling and staffing duplicate physical data rooms is often outweighed by the cost-savings to the reviewing party if it is able to send local personnel and advisors to local data rooms. Where appropriate, the reviewing party would be wise to suggest such an
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approach at the outset. Alternatively, an electronic data room will facilitate worldwide access to the data room contents by appropriate personnel with the requisite language and other skills (e.g., legal, accounting and tax) necessary for the review without attendant travel costs.
2.
Transaction-Specific Factors
Several transaction-specific factors also impact the budget, including the transaction structure, the nature of the targets business, and the extent of the representations and warranties and post-closing indemnification that the parties expect. These factors are discussed below.
Transaction Structure
Tax planning often drives the transaction structure, but the identification of whether assets or shares or a mixture of both assets and shares are being acquired is a key first step in setting the budget. For example, in an asset purchase as opposed to a share purchase, the parties are generally able to specify the liabilities that will be assumed by the buyer, at least between the buyer and seller. This might limit the scope of potential liabilities that need to be investigated, but the parties often engage in considerable negotiation over the assumption and retention of specific liabilities. Further, the transfer of ownership of individual assets and contractual rights often requires numerous third-party (including governmental) consents and notices. Determining whether third-party or governmental consents are necessary often requires considerable diligence and could lead to extensive negotiations with the parties from whom consent must be obtained. Finally, in many jurisdictions the sale of a business by way of an asset transfer often gives rise to a host of employee transfer and benefits issues, as discussed in greater detail in Section 8 (Employee Transfers and Benefits). Accordingly, asset transactions are often costlier to implement than share transactions. Outsourcing transactions and joint ventures often involve asset transfers and, as such, generally present many of the same issues as in a traditional asset acquisition (e.g., negotiating and obtaining required consents and assessing the various liabilities that are to be assumed by the buyer). In an outsourcing or joint venture transaction, however, the continuing
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business relationship generally means that the parties interests are aligned to a much greater extent than in the acquisition context. Generally, parties to these types of transactions are more forthcoming at an earlier stage in the process with respect to diligence matters, which often means that the cost of diligence is easier to estimate. In the auction setting, by contrast, the seller is often not very cooperative until the winning bidder has emerged. In addition to the basic form of the transaction, the need for financing to pay for the transaction should also be considered when setting the budget. The buyer usually understands its basic financing needs at the outset of the transaction. When raising equity to finance a cross-border transaction, particular consideration should be given to compliance with local securities laws, including any local registration requirements. In the context of a debt financing, particular consideration should also be give to the local legal requirements with respect to the mechanics for granting security interests over shares or assets in the relevant jurisdictions. These and other crossborder financing issues are discussed in greater detail in Section 4 (Discrete Financing Issues).
Nature of the Targets Business
The nature of the targets business also plays a key role in formulating the budget. If the target operates in a highly regulated industry, such as banking, health care or energy, the transaction is likely to present specialized legal issues and may give rise to various notification and consent requirements pursuant to relevant industry-specific regulations. A target operating in a high-tech industry, or one which is dependent upon a few key patents or other intellectual property rights, will command specialized input in order to verify the transaction value drivers. Similarly, the number and nature of the targets employees and employee benefit plans, and the presence of any labor unions or other employee representatives (e.g., works councils), will present numerous issues in the closing and post-closing integration context that will require specialized input. On a somewhat more mundane level, a manufacturing entity typically commands more attention than a consulting or sales business given the potentially greater exposure to environmental, real property and various
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operational risks. Likewise, whether the target owns or leases its real property, as well as the nature of the activities it conducts at its various sites, can also significantly impact the budget. If the target owns manufacturing or assembly facilities, for example, surveys, title investigation and environmental testing may be advisable. On the other hand, where the target leases its administrative and sales offices in each jurisdiction the investigation might focus more on reviewing the lease terms. The number of jurisdictions in which the target operates also significantly impacts the transaction costs. Certainly, a transaction involving 20 to 40 countries will present many more issues and, hence, a greater diligence and project management challenge than will a transaction involving just three countries. Nevertheless, where the value allocated to the targets operations in a particular country represents only a small fraction of the total transaction value, a detailed review of the operations in that country may not be warranted. In some large transactions, the operations in no single foreign country will be viewed as being material to the overall transaction. This fact may weigh against conducting an investigation in any of these jurisdictions. On the other hand, because matters which are not material to the business as a whole are often excluded from warranty protection, an investigation may be the only means of uncovering problems which would not be covered by negotiated representations and warranties but which nevertheless may involve substantial amounts.
Extent of Representations and Warranties and Post-Closing Indemnification
Accordingly, a significant factor which should be considered when establishing the budget is the extent of the representations and warranties and post-closing indemnification that the buyer can expect from the seller. An acquirer of a public company can expect very few representations and warranties, along with little or no post-closing recourse or indemnification. The same is generally true (with some variations on survival and recourse) for acquirers of targets from financial sellers such as private equity funds who require certainty as to the transaction consideration in light of required distributions to limited partners. As a result, there is a premium in those types of transactions on conducting a relatively thorough review during the diligence phase so that
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the buyer can seek appropriate protection, often in the form of a negotiated purchase price reduction. Even if the buyer expects to receive extensive representations and warranties and post-closing indemnification coverage, if the seller consists of individuals or an entity that will distribute the sales proceeds and be wound up after the transaction, the costs of enforcing the indemnification might not be justified in light of the difficulties in actually collecting an award. As in domestic transactions, this issue can be mitigated through the use of an escrow. Where the escrow is limited or not available at all, however, thorough diligence becomes increasingly crucial.
3.
Scope of Advisors Roles in the Transaction
The extent to which outside advisors will be relied upon throughout the transaction can significantly impact the budget. Hence, it is critical to establishing an accurate budget (let alone for purposes of efficient project management) to clarify the respective roles and expectations of the parties and their internal resources and advisors with respect to the key elements of the transaction, including the following:
x x x x
Structuring (in particular tax advice, which is usually covered as a separate budget item); Formation of acquisition vehicles or other pre-closing corporate reorganization; Diligence (e.g., with respect to the scope of the review and the nature of the diligence report); Identifying and obtaining governmental and third-party approvals and consents (e.g., foreign investment control, exchange control, antitrust/competition approvals, industryspecific regulation and contractual restrictions); Financing of the transaction (e.g., with respect to credit agreements, security interests and capital raising): Transaction initiating agreements (e.g., confidentiality agreement, bid documents and letter of intent);
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Drafting and negotiating the principal transaction agreements (e.g., master agreement, local transfer agreements, employment agreements and ancillary commercial and transitional agreements, including supply, service and license agreements); Specific areas of law in respect of which advice may be sought (e.g., securities, corporate, antitrust/competition, banking and finance, tax, environmental, employment, employee benefits, labor, litigation, insurance, intellectual property, privacy, real estate, customs, trade and other regulatory and industry-specific compliance matters); Legal opinions (whether in connection with the acquisition financing or otherwise); Closing (both at the master and local levels); Post-closing integration (both at the master and local levels, which is also usually covered as a separate budget item); and Project management.
x x x x 4.
Creating the Budget Template
Once the nature of the engagement, the scope of the diligence, the various transaction-specific factors and the roles of the respective advisors have been assessed and established, that information should be factored into the budget. Since the diligence phase is where most of the initial effort is expended, it is sometimes helpful in multi-jurisdictional transactions to prepare a budget template that breaks out the components of the budget on a jurisdiction-by-jurisdiction basis and, where possible, by specific areas of law. Appendix 3.1 contains a sample budget template in this regard. The template is designed for use in connection with the first phase of a buy-side engagement in the auction setting, but it can be tailored for most types of transactions. Preparing this type of template generally requires at least a cursory review of the data room index and materials in order to determine the comprehensiveness of the sellers initial level of disclosure and to identify key areas for review.
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As the template indicates, it may also be helpful to categorize the target jurisdictions as primary and secondary, based on the desired level of review in light of the partys risk profile and the nature of the targets operations. Primary jurisdictions are those that are identified as being most material to the target business and are generally where the review is focused. The level of review conducted in secondary jurisdictions is often comparable to that conducted in the primary jurisdictions. However, the review in secondary jurisdictions often consumes less resources due to the more limited nature of the operations in these jurisdictions (i.e., essentially where only sales and service facilities are located). A separate category for other jurisdictions might be included as well where, for example, the information memorandum merely indicates that the target markets, sells and services its products through agents or distributors. The review in these other jurisdictions usually consumes fewer resources and sometimes does not involve the direct engagement of local advisors unless the initial review of the available information warrants their involvement. The location of material research and development centers may be of particular importance and also require special attention. The diligence process in cross-border transactions is discussed in greater detail in Section 6 (Diligence). * * *
Once the budget issues are addressed (and in many cases, while the budget is being determined) the parties should consider the mechanics of financing the potential transaction. In the next section, we discuss some of the key elements that should be considered in financing a cross-border transaction.
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Cross-Border Transactions Handbook Section 4 Discrete Financing Issues
SECTION 4 DISCRETE FINANCING ISSUES

Acquisitions and other strategic transactions are often driven by the desire to leverage economies of scale, obtain new technologies, enter new markets or acquire new production facilities. While from the buyers perspective the transaction itself is generally intended to add or create value, obtaining appropriate financing for the deal is often a crucial element of transaction planning. This section discusses some of the key elements that should be considered in financing a cross-border transaction, including the decision to pursue debt versus equity financing, the key legal issues that confront the lender (the costs of which are often borne by the borrower), financial assistance concerns, security and subordination issues, legal opinions and closing issues.
1.
Debt vs. Equity Financing
Efficient access to capital is a critical impetus for many transactions. In many cases, however, purely local banks or credit markets are unable to satisfy all capital requirements of companies with multinational interests or aspirations. It is not surprising that within this environment, capital formation is increasingly viewed and accomplished on a worldwide basis. Unless the parties have the requisite cash on hand, the traditional financing source for a transaction is debt, equity or some type of hybrid.
Debt Financing
Debt financing entails borrowing funds that are to be repaid over a specific period of time, usually with interest that is deductible for tax purposes. Debt financing can be either short-term (i.e., full repayment due in less than one year) or long-term (i.e., repayment due over more than one year). Typically, the lender does not gain an ownership interest in the business of the buyer or the target and generally the obligations of the borrower are limited to repaying the loan and complying with the covenants set forth in the loan documentation. When the borrower itself is insufficiently credit-worthy to support the entire credit extended, guarantees from its shareholders, subsidiaries and possibly other affiliates are likely to be required under standard loan documentation.
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Equity Financing
Equity financing requires an exchange of funds for a share of business ownership. In its simplest form, equity financing generally allows the borrower or acquirer to obtain funds without incurring direct indebtedness; in other words, without having to repay a specific amount of money at any particular time. That said, equity financing comes at a considerable cost as the issuer will need to generate a sufficient return in order to preserve access to capital markets. Further, the issuer could be obligated to grant certain preferred rights to the equity holders, including dividend rights, liquidation preferences and redemption features. One of the key drawbacks to equity financing is the dilution of outstanding ownership interests and the possible loss of control that may result from sharing ownership with additional investors. Further, dividends and other distributions on equity generally are not deductible for tax purposes. Equity financing also requires compliance with the securities laws and regulations of the jurisdictions where the equity is to be issued. If the financing is intended to be obtained through a public offering, this can be a very time consuming and costly process in any jurisdiction. It is not uncommon for development banks that finance large energy and/or heavy infrastructure cross-border projects to invest in the project companies that are developing or managing the particular project or asset. These types of investments often take the form of quasi-equity and normally include convertible debentures, subordinated loans and warrants. Generally, a warrant is often issued together with a bond or preferred stock and entitles the holder to buy a proportionate amount of equity in the project company at a specified price, usually higher than the market price at the time of issuance, for a set period of time (i.e., until the project or asset has reached commercial operation) or in perpetuity.
Mezzanine Financing
Another financing development which has received considerable attention has been the increasing use of mezzanine financing. This is generally a hybrid form of capital as it is often structured as subordinated debt with an equity component such as warrants. Mezzanine financing thus fills a
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gap between senior secured debt and equity in a companys capital structure. This type of financing generally has been associated with corporate restructurings and in connection with leveraged buyouts, but it has other applications, for example in certain forms of project finance, where the actual project involved generates a particular future flow of cash. In the venture capital arena, mezzanine financing is often utilized between early round financings and a liquidity event such as an initial public offering, acquisition or re-financing.
Second Lien Financings
Second lien financings have also become quite popular in the United States. Second lien financings were originally considered as provisional or rescue capital and, traditionally, the proceeds from second liens were used to pay off maturing debt, reduce bank debt or provide incremental liquidity. However, as corporations and lenders have grown more at ease with second liens, they are being used more often and in a broader range of applications including leveraged buyouts. Also referred to as tranche B or junior secured debt, a second lien financing often works in tandem with an asset-based loan in which second lien term loans and second lien bonds are secured by a junior lien on a pool of collateral that also secures first priority debt. Second lien financings are now frequently considered as an alternative to traditional mezzanine and equity financing when structuring a leveraged deal, whether for a middle-market private company or a larger public company.
Leverage Ratios
Debt and equity financing provide different avenues for raising funds, and the borrower typically desires to maintain a commercially acceptable ratio between its debt and equity levels. From the lenders point of view, the debt-to-equity ratio measures the amount of available assets or cushion accessible for repayment of a debt in the case of a potential default. Generally, excessive debt financing may impair the borrowers credit rating and its ability to raise more funds in the future. If the borrower incurs too much debt, its business may be considered overextended, risky and, ultimately, an unsafe investment. On the other hand, insufficient equity may suggest that the shareholders are not committed to the business of the borrower. Lenders commonly consider
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the debt-to-equity ratio in assessing whether the company is being operated in a reasonable, creditworthy style.
Thin Capitalization Rules
While general leverage ratios are often scrutinized to assess a companys financial viability, formal thin capitalization or thin cap rules exist in many jurisdictions throughout the world that limit the interest expense deduction for loans from related parties once certain debt levels are reached. These rules are of particular importance when shareholder or affiliate debt is intended as a financing source (e.g., in connection with a leveraged buyout). Since dividends and other distributions on equity generally are not tax deductible, but interest payments on debt generally are tax deductible, thin cap rules serve to limit the parties ability to use debt to shift tax charges from the jurisdiction where the investment is made to the jurisdiction of the investor. The thin cap rule in Mexico (enacted in January 2005), for example, provides for a 3-to-1 debt-toequity ratio, above which interest will not be tax deductible. The current German thin cap rule applies a 1.5-to-1 ratio. While these rules generally apply only to related party debt, they may also apply to third party debt (e.g., bank debt) in certain situations.
2.
General Considerations for Lenders in CrossBorder Financings
Commercial banks and other financial institutions generally provide the greater part of the acquisition debt. From a senior lenders perspective, an acquisition loan is not considerably different from any other secured corporate credit in that the senior lenders typically do not share in the upside from successful operations following the closing of the transaction. As a result, senior lenders are unwilling to endure any unusual risk associated with the transaction per se. Prior to issuing any sort of commitment letter to the borrower, a lender considering making a cross-border loan to either the buyer or the acquisition vehicle (e.g., a special purpose vehicle organized by the investors to purchase the stock or assets in question) will typically need to address the following issues:
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Tax Registration, Interest Withholdings and Other Payments
A lender of a cross-border loan will typically need to determine (i) whether extending financing to a borrower incorporated in another jurisdiction will subject the lender to any tax (e.g., franchise, income or otherwise) in that jurisdiction, (ii) whether the jurisdiction where the borrower is located will impose withholding tax on the amount of interest to be paid in connection with the financing and (iii) whether the lender has to make any other payments or deposits, such as mandatory deposit requirements with the central bank of the jurisdiction where the borrower is located. Generally, lenders in the cross-border context obtain protections in the loan documents from liability for any transaction-related taxes, such as stamp taxes. Lenders also normally include in the loan documentation a gross-up provision to protect themselves against foreign withholding taxes on interest payments made by foreign borrowers. Further, foreign borrowers often must provide lenders with a tax receipt so the lenders will have evidence of payment to ensure that the lenders will not be held secondarily liable for the tax. The receipt also provides proof of payment so that the lender can claim a tax credit, if available.
Licensing Requirements and Other Approvals
If the lender is not licensed to do business in the jurisdiction where the borrower is located, the lender will need to analyze whether the extension of financing from abroad would be deemed by the laws of the jurisdiction of the borrower as doing business in that jurisdiction and, accordingly, whether the lender needs to obtain any licenses or agency authorizations in the borrowers jurisdiction. The lender will also need to take into consideration any licensing or required approvals that any officers of the lender may need to obtain if on an ongoing and systematic basis they visit jurisdictions to originate or structure new loans where the lender does not have a permanent presence.
Exchange controls, registration and/or reporting requirements
Any lender providing financing in a foreign jurisdiction will typically need to ensure that the borrower will be able repay the lender in the same currency that the loan was denominated and that the funds advanced to the borrower do not need to be converted into its equal in the currency
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of the jurisdiction where the borrower is located. In addition, lenders in cross-border financings typically obtain protections against exchange risks by adopting a judgment clause in the underlying loan documentation. This type of clause provides that if a judgment is obtained by the lender against the borrower in a foreign country the judgment must nevertheless be satisfied in the currency called for in the loan documents or its readily transferable equivalent in another currency, with the equivalency to be determined at the time the lender actually receives payment.
Lender Liability
Particularly at the origination and structuring phase and prior to the issuance of any commitment letter or mandate letter with respect to the financing, the lender will need to understand whether under the laws of the jurisdiction of the borrower the lender could be held legally accountable for a borrowers financial losses due to various actions undertaken by the lender. For example, in the United States a lender could be held liable for damages relating, directly or indirectly, to the refusal to grant a loan after originally promising to do so. Likewise, in the United States and the United Kingdom, if the lender fails to renew a loan or line of credit without apparent cause, or if it improperly forecloses on a loan without adequate notice to the borrower, the lender could be required to compensate the borrower for any damages suffered as a result of the lenders omissions or actions.
Margin Regulations
In the United States, the Federal Reserve Board has issued regulations (known as Regulation U) that prohibit a lender from extending credit in excess of 50% of the value of collateral consisting generally of certain publicly traded securities directly or indirectly securing the loan (commonly referred to as margin stock) or extending credit for the purpose of buying or carrying margin stock which is secured directly or indirectly by such stock in an amount that exceeds 50% the value of the margin stock securing the loan. A related regulation (known as Regulation X) prohibits borrowers from borrowing outside the United States to circumvent Regulation U. Generally, financing the purchase or carrying of the stock of a private company would not be subject to Regulation U or X.
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Although these regulations are specific to the United States, similar requirements apply around the world in the context of securities lending when an owner of certain securities temporarily transfers those securities to another investor or financial intermediary. In these types of transactions, the title and voting rights transfer to the borrower, who can sell or re-lend the borrowed securities during the life of the loan. In return, the borrower agrees to return the loaned securities, secure the loan with collateral of equal or greater value than the loaned securities, pay any user fees (implicit or explicit) and remit to the lender any dividends, coupon interest or other distributions that occur during the time the securities are on loan.
3.
Financial Assistance
Another issue that should be given considerable attention in a crossborder share transaction when determining the appropriate financing structure is whether any applicable laws prohibit or restrict the seller from financing the acquisition of its shares a practice commonly referred to as financial assistance. Financial assistance could arise, for example, when the shares of the target company are pledged, or the target company gives a guarantee, as security for the buyers financing for the transaction. The corporate codes and regulations of many jurisdictions limit a companys ability to create any security or provide any type of financial assistance in connection with the acquisition of its shares or those of its holding company. In England, for example, Sections 155 to 158 of the Companies Act 1985 allow a private company to provide financial assistance in connection with the acquisition of its shares or those of its holding company (provided the holding company is itself a private company and there is no intermediate public company) only if the so-called whitewash procedure is followed. Under the whitewash procedure, an English private company must have net assets and the financial assistance must not have the effect of reducing those net assets or, if it does, the reduction must be covered by distributable profits. Net assets in this context is generally defined as an excess of assets over liabilities, based on current book value. For this purpose, all amounts reasonably necessary to provide for liabilities or losses which are either likely to be incurred or certain to be incurred, but uncertain as to time or amount, must be included in the calculation of
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liabilities. In addition, the directors of the company must make a statutory declaration (which must be publicly filed) containing the particulars of the financial assistance to be provided and stating that in their opinion the company will continue to be able to pay its debts during the next 12 months. Further, the directors opinion must be supported by an auditors report that the directors opinion is not unreasonable in all the circumstances. The costs and time spent in complying with this process will vary significantly from company to company, particularly based on the nature and amount of the assets and operations involved. There is an exception to the whitewash procedure in the instance where the companys principal purpose in giving the financial assistance is not the acquisition of the relevant shares but is only an incidental part of some larger purpose and the financial assistance is given in good faith in the interests of the company. This exception is very rarely relied upon. In the United States, by contrast, a transaction in which the purchase of shares in the target corporation is financed by the target itself or is secured by the targets assets is generally permissible. However, if the target fails to pay its debts after the consummation of the purchase of its shares secured by its assets, creditors may look to fraudulent conveyance laws to avoid the transfer that gave rise to the security interest. When the target defaults on the loan, the risk of failure is borne not only by the target itself, but also by its unsecured creditors who have lost the protection of recourse to unencumbered assets.
4.
Security Interests and Subordination Issues
As is typically the case in domestic transactions, lenders providing financing in connection with cross-border transactions seek to reduce their risk by requiring that the borrower provide security interests and/or other forms of credit support. Creating and perfecting security interests and granting credit support in financing cross-border transactions deserves devoted attention by local legal counsel.
Security Interests
Usually, all security documents covering assets located in the jurisdiction where the borrower is located must be governed by the law of that jurisdiction in order for the security interest to be valid and enforceable.
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Cross-border security packages can thus be cumbersome to implement where the borrowers assets are scattered in several jurisdictions in addition to its home jurisdiction. On the other hand, it may be more beneficial for a lender to create a security interest over assets of the borrower located outside of the lenders home jurisdiction especially if that other jurisdiction provides a more efficient and pro-creditor environment, including self-repossession mechanisms to enforce the security interest created in its favor. In civil law jurisdictions (e.g., Continental European jurisdictions) for example, self-help remedies for foreclosing on security interests are prohibited. In that case, judicial foreclosure would be required to legally effect repossession or attachment over the collateral, which is often a lengthy and costly process. One mechanism lenders employ in cross-border transactions to address the difficulties in obtaining security interests in the borrowers accounts receivable across multiple jurisdictions is to require the borrower to establish an off-shore collection account and to grant a security interest in that collection account to the lender as security for the loans. Generally, the collection account would be subject to an account control agreement in favor of the lender. In this type of arrangement, the lender would also typically impose a covenant requiring the borrower to cause its customers to make all payments to the off-shore collection account in hard currencies for whatever goods or services they purchase from the borrower or its affiliates. While the lender would still need to create and perfect security interests over the underlying accounts receivable in each of the jurisdictions where the obligors are located, this approach simplifies the process of obtaining security in the account where the monies are ultimately paid. Additionally, it is important to note that security interests over personal property and floating liens or blanket liens (i.e., liens over all assets of the borrower, including both real and personal property) are generally less intricate to create and perfect in common law jurisdictions, such as the United States, than in civil law jurisdictions such as in Continental Europe or Latin America, where the security documents often need to be very specific and often need to be amended every time the assets that comprise the collateral have been replaced or modified. Some jurisdictions, including Spain, France and Italy, do not have central filing systems for publicly registering security interests over certain types of collateral, such
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as accounts receivable, and therefore it is almost impossible to confirm whether any particular accounts of a borrower have previously been made subject to a security interest in favor of another party. Even prior to preparing a term sheet, a lender in a cross-border finance transaction should thus obtain certain assurances related to the feasibility of obtaining a valid security package in the jurisdictions where the borrower and its assets are located. To this end, the lenders preliminary diligence will entail determining (i) whether the perfection of a first priority security interest requires a notarized public deed or any legalized or consularized document, as well as any formal notice to the borrowers customers or other parties, (ii) whether the relevant security agreements need to be filed with a commercial or company registry to become valid and what fees apply to those filings and (iii) whether the security agreements will require the payment of any other fees, duties or taxes such as stamp duties.
Subordination Issues
Another general way lenders attempt to reduce their risk in a financing transaction apart from obtaining collateral is to require that the loans of other creditors be subordinate to those of the senior lenders. The subordination of mezzanine or junior debt generally can be achieved either structurally or contractually. Structural subordination refers to the de facto subordination of a lenders claim against a borrower when the borrowers principal assets are held and operations conducted at a subsidiary level. With the junior debt incurred at the holding company level, the junior lenders claim will be limited to the holding companys equity interest in the operating subsidiary. The senior lenders thus effectively subordinate the junior debt by ensuring that the senior lenders, as creditors of the operating company, will be repaid before any distributions up to the holding company can be made. Contractual subordination is generally accomplished through the use of subordination provisions housed in intercreditor or subordination agreements entered into among the senior and subordinated lenders and the debtor. For example, in both second lien term loans and second lien bond transactions the intercreditor agreement will prohibit the second
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lien creditors from (i) exercising remedies against collateral with respect to their second liens, (ii) challenging any exercise of remedies against the collateral by the first lien lenders with respect to their first liens and (iii) challenging the enforceability or the priority of the first liens on the collateral. In many European jurisdictions creating a valid security interest over a particular asset requires possession by the secured party and, as a result, it may not be possible to take a second lien over such asset. Accordingly, second lien financings are still at an early stage of development in Europe.
5.
Cross-Border Legal Opinions
Lenders in cross-border transactions typically require formal legal opinions from their own counsel and from borrowers counsel as a condition to extending any financing. These opinions generally are limited to specific legal aspects involved in financing the transaction and commonly address the following issues: (i) the validity and enforceability of the financing documentation (e.g., the loan agreement, the promissory notes, the guaranties and the security agreements); (ii) the valid incorporation and existence of the borrower; (iii) the authority of the borrower to enter into the financing transaction; (iv) the applicability of stamp duties, taxes and exchange controls in relevant jurisdictions; (v) licensing and registration requirements and other approvals that must be obtained in connection with financing the transaction; and (vi) where the financing is secured, the validity, enforceability and perfection of the security. The financing of a cross-border transaction often implicates the laws of several jurisdictions. These include the laws of the jurisdiction of the borrowers incorporation, the laws of the jurisdictions of the lenders incorporation, the laws governing the financing documentation and the laws of the jurisdictions where any collateral is situated. At a minimum, lenders generally require that legal opinions be provided with respect to the laws of two critical jurisdictions: the laws of the jurisdiction of the borrowers incorporation and the laws governing the financing documentation. Given the complex legal issues that are often addressed in these types of opinions, local counsel should be given sufficient advance notice as to the
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particulars of the opinion they will be required to provide and should be kept informed as to the status of the deal throughout the transaction. Although legal opinions do serve a key role in providing lenders with some degree of comfort in financings, one should not lose sight of the fact that opinions do have significant limitations. For example, legal opinions are limited to the legal aspects of the transaction, and the stated opinions are often based on several assumptions and limited by various qualifications. Accordingly, legal opinions do not address commercial aspects or the business risks (e.g., country risk) associated with the financing, and the business decision as to the commercial viability of a particular financing remains with the lenders. Legal opinions, as lawyers often say, are not guarantees.
6.
Closing Cross-Border Financings
Perhaps the most important condition for a successful closing of a crossborder financing is advance planning and organization. While closing any financing requires the satisfaction of various conditions and significant coordination, these requirements are magnified when dealing with more than one jurisdiction (and quite likely, more than one language, legal system and time zone). Lenders counsel often prepare comprehensive checklists, significantly in advance of closing, which specify the responsibility for the various critical path items and all other conditions that must be completed in order to close the financing in a timely manner. See Section 10 (Closing the Transaction) for more information on closing cross-border transactions generally. * * * With the anticipated financing needs in mind, the parties often turn their attention to discussing the key terms of the deal. In the next section, we discuss the basic elements of the key preliminary agreements that the parties often rely on to commence meaningful discussions regarding the transaction.
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Cross-Border Transactions Handbook Section 5 Preliminary Agreements
SECTION 5 PRELIMINARY AGREEMENTS

The main driving force for proceeding with a domestic or cross-border transaction is, necessarily, some sort of expressed intention on the part of the parties to do a deal, often in the form of a written preliminary agreement. While the use of preliminary agreements is fairly commonplace in the cross-border setting, the parties should take care to ensure that these types of agreements do not have unintended consequences in light of the differing legal landscapes involved in the deal. This section discusses some of the basic elements of the typical preliminary agreements and highlights some of the key pitfalls to be mindful of when contemplating entering into these agreements in the cross-border setting. For purposes of this section, we have taken the term preliminary agreements to include the usual array of documents that parties may enter into in the cross-border transaction context prior to the entry into formal definitive transaction agreements. Preliminary agreements would, therefore, include the following (which may be incorporated into one or more documents):
x x
Confidentiality agreement; Letter of intent (sometimes referred to as, or preceded by, a memorandum of understanding, heads of agreement or term sheet); Lock-out agreement (sometimes referred to as an exclusivity agreement); and Break fee agreement (sometimes referred to as a termination fee or failure costs agreement).
x x
The preliminary agreements will be somewhat different in the auction setting. For example, there may not be a letter of intent if the buyer is identified through the bid process, but the winning bidder and the target nevertheless might enter into an exclusivity agreement. In addition, the
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auction setting necessitates the use of other procedural or informational preliminary documents. For example, the target generally distributes data room rules and a bid process letter, which govern access to the data room and the mechanics for submitting bids, respectively. In addition, the target often prepares an informational memorandum which it uses to solicit initial indications of interest. Baker & McKenzies Rapid Dispositions Handbook provides greater detail on these and other procedural aspects of the auction process.
1.
Confidentiality Agreements
Confidentiality agreements are very common at the outset of negotiations or diligence for transactions in most jurisdictions. While confidentiality obligations might be contained within a letter of intent, it is more common for parties to enter into a separate confidentiality agreement prior to exchanging any confidential information and conducting negotiations with respect to the underlying transaction. Generally in civil law jurisdictions (e.g., Continental European jurisdictions), however, specific confidentiality agreements are not strictly necessary to safeguard the secrecy of a partys confidential information, as the laws of the jurisdiction often provide sufficient statutory protection. Nevertheless, confidentiality agreements may still be useful in civil law jurisdictions to clearly identify the information that is considered confidential, and to specify the relevant rights and obligations of the parties. Appendix 5.1 contains a general checklist of provisions for a typical confidentiality agreement. Generally, to be enforceable, contractual obligations of confidentiality need to be supported by consideration. This is not typically an issue as the consideration for disclosure is usually found in the undertakings of the investigating party to maintain the confidentiality of the information it receives. Hence, at the core of most confidentiality agreements is the obligation of the investigating party to keep the disclosing partys information secret and to use it only for a specified purpose, which is generally limited to the evaluation of the target and proposed transaction. This obligation may be for a fixed period (e.g., for a certain number of years after negotiations have terminated) or it may continue indefinitely. Care should be taken with these terms, however, as courts in some
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jurisdictions may be unwilling to enforce obligations that have a very long or unlimited duration due to public policy concerns. Some of the key elements to consider when contemplating a confidentiality agreement in the cross-border setting are discussed below.
Definition of Confidential Information
A key provision in any confidentiality agreement is the definition of confidential information, to which the relevant obligations of confidentiality will apply. Generally, the disclosing party seeks to define the term broadly to capture essentially all commercial information provided to the recipient during the course of its evaluation of the target and transaction. If this approach is adopted, appropriate carve-outs are typically included with respect to information which is already known by the investigating party or which is already in the public domain. It is equally important to ensure the confidentiality of the fact that negotiations are taking place as well as the content and conditions of those negotiations (including the terms of the ultimate agreement). These issues, however, are often covered by separate covenants in the confidentiality agreement, rather than the definition of confidential information itself. Often, the parties will include the term trade secrets within the definition of confidential information to incorporate specific types of information protected by law (e.g., formulas, patterns, processes and the like that are secret and commercially useful). Trade secret law varies from jurisdiction to jurisdiction and, where appropriate, local laws should be consulted and local terminology included to ensure appropriate protection for this type of information.
Parties and Representatives
Care should also be taken to ensure that all relevant parties are bound by and can enforce the applicable provisions of their confidentiality agreement in the relevant jurisdictions. In a sale of shares, the selling shareholders will be party to the definitive acquisition agreement but most of the actual disclosures will be made by the target company, which is likely to possess and own the relevant confidential information. In these circumstances, the target company should, therefore, be the
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appropriate party to the confidentiality agreement. This automatically eliminates any post-closing obligations on the part of the investigating party (i.e., the buyer), which will own the target company upon closing. In an asset sale, the seller and the disclosing party will typically be the same entity (i.e., the company that owns the relevant assets) and would thus be the relevant party to the confidentiality agreement. The parties should also consider the persons to whom the investigating party is permitted to disclose the confidential information. Often, a partys employees, advisers and other third parties (including lenders) involved in the transaction will require access to the information. In some circumstances the disclosing party might require the investigating party to undertake to have each of its third party representatives enter into a separate confidentiality agreement. This might be appropriate where, for example, the investigating party is a financial buyer that refuses to bear any indemnity obligation with respect to the actions by its third party representatives. Alternatively, the disclosing party may require notification, consent or that the receiving party procure that its third party representatives comply with the relevant confidentiality undertakings.
Restrictions on Sharing Certain Types of Information
The mere presence of a confidentiality agreement is not a free ticket to disclosing any type of information the parties wish, however. For example, data protection laws in many jurisdictions restrict disclosure of personal information about individual employees. Similarly, competition laws throughout the world restrict the parties ability to share competition-sensitive information. These respective issues are discussed in greater detail in Section 6.10 (DiligencePrivacy and Data Protection Laws) and Section 7.4 (Regulatory FrameworkExchange of Competition-Sensitive Information).
Attorney-Client Privilege
Due to the importance of maintaining the protections afforded by any applicable attorney-client privilege, work product doctrine, or rules of similar effect, it may be appropriate to include an express acknowledgement in the confidentiality agreement that the disclosing party may be entitled to these protections with respect to parts of the
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confidential information. Further, the confidentiality agreement could expressly provide that the disclosing party is not waiving, and will not be deemed to have waived or diminished, any of its attorney-client privileges as a result of the disclosure of confidential information in connection with the proposed transaction. However, jurisdictions vary in their application of the attorney-client privilege and work product doctrine and some apply them quite narrowly, if at all. Accordingly, even in a jurisdiction that recognizes these concepts, a disclosing party should not rely too heavily on a provision in the confidentiality agreement devoted to protecting the privileges. A court may ignore it (particularly if the parties become adverse) if a third party claims that the privilege has been waived, or if the transaction never closes. Therefore, while the parties might include a provision in the confidentiality agreement relating to these concepts, the disclosing party should nevertheless carefully monitor the disclosure of any information that may be protected. The buyer, as the investigating party, may also desire that the target retain the benefits of the protections afforded by the privilege after closing and thus might be equally hesitant to rely on a contractual provision in this regard. In the United States, the privilege generally protects only communication between the attorney and his or her client, but not the underlying facts that are the subject of that communication. In this light, US parties might disclose the facts but not any related privileged legal advice, leaving the investigating party free to draw its own legal conclusions. Alternatively, the parties may simply decide that the deal is too beneficial to be held up over an attempt to preserve an applicable privilege, particularly when the harm associated with waiving the privilege is relatively minimal.
Remedies for Breach
The main remedy available for breach of a confidentiality agreement is a claim for damages and/or injunctive relief to prevent further disclosure. Accordingly, it is common in many confidentiality agreements to include an acknowledgement that the disclosing party would be damaged irreparably if any of the provisions of the agreement were breached, and that any such breach could not be adequately compensated by monetary damages alone. This provision may not be necessary, however, if the
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action would only be brought in a civil law country where irreparable damage is not a prerequisite to obtaining the equivalent of specific performance or an injunction. An alternative to judicial determination of disputes under confidentiality agreements is arbitration. One advantage of arbitration is that disputes over the confidential sale, evaluation and offer process do not become a matter of public record. Disadvantages include the plaintiffs difficulty in obtaining injunctive relief and the general unavailability of extensive discovery unless the parties agree to it up front. A more detailed discussion of dispute resolution mechanisms in the cross-border context is contained in Section 12 (Dispute Resolution).
2.
Letters of Intent
The form that a letter of intent can take may vary widely, depending on the size and nature of the proposed transaction, the law of the jurisdiction governing the letter and the purpose for which the parties seek to use it. Appendix 5.2 contains a general checklist of provisions for a typical letter of intent in a cross-border acquisition. Generally, a letter of intent is adopted for the following key purposes:
x x
to memorialize the parties expression of interest in a potential transaction; to provide an understanding of the major deal points that will serve as a frame of reference for the eventual drafting, negotiation and finalization of the definitive transaction documents; to establish a timeframe for the deal (which may be especially useful when the time between handshake and signing of definitive agreements is lengthy); and to impose certain binding obligations on the parties with respect to their discussions on the proposed transaction.
While letters of intent are common for most transactions except auctions, care should be taken to ensure that the time spent negotiating
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them does not outweigh the intended benefits. In certain circumstances (e.g., where the parties have established an extremely short timeframe), it may simply be more efficient to proceed with the negotiation of definitive agreements. Also, it may not be prudent for the parties to commit in a letter of intent to the terms of a possible transaction (even if only from a moral perspective) because doing so could limit the scope of, or weaken the parties leverage with respect to, future negotiations. This is particularly the case from the buyers perspective where the buyer has not yet conducted diligence on the target business. The parties should also take care to ensure that no adverse tax consequences result from the letter of intent, and that the letter does not create difficulties for a party to later change its position on the likely tax treatment of the proposed transaction. Some of the key elements to consider when contemplating a letter of intent in the cross-border setting are discussed below.
Binding/Non-binding
While the parties may intend that certain aspects of a letter of intent be binding, these documents are generally intended to be non-binding with respect to the terms of the underlying transaction. The provisions in a letter of intent that are commonly intended to be legally binding include obligations of confidentiality and exclusivity, termination fee arrangements, provisions governing transaction expenses and noncompetition/solicitation provisions. In certain jurisdictions, such as the United Kingdom and the United States, clear and unambiguous language as to the parties intent with respect to the provisions that are meant to be legally binding is generally sufficient to give rise to a binding obligation. Accordingly, if a letter of intent contains terms that are intended to be binding, these should be clearly identified and the requirements for the creation of a valid contract under local law should be satisfied. To that end, depending on the jurisdiction, consideration may be required to create a valid contract (although mutual promises are generally sufficient for this purpose). Also, particularly in civil law countries and depending on the subject matter of the deal, the contract may need to be executed before a notary,
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and other formalities may need to be complied with, in order for it to be binding. One of the more troublesome aspects of the letter of intent in crossborder transactions is that legally binding obligations may be created which are unintended by the parties. This is particularly the case in jurisdictions which recognize a duty to negotiate in good faith. Therefore, care should be taken to ensure that non-binding terms do not inadvertently create binding, contractual obligations. General terminology, such as subject to contract, is rarely sufficient to avoid this outcome in many jurisdictions. For instance, in France, Italy and other Continental European jurisdictions, a judicial finding could be made that a contract has been formed and is enforceable against the parties where a letter of intent evidences an agreement on the principal terms (e.g., as parties, object and price). Moreover, even where a letter of intent is replaced by definitive agreements, if there is any subsequent litigation on the contract, a French judge, for example, will often refer to the letter of intent to interpret the common will of the parties.
Duty of Good Faith
A duty of good faith during the execution and performance of contracts is commonly present under the laws of many civil law countries, including many Continental European and Latin American jurisdictions. In these jurisdictions the duty of good faith could be triggered not only upon entering into a letter of intent but also with respect to the negotiation of the letter of intent itself. If the duty applies, a party could be held liable for damages if it is found to have not negotiated in good faith at any point during the commercial relationship. As a result, parties should be cognizant of their obligations in this regard from the outset of negotiations because they could impact their conduct as they proceed with the transaction. The precise scope of the duty varies among jurisdictions but the following principles generally apply:
A party must not disclose personal or financial information of the other party during the course of negotiations where that disclosure may cause damage to the other party;
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The parties must not intentionally conceal material facts, and are generally obligated to disclose accurate information to each other which is relevant to their commercial relationship, particularly where that information is not readily discoverable through other means; and The parties should exercise reasonable diligence in seeking to progress the negotiations, and not resort to unwarranted delays or raising immaterial objections. Further, a party is generally obligated not to break off negotiations without due cause, particularly where the other party has a reasonable expectation that an agreement will be entered into. To that end, a party may not propose an unreasonable position in order to terminate negotiations.
In limited cases, parties may be able to avoid these obligations by expressly agreeing to the contrary in the letter of intent. However, the language in the letter of intent would need to be crafted carefully to accomplish this end under the specific laws of the local jurisdiction. For instance, it may be expedient to include an express waiver of any claim for termination of negotiations, or to expressly state that the seller wishes to reserve the right to negotiate with more than one prospective buyer. In some jurisdictions, however, irrespective of the language used in the letter of intent, it may not be possible to contractually avoid the duty to negotiate in good faith under local law. Furthermore, in almost every jurisdiction, including the United Kingdom and the United States, fraud and deliberate bad faith (such as entering into a letter of intent for the purpose of injuring the other party) may be actionable. It is neither possible nor desirable to try to eliminate liability for this type of conduct by a party in the letter of intent.
Exclusivity, No shop and Lock Out Provisions
Letters of intent often contain provisions dealing with the exclusiveness of the negotiations between the parties for a fixed period of time, and the payment of a partys costs plus, in some cases, a penalty if negotiations are terminated early. These agreements are sometimes called exclusivity, no shop or lock out agreements and they are usually
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embodied in the binding provisions of the letter of intent or in a standalone agreement. Wherever these provisions reside, care should be taken to specify the duration of the exclusivity period as it may be unenforceable if it is not keyed to a clearly defined, fixed period of time. As their names imply, these agreements generally prohibit the seller from providing information to, or negotiating with, another prospective buyer during the period of exclusivity. In some jurisdictions, the good faith principle discussed above may be applicable. In these jurisdictions, the existence of an exclusivity agreement should not be viewed as a ticket for a party to simply walk away from negotiations once the exclusivity period has expired. Instead, a party terminating the negotiations without good cause may be subject to a damages claim where the termination amounts to a breach of the duty of good faith, regardless of any language in the agreement to the contrary. Generally, the remedies available to the buyer for the sellers breach of an exclusivity agreement include either an injunction to prevent the seller from negotiating with other potential buyers during the exclusivity period and/or damages. Damages, however, are usually limited to the reimbursement of costs incurred up to that point in connection with the transaction.
Break Fees
Another type of provision that is often included as a binding term in the letter of intent is a termination or break fee provision. A break fee provision may take many forms but it generally requires that one party pay a fee to the other if the transaction does not proceed to signing or closing. The obligation to pay the break fee is usually fault-based (i.e., the action or inaction of a party) and the most likely triggers include the breach of an exclusivity provision, the failure to obtain the requisite shareholder approval or the failure to obtain required regulatory or merger control approvals. While relatively common in large US transactions, these provisions are less prevalent in other jurisdictions and a number of legal issues need to be considered when proposing and negotiating them, including with respect to the following:
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Ensuring that the provision will not contravene any prohibition on the giving of financial assistance by the target in connection with the acquisition of its own shares (e.g., when the break fee is required to be paid by the target, rather than the sellers). Section 4.3 (Discrete Financing IssuesFinancial Assistance) discusses financial assistance in greater detail; Ensuring that directors do not breach their fiduciary duties by agreeing to enter into an inappropriately rigid break fee provision that could be viewed as not in the companys best interests, or that unduly fetters the discretion of the directors; and Whether the break fee provision would be deemed an unenforceable penalty (i.e., where the payment required for the relevant breach of contract does not amount to a genuine estimate of the loss likely to be suffered by the innocent party).
Non-Competition and Non-Solicitation Provisions
Letters of intent (and confidentiality agreements) often contain provisions relating to non-competition as to the business at issue and the nonsolicitation of the parties customers and employees. These provisions should be crafted carefully in order to be enforceable under applicable law. For example, in most jurisdictions these provisions need to be reasonable and limited in time, geography and scope (such as a specific field of activity).
Regulatory Filing Triggers
Letters of intent can also form the basis for a submission for clearance or guidance from the relevant competition, tax or other governmental authorities. For instance, where required in a US transaction, the parties could agree to make Hart-Scott-Rodino filings once a letter of intent is signed. Generally, this filing may be made at any time after the parties have agreed in good faith to undertake the transaction (i.e., before executing a binding agreement and on, for example, the execution of a letter of intent). However, the structure of the transaction generally needs to be sufficiently formalized for the relevant governmental agencies to commence their review.
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Moreover, entry into a preliminary agreement may automatically start the antitrust clock in certain jurisdictions. In Brazil, for example, an antitrust filing will be required (assuming the relevant economic thresholds are met) within 15 business days of realization of the agreement. The position long maintained by the Brazilian antitrust authority (CADE) is that this threshold is met upon the execution of the first binding document, which, depending on its content, could include a letter of intent.
Conditions Precedent
While it is common to find conditions precedent in a letter of intent, in some jurisdictions any condition which is subject to the exclusive will of one of the parties (e.g., a condition tied to the approval of a partys board of directors) will be considered null and void. If the letter of intent is subject only to these types of conditions precedent and these conditions are latter held to be void, the parties could end up stuck with a binding commitment in a jurisdiction (e.g., France, Italy and other Continental European jurisdictions) where a contract will be deemed to exist once the parties evidence their agreement on the principal terms. * * *
With the key preliminary agreements in place, the parties often turn their attention to the acquisition review (or due diligence) phase of the transaction, which we discuss in the next section.
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Cross-Border Transactions Handbook Section 6 Diligence
SECTION 6 DILIGENCE
In the context of a cross-border transaction the acquisition review (or due diligence) investigation is often a daunting and expensive exercise. Differing legal systems, accounting standards, types of business organizations and the unique legal characteristics of each jurisdiction around the globe, in addition to language and cultural barriers, present obstacles to the diligence investigation which are wholly absent in the domestic context. The more jurisdictions involved in the transaction, the more these obstacles serve to magnify the risks of inefficient diligence. This section highlights significant aspects of the diligence process that should be understood in the cross-border setting.
1.
Role of Review
The term due diligence encompasses the process of obtaining and verifying material information about the targets business and identifying material issues and liabilities affecting the business and the proposed transaction. In the United States, the concept originated under the Securities Act of 1933 out of the reasonable investigation defense of underwriters and their counsel in connection with securities offerings, but the process now plays an important role in transactions throughout most of the world, whether involving public or private companies. The diligence investigation serves many purposes in the context of a transaction. It is useful for validating the strategic rationale for the transaction and for verifying material information about the target that is the basis of the deal. Further, it helps identify legal and business risks and deal-stoppers that could impede fulfillment of the parties objectives for the transaction. From the sellers perspective, the exercise often precipitates a greater awareness of, and possibly a housecleaning effort that enables the seller to rectify, troublesome matters. In addition, the diligence investigation plays an essential role in ensuring seamless postclosing integration of the target business.
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The diligence process also plays a direct role in the documentation phase of the transaction. As in a typical domestic transaction, the representations and warranties in the principal cross-border transaction document are designed in part to cause the seller to disclose material information of greatest concern to the buyer. In certain cases, because of local custom, these representations and warranties may not be very extensive. Moreover, even if an unsophisticated seller is willing to make certain representations, it may not fully appreciate all their ramifications. Therefore, the diligence exercise is important in framing the representations and warranties and bringing to the fore issues that may be addressed in advance of closing by way of negotiating an acceptable resolution or specifically allocating risks in the transaction document in order to minimize the likelihood of costly and contentious post-closing warranty claims.
2.
Role of Advisors
As discussed in Section 2 (Project Management), a large cross-border transaction involving a multitude of countries is likely to involve the participation of several players in numerous jurisdictions. It thus becomes critical to allocate responsibility for performing the diligence tasks and to clearly communicate the various responsibilities in order to avoid duplication of efforts or gaps in coverage. Further, the legal diligence coordinator should centrally coordinate the investigation and ensure consistency across jurisdictions so that the results of the investigation can be presented in a meaningful way. To help achieve this goal, it is important for the coordinating lawyer to provide the local lawyers assisting with the investigation in various jurisdictions clear instructions as to the critical elements of the investigation, including the scope of the review, access to the relevant documents and information, the nature, scope and timing of the diligence report, the reporting channels and any specific matters to be investigated at the outset. Having available standardized instructions in this regard will help to ensure that the diligence exercise commences efficiently and is carried out in a consistent manner from jurisdiction to jurisdiction.
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3.
Scope of Review
Diligence can involve varying levels of review from a very cursory review of major issues and limited documents, through to a very detailed review and summary of all issues and documents likely to impact the risk and pricing profile of the target and, ultimately, the integration of the newly acquired business. In determining where a buyer falls on this continuum, there is often a tension at play in these exercises (particularly in the auction context) between implementing a quick pass over the relevant documents in a data room, so as to not expend too many resources too early in the process (i.e., before being selected as the successful bidder) and in conducting a meaningful review of all relevant risk areas and opportunities for purposes of validating the pricing model and forming a post-closing integration plan. Auction sellers often suggest that, if selected to proceed to the next round, bidders will be afforded the opportunity to perform further diligence prior to submitting a final bid. However, depending on the transaction dynamics at that point, further review may not be available, or it may only be provided on an expedited timeline. Accordingly, the initial review cycle may be the buyers best opportunity for conducting a reasonably detailed investigation of the target business. Given the sheer volume of information that is likely to be available in a large cross-border transaction, however, it simply may be cost- or timeprohibitive to conduct a detailed review of all issues and documents. In that case, it is critical to set the parameters for the scope of the investigation and establish appropriate materiality standards in light of the operative cost and time constraints. Setting the general scope of the diligence investigation usually occurs during the budgeting phase. As discussed in Section 3 (Budgeting for the Transaction), the key variables that often determine the scope of the diligence effort are the buyers risk profile, the transaction timetable and the logistics of the diligence itself. As also discussed in Section 3, several transaction-specific factors impact the level of diligence as well, including the transaction structure, the nature of the targets business and the extent of any representations and warranties and post-closing indemnification the buyer can expect to receive from the seller.
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In order for the diligence team to carry out the investigation within the general parameters that have been established at the budgeting phase, it is critical that the team be mindful of the business objectives for the transaction and the established materiality thresholds.
Business Objectives
An understanding of the business objectives is necessary to enable the transaction team to prioritize its investigation within the established parameters. For example, if the diligence team understands at the outset that certain of the targets business relationships are key transaction value drivers, a more detailed investigation can be conducted with respect to those relationships. Likewise, it would be important for the diligence team to understand the intended synergistic benefits of the transaction and, specifically, whether certain operations are intended to be eliminated following the transaction. This will help the team focus its review on the consequences of any planned termination of those operations.
Materiality Thresholds
There should also be established a monetary level below which disclosure of particular problems becomes counter-productive or at least not costeffective. Threshold amounts and other parameters for various types of matters or problems (e.g., subject matter, value or term of contracts and nature or size of litigation) should be established at the outset and communicated to each transaction team member and local lawyer so that the transaction team is not inundated with disclosures which, while potentially significant at the local level, are inconsequential in the context of the global transaction. However, these materiality levels should be designed carefully. For example, a subsidiary whose sole assets are the intellectual property rights of the target business is likely to be critical to the value of the deal even though the subsidiary may have a low book value. Similarly, setting a flat contract value for reviewable contracts may cause certain agreements that could give rise to significant risks (including governmental contracts) to slip through the cracks.
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4.
Diligence Requests
In a negotiated transaction where the buyer has the ability to submit a diligence information request or questionnaire to the target, the scope and materiality thresholds will often be the subject of negotiation between the parties. Ideally, the request should be consistent across all jurisdictions so that the materials produced and their subsequent review are comparable across each jurisdiction. Nevertheless, parts of the request may be inappropriate for certain jurisdictions, depending upon the nature and size of the operations conducted in and from those jurisdictions and the relevant legal and factual considerations that are material in the local context. For example, many multinationals have established holding company structures (usually for tax or liability purposes). Sending an extensive questionnaire to the holding company would have little value since the holding company merely holds the stock of various subsidiaries. Further, the terminology of the request will often need to be modified from country to country. For example, a party might request a copy of an English companys certificate of incorporation, but in Spain a party would need to request a copy of the public deed of incorporation. Having available standardized instructions, questionnaires and checklists, which may be tailored to reflect the nature or size of the local operations or the local legal environment, is important for the coordinating lawyer to ensure efficient, consistent and uniform investigation.
Supplemental Requests
In addition, there is frequently a need for buyers to submit supplemental information requests. This is particularly the case in the auction setting where the data room will omit information that cannot or should not be shown to potential buyers because it is either commercially sensitive or contractually or legally restricted. Commercially sensitive data, for example, may consist of pricing information, strategic plans, sales figures or even the identity of key customers or distributors. To complicate matters, the definition of commercially sensitive data will change depending on who is ultimately invited into the data room to review the information. What may be commercially sensitive for a competitor may not be for a potential buyer who acquires the target to enter a new line of
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business, but the initial data room is likely to be identical for all bidders. Section 7.4 (Regulatory FrameworkExchange of Competition-Sensitive Information) discusses commercially sensitive information in greater detail. Further, what may be important to one bidder may not be as important to another bidder, depending on the bidders rationale for doing the deal. For example, a financial or private equity buyer is likely to place significant emphasis on cash-flow generation, while a strategic buyer is likely to place greater emphasis on synergies or access to new markets. It is important that buyers coordinate their requests for additional information among all team members to avoid duplication of efforts. The seller should also carefully coordinate its response to supplemental requests to ensure compliance with applicable legal requirements.
5.
Nature of the Report
Diligence reports can vary widely. On the one hand, some companies prefer a full legal summary in which the report summarizes the details of all contracts, business relationships and legal aspects of the targets business. These reports can be helpful for identifying information that relates to the transaction as well as the post-acquisition integration process. In a large transaction, it is not uncommon for these reports to exceed several hundred pages. On the other hand, some companies prefer an exceptions only report, which highlights only the significant problems and high-risk aspects of the targets business. These reports are often considerably shorter than the full legal summary, but the cost to produce them may not be much less because the diligence team still must go through the exercise of analyzing the relevant information in order to ferret out the areas of exposure. In addition, the nature of the delivered report may vary depending upon the stage of the transaction. For example, the report produced in the early stages of the auction setting will typically contain far less detail than the report produced in the later, pre-signing stage. Also, the extent of the detail may vary depending upon the subject area or type of issue. Licensing agreements, for example, are likely to be addressed in great detail in the report for a transaction where intellectual property is
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critical. Certain types of commercial contracts (e.g., critical supply or distribution agreements, or contracts with government agencies) also may be highlighted in detail due to their impact on the targets business. Similarly, legacy exposure under prior acquisition or disposition agreements often merits considerable attention in the report where the exposure under those agreements is potentially significant. Accordingly, the report will often end up someplace in the middle of the full legal summary and exceptions only approach. An executive summary will highlight the major issues uncovered during the course of the investigation, and a more detailed report will follow that contains additional relevant information. In the cross-border context, it is most efficient for the report to be organized by jurisdiction following a consistent format and sequence of topics.
6.
Timely Reporting
Whatever the style of the report, it is critical that clear lines of reporting be established between local counsel, the coordinating legal advisor and the client in order that the client can be notified of significant issues as soon as they are discovered. Also, a realistic time schedule for the mechanics of reporting the results of the investigation to the client should be established at the outset. Periodic reporting mechanisms, such as weekly (or more frequent) email updates or conference calls should be arranged so that the coordinating lawyer can be kept aware of the status of all significant issues and report back to the business team as necessary. In addition, ongoing informal reports of the discovery of potentially significant problems should be provided to the coordinating lawyer as soon as they are discovered so that a decision can be made with the business team as to the necessity of any additional investigation of the particular matter. Accordingly, local lawyers conducting the diligence investigation should be comfortable working with the coordinating lawyer on an informal basis. The formality with which lawyers are accustomed to dealing at arms length will slow the flow of information from the local jurisdictions to the coordinating lawyer. Having the investigation conducted in as many jurisdictions as possible by lawyers who are associated in practice or
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who have established and long-standing correspondent relationships with the coordinating lawyer can greatly increase efficiency and speed. Furthermore, even in major transactions, local lawyers have a tendency to pass diligence work to junior lawyers who may not have the experience to identify a problem area or, if they do, may be unable to propose a suitable solution in the limited time available. In this regard, the existence of long-standing relationships with local lawyers is also helpful in ensuring that a degree of sophistication is brought by those local lawyers to the sometimes mundane and tedious task of conducting a diligence investigation.
7.
Specific Matters for Investigation
The very nature of the investigation will vary in each country because of the differing legal systems, types of business organizations and unique legal characteristics of that jurisdiction. Thus, many matters that typically appear on a domestic checklist often need to be considered with increased scrutiny in light of the cross-border nature of the transaction, such as:
Transfers and assignments of intellectual property rights. The transfer or assignment of intellectual property rights and related licenses is regulated in many countries by technology transfer, exchange control or similar legislation. Approvals and notices to appropriate authorities may be necessary. It is also often found that intellectual property rights are owned by a parent or related company not being sold, in which case assignments of those rights will have to be separately obtained. Again, sufficient time must be allowed for this procedure and transitional arrangements may be necessary. Furthermore, searches may reveal registrations in the name of predecessor companies or previous owners. Changing the registrations in many jurisdictions is a slow procedure and recent sale transactions may not yet be reflected in the registry. This should not present an insurmountable problem but it can be cumbersome in that the buyer will require assurances of the chain of title from the registered owner to the seller.
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Transfers of employment. As discussed in greater detail in Section 8 (Employee Transfers and Benefits), the transfer of the targets employees often merits considerable diligence. Unlike in the United States, for example, in many jurisdictions the employees automatically transfer to the buyer in an assets transfer and the terms and conditions of employment for the transferred employees, including employee benefits, must generally remain the same. Otherwise, the employees could have a claim for constructive termination of employment and be entitled to severance payments. In this regard, the buyer will need to determine whether it is possible or desirable from a business standpoint to provide the same or substantially similar terms, which often requires carefully coordinated diligence by specialists in each jurisdiction. Intercompany arrangements. In a far-flung, multi-location business, intercompany agreements reflecting the dependency of the business being sold on the head office or other affiliates will typically need to be assessed. Information technology, administrative services and similar functions may be centralized and the diligence investigation may be the only way of uncovering intercompany arrangements relating to these matters. Guarantees. Parent or related company guarantees of credit facilities or term lease obligations of foreign subsidiaries are quite common. If obligations of foreign subsidiaries are guaranteed by a company not being sold, replacement credit support arrangements typically must be implemented before closing. Substituting a new guarantor may require exchange control approval.
8.
Extra-Territorial Reach of Laws
In addition, certain domestic laws may be triggered with respect to the business of a foreign target upon closing the transaction. Examples of the extra-territorial reach of US laws that are often considered by US parties in this regard include the following:
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Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002, together with related regulatory reforms, significantly changed the corporate governance practices not only of US public companies but also of non-US companies with securities that are listed, traded or otherwise registered in the United States. Although the overall purpose of this law was to address corporate financial scandals, its reforms impact many different areas of law and business practice, each requiring specific analysis. Often of particular concern in the financial diligence phase are the rules that require the maintenance of internal control over financial reporting that conforms to US accounting and securities law standards. Because non-US companies are not normally required to maintain this level of control, a cross-border transaction can raise significant internal control issues. For example, a US public company may seek to acquire a non-US company that does not have sufficient internal control structures in place, or may seek to outsource operations in a manner that will require the service provider to maintain adequate internal control with respect to the outsourced operations. Even in situations where the US company will own less than 100% of a non-US entity, internal control issues still arise to varying degrees, depending on such factors as the level of the US companys ownership, the materiality of the investment to the US company and the level of control that the US company exerts. In addition, if the cross-border transaction involves the acquisition of an enterprise or line of business, the acquiring company should conduct careful inquiries into financial, accounting and other procedural matters, particularly those relating to disclosure controls and procedures, and (as discussed above) internal control over financial reporting. This is of particular importance to CEOs and CFOs that are required to file public certifications with the US Securities and Exchange Commission as to these matters. In a cross-border transaction, financial and accounting differences, as well as differences in the public disclosure and internal control regimes, may make it difficult to render the CEO and CFO certifications. Further, all relationships with auditing firms should be scrutinized carefully to ensure that there is no violation of auditor independence
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requirements. If auditors are deemed not to be independent of their clients, they will be unable to render audit opinions acceptable to the US Securities and Exchange Commission. Because non-US jurisdictions have differing requirements for auditor independence, the independence of any non-US auditors should be analyzed under US standards. Thus, it becomes important to examine all audit firms relationships to all companies, entities and individuals involved in the cross-border transaction. The Sarbanes-Oxley Act also contains fairly specific rules regarding director independence, nominations for directors, CEO and officer compensation, and personal loans to directors and executive officers, which may need to be analyzed depending on the transaction structure. These rules often apply different standards than the rules, if any, that may exist in the targets home jurisdiction.
Foreign Corrupt Practices Act
The US Foreign Corrupt Practices Act of 1977, or FCPA for short, generally prohibits bribery of foreign government officials, whether directly or indirectly through employees, agents or other third parties. Under this law, the term foreign officials includes not just officials themselves, but also officers and employees of government-owned or controlled commercial enterprises (e.g., hospitals, universities and public transportation facilities) and public international organizations. Bribery of political parties, political party officials and candidates for political office also are covered by the FCPA. In appropriate circumstances, the FCPA can apply to US and non-US publicly traded and non-publicly traded companies and US and non-US individuals. In many circumstances, potential targets will not be subject to the FCPA prior to an acquisition, but may be subject to local antibribery laws or laws enacted pursuant to the OECD Convention on AntiBribery. The FCPA also requires US issuers to maintain accurate books and records and an adequate system of internal accounting controls. These controls usually are considered in connection with other diligence activities. The FCPA is enforced by the US Department of Justice and the US Securities and Exchange Commission, and penalties for violations
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include severe civil and criminal fines, as well as imprisonment for guilty personnel, potential debarment and loss of export privileges, in addition to potentially serious damage to the entitys business reputation. Only in unusual cases would potential FCPA violations be detectible from a review of the types of documents generally contained in a data room or otherwise provided in the course of the diligence phase. However, certain diligence can be conducted at an early stage that will enable the buyer to gauge the overall quality of the targets compliance program, if any, and detect red flags. For example, document review may reveal the existence of relevant audits or internal investigations, or irregularities in contract terms that require further inquiry and more extensive and targeted diligence efforts (e.g., extremely large commission payments, lack of compliance representations in agreements, commissioned agents in countries with extremely high corruption perception). Generally speaking, a more thorough investigation of the target business (including interviews of management, employees and third party intermediaries) will be necessary to more conclusively determine the level of exposure to any issues that are currently FCPA violations, or would be violations of the FCPA if they continued post-closing. This type of thorough investigation of a targets non-US operations, however, can be costly and time consuming, and often may be instead addressed through contractual terms, such as certifications, pre-closing covenants and indemnification provisions. To that end, it is often helpful to investigate a few preliminary matters that will help gauge potential exposure before undertaking a more comprehensive review, including:
Is the target or its parent a US public company or a non-US company with securities that are listed, traded or otherwise registered in the United States? Does the target operate in countries with a high incidence of corruption? The TI Corruption Perception Index published by Transparency International, which is an international organization devoted to combating corruption, is a helpful guide in this area. In the 2005 index, 70 countries (i.e., more than half of those included in the index) scored less than 3 out of 10, which indicates a severe corruption problem.
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Does the target regularly do business with government agencies (including government-owned or controlled enterprises), require government approvals or otherwise employ or pay monies (including consulting fees) to government officials or employees of government-owned or controlled enterprises? Does the target have key or essential licenses, concessions, permits or other assets that are subject to government regulation? Does the target use third party intermediaries, such as sales representatives, commission agents, consultants, distributors or middlemen? Is the target involved in any joint ventures and what level of control does the target have over legal and ethical compliance by the joint venture? Does the target include these third parties within the scope of its compliance program and does the target have written diligence procedures for identifying, appointing, retaining, compensating and renewing agreements with such third parties? Has the target been subject to any audits or investigations by any governmental authorities relating to corruption or anti-money laundering issues?
Trade Sanctions and Export Controls
The United States currently maintains country-specific trade and investment sanctions and export controls against various countries and/or their governments, including Cuba, Iran, Sudan, Syria and, to a lesser extent, Burma (Myanmar), Iraq, Libya and North Korea, among other countries. The sanctions and export controls also prohibit or restrict transactions with certain proscribed persons (including designated terrorists and narcotics traffickers), regardless of the country in which they are located. The US trade and investment sanctions generally prohibit a wide variety of transactions (including exports to and imports from the sanctioned
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countries or entities) conducted by US persons. The sanctions generally define US persons to include entities organized under the laws of the United States (including any of their non-US branches), as well as US citizens or permanent resident aliens, wherever located or employed, and all persons physically within the United States. In addition, non-US entities that are owned or controlled by US persons are themselves considered US persons under the sanctions against Cuba. US export controls apply to exports from the United States and reexports from other countries by any person (US or non-US) of US-origin items (goods, software and technology) and foreign-made items that incorporate US content exceeding certain de minimis levels. These controls apply regardless of the nationality, location or ownership of the exporter/re-exporter, and are not limited to exports or re-exports to sanctioned countries. Licensing requirements depend not only on the sensitivity of the export/re-export destination, but also on the sensitivity of the item in question (i.e., its inherent physical or technical characteristics), as well as whether any restricted end-users or restricted end-uses are involved. Violations of US sanctions and export controls are punishable by civil, criminal and administrative penalties, including fines, imprisonment and the denial of export privileges. Collateral sanctions can also be imposed by other US government agencies for certain violations of these laws. For diligence purposes, documents should be reviewed to confirm whether any contracts or activities involve countries or transactions that are affected by sanctions or export controls. In addition, to the extent that a target has been subject to US jurisdiction under these rules, it would be appropriate to conduct a review of contracts and related documents from the previous five-year period to take into account the five-year general statute of limitations period and identify potential successor liability exposure. For US companies being acquired by non-US buyers, the diligence itself could trigger export control issues to the extent controlled technology must be evaluated or reviewed by or discussed with the buyers. There are situations, primarily under the trade and investment sanctions, where the act of acquiring a company with business involving prohibited
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countries will itself trigger the application of the sanctions. In other cases, under both the sanctions and export controls, the mere act of acquiring a company will not implicate these rules, but the continued performance of contracts by the acquired companies could implicate them. For example, the sanctions generally prohibit US person involvement in or facilitation of non-US transactions involving sanctioned countries. Prohibited US person involvement can take many forms, including, for example, US parent company review or approval of specific transactions with sanctioned countries, as well as intercompany transactions (such as the purchase of capital equipment) earmarked for a non-US subsidiarys business with sanctioned countries, and assistance or involvement by US citizens or permanent resident aliens employed outside the United States with respect to sanctioned country transactions. A thorough compliance review should identify any contracts that may require termination prior to closing or exclusion from the transaction.
Antiboycott
US antiboycott laws and regulations prohibit or penalize US companies and, in some cases, their foreign subsidiaries, from participating in or cooperating with foreign boycotts against countries that are friendly to the United States. These laws and regulations are particularly relevant for companies doing business in the Middle East, where the Arab League boycott of Israel is in effect, or with other countries that boycott Israel. The US antiboycott rules are administered under two separate regulatory schemes by the US Department of Commerce and the US Department of the Treasury, respectively. The Department of Commerce rules apply to transactions by entities organized under the laws of the United States, as well as transactions by their controlled-in-fact non-US affiliates to the extent those transactions affect the foreign or interstate commerce of the United States. Transactions generally are considered to be in US commerce if they involve US-origin goods. The Treasury Department rules apply to all US taxpayers and members of their controlled group, including non-US subsidiaries, regardless of whether the transaction is in US commerce. Both sets of rules impose periodic reporting requirements with respect to the receipt of boycott-related requests, even if the recipient does not comply with such requests.
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Violations of the Department of Commerce rules are subject to civil and criminal penalties, while violations of the Treasury Department rules can result in tax penalties in the form of the loss of certain tax benefits (such as foreign tax credits or tax deferral of income of a non-US subsidiary). Furthermore, the mere acquisition by a US company, whether directly or indirectly, of companies with ongoing boycott-related commitments can trigger liability, including US tax penalties, under the antiboycott rules. For diligence purposes, documents should be screened for existing transactions or ongoing contracts that contain boycott-related commitments. The document review should include executed contracts, as well as pre-contractual documents, such as tender invitations and bidding documents, among others. To the extent boycott-related agreements are found, pre-closing amendments to or renunciations of the offending boycott clauses may be required. In addition, as with US trade sanctions and export controls, to the extent a target has been subject to US jurisdiction under the antiboycott rules, a five-year statute of limitations period applies, so a five-year period of review would be appropriate in order to determine the extent of any potential successor liability for a new owner.
9.
Public Record Searches
The amount of publicly available information that may exist with respect to the target company, and the cost to obtain that information, varies widely from jurisdiction to jurisdiction. The existence of a commercial registry in most civil law countries means that some fairly useful corporate information about a target may be publicly available. For example, the commercial registry information on a share company will, in many jurisdictions, include the names of a companys directors, their authorization to represent the company, any restrictions on that authority intended to be binding on third parties, the address of the companys principal place of business and its capital (including issued but not fully paid-in capital). In England and many other countries, annual financial statements of even privately owned companies will be on file at the companies register. Lien, title and litigation searches are frequently requested, but in some jurisdictions are unobtainable or only obtainable at substantial cost or
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after considerable delays. For example, searches for liens or other security interests are not generally possible in most civil law jurisdictions, except for specific types of assets where title is registered (e.g., real property and vehicles). Also, there is no centralized litigation registry in China, Japan and many European countries so it may not be practical to conduct litigation searches in those countries unless the searching party knows the particular court in which a lawsuit has been filed. As in any jurisdiction, care should be taken not to request particular searches where the value of the results is likely to be outweighed by the expense incurred or time it takes to obtain them.
10.
Privacy and Data Protection Laws
Data privacy laws in many jurisdictions including the throughout the European Union, the United States, Switzerland, Hungary, Canada, Argentina and Australia pose another potential obstacle with respect to a multi-jurisdictional diligence exercise. These laws vary from jurisdiction to jurisdiction, but they generally may apply to prevent or restrict the disclosure of personal information about individuals and they may be triggered if the seller, the confidential information or the investigating party is located in any such jurisdiction. Accordingly, before disclosing any personally identifiable information, the disclosing party will need to ensure that the contemplated disclosure does not violate any applicable data protection or privacy law or any privacy policy or representation that the disclosing party has made to the affected individuals with respect to the protection of that information. Further, it may be necessary to ensure that information about employees be edited so that it is anonymous and, where this is not possible, conditions might need to be imposed on the investigating partys use of such information. In many jurisdictions, depending on the particular circumstances, the disclosing party could be held primarily liable for any violations of data protection laws that are caused by the investigating party. Accordingly, while the disclosing party may negotiate for appropriate indemnities in the confidentiality agreement, the disclosing party should closely monitor how the investigating party intends to use and disclose any personally identifiable information.
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11.
Diligence in the Context of Other Forms of Transactions
The diligence process often receives the most attention in the context of an acquisition or divestiture, but the need to conduct a similar review also arises in connection with joint ventures and strategic alliances where the parties are contributing existing businesses. In these types of transactions, particular attention should be afforded to the comprehensiveness of the request and related disclosure in order to ensure that all information relevant to the contributed businesses, and the parties abilities to participate in the transaction and perform their respective obligations, is captured. Likewise, the need for an investigation also arises in the context of an outsourcing transaction, but the focus of the review in this setting is often quite different than in the acquisition context. In an outsourcing transaction, the service provider will use the to-be-acquired assets to provide services to the service recipient who is selling those assets to the service provider. While the service provider often conducts diligence to confirm the value of the assets to be acquired and any restrictions on transferability (similar to the diligence conducted in a typical acquisition), the diligence in the outsourcing context typically also focuses on performance obligations to enable the service provider to validate the assumptions made in its service proposal to the service recipient. The scope of the review is, therefore, heavily focused on the delivery of the services that the service recipient currently receives using the to-be acquired assets. No matter the transaction structure, centralized coordination of the diligence exercise is critical to ensure efficient, consistent and uniform investigation in the cross-border context. * * *
As mentioned above, a critical component of the diligence exercise in the multi-jurisdictional setting, and one that is more focused on the laws of the jurisdictions involved, is the impact that competition and other regulatory matters can have on the deal. In the next section, we discuss the regulatory framework at play in the cross-border setting.
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Cross-Border Transactions Handbook Section 7 Regulatory Framework
SECTION 7 REGULATORY FRAMEWORK

Often, one of the most critical considerations in a cross-border transaction is whether the contemplated transaction will be permitted and effective under the laws of each material jurisdiction and, if so, the impact that any required regulatory approvals and clearances may have on the overall timing of the transaction. In many cross-border transactions regulatory considerations turn out to be one of the most crucial drivers of the overall feasibility and timing of the transaction. This section addresses the regulatory framework applicable to crossborder business combinations, including the typical issues that arise in the context of a merger control or competition analysis, gun jumping issues, exchanges of competition-sensitive information, typical foreign investment regulations, common industry-specific regulations and exchange control requirements.
1.
Overview
The acquisition of a sizeable non-US company (or a sizeable US company with non-US subsidiaries) will often be subject to government approvals and notices, including one or more of the following:
x x x x
Antitrust or antimonopoly notices or consents; Foreign investment approvals; Exchange control approvals; and Tax clearances and other tax filings.
These may vary depending on the nature, size and structure of the target business and the manner in which it is acquired. The assets and business of the acquiring entity and its entire company group are quite often considered relevant as well, particularly in the analysis by competition authorities. Moreover, many of the regulations discussed in this section may also apply to joint ventures, strategic alliances and other business
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combinations. Legal counsel should be consulted to determine how a particular transaction may be affected by these considerations. In many cases where an approval, clearance or consent is required, it will have to be obtained in advance of the acquisition and the acquisition may not be closed prior to the expiration of applicable review or waiting periods. In other cases, it is necessary only to notify the appropriate governmental authority. Failure to obtain a required governmental approval or clearance may make the acquisition void or voidable under the laws and regulations of a jurisdiction. In other cases, the failure may not affect the validity of the acquisition, but may deny the buyer the right to remit earnings or repatriate capital, or cause it to lose tax or other benefits or incentives. In a cross-border business combination, the parties may need to consider whether they want to delay closing (or the implementation of a strategic alliance or similar transaction) until all required government approvals are obtained, or whether it would be possible and desirable to proceed with certain portions of the acquisition in some countries while leaving other portions for a delayed closing after the requisite approvals have been received. In the latter case, the parties should provide for a reduction in the purchase price or other consequences (e.g., the relevant operation is sold to a third party with the net proceeds to the buyers account) if a required approval is not obtained. If an entity or business segment in a particular jurisdiction is vital to the entire enterprise, the entire transaction should be made subject to obtaining all necessary approvals for its acquisition. Where operations in a particular jurisdiction are not vital to the enterprise as a whole, or where approval is highly likely but time consuming, it may be appropriate to arrange a bifurcated closing where the transaction agreements are signed and the principal transaction closed effective as of a certain date but a subsequent closing (or series of closings) is held sometime in the future in order to permit the parties to obtain the necessary approvals for the acquisition of those operations. Prior to agreeing to defer closing in a jurisdiction while awaiting approval, it is crucial to ensure that the mere act of closing part of the transaction in another jurisdiction does not violate applicable gun
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jumping rules or any other competition laws of the jurisdiction where the deferred closing is to occur. In addition, the sharing of certain kinds of information prior to obtaining the required competition approvals should be treated with particular sensitivity, as it may be deemed anticompetitive. In any case, the acquisition agreement should make the closing in a given jurisdiction subject to obtaining all necessary government approvals in that jurisdiction. In fact, it may even be a violation of foreign law to sign an unconditional acquisition agreement. The need for government approvals may also affect the structure of the acquisition. For example, the acquisition of shares in a holding company that owns shares in a foreign entity may not be subject to the same approval requirements (e.g., a foreign investment approval) as a direct acquisition of the shares or other equity interests in the local entity. Generally, antitrust or competition approval requirements are not affected by structure, however. Government approvals are of such importance that they should be considered in detail during the course of negotiations and prior to the execution of the definitive transaction agreement. Early in the negotiation process, the parties will need to identify which regulatory authorities have the power to delay, impose fines, prohibit or even order the unwinding of a business combination that is deemed to be unlawful under their respective regulations. In order to avoid these consequences, the parties should understand the procedures and timelines to file the required notices or applications with the relevant governmental authorities and agree in advance as to which party will bear the primary responsibility in this regard.
2.
Competition Analysis
The overarching theory of merger control regulation (also known as competition or antitrust regulation in some jurisdictions) is to promote effective competition for the benefit of end-users of products and services. Indeed, more than one-third of the countries recognized by the United Nations have some form of merger control law currently in effect. Many of these laws contain a statement similar to that contained in the European Unions regulations that their intent is to cover all
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mergers that significantly impede effective competition . . . in particular as a result of the creation or strengthening of a dominant position.1 Although similar themes echo around the world, the specifics of the merger control laws, implementing regulations and interpretive statements vary widely from jurisdiction to jurisdiction. Each of the more than 60 jurisdictions that actively enforce their merger control regulations has published specific thresholds that may trigger either a mandatory or voluntary (but under certain conditions advisable) application and review or a notification to the relevant competition authorities. The idea of coordinating a thorough competition review may seem daunting in the context of a large multi-jurisdictional transaction, but the potential consequences of failing to comply with the relevant merger control laws and regulations make it a critical step in the acquisition process. Enlisting the assistance of competent legal counsel at the outset of the strategic planning phase can help make the process much more manageable. In general, there are three critical elements in a thorough competition review: x x x conducting a substantive review; developing a coordinated filing strategy; and incorporating the review timetable into the overall transaction timetable.
Substantive Review
First, the parties should undertake a substantive review to determine which jurisdictions merger control authorities may claim jurisdiction over the proposed transaction. Broadly speaking, merger control authorities base their jurisdiction on one or a combination of the following criteria: (i) gross revenues of the parties (typically revenues of the entire buyer group and revenues of the target, but not those of the entire seller group) for the last fiscal year within the territorial borders of
1
Council Regulation (EC) No. 139/2004 of 20 January 2004 on the Control of Concentrations Between Undertakings, 2004 O.J. (L 24) 1.
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the particular jurisdiction (so-called destination sales); (ii) physical presence of an entity (often, but not always, a target subsidiary); or (iii) anticipated anticompetitive effect that the proposed business combination may have on the domestic market. Notably, in an effort to streamline the competition review process for companies with significant business in three or more of its Member States, the European Union has instituted a one-stop-shop review process for vetting larger cross-border mergers. Accordingly, national review by the EU Member States is pre-empted if parties to a merger meet the thresholds for EU Commission review. On the other hand, even if the parties technically meet the thresholds for EU review, they may ask the EU commission (by way of a reasoned submission or Form RS) to cede its authority back to one or more of the Member States for review by their national competition authorities. Additionally, parties can now request EU review under certain circumstances where EU review is not otherwise required.
Coordinated Filing Strategy
A second important element in a thorough competition review is that the parties should develop a coordinated filing strategy, and in particular, agree upon consistent definitions of the relevant markets. More often than not, a proposed combination affects more than one product market, and the relevant geographic market for those products may vary. These market definitions are important not only for the purpose of collecting and analyzing the necessary information about the parties business and the anticipated competitive effects and market shares (i.e., to be sure that the parties are comparing apples to apples), but also in presenting the information to the relevant authorities. Because competition authorities increasingly collaborate in their review procedures and pay close attention to the decisions taken by their counterparts, it is strongly advisable to maintain a consistent and coordinated approach among the various jurisdictions in which filings are required, despite the sometimes strong temptation to manipulate a market definition to play down potential anticompetitive effects in individual jurisdictions. In addition, the parties would be well advised to ensure that any merger control notifications filed with respect to an
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acquisition also address the subsequent integration of the companies at the local level. Failure to anticipate the post-closing integration of local subsidiaries may result in further notifications to the competition authorities, thus giving rise to unnecessary additional costs and potential delays in the post-closing integration process.
Timetable
Finally, it is essential for the parties to clearly understand the timetable for the review process and to incorporate this into their overall transaction timetable. Where consent of merger control authorities is required, suspension of closing is typically mandatory. To that end, 30 to 45-day waiting periods are most common, but longer periods apply in a few cases (e.g., 2 months for Poland). In many jurisdictions, these periods can be extended if the authority considers a filing to be incomplete, requests additional information or gives notice of an extended review. However, in non-controversial situations, some jurisdictions, including Germany and the United States, allow the parties to request an early termination of this waiting period. In planning the timeline for this process, it is also important to take into account the fact that in many countries the administrative and government offices are closed during holiday periods (most commonly December-January), and waiting periods may also be suspended for the duration of public holidays. Post-closing notices and filings are typically required to be made within 15-30 days of closing, although longer periods may apply in some cases.
Filing Responsibility
In most jurisdictions, the buyer is often legally responsible for filing the requisite merger control notifications, although in a few places, the parties are jointly responsible. In practice, however, it is quite common for both parties to collaborate on the preparation of the filings, regardless of statutory obligation. From a project management standpoint, it often proves to be a good investment for the seller to begin collecting the relevant information well ahead of time, as any potential buyer will eventually require this information. Accordingly, many sellers begin working with their counsel early in the process to compile a preliminary analysis based on destination sales and market shares. This can be
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particularly useful in the auction setting, where the relative complexity of the competition review process and the likelihood of substantive issues due to elevated market shares resulting in protracted review periods or conditional approvals may be a factor in the selection among several potential bidders. A preliminary analysis also enables the sellers management to better control expectations as to the timing of closing and, to some degree, the anticipated costs to get there.
3.
Gun Jumping Issues
The waiting periods imposed by most merger control laws worldwide require parties to suspend the conclusion and implementation of a transaction prior to approval or the expiration of the waiting period. Competition authorities worldwide are increasingly pursuing procedural violations of merger control rules. In particular, the US antitrust authorities have fined companies for unlawful activities prior to the expiration of the waiting period under the Hart-Scott-Rodino Act. Although the parties are entitled to take integration steps during any waiting period, these steps should fall short of de facto implementing the transaction. Accordingly, the parties should avoid: x the acquisition of legal title in shares with sufficient voting rights for one party to have decisive influence over the other (this definitely occurs where a buyer acquires the ability to exercise over half of the voting rights in the target); the acquisition of legal title by one party over the others assets (in the case of an asset transaction); the acquisition and exercise by one party of the right to appoint members to the others board of directors, administrative board or other bodies controlling the other party; the acquisition by one party of the right to veto strategic decisions, such as adoption of any annual business plan or budget or the appointment of senior management, although this does not prevent the imposition of obligations to ensure that the acquired business operates in the ordinary course during the
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x x
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interim period but without otherwise restricting pricing, marketing, customer relationships or product development; x one party beginning to manage the others business on a de facto basis, including de facto integration, joint marketing, integration of sales forces, etc; employees being transferred or seconded between the parties (although it is generally permissible for an employee to apply for a position properly advertised in the ordinary course of business); and the parties jointly contacting customers or suppliers to discuss price or future terms of supply (even if such a discussion is initiated at the request of the relevant customer or supplier). Joint customer or supplier contact limited to explaining the transaction and future operations of the business is generally acceptable.
4.
Exchange of Competition-Sensitive Information
In many transactions, the negotiation process (either initially, at the diligence stage, or later when there is a time lag between signing and completion) will inevitably involve the transfer of competition-sensitive information, whether orally, electronically or in written format. One of the overriding purposes behind the existence of a competition law regime, however, is to ensure that the entities engaged in transfers of information, for whatever legitimate purpose, remain fully in competition with one another until the conclusion of the project in question (or, in the event that the project discussions do not succeed, going into the future). It is therefore important to ensure that information transfers between the parties comply with the applicable competition laws. The following guidelines are designed to highlight the need to distinguish between the different categories of information and the competition law prohibitions or restrictions on the exchange of sensitive information falling within each category. These are generic guidelines based on US and EU competition laws and regulations regarding the exchange of
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information between actual or potential competitors in the context of a proposed acquisition. Jurisdiction-specific competition advice should always be obtained in connection with any contemplated disclosure of potentially competition-sensitive information.
General Rules
Information can broadly be divided into three categories: x x x permitted information; controlled release information; and prohibited information.
Before exchanging any information, the parties to the transaction should always consider and determine what category each item of information falls into. Only then can they protect themselves and their officers, employees and staff from any allegations that the project negotiations facilitated either the transfer of sensitive information between the parties or the coordination of their competitive behavior.
Permitted Information
The following data can be freely transferred: x publicly available information (including information on overall capacity utilization in the market and published projections concerning general and specific market trends); general assumptions intended to assist with a financial model to be used to value the target (but not internal assumptions about future prices of specific products in respect of which the companies concerned are competitors or potential competitors); information relating to the integration of the parties computer systems; information relating to the integration of the parties accounting, treasury and information management methods; general descriptions of available products or services;
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x x x x x x
facility descriptions, including capacity utilization; environmental information of a non-competitively sensitive nature; announced capital expansion or closure plans; personnel information (but not detailed cost/salary information); published financial statements of the target; and corporate structure and shareholding investments.
The following data can be exchanged in the appropriate format: x x x x historic (i.e., more than one year old) regional sales by volume and product type (but not broken down by customer); historic aggregate (i.e., not broken down by product/supplier) costs of inputs, supplies and facilities; historic aggregate profit margin information; and historic aggregate expenses and overhead charges.
Controlled Release Information
Subject to review and approval by legal counsel, it may be possible to release some of the following to a limited number of designated recipients for the purposes of the diligence investigation: x x x x marketing plans and strategies; historic (i.e., more than one year old) pricing data and customer information; historic individual (i.e., non-aggregated) product margin information; historic individual costs of input, supplies and facilities;
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x x x x
current regional sales information and projected revenues by volume and product type (but not broken down by customer); new product development or discontinuation of existing products; unannounced capital expansion or closure plans; and proprietary technical know-how and data.
Prohibited Information
Subject to the use of independent third parties as discussed in the next paragraph, there must be no transfer of the following information between the parties: x x x x x x x x current pricing data, including discounts and rebates and other terms and conditions of sale; current bids or negotiations with specific customers; current specific customer information; current wage and salary information; future pricing intentions; future customer strategies; current individual product margin information; and current individual costs of input, supplies and facilities.
Use of Independent Third Parties
The use of independent consultants, accountants and lawyers may alleviate concerns over the exchange of information between the parties concerned. A third party may be able to review the competitively sensitive information and provide the receiving company with a nonconfidential summary (e.g., by aggregating data or by removing specific price or customer information). However, even with the use of a third party, information should only be exchanged upon approval of legal counsel and pursuant to a confidentiality agreement with the third party
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that, among other things, limits the information provided by the third party.
Penalties
Under EU law (and the laws of every EU Member State) it is considered illegal for a company to obtain information from a competitor which could, even on a purely theoretical basis, be used by that company to affect competition on a market within the European Union or that particular Member State. The penalties for competition law infringements are severe. At the EU level, the European Commission has the power to fine a company up to 10% of its annual worldwide turnover, a power which it uses on a regular basis to levy fines of tens of millions of Euros. Each Member State provides for similar penalties in their national laws. Similarly, in the United States, parties who are subject to premerger notification filing under the Hart-Scott-Rodino Act and jump the gun and begin to consolidate operations before closing may be subject to civil penalties of up to $11,000 per day per party. In addition, prior to the merger or acquisition, the parties are subject to the antitrust rules and penalties, including treble damages, with respect to collusion and agreements among competitors.
5.
Foreign Investment Approvals and Notifications
A number of countries impose approval or registration requirements on foreign buyers simply because they are nonresidents of the jurisdiction in which the target enterprise is located (e.g., Argentina and China) or because of the nature of the asset being acquired (e.g., Canada and New Zealand). In some cases governments may require pre-merger notification or approval where a proposed transaction involves a foreign buyer, but there is a trend toward liberalization in this area. Varying restrictions appear throughout Latin America, the Middle East and Asia. In other countries (including Italy, the United States and Venezuela), no prior approval is needed for an acquisition by a foreign-owned or controlled entity, provided that the target business is not engaged in a sensitive industry, but the government must be notified after the fact. France extends its notification requirement to include indirect
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acquisitions (i.e., an acquisition of an entity that owns a French company). In yet other jurisdictions, the foreign shareholder will need to lodge a notice in connection with the local entitys corporate maintenance requirements.
6.
Industry-Specific Regulations
As noted above, any acquisition that results in the transfer of an enterprise from local to foreign control may come under intense governmental scrutiny if a particularly sensitive industry is involved. Apart from the obvious examples of sales of weapons components or technology transfers to states that are believed to support terrorism, national security concerns may limit or prohibit acquisitions that the government believes could jeopardize domestic capability, capacity and technological leadership. Some examples of industries that are commonly considered sensitive include banking, communications, computers, defense, public utilities, shipping and transportation. In the United States, the so-called Exon-Florio provision of the Omnibus Trade and Competitiveness Act authorizes the President to suspend or prohibit any foreign acquisition of a US corporation that is determined to threaten the national security of the United States. The Committee on Foreign Investment in the United States, or CFIUS for short, was established to receive notices of proposed acquisitions, and to review and report to the President on their conclusions regarding the potential effect of the transaction on national security or domestic capabilities related to national defense. The review by CFIUS typically takes 30 days or less, but may take up to 90 days if an in-depth investigation is deemed to be warranted. The Exon-Florio rules do not actually define national security and it thus may have broad application, as evidenced by the failed bid by Chinese oil company CNOOC Ltd. For California-based Unocal in June 2005. CFIUS was apparently preparing to review that transaction due to the fact that many oil companies have underground mapping technologies and deep water drilling capabilities that could have military application. Regardless of the ultimate threat to national security, these rules provided an avenue for reviewing and potentially delaying or modifying a transaction that had enormous political impact in the United States during
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a period of high oil prices. The uncertainty created by the potential for government review was the main reason given by CNOOC for withdrawing its bid for Unocal in August 2005 and serves as a reminder of the importance of anticipating and planning for government review so that appropriate steps can be taken to mitigate political fall-out early in the transaction process and before a bid becomes public. France has also established restrictions on foreign acquisitions in certain industries, including electronics, data processing and defense. Approval of cross-border transactions involving these industries may not be available at all or may be made conditional upon continued substantial French participation. Outside of these sensitive industries, government approvals may be fairly routine. That said, even routine approvals may be quite time consuming, requiring anything from two weeks to six months to obtain, and in controversial situations, sometimes even longer. Furthermore, local permits and registrations may also need to be transferred depending on the particular industry and transaction structure. A medical device manufacturer, for example, is likely to hold important permits, the transfers of which must be anticipated and addressed early in the process.
7.
Exchange Control Approvals
In some countries, in addition to requiring prior approval for an acquisition by a foreign buyer, the investment may also be subject to exchange control approval, in which case the transfer of funds in connection with the acquisition will often require approval as well. Moreover, without such approval, it may not be possible to repatriate profits, capital, interest or royalties. In some cases (e.g., local asset sales in the context of a global acquisition), payment of the purchase price locally in local currencies is required unless an advance approval is obtained. Most Western European countries no longer impose these types of requirements. The United Kingdom, for example, abolished all such restrictions in 1979. Thus, profits may be freely repatriated (subject to applicable withholding tax and possibly reduced rates under the
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applicable double taxation treaties) without advance approval of the investment or acquisition. Many jurisdictions, however, still impose foreign exchange controls, particularly in Latin America (e.g., Brazil) and Asia-Pacific (e.g., China). The ease of obtaining foreign exchange approvals may depend on whether the seller is already in full compliance with local exchange control laws. If the seller is not in full compliance and does not hold all appropriate approvals, it may be difficult and time consuming to obtain approval for the acquisition.
8.
Local Business Rules and Reporting Obligations
In addition to pre-closing regulatory considerations, prudent buyers (or business venture partners) should take time to familiarize themselves with the local rules applicable to doing business in the countries in which the business will be operating after closing. Management will need to develop a coordinated system of corporate maintenance for all of its subsidiaries to ensure timely compliance as necessary to begin and maintain the business as a going concern. Section 11 (Post-Closing Actions) discusses some of the common post-closing issues that should be considered in this regard. * * *
Another highly regulated aspect of doing business that can impact the timing and structure of a cross-border transaction is the transfer of the targets employees and benefits plans. Like the competition and other regulatory matters discussed in this section, the employee-related issues generally need to be addressed on a jurisdiction-by-jurisdiction basis. In the next section, we discuss the broad areas of inquiry surrounding the transfers of employees and benefits plans.
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Cross-Border Transactions Handbook Section 8 Employee Transfers and Benefits
SECTION 8 EMPLOYEE TRANSFERS AND BENEFITS

Another crucial component of a cross-border (as well as domestic) transaction is the transfer of the targets employees and their corresponding benefits. Employee-related issues often require significant advance planning and, correspondingly, careful diligence, due to their propensity to affect the transaction timeframe. Most, if not all, of the employee transfer and employee benefits issues in a cross-border transaction will flow from the structure of the transaction. That is, the structure of the transaction will dictate the range of issues under local law regarding how employees and employee benefit plans will be handled. Generally speaking, there are a few main areas of inquiry in this connection: x x whether employees transfer automatically by operation of law or whether they must accept an offer of new employment; whether there are local approvals, consultations and notices required as part of this process and, if so, which party is obligated to secure them; how to identify the employees who need to transfer with the target business; whether the transfer of employees triggers severance and termination indemnities under local law and, if so, which party will be responsible for paying that liability; whether the new employer assumes any liabilities to the employees by operation of law, and whether the former employer retains any liabilities or remains jointly responsible with the new employer for liabilities to the employees; whether employee benefit plans and their related liabilities transfer automatically or whether the parties must take special action to replicate plans or transfer a plan to another entity;
x x
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whether the funding levels of funded employee benefit plans are acceptable to the parties and, if not, which party will be responsible for the underfunding; whether the targets employees are covered (or are intended to be covered) by any sort of global equity compensation arrangement; and whether any transitional services will be required until all employment-related functions can properly be performed by the target business after closing.
This section addresses these broad areas of inquiry.
1.
Automatic Transfer vs. Offer/Acceptance
In general under US employment law, if a transaction involves a transfer or exchange of the equity ownership of the target business, then all of the assets and liabilities remain with the target business and only the targets equity ownership changes. In this form of transaction, no termination of employment occurs because the employees of the acquired entity remain employed the same as before. On the other hand, if a transaction involves the sale or transfer of the underlying assets and liabilities of a business, the status of the employees becomes an important issue. If the employees are intended to transfer along with the assets and liabilities, they must formally accept a new offer of employment. If no offer is made to an employee, that employee remains employed by the existing business and does not transfer with the underlying assets and liabilities. Generally speaking, an offer of employment does not need to be made to all employees. Except where contractual provisions (e.g., collective bargaining agreements) require otherwise, the buyer can pick and choose which employees are worthy of an offer, depending on the needs of the business. In a cross-border transaction, the US rules described above do not necessarily apply. Whether and how employees transfer in a particular jurisdiction depends on the employee transfer laws of that jurisdiction.
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Cross-Border Share Transfers
In most jurisdictions outside of the United States, if the form of the transaction is a transfer or exchange of equity, then, similar to the rule in the United States, the employees will continue in employment the same as before. The transaction will not affect the continued employment of the employees in the target company.
Cross-Border Asset Transfers
If the transaction involves a sale or transfer of a business as a going concern (that is, an assets transaction) then the result depends on the jurisdiction. In some jurisdictions, the result is the same as in the United States. That is, an employee does not transfer unless he or she accepts a formal offer of employment. For purposes of this handbook, we refer to these jurisdictions as offer/acceptance jurisdictions, and they include the following, among others: Australia, Canada (other than Quebec), China, Hong Kong and the United States. In other jurisdictions, most notably the members of the European Union and many Latin America jurisdictions (including Mexico and Brazil), a sale or transfer of the business will cause the employees who are dedicated to that business to transfer automatically with the business. We refer to these jurisdictions as automatic transfer jurisdictions. Members of the European Union are bound by the Acquired Rights Directive, promulgated by the European Council on February 14, 1977, which provides this result. The Acquired Rights Directive, which each EU member was obligated to implement through suitable legislation, is too long to discuss in comprehensive detail in this handbook. Generally speaking, however, the Acquired Rights Directive has two goals: x to provide for a contractual continuity of employment notwithstanding a change of employer as a result of a transfer of a business; and to require that there be a certain minimum of consultation with representatives of the employees who are being transferred.
Therefore, the transfer of a business in an automatic transfer jurisdiction, whether in the form of a share transaction or an asset transaction, does
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not terminate the employment of the business employees. The employees continue in employment with the target business the same as before the transaction. Also, in some EU jurisdictions (e.g., Germany) the employees nonetheless have the right to object to the transfer of employment occasioned by an asset sale and remain employed by the seller. Thus, some care should be taken in these jurisdictions to identify who is likely to consent and who will not. Furthermore, what constitutes a business for purposes of the Acquired Rights Directive is not the same in each of the EU member jurisdictions. Article 1 of the Directive provides that it applies to the transfer of an undertaking, business or part of a business to another employer as a result of legal transfer or merger. Given the different legislation enacted by each of the EU members to implement this Directive, there is no uniform approach to this issue. Each jurisdiction has a potentially different answer of what is a business. Accordingly, local legal guidance is recommended to determine whether a particular transaction constitutes a transfer of a business for these purposes. At least one jurisdiction is both an automatic transfer jurisdiction and an offer/acceptance jurisdiction. In Singapore, the issue of whether an employee transfers automatically by operation of law depends on that individuals status under the Singapore Employment Act, or SEA for short. For Singapore employees who are covered by the SEA, employment transfers automatically by operation of law, provided certain notification procedures are complied with. If the employee falls into the category of a managerial, executive or confidential employee, however, then the provisions of the SEA do not apply to that persons employment. For those employees, an offer letter and acceptance by the employee is typically required. Where a formal offer of employment must be extended to a transferring employee, there may be special requirements under local law as to the form, content and timing of that offer. For example, there may be a requirement that the offer be drafted in the local language, particularly if the employee is not fluent in English (for example, in Japan). Determining the employees local language may not be easy, especially in countries such as Belgium, where the local language could be either French, Dutch or Flemish, depending on the region. Another local
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requirement may be that the offer be provided a certain number of days or weeks in advance of the closing of the transaction. Given these results, it is important to be aware of the differences in terminology with respect to an asset transfer and a transfer of a business in certain jurisdictions. A US-trained M&A specialist who assumes that a transfer of a business outside the United States is comparable to a US asset deal, such that the employees of the target would not transfer unless they accept a formal offer from the buyer, would be in for a surprise to find out that, instead, the employees of certain of the targets subsidiaries transferred automatically with the business. This can have drastic consequences from a cost and synergy standpoint as those automatically transferred employees may be entitled to the same terms and conditions of employment as were provided by the seller (including compensation and benefits), as discussed in the following section.
2.
Terms and Conditions
In automatic transfer jurisdictions the terms and conditions of employment, including employee benefits, must generally remain the same. (In EU jurisdictions, however, there is an exception for pension rights.) That is, the buyer is not permitted to change an employees base salary, bonus, employee benefit plans or fringe benefits/perquisites. Otherwise, the employees would likely have a claim for constructive termination of employment, triggering potential severance payments, as discussed in greater detail in subsection 5 (Severance/Termination Indemnities) below. In offer/acceptance jurisdictions, the terms and conditions are not bound by the same restrictions. However, for business reasons it is typical for offers to be on terms that, in the aggregate, are no less favorable than those enjoyed by the employees before the transaction took place. In any transaction, the buyer will have to determine whether providing the same or substantially similar terms and conditions is in fact possible or desirable from a business standpoint. For example, the employees might be entitled to a generous incentive bonus program that is inconsistent with the type of bonus program the buyer wants to provide for its employees. Or, the buyer might not be in a position to provide equity
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compensation to the employees, where previously they participated in a stock option or stock purchase plan. For these reasons, the diligence process is key. It is imperative that the buyer take the time to understand what terms, conditions and benefits the employees previously enjoyed under their former employment. Where the buyer is unable to provide such terms, conditions and benefits, it should seek to provide comparable terms, conditions and benefits, such as offering a higher base salary in lieu of a benefit the new employer cannot provide.
3.
Approvals, Consultations and Notices
In many non-US jurisdictions, an employee cannot transfer to new employment without there being first some type of approval (or consent), consultation or notification. The local laws may include requirements regarding when to notify employees regarding the transaction, the content of the notice, and so forth. Depending on the jurisdiction, the burden may be on either or both parties to a crossborder transaction to fulfill these requirements. Mexico, for example, as an automatic transfer jurisdiction, requires that the new employer deliver a substitution notice to the transferred employees notifying them of the effective date of the transfer as well as other pertinent information. Article 6 of the Acquired Rights Directive (discussed above) sets out provisions for disseminating information to employees involved in a transfer of a business. The parties to the transaction must inform employee representatives of the reasons for the transfer; the legal, economic and social implications of the transfer to the employees; and the measures envisaged in relation to the employees. Further, the seller must provide this information to the employees in good time before the transfer is carried out. Some EU member jurisdictions have, as permitted by the Acquired Rights Directive, limited this obligation to only those transfers involving a certain threshold number of employees.
Works Council and Similar Notice/Consultation Requirements
Approvals and consents are not limited to the employees of the business being transferred. In some jurisdictions, for example, the buyer of a business must consult with the local works council with respect to the intended transaction. In the European Union, although the particular
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requirements differ from jurisdiction to jurisdiction, they generally run hand-in-hand with the local rules that implement the Acquired Rights Directive. Often the required consultation must be conducted a prescribed amount of time in advance of the closing. Similarly, the buyer may be required to consult with representatives of the local trade unions regarding the transaction. The consultation process may be a notification to a particular entity, or it may involve substantive discussion and negotiation.
4.
Identification of Employees
Another issue that can prompt significant attention in a cross-border transaction, particularly when a business is being transferred in an asset transaction, is the identification of the employees who work for the target business. Employees who transfer with the target business potentially increase the amount of liabilities incurred by the buyer to run the business. Employees who do not transfer with the target business increase the potential severance liabilities for the employer transferring the business, particularly if that employer is unable to use those employees in another line of business. In the case of a transaction involving the transfer of equity ownership of a business, all of the employees working in the target business remain employed by the target business. However, where the transaction involves the transfer of employees from one employer to another (i.e., an asset transfer), both parties will want to understand who works in the business in order to ensure that the right people transfer and to account for any associated liabilities and notification or consultation requirements that may impact the transaction value and timeframe. For example, some employees may work both in the business being transferred and another business that is not part of the transaction (e.g., headquarters employees, support function employees or employees who also work for another line of the sellers business). In that case, it may be necessary to determine exactly how much time the employee works in the target business as a percentage of his or her entire working time. An employee who works 95 percent of the time in the target business may be easily identified as one who should transfer. However, the issue is much less clear when an employee works in the neighborhood of 50 or 60
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percent of the time in the target business. There, the issue may need to be resolved in negotiations between the parties, especially in automatic transfer jurisdictions, and careful diligence will be important in this regard. Furthermore, the identification of employees (and their personal information) may need to be conducted in a manner that does not run afoul of local data privacy rules. To the extent that schedules of employees are prepared as part of a data room, for example, the names of the employees may need to be deleted (and perhaps replaced by numbers). See Section 6.10 (DiligencePrivacy and Data Protection Laws) for a further discussion regarding data privacy issues in crossborder transactions.
5.
Severance/Termination Indemnities
As indicated above, identifying employees is important because those employees who do not transfer and remain behind may ultimately be terminated, thereby triggering the payment of severance or termination indemnities. The employees who transfer may also have rights to severance if the new employer does not provide the same terms and conditions of employment. In some jurisdictions, employees may be able to claim severance even if they are transferred to a new employer and even if they receive the same terms and conditions of employment as before. Accordingly, the subject of severance or termination indemnities is a very sensitive one for both parties in a cross-border transaction. In many non-US jurisdictions, there are expensive severance obligations under local law if an employee is involuntarily terminated. These obligations are typically statutory in nature and may not be waived by the employee. Further, depending on the jurisdiction and on how many years the employee has been employed, the amount of the severance obligation may represent a substantial liability to the employer. It is rare that these types of obligations are pre-funded or are reflected on the target business balance sheet. The parties often negotiate in the principal transaction agreement which party will be responsible for paying these liabilities. The seller usually seeks to have the buyer indemnify it for the cost of this severance liability
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on the basis that, but for the transaction, the seller would not have incurred the liability. On the other hand, it is also common for the buyer to seek to avoid severance liability for employees who do not transfer and to accept liability only for employees who do transfer and who subsequently terminate employment. Furthermore, unlike in the United States, even though the employees are not constructively terminated in connection with the transaction, the buyer, whether directly (in an asset deal) or indirectly (in a share deal), inherits substantial severance and retirement obligations, particularly when an aging workforce is involved. Since these obligations often are unfunded and do not appear on the targets balance sheet, the buyer may need to independently determine the potential cost and adjust the purchase price accordingly.
6.
Employee Benefit Plan Issues
Similar to the rules described above with respect to employee transfer issues, the form of the transaction will determine whether and how employee benefit plans will transfer.
Cross-Border Share Transfers
If the transaction involves the transfer of the equity ownership of the business, then the new owner will step into the shoes of the former owner and, since only the equity ownership has changed, all employee benefit plans maintained or sponsored by the target business will remain with the target business under its new ownership. That said, employee benefit plans maintained or sponsored by another entity (e.g., the targets pre-closing parent company) often will not remain with the target business and some type of plan spin off or replication of benefits may be required.
Cross-Border Asset Transfers
In an asset transaction, however, the rules with respect to employee benefit plans do not parallel the rules for the transfer of employees. Just because an employee transfers automatically by operation of law does not mean that the employee benefit plans providing benefits to that employee also transfer. In some cases, the employee benefit plans may cover more
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than one line of business and will remain in place to continue to provide benefits to the employees in the lines of business that are not being transferred. Further, the issue of whether the employee benefit plans transfer with the business is different from the issue of whether the buyer is obligated to provide the transferred employees with the same terms and conditions of employment. It is possible (and common) for a buyer to have the obligation to provide benefits to employees even though the sellers benefit plan that gave rise to those benefits does not itself transfer with the target business. This situation arises in many joint venture transactions, for example, where the employees are unable to continue in their current benefit plans while working for the joint venture. In that case, the joint venture entity may be required to create new plans for the transferred employees mirroring the plans they previously participated in when employed by their former employers. Where possible, the new employer may seek to have assets transferred from the former employers benefit plans to provide the new employer with the ability to fund the benefits. With regard to pension plans, the Acquired Rights Directive as it applies to member states of the European Union does not require that private and supplementary pension schemes be transferred to the transferee employer, even though the employees working exclusively in the business are transferred. Thus, under TUPE in the United Kingdom, for example, a pension trust established for employees in a business to be transferred to a buyer would not itself transfer to the buyer automatically by operation of law. Here, too, it is critical for the buyer to understand what types of benefits the seller extended to its employees, so it can provide substantially similar benefits following closing. The diligence phase is therefore extremely important to the parties.
7.
Funding Issues
There are a number of important reasons why funding of the employee benefit plans is an issue for both parties to a cross-border transaction. First, the buyer will want to know whether any assumed plans are pre94 Baker & McKenzie
funded or funded on a pay-as-you-go basis. If a plan is pre-funded, the issue will be whether the plan is fully funded on the date of closing, and if not, the amount of the underfunding. If the plan is funded on a pay-asyou-go basis, the buyer will want to know what extra financial liabilities it will have as a result of assuming the employee benefit plans. The term funded is not a universal term, however, and it is not synonymous with setting aside assets in a trust. The type of plans most commonly associated with funding issues are pension or retirement plans. Private pension plans may be funded through a trust, or perhaps financed through the purchase of one or more insurance contracts. In Germany, for example, a typical pension plan is funded through a book reserve system, where the employer does not set aside assets to fund its pension obligation but instead accrues an obligation on its balance sheet for its pension promise. The accrual gives rise to a tax deduction for the employer. What is unique about the German system is that the amount of the accrual for accounting purposes is not 100% of the liability. In other words, the amount of the employers liability to pay the pension promise is greater than the amount accrued on the financial statements of the employer. A businessman in Germany might say that his companys pension plan is fully funded, even though in US terms the plan is under funded. Funding is also extremely important if the buyer is not assuming the sellers employee benefit plan, but is establishing its own employee benefit plan and accepting a transfer of assets equal to the liabilities accrued for the transferred employees. This might occur, for example, where the seller maintains an employee benefit plan covering the employees of more than one line of business and the buyer is required to set up its own plan to cover the transferred employees. In that case, the buyer will want some assurance that the assets it receives will be sufficient to cover its liabilities. To that end, the transaction agreement should set forth the appropriate transfer mechanism for the parties to follow in order to calculate and then transfer the requisite amount of assets. Typically, this language is very specific and refers to liabilities calculated on a PBO (projected benefit obligation) basis, or on an ABO (actual benefit obligation) basis. Often, the parties will need to
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engage the services of an actuary or benefits consultant to assist with this process.
8.
Global Equity Compensation Issues
The use of stock options, restricted stock, restricted stock units and other forms of equity compensation globally has created a myriad of additional tax and legal issues that sometimes are overlooked or glossed over in a cross-border transaction given the timing and other complexities of the transaction. Nevertheless, equity compensation awards raise potentially significant issues not only in the United States but also in many other countries. For instance, the adjustment and conversion of equity awards as a result of the transaction may trigger adverse tax consequences for the optionee and/or for the issuer. Similarly, a transaction may necessitate non-US securities law filing obligations for equity awards that need to be satisfied prior to completion of the transaction. In other situations, labor and employment consequences associated with changing or ceasing equity compensation arrangements as a result of the transaction may arise. Regardless of the nature of the transaction itself, the parties to any crossborder transaction should thoughtfully consider the impact of the transaction on equity compensation to avoid potentially significant legal and regulatory exposures. In this subsection, we will briefly discuss how equity compensation issues arise and are shaped in a cross-border transaction, and identify some of the common tax and legal issues arising in different types of transactions.
Form of Transaction and Governing Documents
The structure of the transaction and the terms of the equity compensation plan documents typically guide the treatment of the equity compensation awards in a transaction. As discussed above, in some instances the form of transaction (e.g., a share transfer or an asset transfer) may quickly flush out issues that the parties will need to address and similarly may foreclose alternatives for dealing with global equity compensation awards. For example, where a target will be merged into a buyer with the buyer surviving, the parties will need to address any outstanding equity compensation awards involving shares of the target. Similarly, where two unrelated parties establish a joint venture entity that is not part of either
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parties consolidated group (as determined under either US or local law), the joint venture parties will need to consider how to grant equity compensation awards to the joint ventures employees in light of the restrictions often placed on an issuers ability to grant awards to nonemployees of the issuer or the issuers consolidated group. Similarly, the governing plan documents often limit what may happen with outstanding equity compensation awards in the event of a transaction. Most US equity compensation plans include provisions regarding the treatment of stock options and other types of awards in the event of a change in control. For example, many plans provide for accelerated vesting upon certain events tied to a transaction, and accelerated vesting of awards can affect the tax treatment. In Spain, for example, employees may take advantage of a tax exemption for income derived from stock options provided, among other conditions, the options do not vest within two years of grant. Where a transaction triggers an acceleration of vesting within two years of grant, employees in Spain will lose the ability to utilize this tax exemption. In other countries, such as Venezuela, where stock options become taxable upon vesting, an acceleration of vesting (caused by a transaction) may trigger a taxable event. Notwithstanding the governing plan documents, the parties sometimes may be able to negotiate alternatives for addressing equity compensation awards as part of the transaction itself. However, this approach requires sufficient diligence by the parties, and negotiation and drafting of appropriate provisions for the transaction agreement. In some instances, this approach also may require amendments to the underlying equity compensation plan and also may require prior approval from the optionee, affected issuers compensation committee and/or board of directors.
Tax Considerations
Many transactions involve the conversion of stock options and other forms of equity compensation from awards covering shares of a target to awards covering shares of the buyer. In some countries, the conversion of awards (particularly stock options) may be considered a taxable event from an employees perspective. This same issue also arises when equity
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compensation awards are adjusted to reflect a spin-off. More specifically, some countries treat a conversion of equity compensation awards as a disposal of one award followed by the grant of a new award. For example, in countries where stock options are subject to taxation on the date of grant (e.g., Belgium and Switzerland), the grant of the converted option may result in new taxable event, thus exposing employees to double-taxation on essentially the same award. Similarly, the conversion of equity compensation awards may impact any preferential tax status previously obtained by a party to a transaction. For example, French-qualified options granted by a target likely will lose their qualified status upon being converted to stock options for the buyers shares (although the disqualification depends upon the nature of the corporate transaction). Similarly, for options granted by a target under an Inland Revenue share option scheme in the United Kingdom, the parties may be able to obtain specific approval from the Inland Revenue to maintain or roll over the favorable tax treatment for those stock options upon their conversion to options covering the buyers shares.
Securities Issues
Securities issues often arise in cross-border transactions in various scenarios where global equity plans are at play. For example, where an issuer will be granting awards in jurisdictions where the issuer previously granted awards, the new grants may prevent the issuer from relying upon previously-used registration exemptions and may trigger new registration and prospectus obligations (a similar issue arises where an issuer is granting awards in a jurisdiction where it has not previously granted awards). For example, in Belgium, an issuer is required to submit an abbreviated prospectus to the Banking Commission where stock options are granted to more than 50 employees. If an issuer previously granted stock options to 30 employees earlier in a year and then grants stock options to an additional 30 employees who became employees of that issuer as a result of a stock acquisition later that same year, the issuer will be required to submit an abbreviated prospectus prior to issuing the grants to the new employees. Where the parties intend for the grants to be made upon closing of the transaction careful diligence and advance planning will be critical.
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Similarly, where awards will be converted from awards covering a targets shares to awards covering a buyers shares, the parties will need to consider whether the target previously satisfied the local securities law requirements for issuing those awards. Often, this issue is addressed in the representations and warranties contained in the principal transaction agreement. Additionally, the parties will need to consider whether any exemptions previously used by the target, or securities-related approvals previously obtained by the target, will remain effective. At a minimum, the parties often will need to notify the local securities authorities of a change in corporate structure and the change in the underlying shares that will be issued under the converted awards.
Cessation of Benefits
As noted above, in automatic transfer jurisdictions, the terms and conditions of employment of the transferred employees must generally remain the same after the transfer. However, where the targets employees participate in a broad-based employee stock purchase plan, for example, but the buyer does not maintain such a plan, the buyers failure to offer similar benefits to the transferring employees may be viewed as a breach of the essential terms and conditions of employment. This may constitute a constructive termination of the employment of those employees, which, in turn, may trigger severance obligations under local law.
After the Transaction
Following any cross-border transaction where equity compensation is used globally, the surviving issuer of the awards will be faced with multiple tasks. For example, the new issuer will need to memorialize any new and/or converted awards by delivering new award agreements and related documentation to the affected employees. The new issuer will also need to integrate any new and/or converted awards into its existing stock plan administration, which may involve the establishment of new brokerage accounts. Further, the new issuer will need to ensure the ongoing legal and regulatory compliance of the awards for example, by providing notices to the applicable local governmental and regulatory authorities. Here again, careful diligence will be important to ensuring that these tasks are handled expeditiously following closing.
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9.
Transitional Services
It often happens in a cross-border transaction that the buyer will not have sufficient time to accomplish all of the necessary steps for employee transfers and employee benefit programs on the date of closing. In that case, the buyer may need transitional services; that is, the services of another party, perhaps a third party, to provide certain payroll, administrative and employee benefit plan coverage to the transferred employees for a period of time. The period of transitional services depends on the needs of the buyer and it may last anywhere from a few weeks to a few months or longer. The period should be long enough for the buyer to take whatever steps it needs to establish its own plans, programs and arrangements for employees. The most common type of transitional service is payroll. Particularly in a new jurisdiction, there may be no way of delivering paychecks to local employees, calculating withholding taxes, and so forth. Employee benefit plan coverage is another area where transitional services may be helpful. The buyer may find it difficult to obtain life insurance or health insurance coverage on short notice, for example. In that case, the buyer might contract with the seller to cover the transferred employees under their former employee benefit plans during the transitional services period. Whether this type of transitional service is legally permissible, and how this coverage is structured, varies from jurisdiction to jurisdiction. International transactions no doubt pose some challenging human resource issues. The complexity of foreign legal principles coupled with the speed and timing of the transaction will make it difficult to analyze all the issues and resolve them prior to closing. Appendix 8.1 contains a general checklist from the buyers perspective of the key issues to plan for in the cross-border setting when dealing with non-US employee transfers and benefits. The more the parties can anticipate these issues, the better off they will be in making the transaction a successful one. * * *
Although there is often considerable overlap in the processes, once the parties develop a sufficient understanding of the key diligence and
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regulatory issues involved in the deal, they often proceed with drafting and negotiating the principal transaction agreements. In the next section, we discuss some of the key documentation issues that arise in crossborder transactions.
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Cross-Border Transactions Handbook Section 9 Documenting the Transaction
SECTION 9 DOCUMENTING THE TRANSACTION

In a cross-border transaction, as with any purely domestic transaction, there will generally be one principal transaction agreement, be it an acquisition or divestiture of assets, shares or other equity interests, a joint venture, an outsourcing arrangement or some other form of business transaction. Just as project management and pre-transaction review procedures will be inherently more complex in a multi-jurisdictional transaction than in a purely domestic one, so will the transaction documentation require an extra degree of complexity. This section considers the reasons for that inherent complexity before examining how a cross-border transaction may give rise to specific drafting concerns and how the transaction documentation will need to be drafted carefully to ensure that the transaction has legal effect in each jurisdiction.
1.
The Governing Law Debate
One of the most significant issues facing parties in cross-border transactions concerns the choice of law that will govern the transaction and its documentation. It is crucial for all parties to agree on the governing law as soon as the transaction commences since the structure and content of transaction documentation vary greatly from jurisdiction to jurisdiction. Furthermore, the decision as to which law will govern the transaction agreement will also affect many other aspects of the management of the transaction, including the intent and areas of focus of the diligence investigation. Historically, the choice of governing law has impacted significantly on the structure of the transaction documentation. For instance, acquisition agreements in common law jurisdictions (e.g., the United States, Canada and the component jurisdictions of the United Kingdom) have always tended to be lengthier than the agreements typically used in civil law jurisdictions (e.g., Continental European jurisdictions). This is due, in part, to the fact that common law jurisdictions have placed a greater emphasis on the use of representations and warranties for the purposes of both buyer and seller protection.
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English common law, and many of its descendant jurisdictions, does not recognize any general obligation of good faith in the law of contract. Accordingly, parties to contracts in common law jurisdictions have typically been guided by the principle of caveat emptor or buyer beware when entering into contractual arrangements. As such, an aggrieved party in a contractual arrangement governed by common law has typically not been able to rely on any rights of recourse other than those occasioned by a breach of the express contractual terms. Hence, parties in common law jurisdictions have come to rely heavily on the use of extensive representation and warranty provisions in transactional agreements to draw out disclosure of issues and problems and, thereby, to reach a meaningful allocation of liability. In many civil law countries, by contrast, parties are typically under obligations of good faith to each other, as discussed above in Section 5 (Preliminary Agreements). This obligation generally requires the parties to engage in a more comprehensive, legally obligated, disclosure of issues and problems than is typical in common law jurisdictions. Accordingly, the use of extensive representations and warranties in the principal transaction agreements has been less common in many civil law jurisdictions as the parties are already under an obligation to deal with one another in good faith and make appropriate disclosures as a matter of course. While the good faith concept is gradually creeping into the law of common law jurisdictions such as England and Wales, the fact remains that parties to common law-governed transaction documents continue to make considerable use of extensive representation and warranty provisions. Furthermore, as business becomes more global and crossborder transactions more common, there has tended to be something of a convergence in transaction documentation, with the lengthier common law form agreement now becoming more of the norm. In spite of this, parties will need to be prepared for inevitable differences of opinion if dealing with counterparts in foreign jurisdictions whose practice is somewhat different than that with which people in common law jurisdictions are more familiar. Even once a decision is made about which law will govern the transaction documentation, the parties should ensure that the cross-border
agreements are drafted with sufficient breadth so as to encompass legal concepts in other jurisdictions which may be included in the transaction. This will range from ensuring that definitions are sufficiently broad to cover both foreign and domestic concepts, to drafting closing provisions to ensure that local closing formalities are respected in each relevant jurisdiction. It is therefore very important for parties in multijurisdictional transactions to ensure that their legal counsel are versed in the broad range of international legal issues that will affect the drafting of the documentation. We will now discuss some of the key aspects to consider when drafting cross-border transaction agreements in the context of share and asset acquisitions and business process outsourcing transactions.
2.
Cross-Border Acquisition Agreements
The principal aim of any acquisition documentation, whether in the crossborder or domestic context, is fairly straightforward: to give legal effect to the transfer of assets, shares or other equity interests in each jurisdiction which is part of the transaction. Beneath this surface simplicity, however, several key issues (in addition to the governing law choice) should be considered at the outset of the documentation phase in a cross-border share or asset transfer. These include, but are not limited to, the following types of questions: x Who will be the parties to the acquisition agreement? Will only one member of each partys corporate group enter into the master agreement and, as result, agree to procure that their subsidiaries or affiliates will do all things necessary to give legal effect to the transaction? Will the parent or another member of the contracting parties corporate group be required to act as a guarantor in connection with the transaction? Will the parties be able to conduct extensive diligence in each jurisdiction prior to signing the principal transaction agreement or will they need to contract around potential risks? What sort of balance needs to be struck between ensuring that representations and warranties are sufficiently broad to cover
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both foreign and domestic issues and yet sufficiently specific and detailed to cover particular items of concern that may have been discovered during the diligence process? x Given that different jurisdictions often use different means for calculating the damages suffered by an aggrieved party and, therefore, the compensation to which they are entitled, what specific method will the parties agree to use in any specific case?
These are only some of the multitude of questions which both parties will need to consider when drafting, negotiating and finalizing the transaction agreements. That said, the issues reflected above are critical and will have long-run implications for the ultimate allocation of risk and liability between the parties.
Giving Effect to the Transaction in Local Jurisdictions
In many cross-border transactions, local law will stipulate the required documents and actions necessary to give effect to the share or asset transfers in the local jurisdictions (e.g., a stock transfer form accompanied by delivery of share certificates when certificated, notarial deed or other instrument of transfer for shares or equity interests, or a bill of sale and assignment and assumption agreement or business transfer agreement for assets). The form which many of these base documents takes is, often, quite disarmingly simple. Nevertheless, it is important for the parties to ensure that all of these relatively mundane and straightforward local transfer instruments are governed by an umbrella agreement which deals with material issues such as: (i) the terms on which the shares and assets will be acquired and certain liabilities assumed; (ii) the means by which the parties intend to allocate risks with respect to the transferred shares or assets (e.g., through representations and warranties, indemnities and carve outs of certain liabilities); (iii) the mechanics leading up to and following closing (e.g., conditions to closing, purchase price adjustments, post-closing covenants and other obligations); and (iv) how the parties intend to resolve any dispute that may arise in relation to the transaction following closing. None of these issues should be of any surprise to anyone familiar with transaction documentation in a purely domestic context. However, given
the interplay of various legal systems and cultural mores, the importance of an overarching master acquisition agreement, linking together the documents required to give effect to the transaction in each jurisdiction is magnified in the cross-border context. For example, as discussed in Section 10.7 (Closing the TransactionMoving Funds), the parties often need to allocate the purchase price to the local target in the local transfer documents. If the master umbrella agreement contemplates a purchase price adjustment based on some financial or other measure, the parties will need to contemplate the local implications of that adjustment. In all cases, the key objective is to ensure that the master umbrella purchase agreement which has been negotiated (often heavily) by the parties governs the transaction. As such, it is not advisable from a risk or project management standpoint for the parties to set out negotiating a master purchase agreement and then conduct a similar exercise for the documentation in each local jurisdiction that will actually give legal effect to the transaction at the local level. Pursuing such a course of action would greatly increase the likelihood of issues receiving inconsistent treatment in the documents across the jurisdictions. Rather, the aim should be to ensure that local documentation is kept subordinate to the master agreement and serves only as the bare minimum necessary to give legal effect to the asset or equity transfer in the local jurisdiction.
Local Share Transfer Documents
In the case of share transfers, the local documentation is often very simple and straightforward. It normally takes the form of a simple stock power, share transfer form or other instrument of transfer which merely specifies the names of the parties to the local share sale, the quantity and value of, and the consideration payable for, the transferred equity interests. In certain civil law jurisdictions, the parties may be required to appear before a civil law notary, who will execute a notarial deed giving effect to the transfer of the relevant equity interests. Section 10.2 (Closing the TransactionNotaries) discusses the function of notaries in closing crossborder transactions in greater detail.
Local Asset/Business Transfer Documents
The documentation gets more complicated when the assets of a going business are being transferred, given the wide variety of asset classes often
involved. Issues of particular concern include effecting the transfer of contractual rights and obligations, as well as employees and related benefit plans in accordance with local laws. In addition, the parties should ensure that they comply with applicable local legal requirements in order to legally affect the contemplated transfer of assets and liabilities. In some countries, if the assets are not scheduled in accordance with local legal requirements, they may be deemed not to have validly transferred from the seller to the buyer. Generally speaking, the listing of assets should be more specific and detailed (in some cases by asset categories) in civil law jurisdictions, whereas it is usually sufficient to provide general descriptions of asset categories under the laws of most common law countries. In Germany, for example, the schedules of assets must be prepared with a high degree of specificity. Ideally, the transferring party would list every single asset that is being transferred to the transferee. Some entities keep detailed asset lists in the normal course of business, and these lists can often be printed out and attached as schedules to the asset transfer documents. Often, however, comprehensive schedules listing every single asset are not available. In an asset deal where an entire companys assets are being transferred, the issue is simply one of identification of the transferring assets and a general reference to all assets located at [a specific identifiable location] will often suffice. Where the relevant assets are not housed in separately identifiable locations, however, or where they might be mixed with other assets that are not transferring (e.g., in the context of a divisional sale), the issue is a bit trickier. In that situation, a catch-all-clause should be added providing that the asset schedules are not exclusive and that the transferor transfers to the transferee all assets relating to the business, except those which are not owned by the transferor or are otherwise intended to be carved out of the transaction (which, in turn, should also be listed in a schedule). Nevertheless, depending on how precisely the business is described, even a catch-all clause may not completely eliminate the risk that title to all of the relevant assets will not pass to the transferee.
Business Transfer Agreements
Parties to domestic asset transactions will typically be familiar with the use of a bill of sale to effect the transfer of assets and an assignment and
assumption agreement to effect the transfer of liabilities. In the international context, however, the local subsidiaries of the parties, as the local seller and buyer, often enter into a business transfer agreement, or BTA for short, for each jurisdiction in which assets are transferring in order to establish that a going business, rather than select assets, are being transferred in the local jurisdiction. To that end, the BTA would be based upon and consistent with the overall master purchase agreement. As such, the BTA is a relatively short document which addresses only those issues relevant to the local transaction (e.g., the legal transfer of assets used in the business, the assumption of liabilities related to the business and the local legal formalities surrounding the transfer of employees dedicated to the business). While there are certain exceptions (e.g., France), the BTA will usually contain many cross references back to the master agreement and will be deliberately silent on most issues covered by the master agreement, including representations and warranties, indemnities and covenants. Typically, the BTA will contain no, or only a few, closing conditions (e.g., references to locally required government approvals) since it is signed and delivered in conjunction with the closing under the master agreement. To ensure that the master agreement controls the whole transaction, however, the BTA will typically include language stating that it is expressly subject to the master agreement in the event of any inconsistency. Further, the governing law and dispute resolution language in the BTA will expressly replicate the language of the master agreement. This will ensure that any post-closing disputes between the parties are channeled up to the master agreement and not dealt with at the purely local level. Despite its relatively simple nature, the use of a BTA offers a number of particular benefits, including the following: x The form of the BTA is typically negotiated and agreed by the lead counsel and distributed to local counsel for comment. Local negotiation of the BTA in each country is often severely restricted. This approach assures consistency with the master agreement and deal terms, facilitates preparation of the required local documentation and reduces cost.
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Local counsel, particularly in civil law jurisdictions, often have limited experience with bills of sale and other transfer documentation. The use of the BTA provides a more efficient means for local counsel to comment on transfer mechanics from a local law perspective without the need to review the entire master agreement, thus potentially reducing the associated time delays and cost implications. In many jurisdictions, if the parties can satisfy local tax authorities that the transaction constitutes the sale of a business as a going concern (as opposed to the sale of isolated assets) the local transfer may be exempt from value added or goods and services taxes. While the use of a bill of sale, assignment and assumption agreement or other document will not necessarily lead to such an exemption being refused, the BTA, as the sole operative transfer document, serves as a useful tool for demonstrating that the assets transferred constitute the transfer of a business as a going concern. In many jurisdictions, a stamp duty is assessed on the written documentation used to transfer assets that cannot otherwise be transferred by physical delivery (e.g., intellectual property rights, accounts receivable and goodwill). Therefore, stamp duty will not be assessed on assets transferring by delivery of possession but would generally be assessed on all assets transferred pursuant to a bill of sale. The BTA provides greater flexibility for minimizing these stamp duties by enabling language to be included that provides for the transfer of tangible assets by way of delivery of possession and eliminating the stampable bill of sale. All jurisdictions have particular requirements for the means by which employees are transferred in connection with the transfer of a business as a going concern. The BTA serves as a convenient document in which to lay out the particular local legal requirements for the transfer of those employees in conjunction with all other transfer mechanics.
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In certain circumstances, local authorities may require a local language translation of the operative transfer documents. Due to its relative brevity, the BTA will prove to be an easier document to translate when compared to the master agreement. The BTA will often include schedules that set forth the particular assets and liabilities transferring in the relevant jurisdiction. Accordingly, each BTA will serve as a useful future reference of the assets transferred in the corresponding jurisdiction.
Ancillary Documentation
It is important to note that the master acquisition agreement (and the associated local transfer documentation) will not necessarily be the only documents entered into by the parties in cross-border share or asset transactions. The parties may decide to enter into specific documents providing for indemnification against certain liabilities (e.g., tax covenants and deeds of indemnity for environmental liabilities in particular jurisdictions) rather than including extensive jurisdiction-specific indemnification language in the master agreement. In addition, if a target is being divested from a larger group, the parties may need to enter into some sort of transitional services arrangement for an interim period until the buyer is able to provide for itself various functions such as treasury services, IT support, payroll and others. The drafting of these ancillary documents will often present similar issues to those encountered when drafting the principal asset or share acquisition agreement. For instance, the ancillary documents will need to be drafted carefully to ensure that they are sufficiently broad to cover legal concepts that are relevant to both the governing law of the acquisition and any applicable local legal requirements, and properly reflect the local applicable tax regime. In addition, the parties will need to review the ancillary documentation carefully to ensure that it is consistent with the terms of the master agreement. To this end, parties often include a provision expressly stating which agreement will prevail in the event of inconsistencies. Similarly, the parties should ensure that all documentation is consistent from the perspective of the dispute resolution provisions, as discussed in greater detail in Section 12 (Dispute Resolution).
3.
Business Process Outsourcing
As a service-driven transaction, outsourcing transactions generally involve delivery obligations that distinguish them from typical share and asset acquisition transactions and make them more akin to traditional longterm commercial arrangements. While the party delivering the outsourcing services may acquire assets (including facilities, equipment, intangibles, rights under third party contracts and employees) from the party receiving the outsourced services, the asset transfer is often of secondary importance to the delivery obligations assumed by the service provider. On the other hand, when a party transfers the performance of a business function to a service provider across multiple countries, the issues involved in documenting the transaction have much in common with the issues involved in structuring and documenting traditional multijurisdictional share and asset acquisitions. For example, the parties may utilize an umbrella master agreement that sets forth the general business and legal terms that apply to any local companion agreements entered into underneath the master agreement. The master agreement may also provide a process for implementing the local agreements. This structure permits the parties to allocate business and legal risks in a consistent and efficient manner while still respecting the independence and unique business process and technical constraints of the local entities involved in the business process outsourcing transaction.
Master Agreement
In the context of business process outsourcing agreements, the master agreement typically will address the intended scope of the services to be provided, any service transition and transformation obligations, pricing and payment structures, term and termination procedures and the licensing and ownership of any intellectual property rights involved in the transaction. The master agreement generally will also contain representations and warranties, indemnification obligations, liability limitations and disclaimers, governance structures and dispute resolution procedures that apply at the global and local levels of the transaction. Accordingly, the parties to a cross-border outsourcing transaction are faced with many of the same documentation issues that arise in the cross112 Baker & McKenzie
border acquisition context, including the choice of governing law, the extensiveness of the representations and warranties and the manner in which damages are calculated. The detailed business requirements of the outsourcing transaction are generally addressed in schedules that are appended to the master outsourcing agreement. These schedules typically include detailed statements of work, service level agreements, transition plans, pricing mechanisms, transferring asset inventories, security and confidentiality commitments, employee transfer provisions and disaster recovery and business continuity plans, all prepared in accordance with local legal requirements. These schedules are generally incorporated by reference as applicable through the terms of the master agreement and local companion agreements. In addition, the master agreement in the outsourcing context may include affirmative covenants from the outsourcing services customer and vendor to procure that their respective local entities enter into appropriate local companion agreements to implement the outsourcing transactions contemplated at the global level.
Local Companion Agreements
The local companion agreements sit underneath the master agreement and generally are entered into by and between the particular service recipient and service provider at the local level. The local companion agreements provide the context for creating specific amendments and modifications to the master agreement as may be necessary to address local business process issues and technical constraints. For example, certain service towers may fall outside the scope of the services to be provided in a given local jurisdiction, or the process used to perform a particular service function may be unique to certain jurisdictions. In the context of a human resource outsourcing transaction, for example, payroll processing may not be outsourced in every jurisdiction, or the process for delivering payroll services may be significantly different in a jurisdiction where the local entity has not migrated to a global payroll processing application. Local companion agreements allow the parties to specifically address these types of divergent issues where relevant to the particular local jurisdiction. In this regard, local companion agreements in the outsourcing context are often considerably more substantive than
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the local business transfer agreements utilized in cross-border share and asset acquisitions. Local companion agreements also allow the parties to comply with and accommodate mandatory requirements of local law without obligating the parties to adopt each and every mandatory local requirement across the entire scope of the transaction. Similar to a business transfer agreement, a local companion agreement can thus facilitate the processing and recordation of local asset transfers. From a legal perspective, the local companion agreements in the outsourcing context provide privity of contract between the local business presences of the customer and the supplier in each applicable jurisdiction, which allows the local entities to form binding contracts that local courts are likely to respect and enforce. Properly structured, these contracts may also help minimize the risk of local disputes by clearly defining each entitys obligations at the local level through local statements of work and service level agreements. This is of significant importance in the outsourcing context where the success of the overall relationship depends on the ability of services to be provided efficiently at several levels and locations of the recipients business.
Employee Transfers
The global master agreement in the outsourcing context is typically structured to provide a process, as opposed to a mandate, for implementing local companion agreements in order to avoid claims that the parent company or the company executing the master agreement has made binding commitments on behalf of local subsidiaries or affiliates. This process may allow the parties greater flexibility and timing opportunities for dealing with local works counsels and other interested parties with respect to employee transfers by deferring decisions regarding local business transfers until the local companion agreements have been properly considered by the applicable local entities. For example, the parties may implement the outsourcing services on a gradual, jurisdiction-by-jurisdiction basis, as the various local legal formalities are complied with. To this end, the master agreement typically would include a transition plan that sets out the schedule for implementing the local companion agreements.
Tax Minimization
The master/local agreement structure in the context of a business process outsourcing transaction can also facilitate local invoicing, which may help simplify overall transaction taxes and VAT compliance expenses. For example, if the service providers local entity delivers services to the customers local entity and is able to invoice the customer locally, any VAT chargeable on the delivery of the services may be creditable by the customer against its other VAT obligations. If instead, the service providers local entity is obligated to invoice its parent entity (which, in turn, invoices the customers parent entity for the locally provided services), neither parent entity may have an opportunity to offset the related VAT expense against any other VAT obligations. In that case, the VAT expense may become a real cost that should be factored against any savings that the outsourcing transaction may otherwise generate for the customer, and may prompt the parties to re-think the structure of the transaction.
Variations
While the master/local agreement structure has many benefits in the outsourcing context, the ultimate structure of the business outsourcing agreement no doubt depends on the specific facts and circumstances of the transaction and the objectives of the parties involved. Alternative structures may include regional agreements with local participation agreements, master agreements with localized statements of work, collections of local business process outsourcing agreements uniquely negotiated in each jurisdiction, and countless other variations. In any case, choosing an appropriate structure may have significant short- and long-term consequences which should be carefully considered in the context of the specific facts and circumstances of the particular business process outsourcing transaction. * * *
Assuming the deal proceeds as planned, the next major phase, after any remaining diligence is conducted, is for the parties to close the transaction. In the next section, we discuss some of the key elements of a cross-border closing.
Cross-Border Transactions Handbook Section 10 Closing the Transaction
SECTION 10 CLOSING THE TRANSACTION

Cross-border closings and domestic closings share many of the same essential elements: the parties must execute and deliver various transaction documents, transfer the contemplated business, assets or shares in exchange for the agreed upon consideration and carry out their other respective closing obligations. However, cross-border closings are made more complicated due to the sheer scope of the transaction and the differing local requirements that may arise when legal systems from multiple jurisdictions are involved. In this section, we discuss some of the important elements and processes of a cross-border closing. The underlying theme that emerges is that thorough planning and the ability to anticipate issues are critical to a successful closing.
1.
Availability of Key Personnel
One of the most critical elements for a successful closing is to ensure the availability of key personnel well in advance of the time contemplated for the actual closing. This is necessary for two main reasons. First, key personnel are sometimes needed to make decisions about material issues that may arise right before closing and that must be resolved before one or both parties are willing to close. Second, and perhaps more importantly, key personnel are often the directors or officers of the entities involved in the closing (or are otherwise authorized to represent the entities) and, as such, might be the only people authorized to sign the transaction documents. Without their signatures on key documents, the transaction cannot close. Key personnel may be required to attend board meetings to approve certain aspects of the transaction. This will depend on whether board approval is required in a particular jurisdiction and if the relevant local laws require meeting attendance (in contrast to signing written consents, which can usually be circulated via email or fax and signed in counterparts). Where meetings are required by local law, board members can typically attend in person or by telephone. Either way, holding a board meeting requires advance notice, coordination of
schedules and the execution of documents, which presents time demands on the key personnel. In many cross-border transactions, one or both of the parties will be a multinational corporation that has appointed many different individuals to serve as officers or directors for its different affiliates around the world. There are two basic options in this case for securing signatures from key personnel. The first option is to locate and contact the key personnel in each jurisdiction, which can be a time-consuming process given that most key personnel are extremely busy, traveling on business and may have multiple offices and residential addresses. Once located, it may be necessary to explain the transaction to the key personnel, how their local entity is involved, what decisions they are being asked to authorize and what documents they are being asked to execute. Quite often, it will be necessary to follow up with key personnel to ensure that they sign and return the documentation in time for the closing. The second option is to arrange for the adoption of authorizing resolutions and/or the grant of powers of attorney by the key personnel in each jurisdiction, authorizing individuals in the country where the closing will take place to execute the documents on behalf of the respective local entities. This approach has the benefit of consolidating the authority to execute the transaction documents in the hands of a few key individuals whose accessibility can be secured easily in advance of the closing. This way, it will not be necessary to spend time chasing people around the globe to get their signatures, as there will almost certainly be more substantive deal issues requiring attention before closing. That said, adopting authorizing resolutions and/or obtaining powers of attorney also takes time, especially if local laws require the powers of attorney to be legalized before a consulate. Therefore, powers of attorney should be obtained very early in the transaction so as to avoid potentially holding up the closing due to a technical issue. If, on the other hand, the multinational corporation has appointed an identical (or almost identical) slate of directors and officers to manage its affiliates around the world, it will be easier to identify who must sign the transaction documents, but those same individuals will have to bear the burden of reviewing and executing numerous documents. As key personnel, this could present an unexpected and unwelcome demand on
their time. In these cases, the key personnel should be forewarned to set aside sufficient time to review and execute the transaction documents. Often, their signatures will be obtained in advance of the closing and the documents will be held in escrow until the closing date. Authorizing resolutions or powers of attorney authorizing others to sign the documents might nevertheless be beneficial if the directors and officers have unexpected travel schedules or know that they will not be available in the period before closing. This way, the closing is not dependent upon the availability of a small number of individuals.
2.
Notaries
A notary is another individual whose involvement is often critical in a cross-border closing. This is so because in many civil law jurisdictions, certain actions, including share transfers, asset transfers and the transfer of title to real estate, can only be effected validly in the presence of a notary who must make appropriate certifications or registrations in accordance with local law. The civil law notary functions as a government-appointed attorney, acting in effect for both parties, to ensure that proper title has been conveyed. The civil law notary plays a function far beyond that of a notary public in the United States. For instance, in many civil law countries, including Mexico and Germany, real property can only be transferred by notarial deed, and it is up to the notary to ensure that there are no material encumbrances on the property. By contrast, in most common law jurisdictions, including the United States, the buyer will often rely instead on title insurance or an opinion of its counsel based on an examination of publicly available records at the registry of deeds or other equivalent agency. The notary will deal with all other formalities of transfer as well, including recording the deed of transfer in accordance with local law. It is almost always necessary to make an appointment with the notary in advance. Depending on the notarys schedule, and whether the parties or their advisors have a good history or existing relationship with the notary, it may be possible to schedule an appointment quickly. In any case, it is important to schedule the appointment well in advance of the closing date.
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A notarial fee is applicable to the transfer of shares, assets and real estate in many jurisdictions. The fee varies from jurisdiction to jurisdiction and it can be a flat rate or a percentage of the transaction value, or it could be calculated on a scale that changes depending on the transaction value but not necessarily in proportion to the transaction value. The notary will usually require the parties to deposit the notarial fee into the notarys bank account before formalizing the transaction. Therefore, it is important for the parties to determine who will pay the notarial fee and to ensure that it will be wired to the notarys bank account (and that the notary confirms receipt) before the meeting with the notary. Some notaries are very specific about whether the wire transfer must come from the buyer or seller and whether it must come directly from the actual entity buying or selling in the local jurisdiction (as opposed to an affiliate).
3.
Releases and Third-Party Consents
Obtaining necessary releases and third-party consents may be complicated in the cross-border setting by the location of the creditors and the differing local rules which may come into play, for example, when determining whether a consent is in fact necessary in a particular situation. One or more of the target subsidiaries may own assets on which there are liens or other encumbrances securing outstanding debt. The existence of liens or encumbrances may be uncovered through local public records searches or investigation of the local subsidiarys documents. But, as discussed in Section 6.9 (DiligencePublic Record Searches), the amount of publicly available information (and the cost to obtain it) varies widely from jurisdiction to jurisdiction. Sellers will often arrange for the outstanding debt to be repaid, and the encumbrances released, before closing or simultaneously with closing. If the repayment and release is to occur simultaneously with the closing, a portion of the consideration from the buyer will need to be paid directly to the creditor at the closing in exchange for the simultaneous release of the encumbrances. Accordingly, it is critical to locate the creditor and obtain the creditors cooperation in connection with the transaction. In the cross-border setting, it would not be unusual for a creditor to be located in a
jurisdiction other than the jurisdiction in which the lien is registered, or for the creditors whereabouts to be unknown. In addition, an understanding of the local legal requirements to extinguish the debt and release the lien is necessary to ensure that this is accomplished properly and in time for closing. Furthermore, as in a typical domestic transaction, the parties should ensure compliance with change of control or anti-assignment provisions in material agreements, leases or licenses that otherwise may be breached in connection with or as a result of the transaction. Accordingly, the seller should determine early in the transaction whether any third party consents are required to consummate the transaction as the buyer may consider certain contracts to be material to the overall valuation of the business. The possible outcomes vary not only on a contract-by-contract basis, but also on a jurisdiction-by-jurisdiction basis. One would typically need to confirm the local legal requirements as to whether consent is, in fact, required to assign a contract when the contract is silent, as well as the impact, if any, that the transaction structure (e.g., merger, asset sale or stock sale) has on the issue. Finally, the parties should be mindful of the fact that many third parties may refuse to give consent without additional consideration.
4.
Centralized vs. Local Closings
In a cross-border transaction where distinct local transactions will occur (e.g., in the acquisition context where assets or shares of the targets subsidiaries will be acquired directly at the local level), thought should be given as to whether to hold a single, centralized closing, or whether to hold several localized closings under the purview of the master agreement. In a centralized closing, all of the transaction documents are executed by the same people in the same city, and are all physically located in organized files at the closing. Often, this is achieved through the adoption of authorizing resolutions and/or the granting of powers of attorney to individuals located in the country where the closing will take place (some of whom will, most likely, attend the actual closing themselves in case last-minute signatures are required). For example, in a transaction involving asset transfers in multiple jurisdictions around the
world, the individuals authorized to sign the relevant asset transfer documents on behalf of the local buyer and the local seller would grant authority to their respective representatives who are located in the master jurisdiction. The authorized representatives would then execute the asset transfer documents in time for or at the closing. The benefit of this approach is that it puts control over the execution of the documents in the hands of the individuals who are responsible for closing the transaction. It also saves the parties from the having to spend precious time chasing people around the world to sign documents on the eve of closing. In other cases, however, the parties may decide to have local closings in some or all of the jurisdictions involved in the transaction. This decision is usually driven by the local legal requirements for effecting the transaction. For example, as discussed above, if real property is being conveyed, in most civil law jurisdictions the parties will need to appear before a notary who must certify or register the notarial deed conveying title to the property from the seller to the buyer. The notary must be presented with the parties original signatures on the version of the notarial deed that is to be notarized. It would be insufficient in that case for the parties to execute a purchase agreement offshore in counterparts and exchange signatures by fax, as this would not qualify as a valid transfer of title to the real property under relevant local law. Where there are no particular local legal requirements for the transfer of property, the parties may nevertheless decide to hold local closings for other, non-legal reasons. For instance, depending upon the cultural issues involved among the parties to the transaction, the parties may decide that it will be smoother for purposes of the closing, and for their relations post-closing, to hold a local closing in certain jurisdictions. Or, in those cases where there are only a few local jurisdictions (e.g., 2 or 3, as opposed to 30), it may be more cost-efficient to hold local closings in each jurisdiction and to coordinate them remotely from the parent entities respective home offices.
5.
Listing of Assets
When assets are being transferred as part of the transaction it is important to determine how detailed those assets must be described in the schedules
to the transaction agreement. As discussed in Section 9.2 (Documenting the TransactionCross-Border Acquisition Agreements), the rules for scheduling assets vary from jurisdiction to jurisdiction. If the assets are not scheduled in accordance with local legal requirements, they may be deemed not to have validly transferred from the seller to the buyer. Regardless of the local legal requirements, the parties should begin preparing the schedules early on in the transaction because this task can be particularly time-consuming in the cross-border context given the volume of jurisdictions and issues that typically come into play. Not only will the schedules need to be reviewed by representatives of various disciplines (e.g., legal, tax, business and accounting), but very often the schedules will need to be reviewed at several management levels within the parties respective internal organizations depending upon where the financial responsibility for a particular country or region lies within the organization (e.g., management at the local country, regional and headquarters level). If local management is not fully aware of the transaction, or is not fully supportive of the transaction, the preparation of schedules might take on a low priority. This can lead to delays that could potentially hold up the closing.
6.
Time Differences: Escrow Closing
In most cross-border transactions, the jurisdictions involved will be located in different time zones. These time differences could make it difficult to hold actual local closings simultaneously with the closing under the master agreement. The parties can often overcome this problem through the use of informal escrows or pre-closings where the local closings take place one or two days in advance of the master closing. In that event, all of the executed documents often will be left with a local lawyer pursuant to a letter agreement providing that the local closing documents will be delivered to the parties when the lawyer is notified that the closing under the master agreement has taken place. Alternatively, the parties may decide to schedule all of the local closings so that they will actually occur on the same date and as of the same effective time. This may be achieved by specifying in the master agreement and local agreements that the closings will occur on a particular date and at a particular effective time. Those jurisdictions
ahead in time of the master jurisdiction would execute their respective local closings first, with the other countries to follow depending upon their order in the international time zones. The executed documents would then be held in escrow by local counsel until the parties are notified that the closing under the master agreement has taken place. This process is similar to the one described in the previous paragraph; however, holding actual closings at the time specifically contemplated in the master agreement tends to convey a bit more importance to the local jurisdictions, which may be necessary to the preservation of key local relationships. The procedure will differ where the parties do not hold any local closings, but instead hold a centralized or master closing for all jurisdictions at the location for the closing under the master agreement. In this case, the local documents can be executed at the central closing or be executed and sent in advance to the location of the master closing, often via fax or email (except where actual originals are required or desired), and copies would then be provided to the individuals responsible for the closing. Alternatively, as discussed above, representatives in the master jurisdiction may have been granted a power of attorney to execute the local transaction documents, in which case they will typically execute the local documents themselves on or before the closing date. Lead counsel in the master jurisdiction will then hold all of the documents until they can confirm that all required closing actions (including the execution and delivery of the transaction documents) have taken place in each jurisdiction in order to formally effect the master closing.
7.
Moving Funds
The transfer of funds at the closing of a cross-border transaction also gives rise to concerns not present in the domestic setting and requires advance planning. Where the transaction consideration consists of cash, payment will normally be made by wire transfer. The parent buyer or one of its affiliates will often pay the total aggregate consideration for all jurisdictions in one lump sum. In that case, the master agreement would specify that the buyer is paying the entire purchase price, on behalf of itself and its subsidiaries, to the parent seller, for itself and on behalf of its
subsidiaries. The local agreements would refer to the agreed purchase price for the transaction effected in their respective jurisdictions, and would indicate that the buyer has paid, and the seller has received, that local purchase price. The buyer and seller would then account internally (e.g., through intercompany loans) for the payment of the purchase price. If the transaction contemplates the local transfer of assets in individual jurisdictions, payment of the purchase price may have to be made locally between the local buyer and the local seller, often in the local currency. To the extent that the local buyer does not already have local currency on hand to pay for the assets, the parent company of the local buyer will likely have to make a loan or a capital contribution to the local buyer. This could implicate the exchange control laws in some jurisdictions, which require the registration of the loan or new capital. This registration process can be a very document-intensive and timeconsuming process, potentially holding up the local closing unless the issue is identified early in the transaction. Section 7.7 (Regulatory FrameworkExchange Control Approvals) discusses exchange control issues in greater detail. In some cases, it may be possible to arrange for back-to-back loans, where the parent company opens a line of credit at its bank and the bank, in turn, lends money to the local subsidiary. This may successfully avoid the pitfalls of local exchange control laws. A flow of funds memorandum is commonly used in cross-border transactions as a convenient tool for illustrating the flow of money as agreed by the parties. The memorandum will typically specify the payor, the payee, the payees bank account details and the amount of the payment, among other things, and it serves as a useful project management tool for ensuring that the funds get where they need to be for the closing. The more individual payments there are, and the more payors, payees, currencies and banks, the more valuable a flow of funds memorandum will be to the success of the closing. The memorandum will often be most useful to the parties respective treasury groups, although the legal, accounting and business representatives will also find the document extremely useful for confirming the crucial steps involved in the payment of the transaction consideration. * * *
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Once the transaction closes, the parties are often faced with addressing numerous short-term operational issues so that the operations of the target business may proceed smoothly after the closing. In the next section, we highlight several of these issues.
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Cross-Border Transactions Handbook Section 11 Post-Closing Actions
SECTION 11 POST-CLOSING ACTIONS

The closing of the transaction signifies a new beginning for the parties. In an acquisition or divestiture the parties often part ways, with the buyer in control of a new business or entity, save perhaps for transitional arrangements for a defined period of time. In the joint venture and strategic alliance context, the parties find themselves with new roles and responsibilities with respect to operating the target business. While in the outsourcing context, the service provider and customer maintain an important link as the service provider takes over the provision of key services to the customer. No matter the transaction structure, several important operational actions often must occur shortly after the transaction closes in order that the target business may carry on or begin its business activities in the manner the parties desire and in compliance with local laws. In the acquisition context the buyer is often faced with a significant integration challenge and Baker & McKenzies Post-Acquisition Integration Handbook addresses the key issues arising in that context. In this section, however, we discuss some of the common post-closing operational actions that often fall through the cracks as the transaction team shifts its focus to the next transaction. Anticipating and planning for these issues in advance of closing is often important in order that the day-to-day operations of the new or newly acquired business may proceed smoothly after the closing.
1.
Licenses, Permits and Registrations
The types of licenses, permits and other registrations that may be necessary to run the targets business largely depends on the requirements of the particular industries and jurisdictions in which the target operates. In the context of an asset deal, the buyer will often have to apply for the assignment of the sellers licenses, permits or registrations (assuming the seller does not require them to operate any retained business) or make fresh applications for new registrations postclosing (to the extent this was not practically or legally possible prior to closing). It is important for the buyer to establish a plan for transferring
or applying for new licenses, permits or registrations prior to closing. Otherwise, the buyer may be left owning a business that it is not licensed to operate. In a share deal, by contrast, the licenses, permits and registrations generally remain with the target business since only the targets ownership changes. On a more general level, in order to maintain a local entitys good standing in its jurisdiction of organization, in addition to the requisite tax returns, many countries also require the filing of annual reports or annual accounts with the local companies house (or, in the case of civil law countries, the Commercial Registry). A failure to file (or late filing) may result in financial penalties, limitation of corporate services available to the company, or even personal liability for directors and officers.
2.
Bank Accounts
If bank accounts are acquired as part of the transaction, the buyer should consider whether existing signatories should be removed and replaced. Often this consideration will depend on whether existing signatories are employees who will transfer to the buyer as part of the acquisition and whether the buyer has a company policy with respect to which certain of its employees can act as bank account signatories. In addition, the buyer will need to determine the particular requirements that the local jurisdiction may impose on bank account signatories (e.g., residency requirements or that signatories be executive-level employees). If the buyer has formed a local legal entity to effect the transaction in a particular local jurisdiction (i.e., in an asset deal), the buyer may have already set up a local bank account either as part of the formation process or because the purchase price must be paid locally. Where this is not the case, the buyer could wait until after the closing to set up a local bank account. If the transaction represents the buyers first entry into a particular local jurisdiction, the local bank might require a letter of recommendation from the buyers existing corporate banker. This often takes time to obtain depending on the buyers pre-existing relationship with its bankers and the size of the bank. Accordingly, the buyer should determine the types of documents that each bank will require as soon as possible.
3.
Payroll
Depending on the buyers internal capabilities, payroll may be handled within the buyers organization or it may be outsourced. Often, a transition services agreement between the buyer and the seller will obligate the seller to continue to handle the payroll function for a period of time following closing. During this period (or prior to closing if the buyer will take on this role immediately following closing) the buyer must ensure that it obtains all necessary employment and tax registrations and that it hires any necessary consultants or service-providers to assist with the payroll function. The buyer must also ensure that once the transition services arrangement with respect to payroll services expires (or upon closing if the buyer does not require transitional payroll services), all transferred employees can be paid and all necessary deductions made and remitted to appropriate government or private organizations.
4.
Auditor, Director and Officer Changes
In the case of a share purchase, the buyer will often require some or all of the directors and officers of the target entity to resign from their positions as officers and directors. The buyer is usually interested in appointing its own individuals to these posts. The resignation of old directors and officers and the appointment of new ones usually can be achieved simultaneously on, and as of, the closing date. In particular, under the laws of most jurisdictions, it is sufficient for the purpose of the closing for the outgoing directors and officers to tender their resignation letters at the closing. Furthermore, it is typical for these resignation letters to be one of the conditions to closing. Corporate resolutions are also required in most cases to accept the resignations of the outgoing directors and officers and to appoint the new directors and officers. These resolutions are also usually among the closing documents that are executed and delivered at closing. Many local jurisdictions require other formalities to change directors and officers, such as submitting government forms and registering the change with the local commercial registry. A number of jurisdictions require a list of other entities in which the newly appointed director already holds directorships. Although these additional formalities can often be handled
shortly after closing, the preparation of the necessary documentation often becomes a time-consuming exercise. It is also important to note that some countries (e.g., Australia, Japan, Sweden and Switzerland) have nationality and/or residency requirements for directors and officers of local companies. This can be inconvenient for companies who are used to having the same slate of individuals serve as the directors or officers for all subsidiaries. The obvious solution for an entity with an operational presence is to appoint one or more of the local managers to fulfill this requirement. On the other hand, if the subsidiary in question does not employ a qualified individual to serve as a director or officer (i.e., sales staff are present locally but operational staff are not), it is sometimes possible to retain a third party to act in this capacity.
5.
Operational Requirements
Some jurisdictions (e.g., Italy, Spain, Netherlands and Venezuela) impose a certain minimum capitalization for companies organized under their laws. In addition to coming into play at the time the company is formed, these rules also require that companies maintain a certain minimum debtto-equity ratio as a condition of their continued existence and good standing. On a more day-to-day level, buyers should also promptly assess who within the organization in each jurisdiction should have the power to enter into contracts on behalf of the company, and what limitations should be imposed on that authority. To that end, the requirements for granting a power of attorney or similar authority to non-directors and non-officers differ from jurisdiction to jurisdiction. The buyer should also ensure that all necessary insurance is obtained with respect to the new assets and operations acquired as part of the transaction, including with respect to any real estate. Likewise, the buyer should verify that all new directors and officers will be protected under existing policies.
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6.
Fiscal Year and Other Corporate Changes
The buyer often uses the closing as an opportunity to change the corporate name, fiscal year and domicile of the acquired entity. These changes can usually be included in the corporate resolutions discussed above regarding director, officer and auditor changes. Other documentation may be required under relevant local laws with respect to these changes. The buyer should check with local counsel well in advance of the closing to confirm if any additional documentation is required to actually effect the changes (in which case these documents should be executed at the closing), as opposed to merely formalizing them (in which case the matters usually can be handled sometime after closing).
7.
Signage and Letterhead
Many companies, particularly those for whom the transaction represents the commencement of international operations, overlook the fact that local law in many jurisdictions dictates that certain information be included on company signage, letterhead, fax cover sheets, business cards and envelopes. For example, Singapore law requires companies to include (in Romanized letters) their full registered name and registration number on all letterhead and invoices. In addition, the full registered name must be prominently displayed (in Romanized letters) on all premises signage. The consequences of failing to comply with these requirements range from warnings or minimal financial fines to criminal liability (e.g., Australia).
8.
Ongoing Compliance
The buyer often spends considerable time and effort, including obtaining advice from legal counsel and tax advisors, to ensure that appropriate legal entities are established in relevant jurisdictions to consummate the transaction. Following closing, buyers often become occupied with transition and integration issues, as well as tending to day-to-day operational matters, and they often overlook the corporate and tax formalities necessary to keep the newly formed entity in compliance with local law. Failures in this regard, however, can have monetary and, in extreme cases, criminal ramifications. *
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In a perfect world, once the transaction closes and the on-going compliance issues have been considered, the parties would go forward peacefully and without controversy. Unfortunately, disputes and controversies sometimes do arise. In the next section, we discuss some of the key factors to consider early on in the deal process to establish a proper mechanism for resolving disputes.
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Cross-Border Transactions Handbook Section 12 Dispute Resolution
SECTION 12 DISPUTE RESOLUTION

Once the deal closes, there is often a tendency for the parties to believe that future disputes are unlikely to arise between them or, if they do occur, to believe that they can simply work them out through the course of good business. As a result, the parties often give the dispute resolution clauses in many transaction documents little or no consideration. Yet disputes can and do arise following signing or closing and a significant one could wipe out many of the transactions intended benefits. This is not to suggest that the dispute resolution clause must become the focus of contractual negotiations. Nevertheless, parties who consider how best to resolve potential disputes in the context of the overall deal they strike, either as an extra benefit or an additional risk, may be able to gain a leg up on achieving a favorable result in the face of a dispute and may be able to save substantial time and expense in the process. This section discusses some of the key considerations that will inevitably cause one or another dispute resolution mechanism and forum to be a more strategic option than another in the cross-border setting.
1.
Key Initial Questions
As in the domestic context, a key first step to crafting an appropriate dispute resolution mechanism is for the parties to understand the critical components of their relationship that might impact the successful resolution of a dispute. To that end, the following are a few examples of the kinds of questions a party should ask itself before deciding on the best type of dispute resolution for a particular deal. The answers to these questions will differ with each transaction and, as a result, so will the dispute resolution mechanism: x x Which party is more likely to be the plaintiff and which will be the defendant? What types of disputes are likely to arise and are they likely to be about non-payment, performance or something more complicated?
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x x x x x x x x x x
Who will be holding the money or assets and in what jurisdiction? Is there any key intellectual property involved in the transaction and, if so, who owns it? How difficult will it be to locate and serve the opposing party after the transaction has closed? How difficult will it be to get jurisdiction in the preferred forum? Will discovery be necessary to prove claims that are more likely to arise? Is there a likelihood that a dispute may involve more than two parties? Are there quality, fairness or other concerns with the local courts in the country where the counterparty is located? Is it likely or desirable that the parties relationship will continue after resolution of the dispute? Which party will be most concerned about the publicity associated with any disputes? How difficult will it be to have a foreign country judgment enforced in the countries where enforcement is most likely to occur?
Whether a party is better off utilizing a particular form of dispute resolution or resolving the disputes in a particular country will depend largely on the answers to questions like these.
2.
General Options for Dispute Resolution Clauses
In general, dispute resolution clauses take one of only a few forms but practical experience and logic teaches us that no single approach to dispute resolution and no single approach to forum selection is appropriate for every deal. Like so many terms in a deal, if the dispute
resolution provision is written to address one partys concerns, it will typically be adverse to the other party. The first option is simply not to provide for any dispute resolution clause in the transaction agreement. This approach results in the most uncertainty, leaving either party free to file a lawsuit in any court it believes will exercise jurisdiction. However, this approach can be a strategic fallback when the other party refuses to include any dispute resolution clause except for one you simply cannot live with. For those parties opting to include a dispute resolution clause in the transaction agreement, the choice generally comes down to litigation or arbitration, with various levels of negotiation or mediation often agreed upon as a preliminary step. The forum for the arbitration or litigation usually will be the home country (or state) of either party or a third, neutral country (i.e., home, away or neutral). Litigation in a neutral court is a relatively new concept and is only available in a few jurisdictions, including the United States and England. In the United States, for example, several states, including New York and Illinois, have passed statutes expressly permitting the selection of their courts for crossborder disputes even if there is no other contact with the forum. Typically, that states law must be the governing law for the underlying agreement and a minimum dollar threshold must be met. To date, there are very few jurisdictions outside the United States and England that will accept jurisdiction over disputes on this so-called neutral basis as most courts require some level of contact with the forum. Litigation remains the most common dispute resolution mechanism, in part because unless the parties agree to another approach, they will be forced to litigate their disputes by default. When the parties in fact prefer litigation, the thoughtful drafting of a forum selection clause can provide significant benefits, including the avoidance of expensive and protracted fights over service of process, personal jurisdiction, enforcement and other critical issues. Courts in the United States and in most other industrialized countries typically will enforce forum selection and arbitration clauses in accordance with the parties agreement, although most countries also require some level of contact with the selected forum.
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As mentioned above, many parties opt to require various levels of negotiation or mediation prior to resorting to binding arbitration or litigation. These steps can save time and money if both parties are motivated to fully participate and thus tend to be more common in longterm relationships like joint ventures or outsourcing transactions, which are presumed at the outset to be more cooperative in nature.
3.
Litigation vs. Arbitration
Litigation and arbitration each offer definable benefits and risks. Understanding their unique characteristics and the characteristics of the potential forum in the context of the types of questions set forth at the beginning of this chapter is a critical first step in the development of a strategically beneficial dispute resolution clause. Characteristics of litigation in most jurisdictions generally include: x x x x x x x x x the right to an appeal; potentially lengthy delays; relatively low costs to initiate the process, but often significant long-term costs to see it through to conclusion; the language of the proceedings (and pleadings) is generally the language of the local jurisdiction; various procedural formalities are required to initiate the process including service of process and jurisdiction; established procedures for adding third parties; the fairness and quality of courts can vary significantly depending on the country or even within a particular country; the process is typically a matter of public record and thus is not generally confidential; discovery is largely unique to the United States and is generally unavailable in other countries;
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court rulings in the United States generally create binding precedent, but this is generally not the case in other countries; and potential difficulties enforcing judgments abroad.
The characteristics of a typical international arbitration, on the other hand, include: x x x x x the lack of the right to an appeal; a flexible process that may be tailored by the parties to best suit their needs (including as to the language of the arbitration); a process that can be significantly faster than litigation; greater costs to initiate the process compared to litigation, but often lower costs to see it through to conclusion; fewer technical procedural requirements are needed to initiate the process (e.g., no service of process or jurisdiction requirements); the ability to select arbitrators with specific qualifications, which may result in a more appropriate or practical resolution; the same counsel may be used in almost every forum; the process is generally confidential; discovery is generally not available unless the parties specifically agree to it; awards are often easier to enforce abroad than court judgments; and potential difficulties in obtaining emergency relief on an urgent basis.
x x x x x x
Some of the drawbacks of litigation can be addressed in the dispute resolution clause itself. For example, the parties can consent expressly to jurisdiction in a particular court and an agent for purposes of accepting service of process. The parties can also empower the court to award
attorneys fees. Unfortunately, no matter how carefully the parties draft the clause, nothing in the agreement can force a court to act more quickly or enable a judgment to be more enforceable in another country. Arbitration, on the other hand, is extremely flexible in that the parties are generally free to craft almost any process they want, including one that balances the parties competing concerns as to how disputes should be resolved based on experience in their home countries. As such, a crossborder transaction involving parties from different countries presents a compelling argument for arbitration over litigation because the parties likely come to the table with different rules and expectations for litigation. Some of the key elements to consider when drafting the dispute resolution clause in a cross-border transaction are discussed below.
4.
Enforcement of Judgments and Awards
One of the most unique issues in cross-border disputes relates to the uncertainty surrounding the enforcement of foreign country judgments or arbitration awards. While parties may more easily appeal a court judgment in the jurisdiction in which it was rendered, some countries will not enforce the judgments of foreign courts, including those of the United States. Several European conventions exist, including the Brussels and Lugano Conventions, regarding the recognition of court judgments within and among various signatory countries; however, the United States is not a party to any convention or any other treaty providing for the enforcement of judgments rendered by foreign courts. Nevertheless, the courts of the United States are generally more receptive to the enforcement of foreign court judgments than are the courts of most other countries. Accordingly, a US judgment is less likely to be enforced abroad, while US courts are often more inclined to enforce a judgment rendered by a foreign court. On the other hand, the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (commonly referred to as the New York Convention), which more than 130 countries have signed, including the United States, has made arbitral awards significantly easier to enforce across international borders. Thus, unless enforcement
will occur in the same jurisdiction in which the dispute is decided, a US plaintiff is typically better off choosing arbitration in a cross-border transaction in order to increase the likelihood that it will be able to enforce a decision should the need arise. With this understanding, once a party determines that it is more likely to be the plaintiff in significant disputes, it might be compelled to require arbitration as the mechanism for resolving disputes under the transaction agreements in order to increase the chance that an award will be enforceable in a foreign jurisdiction. Conversely, a party who is more likely to be a defendant might press for litigation in order to make it more difficult for the plaintiff to enforce a judgment. This choice should be balanced, however, by a careful consideration of the actual rules in the particular jurisdiction where enforcement will likely need to occur. The most obvious location for enforcement is the place of business of the other party; however, enforcement can be sought anywhere that the judgment debtor has assets.
5.
Delays
Just as a likely plaintiff will generally be more concerned about enforcement, the likely plaintiff will also generally be more interested in avoiding delays in resolving disputes. Delays can affect several phases of the dispute resolution process, including the length of time required for a court or arbitrator to render a judgment or award, hear and decide appeals and rule on matters of enforcement. Litigation typically takes longer than arbitration in all three phases, and these delays are generally thought to be a disadvantage for a plaintiff and an advantage for a defendant. There are, however, ways to reduce the delays associated with litigation and arbitration. For example, in litigation under most judicial systems throughout the world, proper service of process and personal jurisdiction over the parties are unavoidable prerequisites to a courts ability to hear a dispute. Without an express clause in the agreement concerning these issues, a party is likely to spend six months or more obtaining service of process on a foreign party and perhaps another six months fighting over whether the chosen court has jurisdiction or is an appropriate forum for the dispute in question. The delays and risks associated with these very
provincial litigation issues can be mitigated in a clause where the parties expressly consent to a specific jurisdiction and expressly appoint a local agent to accept service of process on a partys behalf. With arbitration the parties have the ability to potentially create a more efficient resolution process by tailoring the procedures to best fit the transaction and the anticipated disputes. For example, the parties can choose the language to be used in the arbitration proceedings, whether the arbitration should proceed under the purview of an administrative body, whether to appoint arbitrators with specific industry experience, what procedural rules will apply to the conduct of the arbitration, how much discovery is permissible, how quickly an award must be rendered and what damages are available, all within the arbitration clause contained in the transaction agreement. Whether opting for arbitration or litigation, the more the parties are able to agree on the procedural aspects during the relatively cooperative period while they are negotiating the transaction agreements, the more time and money they could save in the future should a dispute arise and the relationship turns contentious. At that point, with the haggling over procedural aspects behind them, the parties will be able to focus their efforts on resolving the underlying dispute.
6.
Discovery
Discovery is a concept that is largely unique to the US legal system. Pretrial depositions and very expansive document productions, while common in the United States, are unavailable in almost every other legal system in the world. US discovery is typically one of the most intrusive, prolonged and expensive phases of a lawsuit, but it becomes critically important if proving or defending against the potential claims requires information that is uniquely in the possession of another party (e.g., proving knowledge of a particular factual circumstance as it may be relevant to a knowledge qualifier in a representation contained in the principal transaction agreement). While US courts provide an obvious forum in the event pre-trial discovery is necessary, the parties are generally free to agree on a procedure for discovery in the context of arbitration. If the arbitration
clause is silent as to discovery, the availability of discovery will largely depend on the arbitrators willingness to allow it, which will be greatly influenced by the arbitrators personal experience. Generally, US arbitrators tend to permit discovery and non-US arbitrators do not. Regardless of the arbitrators background or inclination, however, if the parties specifically provide for discovery in the applicable dispute resolution clause, the arbitrators must allow it.
7.
Costs
Litigation is often thought to be more expensive than arbitration, but outside the United States where legal systems do not permit discovery or jury trials, the cost to litigate can be much more in line with the cost to arbitrate. Even if the overall legal expenses are less, no one selecting arbitration should be confused into thinking that arbitration will be cheap. International arbitration has become a highly advanced and sophisticated dispute resolution mechanism and the arbitrators, or one sides counsel, can independently cause fees to increase significantly if, for example, discovery is permitted as part of the arbitration. Moreover, certain arbitration organizations charge significant up-front fees and many arbitrators require significant advance payments, which can make it very costly just to begin the dispute resolution process. While these up-front costs can be a drawback, they can also provide a strategic benefit to the would-be defendant by deterring the other party from filing some or all of their potential claims. When evaluating the relative costs of the dispute resolution mechanisms, a party to a cross-border transaction should also consider whether the default rule of the applicable forum is that the loser pays the winners legal fees or whether each side pays its own fees. In the arbitration context, the default rules of most international arbitration associations specifically empower the arbitrators to award arbitration expenses, including attorneys fees, as part of the final award. By contrast, the general default rule for arbitrations conducted in accordance with US rules is for each side to be responsible for their own legal fees regardless of who prevails. Similarly, in the litigation context, the general default rule in the United States is that the parties pay their own legal fees, whereas in Europe the general default rule is that the loser pays.
Accordingly, the default rules can be a significant deterrent to a partys ability to bring a claim. Depending on which side of the dispute a party is more likely to find itself, that party may be inclined to contract around the applicable default rule by including an express provision in the dispute resolution clause as to the responsibility for payment of legal fees.
8.
Confidentiality
As in the domestic context, another significant concern for many parties to cross-border transactions is preserving confidentiality, both with respect to the dispute itself and with respect to the components of the underlying transaction. Often the parties will have entered into a confidentiality agreement or will include a confidentiality clause within the main transaction agreement that prevents the parties from disclosing the transaction and any proprietary information shared in connection with it. Litigation in the United States, Europe and Asia is a public process, however, so these clauses can lose much if not all of their intended effect during the course of litigation. While the parties might be able to preserve the confidentiality of some documents produced during the discovery process, most of the documents will become publicly available information. The trial itself and the judgment will also typically become a matter of public record. Arbitration, on the other hand, is generally a private process and the parties are typically free to agree among themselves to keep documents, the proceedings and the award confidential. In addition, the laws governing the arbitration process in many countries, including England, as well as the rules of many arbitration organizations, actually require arbitration hearings to be kept private unless the parties agree otherwise. While several laws and arbitration rules require the institution and the individual arbitrators to maintain confidentiality, very few of these rules provide for similar restrictions on disclosure by the parties to the arbitration. Accordingly, if the parties desire, they could expressly tailor their arbitration clause to provide for the confidentiality of the arbitration proceeding and everything disclosed in connection with it. In evaluating whether to expressly provide for this type of confidentiality, the parties should also consider the powerful effect of negative publicity (including
the threat of it) as that can sometimes weigh in favor of avoiding confidentiality.
9.
Interim Relief
As in domestic transactions, cross-border transactions often present situations in which one party may require immediate relief at the outset of a dispute in order to prevent irreparable harm. This interim relief may take the form of a temporary restraining order or a preliminary injunction and it may be necessary to protect a partys intellectual property or to preserve assets, evidence or other rights that are essential to a partys business. The courts of most jurisdictions have well-established procedures to both facilitate the adjudication of requests for interim relief and to impose the necessary relief immediately. Even so, the parties should consider expressly providing for the right to bypass any preliminary requirement to negotiate or seek mediation in the event emergency relief is necessary. In arbitration, on the other hand, the matter is significantly more complicated. While many arbitration organizations are starting to adopt rules for granting interim relief, the parties must agree to special procedures and those procedures are not very tested yet. Further, there is a delay associated with the selection of the arbitrators. If there is no arbitral tribunal in place at the time a party requires interim relief, that party may have little other recourse than to head to the courts to seek interim relief, particularly if an arbitration on the merits will be practically meaningless absent interim protection. Certain national arbitration laws as well as the arbitration rules of certain organizations, including the International Centre for Dispute Resolution and the International Chamber of Commerce, expressly provide that a party may go to the local courts to seek interim relief without waiving or otherwise affecting the ongoing obligation to arbitrate. If the applicable arbitration rules do not provide this right, the parties could expressly provide for it in their arbitration clause. This is yet another example of why it is important to understand the rules selected and the arbitration law of the chosen forum when opting for arbitration in a cross-border transaction. This consideration is even more critical in the arbitration
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setting given that the orders of an arbitral tribunal granting interim relief may be difficult to enforce abroad.
10.
Damages
Another important reason why parties select arbitration over litigation, especially non-US parties, is to avoid the possibility of excessive damages. That said, punitive damages, as well as other undesirable or speculative damages can be specifically excluded in most dispute resolution clauses, whether litigation or arbitration is the chosen mechanism. While punitive damages are against the public policy of most non-US jurisdictions, some US jurisdictions, including the state of New York, and some arbitral rules, including those of the International Centre for Dispute Resolution, prohibit arbitrators from awarding these types of damages as well. In order to ensure that the arbitrators adhere to any contractual limitations on damages, the parties may expressly state in the arbitration clause that the arbitrators have no authority to render an award in excess of the limitations provided for in the agreement. This type of express link to the scope of the arbitrators authority should give the parties stronger grounds for vacating any award that is inconsistent with the limitations on liability provisions.
11.
Choice of Law
While choice of law provisions are not always housed in the dispute resolution clause, in practice they are frequently negotiated in connection with the forum selection provision of the dispute resolution clause. Often, the parties will trade these two terms, with one party settling for the forum of its choice and the other settling for its desired choice of law. In the context of arbitration, however, the forum of the arbitration is often much more valuable than the choice of law. This is so because most disputes in the transaction setting tend to relate to breach of contract claims and contract law is relatively consistent from one country to the next. True, procedural laws and the quality of the courts can vary significantly from country to country. However, the selected forum for arbitration will have significant impact on the arbitrator pool, the
procedures to be applied to the arbitration itself, how much the local courts can interfere, and the grounds for vacating or appealing an award.
12.
Multiple Parties
Disputes involving multiple parties are common. A supplier, a contractor and the owner might have related disputes, or the parent and local entities could be involved in a dispute with a third party. Most jurisdictions have procedural rules that govern the involvement of multiple parties in the litigation context. However, since arbitration is governed by contract, it is not as easy to bring in a third party, especially when that third party is not a signatory to the arbitration agreement. The most troubling aspect of the multiple party arbitration dilemma occurs when one party has an arbitration agreement in its contract with party A and a different arbitration provision in its contract with party B. While some courts may order consolidation when the disputes are related, more often than not, the party will have to arbitrate against A and B separately. Not only could this lead to additional expenses, but it also raises the risk of inconsistent awards. The solution to this dilemma is to ensure consistency among disputes provisions and to expressly provide for consolidation of arbitrations. When a cross-border transaction involves multiple parties or multiple agreements, care should be taken to include the same disputes clause in each of the agreements. The following is an example of the type of language that is sometimes included to effectuate consolidation when necessary: Arbitration proceedings under this agreement may be consolidated with arbitration proceedings pending between other parties if the arbitration proceedings arise from the same transaction or relate to the same subject matter. Consolidation will be by an order of the arbitrator in any of the pending cases or, if the arbitrator fails to make such an order, the parties may apply to any court of competent jurisdiction for such an order.
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Where consolidated arbitration proceedings are a possibility, the parties should also ensure that the applicable rules address the methodology for the selection of arbitrators or include an express provision to that effect within the agreement. This precaution will prevent the inevitable conflict created when one or more parties feels left out of the arbitrator selection process. Again, dispute resolution clauses very rarely need to become a central focus in cross-border negotiations, and they seldom need to become complicated or long. However, careful attention to the dispute resolution clause at the drafting and negotiation stage, particularly with respect to the issues of cost, delay and the potential impact on the intended allocation of risk between the parties, could prove strategically advantageous if and when a dispute does arise.
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Cross-Border Transactions Handbook Appendix 2.1 Acquisitions Flowchart
APPENDIX 2.1
ACQUISITIONS FLOWCHART
Cross-Border (Multi-Jurisdictional) Mixed (Asset & Share) Acquisition Buyer
Process Flow Overview

Letter of Intent Prepare for Acquisition Review
Initiate Transaction
Confidentiality Agreement
Acquisition Review
Analyze and Research
Analysis and Certain Filings
Draft Purchase and Ancillary Agreements
Prepare for Negotiations
Draft Disclosure Schedules
Finalize Disclosure Schedules
Sign Definitive Agreements
Further Regulatory Filings
Complete Implementing Documents
Finalize and Close the Transaction
Key:
Process Step
Decision
Document
Predefined Process
End
Terminate Transaction
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B&M Coordinating Office
Determine who the Client is and who the Seller and Target are
Gather Information about Transaction
Conduct Conflict Check & issue Conflict Alert

Establish Ethical Screen
B&M Local Offices & Correspondents
Answer Affects: - Conflict Check and possible Waiver - Confidentiality Agreement - Letter of Intent
Information to Gather: - Name of Seller, Target, Buyer and other parties or Advisors (e.g., investment bankers, lenders) - Reason for Deal - General Business Information If Conflict, - Jurisdictions in which Send Conflict Waiver Letter Client located to Client and Seller Target located - Scope of Engagement - Structure - Timeline
Yes
Client
Client Contacts B & M about a Transaction
Provide Information about Transaction
Conflict Waiver Letter
Conflict Waiver Signed?
No
Seller's Counsel
Seller
Conflict Waiver Letter
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Initiate Transaction
Confidentiality Agreement
Prepare Preliminary Working Group List
Review Confidentiality Agreement
Preliminary Working Group List
Client
Negotiate If Necessary
Sign Confidentiality Agreement
OR
Seller's Counsel
OR
Seller
Prepare and Send Confidentiality Agreement
Sign Confidentiality Agreement
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Letter of Intent
No
Letter of Intent Required?
Yes
Collect information on Target & Draft Letter of Intent
Draft Letter of Intent
Send Letter of Intent
Send Letter of Intent for Signature
Destroy or Return Information & Documents
Letter of Intent Information: - Names and Jurisdiction of Target, Seller, and Buyer - Shareholders/Capital Structure - Transaction Structure - Purchase Price/ Consideration - Payment of Purchase Price/Consideration - Conditions to Closing - Key Employees - Timeline/Duration
Review & Revise
Negotiate
Client
Provide information on Target and Terms for Draft Letter of Intent
Draft Letter of Intent
Sign Letter of Intent
OR
Seller's Counsel
Review Letter of Intent
Request Destruction or Return of Information & Documents
OR
Seller
Sign Letter of Intent
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Prepare for Acquisition Review
Acquisition Review Analyze and Research
Finalize Working Group List
Send Working Group List
Prepare Transaction Description and Relevant Matrices

Acquisition Review Buyer
Prepare and Send Instructions to Local Legal Advisors

Determine Acquisition Vehicle(s)
Identify & Analyze Legal, Tax and Business Concerns
Coordinate
Prepare Working Group List
Working Group List

Local Legal Advisors
Corporate Organization Chart Employment/Labor Matrix Group Summary Matrix Real Property Matrix Regulatory Matrix Instructions to
Coordinate & Conduct
Coordinate & Conduct
Acquisition Review Buyer
Determine Acquisition Vehicle(s)
Coordinate
Coordinate
Client
Working Group List
Baker & McKenzie Deal Team: - Antitrust/Competition - Banking - Benefits, Employment & Labor - Corporate/Compliance - Environmental - Intellectual Property, IT - Litigation - Real Estate - Tax - Other Practice Groups and offices
Seller's Counsel
Working Group List
Coordinate
Seller
Working Group List
Client Deal Team: - Business Development - Environmental/Facilities - Finance - Human Resources & Employee Benefits - Intellectual Property, IT - Investment Bank - Legal Department - Operations - Real Estate - Regulatory - Risk Management - Tax/Accounting - Others
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Analysis and Certain Filings
No
Gather Information for Regulatory and Labor Analysis
Identify and Analyze Regulatory and Labor Issues

Any Regulatory Filing Necessary?
Determine need for any POA for Regulatory or other purposes. Prepare & arrange for Signature, Notarization, Localization and/or Apostille
Coordinate Regulatory Filings
Identified Jurisdictions for Transaction OR Pick-List of all Countries
Coordinate
Plan & Organize
Yes
Yes
Coordinate
Determine need for any POA for Regulatory or other purposes. Prepare & arrange for Signature, Notarization, Localization and/or Apostille
Prepare & Make Regulatory Filings
Gather Relevant Information: Coordinate - Worldwide Sales - Destination Sales - Employee Headcount/Labor Data Identify and - Gross Assets (book) Value Analyze - Market Shares Regulatory and - Compliance Information Labor Issues - Corporate Structure - Change of Control - Plant/Warehouse Locations - Investment or other Government Incentive Grants Coordinate - Industry Specific Regulations
Coordinate
Client

File Notification at this time?
Sign POA and arrange for Notarization, Localization and/or Apostille, as appropriate
No
Coordinate
Coordinate
Seller's Counsel
Coordinate
Coordinate
Seller
Make Regulatory Filings
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Prepare for Negotiations
Prepare Document List
Purchase and Ancillary Agreements
Master Documents: - Purchase Agreement - Assignment and Assumption Agreement - Business Transfer Agreement Form - Escrow Agreement (Indemnification) - Intellectual Property Transfer Documents - Release - Employee Benefits Allocation Agreement - Employment Agreement - Consulting Agreement - Noncompetition Agreement - Transitional Services Agreement - Transitional Intellectual Property License
Review & Revise
Review & Prepare for Negotiations
Client
Seller's Counsel
Receive Purchase and Ancillary Agreements
Review Purchase and Ancillary Agreements
Review & Revise
Seller
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Draft Disclosure Schedules

Finalize Disclosure Schedules
Receive Draft Seller Disclosure Schedules
Prepare Draft Buyer's Disclosure Schedules

Destroy or Return Acquisition Review Documents
Compare Documents
Prepare Final Buyer's Disclosure Schedules
- Draft Disclosure Schedules - Acquisition Review - Seller's Representations in Purchase Agreement
Coordinate
Negotiate, Revise & Finalize
Yes
Compare Documents
Review, Revise & Finalize
Client

Negotiations Successful?
No
Buyer's and Seller's Disclosure Schedules
Review, Revise & Finalize
Seller's Counsel
Prepare Seller Disclosure Schedules
Receive Draft Buyer's Disclosure Schedules
Request Destruction or Return of Acquisition Review Documents
Prepare Final Seller's Disclosure Schedules
Seller
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Further Regulatory Filings
No
Sign Definitive Agreement
Complete Implementing Documents
Definitive Purchase and Ancillary Agreements
Any Further Regulatory ("PreMerger") Filing or Labor Notification Required at this Time?
Yes
Identify and Analyze Regulatory and Labor Notification Issues

Complete & Make Regulatory Filings and Labor Notifications
Coordinate
Coordinate
- Shareholders - Directors - Other 3rd Parties
Under Negotiated Structure / Obtain Missing Information

Coordinate
Coordinate
Client
Obtain Approvals Required for Signing
Seller's Counsel
Coordinate Regulatory Filings and Labor Notifications with Buyer's Counsel
Coordinate
Coordinate
Seller
Obtain Approvals Required for Signing
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Finalize and Close the Transaction
Acquisition Vehicle(s)
Plan & Organize
Plan & Organize
Simultaneous Sign & Close
Client
Simultaneous or Bifurcated Close
END
Bifurcated Sign & Close
Seller
Seller's Counsel
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Acquisition Review - page 1 of 1
No
Conduct Public Records Search & obtain any Seller Acquisition Review Report
Draft Acquisition Review Request
Prepare and Send Acquisition Review Instructions to Local Advisors

Acquisition Review Adequate?
Analyze Response, Prepare & Coordinate Preliminary Acquisition Review Report
Review Draft Seller Disclosure Schedules
Final Acquisition Review Report
Coordinate
Review & Revise
Coordinate
Conduct Public Records Search
Negotiate Scope, Revise & Finalize
Acquisition Review Instructions
Analyze Response & Prepare Preliminary Acquisition Review Report
Review & Revise
Negotiate
Coordinate
Client
Draft Acquisition Review Request

Preliminary Acquisition Review Report
Final Acquisition Review Report
Yes
Seller's Counsel
Review Draft Acquisition Review Request
Prepare Response to Acquisition Review Request
Prepare Draft Disclosure Schedules & Send to Buyer's Counsel

Coordinate
Coordinate
Seller
Review Draft Acquisition Review Request
Prepare Response to Acquisition Review Request
Send Response to Acquisition Review Request to Buyer's Counsel
Prepare Draft Disclosure Schedules & Send to Buyer's Counsel
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Simultaneous Sign and Close - page 1 of 2
Prepare Closing Checklists
Prepare, Review and Revise Local Closing Documents

Local Closing Documents
Coordinate
Coordinate
B&M Local Office & Correspondents
Compare & Finalize
Coordinate
Documents: - Business Transfer Agreements - Share Transfer Documents - Other Required Transfer Documents Coordinate - Board/Shareholder Authorizing Resolutions - Letter Offering or Confirming Transfer or Continuation of Employment - Powers of Attorney Prepare, Review - Good Standing Certificates or Nearest Equivalent and Revise Local - Officer's Certificates Regarding: Closing Charter Documents Documents Corporate Approvals Incumbency - Resignation of Officers and Directors, if necessary - Charter Amendments - Name Change Filings, if necessary Coordinate Negotiate - Registration of Trade Name Forms Revise & Finalize - VAT Invoices - Tax Certificates
Client
Review Local Closing Documents
Seller's Counsel
Closing Checklist: - Share Purchase Agreement - Share Transfer Documents - Promissory Note - Guarantee - Letter of Credit - Security Agreement - Financing Agreement - Escrow Agreement (Indemnification) - Intellectual Property Transfer Documents - Employment Agreement - Consulting Agreement - Noncompetition Agreement - Regulatory Approvals/Clearances - Labor Notifications - Third Party Consents - Lease/Sublease - Novation Agreement - Transitional Services Agreement - Transitional Intellectual Property License - Legal Opinions - Shareholders Consent or Minutes of Meeting and/or Directors Consent or Minutes of Meeting - Disclosure Schedules/Letter - Bring-Down Certificate - Good Standing Certificates or Nearest Equivalent - Officer's Certificates Regarding: Charter Documents Corporate Approvals Incumbency - Resignation of Officers and Directors, if necessary - Corporate Books and Records - Charter Amendments - Name Change Filings, if necessary - Registration of Trade Name Forms - Closing Sequence and Flow of Funds Memorandum - Payment of Seller's Debt - Payment of Purchase Price - Share Certificates, if any - Tax Certificates
Coordinate
Coordinate
Seller
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Simultaneous Sign and Close - page 2 of 2
Prepare Execution Copies of Purchase & Ancillary Agreements

Prepare and Assemble Other Closing Deliveries
Post Closing Action Items
Manage Signing and Closing of the Transaction
Coordinate and Make Regulatory Filings and Labor Notifications, if Necessary
Coordinate
Coordinate
Coordinate
Close the Transaction
Make Regulatory Filings and Labor Notifications, if Necessary
Coordinate
Client
Review Closing Documents
Sign and Close the Transaction
Seller's Counsel
Coordinate
Seller
Sign and Close the Transaction
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Bifurcated Sign and Close - page 1 of 3
Necessary if, Regulatory Filings or Labor Notifications required and not previously filed or made based on Letter of Intent
Coordinate
Yes
Yes
Yes
Coordinate
Client
Sign Purchase Agreement and Do Not Close
Closing Conditions Fulfilled by Closing Date?
No
Waive Closing Conditions?
No
Closing Conditions Fulfilled By Termination Date?
No
Seller's Counsel
Buyer's Closing Conditions: - Required Government Authorizations Obtained? - Financing Obtained? - Buyer Satisfied with Acquisition Review? - Required Regulatory Approvals/Clearances Obtained? - Required Labor Notifications Made? - Required 3rd Party Consents Obtained? - Accuracy of Seller's Representations - Seller's Performance of Pre-Closing Covenants - No Proceedings - No Conflict with Legal Requirements or Orders
Request Destruction or Return of Acquisition Review Documents
Coordinate
Seller
Sign Purchase Agreement
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Coordinate
Coordinate
Compare & Finalize
Coordinate
Documents: - Business Transfer Agreements - Share Transfer Documents - Other Required Transfer Documents Coordinate - Board/Shareholder Authorizing Resolutions - Letter Offering or Confirming Transfer or Continuation of Employment - Powers of Attorney Prepare, Review - Good Standing Certificates or Nearest Equivalent and Revise Local - Officer's Certificates Regarding: Closing Charter Documents Documents Corporate Approvals Incumbency - Resignation of Officers and Directors, if necessary - Charter Amendments Coordinate - Name Change Filings, if necessary Negotiate - Registration of Trade Name Forms Revise & Finalize - VAT Invoices - Tax Certificates
Client
Seller's Counsel
Closing Checklist: - Share Purchase Agreement - Share Transfer Documents - Promissory Note - Guarantee - Letter of Credit - Security Agreement - Financing Agreement - Escrow Agreement (Indemnification) - Intellectual Property Transfer Documents - Employment Agreement - Consulting Agreement - Noncompetition Agreement - Regulatory Approvals/Clearances - Labor Notifications - Third Party Consents - Lease/Sublease - Novation Agreement - Transitional Services Agreement - Transitional Intellectual Property License - Legal Opinions - Shareholders Consent or Minutes of Meeting and/or Directors Consent or Minutes of Meeting - Disclosure Schedules/Letter - Bring-Down Certificate - Good Standing Certificates or Nearest Equivalent - Officer's Certificates Regarding: Charter Documents Corporate Approvals Incumbency - Resignation of Officers and Directors, if necessary - Corporate Books and Records - Charter Amendments - Name Change Filings, if necessary - Registration of Trade Name Forms - Closing Sequence and Flow of Funds Memorandum - Payment of Seller's Debt - Payment of Purchase Price - Share Certificates, if any - Tax Certificates
Coordinate
Coordinate
Seller
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Prepare Execution Copies of Ancillary Agreements

Manage Closing of the Transaction
Coordinate
Coordinate
Coordinate
Coordinate
Client
Seller's Counsel
Coordinate
Seller
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Cross-Border Transactions Handbook Appendix 3.1 Budget Template
APPENDIX 3.1
BUDGET TEMPLATE
Fee Estimate Auction Setting (Initial Phase of Project)
1.
Environmental/ Health/ Safety Real Estate/ Labor/ IP1 Property/ Employee Leases Benefits Credit Tax & 2 Finance
Review of Data Room Materials

Litigation/ Regulatory/ Insurance Trade Compliance Other areas Total per Country
Country
Corporate Commercial (Customers/ Suppliers/ Distributors etc.)
Primary Jurisdictions3 [country] [country] Secondary Jurisdiction4 [country] [country] Other Jurisdictions5 TOTAL
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Cross-Border Transactions Handbook Appendix 3.1 Budget Template
2.
Prepare Supplemental Request Lists
Included in 1.
3.
Prepare Report (regarding findings/open issues associated with 1 and 2)6
Included in 1.
4.
Assistance with Preparation of Initial Bid
Total of $___________.
5.
Assess Regulatory/Merger Control Filing Requirements7
Total of $___________.
6.
Expenses
Approximately ____% of fees.
7.
Summary of amounts: $ __________ __________ __________ __________ $ __________
a.
Diligence (including Report):
b.
Assistance with bid:
c.
Regulatory assessment
d.
Expenses (approximate):
TOTAL:
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Cross-Border Transactions Handbook Appendix 3.1 Budget Template (footnotes)
___________________
Generally, we would not propose undertaking a detailed review of every patent and trademark registered around the world in the initial phase of the investigation in the auction setting. Instead, we would typically propose working closely with the clients internal team to focus the review on the targets pattern of, and procedures for, the protection of its intellectual property rights and the more material items of IP, along with any related license agreements, litigation, etc. The fee estimate would reflect only this initial, limited IP investigation. 2 Often, the clients internal team will review the detailed terms of the targets financing documents, particularly those at the parent level. If the bid is structured on a debt free basis, we would typically propose focusing on change in control triggers (and applicable penalty payments) in the credit documents at the local level, along with any liens or security interests. 3 The primary jurisdictions would generally be those in which the target owns or leases manufacturing or assembly facilities, generates a material level of sales or has established a holding company for material subsidiaries and/or IP. 4 The secondary jurisdictions would generally be those jurisdictions in which the target has less significant sales and service facilities. Due to the limited nature of information that is typically included in the offering memorandum with respect to secondary jurisdictions, these figures would be more of a rough estimate, with some of the secondary jurisdictions likely to be above, and others likely to be below, that figure. A jurisdiction which would otherwise be categorized as secondary might move to the primary category (at least for IP purposes) if an R&D facility is located in that jurisdiction. 5 A catch-all is often included, for example, if the offering memorandum references other jurisdictions where the target markets, sells or services its products, often through agents or distributors, but detailed information as to the nature of the activities in those jurisdictions is lacking. 6 The structure and nature of the report (e.g., whether a full legal review, exceptions only or some combination) would be discussed with the client. However, for purposes of the initial diligence phase in the auction setting, the report often takes the form of an executive summary (highlighting major value drivers and possible liability issues) as this is likely to be of most assistance in informing and finalizing the clients next bid. 7 Where applicable, this would include investigating substantive issues and possible counter arguments to assist with final bid preparation.
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Cross-Border Transactions Handbook Appendix 5.1 Confidentiality Agreement Checklist
APPENDIX 5.1 CONFIDENTIALITY AGREEMENT CHECKLIST

x x x x x x x x x x x x x Definition of Confidential Information. Restricted use and nondisclosure obligations. Nondisclosure of transaction and content of negotiations. Legal compulsion to disclose confidential information. Disclosing party contacts (to control the lines of communication). Non-solicitation provisions. Return or destroy obligations with respect to the confidential information. Attorney work product and attorney-client privilege. No obligation to negotiate definitive agreement. No representations or warranties with respect to information provided. Data protection and privacy restrictions. Remedies. Governing law.
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Cross-Border Transactions Handbook Appendix 5.2 Letter of Intent Checklist
APPENDIX 5.2 LETTER OF INTENT CHECKLIST

x x Parties. Clear and unambiguous statement as to whether the letter or specific clauses are intended to be legally binding (the parties should be cognizant of the effect of local laws in this regard). Description of the terms of the proposed transaction, including: A description of the target and whether shares or assets and any liabilities are being acquired; Price and/or pricing formula, and adjustments to the price in certain circumstances (e.g., adverse findings in due diligence and/or by reference to relevant financial measures1 based on closing financial statements); Other buyer-favorable protections such as an escrow or holdback of a certain part of the purchase price to secure future indemnification or adjustment payments;2
Description of expectations as to the timing of the diligence process (including the level of access and communication channels), signing, satisfaction of conditions and/or closing. Conditions precedent. These may include: Governmental and regulatory consents or approvals; No material adverse change in the target business;
The terminology used in the letter of intent with respect to financial matters should conform to local usage, both corporate and accounting. 2 The need for an escrow or alternative means of securing the sellers payment obligations (e.g., a bank guaranty) will depend upon an evaluation of several factors, including the size of the parties (particularly the seller), the availability of efficient legal remedies in the event that the seller fails to pay and any setoff rights that the buyer may have.
Cross-Border Transactions Handbook Appendix 5.2 Letter of Intent Checklist
No law, order or legal proceeding challenging the transaction; Board and/or shareholder approval;3 Accuracy of representations and warranties at closing; The buyer having obtained financing; and Entry into certain ancillary agreements (e.g., employment agreements with key personnel, short- or long-term service agreement, supply contract or transition services agreement).
x x x x x x x x
General description of the level of representations and warranties to be included in the definitive agreements. Description of any non-compete/non-solicitation covenant required from the seller. Exclusivity. Break fee. Confidentiality (particularly if no earlier confidentiality agreement exists). Termination date for negotiations and any obligations (such as confidentiality) that survive termination. Costs and expenses (including transfer taxes). Governing law.
The inclusion of board approval and/or satisfactory completion of diligence leaves considerable discretion with the buyer and may be regarded as void in certain jurisdictions or, at the very least, may be objected to by the seller as converting the definitive agreement into an option.
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Cross-Border Transactions Handbook Appendix 8.1 Employee Transfers/Benefits Checklist
APPENDIX 8.1 BUYERS INTERNATIONAL HR CHECKLIST FOR NON-US EMPLOYEE TRANSFERS AND BENEFITS
1. Pre- Signing
Jurisdictions
Identify each jurisdiction where the buyer will assume or hire employees, whether at closing or subsequently, and consider alternatives where the buyer does not currently have a presence.
Transfer of Employees
Identify all employees who will be assumed or offered employment by the buyer, including employees who work less than 100% of their time in the target business. For each jurisdiction, determine whether employees will be automatically assumed by operation of law (and with which benefits), or whether employees must be offered new employment by the buyer, and if so, when and upon what terms the offer must be extended. In those jurisdictions where employees must be offered new employment by the buyer, or have a right to object to their transfer by operation of law, negotiate with the seller whether the buyer or the seller will be responsible for local severance liabilities and termination indemnities payable to those employees who do not accept the buyers offer of employment, or object to the transfer. For each jurisdiction, determine whether any notification to, or consultation with, the employees, any works council or other entity is required. For each jurisdiction, determine with the seller the mechanics for, and the content of, notice to employees of the proposed transaction.
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Review employment agreements and collective bargaining or other labor agreements for unusual terms or conditions and any provisions triggered by the proposed transaction.
Employee Benefit Plans
Identify all employee benefit plans covering employees who will be assumed by operation of law by the buyer or who will be offered employment by the buyer. With respect to each such employee benefit plan, determine: annual employer contributions, if any, and whether those contributions are current; whether assets are set aside to fund or finance the employee benefit plan obligations, and if so, whether the plan is fully funded and whether the assets appear on the targets balance sheet; whether the buyer will assume the employee benefit plans or be required to establish mirror or similar plans to cover the employees; whether there will be a transfer of seller-owned assets or insurance policies to fund or finance the employee benefit plan obligations at closing; and whether the buyer must take any other action with respect to the plans prior to closing.
Assess equity compensation plans, including change in control provisions and tax and securities consequences arising from the transaction.
Purchase Agreement
Negotiate with the seller the necessary employee and employee benefits representations and warranties, indemnities, covenants, schedules and other language. If employees are to remain covered by the sellers employee benefit plans after closing for a period of time, negotiate with the seller the terms of an appropriate transitional services arrangement.
2.
After Signing/Pre-Closing
Transfer of Employees
In those jurisdictions where the buyer does not currently have a presence, determine who will be the employer of assumed or hired employees. Effect notifications to and conduct consultations/negotiations with employees, works councils and labor unions concerning the transfer of employees and employee benefit plans, where necessary. To the extent necessary, retain employee benefit consultants to advise on equivalent terms of employment and integration of assumed employee benefit plans with the buyers employee benefit plans. For those jurisdictions in which formal offers of employment must be extended, extend those offers on the part of the buyer.
Employee Benefit Plans
x x
Determine which benefit plans will transfer at closing and take any action necessary to effect their transfer. Comply with applicable securities and tax rules and prospectus delivery requirements with respect to equity-based compensation plans. Determine the extent to which transitional assistance by the seller will be needed and arrange for same. Commence steps to implement the transfer after closing of those plans to be transferred subsequent to closing.
x x
3.
x x
Post-Closing
Complete the transfer of assumed employee benefit plans. Establish new employee benefit plans to provide benefits not otherwise covered by assumed employee benefit plans.
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x x
Memorialize new and/or converted equity awards and integrate those awards into existing stock plan administration. Ensure on-going legal and regulatory compliance.
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Cross-Border Transactions Handbook Baker & McKenzie offices worldwide
BAKER & McKENZIE OFFICES WORLDWIDE

ARGENTINA - BUENOS AIRES Baker & McKenzie Sociedad Civil Avenida Leandro N. Alem 1110, Piso 13, 1001AAT Buenos Aires, Argentina Telephone: +54 11 4310 2200; 5776 2300 Facsimile: +54 11 4310 2299; 5776 2399 AUSTRALIA MELBOURNE Baker & McKenzie Level 39 Rialto 525 Collins Street Melbourne, Victoria 3000 Postal Address: GPO Box 2119T Melbourne, Victoria 3001 Telephone: +61 3 9617 4200 Facsimile: +61 3 9614 2103 AUSTRALIA SYDNEY Baker & McKenzie Level 26, A.M.P. Centre 50 Bridge Street Sydney, N.S.W. 1223 Postal Address: P.O. Box R126, Royal Exchange Sydney, NSW 1223 Melbourne, Victoria 3001 Telephone: +61 2 9225 0200 Facsimile: +61 2 9225 1595 AUSTRIA VIENNA
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BRAZIL BRASILIA Trench, Rossi e Watanabe Advogados SCN Q.04 - Bloco B - Sala 503 B Centro Empressarial Varig 70714 900 Braslia, DF, Brazil Telephone: +55 61 2102 5000 Facsimile: +55 61 327 3274 BRAZIL PORTO ALEGRE Trench, Rossi e Watanabe Advogados Avenida Borges de Medeiros, 2233 4 andar - Centro 90110 150 Porto Alegre, RS, Brazil Telephone: +55 51 3021 1900 Facsimile: +55 51 3021 1901 BRAZIL RIO DE JANEIRO Trench, Rossi e Watanabe Advogados Av. Rio Branco, 1 19 andar, Setor B Centro Empresarial International Rio 20090 003 Rio de Janeiro, RJ, Brazil Telephone: +55 21 2206 4900 Facsimile: +55 21 2206 4949 BRAZIL SAO PAULO Trench, Rossi e Watanabe Advogados Av. Dr. Chucri Zaidan, 920, 13 andar, Market Place Tower I 04583 904, So Paulo, SP, Brazil Telephone: +55 11 3048 6800 Facsimile: +55 11 5506 3455
CANADA CALGARY Baker & McKenzie LLP Suite 2600 Bow Valley Square 3 255 Fifth Avenue SW Calgary, Alberta T2P 3G6 Canada Telephone: +1 403 444 9363 Facsimile: +1 403 444 9373 CANADA TORONTO Baker & McKenzie LLP BCE Place 181 Bay Street, Suite 2100 P.O. Box 874 Toronto, Ontario M5J 2T3 Canada Telephone: +1 416 863 1221 Facsimile: +1 416 863 6275 CHILE SANTIAGO Cruzat, Ortzar & Mackenna Ltda Nueva Tajamar 481 Torre Norte, Piso 21 Las Condes, Santiago, Chile Telephone: +56 2 367 7000 Facsimiles: +56 2 362 9875; 362 9876; 362 9877; 362 9878 CHINA BEIJING Baker & McKenzie LLP Suite 3401,China World Tower 2 China World Trade Center 1 Jianguomenwai Dajie Beijing 100004 Peoples Republic of China Telephone: +86 10 6535 3800 Facsimile: +86 10 6505 2309; 6505 0378
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CHINA HONG KONG SAR Baker & McKenzie 14th Floor, Hutchison House 10 Harcourt Road, Central Hong Kong SAR Telephone: +85 2 2846 1888 Facsimiles: +85 2 2845 0476; 2845 0487;2845 0490 CHINA - SHANGHAI Baker & McKenzie LLP Unit 1601, Jin Mao Tower, 88 Century Boulevard, Pudong Shanghai 200121, Peoples Republic of China Telephone: +86 21 5047 8558 Facsimile: +86 21 5047 0020 COLOMBIA BOGOTA Baker & McKenzie Bogota Avenida 82 No. 10-62, 6th Floor Bogota, Colombia Postal Address: Apartado Aereo No.3746 Bogot, D.C., Colombia Telephone: +57 1 634 1500; 644 9595 Facsimile: +57 1 376 2211 CZECH REPUBLIC PRAGUE Baker & McKenzie v.o.s. Praha City Center Klimentsk 46 110 02 Prague 1, Czech Republic Telephone: +42 236 045 001 Facsimile: +42 236 045 055
EGYPT CAIRO Helmy, Hamza & Partners/ Baker & McKenzie World Trade Center 1191 Cornich El Nil Eighteenth Floor Cairo, Egypt Telephone: +20 2 579 1801 to 1806 Facsimile: +20 2 579 1808 ENGLAND LONDON Baker & McKenzie LLP 100 New Bridge Street London EC4V 6JA, England Telephone: +44 20 7919 1000 Facsimile: +44 20 7919 1999 FRANCE PARIS Baker & McKenzie SCP 32 avenue Klber - BP 2112 75771 Paris Cedex 16, France Telephone: +33 1 4417 5300 Facsimile: +33 1 4417 4575 GERMANY BERLIN Baker & McKenzie LLP Friedrichstrasse 79-80 10117 Berlin, Germany Telephone: +49 30 2038 7600 Facsimile: +49 30 2038 7699 GERMANY DUSSELDORF Baker & McKenzie LLP Neuer Zollhof 2 40221 Dsseldorf, Germany Telephone: +49 211 311 160 Facsimile: +49 211 311 16199
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GERMANY FRANKFURT Baker & McKenzie LLP Bethmannstrasse 50-54 60311 Frankfurt/Main, Germany Telephone: +49 69 299 080 Facsimile: +49 69 299 08108 GERMANY MUNICH Baker & McKenzie LLP Theatinerstrasse 23 80333 Munich, Germany Telephone: + 49 89 552 380 Facsimile: + 49 89 552 381 99 HUNGARY BUDAPEST Martonyi s Kajtr Baker & McKenzie Attorneys at Law Andrssy t 102 1062 Budapest, Hungary Telephone: +36 1 302 3330 Facsimile: +36 1 302 3331 INDONESIA JAKARTA Hadiputranto, Hadinoto & Partners The Jakarta Stock Exchange Building Tower II, 21st Floor Sudirman Central Business District Jl. Jendral Sudirman Kav.52 53 Jakarta 12190, Indonesia Telephone: +62 21 515 5090; 515 5091; 515 5092;515 5093 Facsimiles: +62 21 515 4840; 515 4845; 515 4850; 515 4855; 515 4860; 515 4865 ITALY BOLOGNA Studio Bernini Associato a Baker & McKenzie Via Mascarella, 94-96 40126 Bologna, Italy Telephone: +39 51 240 788 Facsimile: +39 51 240 131
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ITALY MILAN Baker & McKenzie Milano StP 3 Piazza Meda 20121 Milan, Italy Telephone: +39 2 762 311 Facsimile: +39 2 762 31620 ITALY - ROME Baker & McKenzie Rome StP Viale di Villa Massimo, 57 00161 Rome, Italy Telephone: +39 6 440 631 Facsimile: +39 6 440 63306 JAPAN TOKYO The Prudential Tower, 11th Floor 13-10 Nagatacho 2-chome Chiyoda-ku, Tokyo 100 0014 Postal Address: CPO Box 1576 Tokyo 100 8694, Japan Telephone: +81 3 5157 2700 Facsimile: +81 3 5157 2900 KAZAKHSTAN ALMATY Baker & McKenzie - CIS, Limited Samal Towers, Samal-2, 14th Floor 97 Zholdasbekov Street Almaty, Kazakhstan 050051 Telephone: +7 3272 509 945 Facsimile: +7 3272 509 579 MALAYSIA KUALA LUMPUR Wong & Partners Level 41 Suite A, Menara Maxis Kuala Lumpur City Centre 50088 Kuala Lumpur Malaysia Telephone: +60 3 2055 1888 Facsimile: +60 3 2161 2919
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MEXICO CANCUN Baker & McKenzie Abogados S.C. Edificio Galeras Infinity, Piso 2 Av. Nichupt 19, Mza 2 SM 19 77500 Cancn, Q. Roo, Mxico Telephone: +52 998 881 1970 Facsimile: +52 998 881 1989 MEXICO CHIHUAHUA Baker & McKenzie Abogados S.C. Edificio Punto Alto, Piso 4 Av. Valle Escondido 5500 Fracc. Desarrollo El Saucito 31125 Chihuahua, Chihuahua Telephone: +52 614 180 1300 Facsimile: + 52 614 180 1329 MEXICO GUADALAJARA Baker & McKenzie Abogados S.C. Blvd. Puerta de Hierro 5090 Fraccionamiento Puerta de Hierro 45110 Zapopan, Jalisco, Mxico Telephone: + 52 33 3848 5300 Facsimile: + 52 33 3848 5399 MEXICO JUAREZ Baker & McKenzie Abogados, S.C. Edificio Baker & McKenzie, Piso 2 P.T de la Republica 3304, Col.Partido Escobedo 32330 Juarez, Chihuahua Postal Address: P.O. Box 9338 El Paso, Texas 79995 Telephone: +52 656 629 1300 Facsimile:+52 656 629 1399
MEXICO MEXICO CITY Baker & McKenzie, S.C. Edificio Scotiabank Inverlat, Piso 12 Blvd. M. Avila Camacho 1 Col. Polanco 11009 Mexico, D.F. Telephone: +52 55 5279 2900 Facsimile: +52 55 5279 2999 MEXICO MONTERREY Baker & McKenzie Abogados, S.C. Edificio Oficinas en el Parque Torre I Piso 10 Blvd. Antonio L. Rodriguez 1884 Pte. Col. Santa Maria 64650 Monterrey, Nuevo Len, Mxico Telephone: +52 81 8399 1300 Facsimile: +52 81 8399 1399 MEXICO TIJUANA Baker & McKenzie Abogados, S.C. Edificio Centura, Piso 1 Blvd. Agua Caliente 10611 Col. Aviacion 22420 Tijuana, B.C. Mxico Postal Address: P.O. Box 1205 Chula Vista, California 91912 1205 Telephone: +52 664 633 4300 Facsimile: +52 664 633 4399 THE NETHERLANDS AMSTERDAM Baker & McKenzie Amsterdam N.V. Leidseplein 29 1017 PS Amsterdam, The Netherlands P.O. Box 2720 1000 CS Amsterdam Telephone: + 31 20 551 7555 Facsimile: + 31 20 626 7949
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PHILIPPINES MANILA Baker & McKenzie 12th Floor, Net One Center 26th Street Corner 3rd Avenue Crescent Park West Bonifacio Global City Taguig, Metro Manila, Philippines 1634 Postal Address: MCPO Box 1578 Makati City 1299, Philippines Telephone: +63 2 819 4700 Facsimiles: +63 2 816 0080,728 7777 POLAND WARSAW Baker & McKenzie Gruszczynski i Wspolnicy Attorneys at Law LP Focus Building Al. Armii Ludowej 26 00-609 Warsaw, Poland Telephone: +48 22 576 3100 Facsimile: +48 22 576 3200 RUSSIA MOSCOW Baker & McKenzie - CIS, Limited Sadovaya Plaza, 11th Floor 7 Dolgorukovskaya Street Moscow, Russia 127006 Telephone: +7 495 787 2700 Facsimile: +7 495 787 2701 RUSSIA ST.PETERSBURG Baker & McKenzie - CIS, Limited 57, B. Morskaya Street St. Petersburg, Russia 190000 Telephone: +7 812 303 9000 Facsimile: +7 812 325 6013
SAUDI ARABIA RIYADH Baker & McKenzie Gulf Limited Olayan Centre Tower II Al Ahsa Road PO Box 4288 Riyadh 11491, Saudi Arabia Telephone: +966 1 291 5561 Facsimile: +966 1 291 5571 SINGAPORE Baker & McKenzie.Wong & Leow #27 01 Millenia Tower 1 Temasek Avenue Singapore 039192 Telephone: +65 6338 1888 Facsimile: +65 6337 5100 SPAIN - BARCELONA Baker & McKenzie Barcelona S.L. Avda.Diagonal, 652 Edif. D, 8th floor 08034 Barcelona, Spain Telephone: +34 93 206 0820 Facsimile: +34 93 205 4959 SPAIN MADRID Baker & McKenzie Madrid S.L. Paseo de la Castellana, 92 28046 Madrid, Spain Telephone: +34 91 230 4500 Facsimile: +34 91 391 5149 SWEDEN STOCKHOLM Baker & McKenzie Advokatbyr Linnegatan 18 P.O. Box 5719 SE - 11487 Stockholm, Sweden Telephone: +46 8 5661 7700 Facsimile: +46 8 5661 7799
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SWITZERLAND GENEVA Baker & McKenzie Geneva Chemin des Vergers 4 1208 Geneva, Switzerland Telephone: +41 22 707 9800 Facsimile: +41 22 707 9801 SWITZERLAND ZURICH Baker & McKenzie Zurich Zollikerstrasse 225 P.O. Box 8034 Zrich Switzerland Telephone: +41 1 384 1414 Facsimile: +41 1 384 1284 TAIWAN TAIPEI Baker & McKenzie 15th Floor, Hung Tai Center No.168, Tun Hwa North Road Taipei, Taiwan 105 Telephone: +886 2 2712 6151 Facsimiles: +886 2 2716 9250; 2712 8292 THAILAND BANGKOK Baker & McKenzie Ltd. 25th Floor, Abdulrahim Place 990 Rama IV Road Bangkok 10500, Thailand Telephone: +66 2636 2000; 2636 2222 Facsimile: +66 2636 2111 UKRAINE KYIV Baker & McKenzie - CIS, Limited Millennium Business Center Fifth Floor, 12a Volodymyrska Street Kyiv, Ukraine 01025 Telephone: +380 44 490 7070 Facsimile: +380 44 490 6787
UNITED STATES CHICAGO Baker & McKenzie LLP One Prudential Plaza 130 East Randolph Drive Chicago, Illinois 60601, US Telephone: +1 312 861 8000 Facsimiles: +1 312 861 2899; 861 8080 UNITED STATES DALLAS Baker & McKenzie LLP 2300 Trammell Crow Center 2001 Ross Avenue Dallas, Texas 75201, US Telephone: +1 214 978 3000 Facsimile: +1 214 978 3099 UNITED STATES HOUSTON Baker & McKenzie LLP 711 Louisiana, Suite 3400 Houston, Texas 77002-2716, US Telephone: +1 713 427 5000 Facsimile: +1 713 427 5099 UNITED STATES - MIAMI Baker & McKenzie LLP Mellon Financial Centre 1111 Brickell Avenue Suite 1700 Miami, Florida 33131, US Telephone: +1 305 789 8900 Facsimile: +1 305 789 8953 UNITED STATES - NEW YORK Baker & McKenzie LLP 1114 Avenue of the Americas New York, New York 10036, US Telephone: +1 212 626 4100 Facsimile: +1 212 310 1600
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UNITED STATES - PALO ALTO Baker & McKenzie LLP 660 Hansen Way Palo Alto, California 94304, US Telephone: +1 650 856 2400 Facsimile: +1 650 856 9299 UNITED STATES - SAN DIEGO Baker & McKenzie LLP Twelfth Floor, 101West Broadway San Diego, California 92101, US Telephone: +1 619 236 1441; +1 800 786 1022 Facsimile: +1 619 236 0429 UNITED STATES SAN FRANCISCO Baker & McKenzie LLP Two Embarcadero Center Twenty-Fourth Floor San Francisco, California, 94111-3909, US Telephone: +1 415 576 3000 Facsimiles: +1 415 576 3099; 576 3098 UNITED STATES WASHINGTON, D.C. Baker & McKenzie LLP 815 Connecticut Avenue, NW Washington, D.C. 20006-4078, US Telephone: +1 202 452 7000 Facsimile: +1 202 452 7074
VENEZUELA CARACAS Baker & McKenzie SC Torre Edicampo, PH Avenida Francisco de Miranda Cruce con Avenida Del Parque Urbanizacin Campo Alegre, Caracas 1060 Postal Address: PO Box 1286 Caracas 1010-A, Venezuela US Mailing Address: Baker & McKenzie M-287, Jet Cargo International P.O. Box 020010 Miami, Florida 33102-0010, USA: Telephone: +58 212 276 5111; 276 5112 Facsimiles: +58 212 264 1532; 264 1637 VENEZUELA VALENCIA Baker & McKenzie SC Edificio Torre Venezuela, Piso No.4 Av. Bolivar cruce con Calle 154 (Misael Delgado) Urbanizacion La Alegria Postal Address: PO Box 1155 Valencia, Estado Carabobo, Venezuela Telephone: +58 241 824 8711 Facsimile: +58 241 824 6166 VIETNAM HANOI Baker & McKenzie LLP 13th Floor, Vietcombank Tower 198 Tran Quang Khai Street Hoan Kiem District Hanoi, Socialist Republic of Vietnam Telephone: +84 4 825 1428; 825 1429; 825 1430 Facsimile: +84 4 825 1432
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VIETNAM HO CHI MINH CITY Baker & McKenzie LLP 12th Floor, Saigon Tower 29 Le Duan Blvd. District 1, Ho Chi Minh City Socialist Republic of Vietnam Telephone: +84 8 829 5585; 829 5601; 829 5602 Facsimile: +84 8 829 5618
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Cross-Border Transactions Handbook - Roeder

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Cross-Border Transactions Handbook

Baker & McKenzie

Cross-Border Transactions Handbook Editors Note

Cross-Border Transactions Handbook Contributing Lawyers

Cross-Border Transactions Handbook Table of Contents

Cross-Border Transactions Handbook Table of Contents

Diligence in the Context of Other Forms of Transactions ................................................... 68

Cross-Border Transactions Handbook Table of Contents

BAKER & McKENZIE OFFICES WORLDWIDE..............................................175

Cross-Border Transactions Handbook Section 1 Introduction

Cross-Border Transactions Handbook Section 1 Introduction

Focus of the Handbook

Cross-Border Transactions Handbook Section 1 Introduction

Organization of the Handbook

Cross-Border Transactions Handbook Section 1 Introduction

Cross-Border Transactions Handbook Section 1 Introduction

Baker & McKenzie

Cross-Border Transactions Handbook Section 2 Project Management

SECTION 2 PROJECT MANAGEMENT

Cross-Border Transactions Handbook Section 2 Project Management

Cross-Border Transactions Handbook Section 2 Project Management

Scope of the Project

Assembling the Transaction Team

Cross-Border Transactions Handbook Section 2 Project Management

Baker & McKenzie

Cross-Border Transactions Handbook Section 2 Project Management

Baker & McKenzie

Cross-Border Transactions Handbook Section 2 Project Management

Cross-Border Transactions Handbook Section 2 Project Management

Cross-Border Transactions Handbook Section 2 Project Management

Cross-Border Transactions Handbook Section 2 Project Management

Cross-Border Transactions Handbook Section 2 Project Management

Roles and Responsibilities

Cross-Border Transactions Handbook Section 2 Project Management

Managing Local Legal Counsel

Baker & McKenzie

Cross-Border Transactions Handbook Section 3 Budgeting for the Transaction

SECTION 3 BUDGETING FOR THE TRANSACTION

Cross-Border Transactions Handbook Section 3 Budgeting for the Transaction

Cross-Border Transactions Handbook Section 3 Budgeting for the Transaction

Cross-Border Transactions Handbook Section 3 Budgeting for the Transaction

Cross-Border Transactions Handbook Section 3 Budgeting for the Transaction

Cross-Border Transactions Handbook Section 3 Budgeting for the Transaction

Scope of Advisors Roles in the Transaction

Cross-Border Transactions Handbook Section 3 Budgeting for the Transaction

Creating the Budget Template

Baker & McKenzie

Cross-Border Transactions Handbook Section 3 Budgeting for the Transaction

Baker & McKenzie

Cross-Border Transactions Handbook Section 4 Discrete Financing Issues

SECTION 4 DISCRETE FINANCING ISSUES

Debt vs. Equity Financing

Cross-Border Transactions Handbook Section 4 Discrete Financing Issues

Cross-Border Transactions Handbook Section 4 Discrete Financing Issues

Cross-Border Transactions Handbook Section 4 Discrete Financing Issues

General Considerations for Lenders in CrossBorder Financings

Baker & McKenzie

Cross-Border Transactions Handbook Section 4 Discrete Financing Issues

Tax Registration, Interest Withholdings and Other Payments

Cross-Border Transactions Handbook Section 4 Discrete Financing Issues

Cross-Border Transactions Handbook Section 4 Discrete Financing Issues