© 2017 The Texas Lawbook.
By Former Sabre & Travelocity GC Sterling Miller
One of the most exciting events for an in-house lawyer is when their company becomes involved in a merger/acquisition, joint venture, or other strategic transaction.
It becomes even more challenging when the transaction is international in nature. And it really becomes fun when it involves multiple companies in multiple countries.
While such transactions are rare for most companies, many in-house counsel will need to deal with a trans-border transaction at some point in their careers, either as a prime member of the deal team or as a subject matter expect who participates in a specific part of the deal.
A while back, I participated on a panel at Baker McKenzie’s annual “Doing Business Globally” event in Dallas, Texas. My panel discussed winning strategies in cross-border deals. Joining me were Michael E. Santa Maria, a partner in the Dallas office of Baker McKenzie, and Matt Haltom, the General Counsel for Sally Beauty Supply.
This edition of “Ten Things” will borrow from the presentation we gave at that event (and thank you to the good folks at Baker McKenzie for permission to do so),[1] along with some recent updates and links to resources.
Here are ten things you need to know for a successful trans-border transaction:
(1) “Kickoff Meeting.” Virtually any deal of any size needs a “kickoff” meeting with all of the key stakeholders from around the company, along with outside experts.
In the context of a trans-border transaction you need to plan early with respect to a myriad of issues, including different legal and regulatory systems, accounting standards, management structures, employee rights, cultural issues and “timing” matters. You also need to determine how best to coordinate and execute across multiple borders in multiple time zones. Assigning a Project Manager and other key roles and duties is essential.
You will need to set up regular meetings and briefings, a tracking tool, and data repository/e-room. Developing a realistic sense of “timing” of the deal, e.g., regulatory review and closing, is also very important. The kickoff meeting is where you begin to bring all of this together as well as assign roles and responsibilities to key individuals or groups.
(2) Proper Deal Structure. The goal here is to determine the transaction structure that maximizes overall value of the deal, in light of the international nature of the transaction.
You will need to determine if you want an asset purchase (i.e., pick and choose what you want), a share purchase of the entire company, a joint venture, a distributorship, or a mixture. Key considerations include commercial, legal, personnel, IT, and, most importantly, tax issues – all viewed from the lenses of the different countries involved, i.e., don’t just assume what applies in your home country applies universally.
Avoiding unfavorable tax consequences and otherwise avoidable regulatory approvals (e.g., antitrust) should be top of mind when determining the structure. There may even be times when the rules in one country conflict with the rules in another applicable country. That’s when the lawyers really earn their money.
Finally, deal structure also determines the proper scope of the due diligence effort so getting the parameters of the structure down early will help drive an efficient due diligence process.
(3) Due Diligence. Due diligence is probably one of the most expensive phases of a trans-border deal. And it should be. This is the process by which you – through document and contract review, financial information, interviews, etc., acquire the deepest and broadest knowledge of the other company, and your best way to spot potential pot-holes that can screw up your deal or materially impact the valuation or other economic considerations.
Key to a good due diligence process is scoping, i.e., determining “what” needs to be reviewed, by “whom,” “where,” “when,” and for “what” purpose.
A helpful tool is to map out due diligence on an “x/y” axis with “x” being the jurisdictions and “y” being the subject areas. Jurisdictions can be primary, secondary, and tertiary. Subject areas are typically corporate, commercial, HR, real estate, environmental, litigation, IP, and tax.
You also need to determine materiality thresholds, level of review, scope of analysis, and the form of the report – so there is a consistent method of presenting the results. Breaking up due diligence in this manner also allows you to refine the scope of the project should there be budget pressure, e.g., you can potentially lop-off some of the tertiary jurisdictions if the budget becomes an issue.
Note that you will have several different audiences for the results of the due diligence, each with the need for the information at a different level of detail and complexity. For the in-house legal team, you will likely want the “more is better” approach. For the Board of Directors, you will probably need to reduce things down to a slide or two in a PowerPoint deck where the focus is on “deal killers” and simple color-coding (e.g., red, yellow, green) to represent status or problems.
(4) Anti-Corruption Issues. In today’s environment around anti-corruption/anti-bribery enforcement, companies that acquire other companies can be responsible for the actions of that company even if the problems arose before the date of the acquisition.
As a result, it is very important to carefully and thoughtfully diligence the corruption and compliance risks of the target business or JV partner. You will most certainly get this question from the Board of Directors (or you should get it) because the risks associated with the civil and criminal liability are high, in addition to the cost and distraction to management and the Board in the event of a problem.
Furthermore, you should brace people for the fact that key contractual relationships may be lost once the “clean” multi-national company comes in and stops any illegal activity. Since there is probably not a folder in the e-room marked “Bribes,” you and your counsel will need to come up with a list of “red flags,” things that will tell you that you need to look deeper.
Here are some best practices to consider:
- Focus your diligence on relevant jurisdictions, customers and key relationships (a contract with the a government agency in Nigeria run by the brother-in-law of the president will likely require a second look)
- Understand market and best practices in the target business’s industries (interview the key players)
- Consider the business’s compliance history
- Engage a forensic accountant to “follow the money”
- Understand how business is conducted in the problematic jurisdictions
- Get certifications from the finance/legal teams pre and post transaction.
(5) Anti-Trust/Regulatory. With any large deal, and especially with a trans-border deal, you can count on there being a number of regulatory hurdles to clear, the most challenging potentially being the anti-trust issues. With respect to such issues you need to be aware of both substantive and procedural problems.
Regarding substantive, there needs to be a realistic evaluation of whether or not the deal can pass muster with competition law regulators in all of the countries where the transaction must be notified. This will mean looking at market shares (along with market definition), competitors, potential reactions from customers, etc. It’s a big job, depending on how complex the transaction is.
Moreover, the analysis is often pretty “squishy” meaning there is a lot of “touch and feel” vs. black and white. This tends to drive the executive nuts, so it’s worth spending time up front to explain the anti-trust review process (and what regulators focus on) so the C-Suite and the Board are sensitized to the issues along with the difficulty of predicting how regulators will act in any situation.
On the procedural side, you need to figure out fairly quickly where the transaction needs to be notified and when. For some jurisdictions, it needs to be notified in advance of closing, for some it may be after. All of the different regulatory regimes have different time frames for evaluating and approving/rejecting a deal and, unfortunately, your transaction may be at the mercy of the “last” regulator to approve the deal.
Again, it is very worthwhile to explain all of the timeframes and conditions to the C-Suite and Board as far in advance as possible so there are no surprises if your deal gets hung up because you’re waiting on regulatory approval.
Don’t forget that just because you’ve announced a deal, that does not mean you and the target company can begin to coordinate activities. You’re still competitors until the deal is approved and finalized and any “gun jumping” can lead to serious anti-trust violations and fines (or worse). While some joint integration planning is permitted, you need to be very careful in terms of any plans to approach customers, share or amend contracts, etc. Outside counsel is critical here.
You will also want to have a separate “kick-off” meeting (or dedicated section of your master kick-off meeting) regarding the drafting of documents. Nothing can make your transaction go sideways with regulators faster than just a handful of poorly drafted transaction-related documents (including presentations, financial analysis, email, etc.).
Work with outside counsel on the critical issue. Finally, don’t forget to consider the other regulatory issues that might affect your deal, including foreign investment restrictions, exchange control, import/export issues, sanctions, and a host of local permits and other issues. You do not want to be thinking of these things several months into your transaction or two days before closing because they can be deal killers, or at least deal “delayers.”
(6) Employee Transfer/Benefits. Most international transactions will have an impact on the workforce of both companies. Typically, the overriding goal is to move the employees of the target company under the human resources policies and benefits of the acquiring company.
Additionally, there will likely be some type of restructuring of the workforce, potentially with a number of positions no longer being needed. In the USA, all of this is fairly straightforward because in most instances employers enjoy “employment at will” type relationships with their workforce and employees are free to leave or have their employment terminated with few restrictions.
This is not the case outside the USA and it is critical that you understand the employee issues early in the process.
Most countries have very specific regulatory processes for when and how employees can be terminated or transferred, the cost of doing so in terms of severance or ongoing/transferred benefits, and when works councils/unions need to be notified and consulted about changes in employment status of their members, especially when there is a dramatic change such as usually follows a merger or acquisition.
If you go into the transaction thinking you can pretty much do what you need to do with respect to employees and benefits, you may be in for a very rude surprise. Key here will be to set out each jurisdiction where affected employees are working and delving into the laws and regulations of that country covering employee rights and benefits in the event of a transaction such as yours. In fact, you may likely find that the benefits you offer employees in some countries will simply have to be different than those offered in your home country.
The analysis of the employee issues may even cause you to restructure the deal in a way that can avoid some of the more onerous requirements. Lastly, be mindful of the data privacy issues involving employee data. Whether or not that data can be accessed, transferred, or otherwise freely shared is not always a simple answer and may require adjusting some of your processes.
(7) Negotiating/Drafting the Agreement. Certainly the technical issues regarding negotiating and drafting the formal agreement(s) covering a trans-border transaction can be daunting, especially if it involves multiple parties in multiple countries.
Just as important, however, is to go into the transaction understanding that there may be significant cultural differences at play that can materially affect how the agreement gets drafted or falls into place. For example, relationship building is a key factor in deals in Asia and Latin America.
Likewise, tactics that work well or our acceptable in some places are not welcome/are unacceptable elsewhere (sorry Mr. Trump). A good deal lawyer will be sensitive to these cultural differences, in many cases doing some research in advance to better understand how to “do business” in different countries.
Further, as with issues involving employees, go into the negotiations understanding that local laws and regulations may have an impact on how you draft the agreement or even the amount and type of due diligence you can review as part of the negotiation. Some things to keep in mind:
- Understand and account for the seller’s culture and perspective in negotiation (e.g., more time may be spent on relationship building or seller premium on post-closing treatment of target employees)
- Understand implications of the “style” and governing law of the transaction agreement and negotiate these as items of real value
- Identify that local law may have an effect on the transaction, even where the agreements are governed by foreign law (e.g., voting, share issuance, liquidation procedures, minority protections, etc.)
- Negotiate “form” documents for local business transfer/asset transfer or share transfer documentation required to give effect to the transaction and revise only to extent required by local law (do not permit substantive negotiation of primary deal terms at the local level, i.e., don’t let the tail wag the dog)
- Remember that the agreement may need to be filed publicly depending on local law (even in the USA)
(8) Dispute Resolution. As a former litigator I have a special place in my heart for dispute resolution provisions. One thing that always puzzled me was why the corporate lawyers would generally negotiate these provisions without ever consulting anyone in the litigation group. That usually meant that when a dispute arose, there were things in the dispute resolution procedure that both sides regretted.
My first point is do not treat dispute resolution as “boiler plate” and loop in someone with a litigation background to help prepare the clause.
Second, is you need to determine what type of process you want in place in the event of disputes over or arising under the agreement post-closing, and you want to be thinking about these issues early in the process and not as a throw-in on the last day.
Depending on the jurisdictions involved, most of the time one of the parties is not excited about the possibility of any disputes being litigated in the local “home” court of the other party. Generally, they feel like they may not get a fair shake. The way around this is to agree to an independent dispute resolution forum, usually arbitration under the direction of a well-known arbitral body in a neutral location.
Additionally, there may be some disputes that lend themselves to an even more limited system, such as hiring an independent financial expert to decide on issues of valuation or other post-closing financial terms. If you do decide to arbitrate, here are some key things to keep in mind:
- Which arbitration rules will apply?
- In what language will the parties conduct the arbitration?
- The scope of discovery
- Who bares what costs, including whether the prevailing party gets their attorneys’ fees
- Governing law
While you can agree to arbitrate with a simple two sentence paragraph, it is far better to provide for a detailed procedure relating to how the arbitration will be conducted (usually as a schedule to the agreement). The less left to chance, the better the process is for both sides.
(9) Deal Execution. There are literally thousands of things that need to be done and tied-off before a complicated trans-border transaction can close. You do not want to be the lawyer everyone is looking at if there is a glitch at the closing meeting because someone forgot that the permits needed to transfer some necessary part of the business take weeks to obtain vs. days.
Go into a trans-border transaction assuming that it will be dramatically more complicated to close than a wholly domestic one. Consequently, you must build a detailed plan of everything that needs to happen (and the dependencies) to close your deal and you need to bake-in sufficient time frames for those things to occur — even if that is not what the C-Suite or Board wants to hear.
Your outside counsel will be tremendously helpful here and can help you build a step-by-step planning document that will become the “Bible” of your deal. Not only do you need to set out the steps, you need to identify who is responsible for get those steps completed and conduct regular status meetings to ensure everything is on track or, if there are problems, establish work plans to get things back on track quickly.
Lastly, develop a protocol to delay smaller local closings or other isolated aspects of the larger transaction, i.e., if we cannot close in non-critical Country X there is a plan in place to simply isolate Country X and close the larger deal now (and close Country X later).
(10) Integration Planning. You’ve accomplished 1 through 9 above and your deal has closed. You might think the hard part is over. It isn’t. Point 10, integration planning and execution, is the most critical step of all.
If you fail to properly integrate the new company, its employees, and products/lines of business into your company, then everything you have done to date and every dollar spent has been essentially wasted.
Without proper integration, the expected synergies do not happen, the value of the business is eroded, key people leave, and management is distracted. All of which are bad outcomes. I have been part of successful and not so successful integrations. Success always comes back to proper planning. You start planning for the integration from the very first days to the transaction.
This is not something that can be an afterthought or saved for the end. It’s crucial that all of the key groups come together early, i.e., HR, legal, tax, IT, sales, compliance, corporate, finance, affected business units, etc. Moreover, integration planning needs to be prioritized by all of these groups. It cannot be a “show up to the meeting and that’s it” type of engagement.
Corporate Development is not responsible for the integration of the companies. Only the various staff groups and business units can make it happen properly. You will need an integration coordinator and an integration “playbook” that, relying on the due diligence process, details with military-like precision exactly how the integration process will move forward, on what time frame, and who is responsible for which tasks.
Pay particularly close attention to the IT integration issues, including third-party licenses, cloud storage, system security/data privacy issues, and the needs of customers post-closing. If the technology goes bad for a customer after the deal closes, you may never recover that relationship.
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The above is not an exhaustive list of the things you need to do to have a successful trans-border transaction. It is, however, a helpful guide and sets out key issues and milestones that, as in-house counsel, you need to be familiar with to be a functioning member of the team working on the transaction. It also gives you a checklist to work with to ensure the internal team and your external team are focused on the most important issues.
Additionally, all of these tips work for a wholly domestic transaction as well. A couple of great resources for in-house counsel are “Practical Law” (requires subscription but has very helpful templates, forms, and check lists) and “Getting the Deal Through” (free for in-house counsel). Both are worth checking out.
Sterling Miller is the former general counsel, corporate secretary and chief compliance officer at Sabre Corporation & Travelocity.com. His articles can be found at www.TenThings.net.
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