Cross-Border M&A - 2021 Checklist for Successful Acquisitions in the United States M&A in 2020, like much else of a year in which a novel coronavirus exploded into a global pandemic, was both unpredictable and marked by extreme highs and lows. Global M&A volume amounted to $3.6 trillion in 2020, just above the average annual volume of $3.5 trillion over the ten years beginning...
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Cross-Border M&A - 2021 Checklist for Successful Acquisitions in the United States
M&A in 2020, like much else of a year in which a novel coronavirus exploded into a global pandemic, was both unpredictable and marked by extreme highs and lows. Global M&A volume amounted to $3.6 trillion in 2020, just above the average annual volume of $3.5 trillion over the ten years beginning with 2010. However, the year's total disguises dramatic volatility in M&A activity over the year's four quarters, which presented great challenges and opportuni-ties for dealmakers, and made M&A in 2020 exceedingly complex and multi-faceted.
While the first quarter began with several large transactions, including Aon's $30.1 bil-lion acquisition of Willis Towers Watson and Morgan Stanley's $13.1 billion acquisition of E*Trade Financial, M&A slowed significantly in the latter half of the quarter as equity markets plunged and the public and private sectors implemented widespread shutdowns in response to the unprecedented coronavirus crisis. In the second quarter, global deal volume declined to levels not seen since the first quarter of 2013, as shutdowns continued and businesses devoted their re-sources to existence-preserving activities. Global M&A volume was $687.8 billion and $561.4 billion in the first and second quarters, respectively, and $1.2 trillion for the first half of 2020.
M&A recovered in the third quarter, with $1.1 trillion in global transaction volume, led by a surge in large deals in the U.S., including Seven & i Holdings' $21.0 billion acquisition of Speedway, Gilead Sciences' $20.8 billion acquisition of Immunomedics, and Analog Devices' $20.7 billion acquisition of Maxim Integrated Products.
M&A activity in the fourth quarter was especially robust, as global transactions reached $1.3 trillion, the second-highest quarter in M&A since the beginning of 2010 and just a bit more than the first two quarters of 2020 combined. There was nearly $2.4 trillion in global M&A dur-ing the second half of 2020, twice the first half's level. Nine of the year's ten largest transactions were announced in the second half, including S&P Global's $43.5 billion acquisition of IHS Markit, AstraZeneca's $39.6 billion acquisition of Alexion Pharmaceuticals, and Advanced Mi-cro Devices' $34.6 billion acquisition of Xilinx, all of which were announced in the fourth quar-ter.
As for cross-border deals, $1.3 trillion, or 35% of last year's deals (including four of the 10 largest deals), were cross-border – despite all the talk (and reality) of the end of globalization, protectionism, etc. – comparable to averages of $1.2 trillion and 35% over the prior ten years. Not even a global pandemic, shutdowns and border closures could blot out the promise of cross-border M&A. Approximately 21% of last year's $1.4 trillion U.S. deal volume involved non-U.S. acquirors. Canadian, French, German, Japanese and U.K. acquirors accounted for approxi-mately 49% of the volume of cross-border deals involving U.S. targets, while acquirors from China, India and other emerging economies accounted for approximately 6%.
As 2021 opens with infection counts rising around the world, there is hope of effective and widespread vaccination by the end of the year. Despite the inevitable and unique uncertain-ties inherent in the current climate, we expect cross-border transactions into the U.S. to continue to offer compelling opportunities. And, as always, transacting parties will do better if they are well-prepared for the cultural, political, regulatory and technical complexity inherent in cross-border deals. Now, more than ever, advance preparation, strategic implementation and deal structures calibrated to likely concerns are critically important.
The following is our updated checklist of issues that should be carefully considered in advance of an acquisition or strategic investment in the U.S. Because each cross-border deal is unique, the relative significance of the issues discussed below will depend upon the specific facts, circumstances and dynamics of each particular situation.
Political and Regulatory Considerations. A high percentage of investment into the U.S. will be well-received and not politicized. However, a variety of global economic fault lines continue to make it more important than ever that prospective non-U.S. acquirors of U.S. businesses or assets undertake a thoughtful analysis of U.S. political and regulatory implications well in advance of any acquisition proposal or program. This is particularly so if the target company operates in a sensitive industry; if post-transaction business plans contemplate major changes in investment, employment or business strategy; or if the acquiror is sponsored or financed by a foreign government or organized in a jurisdic-tion where a high level of government involvement in business is generally understood to exist. High-profile transactions may result in political scrutiny by federal, state and local officials. The likely concerns of federal, state and local government agencies, employees, customers, suppliers, communities and other interested parties should be thoroughly con-sidered and, if possible, addressed before any acquisition or investment proposal becomes public. This is especially important in light of the ongoing shift in the U.S. towards "stakeholder governance" and the growing embrace of ESG (environmental, social and governance) principles by shareholders and companies alike, as detailed in our firm's re-cent Some Thoughts for Boards of Directors in 2021.
Similarly, potential regulatory hurdles require sophisticated advance planning. In addi-tion to securities and antitrust regulations, acquisitions may be subject to CFIUS review, and acquisitions in regulated industries (e.g., energy, public utilities, gaming, insurance, telecommunications and media, financial institutions, transportation and defense contract-ing) may be subject to an additional set of regulatory approvals. Regulation in these are-as is often complex, and political opponents, reluctant targets and competitors may seize upon perceived weaknesses in an acquiror's ability to clear regulatory obstacles as a tac-tic to undermine a proposed transaction. Finally, depending on the industry involved, the type of transaction and the geographic distribution of the workforce, labor unions may well play an active role during the entire phase of the process. Pre-announcement com-munications plans must take account of all of these interests. It is essential to implement a comprehensive communications strategy, focusing not only on public investors but also on all of these other core constituencies, prior to the announcement of a transaction, so that all of the relevant constituencies may be addressed with appropriately tailored mes-sages. It will often be useful, if not essential, to involve experienced public relations firms at an early stage when planning any potentially sensitive deal.
Transaction Structures. Non-U.S. acquirors should consider a variety of potential trans-action structures, particularly in strategically or politically sensitive transactions. Struc-tures that may be helpful in sensitive situations to overcome potential political or regula-tory resistance include no-governance and low-governance investments, minority posi-tions or joint ventures, possibly with the right to increase ownership or governance rights over time; partnering with a U.S. company or management team or collaborating with a U.S. source of financing or co-investor (such as a private equity firm); utilizing a con-trolled or partly controlled U.S. acquisition vehicle, possibly with a board of directors having a substantial number of U.S. citizens and prominent U.S. citizens in high-profile roles; or implementing bespoke governance structures (such as a U.S. proxy board) with respect to specific sensitive subsidiaries or businesses of the target company. Use of debt or preferred securities (rather than common stock) should also be considered. Even seemingly more modest social issues, such as the name of the continuing enterprise and its corporate location or headquarters, or the choice of the nominal legal acquiror in a merger, can affect the perspective of government and labor officials.
CFIUS. The scope and impact of regulatory scrutiny of foreign investments in the U.S. by CFIUS has expanded significantly over the last decade, particularly following passage of the Foreign Investment Risk Review Modernization Act (FIRRMA) in 2018. Alt-hough notification of most transactions will remain voluntary, FIRRMA introduced man-datory notification requirements for certain transactions, including investments in U.S. businesses associated with critical technologies, critical infrastructure, or sensitive per-sonal data of U.S. citizens where a foreign government has a "substantial interest" (e.g., 49% or more) in the acquiror. Critical technology and critical infrastructure are broad and flexible concepts, and FIRRMA expanded their scope to include "emerging and foundational technologies" used in computer storage, semiconductors and telecommuni-cations equipment sectors and critical infrastructure in a variety of sectors. Supply chain vulnerabilities during the Covid-19 pandemic have also increased the likelihood that in-vestments in U.S. healthcare, pharma, and biotech companies will be closely reviewed by CFIUS.
Personal data is also a key area of scrutiny for CFIUS. Most of the enforcement actions in 2020 involved concerns about Chinese investors' access to sensitive personal data of U.S. citizens. CFIUS enforcement in these sectors is likely to continue during the Biden Administration. In fact, the Biden campaign's website focused on domestic supply chain security to ensure that neither the U.S. nor its allies will be dependent on critical supplies from certain nations, including China and Russia. At the same time, the U.S. is likely to remain open to foreign investment, even in the national security sector. Most foreign in-vestment will still be cleared, including Chinese investments, although they may get close review and possibly require mitigation actions, especially to the extent they involve intel-lectual property, personal data, and cutting-edge or emerging technologies. While notifi-cation of a foreign investment to CFIUS remains largely voluntary, transactions that are not reviewed remain subject to potential CFIUS review in perpetuity.
Thus, conducting a risk assessment for inbound transactions or investment early in the process is prudent to determine whether the investment will require a mandatory filing or may attract CFIUS attention. Parties may wish to take advantage of the "declarations" process, which provides expedited review for transactions that present little or no signifi-cant risk to U.S. national security. Parties should also agree on their overall CFIUS strat-egy and consider the appropriate allocation of risk as well as timing considerations in light of possibly prolonged CFIUS review.
Acquisition Currency. Cash remains a common form of consideration in cross-border deals into the U.S., with all-cash transactions representing more than 47% of the volume of cross-border deals into the U.S. in 2020 (down from an average annual share of 55% over the prior five years), as compared to approximately 39% of the volume of all deals involving U.S. targets in 2020. However, non-U.S. acquirors must think creatively about potential avenues for offering U.S. target shareholders a security that allows them to par-ticipate in the resulting global enterprise. For example, publicly listed acquirors may consider offering existing common stock or depositary receipts (e.g., ADRs) or special securities (e.g., contingent value rights). When U.S. target shareholders obtain a continu-ing interest in a surviving corporation that had not already been publicly listed in the U.S., expect heightened focus on the corporate governance and other ownership and structural arrangements of the non-U.S. acquiror, including as to the presence of any con-trolling or large shareholders, and heightened scrutiny placed on any de facto controllers or promoters. Creative structures, such as issuing non-voting stock or other special secu-rities of a non-U.S. acquiror, may minimize or mitigate the issues raised by U.S. corpo-rate governance concerns. The world's equity markets have never been more globalized, and investors' appetite for geographic diversity never greater; equity consideration, or an equity issuance to support a transaction, should be considered in appropriate circum-stances.
M&A Practice. It is essential to understand the custom and practice of U.S. M&A trans-actions. For instance, understanding when to respect – and when to challenge – a target's sale "process" may be critical. Knowing how and at what price level to enter the discus-sions will often determine the success or failure of a proposal; in some situations it is prudent to start with an offer on the low side, while in other situations offering a full price at the outset may be essential to achieving a negotiated deal and discouraging com-petitors, including those who might raise political or regulatory issues. In strategically or politically sensitive transactions, hostile maneuvers may be imprudent; in other cases, unsolicited pressure might be the only way to force a transaction. Takeover regulations in the U.S. differ in many significant respects from those in non-U.S. jurisdictions; for example, the mandatory bid concept common in Europe, India and other countries is not present in U.S. practice. Permissible deal protection structures, pricing requirements and defensive measures available to U.S. targets will also likely differ in meaningful ways from what non-U.S. acquirors are accustomed to in their home jurisdictions. Sensitivity must also be shown to the distinct contours of the target board's fiduciary duties and de-cision-making obligations under state law. Consideration also may need to be given to the concerns of the U.S. target's management team and employees critical to the success of the venture. Finally, often overlooked in cross-border situations is how subtle differ-ences in language, communication expectations and the role of different transaction par-ticipants can affect transactions and discussions; preparation and engagement during a transaction must take this into account.
U.S. Board Practice and Custom. Where the target is a U.S. public company, the cus-toms and formalities surrounding board of director participation in the M&A process, in-cluding the participation of legal and financial advisors, the provision of customary fair-ness opinions and the inquiry and analysis surrounding the activities of the board and fi-nancial advisors, can be unfamiliar and potentially confusing to non-U.S. transaction par-ticipants and can lead to misunderstandings that threaten to upset delicate transaction ne-gotiations. Non-U.S. participants must be well advised on the role of U.S. public compa-ny boards and the legal, regulatory and litigation framework and risks that can constrain or proscribe board or management action. These factors can impact both tactics and tim-ing of M&A processes and the nature of communications with the target company.
Distressed Acquisitions. The U.S. continued to be the location of choice for the restruc-turing of large multinational corporations in 2020. Several industries, including airlines, retail, shipping, and the energy sector, as well as businesses that service the energy sec-tor, were particularly hard hit by the Covid-19 pandemic. Although the pandemic was global, multinational companies have taken advantage of the debtor-friendly and highly developed body of reorganization laws, as well as the specialized bankruptcy courts, that make a U.S. filing attractive. Among the advantages of a U.S. bankruptcy are the expan-sive jurisdiction of the courts (such as a worldwide stay of actions against a debtor's property and liberal filing requirements); the ability of the debtor to maintain significant control over its normal business operations; relative predictability in outcomes; and the ability to bind holdouts to debt compromises supported by a majority of holders and two-thirds of the debt.
U.S. bankruptcy courts have become increasingly receptive in recent years to large sales of assets or of the whole company during the pendency of a bankruptcy case. Features of the Bankruptcy Code of particular importance to M&A transactions include the ability to obtain a sale order providing title free and clear of all prior liabilities and liens, the ability to borrow on a super-senior basis to fund the company during and upon exit from bank-ruptcy, the ability to reject undesirable contracts and leases while keeping those desired by the buyer, and the easing of certain antitrust and securities regulatory burdens.
Firms evaluating a potential acquisition of a distressed U.S. target or U.S.-based assets should consider the full array of tools that the U.S. bankruptcy process makes available. These include acquisition of the target's fulcrum debt securities that are expected to be converted into equity through a restructuring, acting as a plan investor or sponsor in con-nection with a plan of reorganization, backstopping a plan-related rights offering, or par-ticipating as a bidder in a court-supervised "Section 363" auction of a debtor's assets.
Transaction certainty is critical to a debtor and its stakeholders and thus to a potential ac-quiror's success in a distressed context. Accordingly, non-U.S. participants need to plan carefully (particularly with respect to transactions that might be subject to CFIUS review, as discussed above) to ensure that their bid will be considered on a level playing field with U.S. bidders. Acquirors must also be aware that there are numerous constituencies involved in a bankruptcy case that they will likely need to address (including bank lend-ers, bondholders, distressed-focused hedge funds and holders of structured debt securities and credit default protection, as well as landlords and trade creditors), each with its own interests and often conflicting agendas, and that there exists an entire subculture of so-phisticated investors, lawyers and financial advisors.
Various options are available to troubled companies seeking to take advantage of the U.S. bankruptcy laws. Multinational debtors have filed bankruptcy petitions in the U.S. and linked the confirmation of a plan of reorganization with successful administration of related foreign insolvency proceedings. Large non-U.S. companies can file cases under Chapter 15 of the U.S. Bankruptcy Code to obtain "recognition" of foreign insolvency proceedings in a U.S. bankruptcy court. The requirements for such recognition are min-imal, and include such connections to the U.S. as debt instruments with U.S. choice of law or venue provisions or payment of a retainer to U.S. counsel. Recognition under Chapter 15 facilitates restructurings and asset sales by providing debtors with protection from creditors in the U.S. and the ability to administer U.S. assets. Chapter 15 also pro-vides the ability to bind U.S. creditors to the terms of a restructuring plan implemented in a foreign proceeding, as well as protection against counterparties' termination of U.S. contracts and leases.
Debt Financing. While debt-fueled M&A activity came to a screeching halt during the first several months of the Covid-19 crisis, it came roaring back in the second half of 2020, as suspended deals were revived and new deals emerged, especially in the fourth quarter. Pfizer's wholly-owned Upjohn subsidiary raised $12 billion in permanent bank and bond financing related to its combination with Mylan N.V.; Salesforce obtained $10 billion of bridge commitments to support its acquisition of Slack; Nasdaq obtained $2.5 billion of bridge commitments to support its acquisition of Verafin; and PPG Industries raised $2 billion of term loan commitments to supports its acquisition of Tikkurila. In the private equity space, near-zero interest rates propelled a remarkable, nearly 20% increase in 2020 deal activity over 2019 levels, to the highest levels since 2007.
2020 was a unique year in many ways, but in this realm it reaffirmed an old lesson for deal-makers: windows can open as quickly as they shut, and the best strategy is to be the right mix of patient and prepared. Doing deals in 2021 with leverage will require careful planning and thoughtful approaches to negotiating a financing commitment, particularly as to ensuring the conditionality of banks' commitments will withstand a disrupted mar-ket, as well as to capture momentum in a good window to obtain the best terms and eco-nomics.
Important questions to ask when considering a transaction that requires debt financing in-clude: what is the appropriate level of leverage for the resulting business; which financ-ing market has the most favorable after-tax costs, terms and conditions for a particular cross-border deal; how committed the financing is or should be; which lenders have the best understanding of the acquiror's and target's businesses; whether there are transaction structures that can minimize financing and refinancing requirements; whether there are ways to share financing risk between a buyer and seller; which banks are in the strongest position to provide acquisition financing commitments; how many banks should be in-cluded in a process to line up the financing so as to best determine current market condi-tions; and how comfortable a target will feel with the terms and conditions of the financ-ing.
Litigation. Shareholder litigation continues to accompany many transactions involving a U.S. public company but is generally no cause for concern. Excluding situations involv-ing competing bids – where litigation may play a direct role in the contest – and going-private or other "conflict" transactions initiated by controlling shareholders or manage-ment – which form a separate category requiring special care and planning – there are very few examples of major acquisitions of U.S. public companies being blocked or even delayed due to shareholder litigation or of materially increased costs being imposed on arm's-length acquirors. In most cases, where a transaction has been properly planned and implemented with the benefit of appropriate legal and investment banking advice on both sides, such litigation can be dismissed or settled for relatively small amounts or non-financial "therapeutic" concessions. Sophisticated counsel can usually predict the likely range of litigation outcomes or settlement costs, which should be viewed as a cost of the deal.
While careful planning can substantially reduce the risk of U.S. shareholder litigation, the reverse is also true: the conduct of the parties during negotiations, if not responsibly planned in light of background legal principles, can create an unattractive factual record that may both encourage shareholder litigation and provoke judicial rebuke, including significant monetary judgments. Sophisticated litigation counsel should be included in key stages of the deal negotiation process. In all cases, the acquiror, its directors and shareholders and offshore reporters and regulators should be conditioned in advance (to the extent possible) to expect litigation and not to view it as a sign of trouble. In addi-tion, it is important to understand that the U.S. discovery process in litigation is different, and in some contexts more intrusive, than the process in other jurisdictions. Here again, planning is key to reducing the risk.
The pandemic has reinforced the importance of merger agreement provisions governing the choice of law and the choice of forum in the event of disputes between the parties— particularly disputes in which one party may seek to avoid the obligation to consummate the transaction. In Travelport Ltd v. Wex, for example, the English High Court interpret-ed the material adverse effect provisions of the parties' agreement under English law in a manner that surprised many U.S. observers. Similarly, in separate decisions examining whether and when a party can exit a merger agreement because the counterparty breached its interim operating covenants, the Superior Court of Justice in Ontario reached a different result than the Delaware Court of Chancery. These disputes, reflecting the transactional disruption occasioned by the pandemic, have taught again an important les-son: cross-border transaction planners should consider the courts and laws that will ad-dress a potential dispute and consider with care whether to specify the remedies available for breach of the transaction documents and the mechanisms for obtaining or resisting such remedies.
Tax Considerations. Three years later, taxpayers continue to adapt to fundamental changes in U.S. business taxation enacted at the end of 2017. These changes included: a reduction in the corporate income tax rate to 21%, full expensing for "qualified property" placed in service prior to January 1, 2023, a deduction for "foreign-derived intangible in-come" (FDII), limitations on the deductibility of business net interest expense to 30% of "adjusted taxable income" (an amount that approximates EBITDA and, beginning in 2022, EBIT), limitations on the use of a corporation's net operating loss carryforwards to 80% of taxable income in any particular year, limitations on deductible payments made from U.S. to non-U.S. affiliates in large multinational groups by way of a "base erosion and anti-abuse tax" (BEAT), and disallowance of deductions for certain interest and roy-alty payments to related non-U.S. parties pursuant to "hybrid" arrangements. In addition, sweeping changes were made to the U.S. taxation of income earned by non-U.S. subsidi-aries of a U.S. corporation by providing for a 100% deduction for dividends received by a domestic corporation from 10%-owned non-U.S. corporations (which may also elimi-nate tax on gain recognized upon a sale or disposition of a stake in such non-U.S. corpo-rations), and a new minimum tax on earnings of non-U.S. subsidiaries (GILTI).
Importantly, the 2017 legislation did not alter the U.S. tax rules generally applicable to corporate mergers and acquisitions, and also left in place existing rules applicable to "in-version" transactions. In fact, the 2017 law contains harsh additional rules intended to deter inversions. Rather than simplifying corporate taxation, U.S. tax "reform" has fur-ther exacerbated the complexity of U.S. tax rules applicable to multinational groups. But, extensive administrative guidance issued by the U.S. Department of the Treasury and the Internal Revenue Service since enactment has provided taxpayers with greater certainty regarding the interpretation of many rules.
Understanding the interplay of these rules frequently requires detailed modeling. Specif-ically, potential acquirors of U.S. target businesses should carefully model the anticipated tax rate of such businesses, taking into account the benefits of the reduced corporate tax rate, immediate expensing and, if applicable, the favorable deduction for FDII, but also the impact of the limitations on net interest expense deductions and certain related-party payments, limitations on the utilization of net operating losses under the statute and under recently proposed regulations that may further diminish the value of target net operating loss carryforwards, as well as the consequences of owning non-U.S. subsidiaries through an intermediate U.S. entity. This will typically require a detailed understanding of exist-ing and planned related-party transactions and payments involving the target group. In particular, the combination of the reduced corporate income tax rate and limitations on the deductibility of interest expense generally make it less attractive than under prior law to "push" acquisition debt into the U.S. group. Another critical diligence item is confirm-ing a target's one-time "transition tax" liability and whether it has validly elected to pay such liability over time.
In cross-border transactions involving the receipt of acquiror stock, the identity of the ac-quiring entity must be carefully considered. While U.S. tax reform has ameliorated some of the negatives historically associated with having a U.S.-parented multinational group, a non-U.S.-parented group may avoid application of the U.S. CFC rules, which have been significantly expanded by the GILTI regime. Because tax reform made the anti-inversion rules even more restrictive, combining under a non-U.S. parent corporation frequently will be feasible only where shareholders of the U.S. corporation are deemed to receive less than 60% of the stock of the non-U.S. parent corporation, as determined under com-plex computational rules.
Although President-elect Biden has proposed numerous changes to business taxation, in-cluding raising the corporate income tax rate to 28%, doubling the GILTI rate, and im-posing a minimum tax on corporations with book profits of $100 million or more, the state of the economic recovery and the narrow margins of Democratic control in Con-gress make dramatic tax law changes unlikely, at least in the near term.
Disclosure Obligations. How and when an acquiror's interest in the target is publicly disclosed should be carefully controlled and considered, keeping in mind the various ownership thresholds that trigger mandatory disclosure on a Schedule 13D under the fed-eral securities laws and under regulatory agency rules such as those of the Federal Re-serve Board, the Federal Energy Regulatory Commission (FERC) and the Federal Com-munications Commission (FCC). While the Hart-Scott-Rodino Antitrust Improvements Act (HSR) does not require disclosure to the general public, the HSR rules do require disclosure to the target before relatively low ownership thresholds may be crossed. Non-U.S. acquirors should be mindful of disclosure norms and timing requirements relating to home jurisdiction requirements with respect to cross-border investment and acquisition activity. In many cases, the U.S. disclosure regime is subject to greater judgment and analysis than the strict requirements of other jurisdictions. Treatment of derivative secu-rities and other pecuniary interests in a target other than common stock holdings can also vary by jurisdiction.
Shareholder Approval. Because most U.S. public companies do not have one or more controlling shareholders, public shareholder approval is typically a key consideration in U.S. transactions. Understanding in advance the roles of arbitrageurs, hedge funds, insti-tutional investors, private equity funds, proxy voting advisors and other market players – and their likely views of the anticipated acquisition attempt as well as when they appear and disappear from the scene – can be pivotal to the success or failure of the transaction. These considerations may also influence certain of the substantive terms of the transac-tion documents. It is advisable to retain an experienced proxy solicitation firm well be-fore the shareholder meeting to vote on the transaction (and sometimes prior to the an-nouncement of a deal) to implement an effective strategy to obtain shareholder approval.
Employee Incentives and Integration Planning. Employee compensation and benefits ar-rangements, both as legal and cultural matters, require careful review and planning dur-ing both the diligence and execution process in any cross-border deal. Post-acquisition integration of employees, compensation and benefits structures will require close atten-tion to the arrangements in place at the target company, consideration of the totality of ar-rangements in place at the acquiror, and the U.S legal, tax and regulatory framework, which sometimes limits changes to existing arrangements with executives. If possible, the team who will be responsible for integration should be involved in the early stages of the deal so that they can help formulate and "own" the plans that they will be expected to execute. Too often, a separation between the deal team's modeling of expected synergies and the integration process of the execution teams invites slippage in execution of a busi-ness plan, which in hindsight is labeled by the integration team as overly ambitious, whether in scale or timing, or simply fails to take into full consideration corporate cultur-al differences. Integration planning also should be carefully phased in during the period between signing and closing, as certain steps will require sensitivity to regulatory mat-ters.
Corporate Governance and Securities Law. Current U.S. securities and corporate gov-ernance rules can be troublesome for non-U.S. acquirors who will be issuing securities that will become publicly traded in the U.S. as a result of an acquisition. SEC rules, the Sarbanes-Oxley and Dodd-Frank Acts and stock exchange requirements should be evalu-ated to ensure compatibility with home jurisdiction rules and to be certain that a non-U.S. acquiror will be able to comply. Rules relating to director independence, internal control reports and loans to officers and directors, among others, can frequently raise issues for non-U.S. companies listing in the U.S. Non-U.S. acquirors should also be mindful that U.S. securities regulations may apply to acquisitions and other business combination ac-tivities involving non-U.S. target companies with U.S. security holders.
Antitrust Issues. To the extent that a non-U.S. acquiror directly or indirectly competes or holds an interest in a company that competes in the same industry as the target company, antitrust concerns may arise either at the U.S. federal agency or state attorneys general level. Recent enforcement actions show that concerns can also arise if a non-U.S. ac-quiror operates either in an upstream or downstream market of the target. As noted above, pre-closing integration efforts should also be conducted with sensitivity to anti-trust requirements that can be limiting. Home jurisdiction or other foreign competition laws may raise their own sets of issues that should be carefully analyzed with counsel. Change in the leadership of the U.S. antitrust agencies in 2021 will not immediately im-pact the review process in most transactions because the administration of the antitrust laws in the U.S. is carried out by professional staff that tend to rely on well-established analytical frameworks. Accordingly, the outcomes of most transactions can generally be predicted. The U.S. antitrust agencies will continue to scrutinize the remedies offered by transaction parties, and to prefer (1) divestitures in lieu of conduct remedies that require ongoing oversight to ensure compliance and (2) acquirors of the divestiture assets to be approved prior to closing rather than permitting divestiture acquirors to be identified by the parties and approved by the agency after closing. What is likely to change during the Biden Administration is increased requirements in remedying concerns, particularly in vertical transactions or involving pharma/high-technology sectors. Even in transactions that raise concerns, careful planning and a proactive approach to engagement with the agencies can facilitate getting the deal through.
Due Diligence. Wholesale application of the acquiror's domestic due diligence standards to the target's jurisdiction can cause delay, waste time and resources or result in missing a problem. Due diligence methods must take account of the target jurisdiction's legal re-gime and, particularly important in a competitive auction situation, local norms. Many due diligence requests are best channeled through legal or financial intermediaries as op-posed to being made directly to the target company. Due diligence requests that appear to the target as particularly unusual or unreasonable (which occurs with some frequency in cross-border deals) can easily create friction or cause a bidder to lose credibility. Similarly, missing a significant local issue for lack of jurisdiction-specific knowledge or understanding of local practices can be highly problematic and costly. Prospective ac-quirors should also be familiar with the legal and regulatory context in the U.S. for dili-gence areas of increasing focus, including cybersecurity, data privacy and protection, Foreign Corrupt Practices Act (FCPA) compliance, and other matters. In some cases, a potential acquiror may wish to investigate obtaining representation and warranty insur-ance in connection with a potential transaction, which has been used with increasing fre-quency as a tool to offset losses resulting from certain breaches of representations and warranties.
Collaboration. More so than ever in the face of current U.S. and global uncertainties, most obstacles to a deal are best addressed in partnership with local players whose inter-ests are aligned with those of the non-U.S. acquiror. If possible, relationships with the target company's management and other local forces should be established well in ad-vance so that political and other concerns can be addressed together, and so that all poli-ticians, regulators and other stakeholders can be approached by the whole group in a con-sistent, collaborative and cooperative fashion.