Negotiating and Closing on a Cross-Border M&A Transaction Doing Business Globally: A Practical Workshop on Risks, Best Practices and Strategies for Success 2011 Western Hemisphere Meeting March 9, 2011 Dallas Valerie Diamond, Matthew Gemello, Gerry McGrath, Jonathan Newton and Claudia Prado 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. Negotiating and Closing on a Cross-Border M&A Transaction Planning for the Transaction • Where is the transaction? • What is the scope of the proposed transaction? • Entire entity? • Business operation? • Specific assets? • How will the sale be conducted? • Privately negotiated? • Auction? © 2011 Baker & McKenzie LLP 2 Negotiating and Closing on a Cross-Border M&A Transaction Planning for the Transaction (cont.) • How will the purchase price be funded? • Internal funds? • Stock? • Borrowing from third parties? • Mix? © 2011 Baker & McKenzie LLP 3 Negotiating and Closing on a Cross-Border M&A Transaction Planning for the Transaction (cont.) • Who will work on the transaction? • Internal • External • Accountants (including forensic) • Attorneys • Investment bankers • Third party investigators or similar resources © 2011 Baker & McKenzie LLP 4 Negotiating and Closing on a Cross-Border M&A Transaction Planning for the Transaction (cont.) • Consider confidentiality considerations • Internal • External • Compliance © 2011 Baker & McKenzie LLP 5 Negotiating and Closing on a Cross-Border M&A Transaction Planning for the Transaction (cont.) • • • • • • • Schedule an organizational meeting of the team Establish roles and responsibilities for the team members Consider the costs of doing the deal Learn about the seller Consider how the acquired company will be integrated Agree due diligence approach Structure / tax © 2011 Baker & McKenzie LLP 6 Negotiating and Closing on a Cross-Border M&A Transaction Timing of the Transaction • How long will it take to: • Plan and agree upon the team members, the scope of their work and the responsibility timelines for the team? • Conduct diligence of target? • Respond to diligence requests by financing source, if any? • Satisfy regulatory requirements? • Obtain required third party consents? • Negotiate? © 2011 Baker & McKenzie LLP 7 Negotiating and Closing on a Cross-Border M&A Transaction Letter of Intent / Term Sheet • Why use a preliminary agreement? • How will a preliminary agreement impact timing? • Should the preliminary agreement be binding or nonbinding? • What is the effect of local law on “non-binding” provisions? • Consider express and implied duties • Consider non-competition / non-solicitation obligations and restrictions © 2011 Baker & McKenzie LLP 8 Negotiating and Closing on a Cross-Border M&A Transaction Letter of Intent / Term Sheet (cont.) • Should you ask for / obtain exclusivity and no-shop protection? • Why you should ask for breakup fees? • How do you respond to requests for reverse breakup fees? • What are the public disclosure obligations? • Will any regulatory filings be required? • Remember to address confidentiality provisions if there is not a separate confidentiality agreement • Precise or “feels good”? © 2011 Baker & McKenzie LLP 9 Negotiating and Closing on a Cross-Border M&A Transaction Structure of the Transaction • What is the appropriate acquisition vehicle? • US or local? • Should there be a holding or intermediate company for liability, tax or other reasons? • Consider limitations on liability of equity owners in the possible jurisdictions • What is the appropriate capitalization? • How does this impact post-acquisition integration? © 2011 Baker & McKenzie LLP 10 Negotiating and Closing on a Cross-Border M&A Transaction Structure of the Transaction (cont.) • Will the source of funding impact the structure? • Will internal or borrowed funds be used? • Consider the timing constraints of relying on a third party • Consider currency and exchange rates • Will local laws require registration or disclosure of source of funds? • Consider stock related issues such as registration rights, listing, etc. © 2011 Baker & McKenzie LLP 11 Negotiating and Closing on a Cross-Border M&A Transaction Structure of the Transaction (cont.) • Consider the tax and accounting issues regarding • Choice of funding • Acquisition vehicle • Resulting ownership structure • Common tax and accounting issues include • Resulting basis in assets • Interest deductions and withholdings • Allocation of purchase price • Transfer taxes • VAT taxes © 2011 Baker & McKenzie LLP 12 Negotiating and Closing on a Cross-Border M&A Transaction Structure of the Transaction (cont.) • How will the acquisition be structured? • Equity interests • Asset acquisition • Merger, if available under applicable law • Consider the liabilities that may attach to the purchase • Consider US and local law requirements for the actual transfer of the equity interests or assets • Do you need local transfer agents? © 2011 Baker & McKenzie LLP 13 Negotiating and Closing on a Cross-Border M&A Transaction Structure of the Transaction (cont.) • How will the acquisition be documented? • Equity interests • Asset acquisition • Merger • Consider “standard” conveyance documents • Consider “standard” ancillary documents • One v. multiple buyers • Acquisition documents © 2011 Baker & McKenzie LLP 14 Negotiating and Closing on a Cross-Border M&A Transaction Structure of the Transaction (cont.) • How will the documents address? • Risk allocation • Representations and warranties • Purchase price installment payments and holdbacks • Working capital / debt adjustments • Indemnification • Escrows • Funding of purchase price • Covenants pending and conditions to close • How do I hold target to the deal but give myself a way out? • Governing law • Dispute resolution © 2011 Baker & McKenzie LLP 15 Negotiating and Closing on a Cross-Border M&A Transaction Due Diligence • Discuss and establish the scope with target • Legal • Operations • Financial • Benefits • Regulatory • Litigation • Real estate • Environmental • Consider materiality thresholds • Agree upon place for, or mode of, production or delivery © 2011 Baker & McKenzie LLP 16 Negotiating and Closing on a Cross-Border M&A Transaction Due Diligence (cont.) • Continue to refine the budget for costs as you go • Continue to refine the scope of the requests and consider need for supplemental requests • Who is keeping track? • Establish with the target the timeline(s) for • Delivery of the requests • Delivery of the responses • Managing local teams © 2011 Baker & McKenzie LLP 17 Negotiating and Closing on a Cross-Border M&A Transaction Due Diligence (cont.) • Define the final product to be generated by the results of the diligence • Responsibilities for preparation • Interim reports • Form of final report • Use by third parties • Consider public sources • Refine the diligence requests prior to submission to target © 2011 Baker & McKenzie LLP 18 Negotiating and Closing on a Cross-Border M&A Transaction Due Diligence (cont.) • Be prepared to negotiate • Scope of target responses • Timing of responses • Distribution of responses • Consider inevitable objections from target • Privilege • Burden • Cost © 2011 Baker & McKenzie LLP 19 Negotiating and Closing on a Cross-Border M&A Transaction FCPA and Related Considerations • US Foreign Corrupt Practices Act • Expansive scope • Geographic reach • Expensive and well publicized consequences • Other comparable laws • UK bribery law • There are significant differences between UK and US laws © 2011 Baker & McKenzie LLP 20 Negotiating and Closing on a Cross-Border M&A Transaction FCPA and Related Considerations (cont.) • Diligence is crucial • Consider scope / responsibilities outside of “standard” diligence • What is “market”? • When and how much? • Timing will be affected • Actual costs may not have been fully anticipated • Consider the substantive impact on proposed transaction and the acquiring company after the acquisition • Forensic accounting, interviews, agent background checks © 2011 Baker & McKenzie LLP 21 Negotiating and Closing on a Cross-Border M&A Transaction Global Equity Issues • Identify all plans and other arrangements • Identify employee locations • Consider US and local • Benefit laws • Securities laws • Tax considerations (for acquiror, target and employees) • Consider eligibility of employees • Consider impact if stock-for-stock deal © 2011 Baker & McKenzie LLP 22 Negotiating and Closing on a Cross-Border M&A Transaction Choice of Law • Consider impact on documents • Risk allocation • Good faith • Enforceability • Will the choice be enforceable? © 2011 Baker & McKenzie LLP 23 Negotiating and Closing on a Cross-Border M&A Transaction Consider Use of Arbitration to Settle Disputes • Are the local courts fair and efficient? • What can you do to find out? • What arbitration forums are available? • How do you conduct diligence on the available forums? • Is mediation an alternative? • Will your choices of dispute resolution mechanism, forum and procedure be enforceable? © 2011 Baker & McKenzie LLP 24 Negotiating and Closing on a Cross-Border M&A Transaction For additional information, please contact: – Valerie H. Diamond Baker & McKenzie LLP Two Embarcadero Center, 11th Floor San Francisco, CA 94111 415 576 3086 valeriediamond@bakermckenzie.com – Jonathan B. Newton Baker & McKenzie LLP 711 Louisiana, Suite 3400 Houston, TX 77002 713 427 5018 jonathan.newton@bakermckenzie.com – Matthew R. Gemello Baker & McKenzie LLP 660 Hansen Way Palo Alto, CA 94304 650 856 5541 matthew.gemello@bakermckenzie.com – Claudia F. Prado Trench, Rossi e Watanabe Advogados Av. Dr. Chucri Zaidan, 920 - 8º andar São Paulo, SP 04583-904 Brazil +55 (11) 3048 6840 claudia.prado@bakermckenzie.com – Albert G. McGrath, Jr. Baker & McKenzie LLP 2001 Ross Avenue, Suite 2300 Dallas, TX 75201 214 978 3028 albert.mcgrath@bakermckenzie.com © 2011 Baker & McKenzie LLP 25