International Trade Issues in Mergers & Acquisitions
(Everything Corporate Lawyers Wanted to Know
About International Trade, But Were Afraid to Ask)
Presentation to the New Jersey Corporate Counsel
Association
Daniel J. Gerkin, Of Counsel, K&L Gates LLP, Washington, DC
Darlene Lapola, In-House Counsel, Avis Budget Group, Inc.
Marina Solo, Of Counsel, K&L Gates LLP, Newark, NJ
Jerome J. Zaucha, Partner, K&L Gates LLP, Washington, DC
December 13, 2012
Copyright © 2012 by K&L Gates LLP. All rights reserved.
Introduction
 Companies contemplating mergers and acquisitions with
international implications must be mindful of the potential
international trade issues associated with the proposed
transaction
 This presentation will highlight some of the key international
trade issues to consider in connection with a potential merger
or acquisition, including the following topics:
 Notification, Amendment, and Approval Requirements
 Due Diligence
 Approaches for Dealing with Results of Due Diligence
 Evaluation of Potential Impact of Trade Regulations on PostAcquisition Operation of Business
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Notification, Amendment,
and Approval Requirements
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Notification, Amendment, and Approval Requirements
 If target operates in a regulated industry, consider
whether U.S. Government agency imposes any
requirements/ restrictions, such as:
 The U.S. Department of Agriculture
 Agricultural land
 The U.S. Department of Transportation
 Air carriers
 Merchant shipping vessels
 The Federal Communications Commission (FCC)
 Radio licenses
 The Federal Reserve Board/The Office of the Comptroller of the
Currency
 Banks
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Notification, Amendment, and Approval Requirements
(cont’d)
 Acquisitions implicating national security considerations
 The Committee on Foreign Investment in the United
States (“CFIUS”)
 U.S. Department of Defense, Defense Security Service
(“DSS”)
 U.S. Department of State, Directorate of Defense Trade
Controls (“DDTC”)
 Entities holding licenses/authorizations from U.S.
Government
 International Traffic in Arms Regulations (“ITAR”)
 Export Administration Regulations (“EAR”)
 Bonds held in connection with acting as importer of record
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Notification, Amendment, and Approval Requirements
(cont’d)
 Acquisitions implicating national security considerations
(cont’d)
 The CFIUS
 The CFIUS, an interagency committee chaired by the U.S.
Department of the Treasury, conducts reviews of proposed
mergers, acquisitions or takeovers, of U.S. persons by
foreign interests under Section 721 of the Defense
Production Act.
 Definition of “covered transaction”
 Treatment in transaction documents
 The CFIUS review is a voluntary process and affords an
opportunity to foreign persons and U.S. persons entering into
a transaction to submit the proposed transaction for review
by CFIUS to assess the impact of the transaction on U.S.
national security.
 Overview of review, investigation, and Presidential review periods
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Notification, Amendment, and Approval Requirements
(cont’d)
 Acquisitions implicating national security considerations
(cont’d)
 The CFIUS (cont’d)
 Although filing a notice of a transaction with CFIUS is
voluntary, CFIUS can initiate a review unilaterally and can
compel the production of necessary information regarding the
terms of any covered transaction
 If CFIUS is not satisfied that national security concerns can
be mitigated, it can recommend that the President suspend
or prohibit such a transaction, and the President may order
divestment if the transaction has been completed, regardless
of whether a notice was filed
6
Notification, Amendment, and Approval Requirements
(cont’d)
 Acquisitions implicating national security considerations
(cont’d)
 The CFIUS (cont’d)
 Recent examples:
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Dubai Ports World – acquisition of company that operated
various U.S. port facilities by Dubai company
Firstgold Corp. – failed acquisition of Nevada-based mining
concern
Ralls Corporation – President invoked national-security
concerns to prevent a firm owned by two Chinese nationals
from acquiring four wind-farm projects in Oregon
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Code 1: NAAP8
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Notification, Amendment, and Approval Requirements
(cont’d)
 Acquisitions implicating national security considerations
(cont’d)
 DSS
 A Company is considered to be operating under Foreign
Ownership, Control, or Influence (“FOCI”) whenever a foreign
interest has the power, direct or indirect, whether or not
exercised, and whether or not exercisable, to direct or decide
matters affecting the management or operations of that
company in a manner which may result in unauthorized
access to classified information or may adversely affect the
performance of classified contracts.
 5 percent ownership threshold (SF-328)
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Notification, Amendment, and Approval Requirements
(cont’d)
 Acquisitions implicating national security considerations
(cont’d)
 DSS (cont’d)
 The following factors relating to a company, the foreign interest, and
the government of the foreign interest are reviewed in the aggregate
in determining whether a company is under FOCI:
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Record of economic and government espionage against U.S. targets;
Record of enforcement and/or engagement in unauthorized technology
transfer;
The type and sensitivity of the information that shall be accessed;
The source, nature and extent of FOCI;
Record of compliance with pertinent U.S. laws, regulations and contracts;
The nature of any bilateral and multilateral security and information
exchange agreements that may pertain; and
Ownership or control, in whole or in part, by a foreign government
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Notification, Amendment, and Approval Requirements
(cont’d)
 Acquisitions implicating national security considerations
(cont’d)
 DSS (cont’d)
 When a company with a facility security clearance enters into
negotiations for the proposed merger, acquisition, or takeover by a
foreign interest, the contractor must submit notification to DSS of
the commencement of such negotiations.

The notification shall include the type of transaction under negotiation
(stock purchase, asset purchase, etc.), the identity of the potential
foreign investor, and a plan to mitigate/negate the FOCI consistent with
paragraph 2-303, National Industrial Security Program Operating
Manual (NISPOM).
 FOCI Mitigation
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Notification, Amendment, and Approval Requirements
(cont’d)
 Acquisitions implicating national security considerations
(cont’d)
 DDTC
 A company registered with DDTC (as a manufacturer/exporter or
broker of defense articles, defense services, or related technical
data) under the International Traffic in Arms Regulations (22 C.F.R.
Part 120, et seq.; “ITAR”) must notify DDTC at least 60 days in
advance of any intended sale or transfer of ownership or control to
a foreign person

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Section 122.4(b) of the ITAR
CFIUS overlay; ordinarily not treated as a consent
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Notification, Amendment, and Approval Requirements
(cont’d)
 Acquisitions implicating national security considerations
(cont’d)
 DDTC (cont’d)
 A company registered with DDTC under the ITAR must, within five
days of the event, notify DDTC if there is a material change in the
information contained in the company’s Statement of Registration,
including, for example, the establishment, acquisition, or divestment
of a subsidiary or foreign affiliate

Section 122.4(a)(2) of the ITAR
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Notification, Amendment, and Approval
Requirements (cont’d)
 In connection with offshore transactions by U.S.
companies
 Exemplary jurisdictions
 Australia/New Zealand
 Brazil
 India
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Code 2: DDTC15
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Due Diligence
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Due Diligence (cont’d)
 Importance/purpose of international trade due diligence
relates to:
 Successor liability – minimizing potential liability for prior
activities of the target (Sigma Aldrich ALJ decision);
 Severe penalties
 Ensuring proper valuation and minimize disruption;
 Potential for cost savings
 Identifying existing and avoiding future compliance issues;
 Assessing timeline and cost of post-acquisition
compliance; and
 Assisting in integration of the target’s business into the
business of the acquiring company
 Substantial lead time required
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Due Diligence (cont’d)
 There are an array of issues that should be covered in any
international trade due diligence
 Such issues go beyond penalties for prior violations by the
company being acquired
 Although any due diligence inquires should be tailored to a
particular transaction, the following general areas should be
analyzed:
 The nature and type of target’s international commercial activities;
 The target’s affiliates, customers, agents, distributors, and export
destinations;
 The target’s suppliers and the nature and type and origin of raw
materials or finished goods sourced by the target
 Prior enforcement actions, prior disclosures, and legal advice; and
 Existing compliance and recordkeeping programs
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Due Diligence
 The United States traditionally substantially regulated both import
and export trade, although it is becoming apparent that more and
more countries are following this pattern and increasing regulations
on import and export activities
 Accordingly, also now focus on compliance with the trade laws of other
countries
 The following are examples of U.S. international trade-related issues
that should be considered in connection with due diligence
 Export Controls
 Antiboycott
 Embargo Restrictions and Sanctions
 Customs Compliance
 Foreign Corrupt Practices Act/Anti-Money Laundering
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Due Diligence (cont’d)
 International Trade Topics to Cover (cont’d)
 Export Controls
 Applicable laws


Export Administration Regulations (15 C.F.R. Part 730, et seq.; EAR), which are
administered by BIS
International Traffic in Arms Regulations (22 C.F.R. Part 120, et seq.; ITAR), which
are administered by DDTC
 Brief overview of topics to cover
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Classification of target’s commodities, software, and/or technology
Foreign national employees – I-129 work visa
Export activities/licenses and other authorizations
Automated Export System (AES) compliance
Prior investigations, enforcement actions, and disclosures
Antiboycott issues – focus on transactions in certain regions
Existence of export compliance policies/procedures
Prior contact with U.S. Government
Results of any prior export control-related audits by the target
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Due Diligence (cont’d)
 International Trade Topics to Cover (cont’d)
 Embargo Restrictions and Sanctions
 Applicable laws


The various statutes, Executive Orders, and regulations (including 31 C.F.R. Part
500, et seq.), which are administered by OFAC
Statutes and Executive Orders authorizing the imposition of sanctions on non-U.S.
persons for engaging in certain activities relating to Iran
 Brief overview of topics to cover
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Nature of U.S. involvement in non-U.S. business activities of the target
Identification of prior and ongoing dealings with countries and persons that currently
are or have, within the last five (5) years, been subject to embargo-type restrictions
Nature of non-U.S. operations involving and structure of the entities engaged in
dealings with embargoed countries/persons
Existing compliance policies/procedures
Prior investigations, enforcement actions, and disclosures
Prior contact with U.S. Government
Results of any prior embargo-related audits undertaken by the target
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Due Diligence (cont’d)
 International Trade Topics to Cover (cont’d)
 Customs Compliance
 Brief overview of topics to cover
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Prior applications/requests to CBP
Prior investigations, enforcement actions, and disclosures
Existing compliance policies/procedures
Identification of imports into the United States

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Importer of record
Classification (e.g., Pharmaceutical Appendix)
Valuation
Country of origin (e.g., API)
Preferential trade programs
Customs brokers and bonds
Prior contact with U.S. Government
Results of any prior customs-related audits undertaken by the target
22
Due Diligence (cont’d)
 International Trade Topics to Cover (cont’d)
 Foreign Corrupt Practices Act
 Brief overview of topics to cover
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Identification of target’s practices with respect to foreign agents,
consultants, and distributors
Existing manuals and compliance procedures
Possible violations
Prior investigation and enforcement matters
Prior contact with U.S. Government
Results of any prior audits undertaken by the target
Nature of non-U.S. operations
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Due Diligence (cont’d)
 International Trade Topics to Cover (cont’d)
 Other
 Government Contracts
 Facility Security Clearances

Issues relating to classified information
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Code 3: DD25
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Notification, Amendment, and
Approval Considerations
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Notification, Amendment, and Approval
Considerations
 U.S. Regulatory Issues
 Offshore Regulatory Issues
 Regional/Local Counsel
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Approaches for Dealing with
Results of Due Diligence
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Approaches for Dealing with Results of Due Diligence
 There are a number of approaches for dealing with
violations discovered in connection with due diligence
 Valuation reduction
 Escrow – sum of money withheld from sales price to offset costs
associated with potential penalties for violations
 Require target to file voluntary disclosure with relevant U.S.
Government agency prior to closing
 Buyer can make closing terms contingent upon outcome of action on
voluntary disclosure
 Indemnification (possibly in conjunction with a post-closing voluntary
prior disclosure)
 Require post-closing cooperation in connection with future audits etc.
 Earn-out where the parameters are defined by losses resulting from
penalties and audits
 Stripping “offending” assets out of the transaction or isolating them in a
separate acquisition vehicle or cancellation of transaction altogether
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Evaluation of Potential Impact
of Trade Regulations on PostAcquisition Operation of
Business
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Evaluation of Potential Impact of Trade Regulations
on Post-Acquisition Operation of Business
 International trade issues may impact the feasibility/objective of a
potential merger or acquisition
 Because of substantial restrictions that can apply, evaluation of any
such restrictions must be undertaken
 For example:
 Involvement of Restricted/Denied Parties
 Exports of technology to country in which acquiring company is
organized and/or located
 May not be feasible to combine target’s technology with acquiring
company’s technology
 If acquisition is intended to allow acquired company to act as
distributor of goods and an antidumping or countervailing duty
order applies to such goods, may not be feasible
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Code 4: EVAL32
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Questions?
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Contact Information
 Daniel J. Gerkin
daniel.gerkin@klgates.com
(202) 778-9168
 Darlene Lapola
 Marina Solo
marina.solo@klgates.com
(973) 848-4129
 Jerome J. Zaucha, Partner, Washington, DC
jerome.zaucha@klgates.com
(202) 778-9013
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