Cross-Border Transactions Handbook_Roeder

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Cross-Border Transactions

Handbook


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Cross-Border TransactionsHandbook

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Baker & McKenzie 2006All rights reserved.

This publication is copyright. Apart from any fair dealing for the purposes of private study orresearch permitted under applicable copyright legislation, no part may be reproduced ortransmitted 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 andis not intended to be a comprehensive exposition of all potential issues arising in the context of across-border or multi-jurisdictional transaction, nor of the law relating to such issues. It is notoffered as advice on any particular matter and should not be taken as such. The precedentdocuments 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 inrespect of anything done and the consequences of anything done or permitted to be done oromitted to be done wholly or partly in reliance upon the whole or part of this volume. Before anyaction is taken or decision not to act is made, specific legal advice should be taken in light of therelevant circumstances and no reliance should be placed on the statements made or documentsreproduced 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 apartner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference toan office means an office of any such law firm.


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Cross-Border Transactions HandbookEditors Note

EDITORS NOTE

Baker & McKenzie was founded in 1949. For more than 50 years, Baker & McKenzie has providedsophisticated advice and legal services to many of the worlds most dynamic and successfulorganizations. With a network of more than 3,000 locally qualified, internationally experiencedlawyers in 38 countries, Baker & McKenzie has expertise in all of the disciplines that are typicallyrelevant to a cross-border transaction. Working in experienced inter-disciplinary teams to advise oncorporate, securities, tax, antitrust/competition, finance, commercial, intellectual property,employment, employee benefits, IT, environmental, real property, trade and other compliance andregulatory matters, Baker & McKenzie is in a unique position to assist companies in planning andimplementing cross-border transactions and to deliver integrated solutions which take into accountall 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 aclearer appreciation for the breadth and depth of business and legal considerations associated withcross-border transactions.

Related Publications

Baker & McKenziesPost-Acquisition Integration Handbook summarizes the issues to beconsidered when integrating an existing and newly acquired business operating in the same field, tosave costs, develop synergies and generate value for shareholders.

Baker & McKenziesRapid Dispositions Handbook summarizes the issues to be consideredwhen selling a business and provides an organized collection of practical know-how, specificallyrelevant to a situation where a company wishes to dispose of a business or undertake a disposalprogram.Baker & McKenziesAcquiring Companies and Businesses in Europe provides a country-by-country 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 & McKenziesWillkommen in Amerika Handbook: A Legal Guide to DoingBusiness in the United States of America provides an overview of several areas of US law thatare of significant interest for German, Austrian or Swiss companies who either plan to enter the USmarket 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 & McKenziecontact partner or any of the contributing lawyers listed on the next page. Further details on thefirm, our people and our practice may be found atwww.bakernet.com .

John Morrow Lewis Popoff Partner Knowledge ManagerNorth America, M&ASenior Editor EditorBaker & McKenzie, Chicago Baker & McKenzie LLPTel: +1 312 861 8621 Tel: +1 312 861 8160 [email protected] [email protected]


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Cross-Border Transactions HandbookContributing Lawyers

Contributing Lawyers

Editors

John MorrowPartnerSenior EditorBaker & McKenzie, Chicago

Lewis Popoff Knowledge ManagerNorth America, M&AEditorBaker & McKenzie LLP

Section Contributors

Discrete Financing IssuesSection 4 Jose Moran, PartnerBaker & McKenzie, Chicago

Preliminary AgreementsSection 5 David Malliband, PartnerBaker & McKenzie, Chicago

Sarbanes-Oxley ActSection 6Nathan Dooley, Global Knowledge Officer SecuritiesBaker & McKenzie LLP

Foreign Corrupt Practices ActSection 6

Carrie DiSanto, PartnerBaker & McKenzie, Chicago

Trade, Export and AntiboycottSection 6 Janet Kim, PartnerAllison Stafford Powell, AssociateBaker & McKenzie, Washington, DC

Regulatory FrameworkSection 7 Regine Corrado, PartnerAlexandra Lee, Associate

Baker & McKenzie, Chicago

Employee Transfers and BenefitsSection 8 David Ellis, PartnerBaker & McKenzie, Chicago

Global Equity CompensationSection 8 Brian Wydajewski, PartnerBaker & McKenzie, ChicagoandValerie Diamond, Partner Julia Walk, AssociateBaker & McKenzie, San Francisco

Documenting the TransactionSection 9 David Chmiel, AssociateBaker & McKenzie, London

Business Process OutsourcingSection 9Peter George, PartnerBaker & McKenzie, Chicago

Closing the TransactionSection 10 Helen Mantel, AssociateBaker & McKenzie, Chicago

Post-Closing ActionsSection 11 Olivia Tyrrell, AssociateBaker & McKenzie, Chicago

Dispute ResolutionSection 12

Michael Morkin, PartnerEthan Berghoff, PartnerBaker & McKenzie, Chicago


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Cross-Border Transactions HandbookTable of Contents

TABLE OF CONTENTS

SECTION 1 INTRODUCTION................................................................ 1 1. Focus of the Handbook........................................ 2 2. Organization of the Handbook............................. 3

SECTION 2 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

SECTION 3 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

SECTION 4 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

SECTION 5 PRELIMINARY AGREEMENTS.......................................39 1. Confidentiality Agreements................................40 2. Letters of Intent..................................................44

SECTION 6

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


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11. Diligence in the Context of Other Formsof Transactions................................................... 68

SECTION 7 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 SECTION 8 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

SECTION 9 DOCUMENTING THE TRANSACTION...........................103 1. The Governing Law Debate..............................103 2. Cross-Border Acquisition Agreements.............105 3. Business Process Outsourcing ........................112

SECTION 10 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

SECTION 11 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


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6. Fiscal Year and Other CorporateChanges ............................................................131

7. Signage and Letterhead...................................131 8. Ongoing Compliance ........................................131

SECTION 12 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

APPENDIX 2.1 ACQUISITIONS FLOWCHART.......................................147

APPENDIX 3.1 BUDGET TEMPLATE ....................................................163

APPENDIX 5.1 CONFIDENTIALITY AGREEMENT CHECKLIST.............167

APPENDIX 5.2 LETTER OF INTENT CHECKLIST ..................................169 APPENDIX 8.1 BUYERS INTERNATIONAL HR CHECKLIST

FOR NON-US EMPLOYEE TRANSFERS ANDBENEFITS.....................................................................171

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


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Cross-Border Transactions HandbookSection 1 Introduction

Baker & McKenzie 1

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 thatare familiar in a strictly domestic context, including mergers,acquisitions, dispositions, joint ventures, strategic alliances and businessprocess outsourcing. Similar to a transaction within a single jurisdiction,the choice of which transaction structure to utilize will depend on acompanys overall business strategy.

Companies pursuing revenue growth, new technologies, alternativeproduction sites or economies of scale may explore mergers andacquisitions; companies seeking to generate cash or focus on core businesses may explore dispositions; companies looking to gain access tonew markets or technologies may explore joint ventures or strategicalliances; 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 acompanys business objectives, there will be goals that are common incarrying out all transactions: (i) achieving certainty of execution; (ii)maximizing the economic benefit of the transaction; (iii) reducing theamount of management time absorbed by the process; (iv) shortening thetime frame in which the transaction is completed; (v) controlling theassociated transaction costs; (vi) properly identifying and addressing therisks associated with the transaction; and (vii) effectively managingexposure to liabilities.

The successful attainment of these goals depends, in large part, on thesuccessful planning, organization and coordination of the internaltransaction team and outside advisors. Successful transactionmanagement is challenging in a strictly domestic context: more than half of acquisitions, joint ventures and strategic alliances fail. In the cross- border context, successful transaction management is even more difficult.

When we speak in this handbook of cross-border, or multi- jurisdictional or international transactions, we are referring to


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transactions involving 2 or more countries, often as many as 20 to 30, butin some cases much larger (such as 80 or more). The differences betweena 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 andimplementation of the transaction is legally valid under local law andconsistent with local practice. While a cross-border transaction willinvolve most of the complexities inherent in the domestic context, cross- border transactions raise a set of issues that are specific to theinternational context, such as exchange control restrictions, foreigninvestment law approvals and local formalization requirements (e.g., notarial deeds), to name a few. From a practical point of view, a cross- border transaction is essentially a large-scale, global undertakinginvolving many moving variables.

Accordingly, managing a cross-border transaction requires active andexperienced coordination to increase the likelihood that the transaction issuccessfully completed in a cost-efficient and timely manner, withminimal error.

1. Focus of the Handbook

This handbook focuses on the project management challenge of executingcross-border transactions, discusses various relevant legal issues in atransaction management context and treats these legal issues as risks thatshould be identified, quantified, addressed in an overall negotiationstrategy and reflected in the final transaction documents and procedures.

In discussing the project and risk management aspects of cross-bordertransactions, this handbook highlights the commonalities of the maintransaction structures as they pertain to cross-border transactions, with ageneral 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 toeffect the transaction. In an acquisition, the relationship between theparties terminates for most purposes at the close of the transaction; the


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post-closing relationship is generally limited to managing the mechanicsof the short-term transitional arrangements, purchase price adjustmentsand disputes that arise with respect to indemnification obligations.

Joint ventures, on the other hand, depend on an ongoing businessrelationship 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 contributeexisting businesses with assets in multiple jurisdictions, in which case thetransaction 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 viarepresentations and warranties and indemnification provisions; formingspecial purpose companies to accept local transfers of assets and liabilities;identifying and managing third party consents, employee notificationrequirements, foreign investment approvals, exchange control obligationsand pre-merger competition filings; and assessing and paying transfer taxobligations.

Accordingly, this handbook does not attempt to provide a detaileddiscussion of each major transaction structure. Baker & McKenziepublishes other handbooks, including those listed in the Editors Noteunder the heading Related Publications, that look at individualtransactions in greater depth. Please contact Baker & McKenzie if youwould like a copy of the firms other publications.

2. Organization of the Handbook

This handbook describes and collects best practices in managing cross- border transactions. Each section includes a narrative describing arecommended approach to a major aspect of cross-border transactions.In addition, some valuable know-how and tools for managing cross- border transactions are included as appendices. Materials have beenincluded with the goal of being useful both to companies that conductmost transactions through their in-house legal teams and those companiesthat 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-borderacquisition. For a company with a large in-house legal department, thistype of business process tool can be useful in defining and standardizing

the in-house teams approach to cross-border acquisitions. For acompany that relies heavily on outside advisors, a better understanding of the cross-border acquisition process can help the in-house team to moreeffectively manage outside counsel and determine how to allocate itsscarce 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 andmanaging an effective transaction team. In the acquisition and dispositioncontext, effective project management is essential for identifying positiveand negative value drivers and informing negotiations. Much of theproject management effort will be reflected in the final transactiondocuments, which ultimately may be interpreted by a court or arbitrationpanel. In the joint venture and strategic alliance context, the projectmanagement challenge is more subtle. The transaction team mustidentify 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 theinternal transaction team to work together effectively will be a key factorin constructive negotiations and potentially will be a key determinant inthe success of the joint venture or strategic alliance. Section 3 (Budgetingfor the Transaction) discusses strategies for ensuring that the internal legalteam and external legal advisors are on the same page with respect to thelegal fees that will be incurred on the transaction. Effective projectmanagement is one of several conditions to accurate budget estimates:often, a transaction that takes six months rather than one month to closewill be more expensive. Nevertheless, proper communication and a clearunderstanding of the risk profile, strategic objectives and main costvariables will help to ensure that surprises are kept to a minimum.

The next two sections address discrete issues that highlight how commonconsiderations and assumptions in the domestic context should beaugmented or modified in the cross-border setting. Section 4 (DiscreteFinancing 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 debtversus equity financing and the challenges of taking secured interests inthe cross-border context. Section 5 (Preliminary Agreements) discusses

the potential pitfalls of entering into preliminary agreements in the cross- border context, including agreeing to an unfamiliar governing law andenforceability of preliminary agreements.

The next three sections focus on identifying the main risks that need to bemanaged in a cross-border transaction. Section 6 (Diligence) discussesthe challenge of conducting a diligence investigation in a multi- jurisdictional context. In a strictly domestic context, defining the roleand scope of the review and the materiality thresholds is critical. In a

multi-jurisdictional context, this exercise can become extremelychallenging. Section 7 (Regulatory Framework) discusses the mainregulatory 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 (EmployeeTransfers and Benefits) discuses the major issues with respect to thetransfer of employees and benefit plans that arise in cross-bordertransactions. This section also addresses the significant issues involved inimplementing equity compensation and benefit plans in multiplecountries.

The final sections discuss the process of documenting and closing a cross- border transaction and the considerations that come into play after thetransaction has closed. Section 9 (Documenting the Transaction)discusses how documentation used in a strictly domestic context mayneed to be modified to properly identify and allocate the risks associatedwith a cross-border transaction. Section 10 (Closing the Transaction)

discusses the challenges of closing transactions with differing localrequirements and multiple time zones. Section 11 (Post-Closing Actions)discusses post-closing operational actions that often fall through the cracksas the transaction team focuses on the next transaction. Lastly, Section12 (Dispute Resolution) discusses the considerations for crafting anappropriate and strategically beneficial dispute resolution mechanism.


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Cross-Border Transactions HandbookSection 2 Project Management

Baker & McKenzie 7

SECTION 2

PROJECT MANAGEMENT

The ability of a company to realize its objectives in any major corporatetransaction will depend on effective transaction management, including:(i) clearly defined roles and responsibilities; (ii) appropriate project andcommunications plans; (iii) efficient access to and management of internaland external know-how; and (iv) risk identification and management.The transaction management challenge in the cross-border setting isexacerbated 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 Investment approvals;x Exchange control approvals or consents;x Tax clearances;x Clearances under local or international competition laws;x Unusual problems arising in the acquisition review (or due

diligence) investigation of a foreign target;x Language and cultural barriers;x The necessity of agreeing on an allocation of the purchase price

among assets located in various jurisdictions; orx Burdensome or unusual mechanics required to comply with local

law or practice relating to the documentation necessary to effectthe transaction for local purposes.

The sheer volume of issues and tasks that often arise in the jurisdictionsinvolved in a cross-border transaction elevates the importance of carefulorganization and planning early on in the transaction in a way nottypically 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 magnitudethan the already significant costs that might arise from the poormanagement of a typical domestic transaction.

The overarching requirement for managing a cross-border transaction isthus an understanding of how each aspect of the transaction relates toevery other aspect. Appendix 2.1 (Acquisitions Flowchart) illustrates this,from the naming of the transaction team to the closing of the transactionand thereafter. While this flowchart focuses on the legal aspects anddocumentation, it also outlines the fundamental progress of thetransaction and serves as a useful project management tool for organizingthe entire transaction.

1. Organizing Principle

A major cross-border transaction such as an acquisition, disposition, jointventure, strategic alliance or outsourcing transaction ultimately relates toa legal process or legal document. The legal structure therefore offers apractical 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 legalteam. The legal team must therefore ensure that the documents reflectthe agreed business arrangements and the level of risk appropriate fortheir clients bargaining position.

Perhaps even more important, while the transaction documents willtypically provide a mechanism to claw back a significant portion of thetransaction proceeds in the event that issues have not been fully disclosedin the acquisition review process, risks have been misestimated, or assets

and liabilities have been defined poorly, the cost and time required toenforce such a mechanism, particularly when multiple jurisdictions areinvolved, can be considerable. Therefore, it is incumbent on the legalteam to not just paper the deal, but also to ensure that adequate dealmanagement is in place so that the documents retain their clients benefitof the bargain.

Securing adequate deal management in the cross-border setting can be a tallorder 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, in-house legal departments often are thinly staffed (often with limitedpersonnel outside corporate headquarters) and oriented to serving

internal clients, many of whom have strong opinions about how thetransaction should be managed and, as revenue generators rather thancost centers, are more influential organizationally. As a result, in cross- border transactions the external legal teams often play a critical role insupplementing the internal legal team with strategies and tools to ensurea smooth transaction.

2. Scope of the Project

As a threshold matter the parties involved must fully understand thescope 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 aparticular product line or piece of know-how? Do the parties intend torealize significant synergies as a result of the transaction? Are the partiespublic or private and of what nationality? What internal and externalresources will the parties engage for the transaction? Are 80 countries

involved or just 2? Is the target subject to significant political, economicor legal risks in the countries where it operates? Does the target conductmanufacturing or other extensive operations in each country where it hasa presence, or does it merely operate sales companies in certaincountries? Are the parties involved in highly regulated or highlyspecialized industries? Has the targets management done a good jobrunning the targets business? Will the buyer need to obtain financingfrom a third party to do the deal? Is this a negotiated transaction or is itan auction? The answers to these types of questions will dictate how theproject should be managed and the particular areas of expertise thatshould be brought to bear on it.

3. Assembling the Transaction Team

Perhaps the most critical element in a successful cross-border transactionis the ability to move the entire process forward evenly and in anorganized fashion, with free and complete communication among thosecharged with responsibility for it. The first step, then, is identifying thepersons inside and outside the company who will be charged with


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effecting the transaction. Depending on the scope of the transaction, thetransaction team is likely to include internal members or groups from thelegal 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 participantsand the timing of their inclusion in the transaction team will depend onthe type, size, structure and timing of the transaction and the partiesinvolved, the key players and their respective roles typically includethe following:

x Officers/Senior Managers (including GeneralCounsel). The officers and senior managers are oftenresponsible for driving the transaction (e.g., setting the timelineand tone of the process). They are critical to the decision toinitiate and proceed with the transaction and often participate inthe acquisition review or due diligence process. In thedisposition context, they also help gather the information thatgoes into both the information or offering memorandum anddata room, are actively involved in management presentations

and may serve as a front-line contact for potential buyers. Oncethe parties enter into negotiations, senior officers and membersof the legal department may also be involved in negotiatingparticular deal terms.

x Local Management. It is often helpful to involve the localmanagement of the parties in multi-jurisdictional transactionssubject to confidentiality constraints as discussed below insubsection 4 (Organizational Meeting). They may assist with theacquisition review process and coordinate with local advisors asto the implementation of the transaction at the local level. Inaddition, many buyers will want to include key local managers inthe list of those to whom knowledge is ascribed for purposes of the representations and warranties contained in the transactiondocumentation, thereby making their involvement prior to theexecution of the documents all the more crucial.


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x 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 theseller is a small company or privately held or if the target business represents a significant percentage of the sellers overallenterprise. For example, if the seller is a small, privatecompany, directors and shareholders may be involved inidentifying potential buyers. Ultimately, the directors (andpossibly the shareholders) will need to approve the transaction.In many jurisdictions, the directors will need to make theirdecision based on the principle that the transaction is in the bestinterests of the company and, as such, their involvement andunderstanding is critical from an early stage.

x Investment Bankers. Investment bankers usually identifypotential transactions and help bring the parties together toconsummate the transaction. They often help determine theoptimal transaction structure and assist in identifying synergiesand with valuations, in addition to providing strategic and other

business advice. In the disposition context, they frequentlyidentify appropriate bidders, prepare information memorandaand lead the sales effort. Investment bankers may also beinvolved in negotiating key deal terms that affect valuation andother financial and strategic aspects of the transaction.

x Outside Legal Counsel. Given the multiple and oftenunfamiliar legal systems and local practices at play in cross- border transactions, the role of principal project coordinatoroften falls upon the legal advisors to the respective parties,although it is not unusual for this role to be assumed (at least inthe early stages) by business development personnel inconjunction with the partys financial advisors, particularly inthe auction context. Typically, the responsibilities of outsidelegal counsel will include: reviewing and/or compiling allrelevant documents for the acquisition review process; takingthe 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 andfinancial advisors; counseling on specific legal issues, such ascorporate and tax structure, environmental concerns,

employment/labor law, employee benefits, intellectualproperty, real estate, antitrust/competition, compliance, tradeand other regulatory matters; and coordinating the overallprocess so that senior management can continue to meet theirday-to-day responsibilities. It is imperative in the cross-bordersetting that the coordinating lawyer have a global view of the lawand a degree of familiarity with the legal systems of thesignificant jurisdictions involved in the deal. Having seen similarproblems on previous transactions and knowing the nature of possible resolutions of these problems is indispensable.

x Accountants. The accountants main role is to review andanalyze the financial statements and tax documents, particularlyas they relate to certain compliance issues, the structure of thetransaction and the valuation of the target. Sometimes,accountants will work in conjunction with financial advisors andlegal counsel to determine the optimal tax structure for the

transaction.x Other Professional Advisors. In a large cross-border

transaction is it also fairly common for the buyer to retain otherprofessional advisors to assist with discreet areas of concern.These may include employee benefits, environmental, humanresources, insurance and other industry-specific advisors orconsultants.

4. Organizational Meeting

All core members of the initial transaction team should be included in anorganizational meeting as soon as the basic decision is made to proceedwith the transaction. Participation by all core team members in theorganizational meeting is the first opportunity to give them the fullpicture of the intended transaction and to get them to buy into it. Thespecific objectives for the deal should be explained, includingexpectations 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 bedesignated as the team leader, with everyone else, inside and outside thecompany, 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 ismoving forward evenly on all fronts. All members subsequently joiningthe team should receive similar information.

Participants should obviously be given guidelines for preparing for theorganizational meeting. If they do prepare, their active participation inthe meeting discussions can be very beneficial in getting them to buy intothe transaction as a priority. Their participation is also particularly

important in analyzing the target business and the likely concerns thatmay affect the value of the transaction. Identifying these concerns at theoutset (even if they are subsequently refined) is vital in determining howto analyze the transactions key value drivers and addressing importantissues 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 theinformation required to document any deal can be challenging,particularly if the members of the transaction team do not fully appreciatethat the legal teams charge is far broader than identifying and managingthe legal issues associated with the transaction. Therefore,communications among the legal team, the other internal teams andexternal consultants should complete a virtual circle, with the businessteam communicating the proposed valuation of the target business and theassociated positive and negative value drivers, the legal team and otheroutside advisors identifying risks that may affect the value drivers andcommunicating those risks back to the business team, and the businessand legal teams developing a negotiation strategy designed to allocatethose risks in a manner that preserves the value of the transaction.

While not wishing to overwhelm members with irrelevantcommunications, there should be a presumption that any significantcommunication would be of interest to and would enhance the

performance of other team members. Moreover, all communication


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the security features are that will ensure confidentiality of informationand who is responsible for managing the platform.

Confidentiality

While open communication is essential for the smooth functioning of thetransaction team, it is essential that confidential transactions remainconfidential. There may also be a desire by a prospective buyer, as wellas the seller, to keep the proposed transaction confidential within theirrespective organizations until definitive documentation is signed. Partiestypically enter into confidentiality agreements for this purpose that willlimit access to the information concerning the transaction only to thosepeople who need to know it in connection with the deal. Thus, eachparty should ensure that adequate controls are in place to protect againstinadvertent disclosure of the existence of the proposed transaction or theother partys confidential information.

The sharing between the parties of competitively sensitive informationmay also be subject to antitrust or competition rules prohibiting gun jumping. When the internal and external transaction teams are spreadthroughout many foreign jurisdictions, it is imperative that clear

instructions be provided at the outset to the entire transaction team as tothe sensitive nature of the transaction and the limits on disclosure.Confidentiality agreements and gun jumping issues are discussed ingreater detail in Section 5.1 (Preliminary AgreementsConfidentialityAgreements) and Section 7.3 (Regulatory FrameworkGun JumpingIssues), respectively.

Timeline

Another important element in ensuring that the transaction proceedsefficiently is communicating the intended timeframe to the transactionteam. The project manager must see to it that each participant meetsdeadlines and that information is communicated expeditiously to allrelevant members of the team. If instructions are sufficiently clear andcommunication channels are established, it will be possible for the projectmanager 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 pressureon 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 wellas the transaction as a whole. From the individuals point of view, eachmember should be given a clear concept of what he or she is toaccomplish 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 pointof his or her function or particular jurisdiction. For example, localcounsel in a particular country may insist that specific provisions beincluded in the transaction agreement to address a jurisdiction-specificrisk without realizing that the particular risk is relatively trivial in thescope of the global transaction.

Accordingly, it is important to clarify at an early stage who will havedecision-making authority initially and from time to time during thetransaction as new issues arise or assume greater significance. Since manyareas of the transaction overlap, it is also critical to establish therespective responsibilities of each team member with respect to eachphase of the transaction. For example, during the diligence phase, thelawyers need to know whether they will be charged with the employee benefits analysis, or whether the parties internal management or externalemployee benefits consultants will have sole responsibility for thosematters. Similarly, the structure of any acquisition financing may involveinput 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 requirecoordination and clear and continuous communication among teammembers in order to avoid gaps in addressing new issues as they ariseduring the course of the transaction. Investing time at the outset toestablish fundamental parameters for the roles and responsibilities of themembers of the transaction team will inevitably reduce the likelihood of miscommunication, error and other significant inefficiencies. Key goalsare to prevent runaway services, duplication of efforts and significantmatters 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 totheir respective roles in the cross-border transaction. In particular, it isimperative for the principal legal advisors to prepare clear instructions tolocal legal advisors describing the transaction, timeline and relative rolesand responsibilities of all of the local counsel. Procedures regarding theacquisition review process, including the scope and applicable materialitythresholds, should be clearly explained, as should the rules regardingconfidentiality and other sensitive issues. Local contact informationshould be exchanged among the clients local advisors where and whenappropriate. 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 managingcosts.

* * *

Another key factor that influences the project management endeavor and,in particular, the various roles of the individual participants on the projectteam, 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 HandbookSection 3 Budgeting for the Transaction

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SECTION 3

BUDGETING FOR THE TRANSACTION

While effective project management is critical to keeping the cross- border project under control, a thoughtful budget established at theoutset of the transaction also plays a vital role in controlling transactioncosts. This section discusses the key variables that effect the budget in thecross-border setting: the scope of diligence, various transaction-specificfactors, and the scope of the advisors roles in the transaction. Thissection concludes with a discussion of a template that serves as a usefultool 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-diligenceand data room assembly) and it is often at the budgeting phase where theparties agree on the scope of the diligence effort. The key variables thatimpact the cost of diligence include the partys risk profile, thetransaction timetable and the diligence logistics, each of which isdiscussed 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 toinvestigate, negotiate and document the issues that may arise. The moreinvestigation, negotiation and documentation involved in the transaction,the more the transaction will cost. Ultimately, the buyer will need to puta value on the issues uncovered during its diligence and develop anegotiating strategy to use those issues to its advantage in order tocomplete the transaction with an acceptable level of risk.

A buyer who is interested in acquiring a large portfolio of companiesknowing that many will fail, but hoping for one or two home runsmight have a fairly high tolerance for risk. In that situation, the buyeraccepts 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 theother hand, a buyer might be presented with a transformationalopportunity 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, assuch, there is generally a higher risk of failure. Accordingly, this buyerwould be well-advised to conduct extensive diligence. Although theseexamples represent two extremes, the buyers risk tolerance neverthelesswill greatly impact the amount of resources the buyer is willing tocommit to uncovering potential issues.

Transaction Timetable

The time available for completion of the transaction will also significantlyimpact the scope of the review that can be undertaken. Sometimes theneeds of the parties to get the deal done quickly limits the review. Othertimes, the transaction setting influences the timetable for the review. Inthe 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 adetailed review of the target business, which may lead the buyer toexpend considerable resources to complete its review in a tight timeframe. Section 6.3 (DiligenceScope of Review) discusses in greaterdetail the tension at play in the auction setting with respect to the buyersdiligence exercise.

Logistics of Diligence

The logistics of the diligence itself often impacts the budget. Forexample, the existence of a well-organized physical or electronic dataroom appropriately populated with material documents and informationcan result in a less-costly diligence exercise from the reviewing partysperspective. Similarly, in a large multi-jurisdictional transaction it isoften less costly to conduct a review if duplicate data rooms aremaintained on a regional basis. The cost to the disclosing party of photocopying, assembling and staffing duplicate physical data rooms isoften outweighed by the cost-savings to the reviewing party if it is able tosend 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 willfacilitate worldwide access to the data room contents by appropriatepersonnel with the requisite language and other skills (e.g., legal,

accounting and tax) necessary for the review without attendant travelcosts.

2. Transaction-Specific Factors

Several transaction-specific factors also impact the budget, including thetransaction structure, the nature of the targets business, and the extentof the representations and warranties and post-closing indemnificationthat the parties expect. These factors are discussed below.

Transaction Structure

Tax planning often drives the transaction structure, but the identificationof 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 anasset purchase as opposed to a share purchase, the parties are generallyable 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 inconsiderable negotiation over the assumption and retention of specificliabilities. Further, the transfer of ownership of individual assets andcontractual rights often requires numerous third-party (includinggovernmental) consents and notices. Determining whether third-party orgovernmental consents are necessary often requires considerablediligence and could lead to extensive negotiations with the parties fromwhom consent must be obtained. Finally, in many jurisdictions the saleof 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 inSection 8 (Employee Transfers and Benefits). Accordingly, assettransactions are often costlier to implement than share transactions.

Outsourcing transactions and joint ventures often involve asset transfersand, as such, generally present many of the same issues as in a traditionalasset acquisition (e.g., negotiating and obtaining required consents andassessing 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 arealigned 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, whichoften means that the cost of diligence is easier to estimate. In the auctionsetting, by contrast, the seller is often not very cooperative until thewinning bidder has emerged.

In addition to the basic form of the transaction, the need for financing to payfor the transaction should also be considered when setting the budget. The buyer usually understands its basic financing needs at the outset of thetransaction. When raising equity to finance a cross-border transaction,particular consideration should be given to compliance with local securitieslaws, including any local registration requirements. In the context of a debtfinancing, particular consideration should also be give to the local legalrequirements with respect to the mechanics for granting security interestsover shares or assets in the relevant jurisdictions. These and other cross- border financing issues are discussed in greater detail in Section 4 (DiscreteFinancing 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 presentspecialized legal issues and may give rise to various notification andconsent requirements pursuant to relevant industry-specific regulations.A target operating in a high-tech industry, or one which is dependentupon a few key patents or other intellectual property rights, willcommand specialized input in order to verify the transaction valuedrivers. Similarly, the number and nature of the targets employees andemployee benefit plans, and the presence of any labor unions or otheremployee representatives (e.g., works councils), will present numerousissues in the closing and post-closing integration context that will requirespecialized input.

On a somewhat more mundane level, a manufacturing entity typicallycommands 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 realproperty, as well as the nature of the activities it conducts at its varioussites, can also significantly impact the budget. If the target owns

manufacturing or assembly facilities, for example, surveys, titleinvestigation and environmental testing may be advisable. On the otherhand, where the target leases its administrative and sales offices in each jurisdiction the investigation might focus more on reviewing the leaseterms.

The number of jurisdictions in which the target operates also significantlyimpacts the transaction costs. Certainly, a transaction involving 20 to 40countries will present many more issues and, hence, a greater diligenceand project management challenge than will a transaction involving justthree countries. Nevertheless, where the value allocated to the targetsoperations in a particular country represents only a small fraction of thetotal transaction value, a detailed review of the operations in that countrymay not be warranted. In some large transactions, the operations in nosingle foreign country will be viewed as being material to the overalltransaction. This fact may weigh against conducting an investigation inany of these jurisdictions. On the other hand, because matters which are

not material to the business as a whole are often excluded from warrantyprotection, an investigation may be the only means of uncoveringproblems which would not be covered by negotiated representations andwarranties but which nevertheless may involve substantial amounts.

Extent of Representations and Warranties and Post-ClosingIndemnification

Accordingly, a significant factor which should be considered whenestablishing the budget is the extent of the representations and warrantiesand post-closing indemnification that the buyer can expect from theseller. An acquirer of a public company can expect very fewrepresentations and warranties, along with little or no post-closingrecourse or indemnification. The same is generally true (with somevariations on survival and recourse) for acquirers of targets from financialsellers such as private equity funds who require certainty as to thetransaction consideration in light of required distributions to limitedpartners. As a result, there is a premium in those types of transactions onconducting 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 anegotiated purchase price reduction.

Even if the buyer expects to receive extensive representations andwarranties and post-closing indemnification coverage, if the seller consistsof individuals or an entity that will distribute the sales proceeds and bewound up after the transaction, the costs of enforcing the indemnificationmight not be justified in light of the difficulties in actually collecting anaward. As in domestic transactions, this issue can be mitigated throughthe 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 thetransaction can significantly impact the budget. Hence, it is critical toestablishing an accurate budget (let alone for purposes of efficient projectmanagement) to clarify the respective roles and expectations of theparties and their internal resources and advisors with respect to the keyelements of the transaction, including the following:

x Structuring (in particular tax advice, which is usually covered asa separate budget item);

x Formation of acquisition vehicles or other pre-closing corporatereorganization;

x Diligence (e.g., with respect to the scope of the review and thenature of the diligence report);

x Identifying and obtaining governmental and third-partyapprovals and consents (e.g., foreign investment control,exchange control, antitrust/competition approvals, industry-specific regulation and contractual restrictions);

x Financing of the transaction (e.g., with respect to creditagreements, security interests and capital raising):

x Transaction initiating agreements (e.g., confidentialityagreement, bid documents and letter of intent);


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x Drafting and negotiating the principal transaction agreements(e.g., master agreement, local transfer agreements, employmentagreements and ancillary commercial and transitionalagreements, including supply, service and license agreements);

x Specific areas of law in respect of which advice may be sought(e.g., securities, corporate, antitrust/competition, banking andfinance, tax, environmental, employment, employee benefits,labor, litigation, insurance, intellectual property, privacy, realestate, customs, trade and other regulatory and industry-specificcompliance matters);

x Legal opinions (whether in connection with the acquisitionfinancing or otherwise);

x Closing (both at the master and local levels);x Post-closing integration (both at the master and local levels,

which is also usually covered as a separate budget item); and

x Project management.

4. Creating the Budget Template

Once the nature of the engagement, the scope of the diligence, thevarious transaction-specific factors and the roles of the respective advisorshave been assessed and established, that information should be factoredinto the budget. Since the diligence phase is where most of the initialeffort is expended, it is sometimes helpful in multi-jurisdictionaltransactions to prepare a budget template that breaks out the componentsof the budget on a jurisdiction-by-jurisdiction basis and, where possible, by specific areas of law. Appendix 3.1 contains a sample budget templatein this regard. The template is designed for use in connection with thefirst phase of a buy-side engagement in the auction setting, but it can betailored for most types of transactions. Preparing this type of templategenerally requires at least a cursory review of the data room index andmaterials in order to determine the comprehensiveness of the sellersinitial 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 andsecondary , based on the desired level of reviewin light of the partys risk profile and the nature of the targets operations.

Primary jurisdictions are those that are identified as being most material tothe target business and are generally where the review is focused. Thelevel of review conducted insecondary jurisdictions is often comparable tothat conducted in the primary jurisdictions. However, the review insecondary jurisdictions often consumes less resources due to the morelimited nature of the operations in these jurisdictions (i.e., essentiallywhere only sales and service facilities are located).

A separate category forother jurisdictions might be included as wellwhere, for example, the information memorandum merely indicates thatthe target markets, sells and services its products through agents ordistributors. The review in these other jurisdictions usually consumesfewer resources and sometimes does not involve the direct engagement of local advisors unless the initial review of the available informationwarrants their involvement.

The location of material research and development centers may be of particular importance and also require special attention. The diligenceprocess in cross-border transactions is discussed in greater detail inSection 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 someof the key elements that should be considered in financing a cross-bordertransaction.


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SECTION 4

DISCRETE FINANCING ISSUES

Acquisitions and other strategic transactions are often driven by the desireto leverage economies of scale, obtain new technologies, enter newmarkets or acquire new production facilities. While from the buyersperspective the transaction itself is generally intended to add or createvalue, obtaining appropriate financing for the deal is often a crucialelement of transaction planning. This section discusses some of the keyelements 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 andsubordination issues, legal opinions and closing issues.

1. Debt vs. Equity Financing

Efficient access to capital is a critical impetus for many transactions. Inmany cases, however, purely local banks or credit markets are unable to

satisfy all capital requirements of companies with multinational interestsor aspirations. It is not surprising that within this environment, capitalformation is increasingly viewed and accomplished on a worldwide basis.Unless the parties have the requisite cash on hand, the traditionalfinancing 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 taxpurposes. Debt financing can be either short-term (i.e., full repaymentdue in less than one year) or long-term (i.e., repayment due over morethan one year). Typically, the lender does not gain an ownership interestin the business of the buyer or the target and generally the obligations of the borrower are limited to repaying the loan and complying with thecovenants 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 affiliatesare likely to be required under standard loan documentation.


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gap between senior secured debt and equity in a companys capitalstructure. This type of financing generally has been associated withcorporate 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 initialpublic offering, acquisition or re-financing.

Second Lien Financings

Second lien financings have also become quite popular in the UnitedStates. Second lien financings were originally considered as provisional orrescue capital and, traditionally, the proceeds from second liens wereused to pay off maturing debt, reduce bank debt or provide incrementalliquidity. However, as corporations and lenders have grown more at easewith second liens, they are being used more often and in a broader rangeof applications including leveraged buyouts. Also referred to as trancheB or junior secured debt, a second lien financing often works in tandemwith 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 securesfirst priority debt. Second lien financings are now frequently consideredas an alternative to traditional mezzanine and equity financing whenstructuring a leveraged deal, whether for a middle-market privatecompany or a larger public company.

Leverage Ratios

Debt and equity financing provide different avenues for raising funds, andthe 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 orcushion accessible for repayment of a debt in the case of a potentialdefault. Generally, excessive debt financing may impair the borrowerscredit rating and its ability to raise more funds in the future. If the borrower incurs too much debt, its business may be consideredoverextended, risky and, ultimately, an unsafe investment. On the otherhand, insufficient equity may suggest that the shareholders are notcommitted to the business of the borrower. Lenders commonly consider


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the debt-to-equity ratio in assessing whether the company is beingoperated in a reasonable, creditworthy style.

Thin Capitalization Rules

While general leverage ratios are often scrutinized to assess a companysfinancial viability, formal thin capitalization or thin cap rules exist inmany jurisdictions throughout the world that limit the interest expensededuction for loans from related parties once certain debt levels arereached. These rules are of particular importance when shareholder oraffiliate debt is intended as a financing source (e.g., in connection with aleveraged buyout). Since dividends and other distributions on equity

generally are not tax deductible, but interest payments on debt generallyare tax deductible, thin cap rules serve to limit the parties ability to usedebt to shift tax charges from the jurisdiction where the investment ismade 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-to-equity ratio, above which interest will not be tax deductible. The currentGerman thin cap rule applies a 1.5-to-1 ratio. While these rulesgenerally apply only to related party debt, they may also apply to thirdparty debt (e.g., bank debt) in certain situations.

2. General Considerations for Lenders in Cross-Border Financings

Commercial banks and other financial institutions generally provide thegreater part of the acquisition debt. From a senior lenders perspective,an acquisition loan is not considerably different from any other securedcorporate credit in that the senior lenders typically do not share in theupside from successful operations following the closing of the transaction.As a result, senior lenders are unwilling to endure any unusual riskassociated with the transaction per se.

Prior to issuing any sort of commitment letter to the borrower, a lenderconsidering making a cross-border loan to either the buyer or theacquisition vehicle (e.g., a special purpose vehicle organized by theinvestors to purchase the stock or assets in question) will typically need toaddress 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 orotherwise) 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 thelender has to make any other payments or deposits, such as mandatorydeposit requirements with the central bank of the jurisdiction where the borrower is located. Generally, lenders in the cross-border contextobtain protections in the loan documents from liability for any

transaction-related taxes, such as stamp taxes. Lenders also normallyinclude in the loan documentation a gross-up provision to protectthemselves against foreign withholding taxes on interest payments made by foreign borrowers. Further, foreign borrowers often must providelenders with a tax receipt so the lenders will have evidence of payment toensure that the lenders will not be held secondarily liable for the tax. Thereceipt also provides proof of payment so that the lender can claim a taxcredit, 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 theextension 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 agencyauthorizations in the borrowers jurisdiction. The lender will also needto take into consideration any licensing or required approvals that anyofficers of the lender may need to obtain if on an ongoing and systematic basis they visit jurisdictions to originate or structure new loans where thelender does not have a permanent presence.

Exchange controls, registration and/or reporting requirements

Any lender providing financing in a foreign jurisdiction will typically needto ensure that the borrower will be able repay the lender in the samecurrency that the loan was denominated and that the funds advanced tothe 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 incross-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 lenderagainst the borrower in a foreign country the judgment must nevertheless be satisfied in the currency called for in the loan documents or its readilytransferable equivalent in another currency, with the equivalency to bedetermined 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 thefinancing, the lender will need to understand whether under the laws of the jurisdiction of the borrower the lender could be held legallyaccountable for a borrowers financial losses due to various actionsundertaken by the lender. For example, in the United States a lendercould be held liable for damages relating, directly or indirectly, to therefusal to grant a loan after originally promising to do so. Likewise, inthe United States and the United Kingdom, if the lender fails to renew aloan or line of credit without apparent cause, or if it improperlyforecloses on a loan without adequate notice to the borrower, the lendercould be required to compensate the borrower for any damages sufferedas 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 inexcess of 50% of the value of collateral consisting generally of certainpublicly traded securities directly or indirectly securing the loan(commonly referred to as margin stock) or extending credit for thepurpose of buying or carrying margin stock which is secured directly orindirectly by such stock in an amount that exceeds 50% the value of themargin stock securing the loan. A related regulation (known asRegulation X) prohibits borrowers from borrowing outside the UnitedStates to circumvent Regulation U. Generally, financing the purchase orcarrying 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, similarrequirements apply around the world in the context of securities lendingwhen 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 cansell or re-lend the borrowed securities during the life of the loan. Inreturn, the borrower agrees to return the loaned securities, secure theloan with collateral of equal or greater value than the loaned securities,pay any user fees (implicit or explicit) and remit to the lender anydividends, coupon interest or other distributions that occur during thetime the securities are on loan.

3. Financial AssistanceAnother issue that should be given considerable attention in a cross- border share transaction when determining the appropriate financingstructure is whether any applicable laws prohibit or restrict the sellerfrom financing the acquisition of its shares a practice commonlyreferred to as financial assistance. Financial assistance could arise, forexample, when the shares of the target company are pledged, or thetarget company gives a guarantee, as security for the buyers financing forthe transaction. The corporate codes and regulations of many jurisdictions limit a companys ability to create any security or provideany type of financial assistance in connection with the acquisition of itsshares or those of its holding company. In England, for example, Sections155 to 158 of the Companies Act 1985 allow a private company toprovide financial assistance in connection with the acquisition of its sharesor those of its holding company (provided the holding company is itself aprivate 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 havenet assets and the financial assistance must not have the effect of reducingthose net assets or, if it does, the reduction must be covered bydistributable profits. Net assets in this context is generally defined as anexcess of assets over liabilities, based on current book value. For thispurpose, all amounts reasonably necessary to provide for liabilities orlosses which are either likely to be incurred or certain to be incurred, butuncertain 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 astatutory declaration (which must be publicly filed) containing theparticulars of the financial assistance to be provided and stating that in

their opinion the company will continue to be able to pay its debts duringthe next 12 months. Further, the directors opinion must be supported by an auditors report that the directors opinion is not unreasonable in allthe circumstances. The costs and time spent in complying with thisprocess 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 wherethe companys principal purpose in giving the financial assistance is notthe acquisition of the relevant shares but is only an incidental part of some larger purpose and the financial assistance is given in good faith inthe 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 issecured by the targets assets is generally permissible. However, if thetarget fails to pay its debts after the consummation of the purchase of itsshares secured by its assets, creditors may look to fraudulent conveyancelaws to avoid the transfer that gave rise to the security interest. Whenthe target defaults on the loan, the risk of failure is borne not only by thetarget itself, but also by its unsecured creditors who have lost theprotection of recourse to unencumbered assets.

4. Security Interests and Subordination Issues

As is typically the case in domestic transactions, lenders providingfinancing in connection with cross-border transactions seek to reducetheir risk by requiring that the borrower provide security interestsand/or other forms of credit support. Creating and perfecting securityinterests and granting credit support in financing cross-bordertransactions deserves devoted attention by local legal counsel.

Security Interests

Usually, all security documents covering assets located in the jurisdictionwhere 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 implementwhere the borrowers assets are scattered in several jurisdictions inaddition 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-creditorenvironment, including self-repossession mechanisms to enforce thesecurity interest created in its favor. In civil law jurisdictions (e.g.,Continental European jurisdictions) for example, self-help remedies forforeclosing on security interests are prohibited. In that case, judicialforeclosure would be required to legally effect repossession or attachmentover the collateral, which is often a lengthy and costly process.

One mechanism lenders employ in cross-border transactions to addressthe difficulties in obtaining security interests in the borrowers accountsreceivable across multiple jurisdictions is to require the borrower toestablish an off-shore collection account and to grant a security interest inthat collection account to the lender as security for the loans. Generally,the collection account would be subject to an account control agreementin favor of the lender. In this type of arrangement, the lender would alsotypically impose a covenant requiring the borrower to cause its customersto make all payments to the off-shore collection account in hardcurrencies for whatever goods or services they purchase from the borrower or its affiliates. While the lender would still need to create andperfect security interests over the underlying accounts receivable in eachof the jurisdictions where the obligors are located, this approachsimplifies the process of obtaining security in the account where themonies are ultimately paid.

Additionally, it is important to note that security interests over personalproperty and floating liens or blanket liens (i.e., liens over all assets of the borrower, including both real and personal property) are generally lessintricate to create and perfect in common law jurisdictions, such as theUnited States, than in civil law jurisdictions such as in Continental Europeor Latin America, where the sec

Documents

Cross-Border Transactions Handbook_Roeder