ISSUE 122 MAY 2010 £10.00
KEEPING YOU INFORMED OF EMERGING ISSUES IN CORPORATE FINANCE
TAKING STOCK
As a new era dawns, boards must adopt
a sustainability strategy to survive
Trendwatch
Thin
blue line
Insiderdealing
dealing
Insider
Roadshow
Analysis
The auto
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Engineering
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THIN BLUE LINE: TRANSATLANTIC DEALS
As companies once more consider cross-border acquisitions, Mark Dorff of
Brown Rudnick outlines the issues for those occurring across the Atlantic
W
IMAGE: PHOTOLIBRARY
ith some positive momentum
in the economic landscape, we
can expect renewed interest
from US corporate buyers
looking for acquisition opportunities in the
UK and Europe. Likewise, UK and European
companies are likely to renew their
international expansion strategies.
European buyers should determine the
most appropriate transaction structure for
tax and accounting purposes at the beginning
of the process – to avoid wasted time and
expense later resulting from a change in
structure. The options include US-style
merger structures with the formation of an
‘acquisition subsidiary’ and tax transparent
limited liability company (LLC) structures.
If European buyers are considering issuing
shares as acquisition currency, they should
confirm early that applicable exemptions
from US Securities & Exchange Commission
(SEC) and US state securities registration
requirements are available.
Key regulatory issues include Hart-ScottRodino (HSR) competition filings and ExonFlorio clearances. HSR filings are required
depending on the size of the transaction and
the parties involved. Exon-Florio filings are
voluntary and are most likely to be made
where foreign control of a US business may
threaten national security. Other key steps
include legal and financial due diligence, the
drafting and negotiation of a letter of intent
and definitive acquisition documents.
In terms of managing risks going forward,
European buyers may wish to consider:
● structuring the deal with a deferred
consideration element (such as an
earn-out) to mitigate risk relating to the
performance of the acquired business;
● requiring key selling shareholders to agree
to customary non-competition covenants
(although such covenants are prohibited in
some US states, including California);
● ensuring that the due diligence process
includes thorough background checks
and references on key employees who will
become part of the post-acquisition team;
● understanding local market expectations
in terms of equity incentives and other
employee benefit packages to ensure
that new team members are properly
incentivised – US managers will expect
stock options; and
● relocating a key member of the UK /
European team to the US to ensure a
smooth transition after the acquisition.
As above, it is important for European
buyers to ensure their advisory team is led
by top-notch US legal counsel with relevant
deal experience – in the US, the lawyer is
likely to play a more prominent role. The US
broker-dealer regulations require all advisers
on transactions in securities with US persons
to be registered in the US as a brokerdealer. Some UK corporate finance are so
registered, or have correspondent registered
broker-dealer firms, but not all. Anyone
contemplating M&A in the US should take
extreme care and use appropriate
advisers who comply with these
and other local regulations
– ignorance is no excuse –
remember the NatWest Three!
Recently, the market has seen US
corporate buyers looking at a broad range
of potential targets in the UK and Europe.
While many of the issues for acquisitions in
the UK or Europe will be ‘local’, key issues for
sellers in deals with US buyers include:
● US corporate buyers will frequently have
acquisition experience and, therefore, will
seek to use a similar approach on future
deals, so European sellers should be
prepared to deal with US-style acquisition
agreements and negotiation tactics; and
● If stock markets stay reasonably buoyant,
we can expect a re-emergence of USlisted shares as acquisition currency, so
European sellers should be ready to tackle
issues like SEC registration requirements
and other restrictions on resale and
liquidity relating to US-listed shares.
Cross-border deals always have more
unknowns than domestic ones, but they can
also pay off handsomely. The US is still the
largest market in the world by some distance,
while for European sellers, US buyers have
historically been not only the most active, but
also the highest payers. ■
Mark Dorff is partner at Brown Rudnick and
head of its UK corporate practice. He trained
as a US lawyer and is qualified as a UK solicitor.
Brown Rudnick is an international law firm with
a long-standing commitment to work with UK
and European businesses, including advising
buyers and sellers on cross-border M&A
transactions in the US, the UK and in Europe.
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