Managing Cross Border Transactions

Cheryl Satin, Partner, Blake, Cassels & Graydon LLP Jennifer S. Van Driesen, Partner, Latham & Watkins, LLP Nadia Dombrowski, Chief Legal, Risk and Compliance

Officer, hyperWALLET Systems Inc. Isabella Wezdecki, Assistant General Counsel, Johnson &

Johnson

PHASE I“REVERSE

DILIGENCE”

PHASE II“NEGOTIATION

PERIOD”

Project calls w/ wwLegal Team

PHASE III“CLOSING MATTERS”

DIS-INTEGRATIONPLANNING

Kickoff& Team Selection

ReverseDiligence

DraftCIM

CollectCDAs

DistributeCIM

CollectInitial Bids

ManagementPresentations

&Dataroom Access

Collect Final Bids

& Marked APAs

NegotiateAPA &

Ancillary Agts

DisclosureScheduleReviews

ExecuteAPA

ManageDue

Diligence (including corruption diligence)

Employee (EU)Consultations

Draft Sell-side PA

Draft Disclosure Schedules

Create Dataroom

BUYER TASKS

SELLER TASKS

DEAL PHASES

Identify External

Legal Advisors

File Competition

Notices

Secure Financing

Assess Competition

Filings NegotiateAPA &

Ancillary Agts

PHASE I – REVERSE DILIGENCE

Identifying/Engaging Local Advisorsa. Effective sourcing of local counsel

• Objective: to engage local counsel with correct skill set that will work effectively with your deal team at an acceptable cost

• Quality control through: − in-house legal team and principal counsel’s relationships and past

experience− ranking publications (Chambers Global, Legal 500, etc.) and league

tables− firm websites− assessment of skill sets of lead lawyer on the deal

• Check public record to determine counterparty’s counsel

ENGAGING LOCAL ADVISORS CONT’D

b. Conflicts and confidentiality issues• May need to disclose information about counterparty to

clear conflicts• Best practice is to disclose just enough information to

establish no conflict by:− having external counsel or financial advisors make approach− providing only counterparty’s name first, then your identity− scripting the approach e-mail or telephone call

Practice Point: External counsel should notify In-house Legal (not Business) to clear conflict

ENGAGING LOCAL ADVISORS CONT’D

b. Conflicts and confidentiality issues• Once conflicts are cleared, further information may be

divulged to determine firm’s capabilities and proposed team, fee estimates and other pitch information

• In some cases, it may be prudent to first understand rules of confidentiality applicable to local lawyers

LOCAL FIDUCIARY DUTIES AND LIABILITY ISSUES

Directors’ fiduciary duties will be prescribed by the laws of the jurisdiction of incorporation

Conduct of the transaction will also be impacted by the laws of the place(s) of the counterparty’s business

Practice points: deal team should understand potential for director liability under local

law early in the process and advise the board (i.e. as part of Phase I due diligence)

may be possible to mitigate liability through use of local and non-local entities corporate entities to serve as directors (available in some off-shore

jurisdictions)

PHASE II – NEGOTIATION PERIOD

Confidentiality Agreements and Letters of Intenta. Understanding the governing law

• May impact:− enforcement, remedies and interpretation; where uncertain, use

international arbitration clause− ability to trade counterparty’s securities

i. effect of “permitted purpose” clauseii. standstill clausesiii. insider trading restrictions

− obligation to disclose the existence of negotiations− conduct of negotiations (for example, the “Truth in Takeovers”

policy in Australia)

CONFIDENTIALITY AGREEMENTS AND LETTERS OF INTENT CONT’D

b. Confidentiality limitations and disclosure obligations of the counterparty

• Parties are typically restricted from disclosing any confidential information “except as required by law”

• Counterparty may be required to disclose at an earlier stage than under laws of your home jurisdiction

• Practice points:− before engaging counterparty, consult local counsel to advise on what

disclosure obligation may arise and when− CA or LOI should provide for an obligation to consult with counterparty (and

contemplate joint or concurrent press releases) where practicable prior to disclosure

− discuss disclosure obligations with counterparty and determine whether appropriate internal controls are in place to maintain confidentiality and enforce standstills

CONFIDENTIALITY AGREEMENTS AND LETTERS OF INTENT CONT’D

c. Deal protections in the LOI• Limitations may be prescribed by foreign law applicable to

counterparty or the transaction• Exclusivity and non-solicitation

− may be subject to a “fiduciary out”

• Lock-up and Support Agreements− some jurisdictions prohibit contractual commitments beyond certain

thresholds

MANAGING DUE DILIGENCE

a. Ensuring understanding of scope, standards and presentation

• Identify DD reviews that are better managed in-house; avoid duplication of efforts

b. Cost control – establishing effective reporting and allocation of responsibility

• Due diligence review represents most significant risk of cost escalation and budgeting uncertainty

• Lead counsel needs to balance costs with quality and effectiveness of review

MANAGING DUE DILIGENCE ACROSS JURISDICTIONS CONT’D

• Practice points:− provide counterparty with well-organized due diligence request list and

clearest understanding of materiality possible {NOTE: may not be possible/practical in auction}

− communicate expectations to counterparty regarding data room management

− lead counsel reviews data room index and allocates responsibility to appropriate counsel

− consider breadth of discretion given to lead counsel to instruct local counsel

− establish form of report – make it consistent across jurisdictions− break down due diligence review into phases each with a defined scope of

work− regular reporting of progress and costs− As Bidder, consider language/time zone barriers when identifying deal

team for x-border or global deal (balance in-country vs. homebasefunctional leads)

MANAGING DUE DILIGENCE ACROSS JURISDICTIONS CONT’D

• Practice points cont’d:− staffing and time frames should be established up front− alternative fee arrangements on due diligence

• per diem fees might be appropriate where scope, staffing and time frame are well understood

• fee caps− allocation of in-house resources− secondments where appropriate

MANAGING DUE DILIGENCE ACROSS JURISDICTIONS CONT’D

c. Foreign corrupt practices due diligence• U.S. Foreign Corrupt Practices Act (“FCPA”) and

Canadian Corruption of Foreign Public Officials Act(“CFPOA”) criminalize bribery of foreign government officials

• Potential for post-acquisition successor liability – may extend to acquiror and senior officers if undetected

• Reputational risk an issue for buyers and lenders/underwriters

FINANCING CROSS-BORDER TRANSACTIONS

Structuring, thin capitalization and withholding taxes Commitment letters

understand local norms for conditionality Lender requirements

due diligence reliance letters/non-reliance letters

legal opinions

NEGOTIATING THE TRANSACTION AGREEMENT

a. Role of in-house, principal and local counsel• Objective: assign counsel with the appropriate skill set on a cost

effective basis to manage the process and substance of the negotiation

• Practice points:− briefing the full legal team on deal structure, norms of applicable laws, approach

to negotiation and roles; consider weekly standing calls during deal process− assign responsibility to one counsel to lead the negotiations− determine style of the deal− lack of single decision maker can render materiality determinations inconsistent− lead counsel should involve local/in-house/principal counsel as appropriate− make no assumptions about local law or market practice− Develop templates for local usage to implement Master PA

NEGOTIATING THE TRANSACTION AGREEMENTCONT’D

b. Risk management – pressure points and conditions in cross-border agreements

• Interim period covenants • Critical to understand market norms for closing

conditions− definition and use of MAC condition− R&W bring down standard− third party/governmental litigation threatened/pending/in force− diligence?

NEGOTIATING THE TRANSACTION AGREEMENTCONT’D

c. Anti-trust & Other Regulatory Matters• Regulatory matters can pose substantive risks (i.e. liability) and procedural

risks (i.e. timing and completion)• Substantive risks should be managed through due diligence, representations

and warranties, indemnities and in some cases deal conditions• Procedural risks can be managed through undertakings, conditions and,

where appropriate, reverse break fees • Practice points:

− engage anti-trust, foreign investment and regulated industry review as early as possible in due diligence phase

NEGOTIATING THE TRANSACTION AGREEMENTCONT’D

d. Tax and structuring matters• Consider post-acquisition structure – tax cost bump and

other tax structuring considerations are a common feature in cross-border transactions

• Typical for buyer to negotiate a pre-closing reorganization as part of the interim period covenants

NEGOTIATING THE TRANSACTION AGREEMENTCONT’D

e. Benefits/Employee issues• Impact of more employee friendly laws in many parts of

the world on M&A deals− less flexibility to rationalize workforce

• notice periods or pay in lieu for termination of most employees• high standard of “cause” for termination

− potential impact on valuation analysis− possible need to negotiate with works councils, or other labor

representative bodies− regulatory commitments− consider practicality of enforcement when evaluating restrictive

covenants/confidentiality provisions with key employees

PHASE III –CLOSING MATTERS

a. Local counsel opinions• Form and standards of legal opinions can differ across

jurisdictions – scope of legal opinion should be settled as part of transaction agreement

b. Closing & post-closing filings and maintenance

PHASE III – CLOSING MATTERS CONT’D

c. Establishing a risk management culture• Effective reporting and internal controls key for risk management

and public company reporting obligations• Public corporations operating in emerging markets may be subject

to greater scrutiny by securities regulators and exchanges

PHASE III – CLOSING MATTERS CONT’D

• Practice points:− education of local management and advisors− site visits by directors, senior management and appropriate

advisors− ensure language capabilities which link local management to

home management to the board

TWO VIEWS – INSIDE & OUT

View from Inside looking out… Be practical, problem solvers

(eg, 5pg vs 50pg transitional lease)

Provide adequate advance notice of unique, local closing requirements (no surprises)

Adhere to global templates

View from Outside looking in…

[to come]