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Managing Cross-Border Transactions
Common Issues and Best Practices for In-House Counsel
Association of Corporate Counsel- Ontario Chapter Program, Toronto, ON
Blakes, Cassels & Graydon LLP199 Bay Street, Suite 4000
Toronto, ON
May 27, 2013
Mike Gans and John Wilkin, Blake, Cassels & Graydon LLPChris Javornik, BMO Financial Group
Agenda
1. Confidentiality Agreements and Letters of Intent
2. Engaging Local Advisors
3. Local Fiduciary Duties and Liability Issues
4. Managing Due Diligence
5. Financing Cross-border Transactions
6. Negotiating the Transaction Agreement
7. Closing and Post-Closing Matters
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1. Confidentiality Agreements and Letters of Intent
a. 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” clause
ii. standstill clauses
iii. insider trading restrictions
− obligation to disclose the existence of negotiations
− conduct of negotiations (for example, the “Truth in Takeovers” policy in Australia)
3
1. Confidentiality Agreements and Letters of Intent cont’d
a. 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 Canadian law
• 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
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1. Confidentiality Agreements and Letters of Intent cont’d
a. Deal protections in the LOI
• Most deal protections typical in Canadian transactions appear in some form or another in foreign deals
• 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
5
2. Engaging Local Advisors
a. 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
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2. Engaging Local Advisors cont’d
a. 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
7
2. Engaging Local Advisors cont’d
a. 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
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3. 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)
9
4. Managing Due Diligence
a. Ensuring understanding of scope, standards and presentation
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
10
4. Managing Due Diligence Across Jurisdictions cont’d
• Practice points:
− provide counterparty with well-organized due diligence request list and clearest understanding of materiality possible
− 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
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4. 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
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4. Managing Due Diligence Across Jurisdictions cont’d
a. 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
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4. Managing Due Diligence Across Jurisdictions cont’d
• U.S. DOJ and SEC published guidance in November 2012 indicating each will give meaningful credit to companies demonstrating a genuine commitment to uncovering and preventing FPCA violations by conducting thorough due diligence
• FCPA and CFPOA substantially similar – experienced Canadian counsel can typically take the lead and engage U.S. counsel following initial phase of due diligence where red flags arise
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5. 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
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6. 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
− 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
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6. Negotiating the Transaction Agreement cont’d
a. 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?17
6. Negotiating the Transaction Agreement cont’d
a. 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
− Canadian standard is typically for parties to use “commercially reasonable efforts”, foreign market practice may require a difference standard (i.e. “best efforts”)
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6. Negotiating the Transaction Agreement cont’d
a. 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
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6. Negotiating the Transaction Agreement cont’d
a. Benefits 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
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7. Closing and Post-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
a. Post-closing filings and maintenance
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7. Closing and Post-Closing Matters cont’d
a. 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 Canadian securities regulators and the TSX
− OSC Staff Notice 51-720 – Issuer Guide for Companies Operating in Emerging Markets (November 2012)
− TSX and TSX-V Joint Consultation Paper on Emerging Market Issuers (December 2012)
− principal focus on management and corporate governance, financial reporting, non-traditional corporate/capital structures, and legal matters relating to title and ability to conduct operations
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7. Closing and Post-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
− audit of foreign business run by auditor’s Canadian office
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