Significant Issues in Cross-Border M&A Carve-Out Transactions - Part II

© 2015 Winston & Strawn LLP

Two-Part Series on Cross-Border Transactions: Part II – Significant Issues in Cross-Border

M&A Carve-Out Transactions

May 19, 2015


Today’s Speakers

Corporate Partner Chicago +1 (312) 558-7242 [email protected]


Matthew D. Costigan Jacqueline K. McLaughlin

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mailto:[email protected]



Index

1. Strategic Considerations 2. Deal Structure/Planning 3. Due Diligence 4. Specific Issues

• Antitrust/Competition Laws and Other Approvals

• Employees

• Tax

5. Documentation/Execution/Closing 6. Post-Closing/Transition Period 7. Practical Tips

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Strategic Considerations

• An M&A carve-out transaction is complex and presents many unique issues

• The need to unwind the divested assets from the businesses remaining behind requires considerable resources from the seller, the buyer and their respective advisors

• In addition, anytime a transaction is not solely U.S. based, additional issues, complexities and practical considerations arise

• Identifying issues in advance and focusing attention on key areas is critical to the success of the transaction and maximizing deal value for the seller

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Strategic Considerations (scope)

• Critical to first understand the scope of the transaction in order to effectively manage and execute • Where is the target business operated (e.g. where are there sales,

assets, employees, etc.)? • Generally, any necessary transaction steps in a non-U.S.

jurisdiction are determined based on turnover (sales), asset ownership and employees in such jurisdiction

• Determine key jurisdictions vs. secondary jurisdictions

• In each jurisdiction, is there integration with other businesses of the seller, or is each local seller entity engaged solely in the target business?

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Strategic Considerations (impact)

• When considering a carve-out divestiture, the seller needs to consider the effect of the sale on the business being sold and on other parts of its remaining businesses

• It is helpful to think of how the divestiture may be viewed by the following other constituencies:

• Customers • Dealers and Suppliers • Non-Divested Businesses • Partners • Employees • Community / Government Relations

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Index



• Employees

• Tax


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Deal Structure/Planning

• Identify assets (liabilities) to be transferred (assumed) and those to be retained

• What assets (liabilities) to be transferred (assumed) are located in each jurisdiction where the target business is operated? • Which of the seller’s entities own the assets in each jurisdiction?

• Which of the buyer’s entities will acquire (assume) the assets (liabilities)? • Does the buyer have an existing local legal entity?

• Even if a local buyer entity exists, is it the right type of entity to accept the applicable operations/assets/employees?

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• Determine optimal transaction structure for each local jurisdiction • Will a pre-closing reorganization be required? • Create country specific charts

• Considerations specific to a cross-border deal include: • Are any assets located in a Special Economic Zone? • Do any of the assets need to be de-bonded before they can be

transferred?

• The same types of considerations as in a domestic deal need to be considered for each jurisdiction (e.g. corporate, employees, etc.) 9



• Consider up-front separation/transition/integration planning issues, including as it relates to: • IT systems transition program • Facilities overlap • Personnel (including sales force) overlap • Logistics overlap • Finance overlap • Customer and supplier communications • Employee communications • Self-sufficiency plan

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• Intellectual Property/Licensing • Product portfolio technology review • Brand name/trademark transition

• Facilities • Floor plans/relocation, joint occupancy, etc.

• Labor/Employee Benefits • Local jurisdiction requirements (e.g. mandatory severance

countries), works council notifications/consultations, etc.

• Post-Closing Commercial Arrangements • Customer/Supplier/Partner Relations

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• Non-U.S. Execution Teams • Local requirements need to be fully understood as they can differ

substantially. • As much an exercise in project management as substantive

analysis • Track, on a country-by-country basis, specific legal requirements

and steps to complete transaction • Consider local requirements to provide U.S. based personnel with

authority to execute on behalf of local entity (if possible)

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Index



• Employees

• Tax


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Due Diligence

• The nature of a carve-out is that the divested business is inextricably linked with remaining businesses, requiring heightened diligence

• Some information may not relate to the business/assets being sold or partially relate to other businesses not being sold

• Business Due Diligence • Confirm seller’s determination of resources, assets and people as

transferring or remaining with the seller is appropriate • Focus on identifying shared assets and determining treatment

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Due Diligence

• Financial Due Diligence • Carve-out financials

• Likely will not exist and will need to prepared; timing to prepare/audit needs to be factored in timeline

• Tax review • General exposure re foreign exchange/hedging • Intercompany loans • Vendor financing • SEC pro forma requirements • Stranded costs retained by the seller (e.g. loss of scale and

duplicate corporate capabilities)

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Due Diligence

• Carve-Out Financial Statements • Separate financial statements of the operations being sold derived

from the seller’s overall financials • Reflect the historical operations of the carved-out business on a

stand-alone basis • Identify all assets/liabilities of the business being sold, and reflect all

relevant costs of doing business attributable to that business • Allocate overhead expenses and other costs

• Will need to assess materiality in context of carved-out business

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Due Diligence

• Legal Due Diligence • Commercial contracts (including shared contracts) • Intellectual Property rights • Software licensing • Commercial or companies registry in most civil law countries

provides useful public information of a target • Limitations of public searches • Need to consider how acquisition of (or by) a foreign target triggers

or affects application of various US laws

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Index



• Employees

• Tax


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Antitrust/Competition Laws

• Local filing requirements • Determine early on the requirements in each jurisdiction • Develop consistent definitions of the relevant markets –

collaboration of merger control authorities • Practical considerations in determining whether to file • Obtain all necessary approvals prior to closing of principal

transaction vs. delayed closings in certain jurisdictions pending local approval?

• Timeframe expectations • Deadlines for filing (including "quick trigger" jurisdictions) • Outside dates for clearance (or movement to next phase)

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Other Approvals or Consents

• Foreign investment approvals • Local jurisdiction may place approval, notification or registration

requirements on foreign buyers

• Exchange control approvals • Local jurisdiction may require approval for the transfer of funds,

payment of purchase price, or repatriation of capital

• Other governmental approvals or notices may apply depending on the jurisdiction

• Third party contractual consents • Creditor protection processes (objection periods)

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Employees

• Certain employee issues flow from the structure of the transaction

• Automatic employee transfers vs. offer/acceptance • Notifications; consultations • Severance and termination liabilities • Requirements for formal offers of employment • Data privacy laws • Transitional services

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Tax

• In each jurisdiction, need to consider the applicability of stamp duties, transfer or registration taxes, VAT, goods and services or other taxes as a result of the transaction • Does the local jurisdiction impose any of the above taxes on any

aspect of the transaction in such jurisdiction (e.g. the transfer of certain types of assets or lease/sublease of real estate)?

• Can such taxes be avoided or minimized? • Tax clearance certificates – can the seller obtain in each

jurisdiction?

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Index



• Employees

• Tax


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Documentation

• Principal documentation will often require multiple core documents as well as local agreements for implementation • Master Purchase Agreement • Employee Matters Agreement • Intellectual Property Agreement • Transition Services / Shared Services Agreement • Real Estate Agreements • Share transfer agreements for JV interests • Commercial Agreements

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Local Transfer Documents

• Anything needed in order to legally effect all aspects of the transaction – e.g. transfer of assets, shares, employees – locally in each relevant jurisdiction • Local rules differ as to what is sufficient to legally implement the

transaction • Generally will prefer to keep local transfer documents as basic as

legally permissible • Adhere to standard templates to extent possible so master

agreement controls – local deal can't override master deal or have issues treated inconsistently across jurisdictions

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Local Transfer Documents

• Business Transfer Agreement • Separate local agreements for transfer of employees necessary

in certain jurisdictions • Other local agreements may be necessary • Need to consider the following issues for each local document:

• Language • Schedules of assets/liabilities • Local purchase price • Local formalization requirements (by law or customary local

practice) • Execution requirements

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Execution/Closing

• Deferred closings • Is it possible to defer closing in certain non-U.S. jurisdictions (or

effect only a partial closing in such jurisdictions)?

• Local closings • Multiple time zones • Availability of key personnel in various jurisdictions

• Lien releases • Parent guarantees of contractual obligations of foreign

subsidiaries

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Execution/Closing

• Payment of purchase price • The overall purchase price for the transaction allocated among the

assets of the various jurisdictions • Can payment for local assets be settled on behalf of a local

subsidiary at the parent level in USD outside the local jurisdiction (with an internal allocation)?

• Local payment jurisdictions • Some jurisdictions require that local payment be made in local currency

• If total transaction consideration is paid at the parent level, will need parent level true-ups from the seller to the buyer for local payments

• Be aware of potential exchange control restrictions

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Index



• Employees

• Tax


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Post-Closing/Transition Period

• Transition Services • In some instances, divested business will need to provide transition

services to the seller

• Delayed non-U.S jurisdiction closings (including potentially partial jurisdiction closings)

• Delayed transfers of certain assets (e.g. de-bonded equipment) • Short-term joint use and occupancy agreements in shared

facilities • Replacement of guarantees and bonds

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Post-Closing/Transition Period

• True-up related matters per deal terms (e.g. pro-rated real estate taxes, sharing of deal-related costs, etc.)

• Purchase price determination/allocation for each jurisdiction • Local non-U.S. payments/parent level reimbursement • Local tax filings (stamp duty, VAT, transfer, registration, etc.) • Seller restructuring, e.g. liquidate local entities no longer

needed • Requirements of company name changes, or company

signage, letterhead, etc. • Director and officer changes

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Index



• Employees

• Tax


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Practical Tips

10. Clear and efficient communication with local counsel will save time, frustration and expense

9. Develop an organized method of obtaining, synthesizing and

acting upon advice of local counsel 8. Be aware of relationship of local counsel with local client team

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Practical Tips

7. Involve the right people, including outside the U.S., early in the process (or at least prior to signing) 6. Be realistic about how long the transaction will take to complete (typically, 6-18 months) and the disruption and burdens placed on internal resources 5. Be mindful of the perspective of management that will

transfer with the business 4. Determine materiality for appropriate purposes given the business (e.g. diligence, contract consents, etc.)

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Practical Tips

3. Always keep in mind that the post-closing relationship of the parties is far more involved than in standard M&A deals

2. Be prepared to do a lot of blocking and tackling 1. The success of a global carve-out transaction depends not

only on substantive issues, but also in large part on organization and process

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Questions?



Matthew D. Costigan Jacqueline K. McLaughlin

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Thank You