Structuring and managing cross-border private acquisitions

Practical Law UK Articles 6-599-1525 (Approx. 23 pages)

Structuring and managing cross-border private acquisitions

by Simon Rous, Ashfords LLP

Appointing a corporate finance adviser

Having decided to buy or sell a business, an early step will normally be the appointment of a corporate finance adviser (CFA) to assist in identifying a buyer and negotiating headline terms. The seller should shortlist three or four CFAs and hold a beauty parade to identify the most suitable and secure competitive terms. The seller should require a short-form confidentiality agreement or non-disclosure agreement (NDA) with all CFAs interviewed, prohibiting them from using the seller's confidential information to seek a buy-side mandate if not appointed.

Once a CFA is selected, take care with the terms of engagement. Some CFAs present their terms as non-negotiable, saying they have been "approved by head office risk committee" and "blessed by leading Counsel". Push back on issues as appropriate such as levels of CFA liability for negligence, conflicts of interest, and fees not aligned with seller receipt of consideration. The CFA, being on a percentage success fee, is effectively another principal. This is the advantage of legal counsel remunerated on a time incurred basis and, having no overriding imperative for the deal to close, can give more dispassionate advice.

Finding a buyer

The CFA will work with the seller to prepare an information memorandum (IM) to familiarise itself with the business and to serve as the marketing document to potential buyers. In addition to buyers already identified (typically from among suppliers, customers and competitors) the CFA will research suitable bidders, investigate their funding capability and their acquisition track records to prepare a list of those whom they believe appropriate.

Choosing a sale process

There are a two main processes adopted in selling a business, bilateral (also called sale by private treaty) or auction. The choice of process will depend on a number of factors including the seller's objectives, timescales and the nature of the target business.

Bilateral sale

A bilateral sale is a private agreement reached between the seller and one proposed buyer. This method is more appropriate where there are only a small number of potential buyers, where the structure of the target business is complicated or where there are regulatory or third party consents required. Even with NDAs, it is difficult maintaining confidentiality in an auction and the knowledge that a business is for sale may disrupt business, lead to loss of sales and/or of key staff.

Auction

Alternatively the seller can create an auction process among a number of potential buyers. Typically this involves:

A strong seller NDA.
A seller produced information memorandum on the target.
A virtual data room pre-loaded by the sale team with replies to standard due diligence enquiries and relevant data on the target, and often a seller-biased draft sale agreement.
A preliminary round of informal bids to establish a shortlist.
A requirement for shortlisted bidders to make binding offers with evidence of funding, often including a mark-up of the sale agreement.

Seller advantages. Such an auction can assist the seller to:

Secure best price and other terms.
Use the data room reports to monitor the seriousness and activity of competing bidders.
Maintain control of timing and process.

Buyer concerns. The buyer will be concerned that:

It will have to pay a higher price for the target.
There is a risk of a failed bid with wasted management time and fees.
The level of contractual protection is likely to be lower than on a bilateral sale.
It is also likely to receive less information about the target than in bilateral negotiations.
It will have less opportunity to build up relationships with the target's management before the sale.
The target may be damaged by access to information by unsuccessful bidders.

Given the above buyer concerns, an auction process is only likely to work where there are several keen prospective bidders for the target. For more information, see Auction sales: international acquisitions.

Preliminary agreements

Non-disclosure agreements

Confidential information will only be released once a potential buyer has shown serious interest, and then only after an NDA has been concluded. The seller will also seek to impose non-compete and/or non-solicitation restrictions in relation to the customers, suppliers and key employees of the seller and the target business. The NDA is likely to be less confrontational and quicker to settle if drafted in mutual terms.

Where there are multiple potential buyers, for example in an auction, the ultimate buyer should require the right to enforce the NDA against unsuccessful bidders. For more information, see Non-disclosure agreements: key issues in international deals.

Memorandum of understanding, letter of intent, heads of terms or term sheet (MoU)

At an early stage in the process the parties will seek to record key terms in an MoU.

Non-binding. While the MoU provides a useful summary of principal terms, it is generally kept non-binding (except for exclusivity, transaction costs, confidentiality and governing law) because much detail remains to be negotiated and issues may emerge during due diligence requiring re-negotiation of price or other terms. In the UK and US clear language in the MoU, as to which provisions are legally binding and which are not, is usually sufficient. Greater care needs to be taken in civil law jurisdictions (such as France and Italy), where there is a general duty to negotiate in good faith and terms may become binding, even before they are recorded in a definitive sale agreement.

Exclusivity period. Due diligence in a cross-border acquisition can be costly. Consider a binding exclusivity period in the MoU with a break fee to compensate the buyer for professional and other costs if:

The seller withdraws or starts negotiations with a competing buyer.
The buyer discovers in due diligence an undisclosed material liability of which the seller ought to have been aware.

It may also be appropriate to the circumstances of a particular transaction and more common in certain jurisdictions (such as the US) for a seller to require a "reverse break fee" in return for the buyer being granted a period of exclusivity, such fee to become payable if the buyer withdraws from the transaction without good reason. This may trigger an early stage debate as to what constitutes reasonable grounds for withdrawal.

Structuring the deal

Asset or share purchase?

Cross-border private company acquisitions are most often made by a share purchase (often of a local holding company, or local trading subsidiary). However, there may be particular circumstances that make an asset purchase more appropriate.

Liabilities. Unlike a share purchase, an asset purchase generally allows the buyer to specify which (if any) liabilities it will take on. There are limited exceptions to this, such as:

The transfer of employee related liabilities under transfer of undertakings provisions in the EU.
Environmental liabilities associated with land acquired.
Tax liabilities in certain jurisdictions.

Assets. In an asset purchase, only those assets specifically identified will generally transfer, whereas in a share purchase all of the assets (together with liabilities) will transfer with the company. Despite broad drafting, acquisition by asset purchase can lead to assets being omitted from the acquisition where the record keeping in the target is inadequate.

Third-party consents. The transfer of assets is likely to require a greater range of third-party consents, such as from the counterparties to the target's contracts. Where the bulk of the value in the target lies in such contracts, it may be a less risky option to acquire the company as a whole (although change of control provisions in those contracts still need to be checked).

Financial assistance. In many countries the target company is precluded from giving a charge over its assets to secure finance for the acquisition of its shares, whereas a purchaser of assets can use them as security for the acquisition finance.

Pre-emption rights. An asset sale generally only requires simple majority approval of the seller's board. In a share sale, in many jurisdictions the target company's articles of association, bye-laws or shareholders' agreement will include pre-emption provisions requiring, as appropriate:

100% shareholder approval of the proposed sale.
The need to exhaust pre-emption, drag-along or squeeze-out provisions.
A court approved scheme of arrangement.

Regulatory. In most regulated sectors licences, permissions and consents are not readily transferable, and it is usual to acquire the shares of most regulated entities (with regulatory change of control approval as required) (see below, Regulatory and other approvals).

Multiple transfer documents. Many categories of asset (for example, land, intellectual property, benefit of contracts and licences, vehicles and so on) may require separate transfer documents and formalities, making an asset transfer far more complicated than a share transfer.

Tax. Tax losses and reliefs can generally best be preserved by a share purchase. It may be appropriate for the buyer to raise finance and acquire the target shares through an existing or new vehicle in the target's jurisdiction, enabling the purchase vehicle's losses from financing costs to be set against the target's profits. Specialist tax advice in all jurisdictions affected should be taken at an early stage.

In a cross-border transaction, it may make sense to combine share purchases of certain target subsidiaries in parts of the seller group with asset purchases of other parts.

Other structures

Pre-sale reorganisation. The seller might transfer target assets into a newco (a hive out) so the buyer can make a more straightforward purchase of shares (see box, Hive out). Tax advice should be taken on:

The value at which assets are transferred to newco and on the tax implications of the hive out.
Any distribution in specie (in kind) which may form part of the hive-out.
Subsequent distribution of the sale proceeds by the seller to its own shareholders.

Hive out

Image 1 within Structuring and managing cross-border private acquisitions

Dividend in specie. Depending on the jurisdiction, advice should be taken as to whether a distribution in specie (in kind rather than cash) is achievable or whether an alternative route should be found.

More complex jurisdiction specific structures. There are also more complex legal structures which may be suitable depending on the jurisdiction and the circumstances, including:

Legal mergers.
Two step acquisitions and triangular mergers.
Income access and twin holding company.

For more information, see Acquisition structures: international acquisitions.

Post-sale reorganisation. Assuming the buyer used a company in the target's jurisdiction to make the share purchase, it is often appropriate for the target company's business and assets to be transferred to the purchase vehicle (hive up). However, the hurdles to an asset transfer (see above, Asset or share purchase?) will apply, albeit now between members of the same group.

Preparing to acquire

Practical steps

Find out about the "other side". Learn what you can about the other side and consider paying an early courtesy visit on the lead counsel of the other side's legal team to establish a mutual respect outside the context of the transaction.

Culture and language. The buyer team should identify or recruit one or more individuals well-versed in the language and culture of the target and seller. Reliable translation agencies should be identified and terms agreed. It will pay off to do some homework on cultural differences, on such issues as:

Salutations and forms of address.
Body language, hand shaking, bowing, and eye contact.
In choice of negotiators, relevance of gender, age, and corporate seniority.
In negotiation style, outcome versus relationship building.
Attitudes to timetable and tempo.
"Face".
Group versus individual decision-making.

Prepare the client. Unless your clients are experienced in such transactions, hold a workshop with key client personnel to prepare them for the highs and lows, delays and likely sticking points of the impending process.

Managing the deal team

A major challenge of a cross border transaction is the logistical difficulty of efficiently co-ordinating an extended financial, legal and commercial team across jurisdictions, involving a lead corporate finance adviser, lawyers, accountants, pension advisers, environmental consultants and others. Measures that can assist include the following.

Appointing lead counsel. Appoint a member of one of the better known global legal networks, such as ADVOC or Lex Mundi, who can ensure legal support in whatever jurisdiction is required, and will be familiar with co-ordinating cross-border transactions.

Engagement letters. The engagement letters of the various advisers across the relevant jurisdictions and disciplines will address their respective:

Responsibilities.
Liability limits.
Delivery timetables.
Translation costs.
Local professional requirements
Fees.

They will differ and will be invariably drafted to the advantage of the adviser. Negotiating engagement letters can be an unwanted distraction at a time the buyer wants to concentrate on the target. The buyer can itself (or commission its trusted lead counsel to) negotiate terms of engagement with the other advisers at an early stage before their respective mandates are confirmed. In some cases it is appropriate for the client relationship to be directly with the buyer, in others lead counsel can act as "client".

Virtual data room. Setting up a virtual, buy-side only data room can provide a point to store and share:

Contact lists.
Timetables.
Information requests.
Responsibility schedules.
Due diligence reports.
Other information generated by the buyer team.

Choose data room software that works intuitively and does not require users to download extra software or cookies. Wherever possible, set permissions to allow printing and download of documents. For more information, see Setting up a dataroom.

Communication protocol. Lead counsel should establish a communication protocol within the deal team. This can include:

The language to be used for all communication.
Use of the dedicated transaction deal room/data room.
Group e-mail addresses.
Weekly conference calls and status updates.
The extent to which communication should be made directly to the client or routed through lead counsel.
Maintenance of a global contact list of all firms and individuals involved.
A transaction timetable with critical dates including public holidays in the jurisdictions involved.

Contact list. For maximum efficiency everyone on the buyer side needs to know the role and contact details of everyone else on the team (see box, Contact list template). It makes sense to keep prominent and updated in the buyer data room a contact list of all participants.

Contact list template

[Buyer]	[Postal address]	www.buyer-group.com
[●] CFO	Tel:	[[email protected]]
[●] General counsel	Tel:	[[email protected]]
[and so on for rest of buyer team]
UK counsel to buyer	[Postal address]	www.uk-counsel.com
[●] Lead partner	Tel:	[lp@ uk-counsel.com]
[●] Partner (tax)	Tel:	[tax@ uk-counsel.com]
[and so on for rest of team]
Local counsel to buyer	[Postal address]	www.local-counsel.com
[●] Lead partner	Tel:	[[email protected]]
[and so on for rest of team]
Accountants to buyer	[Postal address]	www.accountants.com
[●] Lead partner	Tel:	[[email protected]]
[and so on for rest of team]
Target	[Postal address]	www.target.com
[●] Target CEO	Tel:	[[email protected]]
[and so on for rest of team]
Seller	[Postal address]	www.seller.com
[●] CFO	Tel:	[[email protected]]
[●] General counsel	Tel:	[[email protected]]
[and so on]

Regular conference calls. If time zones allow, a regular, for example weekly, conference call among the due diligence team leaders across the jurisdictions, reporting progress and delays, can be essential to maintain momentum.

For assistance in setting a convenient time across several time zones, see www.timeanddate.com/worldclock/meeting.html.

Data analytic agencies. Information normally accessible from public registers may not be available. In such instances global data analytic agencies such as Dunn & Bradstreet, Kroll and CRISIL, may be able to provide a degree of due diligence.

Local variations: impact on timetable. Factors such as the following may differ from what the buyer is used to in its own jurisdiction, and must be factored into the timetable from the outset:

Regulatory compliance.
Pre-sale restructuring.
Capitalisation.
Valuation.
Creditor and shareholder protection.
Specialist due diligence reports (for example, environmental).

Due diligence

Parameters. To manage the costs and timetable, the buyer will want to set its advisers parameters for the due diligence exercise, such as:

Value thresholds for the target's contracts, below which the document will not be reviewed.
Time thresholds, to exclude from the due diligence review documents over a certain age.
Particular topics on which to focus, depending on the buyer's motivations for acquiring the target.
The extent to which it requires all the results of due diligence to be consolidated into a homogenous report.
The scope and methodology to be adopted in preparing the due diligence report (see below).

Allocation of responsibilities. To avoid duplication or enquiries falling between two stools, the buyer should allocate responsibilities for due diligence among team members (see box, example allocation of due diligence responsibilities).

Example allocation of due diligence responsibilities

(√ = do / X = not do)

Topic	Buyer	UK counsel	Local counsel	Local accountants	Others
Corporate	√	√	√	√	[for example, Delaware counsel]
Finance	√	X	X	√	X
HR	√	X	√	X	X
Trade contracts	√	√	√	X	X
[and so on]

Consistency and standardised reporting. A standardised form of report with agreed topics (such as the list below, in the case of contract reviews) will assist comparison and ensure the basics are addressed:

Title of document.
Parties.
Effective date.
Principal obligations of the first party.
Principal obligations of the second party.
Pricing and payment.
Term and termination.
Liability and indemnity.
Change of control consent.
Assignment.
Law and forum.
Other significant provisions/risks.
Reviewed by.
Report date.

Co-ordination across disciplines. The buyer's accountants, in-house finance team and other disciplines will be conducting commercial, tax and accounting due diligence at the same time as the legal due diligence.

Care should be taken to ensure the sale team are not bombarded with the same or similar questions by different buyer teams and that information is shared. This general rule is even more important in cross-border transactions, with linguistic hurdles and translation costs.

Target management. A concern in any due diligence process, but particularly in a cross border acquisition, is the culture, morale and loyalty of the target management team. For example:

The seller may have motivated them to achieve a sale making them reluctant to disclose problems in the target business.
The seller may be a remote financial institution unaware of adverse issues or practices that local managers may hasten to hide before the takeover.
Local managers may feel themselves treated as pawns in the game, and be disinclined to engage with either buyer or seller.

It is advisable to have a trusted individual on the ground who can get "under the skin" of the target business and its management.

Regulatory and other approvals

Regulatory approvals

Conclusion of a cross-border transaction may be subject to various regulatory approvals.

Foreign investment. In some jurisdictions:

Government approval must be obtained for all foreign acquisitions of domestic targets (for example, in China).
Foreign investors must obtain an investment licence (for example, foreign investors in Saudi Arabia).
Foreign investors must obtain approval before acquiring shares in companies involved in certain restricted sectors (for example, in the US, Russia and France).
In an asset purchase, prior approval may also be needed for a foreign acquisition of land (for example, in Taiwan). Alternatively, a buyer may be required to incorporate a local company to acquire such assets or shares if ownership by a foreign entity is not permitted.

Sector-specific approvals. Regulatory approvals are commonly required in sectors such as national security, financial services, health, telecoms and utilities.

Competition law and merger approvals. Cross-border acquisitions in the European Economic Area (EEA) may, subject to meeting certain turnover thresholds, be deemed to have a Community dimension, making it necessary to make a prior notification to the EU Merger Registry.

Regard should also be had to the anti-trust and merger control legislation in other relevant jurisdictions, particularly the US.

Shares as consideration. Whether on a transfer of assets or shares, if the consideration includes shares or other securities (for example, loan notes) of the buyer, local advice is needed to ensure that the issue of such securities does not breach local securities laws and that appropriate authorisations (for example, shareholder resolutions) are in place.

Conditionality

If the acquisition is to be conditional on regulatory approvals (or other conditions such as counterparty consent to the change of control), the buyer should seek protections in the sale agreement, including:

A clear long-stop date, after which (if the condition is not satisfied) the buyer can withdraw from the transaction.
The repetition of seller warranties on exchange and closing.
Material Adverse Change (MAC) provision to protect against adverse changes in the business, assets or profits of the target prior to closing.
The return of any deposit if the required approval is not obtained.
Obligations on both parties (and, where relevant, the target) to co-operate in securing satisfaction of the condition(s).
Restrictions on the conduct of business of the target between exchange and closing.
Delays in obtaining required regulatory approvals need to be factored into the transaction timetable.

Anti-bribery and corruption

If the business operates in countries with which the buyer is unfamiliar or corruption is perceived to be high, the buyer should undertake a thorough assessment of the local markets (including the use of local agents). Transparency International UK has published guidance for anti-bribery due diligence in the context of mergers and acquisitions.

The UK Bribery Act 2010 may also be relevant, for example certain offences in the Bribery Act, including the offence of bribing a foreign public official, capture bribery that takes place outside the UK where the person involved has a "close connection" with the UK. Further, the offence under the Bribery Act for commercial organisations that fail to have adequate measures in place to prevent bribery can apply to overseas companies whose presence in the UK is relatively small, if they operate part of their business in the UK.

Managing and documenting the acquisition

Step plan and timetable

A large part of lead counsel's role is ensuring that both buy and sale sides know what is expected of them and by when. The early establishment and sharing of a step plan and timetable helps (see box, Step plan and timetable template).

Step plan and timetable template

Buyer team	Target team	Seller team
Buyer limited (BL)	Target limited (TL)	Seller limited (SL)
Buyer corporate finance adviser (BCFA)	Managing director (MD)	Seller corporate finance adviser (SCFA)
English buyer counsel (UKBC)	Target auditors (TA)	English seller counsel (UKSC)
Local buyer counsel (LBC)		Local seller counsel (LSC)
Buyer accountant (BAC)		Seller accountant (SAC)

Action/document	Lead	Signing	Status	Due date
Preliminary documents
NDA	UKSC	BL/SL	Signed
Information memorandum	SCFA	N/A	Circulated
Merger control pre-clearance	UKBC	N/A	Draft in circulation
Tax clearance application	BAC	N/A	<
Data room and due diligence
Data room rules	UKSC
Data room opened	UKSC
Buyer: due diligence information request	UKBC
Replies to information request	UKSC
Supplementary list of Q&A	UKBC
Environmental audit	UKBC
Due diligence report	UKBC
Principal documents
Target business plan	TL/SL
Share purchase agreement	UKBC
Tax covenant	UKBC
Escrow letter	UKBC
Service agreements: key target staff	LBC
Disclosure letter	UKSC
Documents index	UKSC
CDs of disclosure documents	UKSC
Accounting documents
Latest management accounts	TL/TA
Normalised working capital calculation	TL/TA
Estimated surplus net cash	TL/TA
Property documents
Title reports and so on	LSC
Banking and finance documents
Discharge of encumbrances and so on	LSC
Latest statements, cash reconciliation, new mandates, and so on	TL
Ancillary documents
Share transfer forms, share certificates, board minutes, director resignations appointments, powers of attorney, and so on	LSC
Reorganisation
Pre-sale reorganisation (separate list)	LSC
Closing
Separate closing agenda, notarisations and so on	UKBC/LBC
Pre-closing searches	UKBC/LBC
Funds transfer	BL
Post-closing
Filing at companies registry, stamp duty, statutory books, and so on	UKBC/LBC
Closing accounts	BAC/SAC
Price adjustment	BL/SL

These steps and documents are also typical in a single jurisdiction acquisition. The difference with a cross-border transaction is usually the complexity and number of documents:

The buyer may be acquiring a mixture of shares and assets from several seller group subsidiaries in a number of different jurisdictions.
In this context, the challenge is to ensure that all of the various elements are held together and completed simultaneously.
This can be achieved by making the principal acquisition document an overarching framework agreement, in which each of the parties procures to deliver the various other agreements at the same time as the closing of the main transaction (see below, Closing).

Choice of governing law

The jurisdiction of the principal target may be a natural choice of governing law for the sale agreement. However, there may be numerous targets across a number of jurisdictions making it necessary to choose one law for the framework agreement.

The parties are generally free to choose the governing law. Which governing law is chosen will therefore be a matter for negotiation, generally, each party favouring its own law. This can result in a compromise selection of a "neutral" (often English) third jurisdiction.

Irrespective of selection of a neutral third jurisdiction to govern the framework acquisition documents, the law of the country where each target company or asset is based will still be relevant, for example:

Any liabilities that the target has for breaching local laws and regulations.
Taxes that arise on the sale.
Formalities of share or asset transfer.

Principal documents

SPA, BTA or framework agreement. The classic acquisition agreement under common law systems is a share sale and purchase agreement for a company and a business transfer agreement (also called asset sale and purchase agreement) for an asset acquisition.

Where the targets are located across more than one jurisdiction, an overarching framework agreement is generally used to cover the main commercial terms, in particular:

Conditionality.
Price.
Closing requirements.
Price adjustment.
Warranties.
Limitations on claims.
Tax covenant.
Indemnities.
Non-compete and non-solicitation restrictions on the seller.

The framework agreement also has annexed to it or deliverable under it individual transfer documents meeting local requirements for the target companies and assets in each jurisdiction. Care should obviously be taken by local counsel to ensure the commercial objectives of the framework agreement are not undermined by the local agreements.

Disclosure letter. In a cross-border transaction with a data room that may be in several languages, the buyer will:

Insist even more than it would in a single jurisdiction acquisition that the data room is not deemed to be fully disclosed. Instead, it will require the seller to identify documents by reference to the specific warranty against which it wishes to make disclosure.
Want to include a knowledge "saving provision" that the buyer's remedies for breach of warranty are not affected by any investigation made by it or on its behalf into the target's affairs (except if the investigation gave the buyer actual knowledge of the relevant facts). Case law confirms that, at least under English law, the buyer cannot rely on a "saving provision" if it had actual knowledge of the matter on which it seeks to claim (Infiniteland Ltd v Artisan Contracting Ltd [2005] EWCA Civ 758).

Buyer protections

In a cross-border deal the buyer may be entering unfamiliar territory and dealing with parties of whose standing it cannot be confident. Protections can include the following.

Legal opinion

A legal opinion should be obtained on any overseas seller, target or other company involved in the transaction to confirm that the company:

Is validly incorporated.
Remains in existence.
Has validly executed the relevant agreement.
Has power to execute the agreement, including necessary approvals and authorisations.
Will not be in breach of any local laws in complying with the terms of the agreement.
Will be bound by the agreement and that the agreement will be enforceable against it.
Will be bound by the choice of law in the agreement.
Is not insolvent.

Buyer's counsel will also want to consider:

Whether the law firm giving the opinion has adequate professional indemnity insurance in the event that the opinion is given negligently.
By what limitations and assumptions the opinion is qualified and whether these diminish the value of the opinion.
To whom the opinion is to be addressed and who is entitled to rely on it.

"Buyer beware" and good faith. In particular:

In common law jurisdictions, business buyers have limited statutory or implied protection. The general presumption is one of "buyer beware", so the buyer must generally rely on those protections that have been expressly agreed. Extensive warranties and indemnities are therefore a common feature of acquisition documents governed by the laws of common law jurisdictions.
In contrast, in many civil law jurisdictions, parties are under a general obligation to act in good faith to each other. For the seller, this gives rise to an obligation to voluntarily and comprehensively disclose any problems affecting the target, whether or not called for by a warranty.

Warranties and indemnities distinguished. A warranty:

Is an assurance by the seller as to a particular fact or state of affairs in relation to the target.
The remedy for a breach of warranty lies in damages.
For the buyer to bring a warranty claim it will have to show that the effect of the breach was to reduce the value of the target.
The buyer can generally not bring a warranty claim for a matter of which it was already aware, for example by the sellers disclosure, before signing the sale agreement.
Despite a claim for breach of warranty, the buyer must take measures to mitigate its loss.

By contrast, an indemnity:

Is a promise to reimburse the buyer for a particular liability, and is therefore a claim for a debt rather than in damages.
On breach of indemnity the buyer's obligation to mitigate loss is less clear.
Indemnities are generally used where the buyer had knowledge of the matter before signing the sale agreement, and still wanted protection, or where a damages claim would not be an adequate remedy.

For more information, see Warranties and indemnities: acquisitions.

Escrow accounts. If the buyer has concerns as to the ability of the seller to pay in the event of a warranty or indemnity claim, retaining an amount of the purchase price in an escrow account should be considered. Similarly, in the event of deferred cash consideration being payable by the buyer, the seller may require such deferred consideration to be placed in an escrow account. In either case, it may be appropriate for a neutral bank of international repute to act as escrow agent to hold such sums pursuant to an escrow agreement.

Parent company guarantees. If the target will be coming out of a larger group, there may be a parent company within that group with greater financial resources and standing than the seller that the buyer will seek to join in the SPA as guarantor of seller obligations. Similarly, in the event of deferred consideration payable by the buyer, the seller may require a guarantee from the buyer's holding company.

Warranty and indemnity insurance. Warranty and indemnity liability insurance for the benefit of the buyer is becoming increasingly common. This can be useful in a number of circumstances:

Where the seller's covenant, for whatever reason, may not be strong.
Where the seller is an institution refusing to give warranties other than as to title and power to sell the shares.
Where the seller is a private equity fund who, though prepared to give commercial warranties, cannot undertake long term liabilities inhibiting distribution of sale proceeds to its members.

The insurance can be buyer insurance or seller insurance. The premium can be borne by one side, the other or shared and in buyer insurance is often deducted from the purchase price.

Cash free-debt free and closing accounts. Price is typically agreed on a debt free, cash free basis subject to an agreed level of normalised working capital being left in the business. This will necessitate a close examination of the target's latest management accounts leading up to a closing balance sheet and post-closing price adjustment.

Earn-out. To the extent any deferred consideration is to be calculated by reference to an earn-out or other financial formula, care should be taken in the context of a cross-border acquisition not only in properly defining the formula itself, but also in reconciling any differing accounting treatments or policies which may apply across the relevant jurisdictions. Similar care should be taken to the extent of any closing balance sheet adjustment which may apply.

Resolution of disputes. Where there is concern as to the impartiality, delay or costs of the courts with closest nexus to the transaction, the parties may select (local law permitting) resolution of their disputes before the courts of another jurisdiction or by arbitration. Even where the courts of jurisdictions such as England are acknowledged as affording a reasonably quick and economic forum, the parties may still select arbitration to preserve confidentiality. A party with deep pockets may cynically opt for arbitration in the anticipation that, when confronted with the delay and cost of arbitration, the counterparty will be more likely to settle.

Agent for service of process.To minimise procedural and logistical difficulties, especially in cross-border transactions, it is common for sale agreements to require parties to irrevocably designate an agent (typically a law firm) on whom notice of legal proceedings can be served on their behalf and constitute valid service of process on that party.

Closing

Differing jurisdictions, time zones and the complexity of a cross-border transaction make careful planning of the closing (also called completion) process essential.

Closing agenda

A detailed closing agenda, agreed between the parties in advance, is invaluable in this respect, and often this will provide for a "pre-closing" process during which all documents are signed but not yet released. A closing agenda will typically include:

A list of all of the documents to be signed.
The order in which the various actions are to be taken and documents are to be signed and dated. When the transaction documents need to be signed in several different time zones, it may be necessary for the documents to be signed on different days, but then be held, undated, in escrow by a local lawyer. All of the documents can then be dated at the same time as the closing of the principal acquisition agreement, to be governed by the terms of an escrow agreement.
Who will sign each document.
All payments to be made.
Any lawyers' undertakings to be given.
Responsibility for carrying out the various actions.
Post-closing actions and filings.

Formalities

The buyer will need to take local law advice on the formalities affecting the transaction.

Notarisation. A common requirement in civil law jurisdictions is to have the relevant documents notarised (for example in Germany, all share transfer and real property transfer documents need to be notarised):

The notary will need to see original signatures (not copies sent by e-mail or fax).
Practically, this means that, even if the main closing meeting is taking place elsewhere, the parties need to appoint local representatives in those jurisdictions. Powers of attorney may need to be prepared for this purpose.
These arrangements need to be built in to the order of events set out in the closing agenda.

Target board. The buyer will generally want its representatives appointed to the target board at closing. This is not always straightforward and may need weeks of preparation:

In some jurisdictions the director may need to be a local national.
In a regulated industry the director may need to be established with the relevant authorities as a fit and proper person for the role.
The nationality and residence of the directors and where management decisions are made may impact on tax planning for the target and the buyer group.
There will be personal tax planning issues for individual directors.

Money transfers

Same-day transfers of funds between different jurisdictions are often not possible. As a buyer is unlikely to be willing to risk sending funds to the seller until closing has taken place, alternative solutions need to be considered:

The buyer could transfer the funds to its lawyer in advance of closing. That lawyer could then undertake to the seller's lawyer to transfer the funds on fulfilment of all other closing requirements.
However, if the buyer or the seller is based in a jurisdiction where lawyers' undertakings are not recognised or are inadequately regulated, the parties may not be willing to rely on closing undertakings in respect of the purchase price. In this case, a reputable international bank could be appointed as an escrow agent. The buyer would then deposit the purchase price with that bank, on the basis that the escrow agent would be bound by an irrevocable tripartite agreement to release funds to the seller on closing.

Post-closing matters

There are a number of legal formalities to be completed following closing. These vary depending on the:

Type of business acquired.
Jurisdictions in which the target operates.
Buyer's strategic plans for the acquired company.

Common matters to consider include:

The payment of taxes or stamp duties on the share or asset transfer. There are often penalties for late payment, and a failure to pay may damage the buyer's title to the assets or shares.
Securing key contracts. In a share purchase, it may be necessary to obtain consent from or notify the counterparties of the target's contracts under their change of control provisions. Following an asset purchase, such contracts will need to be assigned or novated to the buyer.
Making any necessary filings or registrations with the relevant government bodies.
Integration of the target's human resources function with that of the buyer. A buyer wishing to harmonise employee terms will usually need to obtain those employees' agreement to such changes, and, when operating in the EU, take account of applicable transfer of undertakings regulations.
Reorganising the target's corporate structure, including amending the constitution and changing the officers and writing up the company books.
Integration of the target's financial and commercial operations.

This article was written with contributions from Andrew Betteridge and Stuart Fleet.

Contributor profiles

Simon Rous

Ashfords LLP

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T +44 7977 471330
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Professional qualifications. Solicitor, England and Wales.

Areas of practice. Corporate transactions; mergers, acquisitions and disposals and joint ventures; MBOs/MBIs; international and cross-border deals and inward investment in the UK.

Andrew Betteridge

Ashfords LLP

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T +44 117 3218063
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Professional qualifications. Solicitor, England and Wales.

Areas of practice. Corporate and venture capital work.

Stuart Fleet

Ashfords LLP

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T +44 20 7544 2473

E [email protected]

W www.ashfords.co.uk

Professional qualifications. Solicitor, England and Wales.

Areas of practice. Public and private company mergers and acquisitions, IPOs, secondary fundraisings and other transactions undertaken by quoted companies.

Structuring and managing cross-border private acquisitions | Practical Law