Lately we have seen an uptick in international M&A work – some of it from China, some of it to China, some with other China alternative countries, like India and Malaysia, and some of it within the U.S. relating to U.S. subsidiaries owned by foreign companies. This increase coincides both with the world partially thawing from the Covid freeze and partially because we see increases every fall as companies look to make strategic acquisitions effective 12/31 or 1/1.
I frequently tell clients who are new to international transactions that these deals are like domestic transactions but usually require double the work, even on a good day. A lot of savvy domestic lawyers don’t really appreciate the dynamics of an international transaction (see Good Lawyers and Businesspeople Think They Know How to Draft China Business Contracts. They Don’t). Because each cross-border deal is different, the relative significance of the issues discussed below will depend upon the specific facts, circumstances, and dynamics of each particular situation. There are no “off the shelf” forms for these types of transactions. As a rule of thumb, you just need to be prepared for a lot of moving parts and a much slower timeline than you would like.
Political and regulatory risks abound in international transactions, even if both sides want the deal done yesterday. If the recent news coming out of China (a la Ant Financial and tech antitrust rules) and the U.S. presidential election haven’t driven this point home to you, I’m not sure anything will. Even though foreign direct investment (FDI) into the U.S. remains generally well received and rarely becomes a political issue for most source countries, with regard to anything China, all bets are off.
Prospective non-U.S. acquirers of U.S. businesses or assets should be familiar with the general country, state, and local landscape particular to their industry. And they or their legal team should undertake a comprehensive analysis of the U.S. political and regulatory implications in advance of any acquisition proposal or even initial discussion, especially if the target company operates in a sensitive industry or if the acquirer is sponsored or financed by a foreign government or organized in a jurisdiction where a high level of government involvement in business is generally understood to exist. That means China, and it means an increasing number of foreign countries, as well, especially with the current global economic situation.
When considering the concerns of federal, state, and local government agencies, don’t forget to include the employees, customers, suppliers, communities, and other interested parties. If you are a U.S. company, do they like you now? Will they like you after you have taken on a foreign partner or sold your company wholesale to a foreign company without your easing the transition process? This may not matter as much if you plan on leaving town, but if you stay put in your town after the closing, there may be unintended consequences for you and those you care about.
Do you make an announcement or not? If so, when do you make the announcement? Make sure you address this early in the discussions with your transaction partner. This topic is often covered in your M&A agreement, but you do not want your partner to make an announcement without your involvement, which could happen long before your purchase agreement is inked and signed. Your comprehensive communications plan should address all the potential constituents with a message tailored to their point of view. This is often something the buyer cares more about than the seller, but that is not always the case.
Your potential regulatory hurdles require sophisticated advance planning. In addition to securities and antitrust regulations, your acquisition may be subject to CFIUS review (see CFIUS in the News Again for Overturning China Deals Involving Sensitive Data), and acquisitions in regulated industries (e.g., energy, public utilities, gaming (gambling), insurance, telecom and media, financial institutions, transportation, and defense) may be subject to one or several additional layers of regulatory approvals. At the very least, you should discuss with your attorney whether CFIUS may apply and whether and when you may be required to disclose the planned deal, as well as the risks for not doing so.
Abiding by regulations in these areas is often complex, and political opponents, reluctant targets, and competitors may capitalize on any perceived weaknesses in an acquirer’s ability to clear regulatory obstacles, even if the executive teams and owners on both sides are fully engaged.
With the presumptive election of President Biden, we expect to see a general lessening of President Trump’s often showy interference in prospective international deals, but you should expect continuity in many of the enforcement policies at the federal level and in corresponding state regulatory bodies (this will be very state-specific). In addition, depending on the industry involved and the geographical distribution of the workforce, labor unions will continue to play an active role during the review process (this will also be very state-specific), which is also a significant political and regulatory risk.
As the globe descends again into another Covid-induced spiral, opportunities will continue to arise in the global M&A game. Sophisticated market participants will continue to hunt for arbitrage opportunities in their strategic acquisitions around the world. Everyone needs to continually refine their strategies and tactics as the global and local environment develop. Keep these political and regulatory risk mitigation concepts at the forefront and discuss them often internally and with your counterparts in your deals.