Solutions used in other countries can achieve the same or very similar results in cross-border transactions.
Greater care than normal needs to be taken with respect to how things are communicated or drafted.
Things do not always work the same way as they may in your home country. Sensitivity to different cultures, ways of thinking and doing business goes a long way to bridging gaps in expectations and communication. Issues can often be pre-empted and resolved before they arise.
Greater care than normal needs to be taken with respect to how things are communicated or drafted. For example if a due diligence request list (often seen as a basic, standard form document) is not drafted properly from the outset, then this is likely to have an adverse – and magnifying – knock-on effect for the deal as a whole. A significant amount of time may then be taken up answering questions from multiple jurisdictions which could easily have been pre-empted, or doing work which is not strictly required.
Defining market practice
In riskier countries the buyer may be concerned as to potential leakage of value from the locked box date.
If capital control rules are in place, then it may be hard, or impossible, to dividend-out cash. A buyer then may argue that ‘trapped cash’ should not be included within the net debt calculations in the usual way.
It is important to check if country risk is factored into the valuation – it often is. This may affect the dynamics of the transaction documents themselves. A mechanism to address currency fluctuations may also be required.
An important consideration is whether the deal is locked-box, where the purchase price is fixed at a point in time in the past – often at the date of the last audited accounts – or based on completion accounts where the valuation is fixed as at the date the shares transfer to the buyer. In riskier countries the buyer may be concerned as to potential leakage of value from the locked box date, and therefore prefer the peace of mind that comes with completion accounts.
‘It is market practice’ is often used in negotiations to justify a particular position. But market varies from country to country and continent to continent. Material adverse change clauses are standard on deals in the US, but not in Europe. Very long claim periods for breach of warranty and penalty clauses are usual in Poland.
Addressing valuation issues
Taking the right approach
Equally, a buyer can spend weeks or months carrying out due diligence, only to find that the insurers (where warranty and indemnity insurance is used) refuse to provide coverage because they are unhappy with the sampling approach taken in due diligence. At that point it may be too late to rectify the issue.
If the target is active in – say – 40 countries, it may be impractical for a buyer to take an excessively detailed approach. In these circumstances a buyer may opt to carry out a light touch due diligence in non-core jurisdictions (or rely only on warranty protection) and/or take a ‘sampling’ approach.
Tax covenants and indemnities are standard in the UK and other Western countries, but not always in emerging economies. If a Polish company is acquiring operational assets in Argentina and the deal is implemented at the US level under English law (a real-life example!), then what exactly is market practice?
In what country does the seller have assets? Can a court award be enforced with relative ease (for breach of the SPA for instance)? Is the country party to the New York Convention, ensuring that arbitral awards can be enforced directly in the country with comparably few grounds for local courts to object?
In either scenario, are the local courts sufficiently transparent, independent, and free from unlawful influence? If not, a buyer should consider structuring the deal at the level of an offshore country with more tried and trusted courts.
Even where courts can be relied on, the applicable laws may not be sophisticated enough to accommodate all the necessary concepts built into the transaction documents. This can be challenging in some emerging economies, but equally in some more established markets too. If you are not satisfied that the concepts can be enforced in a manner that achieves the intended commercial result, then consider structuring the deal at the level of a more tried and tested jurisdiction.
There is also a theoretical risk that a government could nationalise the asset in the future or deprive the owner of its use. In that case, a buyer may have the right to take action against the government itself if the investment is structured through an SPV in a country which has a bilateral investment treaty with the target jurisdiction.
Protecting rights
The applicable laws may not be sophisticated enough to accommodate all the necessary concepts built into the transaction documents.
FDI approval procedures are increasingly common. Although formally put in place to avoid unwanted foreign control over strategic assets and resources, such as in the telecoms, energy and defence sectors, it is not unheard of that local governments use the vague wording of the relevant legislation to block deals in far less sensitive sectors. State interference can also occur in merger approval processes and central bank/currency control permissions may also be required.
Planning for deal blockers
‘It is not possible’ or ‘it does not work like that here’ are common phrases when trying to structure or implement cross-border deals. In most cases, it is possible to achieve the same – or a very similar – end result by being creative, or by applying solutions that we have seen used in other countries.
Finding a way to get the job done