Photo of Clifford Aronson, Sally Thurston and Erica Schohn by Dave Cross.
One of the most profound changes in the practice of law is its globalization. We hear that concept every day, but with little discussion of what it means to the lawyers on the front lines successfully negotiating cross-border deals.
Today’s best lawyers bring an in-depth knowledge of their clients’ business objectives when navigating the complexities of these nuanced deals. Beyond M&A capabilities, a successful deal team is multidisciplinary and well-versed in global considerations – from international tax implications to workers’ rights in France, or the possible national security issues that may arise when a Chinese company buys an enterprise that has NSA contracts.
We had the opportunity to talk to a cross-practice group of partners from Skadden, which in 2015 became the first firm to exceed $1 trillion in annual M&A deals. Our conversation underscored just how strongly today’s global dealmaking environment is rooted in the intersection of government, finance, tax and competition, and is increasingly impacted by challenges ranging from national security and employment and compensation issues to data privacy and cybersecurity considerations.
Clifford Aronson, the North American leader of Skadden’s Antitrust and Competition Group, is based in New York.
Brian Duwe heads Skadden’s Chicago office and is a top M&A and corporate lawyer.
Ivan Schlager, based in Washington, D.C., heads the firm’s Committee on Foreign Investment in the U.S. practice.
Erica Schohn is a New York-based partner providing compensation and benefits advice on U.S. and cross-border transactions.
Sally Thurston, a senior tax partner based in New York, offers multinational clients advice on the tax implications of transactions as well as tax planning.
Lawdragon: Let’s talk about how global dealmaking has changed in the past 30 years – and what type of team a firm needs to be successful in today’s M&A environment. Brian, how do you establish the architecture of a global deal at the outset and decide which lawyers and practices you need to have at the table?
Brian Duwe: The architecture is almost always driven by the nature of the parties involved and the specific facts and circumstances of the deal. We review a wide variety of factors at the outset and identify the fundamental issues that are likely to drive structure.
Tax is often a big factor because the structure you choose can have very different tax results and value implications for various constituencies. In larger global transactions, differences in tax regimes may also drive the ultimate choice of jurisdiction in which the resulting company will reside.
You also have to consider the certainty of getting a deal done. Antitrust and other regulatory regimes that can delay or derail a transaction are almost always a factor in considering structure and terms, and those are increasingly more complex global issues. In cross-border transactions we have to consider whether either party is government-owned or whether there are strategically sensitive assets involved and, if so, what political and security issues may arise and what clearances may be required.
The process also involves identifying and managing the expectations of the stakeholders involved. These parties may be large shareholders, debt holders, major contracting parties and others. Depending on the jurisdiction, you may also have to consult with a works council or other labor-related group to address the needs of employees and labor organizations that may be impacted by the deal.
To address all of these and many other complex issues in a global transaction, you need to consult with an array of subject matter experts. At Skadden, we have specialists around the globe and across a wide variety of practices who are not only at the top of their fields, but who are also experts in how their practices interact with the M&A process. Once we have assembled our team, we prioritize the issues with the client and begin to work together to structure the deal. It’s rare that our initial proposal lines up with the other side’s suggestion, so the next step is negotiation. As the structure evolves, you may have to return to the drawing board and reshuffle the pieces numerous times throughout the process, and that requires constant engagement with the entire team.
LD: How do all of your various areas of expertise come into play in today’s global transactions?
Ivan Schlager: In global cross-border deals, you can have a multijurisdictional national security review in France and the United States that impacts your tax structure while you’re simultaneously handling European and U.S. antitrust issues.
The important thing is to understand how each other’s areas may impact one another, to understand the risk allocation issues related to the M&A side or the regulatory side or the tax structuring side. That way, if you come up with a tax structure, for example, you can anticipate how the regulators will view it if they have to impose a mitigation plan around a certain group of assets. We have an advantage, because we present a global platform that can manage the risk across multiple regulatory jurisdictions.
Clifford Aronson: In some areas, like antitrust, the ability to get a deal done is partly a function of how often you’re in front of the agencies. Have you had similar deals in the past? How much experience do you have in the industry? A lot of firms may have antitrust capabilities, but they don’t know the agency well or haven’t had a recent case, and the agency’s always changing from political, policy and economic perspectives.
Schlager: The volume of work that a firm handles and the depth of its experience with different types of transactions gives it credibility with the regulator. For example, when we were in front of the CFIUS regulator on a very difficult transaction, we were tasked with putting a mitigation structure into a certain entity, but there were related tax consequences. We were able to bring in our tax team to explain to CFIUS how we could structure the deal in a way that also addressed the government’s concern. To do that in a seamless fashion is unique.
LD: Let’s talk about the critical role tax now plays in global deal structuring – with inversions, of course – but also with every deal I take it?
Sally Thurston: Potential tax implications need to be understood from the get-go. Is this an equity deal? A cash deal? When it’s cross-border, you have to consider how the funds are going to flow through the company. Will there be financing? In what jurisdiction will it take place? Where is income generated? Deductions? If it’s an equity deal, there are myriad rules we have to navigate. For example, if we decide to incorporate in the UK, because that’s where one of the parties is located, we have to ensure that’s respected for U.S. tax purposes and the like.
In some situations, Skadden’s tax attorneys know about the potential transaction before our M&A lawyers do. The tax considerations can be so integral to making the transaction work that a significant amount of upfront tax analysis is required to determine whether a potential deal is viable before bringing in the deal lawyers to discuss how to put it together.
LD: So a big deal could come in through the tax lawyer?
Duwe: Deal lawyers love when that happens.
Thurston: From a tax perspective, there can be two levels of involvement on global deals. The first is the kind of deal work in which a big transaction is announced and you’re tasked with negotiating with the other side and handling the external contracts and public-facing information.
The second – and what we’re very often doing on behalf of our clients – is advising on the plumbing inside the company. How will you make a potential deal work? How do you merge all the operations after the fact to take advantage of cash that may be trapped offshore in a tax-efficient way? Then, when that tax planning comes to fruition, we can say, “Let’s bring in our deal team, too, to get the transaction done.” Having such a strong tax planning practice allows us to be involved before the transaction, during the transaction and afterwards when the merged companies begin to integrate their operations.
LD: What you’ve all described is quite a sea change from when you started practicing. Could you talk a bit about the evolution of global dealmaking – including the enormous scale of the deals you now do – and how that’s changed your practice over the years?
Aronson: When I started practicing, the largest transactions tended to be oil transactions like Conoco Mobil. They also were usually domestic, so we never really focused on antitrust issues outside the United States.
Today, there are 120 or more antitrust authorities around the world, all of which want a piece of the action. The markets have become more global in terms of commerce, so antitrust issues can apply across borders.
Cross-border transactions involve governments from all over the world, which work together, coordinate and share information. They don’t always agree on the theories, but they share information, so you can’t make one argument to the European Union and another to Brazil and another argument still to China – because they’re all talking to each other, and it will come back to haunt you. That’s a big change in antitrust law.
Increasingly, antitrust enforcement is also consistent in the more developed economies. Antitrust is driven, in theory and in law, by economics. There was a point in time when the European Commission didn’t have an economist on staff. Now the EC has economists, which is good, and their theories are closer to those in the U.S. Brazil – another big antitrust-enforcing country – has economists, and its legal approach is more like the EC. The one unknown is China, where other policies impact the antitrust outcome and make the process difficult to predict.
LD: Let’s say all five of you are working on a deal together and you’re getting hung up on antitrust in Brazil, or there’s an employee compensation issue that’s bubbling up. How are you communicating with one another in real time to keep the train moving while some issues seem to be jumping the tracks?
Erica Schohn: It is critical to communicate because certain milestones are gating items to the deal’s progression. For example, in these large cross-border transactions, there are often employees in more countries than there are even legal entities. Employee-transfer issues, which require consulting with works councils and unions all over the world, create significant timing challenges in global transactions.
The employees impacted by a deal need to know the details around the post-closing terms and conditions of their employment, including the details surrounding their positions, their compensation and their benefits. This requires balancing the overall timeline of the deal with the legitimate desire of the employees for information and the legal requirements in each country surrounding employee communications. Each country has its own protocol with differing timelines for works council, employee representative and individual employee consultation. Much of the communication with the employees occurs after signing the transaction agreement, but in some cases, such as France, the consultation needs to be done prior to signing at a time when few employees know about the impending transaction. Others don’t have any prescribed timelines, so you have to rely on past deal experience to develop a practical process that is reasonable for all the different stakeholders while at the same time complying with legal intricacies around the globe. As an attorney, you never want your area to be the one holding up the closing or the one to force the complication of a delayed closing in a far-away jurisdiction.
Duwe: From a communications standpoint, it often will be the M&A lawyer who has to run point and work back and forth with the tax people, with Erica and her team on benefits and employment and labor issues, with Cliff on antitrust, with Ivan if we have foreign investment questions and issues, and so on. Issues may be raised in one particular area that seem significant in isolation, but when you look at them from the perspective of the whole deal they may not be as large of a concern. The M&A attorney is often in the role of harmonizing and prioritizing the various issues that are raised by the experts.
LD: Ivan, I would suspect your practice has probably changed the most as it has grown in importance to dealmaking?
Schlager: Definitely. Setting aerospace and defense aside, we began experiencing an evolution around 2000, as we saw more network deals and as cybersecurity really emerged as an issue. It started with telecom network and telecom equipment deals, and certain transactions that connected to the energy grid. After Dubai Ports World attempted to buy an operator of seaport terminals in 2006, there was an explosion of rigorous national security reviews.
We’re now seeing other jurisdictions, such as France, pick up national security reviews. It’s not a one-on-one transaction with CFIUS agencies anymore, because whatever commitments the client makes to CFIUS will be examined in other countries. We’ve spent a lot of time in front of the French National Security Agency and have become adept at marrying the commitment a client makes to the French authority with the commitment we have to make to CFIUS with the commitment the Chinese buyer would have to make in front of NDRC (National Development and Reform Commission).
I was working on a difficult transaction over the last couple weeks in which the commitments we made had an impact on a research facility in Germany and a software development facility in India. The practice has become extremely global in nature.
LD: What role does shareholder activism play in deal structuring and how how much do those concerns influence the work each of you do?
Schlager: We have had situations in which we highlighted the presence of an activist for specific agencies to explain why the company was making certain decisions and the pressure the management team was under to deliver for shareholders. We’ve also had activists who’ve tried to manipulate the CFIUS agencies to negatively affect a deal when those agencies are really supposed to look at a transaction and address the narrow national security issues. To the extent activists have been an issue, they’ve been played both ways, right?
Duwe: You can also overstate the impact of shareholder activism on M&A. If there’s opposition to a deal among the shareholders, it attracts a lot of attention and probably gets disproportionately more play in the press than most other transactions. That being said, communication with shareholders has never been more important in M&A transactions. How you communicate a deal, especially at announcement, and how well you are able to work with shareholders so they understand the strategic logic of the transaction are more important parts of the equation than they used to be. In the largest cross-border deals, the shareholders on both sides will likely need to approve the deal; and between the deal announcement and closing, effective shareholder communication can be critical to getting a deal done.
Aronson: I find that sometimes companies are being forced to pursue strategic transactions with their competitors that maybe they wouldn’t otherwise consider. It can be challenging because one of the most important questions that an antitrust lawyer can ask a client is, “Why are you doing the deal?”
Normally you want a very pro-competitive, output-enhancing efficiency-based answer, like “I’m doing it to reduce costs and increase innovations that produce or increase service levels.” But a lot of times the answer is, “I have a shareholder activist who says I better consider this transaction and hopefully we’re going to get some benefits from it.” We have to be able to handle the risk of these kinds of deals from an antitrust perspective, including who is going to take on the risk and what the cost is to the clients.
Thurston: You can encounter shareholder issues in the inversion sphere because that’s such a controversial transaction. It’s a lightning rod for criticism. It is a taxable transaction to the shareholders of the U.S. company, and usually they’re not getting any cash from the deal that they can use to pay their taxes.
Most of the entities that own the shares in these big public companies are tax-indifferent, and they don’t care. But if the company has a big retail base, it has moms and pops who’ve had share certificates in their desk drawer for the last 50 years and now are getting taxed. The challenge becomes how to explain to your shareholders that this is a good thing, this is a deal-enhancing, value-enhancing proposition over the long term.
At certain levels of ownership, another issue is that management could be hit with an excise tax; someone like Erica has to deal with this all the time. Very often the company does something to help those executives deal with the tax burden, and doing so attracts the ire of the shareholders. A lot of that is disclosed in the proxy statements, but not all shareholders will understand the tax analysis.
The challenge is how to get these shareholders to understand the situation and get on board. We’ve had instances in which very small shareholders write in and say, “I really don’t like this and at your next shareholder meeting I want to propose a resolution that the company is not going to engage in these types of transactions anymore.”
LD: That must be fascinating when you’re trying to make a billion-dollar deal and somebody with a few shares can send it sideways.
Schohn: When innovations like inversions come on the scene, they inevitably impact other areas. The excise tax is a good example. As a result of shareholder activism, companies generally have stopped giving executives tax gross-ups for golden parachute excise taxes incurred by executives because of the large payout they receive in a transaction. But, with inversions, executives face a different type of excise tax that investors hadn’t focused on before. It stems from a different provision of the tax code and applies even when executives aren’t receiving any payout in the transaction. Because the executives weren’t receiving money in the transaction to pay the inversion tax, companies were grossing them up – even those that said they wouldn’t gross people up for the tax on golden parachute payments.
We’ve spent a lot of time explaining to shareholder activist groups and proxy advisory groups how this excise tax is different than the golden-parachute excise tax. Initially they didn’t understand that we weren’t going against policies we had already communicated regarding golden parachute tax gross-ups. It was an uphill battle but we eventually got the big proxy advisory firms to understand the technical differences we were dealing with, and not automatically recommend against a company solely because it was providing inversion excise tax gross-ups.
LD: Are there other areas, whether from a practice focus or the rise of global competition, you see over the next five to 10 years becoming an important addition to the core group of lawyers that comes together to get a big deal done?
Duwe: It’s hard to predict. I’m not sure we would have predicted how CFIUS has evolved. When I started practicing, it didn’t exist. What’s important is to continue looking at what’s changing on the regulatory landscape, in particular, and to make sure we have the expertise available to address new developments as they arise.
Schlager: Cyber is kind of a catch-all phrase, but specifically remote access to networks and software updates and how those are accomplished will grow in importance, as well as patches and phishing and firmwide updates that could potentially compromise networks. We live in an interconnected economy – which is also a venue for actors from Russia or France or Israel or China to compromise certain systems. This is an area we haven’t fully come to grips with, but that’s going to evolve over time and be ever more important.
Aronson: On the antitrust side, there’s a theory being floated that having access to big data as a result of a transaction will somehow prevent a competitor from accessing that big data even if the company is not using it today.
The ability to evaluate these theories is going to be important, and it’s not just in the antitrust arena. Big data also raises privacy concerns, and it remains to be seen how legal theories are going to develop to cover these concepts.
Schohn: We’re seeing more and more focus on data privacy and that’s an area that is continuing to develop with the new Privacy Shield rules between the U.S. and the EU.
More recently, we are seeing both billion-dollar companies with massive workforces and smaller companies with global workforces. Even where a transaction doesn’t immediately feel like a huge cross-border undertaking, we find often that the workforce is distributed around the world. One issue that we often run into with these deals, irrespective of the size, is data privacy. We’re trying to get the deal done by sharing information between the companies and suddenly people are saying, “Wait, I can’t share this yet.” And the other company says, “I can’t get this deal done for you if you don’t share that information.”
Duwe: Cyber also impacts the overall risk assessment of a deal. You have to think more critically about the vulnerabilities of the related companies of a potential target, and what potential risks are embedded in their cybersecurity practices. Basically, are you importing risks and vulnerabilities that you didn’t have originally in your own business?
Thurston: From a tax perspective, there are two things going on. If we ever get fundamental tax reform, that will change the playing field for a lot of multinational companies. Who knows whether it will happen, but it has more momentum than it has had in years.
The second issue is the EU and its activism in terms of how they’re deciding state-aid cases and BEPS (base erosion and profit shifting) cases and the like. This will require more cross-border cooperation among tax advisors to make certain a transaction or structure works not only under existing law, but where it may be headed as a result of EU initiatives.
LD: What I’m taking away from this discussion is the profound evolution of dealmaking since you started practicing. It was perhaps a largely linear process to get a deal done, even with contested deals. Now it seems like basically every deal is multidimensional.
Duwe: It’s multidimensional because the landscape for completing these deals has become more complex. In today’s deals, you inevitably have to integrate advice from various team members across a wide range of practices and jurisdictions. But, as has always been the case, our ultimate goal is to ensure that the client’s decision-making process is well-informed, tactically sharp and ultimately drives an outcome that is optimal for their business.