M&A activity in 2023 was subdued relative to recent record-setting volumes. Globally, M&A volume was $2.9 trillion in 2023, compared to $3.6 trillion in 2022, $6.4 trillion in 2021 and an average of $4.5 trillion annually over the prior ten years (in 2023 dollars). In the first part of the year, persistent inflation weighed on macroeconomic sentiment and many forecasters predicted a recession in the U.S. in 2023. The steepest monetary tightening in decades destabilized regional banks and continued to chill financing markets. At the same time, an aggressive anti-trust agenda in the U.S. deterred dealmakers from pursuing transactions that posed risks of a significant delay or litigation with the government.
Despite the challenges confronting dealmakers in 2023, promising signals of a potential recovery in M&A activity emerged at the end of the year. The U.S. economy avoided recession in 2023, the current rate-hike cycle appears to be nearing its end and several significant transactions were completed after withstanding regulatory scrutiny, including Broadcom’s $69 billion
acquisition of VMware and Microsoft’s $69 billion acquisition of Activision Blizzard.
As during the recent M&A boom, cross-border M&A continued to provide attractive opportunities to dealmakers in 2023, another indicator that M&A was cyclically muted but not fundamentally disrupted over the last year. Cross-border deals were 33% ($950 billion) of global
M&A in 2023, consistent with the average proportion over the prior ten years (35%). Acquisitions of U.S. companies by non-U.S. acquirors were $165 billion in transaction volume and represented 6% of 2023 global M&A volume and 17% of 2023 cross-border M&A volume. Canadian, Irish, French, Swiss and British acquirors accounted for 42% of the volume of cross-border
acquisitions of U.S. targets, while acquirors from China, India and other emerging economiesvaccounted for about 9%.
We expect cross-border transactions into the U.S. to continue to offer compelling opportunities in 2024. Transacting parties will do better if they are well-prepared for the cultural, political, regulatory and technical complexity inherent in cross-border deals. Advance preparation, strategic implementation and deal structures calibrated to likely concerns are critically important.
Now, more than ever, thoughtful regulatory strategy and creative financing approaches deserve special focus.
The following is our updated checklist of matters that should be carefully considered in advance of an acquisition or strategic investment in the U.S. Because each cross-border deal is unique, the relative significance of the issues discussed below will depend upon the specific facts, circumstances and dynamics of each particular situation. There is no one-size-fits-all
roadmap to success.
- Political and Regulatory Considerations. A high percentage of investment into the U.S. will be well-received and not politicized. However, a variety of global economic fault lines continue to make it critically important that prospective non-U.S. acquirors of U.S. businesses or assets undertake a thoughtful analysis of U.S. political and regulatory implications well in advance of any acquisition proposal or program. This is particularly so
if the target company operates in a sensitive industry; if post-transaction business plans contemplate major changes in investment, employment or business strategy; or if the acquiror 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 ex-
ist. High-profile transactions may result in political scrutiny by federal, state and local officials. The likely concerns of government agencies, employees, customers, suppliers, communities and other interested parties should be thoroughly considered and, if practical, addressed before any acquisition or investment proposal becomes public. Anticipa-
tion of these concerns is especially important in light of the increasingly widespread acceptance in the U.S. of stakeholder governance and the ongoing relevance of ESG (envi-
ronmental, social and governance) principles to shareholders and companies alike. Planning for these issues is made all the more complex in the current political climate, in which debates about corporate purpose, stakeholder considerations and ESG factors in corporate decision-making have become politicized.
Similarly, potential regulatory hurdles require sophisticated advance planning. In addition to securities and antitrust regulations, acquisitions may be subject to CFIUS review, and acquisitions in regulated industries (e.g., energy, public utilities, gaming, insurance, telecommunications and media, financial institutions, transportation and defense contracting) may be subject to an additional set of regulatory approvals. Regulation in these are as is often complex, and political opponents, reluctant targets and competitors may seize upon perceived weaknesses in an acquiror’s ability to clear regulatory obstacles as a tactic to undermine a proposed transaction. Finally, depending on the industry involved, the type of transaction and the geographic distribution of the workforce, labor unions may play an active role during the entirety of the process. Pre-announcement communications plans must take account of all of these interests. It is essential to implement a comprehensive communications strategy prior to the announcement of a transaction, focusing not only on public investors but also on all other core constituencies so that the relevant constituencies may be addressed with appropriately tailored messages. It will often be useful, if not essential, to involve experienced public relations advisors at an early stage when planning any potentially sensitive deal.
- CFIUS. The scope and impact of regulatory scrutiny of foreign investments in the U.S. by CFIUS has expanded significantly over the last decade, particularly following passage of the Foreign Investment Risk Review Modernization Act (FIRRMA) in 2018, and a series of implementing rules adopted by the U.S. Department of Treasury. As FIRRMA has been implemented, the role of CFIUS and the need to factor the risks and timing of the CFIUS review process into deal analysis and planning has been further heightened. Although notification of most transactions remains voluntary, FIRRMA introduced mandatory notification requirements for certain transactions, including investments in U.S. businesses associated with critical technologies, critical infrastructure, or sensitive personal data of U.S. citizens where a foreign government has a “substantial interest” (e.g., 49% or more) in the acquiror. Critical technology and critical infrastructure are broad and flexible concepts, and FIRRMA includes in that rubric “emerging and foundational technologies” used in computer storage, semiconductors and telecommunications equipment sectors and critical infrastructure in a variety of sectors. Supply chain vulnerabilities during the pandemic also increased the likelihood that investments in U.S. healthcare, pharma and biotech companies will be closely reviewed by CFIUS.
For example, as evidenced by CFIUS’ opposition in 2021 to South Korean chip maker Magnachip Semiconductor Corp.’s merger with Wise Road Capital Ltd., a Chinese private equity firm, CFIUS will take an expansive view of its jurisdiction when semiconductor supply, even involving non-military applications, is at stake. CFIUS had “called in” the transaction for its review even though the transacting parties indicated that they had no U.S. nexus except for being incorporated in Delaware, having a Delaware subsidiary, and being listed on the NYSE, with any de minimis sales into the U.S. only occurring through third-party distributors and resellers. Magnachip’s 2020 annual report, however, indicated that it had a facility in San Jose, California, which it used for “administration, sales and marketing and research and development functions,” that had been closed only in September 2020. A notable aspect of the deal was CFIUS’ issuance in June 2021 of an interim order preventing Wise Road from completing the acquisition of Magnachip pending its review of the transaction. While FIRRMA gave CFIUS the authority to prevent consummation of a transaction pending its review, CFIUS has rarely used that authority. In abandoning the transaction, Magnachip cited its inability to obtain CFIUS’ approval for the merger. Companies operating overseas with even a limited nexus to the U.S. need to undertake CFIUS due diligence before engaging in a transaction in sectors that may involve core national security areas of interest.
Personal data is also a key area of scrutiny for CFIUS. Most recent enforcement actions involved concerns about Chinese investors’ access to sensitive personal data of U.S. citizens. CFIUS enforcement in these sectors is likely to continue, as is a focus on domestic supply chain security to ensure that neither the U.S. nor its allies will be dependent on critical supplies from certain nations, including China. At the same time, the U.S. is likely to remain open to foreign investment, even in the national security sector. Most foreign investment will still be cleared, although it may get close review and possibly require mitigation actions, especially to the extent involving intellectual property, personal data, and cutting-edge or emerging technologies. While notification of a foreign investment to CFIUS remains largely voluntary, transactions that are not reviewed pre-closing remain subject to potential CFIUS review in perpetuity.
Thus, conducting a risk assessment for inbound transactions or investment early in the process is prudent to determine whether the investment will require a mandatory filing or may attract CFIUS attention. Parties may wish to take advantage of the “declarations” process, which provides expedited review for transactions that present little or no significant risk to U.S. national security. Parties should also agree on their overall CFIUS strategy and consider the appropriate allocation of risk as well as timing considerations insight of possibly prolonged CFIUS review.
- Antitrust Issues. The U.S. antitrust enforcement agencies have had an aggressive enforcement agenda. Recently enacted federal legislation provides for significant increases in the budgets of these agencies. The scope of issues being reviewed in strategic transactions has expanded, and may result in delay and further efforts being required by the parties to get the deal cleared as quickly as possible. Although most enforcement continues to involve situations in which a non-U.S. acquiror directly or indirectly competes or holds an interest in a company that competes in the same industry as the target company, antitrust concerns may also arise if a non-U.S. acquiror operates either in an upstream or downstream market of the target. In addition, a new law, when implemented, will require companies to disclose information regarding subsidies they receive from a “foreign entity of concern.” Such foreign entities include, among other things, countries determined by the Secretary of Energy, in consultation with the Secretary of Defense and the Director of National Intelligence, “to be engaged in unauthorized conduct that is detrimental to the national security or foreign policy of the United States.” China, Russia, Iran and North Korea are among the countries currently identified as “foreign entities of concern.” Pursuant to the new law, the federal antitrust agencies, in consultation with other government agencies, will promulgate rules that specify the information that affected parties must include in their HSR filings and when such changes will take effect. Once effective, filing parties should expect increased scrutiny of any disclosed foreign subsidies, even if such subsidies are unrelated to the transaction being notified.
For a vast majority of transactions, the ultimate outcomes of transactions remain predictable and achievable without the need for remedies or litigation. Even in transactions than raise concerns, careful planning and a proactive approach to engagement with the agencies can facilitate getting the deal through.
For those transactions that raise antitrust concerns, parties should be prepared to deal with the U.S. antitrust agencies’ strong preference for (1) divestitures in lieu of conduct remedies that require ongoing oversight to ensure compliance and (2) acquirors of the divestiture assets to be approved prior to closing rather than permitting divestiture ac-
quirors to be identified by the parties and approved by the agency after closing. Also, the agencies have shown a greater willingness to refuse to engage in remedies discussions in some transactions, and transacting parties should be prepared to litigate, possibly with a remedy in place that resolves any concerns that the court may find justified. In all
transactions, pre-closing integration efforts should be conducted with sensitivity to anti-trust requirements that can be limiting. Home jurisdiction or other foreign competition laws may raise their own sets of issues that should be carefully analyzed with counsel.
- Debt Financing. In the first half of 2023, borrowers deferred new debt deals, delayed planned refinancings and paused major corporate transactions while waiting for interest rates to top out. In the second half of the year, inflation slowed and deal activity picked up. With the exception of high-yield bond issuance, which increased $65 billion from the1 3-year low of 2022, investment-grade bond and leveraged loan issuance remained muted compared to the boom year of 2021.
Direct lenders sought to deploy capital in transactions with companies of all types and sizes, including public borrowers, and began to take aim at investment-grade issuers (though investment-grade financing remains almost entirely the purview of the traditional markets). At the same time, banks began expanding into the private credit space through
partnerships or in-house private credit vehicles.
High interest rates drove an increase in “debt default activism,” or debtholders deploying legal arguments to force borrowers to refinance existing low-rate debt on market-rate terms. To guard against such challenges, borrowers should think of their long-term, low-
coupon debt as a valuable asset that must be tended carefully. In assessing corporate transactions, borrowers should build a record with defense in mind. Further, as the conditionality in acquisition agreements has generally tightened, acquirers with buyer’s remorse are searching for new ways to force a renegotiation or termination of pending acquisition agreements. Sellers, buyers and their respective counsel should strive for as much specificity and clarity as possible when negotiating these covenants to ensure that the parties’ expectations and needs are met while limiting the chances for opportunistic assertions or interpretations.
- Transaction Structures. Non-U.S. acquirors should consider a variety of potential transaction structures, particularly in strategically or politically sensitive transactions. Structures that may be helpful in sensitive situations to overcome potential political or regulatory resistance include no-governance and low-governance investments, minority positions or joint ventures, possibly with the right to increase ownership or governance rights over time; partnering with a U.S. company or management team or collaborating with a U.S. source of financing or co-investor (such as a private equity firm); utilizing a controlled or partly controlled U.S. acquisition vehicle, possibly with a board of directors having a substantial number of U.S. citizens and prominent U.S. citizens in high-profile
roles; or implementing bespoke governance structures (such as a U.S. proxy board) with respect to specific sensitive subsidiaries or businesses of the target company. Use of debt or preferred securities (rather than common stock) should also be considered. Even seemingly more modest social issues, such as the name of the continuing enterprise and
its corporate location or headquarters, or the choice of the nominal legal acquiror in a merger, can affect the perspective of government and labor officials.
- Acquisition Currency. All-cash transactions represented 51% by value of cross-border deals into the U.S. in 2023 (below the average of 55% over the prior five years). However, non-U.S. acquirors should also think creatively about potential avenues for offering U.S. target shareholders a security that allows them to participate in the resulting global enterprise. For example, publicly listed acquirors may consider offering existing com-
mon stock or depositary receipts (e.g., ADRs) or special securities (e.g., contingent value rights). If U.S. target shareholders are to obtain a continuing interest in a surviving corporation that is not already publicly listed in the U.S., non-U.S. acquirors should expect heightened focus on the corporate governance and other ownership and structural arrangements of the non-U.S. acquiror, including as to the presence of any controlling or large shareholders, and heightened scrutiny placed on any de facto controllers or promoters. Creative structures, such as issuing non-voting stock or other special securities of a non-U.S. acquiror, may minimize or mitigate the issues raised by U.S. corporate governance concerns. Equity markets have never been more global, and investors’ appetite for geographic diversity never greater; equity consideration, or an equity issuance to supporta transaction, should be considered in appropriate circumstances.
- M&A Practice. It is essential to understand the custom and practice of U.S. M&A transactions. For instance, understanding when to respect—and when to challenge—a target’s sale “process” may be critical. Knowing how and at what price level to enter the discussions will often determine the success or failure of a proposal; in some situations it is prudent to start with an offer on the low side, while in other situations offering a full
price at the outset may be essential to achieving a negotiated deal and discouraging competitors, including those who might raise political or regulatory issues. In strategically or politically sensitive transactions, hostile maneuvers may be imprudent; in other cases, unsolicited pressure might be the only way to force a transaction. Takeover regulations
in the U.S. differ in many significant respects from those in non-U.S. jurisdictions; for example, the mandatory bid concept common in Europe, India and other countries is not present in U.S. practice. Permissible deal protection structures, pricing requirements and defensive measures available to U.S. targets will also likely differ in meaningful ways
from what non-U.S. acquirors are accustomed to in their home jurisdictions. Sensitivity must also be shown to the distinct contours of the target board’s fiduciary duties and decision-making obligations under state law. Consideration also may need to be given to the concerns of the U.S. target’s management team and employees critical to the success
of the venture. Finally, often overlooked in cross-border situations is how subtle differences in language, communication expectations and the role of different transaction participants can affect transactions and discussions; preparation and engagement during a transaction must take this into account.
- U.S. Board Practice and Custom. Where the target is a U.S. public company, the customs and formalities surrounding board of director participation in the M&A process, including the participation of legal and financial advisors, the provision of customary fairness opinions and the inquiry and analysis surrounding the activities of the board and financial advisors, can be unfamiliar and potentially confusing to non-U.S. transaction participants and can lead to misunderstandings that threaten to upset delicate transaction negotiations. Non-U.S. participants must be well advised on the role of U.S. public company boards and the legal, regulatory and litigation framework and risks that can constrain
or proscribe board or management action. These factors can impact both tactics and timing of M&A processes and the nature of communications with the target company.
- Shareholder Approval. Because most U.S. public companies do not have one or more controlling shareholders, public shareholder approval is typically a key consideration in U.S. transactions. Understanding in advance the roles of arbitrageurs, hedge funds, institutional investors, private equity funds, proxy voting advisors and other market players—
and their likely views of the anticipated acquisition attempt as well as when they appear and disappear from the scene—can be pivotal to the success or failure of the transaction. These considerations may also influence certain of the substantive terms of the transaction documents. It is advisable to retain an experienced proxy solicitation firm well before the shareholder meeting to vote on the transaction (and sometimes prior to the announcement of a deal) to implement an effective strategy to obtain shareholder approval.
- Litigation. Shareholder litigation continues to accompany many transactions involving a U.S. public company, but is generally no cause for concern. Excluding situations involving competing bids—where litigation may play a direct role in the contest—and going-private or other “conflict” transactions initiated by controlling shareholders or management—which form a separate category requiring special care and planning—there are very few examples of major acquisitions of U.S. public companies being blocked or even delayed due to shareholder litigation or of materially increased costs being imposed on arm’s-length acquirors. In most cases, where a transaction has been properly planned and implemented with the benefit of appropriate legal and investment banking advice on both sides, such litigation can be dismissed or settled for relatively small amounts or non-financial “therapeutic” concessions. Sophisticated counsel can usually predict the likely range of litigation outcomes or settlement costs, which should be viewed as a cost of the
While careful planning can substantially reduce the risk of U.S. shareholder litigation, the reverse is also true: the conduct of the parties during negotiations, if not responsibly planned in light of background legal principles, can create an unattractive factual record that may both encourage shareholder litigation and provoke judicial rebuke, including
significant monetary judgments. Sophisticated litigation counsel should be included in key stages of the deal negotiation process. In all cases, the acquiror, its directors and shareholders and offshore regulators should be conditioned in advance (to the extent possible) to expect litigation in the U.S. and not to view it as a sign of trouble. In addition, it is important to understand that the U.S. discovery process in litigation is different, and
often more intrusive, than the process in other jurisdictions. Here again, planning is key to reducing the risk. Turning back a high-profile litigation campaign by the plaintiffs’ bar, the New York courts recently made clear that deal-related fiduciary duty claims not arising under U.S. law should generally not proceed in the U.S. These rulings provide welcome comfort that U.S. courts will refuse to export their expansive discovery and
procedural rules in the mine run of situations.
The pandemic reinforced the importance of merger agreement provisions governing the choice of law and the choice of forum in the event of disputes between the parties—particularly disputes in which one party may seek to avoid the obligation to consummate the transaction. In Travelport Ltd v. Wex, for example, the English High Court interpret-
ed the material adverse effect provisions of the parties’ agreement under English law in a manner that surprised many U.S. observers. Similarly, in separate decisions examining whether and when a party can exit a merger agreement because the counterparty breached its interim operating covenants, the Superior Court of Justice in Ontario reached
a different result than the Delaware courts. These disputes, reflecting the transactional disruption occasioned by the pandemic, have taught again an important lesson: cross-border transaction planners should consider the courts and laws that will address a potential dispute and consider with care whether to specify the remedies available for breach of the transaction documents and the mechanisms for obtaining or resisting such remedies.
- Tax Considerations. Understanding the U.S. and non-U.S. tax issues affecting target shareholders and the combined group is critical to structuring any cross-border transaction. In transactions involving the receipt of acquiror stock, the identity of the acquiring entity must be considered carefully. Although some of the U.S. tax law changes enacted
in 2017 (e.g., 21% corporate income tax rate and deduction for dividends received from non-U.S. subsidiaries) have ameliorated certain of the adverse tax consequences traditionally associated with being U.S.-parented, others remain or have been exacerbated (e.g., continued application of “controlled foreign corporation” (CFC) rules to non-U.S.
subsidiaries and expansion of such rules to provide for minimum taxation of CFC earnings (GILTI)). Where feasible, it often remains preferable for the combined group to be non-U.S.-parented, although this determination requires careful modeling, taking into account the potential application of recently enacted U.S. and non-U.S. minimum taxes, as well as adjustments to certain U.S. tax rates currently scheduled to occur in 2026 (e.g., increase in GILTI and BEAT tax rates and reduction of the deduction for foreign-derived intangible income). In transactions involving an exchange of U.S. target stock for non-U.S. acquiror stock, the potential application of “anti-inversion” rules—which could render an otherwise tax-free transaction taxable to exchanging U.S. target shareholders and
could result in significant adverse U.S. tax consequences to the combined group—must be evaluated carefully. Combining under a non-U.S. parent corporation frequently is feasible only where shareholders of the U.S. corporation are deemed to receive less than 60% of the stock of the non-U.S. parent corporation, as determined under complex com-
The Inflation Reduction Act of 2022 introduced a 15% corporate alternative minimum tax (CAMT) on the “adjusted financial statement income” of certain large corporations effective for tax years beginning after December 31, 2022. The CAMT generally applies to corporations with average annual adjusted financial statement income over a three-
year period in excess of $1 billion (but a lower $100 million threshold applies to U.S. corporations that are members of a non-U.S.-parented group that satisfies the $1 billion threshold). The introduction of a parallel set of U.S. minimum tax rules—with broad regulatory authority for the Treasury Department to “carry out the purposes” of the tax—
added significant complexity for large taxpayers, and IRS guidance on numerous topics remains to be issued. While the CAMT shares certain features with the global minimum tax rules under the OECD’s “Pillar Two” rules (which impose a 15% minimum tax on the book income of certain large multinational enterprises and will be effective in many
jurisdictions as of January 1, 2024), numerous differences give rise to complex coordination issues and may lead to double taxation.
Potential acquirors of U.S. businesses should carefully model the anticipated tax rate of the combined business, taking into account the CAMT and Pillar Two taxes (if applicable), limitations on the deductibility of net interest expense and related-party payments, and limitations on the utilization of net operating losses, as well as the consequences of
owning non-U.S. subsidiaries through an intermediate U.S. entity. Such modeling requires a detailed understanding of existing and planned related-party transactions and payments involving the combined group.
- Employee Compensation and Benefits Matters. In the acquisition of a U.S. company, employee compensation and benefits arrangements require careful review as part of the diligence process and are often a key element of deal-related negotiations. Because both existing compensation arrangements and new arrangements that the target company seeks
to implement in connection with a transaction may have a material impact on retention of target employees (and, therefore, the successful post-closing operation of the target’s business) and may have significant associated costs, close coordination among the corporate development, finance, human resources and legal teams at the acquiror, the acquiror’s investment bankers, and the acquiror’s external transaction counsel is critical in order to ensure that all elements are properly accounted for in the valuation analysis, transaction terms and integration plan.
In particular, equity incentive compensation is an area that requires significant focus as it is highly utilized at U.S. companies and, though the practices vary depending on whether a company is publicly traded or privately held, the sector in which it operates, the size of its employee population and other relevant factors, it would not be uncommon for equity awards to represent 10% or more of a company’s fully diluted equity value and for such awards to be held by a substantial percentage of the employee population. Consequently, outstanding equity awards will need to be addressed at multiple stages of the deal process, including accounting for awards in the valuation analysis and purchase price nego-
tiations, establishment of parameters for grants of incremental equity awards between signing and closing, and inclusion of provisions regarding treatment of all outstanding equity awards in the transaction agreement (which treatment must be consistent with the contractual terms of the awards).
Additionally, acquirors should be mindful that, because U.S. employment laws are generally less prescriptive on compensation and benefit matters than the laws of many other jurisdictions, some matters that are covered by applicable law outside the U.S. are generally negotiated on a bespoke basis in U.S. transactions. For example, it is customary in U.S. transaction agreements to include a covenant requiring that the acquiror maintain compensation and benefits for target company employees at specified levels (generally linked to either pre-closing levels or levels applicable to similarly situated acquiror employees) for a specified period of time following the closing (generally 12 months). While this covenant is not individually enforceable by target company employees as a
contractual matter, it is a specific indication of the acquiror’s intended treatment of target employees and, because the terms of the covenant are communicated to employees, a failure of the acquiror to comply with the covenant would have significant consequences both as to employee satisfaction and retention at the target company and more broadly for
the acquiror’s reputation when entering into future transactions. Another example is that, in the U.S., severance benefits are generally a matter of contract rather than statute, and negotiation of specific severance protections for target employees—generally in the form of a commitment from the acquiror to maintain existing severance protections or to allow
the target company to implement new or enhanced protections in advance of closing—is common.
Another area that requires careful analysis and planning in U.S. acquisitions is the potential adverse tax consequences—for both target companies and executives—imposed under Sections 280G and 4999 of the U.S. tax code. Together, these provisions result in a dual penalty, consisting of a loss of federal income tax deduction for the company and a 20% excise tax for the executive, on change-in-control related payments and benefits payable to certain officers and other highly compensated employees of a corporation undergoing a change in control to the extent that the value of such payments and benefits exceeds a threshold calculated based on average historic compensation paid by the corporation to the applicable individual. Consequently, in general, a calculation of the amount of payments and benefits potentially subject to these penalties should be performed by specialized accounting experts retained by the target company, and it is customary for the acquiror and the target company, their respective legal counsel and the accounting firm
performing the calculations to work together to use widely accepted techniques in order to mitigate, to the extent possible, the potential adverse consequences.
- Corporate Governance and Securities Law. Current U.S. corporate governance and securities rules can be troublesome for non-U.S. acquirors who will be issuing securities that will become publicly traded in the U.S. as a result of an acquisition. SEC rules, the Sarbanes-Oxley and Dodd-Frank Acts and stock exchange requirements should be evalu-
ated to ensure compatibility with home jurisdiction rules and to be certain that a non-U.S. acquiror will be able to comply. Rules relating to director independence, internal control reports and loans to officers and directors, among others, can frequently raise issues for non-U.S. companies listing in the U.S. Non-U.S. acquirors should also be mindful that U.S. securities regulations may apply to acquisitions and other business combination ac-
tivities involving non-U.S. target companies with U.S. security holders.
- Disclosure Obligations. How and when an acquiror’s interest in the target is publicly disclosed should be carefully controlled and considered, keeping in mind the various ownership thresholds that trigger mandatory disclosure on a Schedule 13D under the federal securities laws and under regulatory agency rules such as those of the Federal Reserve Board, the Federal Energy Regulatory Commission (FERC) and the Federal Communications Commission (FCC). While the Hart-Scott-Rodino Antitrust Improvements Act (HSR) does not require disclosure to the general public, the HSR rules do require disclosure to the target before relatively low ownership thresholds may be crossed. Non-U.S. acquirors should be mindful of disclosure norms and timing requirements relating to
home jurisdiction requirements with respect to cross-border investment and acquisition activity. In many cases, the U.S. disclosure regime is subject to greater judgment and analysis than the strict requirements of other jurisdictions. Treatment of derivative securities and other pecuniary interests in a target other than common stock holdings can also
vary by jurisdiction.
- Due Diligence. Wholesale application of the acquiror’s domestic due diligence standards to the target’s jurisdiction can cause delay, waste time and resources or result in missing a problem. Due diligence methods must take account of the target jurisdiction’s legal regime and, particularly important in a competitive auction situation, local norms. Many due diligence requests are best channeled through legal or financial intermediaries as opposed to being made directly to the target company. Due diligence requests that appear to the target as particularly unusual or unreasonable (which occurs with some frequency in cross-border deals) can easily create friction or cause a bidder to lose credibility. Similarly, missing a significant local issue for lack of jurisdiction-specific knowledge or understanding of local practices can be highly problematic and costly. Prospective acquirors should also be familiar with the legal and regulatory context in the U.S. for diligence areas of increasing focus, including cybersecurity, data privacy and protection, Foreign Corrupt Practices Act (FCPA) compliance and other matters. In some cases, a potential acquiror may wish to investigate obtaining representation and warranty insurance in connection with a potential transaction, which has been used with increasing frequency as a tool to offset losses resulting from certain breaches of representations and warranties.
- Distressed Acquisitions. In 2023, bankruptcy filings surged as corporations dealt with the challenges of a rising interest-rate environment, resulting in one of the busiest years for bankruptcy since the financial crisis. Amid that upturn, the U.S. has remained the forum of choice for cross-border restructurings. A new participant in U.S bankruptcy courts in late 2022 and 2023 was a number of cryptocurrency companies with world-wide activities which filed U.S. bankruptcies in response to the cryptocurrency downturn in 2022. Multinational companies across a broad range of more traditional sectors including retail, manufacturing, healthcare and finance also continued to take advantage of the debtor-friendly and highly developed body of reorganization laws, as well as the specialized bankruptcy courts, that have long made U.S. Chapter 11 bankruptcy filings attractive.
Advantages of a U.S. bankruptcy include: the expansive jurisdiction of the courts (such as a worldwide stay of actions against a debtor’s property and liberal venue requirements); the ability of the debtor to maintain significant control over its normal business operations; relative predictability in outcomes; the ability to bind holdouts to debt com-
promises supported by a majority of holders and two-thirds of the debt; and the ability to borrow on a super-senior basis to fund the company during and upon exit from bankruptcy.
Another unique tool of the U.S. bankruptcy system that is being used with increasing frequency is the “prepackaged” or “prepack” bankruptcy. A “prepack” is a bankruptcy case filed after pre-negotiating a plan of reorganization with key constituencies. In cases where broad creditor support can be obtained, a “prepack” can facilitate a rapid restruc-
turing of debt or sale of a U.S. or foreign company or its assets in as little as 20-30 days (or even fewer). A “prepack” can also be filed in conjunction with foreign recognition proceedings, facilitating rapid transactions for companies with cross-border operations that still provide acquirors with the comfort and protection of court orders in relevant jurisdictions. Prepacks are an important means of avoiding the expense and disruption that can result from a protracted bankruptcy case.
U.S. bankruptcy courts generally permit the sale of substantial assets or of the whole company during, or in connection with emergence from, a Chapter 11 proceeding. Features of the Bankruptcy Code of particular importance to M&A transactions include the ability to obtain a sale order providing title to assets free-and-clear of all prior liabilities
and liens on a worldwide basis, the ability to reject undesirable contracts and leases while keeping those desired by the buyer, and the easing of certain antitrust and securities regulatory burdens. The ability to sell assets free-and-clear of prior liabilities and thus protect a purchaser from the overhang of legacy liabilities, as well as to resolve all claims against
a company in a single forum, makes Chapter 11 an attractive and increasingly routine option for companies facing potential mass tort liability.
Those evaluating a potential acquisition of a distressed target with a connection to the U.S. should consider the full array of tools that the U.S. bankruptcy process makes available to obtain equity or assets from a bankrupt company. Those could include acquisition of the target’s fulcrum debt tranches that are expected to be equitized through a restructuring, acting as a plan investor or sponsor in connection with a plan of reorganization, backstopping a plan-related rights offering, or participating as a bidder in a court-supervised “Section 363” auction of a debtor’s assets.
Transaction certainty is critical to a debtor and its stakeholders and thus to a potential acquiror’s success in a distressed context. Accordingly, non-U.S. participants need to plan carefully (particularly with respect to transactions that might be subject to CFIUS review, as discussed above) to ensure that their bid will be considered on a level playing field
with U.S. bidders. Acquirors must also be aware that there are numerous constituencies involved in a bankruptcy case that they will likely need to address (including bank lenders, bondholders, distressed-focused hedge funds and holders of structured debt securities and credit default protection, as well as landlords and trade creditors), each with its own
interests and often conflicting agendas, and that there exists an entire subculture of sophisticated investors, lawyers and financial advisors that must be navigated.
Various options are available to troubled companies seeking to take advantage of the U.S. bankruptcy laws. Multinational debtors often file bankruptcy petitions in the U.S. and link the confirmation or consummation of a plan of reorganization with successful administration of related foreign ancillary insolvency proceedings. Even when the principal proceeding takes place elsewhere, large non-U.S. companies can file cases under Chapter 15 of the U.S. Bankruptcy Code to obtain “recognition” of foreign insolvency proceedings in a U.S. bankruptcy court. The legal requirements for such recognition are minimal and can include minor connections to the U.S., such as debt instruments with U.S. choice of law or venue provisions, or payment of a retainer to U.S. counsel. Recognition of a foreign proceeding under Chapter 15 facilitates restructurings and asset sales by providing debtors with many of the same protections that Chapter 11 provides from creditors in the U.S., and the ability to take control of and administer U.S. assets. Chapter 15 also provides the ability to bind U.S. creditors or holders of U.S. law debt to the
terms of a restructuring plan implemented in a foreign proceeding, so long as the proceeding accords with broadly accepted principles of due process and creditors’ rights.
- Contingent Liabilities. The U.S. has an often-exaggerated but not entirely unjustified reputation as the world’s most treacherous jurisdiction for tort, product liability and securities law litigation. Each U.S. target company or business will have its own history of interaction with customers, suppliers, employees, investors and others who may have pending or future claims against the acquisition target or its owners. Care should be taken in investigating such matters and assessing their likely and possible outcomes. Some will be deal-killers. Many will not be. Early and expert familiarity with the relevant subject matter and its litigation and liability history in the U.S. and the particular enterprise involved in an M&A transaction is an essential part of planning for every deal, as is negotiation of relevant counterparty arrangements, and third-party insurance and other risk mitigation mechanisms.
- Collaboration. More so than ever in the face of current U.S. and global uncertainties, most obstacles to a deal are best addressed in partnership with local players whose interests are aligned with those of the non-U.S. acquiror. If possible, relationships with the target company’s management and other local forces should be established well in advance so that political and other concerns can be addressed together, and so that all politicians, regulators and other stakeholders can be approached by the whole group in a consistent, collaborative and cooperative fashion.
Adam O. Emmerich Robin Panovka
Scott K. Charles Jodi J. Schwartz
David A. Katz Ilene Knable Gotts
Andrew J. Nussbaum Joshua R. Cammaker
Mark Gordon T. Eiko Stange
William Savitt Joshua M. Holmes
Emil A. Kleinhaus Karessa L. Cain
John R. Sobolewski Emily D. Johnson
Raaj S. Narayan Erica E. Aho
Amy R. Wolf Franco Castelli
Matthew T. Carpenter
Wachtell, Lipton, Rosen & Katz