COMPANY LAW
| Key issues in acquiring US companies Fri, 11 Feb 2011 21:33:09 GMT |
| Outbound deals by Indian companies have risen steadily since 2000-01 when they were about $0.7 billion, to about $20 billion involving 59 transactions in the first half of the current fiscal year. The US continues to be India’s favourite investment destination. Despite the high levels of joblessness and debt due to the recession that caused concern and political upheaval, foreign investment in non-sensitive sectors of the US have not faced a protectionist attitude. Indian investors looking to invest in US companies should be aware of certain key regulatory and structuring issues that require proper planning and preparation. Federal legal system: In the US, companies are created under state law with certain exceptions, such as federally-chartered national bank. The federal government regulates the sale and transfer of listed securities through the Securities and Exchange Commission (SEC) and polices competition matters through the Anti Trust Division of the Department of Justice . Some states, such as Delaware, are more progressive than others, and so the place of incorporation of a subsidiary can prove to be a critical decision. Merger laws: Unlike India, mergers in the US do not require sanction of a court. Mergers can go through once approved by the acquiring company’s board of directors and the target company’s board and shareholders by a majority vote. In addition, if the buyer holds 90% of the outstanding shares of the target, it can effect a ‘short-form merger’ without target board or shareholder approval. The short-form merger is used to ‘squeeze out’ minority shareholders after tender offers or exchange offers. Even in case of acquisition of 100% shares, there are structuring options, including triangular mergers and reverse triangular mergers that allow the target company to remain a separate corporate entity, but as a subsidiary of the acquirer. Committee on foreign investment in the US (CFIUS): The Exon-Florio Amendment was enacted by the US Congress in 1988 to review foreign investment in the country. A foreign investment that poses threat to the national security can be reviewed by the CFIUS and the US President can block such investment. The committee can review transactions where a foreign acquirer proposes to acquire ‘control’ of a US business, infrastructure, technology or energy assets. Foreign companies that have access to classified US national security information, hold radio or television broadcast licences or government mining leases or nuclear energy facilities, publish US newspapers or are engaged in domestic aviation or banking business, etc, are among those that may be restricted by gaining control of US companies. In recent times, CFIUS exercised its powers to review transactions including Hutchison Whampoa/ Global crossing where the US government was concerned about Hutchison Whampoa’s possible ties with Chinese military and DP World , a state-owned company based in the UAE that approached CFIUS when it proposed to buy six major US seaports. HSR: The Hart-Scott-Rodino Antitrust Improvements Act of 1976, also known as the HSR Act, is the primary US pre-merger notification statute and requires that acquiring parties and target companies in certain M&As, including the acquisition of certain exclusive licences, and participants in the formation of joint ventures, to notify both the Federal Trade Commission and the Antitrust Division of a contemplated transaction before the transaction is consummated. Takeover regulations/securities laws: US takeover regulations differ in many important respects from European or Indian regulations. For example, in the US, the acquirer does not have to offer to buy a minimum percentage of outstanding shares. Further, US securities laws are complex and require adequate planning to ensure compliance. Deal terms: In the definitive acquisition agreement for share purchase or asset purchase, certain deals terms are ‘market’, i.e., they are common in transaction of this nature. Although these are still highly negotiated in most private deals, potential buyers should be aware that they exist and should use them to their advantage, where possible. For example, working capital adjustments are common and should be used for purchase price adjustments. The use of earnouts to compensate sellers based on future performance of the target is also a common mechanism. The use of ‘material adverse change’ as a mechanism to walk away from the deal in case pre-defined adverse events occur between signing and closing has also increased in the past few years. For sellers, some common deal protections include a cap on liability — transactions without seller’s liability cap are simply unknown in the US and the cap typically ranges from 10% to 25% of the purchase price — de minimus — an individual claim will only be considered if it is in excess of a minimum value — and basket — buyer will only be able to make a claim when all individual claims exceeding the de minimus threshold also exceed the basket threshold. Both these seller-friendly deal protections are common in the US. To conclude, while the US remains an open market for deal planning, it is important to understand and address likely concerns of the federal, state and local government agencies and other interested parties early. Proper planning by acquirers will ensure that transactions are executed efficiently, all regulatory hurdles are considered, necessary protections are built in to protect the buyer’s interests, deal protection mechanisms to protect the seller are negotiated but not outright rejected, all of which will ensure that there are no surprises. (The author is associate partner with Khaitan & Co) |
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