Transcript 26th Annual Tulane Corporate Law Institute

Cross-Border Transactions
Presented by
Robert Spatt, Co-Moderator
Partner, Simpson Thacher & Bartlett
George R. Bason, Jr., Co-Moderator
Partner, Davis Polk & Wardwell
Michael Carr
Managing Director and Head of M&A, Americas, Goldman Sachs
Matthew F. Herman
Partner, Freshfields Bruckhaus Deringer
Peter Thomas
Partner, Simpson Thacher & Bartlett
Robert Townsend
Partner, Morrison & Foerster
March 27, 2014
26TH ANNUAL TULANE CORPORATE LAW INSTITUTE
Copyright 2014. All rights reserved.
Panel Introduction
1
Cross-Border Transactions
DISCUSSION OVERVIEW
 Banker Overview of Cross-Border Activity
 Inbound Transactions




CFIUS: Navigating Inbound Investments Through National Security Reviews
Enforceability Issues in Public Cross-Border Sales
Cross-Border Lessons from Softbank/Sprint/Clearwire
The Inbound/Outbound Bridge
 Outbound Transactions




“Regular Way”
To Other Parts of the World
Inversions
Foreign Corrupt Practices Act / UK Bribery Act
 Where Is It Best to Be a Seller?
2
Cross-Border Transactions
Twenty-Sixth Annual Corporate Law Conference
Michael Carr
Goldman, Sachs & Co.
March 27, 2014
3
Banker Overview
INTRA-REGIONAL M&A VOLUME: 2013 THROUGH 2014 YTD
2009 through 2014 YTD
To
From
Net
Latin America
North America
EMEA
Asia (including Japan)
$250
$689
$709
$276
($70)
($608)
($673)
($573)
To
$180
$81
$36
($297)
North America
Latin America
EMEA
Asia (including Japan)
$29bn
2013-2014 YTD
From
Net
$174
$41
$151
$56
($118)
($24)
($168)
($124)
$56
$18
($17)
($68)
EMEA1
$57bn
$76bn
North America
$112bn
$56bn
$5bn
$19bn
$13bn
$38bn
$18bn
$0bn
Latin America
Source: Thomson Reuters (as of March 18, 2014)
Note: Global M&A volume includes transactions greater than $250m;
excludes intra-region activity, spinoffs and leveraged buyouts
EMEA includes Europe, Middle East and Africa; Asia includes India, Japan and Australia
$10bn
4
Asia (including
Japan)1
Banker Overview (cont.)
ANNOUNCED OR COMPLETED 2013 THROUGH 2014 YTD
Year Acquiror
Target
Industry
Acquiror
Region
Target
Region
Transaction Type Amt ($bn)
2014 Actavis PLC
Forest Laboratories
Inc
Pharma
EMEA
North
America
Cash / Stock
$23.3
2013 SoftBank Corp
Sprint Nextel Corp
Telecom
Asia
North
America
Cash / Stock
21.6
2013 Publicis Groupe SA
Omnicom Group Inc
Media
EMEA
North
America
Merger of Equals
19.3
2013 Anheuser-Busch Inbev
Grupo Modelo SAB
de CV
Consumer /
Beverage
EMEA
Latin
America
Cash Acquisition
18.0
2013 CNOOC
Nexen Inc
Oil & Gas
Asia
North
America
Cash Acquisition
17.7
2014 Suntory Holdings Ltd
Beam Inc
Consumer /
Beverage
Asia
North
America
Cash Acquisition
15.7
2013 Oi SA
Portugal Telecom
SGPS SA
Telecom
Latin
America
EMEA
Stock
15.3
2013 Applied Materials Inc
Tokyo Electron Ltd
Technology
North
America
Asia
Merger of Equals
7.0
2013 Shuanghui Intl Holding Smithfield Foods Inc
Consumer /
Food
Asia
North
America
Cash Acquisition
7.0
2013 McKesson Corp
Healthcare
North
America
EMEA
Cash Acquisition
7.0
Celesio AG
Source: Thomson Reuters (as of March 18, 2014)
Note: Global M&A volume includes transactions greater than $250m;
excludes intra-region activity, spinoffs and leveraged buyouts
EMEA includes Europe, Middle East and Africa; Asia includes India, Japan and Australia
5
Banker Overview (cont.)
REGIONAL INFLOWS AND OUTFLOWS
EMEA
$200
$173
$182
$200
$140
$150
$100
North America
$91
$150
$112
$100
$50
$11
$0
($50)
($50)
($53)
($75)
($116)
($150)
($200)
Net
($134)
$118
($100)
($115)
$59
($10)
($93)
2009
2011
2012
2013
$16
($68)
$57
$48
$24
($42)
Net
($34)
2010
$76
($161)
2011
2012
2013
2014 YTD
($27)
$10
$5
$51
Latin America
$200
$150
$150
$100
$39
$60
$66
$43
$100
$50
$50
$17
$0
$75
$24
$52
$57
$37
$4
$0
($28)
($41)
($100)
($50)
($4)
($16)
($8)
($17)
($22)
($2)
2009
2010
2011
2012
2013
2014 YTD
$19
$59
$44
$40
$16
$2
($100)
($96)
($126)
($150)
($150)
($141)
($141)
2011
2012
2013
($75)
($98)
($45)
($200)
($200)
2009
Net
($108)
($144)
2009
2014 YTD
$200
($50)
($92)
($150)
Asia
$50
$61
($200)
($180)
2010
$114
$50
$0
($100)
$171
$167
($1)
2010
($66)
2014 YTD
($11)
To
Source: Thomson Reuters (as of March 18, 2014)
Note: Global M&A volume includes transactions greater than $250m;
excludes intra-region activity, spinoffs and leveraged buyouts
EMEA includes Europe, Middle East and Africa; Asia includes India, Japan and Australia
6
Net
From
Banker Overview (cont.)
ACTIVITY BY INDUSTRY | 2009-2014 YTD
EMEA
North America
$220
$164
$153
$119
$152
$111
$104
$73
$64
($38)
($117)
($143)
TMT
IND
CRG
$80
$30
($12)
($73)
($81)
($109)
$83
$31
($108)
($121)
NR
HC
($114)
($98)
($60)
$13
($34)
($173)
NR
HC
FIG
RE
Asia
$87
$54
($82)
$39
($72)
($54)
TMT
IND
IND
CRG
FIG
RE
Latin America
$107
$35
TMT
$23
$22
$16
($38)
($31)
($17)
FIG
HC
RE
$55
$33
$26
$19
$7
($19)
($7)
($23)
($13)
($8)
$0
$3
($0)
NR
CRG
TMT
IND
FIG
HC
RE
($279)
NR
CRG
To
Source: Thomson Reuters (as of March 18, 2014)
Note: Global M&A volume includes transactions greater than $250m;
excludes intra-region activity, spinoffs and leveraged buyouts
EMEA includes Europe, Middle East and Africa; Asia includes India, Japan and Australia
7
From
Banker Overview (cont.)
M&A VOLUME BY INDUSTRY SECTOR
2009 – 2014 YTD
2013 – 2014 YTD
​Real Estate
5%
​Real Estate
8%
​Healthcare
9%
​Financial Institutions
10%
​Financial
Institutions
9%
​Natural Resources
32%
​Healthcare
12%
​Consumer Retail
13%
​Industrial
14%
​Technology, Media
& Telecom
22%
​Consumer Retail
12%
​Technology, Media &
Telecom
17%
Source: Thomson Reuters (as of March 18, 2014)
Note: Global M&A volume includes transactions greater than $250m;
excludes spinoffs and leveraged buyouts
​Natural Resources
21%
​Industrial
15%
8
Inbound Transactions
9
Inbound Transactions
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
CFIUS Statistics
 114 covered transactions were notified to CFIUS in 2012, divided among the following
industries:




45 (39%) Manufacturing (primarily Computer and Electronics);
38 (33%) Finance, Information, and Services;
23 (20%) Mining, Utilities, and Construction (primarily Utilities);
8 (7%) Wholesale, Retail, and Transportation.
 Investigations have steadily increased over the last five years.
 8 transactions notified in 2012 resulted in mitigations measures.
Covered Transactions, Withdrawals, and Presidential Decisions 2008-2012
Notices
Notices
Number of
Number of
Withdrawn After
Presidential
Year
Withdrawn
Notices
Investigations Commencement
Decisions
During Review
of Investigation
2008
155
18
23
5
2009
65
5
25
2
2010
93
6
35
6
2011
111
1
40
5
2012
114
2
45
20
Total
538
32
168
38
Source: 2012 CFIUS Annual Report to Congress
10
0
0
0
0
1
1
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
CFIUS Statistics
 CFIUS notifications involved buyers from 21 countries in 2012.
The largest
number of notifications by country were:





China: 23 transactions;
UK: 17 transactions;
Canada: 13 transactions;
Japan: 9 transactions;
France: 8 transactions.
 The number of notified transactions involving Chinese buyers has increased
from just 6 in 2010 to 23 in 2012.
Source: 2012 CFIUS Annual Report to Congress
11
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
CFIUS — Statutory and Regulatory Background
 Pursuant to Section 721 of the Defense Production Act of 1950, as amended,
the U.S. President is authorized to investigate the impact on U.S. national
security of mergers, acquisitions and takeovers by or with foreign persons that
could result in foreign control over persons engaged in interstate commerce in
the United States.
 The President is authorized to take a number of measures to protect national
security, including:



Suspending or prohibiting a transaction;
Ordering a completed transaction to be unwound; or
Ordering divestiture of assets or entities.
 The President’s investigative authority is delegated to CFIUS.
12
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
CFIUS — Statutory and Regulatory Background
 The Committee on Foreign Investment in the United States (“CFIUS”) is a
multi-agency committee chaired and staffed by the Department of Treasury.
 Its members are the heads of the Departments of Treasury, Justice, Homeland
Security, Commerce, Defense, State, Energy and the Offices of the U.S. Trade
Representative and Science and Technology Policy.
 The Director of National Intelligence and the Secretary of Labor are nonvoting, ex-officio members of CFIUS, and other executive offices observe and
participate as appropriate.
13
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
CFIUS — Statutory and Regulatory Background
 CFIUS’s duties and powers are defined by regulations, which set out the requirements
for a CFIUS notification and define key terms like “U.S. business,” “foreign person,”
and “control.”
 CFIUS notifications are technically voluntary, and unlike most antitrust/merger control
regimes, a CFIUS filing is not suspensory.

However, CFIUS can initiate its own investigation of a covered transaction, and the President
can unwind a transaction post-closing.

Most parties will defer closing until CFIUS approval.
 The entire CFIUS review process is confidential, including the CFIUS notification,
additional information provided by the parties to CFIUS, and the results of CFIUS’s
review and investigation.

The parties themselves, however, may choose to disclose information regarding the CFIUS
process to the public.

Public companies involved in large scale transactions will typically disclose material
developments in process.
14
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
CFIUS — Review Process
 Prepare Joint Notification

In addition to providing the particulars of the transaction and parties, the notification
responds to a detailed questionnaire about the U.S. business being acquired and
foreign persons party to the transaction.

Information required for the U.S. business includes:
 Disclosure of classified and priority rated U.S. government contracts and contracts with
national security-related agencies;
 Information on all products and services provided to the U.S. government (either directly
or indirectly); and
 Details on possession and trading of export-controlled items, certain Agents and Toxins,
and items with military applications.
15
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
CFIUS — Review Process
 Information required for foreign persons party to the transaction includes:

Disclosure of equity or voting interests held, directly or indirectly, by foreign
governments;

Analysis of whether any foreign government controls the foreign person party to the
transaction;

Future plans for the U.S. business being acquired, including with respect to
eliminating R&D, shutting down facilities in the U.S., modifying or terminating
contracts with the U.S. Government, or eliminating domestic supply; and

Personal Identifier Information (“PII”) of board members, officers, and ultimate
beneficial owners of the foreign person and its intermediate and ultimate parents.

Gathering PII is often time-consuming and burdensome, especially if sovereign
wealth funds or state owned enterprises are in the foreign person’s ownership
chain.
16
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
CFIUS — Review Process
 Submit Notification

CFIUS strongly encourages that parties submit a draft notification 5-10 business days prior to
submitting a “final” notification; this allows CFIUS to review the draft and provide any
comments.
 30-Day Review Period (“Phase 1”)

Once CFIUS determines that the notification is “complete,” it will initiate the 30-day review
period.

Parties can expect to receive requests for additional information during this time, and are
required to respond within 3 business days to avoid stopping the clock.
 45-Day Investigation Period (“Phase 2”)

CFIUS will initiate a 45-day investigation if a CFIUS member agency advises the CFIUS Staff
Chair that it believes the transaction could threaten national security or if the agency (or one of
several agencies) tasked with taking the lead on the 30-day review recommends that an
investigation should be undertaken.

Additional information requests are usually made by CFIUS, again with a 3 business day
deadline.
17
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
CFIUS — Review Process
 Recommendation to the President:

CFIUS may terminate a 45-day investigation at its own initiative without referring the
matter to the President for action.

CFIUS will refer the matter to the President only if it decides the transaction should
be suspended, blocked, or unwound, cannot decide on a recommendation, or
requests that the President make the determination.

The President then has 15 days to make a decision, which is final and cannot be
appealed.
18
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
CFIUS — Practice Points
 There is a presumption in favor of a 45-day investigation when the acquiring
foreign person represents or is controlled by a foreign government or when the
transaction involves “critical infrastructure.”
 As a practical matter, CFIUS prefers not to elevate matters to the President,
and parties will usually withdraw a notice and abandon the transaction when
CFIUS signals its intent to oppose the deal.
 CFIUS will also enter into mitigation agreements with the parties to alleviate
national security concerns, rather than recommend that the President take
action. Mitigation agreements can include, for example:


Restricted information access or control rights for certain individuals;

Ensuring that U.S. government agencies will have continued access to certain
information in the possession of the target or certain of the target’s systems.
Assurances that the U.S. business will continue supplying certain products and
services to the U.S. Government; or
19
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
CFIUS — Hot Button Issues
 Proximity to Sensitive Facilities/Restricted Airspace

In December 2009, the Chinese firm Northwest Nonferrous International Investment
Corp., a subsidiary of China’s largest aluminum producer, attempted to acquire
U.S.-based Firstgold. The transaction was withdrawn due to CFIUS’s concerns
about the proximity of Firstgold assets to sensitive military bases.

In 2012, CFIUS contacted Ralls Corp., which is owned by Chinese nationals, and
requested a notification of Ralls’ investment in wind farm assets. After reviewing
the acquisition, CFIUS recommended that Ralls stop operations until a complete
investigation could be conducted as a result of objections by the U.S. Navy over
wind turbines located near or within restricted Naval Weapons Systems Training
Facility airspace. President Obama ordered Ralls to divest itself of the wind farm
project.

Proximity analysis can be challenging because the parties cannot know in many
cases whether a particular U.S. Government facility is sensitive.
20
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
CFIUS — Hot Button Issues
 Perceived Scrutiny of Chinese Acquirers

There is a perception that some within CFIUS or its constituent agencies are
suspicious of Chinese investment in the U.S.; these concerns may be exacerbated
when parties notify CFIUS only after being contacted by CFIUS post-transaction.
 Huawei elected not to notify CFIUS before consummating a $2 million
acquisition of technology and employees from 3Leaf Systems, a small server
technology firm located in Santa Clara, California.
 CFIUS reviewed the transaction and informed Huawei that it would have to
divest the 3Leaf assets and employees. After initially indicating it would reject
CFIUS’s findings and press its case with President Obama, Huawei ultimately
agreed to divestment.

Public and high profile transactions involving Chinese acquirers can also draw
scrutiny from China Hawk members of Congress, the media, or third-parties, which
can in turn exert pressure on CFIUS
21
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
Case Study — Smithfield Foods
 In May 2013, Shuanghui International, the controlling shareholder of China’s
largest meat processor, announced the signing of an agreement to purchase
U.S.-based pork producer Smithfield Foods in a transaction valued at $7.1
billion, inclusive of debt.
 The parties filed a notification with CFIUS, and CFIUS undertook an
investigation of the transaction.
 Ultimately, CFIUS concluded its investigation without recommending that the
President take any action.
22
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
Case Study — Smithfield Foods
 During the course of the review and investigation, members of Congress the press,
and third-parties raised a number of issues, some arguably more meritorious than
others. The U.S. Senate Committee of Agriculture, Nutrition and Forestry, held publicly
televised hearings regarding the transaction addressing many of these issues.
 Issues Raised:

Proximity: Smithfield owns dozens of processing and distribution facilities, and hundreds of
hog farms, throughout the U.S. Many properties are located in areas with a significant military
presence, including the Hampton Roads area of Virginia, eastern North Carolina, and the
Western U.S.

U.S. Government Contracts: As a major supplier of pork products, Smithfield Foods is a
significant supplier of food products to the U.S. Government, including to the U.S. military.

Supply of By-Products: Certain hog by-products are used in the production of Heparin and
other drugs, and some expressed concern that Shuanghui would control a significant and
important pharmaceutical source material that could be subject to shortage.
23
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
Case Study — Smithfield Foods
 Issues Raised (cont.):

Food Safety: Concerns were raised over the safety record of Shuanghui and other
Chinese companies, though in reality the business thesis of the transaction was
entirely to export pork from the U.S. to China, not import pork from China, and in
any event the USDA would continue to ensure that Smithfield products met
applicable food safety standards post-transaction.

Tax-Payer Funded Research: Some complained that U.S. tax-payer funds used to
research breeding and pork processing technology would now be benefiting China
and contributing to China’s competitive advantage.

Reciprocity: Certain members of Congress complained about the fairness of
allowing an inbound Chinese investment of this magnitude, while a reciprocal
investment by a U.S. company in a Chinese company would not be allowed by the
Chinese government.
24
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
CFIUS — Review of Minority Investments
 A key issue in considering whether to notify a transaction involving a minority
investment by a foreign investor in a U.S. business is whether the deal
involves acquisition of control over the U.S. business.
 CFIUS regulations include a safe harbor for “purely passive” investments of
10% or less.

An investment would not be passive, and thus not meet the safe harbor, if the
foreign acquirer negotiated rights to determine, direct, decide, take, reach, or cause
decisions regarding important matters affecting the U.S. business.

Also, an investment is not “purely passive” if it entitles the investor to hold or control
even one board seat.
25
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
CFIUS — Review of Minority Investments
 Nevertheless, even outside the safe harbor, parties can get comfortable with
not filing if they are confident that CFIUS would agree that there is no control.

The CFIUS regulations include a list of customary negative consent rights that do
not constitute control such as:
 The power to prevent the sale or pledge of all or substantially all of the assets of
an entity or a voluntary filing for bankruptcy or liquidation;
 The power to enter contracts with or guarantee obligations of majority investors
and their affiliates;
 The power to purchase a pro rata interest to prevent dilution;
 The power to prevent changes to the rights of a class of stock;
 The power to prevent the alteration of corporate organizational documents in
relation to the above permissible negative consent rights.
26
Inbound Transactions (cont.)
CFIUS: NAVIGATING INBOUND INVESTMENTS THROUGH NATIONAL SECURITY REVIEWS
CFIUS — Review of Minority Investments
 However, other special governance rights and negative control rights can,
alone or in tandem with each other, convey control. These include:



Board representation by the foreign acquirer;

The right to veto the entry or renewal of contracts, or to control whether contracts
are performed.
The right to veto the hiring or firing of corporate officers;
The right to veto acquisitions or divestitures of assets by the U.S. business (unless
limited to transactions above a truly extraordinary amount);
 The greater the investment is above 10%, the more likely that CFIUS will
consider one or more of these rights to convey control.
27
Inbound Transactions (cont.)
ENFORCEABILITY ISSUES IN PUBLIC CROSS-BORDER SALES
Utilizing the Smithfield Foods Reverse-Breakup Fee/Escrow Paradigm for Public Deals
to Potentially Manage Cross-Border Enforcement and Regulatory Risk
 Issue: How to provide in a public deal sufficient enforceability comfort with foreign buyer
with no meaningful U.S. assets and significant U.S. and foreign regulatory approvals and
inherent financing risk (albeit no “financing out”)?
 Solution:

Strong covenant on required efforts to obtain regulatory approvals, etc. (everything short of a
“MAC”)

Limit deal conditions (no financing condition, only selected foreign regulatory approvals are
conditions to deal, etc.)

Significant reverse-breakup fee ($275 million (≈6% of equity value)) paid by buyer if the deal fails
due to:
 willful breach by buyer (non-exclusive remedy)
 failure of regulatory approvals (other than CFIUS)
 failure of financing sources


Reverse-breakup fee put in escrow in New York
More tailored than the “deposit” structure seen in occasional private deals in certain regions/sectors
28
Inbound Transactions (cont.)
SOFTBANK/SPRINT/CLEARWIRE – Introduction
SoftBank is entrepreneurial, aggressive and global – not a typical Japanese (or foreign) buyer



Founded in 1981 by Masayoshi Son, invests in telecom and internet businesses around the world. TSE listed.
Market cap: ~$90 billion
Mr. Son is the Chairman and CEO – has a “300-year plan” for developing SoftBank’s business
SoftBank has a diverse portfolio of cross-border investments dating back over 15 years, including:



Early investor in Yahoo! and E-Trade
Single largest shareholder in Alibaba, with an investment dating from 2000
And of course its control stake (currently 80%) in Sprint – largest US acquisition by an Asian buyer, and largest Japanese
acquisition of a foreign company
SoftBank’s acquisition of Sprint and indirectly Clearwire






October 15, 2012: SoftBank announces acquisition of control of Sprint, including $3.1B investment at signing
December 17, 2012: Sprint announces acquisition of ~50% of Clearwire it did not already own
January 8, 2013: DISH announces unsolicited offer for Clearwire spectrum and shares
April 15, 2013: DISH launches unsolicited bid for Sprint
July 9, 2013: Sprint closes Clearwire take-private, valuing Clearwire at $14B
July 10, 2013: SoftBank closes acquisition of 78% of Sprint for $21.6B total investment
29
Inbound Transactions (cont.)
SOFTBANK/SPRINT/CLEARWIRE – Some Observations
Larger foreign buyers have been more willing than US buyers to leave in place a public minority



Deals for <100% of US public companies are very rare; ~20 in the past 15 years, a majority with foreign buyers
Perhaps because foreign buyers come from less litigious environments and instead focus on the upside of a
public stub
Interestingly, our two transactions involved the contemporaneous creation of a public minority at Sprint and the
elimination of a public minority at Clearwire
Foreign buyers give rise to additional regulatory complications, particularly in regulated industries

CFIUS required a National Security Agreement addressing certain national security concerns, including:







appointment of National Security Director on Sprint Board as liaison with USG agencies on security issues;
USG one-time right to require Sprint to remove and decommission certain equipment deployed in the Clearwire network; and
USG right to review and approve certain network equipment vendors and managed services providers of Sprint.
Prominence of Huawei concerns in the US prior to and unrelated to the Sprint acquisition
Issues raised (unsuccessfully) by competing bidder DISH
State regulators may favor a home state competing bidder
FCC limitations on foreign ownership affected deal structure and charter documents

FCC approval process became politicized (also unsuccessfully) because of competing bidder
30
Inbound Transactions (cont.)
SOFTBANK/SPRINT/CLEARWIRE – Some Observations
Foreign buyer’s financing sources may have requirements that affect the deal



Close ties to “house bank” and low interest rates are a strategic advantage for Japanese buyers
But there were challenges:

Long-term commitment letters are not common in Japan and unwillingness to leave outstanding for full pre-closing period led
to unusual termination rights by Sprint


Lack of familiarity of Japanese banks with US M&A processes and complexity of two simultaneous public deals
Involvement of large groups in the credit approval process – increased susceptibility to leaks
Yen-denominated borrowing for US deal created lengthy currency risk in regulated industry deal – SoftBank
hedge ultimately saved $2 billion
Conflicting disclosure norms required strategic planning and scheduling

TSE requires prompt disclosure of a board’s approval of a transaction, and Japanese boards often want to
approve based on final language in all respects – limiting flexibility on timing

TSE has discretion to require explanation of rumors (or not) – requiring coordination
Reversal of prior track record of market impact of US acquisitions on Japanese buyers



In the 10 largest overseas purchases by Japanese companies from 2000 through 2011, the acquirers lost an
aggregate of $330B in market value within 12 months after deal announcement
In contrast, SoftBank stock increased by over 150% in the 12 months following deal announcement
Stay tuned for future developments
31
Inbound Transactions (cont.)
THE INBOUND/OUTBOUND BRIDGE
A Reminder of Certain Issues With Implications to Both Directions
 Non-U.S. Disclosure Obligations

In addition to U.S. disclosure requirements (that often let you “no comment” in
response to leaks, rumors, etc.), be sensitive that certain foreign jurisdictions, most
notably the UK for its listed companies, have disclosure obligations that are more
hair-trigger and do not allow “no comment” when the U.S. might.
 This can result in earlier public confirmation of a deal prior to the intended announcement
if acquiring a foreign company or if, for example, a UK buyer is looking at making a U.S.
purchase.
 Cultural Differences

Never forget to be sensitive to—and plan for—the cultural differences between the
parties and the other affected players, like employees, communities and local
officials and regulators
 It can be the difference between a smooth and a rocky road (or even deal failure)
32
Outbound Transactions
33
Outbound Transactions
“REGULAR WAY”
To “Traditional” Jurisdictions
 US Lawyer’s Function


Acting as a bridge to local counsel
Local counsel far and away taking the laboring oar
 “Market Practice” and Relation to Deal Structure and Documentation


Does it matter where the center of gravity is?

What will be the standard for the deal?
Governing law likely to be that of the jurisdiction in question (e.g. UK, Germany, Sweden, France
and Japan)
 Buyer “Anxiety” With Respect to Key Legal/Due Diligence Points

Typical at a lower level, insofar as the following are concerned:
 Basic business due diligence, including related to corruption (e.g. FCPA, UK Bribery Act issues)
 Rule of law—predictability of outcomes, ability to realize legal outcomes on a timely basis, ability to enforce
 Political risk more generally, e.g.:
 Regulatory environment
 Exchange control risk
 Expropriation risk
34
Outbound Transactions (cont.)
TO OTHER PARTS OF THE WORLD
To Other Parts of the World
 BRICS and MINT countries
 US Lawyer’s Function


Role is more active
Often local counsel, however thoughtful and able, will not have depth of experience and
sophistication needed to act capably and autonomously on complex M&A transactions
 “Market Practice”

Local practice likely to be less compelling than in “traditional” jurisdictions
 Template more likely to be “international standard” (but what is it?)

Governing law less likely to be local law
 More likely to be law of a neutral jurisdiction (New York or UK)

Intense focus likely on:
 Business due diligence, including corruption issues (both on status quo, and ability to operate
going forward)
 Rule of law issues
 Political risk and what, if anything, can be done about it
35
Outbound Transactions (cont.)
TO OTHER PARTS OF THE WORLD
To Other Parts of the World
 Hybrid Structures Are Popular


Joint Ventures
Rationales
 Lower amount invested and at risk
 Experience of the local parties
 Actual or perceived “shield” deriving from alliance with local parties

Downsides to Joint Ventures
 Local parties
 Inherently temporary nature
 Track record of most joint ventures
36
Outbound Transactions (cont.)
INVERSIONS
Inversions

Some outbound transactions by US corporations may offer the opportunity to create
so called corporate inversions
 This allows for a redomestication of a US corporate taxpayer to a foreign law tax
jurisdiction by avoiding the rules which would otherwise generally prevent the US
corporate taxpayer from redomesticating on its own
 To avoid these rules, the foreign target’s shareholder must end up with > 20% of the stock
of the combined company (the Obama Administration has proposed increasing the
threshold to 50%)

Structure (“Double Dummy Dropdown”)





Merger parties set up offshore holding company
Offshore holding company sets up two acquisition subsidiaries
Each of the two merger parties is acquired by the respective acquisition subsidiary
Host of details lurking in the above
IRS rules for redomestication away from the US are complex
37
Outbound Transactions (cont.)
FOREIGN CORRUPT PRACTICES ACT / UK BRIBERY ACT
The Hot Button Topic: Due Diligence on Corruption Issues

Violations of the Foreign Corrupt Practices Act (“FCPA”), the law banning corrupt payments to
foreign government officials, broadly defined, can lead to significant penalties for both firms and
individuals, as well as “tag along” civil suits by shareholders

The UK Bribery Act (“UKBA”) is similarly severe and extra-territorial. It covers commercial bribery in
addition to bribery of government officials, though US private bribery may be prosecuted under US
legislation (e.g., Travel Act). In addition, the UKBA has the affirmative defense that the organization
has “adequate procedures” in place designed to prevent bribery (no express FCPA equivalent)


There can be successor liability for FCPA violations: In other words, a company could be liable for
FCPA violations by an acquired company that occurred before the acquisition, particularly if the
acquiring company knew or should have known about the violations at the time of its investment
It is critical that companies perform due diligence prior to commencing an acquisition or JV
partnership—Nearly 90% of recent cases involve conduct of third parties (e.g., distributors, joint
venture partners and foreign-based subsidiaries)

In many circumstances, it is appropriate to obtain further protection through inclusion of
provisions in the relevant purchase agreement, investment agreement, stockholders’ agreement,
or other transaction documentation
38
Where Is It Best to Be a Seller?
Where the center of gravity of a transaction is not pre-ordained, there is
opportunity for sellers to benefit from market arbitrage
39
Where Is It Best to Be a Seller?
REGIONAL PRACTICE ARBITRAGE
US
Conditionality
Legal vendor
due diligence
Reps and
warranties
Disclosure
Europe
>
Buyer has a bring down of reps as a
condition to MAC standard and/or MAC
>
Shift towards MAC (around 1/3 of deals)
>
Delaware law application to interpretation
of a MAC results in clear judicial precedent
and high threshold
>
Generally on the increase
>
Not common and, to the extent given,
typically on a non-reliance basis
>
Increasingly seen (and standard in private equity
deals)
>
Increasing buyer nervousness leading to
ABC investigations as part of diligence
>
General market shift to more buyer diligence (not
just legal)
>
More buyer friendly in scope, including no
undisclosed liabilities rep
>
More seller friendly; often no business reps from
private equity seller
>
Buyer expects business reps even on a
private equity sale
>
Significant move (primarily in UK) towards
warranty insurance
>
Specific disclosure only
>
Disclosure of full data room more common
40
Where Is It Best to Be a Seller? (cont.)
REGIONAL PRACTICE ARBITRAGE
US
Europe
Financing
>
Reverse termination fee/limited
conditionality around financing
>
Certain funds increasingly under threat,
especially given move towards US financing of
certain European deals
Liability
>
Lower caps; deductibles more common
(this is the exception to the buyer-friendly
rule)
>
Higher caps; deductibles less common (though a
different overall regime, as fewer items are
generally indemnified)
Pricing
>
Locked box less common
>
Locked box more common, and spreading to
asset sales and carve-outs
Antisandbagging
>
Occasionally seen but more usual for
agreement to be silent
>
Seen regularly (usually by reference to actual
awareness of the deal team)
Deposits
>
Deals in real estate, privatization, bankruptcy (§363 deals) and in the energy sector, as well as
those in China, Russia and MENA
Break Fees
>
Seller break fees unusual. More common in UK, Russia and HK on larger deals requiring
shareholder approval
>
Purchaser break fees accompany US-style financing and antitrust/regulatory concerns
41