International News, Volume 4, No. 3, Fall 2002
Fall 2002
Tax Beneficial Finance Structures for Cross-Border Acquisitions
By Lowell Yoder
There are a number of alternatives for financing cross-border acquisitions by a U.S.-based multinational (USM). Depending on a USM’s circumstances, a foreign holding and finance company structure can significantly reduce the borrowing costs through tax savings.
For purposes of illustration, assume that the USM is negotiating for the acquisition of the stock in three companies: one in France, one in Germany and one in the United Kingdom. The total purchase price is $60 million, and the companies are approximately equal in value.
One finance alternative is for the USM to borrow $60 million to pay the seller for the stock of the three companies. Assume an interest rate of 7.5 percent, with annual interest expense of $4.5 million. The USM would generally obtain a deduction for the interest expense on its federal and state income tax returns. Assuming a combined tax rate of 40 percent, the tax savings would be $1.8 million (or a net borrowing cost of $2.7 million with an effective 4.5 percent after-tax interest rate). This interest expense benefit would generally be eliminated, however, to the extent earnings from the foreign subsidiaries are repatriated to the USM to service the interest and principal payments, because such distributions would be taxable to the USM as dividends (although U.S. taxes may be reduced with credits for foreign taxes paid on the earnings distributed).
A second alternative finance structure is to place the leverage in each of the three countries where the targets are organized. This can be achieved by having the USM form new holding companies in each country to carry out the acquisitions. Those acquisition companies could either borrow from the outside lender directly (with a USM guarantee), or the USM could borrow the $60 million and lend $20 million to each acquisition company. If the foreign country has rules that permit consolidation of affiliates organized under the laws of its country for income tax purposes, the interest expense of the acquisition company can be used to reduce the operating income of the target in the particular country (France, Germany and the United Kingdom each have such rules). When a target is organized in a country without tax consolidation, the interest expense may be used against the operating income of the target by liquidating the target into the acquisition company (but sometimes there is a waiting period).
Under this alternative, the tax savings from the interest deduction depend on the tax rate in the particular country. If the tax rate is 45 percent (e.g., the approximate rate in Germany and France), the benefit is greater than in the United States, with a tax savings of $1.35 million on a $40 million obligation (the net borrowing cost for those two countries would be $1.65 million with an effective borrowing rate of 4.125 percent). On the other hand, the leverage in the United Kingdom at a 30 percent tax rate would yield a tax savings of $450,000 on a $20 million obligation (the net effective borrowing cost would be $1.05 million with an effective interest rate of 5.25 percent, which is a lower benefit than would be obtained in the United States). Nevertheless, if dividends have to be repatriated to the USM to pay the principal and interest under alternative one, which in turn reduces or eliminates the tax benefits in the United States, then the U.K. leverage is the better alternative because earnings in the foreign country can be paid to service the debt without repatriation to the USM.
A third alternative is a combination of the first two alternatives and can provide a significantly better tax result. In addition to the above acquisition companies, this involves forming a holding company and a finance company. The USM would borrow the $60 million and contribute the funds as a contribution to capital to a foreign holding company. The foreign holding company would form a finance company and the three acquisition companies in France, Germany and the United Kingdom. The $60 million would be made available to the finance company, which in turn would lend the funds to each of the three acquisition companies to acquire the stock of the target companies.
Under this third alternative structure, the interest expense benefits of both alternatives one and two are achieved. The USM would obtain a deduction for $7.5 million annually (assuming foreign dividends are not required to service the loan), and the acquisition companies also would in the aggregate obtain a deduction for $7.5 million annually. While the finance company would have interest income, a number of finance structures result in a tax rate of 2 to 4 percent. The aggregate tax savings in the United States, France, Germany and the United Kingdom would equal $3.6 million. This amount is reduced by the tax cost in the finance company of $135,000 (assuming a 3 percent tax rate), for a net annual tax savings of $3.465 million (leaving a net borrowing cost of $1.035 million, or an effective borrowing rate of 1.725 percent). When interest is paid to a foreign lender (e.g., Germany to the finance company), it is important to avoid withholding tax on the interest payments (some countries do not impose withholding taxes, such as Germany, and other countries have tax treaties that reduce the rate to zero).
The above described structure can result in the interest income received by the finance company being taxed to the USM, even though not distributed as a dividend, under the U.S. Subpart F anti-deferral rules. Nevertheless, the Internal Revenue Service has issued regulations that allow a U.S. taxpayer to elect to treat a foreign company as a disregarded branch of its sole shareholder for U.S. tax purposes. The Subpart F rules can be avoided in the above structure by electing to treat the finance company and each of the acquisition companies as disregarded branches of the holding company. As a result, payments of interest by an acquisition company to the finance company will be disregarded for U.S. tax purposes and not be taxable under Subpart F.
Nevertheless, dividends distributed by the target companies to the acquisition companies to finance the principal and interest payments can also be subject to current tax in the United States under Subpart F, but this adverse consequence also can be avoided by electing to treat the targets as disregarded entities. As a result, the target dividends would be viewed merely as branch distributions to the holding company home office. One final Subpart F anti-deferral rule can be triggered if the foreign companies guarantee the borrowing of the USM, or the USM pledges all of the stock of the foreign subsidiaries. Under the above facts, this loan support arrangement can trigger a deemed taxable dividend from the foreign companies by as much as $60 to $180 million. This concern is avoided by having the USM pledge only 66 percent of the stock of the holding company; foreign guarantees are not permitted.
The nature of cross-border acquisitions provides significant planning opportunities for maximizing the tax savings from deducting financing costs. It is important to work with local and U.S. international tax counsel to achieve the most tax efficient cross-border acquisition finance structure for your particular circumstances (and, thereby, substantially reducing borrowing costs).
Cross-Border Mergers Under German Law
By Jörg Kretschmer and Christophe Samson
Over the last year the volume of takeovers and mergers has declined less in Germany compared to the international average. According to the financial services provider, Thomas Financial, while globally the value of mergers and acquisition transactions was half that of the previous year, the total value of German companies that were taken over or merged equaled approximately less than one-quarter of the previous year’s benchmark value.
The German market has not declined in parallel with the global one because of special factors. European deregulation requirements, in particular in the telecommunications and energy fields, have opened up new market segments for mergers and acquisition activities. The reform of company taxation, of which major parts entered into force on January 1, 2001, means that company disposals and acquisitions can be carried out upon tax conditions that are much more favorable, even for foreign investors. In view of economic globalization, it is not only the large German groups that are under strong pressure to become more international, but also Germany’s small- and medium-sized companies, which have until now been regionally or nationally oriented. Cross-border mergers, therefore, continued to be of strategic importance.
No International Company Law
The objective of a national or an international company merger is to, in the future, place two companies under a single company management. However, there is no international company law: German laws govern German companies and U.S. laws govern U.S. companies. Cross-border mergers, therefore, have to comply with the legal requirements of the countries to which the companies involved are subject. The merger of a German and U.S. company into a single company is not possible pursuant to the provisions of the German Reorganization Act (Umwandlungsgesetz) because the Reorganization Act applies only to German companies. According to court decisions, it is at least doubtful whether companies that have their registered office abroad can "reorganize" themselves in Germany. If a company that has its registered office in Germany moves its registered office abroad, the German courts regard this resolution to change the company’s registered office as a resolution to dissolve the German company. It is, therefore, not possible to achieve a merger by changing the registered office (seat) in this way. Although such court decisions have sometimes been held to conflict with European law, following the decision of the European Court of Justice in the Centros case, it is not yet foreseeable whether it will be possible to "merge companies across the border in both directions" in the near future.
Basic Models for Cross-Border Mergers
Two alternative ways of structuring cross-border company mergers have been developed: the synthetic merger and the merger into a single company by means of a share swap.
In a synthetic merger, the companies wishing to merge with each other do not give up their independence. It is only the business divisions of the companies concerned that are merged. The first basic model for a synthetic merger is the "combined group structure." As in the case of a joint venture, the business divisions of two companies are contributed to a joint subsidiary. The shareholders of the subsidiary are the two companies wishing to merge. It was originally intended that the merger between the pharmaceutical groups Rhone-Poulenc (France) and Hoechst (Germany) would be structured like this. Rhone-Poulenc and Hoechst were to continue to exist as independent companies and were to contribute their business divisions into the operating subsidiary, Aventis.
The second basic model for a synthetic merger is the "separate entities structure." With this structure, unlike with a "combined group structure," the individual business divisions each continue to be owned by the merged companies and are not contributed to a joint venture company jointly owned by the two companies. Externally, however, the two merged companies act as a single company. Their presence and conduct are coordinated through an "equalization" or "sharing agreement." Such agreements can bring the management, the dividend pay out and the equal treatment of the shareholders of both companies in line with each other. This type of merger was chosen for the merger between Rio Tinto PLC (UK) and Rio Tinto Ltd. (Australia). The operative business remained with Rio Tinto PLC and Rio Tinto Ltd. separately. The collaboration and equalization between the companies were, however, governed by the sharing agreement and special voting companies.
Unlike with a synthetic merger, a new parent company can be formed with a merger into a single company. The shareholders of both "old" companies have a share in the new company. The two groups of shareholders are consequently merged. The "old" companies become subsidiaries of the new parent company. Bayerische Hypovereinsbank (Germany) and Bank Austria (Austria) were merged in this way into a single company. The newly formed company, Hypovereinsbank, offered the shareholders of the Bayerische Hypovereinsbank and of Bank Austria a share swap. After the share swap the old shareholders were the new shareholders of the new Hypovereinsbank, of which the Bayerische Hypovereinsbank and the Bank Austria were (provisionally) subsidiaries.
Synthetic mergers require fewer changes and are, therefore, easier to implement. The difficulty with synthetic mergers is in subsequently managing the merged companies. Uniformity can be achieved only with a complex organizational structure. Which method should be chosen in order to achieve an international merger of companies can, however, only be decided on a case-by-case basis.
Responses of the U.K. and U.S. Legislatures in the Wake of Enron
By William Charnley and Brigid Breslin
On July 25, 2002, the U.K. government issued the interim report of its Coordinating Group on Audit and Accounting Issues (CGAA) that was set up to coordinate the response in the United Kingdom to the issues raised in the aftermath of the collapse of Enron and other corporate failures in the United States. Its final report is not expected until the end of 2002. Meanwhile, on July 30, 2002, President Bush signed the U.S. Sarbanes-Oxley Act of 2002, described as "an act to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes."
The discussion set forth below outlines the main interim recommendations of the CGAA and compares the different approaches of the two governments in their bids to restore confidence in the accuracy of audited accounts. It also highlights certain initiatives of the European Commission in this area. The CGAA acknowledged that there had been substantial changes for the better over the past decade in strengthening the U.K. regulatory regime, but it cautioned against complacency. It also recognized the necessary trade-off between the burden of regulation and the encouragement of wealth creation and innovation and reached several preliminary conclusions.
Auditor Independence
The CGAA does not favor a blanket-ban on the provision of non-audit services. It favored improved disclosure of the nature and value of non-audit work by auditors (current regulations merely require the disclosure of the aggregate remuneration of auditors or their associates in respect of non-audit work performed for the company and its associated undertakings for that and the previous financial year). It also suggested further examination of the possibility of mandatory tendering and audit firm rotation. The CGAA did not express support for audit firm rotation but suggested a longstop requirement for rotation every 15 to 20 years. It feared that mandatory tendering could lead to a race to the bottom in terms of audit quality; however, this is not inevitable. The European Commission Recommendation on Auditor Independence of July 19, 2002, requires that the auditor be able to demonstrate that the fee for an audit engagement is adequate to cover the assignment of appropriate time and qualified staff to the task and compliance with all auditing standards, guidelines and quality control procedures.
Instead, it considered the partner rotation requirement should be extended beyond the lead audit partner (in accordance with the EC recommendation) and audit engagement partners should be required to rotate every five years (rather than every seven years as currently required in the United Kingdom).
U.S. Sarbanes-Oxley Act
Section 206 of the Sarbanes-Oxley Act provides for a one-year "cooling-off" period during which no audit may be conducted by a firm whose former employee has become a chief financial officer, chief executive officer, chief accounting officer or controller of the company being audited.
In general, the SEC does not regard an auditor as independent when it has a mutual or conflicting interest with the audit client, audits the audit firm’s own work, functions as management or an employee of the audit client or acts as an advocate for the audit client.
The nine non-audit services deemed by the SEC as inconsistent with auditor independence (and prohibited under the Sarbanes-Oxley Act) include the following: bookkeeping and similar services; financial information systems design and implementation; appraisal or valuation services, fairness opinions or contribution-in-kind reports; actuarial services; internal audit outsourcing services; management functions or human resources; broker or dealer, investment adviser or investment banking services; legal services and expert services unrelated to the audit; and any other service proscribed by the Public Company Accounting Oversight Board (PCAB). However, other non-audit services, including tax services, may be provided if approved in advance by the audit committee. Interestingly, the EC recommendation sets out a strikingly similar list of circumstances deemed to constitute threats to auditor independence.
The CGAA has recommended that in identifying the types of non-audit services that are incompatible with auditor independence, the above list of nine services should be studied carefully, but would prefer a principle rather than a list-based approach.
Audit Committees
Audit committees are not universal in the United Kingdom. However, the U.K. Listing Authority requires listed companies to confirm that they comply with the provisions of the Combined Code with respect to audit committees (which is due to be expanded by the Financial Reporting Council) or else explain their failure to adhere to it. This requires that the board establish an audit committee comprised of at least three non-executive directors whose duties include keeping under review the scope and results of the audit and its cost-effectiveness and the independence and objectivity of the auditors. Where the auditors also supply a substantial volume of non-audit services to the company, the committee must keep the nature and extent of such services under review, seeking to balance the maintenance of objectivity and value for money.
The CGAA suggests that further work is needed to determine whether and in what circumstances it should be mandatory to establish audit committees. It also considers that the role and membership of audit committees need to be strengthened. It has proposed that the audit committee should approve the purchase of non-audit services and set out publicly the reasons why the auditor was engaged to undertake non-audit work and that this does not compromise auditor independence. It should have the principal responsibility for making recommendations to the shareholders on auditor appointments and approve auditor remuneration (the CGAA rejected the suggestion that auditors should be appointed by an independent public body). It should produce a report to shareholders each year (as part of the annual report) on how it has discharged its responsibilities and play a key role in monitoring audit quality and preserving auditor independence.
In relation to this monitoring requirement, it will be interesting to see how the U.K. government proposes that the audit committee fulfill this obligation (in terms of the skills and expertise of members of the audit committee) and what are to be the consequences to the audit committee members for failure to do so. Clarification of the extent of personal liability arising from the imposition of such responsibilities is awaited. New legislative proposals will require careful consideration as, in effect, this moves away from the traditional English concept of a single unitary board that takes responsibility for the contents of the company’s accounts, towards the continental concept of a supervisory board.
The U.S. Approach
Section 301 of the Sarbanes-Oxley Act renders the audit committee responsible for the appointment, compensation and oversight of the work of the company’s auditors, and section 407 requires that the SEC issue rules to require issuers to disclose whether or not the audit committee of that issuer is comprised of at least one member who is a "financial expert" and if not, the reasons why.
Regarding responsibility for the accuracy of the annual accounts, one notable provision in the Sarbanes-Oxley Act that has not found its way into the CGAA recommendations is the requirement that CEOs and CFOs certify the accuracy and completeness of each quarterly and annual report, that the financial statements in the report present the company’s financial condition and results of operations fairly, and that they have evaluated the adequacy of the issuer’s internal controls. This is, in addition to the SEC Order of June 27, 2002, requiring one-off sworn statements by CEOs and CFOs of the largest 947 U.S.-based public companies. In contrast, in the United Kingdom, currently the board of directors as a whole are required to approve the company’s annual accounts and the directors’ report, which are to be signed by a director of the company on behalf of the board.
Oversight of the Accountancy Profession and Enforcement of Accounting Standards
The U.K. government has only recently put in place new arrangements for oversight of the accountancy profession with the creation of the Accountancy Foundation.
The monitoring of the quality of the work of audit firms is the responsibility of recognized audit supervisory bodies. Inspections for the Institute of Chartered Accountants are undertaken by their Joint Monitoring Unit. The Association of Chartered Certified Accountants (ACCA) has separate arrangements. Most auditors are visited every five years. The 20 audit firms that audit most listed companies are visited annually and inspected every three years. Firms with public interest or high-risk audit clients (such as publicly funded charities and companies authorized under the Financial Services and Markets Act 2000) are visited by the ACCA more frequently. The Financial Reporting Review Panel (FRRP) only investigates compliance with accounting standards by public and large private companies when it has received a complaint or where there has been press comment.
Questions have been raised as to whether the funding of the Accountancy Foundation by the six professional accountancy bodies is consistent with independent oversight or whether there should be an independently funded public body with statutory responsibilities (rather than the existing complex non-statutory structure with overlapping regulatory responsibilities).
The CGAA noted that the European Commission intends to promulgate measures in relation to the establishment of public oversight of the audit profession (and the role of audit committees). The CGAA recommends that the government undertake an early review of the regulatory arrangements put in place under the Accountancy Foundation and that the review board consider whether the function of monitoring the work of auditors (at least in relation to auditors of listed companies) should remain the responsibility of the professional bodies. The enforcement of accounting standards by the FRRP should be more widespread and on a proactive basis (which would require a massive increase in the FRRP’s staff and resources; it currently only has one administrative staff member and one technical staff member).
Perhaps the most fundamental difference in the approaches of the U.K. and U.S. governments is in the oversight of the auditing profession. The U.S. PCAB will register, oversee, regulate, inspect, investigate, discipline and impose sanctions on public accounting firms and establish and enforce auditing quality control, ethics and independence standards. The SEC will have oversight of the PCAB that will be funded by new annual accounting support fees imposed on publicly traded companies based on their market capitalization and a registration fee and an annual fee from each registered public accounting firm; $98,000,000 is allocated to the SEC to add at least 200 qualified professional to, among other tasks, provide enhanced oversight of auditors and audit services.
The PCAB’s armory of potential sanctions include the suspension of registration; suspension or bar of a person from further association with any registered public accounting firm; limitation on the activities, functions or operations of such firm or person; fines of up to $100,000 for a natural person or $2,000,000 for any other person for each violation (where there has been intentional or knowing violations, those limits are raised to $750,000 and $15,000,000 respectively); censure; and required additional professional education or training.
The seriousness of recent corporate failures has led to rapid responses from the U.K. and U.S. governments. The CGAA has, in its interim report, shown extensive regard to the measures recently adopted in the United States. However, it must be borne in mind that the two governments are tackling the current problems from different starting points.
The U.K. government is building on reforms introduced over the past 10 years in response to corporate abuses of the 1980s. Also, the United Kingdom has only relatively recently consolidated its major SROs into one large regulator, in the form of the Financial Services Authority. This form of consolidation has not yet reached the regulatory bodies of the accountancy profession. There may be reluctance to impose an independent oversight body on the auditing profession in the United Kingdom, like the U.S. PCAB, in view of the fact that the newly formed U.K. Accountancy Foundation has not yet had a chance to prove its effectiveness. Whereas in the United States, which has a successful and lengthy history of having a powerful independent securities regulator in the form of the SEC, it was a natural next step to create a powerful independent public oversight body for the auditing profession.
In addition, accounting and auditing standards in the United Kingdom (like international standards) are principle-based whereas in the United States they are rule-based. Although there are signs that the United States may move in the direction of the principle-based approach (which is less susceptible to manipulation and evasion), this cannot be achieved in a short period of time.
However, the prominent and common theme of both governmental responses is to shift onto the audit committee increased responsibility for the accuracy of the audited accounts and the management of the relationship between the company and its auditors. The impact of the proposed increase in responsibility and concomitant potential increase in liability for the members of audit committees in the United Kingdom have not yet been fully considered by the CGAA in detail.
We await the U.K. CGAA’s final report with interest.
Private Party Liability and Obligations Under International Law
By Jeffrey Bates
Conventionally, international law has been dismissed by commercial lawyers as either a toothless oxymoron or an irrelevancy. Times have changed, however.
There has been an explosion of suits against multinational corporations alleging violations of international law. Claims under international law also are central to the slavery "reparations" and apartheid cases recently filed in U.S. courts against insurance companies, banks, railroads, universities and others.
While international law has traditionally focused on nation states, it has never been entirely aloof from individuals and corporations. In the United States, federal courts have been enforcing international law for and against individuals since the earliest days of the republic, as the state courts did before them, in turn following the long-established practice of the English courts. In recent times, international law claims have been filed against multinational corporations in the United States, England, Australia and the Netherlands. Multimillion-dollar settlements have been reached in the United States and England, as the leading American and English plaintiffs class action firms have discovered the field.
These cases have been joined by the slavery reparations and apartheid cases, which include international law human rights claims. The international law claim in the slavery cases has been cited as a maneuver around some of the legal problems these cases face. Slavery has long been prohibited by international law, perhaps since before the American Civil War, although that fact is controversial (Justice Story held it was in 1822; Justice Marshall held it wasn’t in 1825; ex-President John Adams argued it was in The Amistad in 1841), and the plaintiffs’ lawyers are arguing that violations of international human rights law have no statute of limitations. The apartheid cases are explicitly brought under two U.S. federal statutes that have been held to provide a federal cause of action for violations of international law. In a landmark ruling earlier this year, a New York federal court held that multinational parent corporations can be sued under these statutes when foreign subsidiaries they control cooperate with foreign government officials in violating rights protected by international law.
In addition to adjudication of international law claims in national courts, there are a number of international tribunals established by treaties that do so. Among these, NAFTA and World Trade Organization tribunals are better known to U.S. lawyers, while European lawyers have become increasingly familiar with various transnational European courts. There also are lesser-known tribunals, such as that established by the Law of the Sea Convention (covering, e.g., ocean pollution claims). Claims against corporations can be "espoused" by governments and asserted in these government-to-government forums. They may also be asserted in diplomatic exchanges, as when the Philippines pressed Canada earlier this year to provide compensation for environmental damage caused by a mining joint venture involving a Canadian mining giant.
Apart from these assertions of liability under international law, there are a number of international regulatory regimes affecting commercial activities. These include the OECD’s version of the U.S. Foreign Corrupt Practices Act, adopted by most of the OECD member countries; a U.S.-Canada Great Lakes Commission protocol, mandating stringent limitations on wastewater discharges into the Great Lakes and their tributaries; and the just-adopted U.N. Convention for the Suppression of the Financing of Terrorism, requiring new record keeping and reporting requirements for financial institutions. If the Cartagena Biosafety Protocol goes into force as expected, biotechnology and pharmaceutical firms will confront an international version of the restrictive "Precautionary Principle." Various U.N., OECD and European working groups are presently considering if and when to make lenders liable for environmental harm caused by foreign direct investment projects they finance.
Acting less directly, the United Nations Commission on International Trade Law (UNCITRAL) has adopted "model laws," including one on cross-border insolvencies that has been adopted in various forms in Canada, Mexico and Japan and incorporated into bills before the U.S. Congress. Similarly, the U.N.’s International Labor Organization is working on an international standard for chemical safety data sheets and hazard warnings.
Business Opportunities in South America’s Time of Turmoil
By Adolfo Garcia and Alejandro Fiuza (Marval, O’Farrell & Mairal, Buenos Aires)
Since Argentina’s long-anticipated default on its debt followed by an out-of-control currency devaluation that rocked South American business and financial circles and markets early this year, some other South American countries have started to feel the waves, albeit not necessarily in the same manner. A crisis of confidence, not different from a similar crisis that is shaking the foundations of U.S. capital markets, is slowly starting to spread and to move most U.S. investors away from this region—and not just the most affected countries such as Argentina and Venezuela (Hugo Chavez).
However, as many U.S. investors are moving out, a new breed of U.S. investors with an appetite for risk is moving in. These investors range from private investors, vulture funds and venture capital firms trying to make a profit out of the low recession values, to U.S. strategic investors trying to expand market share and/or lever up their existing market positions by acquiring competitors, key suppliers or customers at bargain prices in comparison to what these prices would have been just a year ago. Some of these players were in South America before and are now taking advantage of their knowledge of the old winds to outmaneuver the new ones in order to take their vessel to safe harbor. Others are just trying to learn about the new weather patterns as fast as they can with the only certainty that the challenges lying ahead are uncharted waters for all players.
The opportunities range from the acquisition of distressed papers (such as bonds and shares of publicly owned companies), distressed assets (e.g., real estate and agricultural commodities), distressed companies (companies in Chapter 7 and Chapter 11, especially in export-oriented sectors), to the typical turn around and industry consolidation (e.g., in finance, insurance, automobile spare parts and other industries). Other opportunities relate to debt restructuring and supplying mezzanine financing to investors and businesses, especially export-oriented businesses (e.g., agribusinesses, oil and gas, tourism, etc.).
From a legal standpoint, turmoil means that it is time to get back to the basics. These opportunities require the investor to conduct a thorough due diligence investigation on business, political risk, tax and legal matters. This investigation should follow a deep understanding of the new, changing laws and regulations and their impact on the revenues, profits and cash flow in the likely crisis scenarios surrounding the investment. The investors’ experience in past situations may be a reasonably strong foundation from which one or several models should be built. They also require finding tax efficient and creative structures that prioritize self-enforcement mechanisms, including self-enforcement guarantees, such as holdbacks and earn-outs, and independent guarantees, such as escrows, SBLCs and the like. And then, the usual suspects, including, without limitation, creating extra shields to isolate from liability and selecting appropriate jurisdictions to incorporate funds, parent and portfolio companies as well as applicable laws and the "legal" situs of a transaction. In the current scenario, the choice of foreign or local law in contracts may be the difference between enforcement of a payment promise in the agreed-upon currency or being required to collect local currency at a less-than-market exchange rate. Selecting the appropriate court or arbitration panel to hear any disputes (preceded by mandatory mediation or direct negotiation) and the appropriate place to litigate or arbitrate it, may be equally important and bear a significant impact on the agreement and its future performance. Careful and planned drafting can provide significant protection to the foreign company or investor going into these uncharted waters.
*The views expressed in this article are not necessarily those of McDermott, Will & Emery or Marval, O’Farrell and Mairal.
Alejandro Fiuza can be contacted at +54 11 4310 0213 or at adf@marval.com.ar.
Green Paper on E-Commerce for the Republic of South Africa
By J. Michael Judin (Goldman Judin Maisels Inc., South Africa)
The Green Paper on Electronic Commerce for South Africa, November 2000, did not constitute legislation and it was not followed by a White Paper. It was, however, followed by a National E-Commerce Law Conference, during April 2001 (as a precursor to a bill published for public comment on March 1, 2002, and scheduled before the Parliament of the Republic of South Africa).
The bill was enacted as the Electronic Communications and Transactions Act of 2002, which came into operation on August 30, 2002. South Africa’s President Thabo Mbeki used digital technology to sign it into law during July 2002. In terms of Regulation 68 of 2002, signed by the president, the Electronic Communications and Transactions Act came into operation on Friday, August 30, 2002. The act seeks to address several matters. These include bridging the digital divide by developing a national e-strategy for South Africa, ensuring legal recognition and equality between electronic- and paper-based transactions and promoting public confidence and trust in electronic transactions. In terms of the act, an individual can decide on the types of technology the individual wants to use and provide for contractual relationships. The act does not interfere with an individual’s business dealings and relationships. It is important to note that the act makes the first statutory provisions about cyber-crime in South Africa.
One advantage of the South African legislation coming after most of the developed world has passed its own is that it has been able to pick the best from other legislation, which will make it amongst the best e-commerce legislation in the world.
An important chapter deals with personal information and privacy protection. The chapter establishes a voluntary regime for protection of personal information. Personal information includes any information capable of identifying an individual. Collectors of personal information (data collectors) may subscribe to a set of universally accepted data protection principles. It is envisaged that consumers will prefer to deal with only those data collectors who have subscribed to the recorded data protection principles. The sanctions for breach of these provisions are left to the parties themselves to agree on. Subscription to these principles is voluntary, due to the fact that the South African Law Commission is currently developing specific data protection or privacy legislation, which is expected to be enacted within 24 months.
According to International Telecommunications Union figures, South Africa has almost 60 percent of all African internet users and approximately two million of South Africa’s approximately 43 million people use the internet. The perennial issue of the digital divide between those who use it and those who don’t is, therefore, important to South Africa and offers exciting opportunities for foreign companies entering the South African market. Even with only two million using the internet, South Africa has a highly sophisticated and well-developed system of e-commerce and is not only the leading player on the African continent, but a major world player.
South African President Thabo Mbeki has been described as "a man with an IT mission" and has himself called information technology a "special sector of the economy," due to its potential to increase productivity across a wide range of activities, boost competitiveness and spur higher levels of economic growth. No doubt the rest of the world will be interested in sharing the wealth that will be generated by these developments.
J. Michael Judin can be contacted at +27 11 447 8177 or via e-mail at law@elawnet.co.za.
