Managing the International Merger Review Process
By Stephen P. Sullivan
Today, most significant transactions between U.S. companies (or between U.S. and foreign companies) require merger notification under the antitrust or competition laws of at least one foreign country. Since the mid-1990s, there has been explosive growth in the number of countries with merger notification laws. In 1990, approximately 12 jurisdictions had antitrust merger control regimes. Now, more than 60 jurisdictions have merger control laws. Each of these laws has unique thresholds, timing and processes. Consequently, complying with all of the potential notification requirements is becoming one of the more burdensome aspects of completing a transaction. Any company active in the international mergers and acquisition arena must understand the complexities of these notification and approval requirements and have a plan for resolving them.
Procedural Challenges of Completing Worldwide Antitrust Notifications
Completing all antitrust notifications required by a large transaction has become a complex and confusing process. Over 60 countries can claim potential jurisdiction over a deal based on nothing more than the fact that the target has sales or assets in that jurisdiction. Nearly every interested country has its own threshold for determining when notification is required. These thresholds are based on a combination of different factors, including the worldwide or local turnover of the target company and possibly the acquirer; the market shares of the parties; or the worldwide and local assets of the companies. Worse still, these thresholds can change more than once in a single year.
Added to this complexity is the fact that notification deadlines vary dramatically. Notifications can involve pre- or post-approval. Similarly, filing deadlines can be pre-transaction, post-transaction or both. Indeed, in many countries, filing is required very early in the process. It often comes as a surprise for companies to learn that some countries require notification of a transaction within a week of signing an agreement. In other countries, the parties choose when to file but cannot close the transaction before approval or expiration of the waiting period. Such pre-approval can be required even when both parties are organized or headquartered outside of the jurisdiction.
While the process of compliance is difficult, it can be managed if companies follow a few simple procedures. First, create regular subsidiary reporting requirements in anticipation of future notifications. Second, start the compliance process early in the deal. Third, centralize and coordinate the notification process.
Step One: Create Regular Reporting Requirements
By making a few additions to its subsidiary reporting requirements, a company can ensure that the most crucial data is readily available should a potential transaction arise. The first step in the merger review process is to determine the countries in which a filing is required. To analyze notification requirements, counsel must have, at a minimum, information on the assets and turnover of the companies by country (while some countries require evaluation of market shares, this question can be typically addressed once counsel understands the scope and magnitude of the companies’ activities). Obtaining this information can take considerable time because parent companies often only have consolidated information and not country-by-country data.
By requiring subsidiaries to provide asset and turnover data by country in their annual reporting, companies will have the required information available when needed. Similarly, maintaining a central database of the subsidiaries’ major product lines by country will help with the completion of any required notifications. Indeed, a number of our large multinational clients that have adopted this protocol have cut weeks or even a month off the time it takes to evaluate and complete the notification process.
Step Two: Start the Compliance Process Early
Companies should start the notification process early in the transaction process because of the short deadlines for many notifications. Determining where notification is required while negotiating the transaction can not only expedite closing, but it may also permit the parties to agree on allocation of the risks and expenses of the notification process. Without an early start, filing in time is not always possible and the possibility of fines is increased.
Step Three: Centralize and Coordinate the Worldwide Notification Process
One of the most important aspects of successfully navigating the notification process is to organize the process so it is centralized and coordinated. Coordination is crucial to ensure that all notifications are consistent and do not propound contradictory arguments about markets or competition. Coordination also provides several other benefits that include ensuring that all information requests come from one source with duplication eliminated. It is also important that a consistent level of quality is achieved, a company can effectively manage the timing of multiple deadlines for notification and review and any required remedies are consistent across jurisdictions. In short, centralizing and coordinating the worldwide notification process has become one of the most important elements in guaranteeing that a significant transaction can be completed intact and in a timely basis.
Cross-Border Financing Provides U.S. Economic Benefit
By Matthew P. Larvick
Sophisticated cross-border investment transactions can provide significant economic opportunities to U.S. corporations. One transaction that has recently gained popularity involves a partnership formed between an U.S. corporate group and a foreign company such as a bank. As discussed below, certain foreign companies (primarily banks) are able to realize favorable after-tax returns from such investments and, consequently, are willing to provide economic incentives to U.S. investors.
In its basic form, two members of an U.S. consolidated group of corporations form a partnership. Under U.S. tax rules, the partnership chooses to be taxed as a corporation. One of the U.S. partners contributes a significant amount of cash to the partnership, and the other partner sells its equity to a foreign company such as a foreign bank, which is subject to the taxing jurisdiction of Country A. The foreign bank makes its own cash contribution to a partnership.
Subsequently, another member of the U.S. consolidated group borrows funds from the partnership in exchange for an interest-bearing note. The same corporation enters into an agreement to purchase the foreign bank’s partnership interest some years in the future, paying the discounted purchase price up front. The purchase price is typically paid to another foreign entity located in Country B, which has agreed to purchase a foreign bank’s interest.
Since the primary investorsthe foreign bank and the U.S. group are located in two separate taxing jurisdictions, the transactions are taxed under two sets of rules: those applicable in the United States and those applicable in Country A. Under U.S. rules, the forward purchase of the foreign bank's partnership interest is deemed complete when the discounted price is paid. As a corporation for U.S. tax purposes, the partnership realizes taxable interest income on the loan it has made and pays U.S. income tax on that income (not including any other deductions). Since the U.S. group receives a corresponding interest deduction, it is tax neutral.
Under Country A's tax laws, the partnership is treated as a pass through entity in which the foreign bank is a partner. By the terms of the investment, no cash is distributed to the foreign bank. The foreign bank receives a basis increase in its partnership interest, equal to its share of the partnership's income. At the same time, the foreign bank becomes entitled to a tax credit against Country A's taxes for a portion of the U.S. income taxes paid by the partnership.
How does the U.S. group benefit from all of this? The key lies in the hands of a foreign bank. As a result of the transactions, the foreign bank receives a favorable after-tax return in its home country, due in part to the provisions in Country A's tax laws that allow a foreign bank to increase its tax basis in its partnership interest, claim a tax credit against Country A's taxes, deduct funding costs against other income and receive a tax free-return upon sale of the partnership interest. These foreign tax rules enhance the foreign bank's after-tax return, making the foreign bank willing to provide an economic return to its U.S. counterpart. Typically, the U.S. group can expect to receive a fee for its participation. Alternatively, the transaction can be varied so the U.S group retains a portion of the funds contributed by a foreign bank, allowing the U.S. group to borrow at a favorable interest rate.
It is important to understand what the above transaction is not. The investment is not akin to so-called "corporate tax shelters" or "products" that have been receiving so much attention lately in the business and financial press (our Firm's experience is that such transactions should be approached, if at all, with an extraordinary degree of caution). To the contrary, the above transactions can be expected to provide the Internal Revenue Service with more, rather than less, tax dollars.
Obviously, the above transactions must be carefully structured to achieve the desired results for all parties involved. For example, the purchase of a foreign bank's partnership interest must be covered by adequate security arrangements. Moreover, the involvement of foreign counsel is typically necessary. In our experience, however, such hurdles can be overcome, and the above transactions can provide material investment income or reduced borrowing cost to U.S. corporations having an appropriate liquidity profile.
Exporter Controls Enforcement: Exporters Must Focus on Compliance
By David J. Levine and Jay Taylor
U.S. export control laws and requirements have evolved during the past several years from a predominantly product-based system to one that focuses more than ever on the end-use and end-users of the exported items, including technology. Corresponding actions and measures undertaken by U.S. export enforcement agencies—including the U.S. Commerce Department’s Bureau of Export Administration (BXA), the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and the U.S. State Department’s Office of Defense Trade Controls (ODTC)—require increased vigilance by U.S. companies regarding their customers and the actual and potential uses for their goods and technology. U.S. companies should realize that, in certain circumstances, disclosure of technology and provision of goods to foreign nationals may be "deemed" to be an export even if no shipment or transmission outside of the United States occurs.
Recent enforcement actions by BXA highlight the need for companies to adopt and maintain export compliance programs, in accordance with BXA’s "Know Your Customer" guidelines. In one recent case, the foreign subsidiary of an U.S. chemical producer settled charges related to an alleged violation of the Export Administration Regulations (EAR) by paying a $30,000 civil penalty. BXA had alleged that the Dutch subsidiary had re-exported U.S. chemical products from Holland to the Ivory Coast and Turkey without first obtaining the proper authorization from BXA. In another export control matter, a California company pled guilty to charges of illegally exporting semiconductor manufacturing equipment to a division of India’s Department of Atomic Energy. As a result of its actions, the company lost its export privileges to India, has incurred a $100,000 criminal fine and has been placed on two years probation by a California district court.
As evidenced by these recent cases, the U.S. government continues to treat export control enforcement as a national security objective. While license requirements and controls over exportation of several products have been relaxed in recent years, enforcement of existing controls remains strict. Companies that engage in international sales and shipments are thus well advised to develop internal programs for export control compliance, including measures for ensuring due diligence with respect to product end-uses and end-users. Many companies actually screen exports against the "denied persons" or "denied entities" lists maintained by BXA and ODTC. However, the inconsistent formats for such lists have posed compliance difficulties for many exporters generally and, with the advent of e-commerce, more specifically, for Internet sellers who face unique challenges in identifying customers in cyberspace. U.S. export regulators have yet to address these unique issues facing e-exporters.