Coming to America
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Ameek Ponda and Douglas Stransky, partners in Sullivan & Worcester’s Tax Department, co-authored the following article. Mr. Ponda is the director of the Tax Department and a member of the Firm's Management Committee. He concentrates his practice in structuring corporate mergers and acquisitions, advising emerging companies on financing and business issues, designing REIT transactions and financial instruments, and working on cross-border financings and acquisitions. Mr. Stransky concentrates his practice on international tax planning. He has structured numerous tax efficient international mergers, acquisitions, dispositions and reorganizations for a broad spectrum of public and private clients in the financial services, life sciences, manufacturing, private equity, technology and venture capital industries.
United States businesses of all sizes and sectors are more likely than ever to be targeted by buyers from around the globe, including buyers from rapidly emerging economies such as Brazil, China, India, Israel, and Russia. This “inbound” deal flow stems from the convergence of several trends, including globalization, the rise of sovereign wealth funds and a weakened U.S. dollar. In addition, the United States’ comparatively welcoming legal and regulatory environment signals to the rest of the world that “America is open for business.”
In Massachusetts, some notable inbound deals over the last 18 months included the $11.6 billion acquisition of GE Plastics by Saudi Arabian Basic Industries Corporation, the $8.8 billion purchase of Millennium Pharmaceuticals by Japan’s Takeda Pharmaceutical Co., the $3.9 billion acquisition of Putnam Investments by Canada’s Great-West Lifeco, Inc., the $2.6 billion purchase of Sepracor, Inc. by Japan’s Dainippon Sumitomo Pharma Co., and the $1.7 billion acquisition of Samsonite Corporation by United Kingdom-based CVC Capital Partners Ltd.
Cross-border deals are always more complex than comparable domestic ones. They involve at least two sets of legal and regulatory frameworks, additional currencies, multiple languages and time zones, and potentially significant differences in business culture. Foreign investors and U.S. sellers exploring inbound deals should proceed with informed boldness when developing transaction strategies.
On the sell side, understanding the foreign buyer’s goals and recognizing its possible inexperience with U.S. laws and commercial customs and practices will go a long way toward maximizing value in the deal and ensuring a smoother process. For example, a foreign buyer will likely not be familiar with U.S. employment laws, tort litigation, etc., which are markedly different than those of many other countries.
On the buy side, it is critical for foreign investors to understand U.S. laws and commercial customs and practices. Successful execution is more art than science, and early involvement by experienced U.S. advisors will be important. For example, in contrast to market practice in other parts of the world, there is generally less emphasis on due diligence in the United States, particularly protracted, intrusive due diligence, and instead a reliance on seller representations and associated indemnities. Of course, exceptions to this general rule exist when statutes, cases, and regulations have expanded successor liability into particular areas, and thus more due diligence may be appropriate, for example, with respect to environmental, employment/benefits, money laundering and international trade issues.
Another consideration for inbound mergers and acquisitions is the Foreign Investment and National Security Act (“FINSA”). Under FINSA, the President is authorized to block certain foreign acquisitions, takeovers or mergers if they are considered threats to national security. Foreign governments investing through sovereign wealth funds attract scrutiny under these rules, as do any foreign investments in U.S. infrastructure, energy assets or sensitive technologies. Where both a foreign government and a sensitive industry are present, the scrutiny can be intense – witness the CNOOC and Dubai Ports World tempests. By limiting the focus of the review to U.S. national security matters and by minimizing political exposure during the review process, FINSA has defused much of the potential for controversy. Although only certain inbound transactions implicate FINSA, the parties need to plan and structure carefully to ensure their transactions are well received by the Committee on Foreign Investment in the United States, or CFIUS, which is responsible for FINSA review.
Whether or not the proposed acquisition implicates a substantive antitrust problem, it may be necessary, depending on the size of the transaction, to report the acquisition in advance to the U.S. competition agency under the Hart-Scott-Rodino Antitrust Improvements Act, or HSR Act. The purpose of the HSR Act is to give U.S. authorities time to review a proposed transaction for its anti-competitive effects. The HSR filing typically has minimal impact on the timeline to closing, but sometimes can result in substantive review with additional delay or, worse, a determination that the transaction has an anti-competitive effect. Although most U.S. targets preparing for a sale are well aware of the HSR Act, some foreign investors may be less familiar with its provisions.
Additional restrictions or considerations for inbound deals include annual reporting to the Department of Commerce’s Bureau of Economic Analysis if a foreign person acquires more than 10 percent of a U.S. target, and to the Department of Agriculture for certain inbound real estate acquisitions involving farmland, including timberland.
The Foreign Corrupt Practices Act (“FCPA”) may also challenge a foreign buyer where the target is a U.S. company with extensive foreign operations and potential FCPA exposure from those foreign operations. Under the FCPA, an acquiring company can be held liable for any prior unlawful payments made by the target company, and this successor liability can result in the termination of a proposed acquisition, as happened with Lockheed Martin’s agreement to acquire the Titan Corporation. Moreover, FCPA prosecutions and investigations in the context of mergers and acquisitions are on the rise.
In addition to the regulatory restrictions, flexible acquisition structures and tax planning must also be considered in any inbound transaction. For example, foreign buyers expecting payment streams from their U.S. acquisitions – be it dividends, interest, royalties, rent or service fees – should take steps to minimize cross-border withholding taxes. To achieve this, properly advised acquirers will consider interposing an intermediate holding company, located in a country with favorable tax treaties or other tax attributes, such that overall taxes are minimized on payments that cross borders. U.S. state and local tax issues will also almost certainly be a consideration, particularly if these jurisdictions offer tax credits or other special incentives.
Despite the spectrum of issues and its attendant complexity, properly advised U.S. sellers and foreign buyers will be well positioned to participate in the growing trend of inbound deals.
