Considerations for non-US acquirers looking to buy a publicly traded US-based company in a negotiated (i.e., friendly) transaction.

By Thomas W. Christopher, Bradley C. Faris, Alexander B. Johnson, Amanda P. Reeves, Les P. Carnegie, Kristin N. Murphy, and Kaitlin Verber

In 2019, the public M&A market in the US continued at a strong level. A total of 198 M&A deals with equity values over US$100 million were announced with US public company targets in 2019, worth a combined total of more than US$909.7 billion[1]. Non-US acquirers continued to represent a meaningful portion of US public company acquirers, accounting for approximately 25% of public company buyers since 2017[2].

The acquisition of a US public company by a non-US acquirer is a transformational transaction for the target and likely a significant transaction for the acquirer. There is no standard formula for such a transaction, and the legal considerations that arise require careful analysis on a case-by-case basis. Latham’s guide, Acquiring a US Public Company, summarizes such considerations for acquirers contemplating such a transaction.

By Stuart Alford QC, Daniel Smith

Teamwork

Proposed changes to corporate criminal offending should cause corporate dealmakers to review the scope of acquisition diligence, particularly in light of the UK Serious Fraud Office’s (SFO’s) increasing use of deferred prosecution agreements (DPAs), as highlighted by the recent Rolls Royce and Tesco cases.

Expected Expansion of Corporate Liability Offences

As is widely appreciated, corporates can be prosecuted under the Bribery Act for “failing to prevent” bribery. New legislation is set to create offences for a wider range of criminality, starting with the facilitation of tax evasion, but possibly followed by fraud, false accounting and money laundering.

The new style of corporate offences bypasses the long-standing English law requirement that prosecutors prove that a “directing mind or will” (i.e., directors or other senior management) was culpable in order to establish corporate criminal liability. This has made prosecution of large multinationals challenging, as very senior employees may not be privy to decisions made on the ground. The future landscape for corporate prosecutions is expected to more closely map the US, where an employer can be automatically answerable for the crime of its employee.

By Nick Cline, Dan Treloar, Katie CampbellPencils_sngleColClr

Warranty and Indemnity (W&I) insurance, which seeks to bridge the gap between a buyer’s wish for deal protection and a seller’s desire for a clean exit, has become a common product in European M&A transactions. In our view, there is real value in having a thorough understanding of the process and key practical considerations for acquiring a policy. According to the Latham & Watkins 2016 European Private M&A Market Study, which examined over 170 deals signed between July 2014 and June 2016, the proportion of transactions where W&I insurance was used has increased, with around 13% of transactions now using the product. Claims data compiled by AIG (R&W Insurance Global Claims Study) indicates that claims are filed against around one in seven W&I policies globally, suggesting real protection for both buyers and benefit to sellers that would otherwise be exposed to such claims.

Planning, Timing and Readiness

In both bilateral and auction sale processes, strategic bidders can enhance the deliverability of their offers by addressing W&I insurance early in the process. Bidders can present themselves as “dealready” counterparties that pose a lower execution risk than rival bidders. Early engagement with brokers and lawyers will also reduce the risk of coverage gaps and ensure a smoother process. Brokers can also seek beneficial terms and leverage any competitive tension between underwriters earlier in the process.

By Richard Butterwick, Cathy Yeung, Yilong Du, Karima Salway

Overseas direct investment by Chinese companies increased significantly in 2016 to US$212 billion, a 143% increase from 2015. While outbound M&A interest remains strong in China, recent measures taken by the Chinese government to scrutinise transaction fundamentals more closely and slow capital outflows may impact deals in 2017. Consequently,

Chairs in a meeting room

what should European corporates know and do in order to minimise the risk of an aborted deal?

1. Why Do the Deal?

Chinese regulators are focusing on the authenticity and commercial purpose of deals by Chinese companies. Acquisitions with a solid rationale that benefit the Chinese economy are unlikely to be rejected outright. So-called “irrational” deals (outside of a Chinese buyer’s core sector, particularly in the real estate, media, sports or hospitality sectors) will face greater regulatory hurdles and carry a higher abort risk. European corporates and their advisers need to factor this into any approach from a Chinese company.

By Nick Cline, Robbie McLaren, Katie Campbell

Britain’s decision to leave the European Union in June 2016, coupled with the election of Donald Trump as US president in November 2016, gave dealmakers plenty of pause for thought last year – but ultimately did little to derail strategic M&A. Encouraged by the post-Brexit decline in the value of sterling and supported by the continuing availability of transaction financing at attractive rates, the number of acquisitions of UK companies by US acquirers reached the highest level in 10 years, with 262 deals valued at US$48 billion closing in 2016.
Interesting reflection and lines formed by two modern glass architecture.With attractively priced credit predicted to continue to finance M&A transactions throughout 2017 and foreign buyers continuing to regard the UK and Europe as an attractive investment opportunity, there are strong indications that inbound UK and European M&A activity from the US will continue. In our view, transatlantic deal makers will increasingly encounter the following key deal term differences between the US and UK M&A markets. 

Transaction Accounts: Completion v Locked Box

In the Latham & Watkins 2016 European Private M&A Market Study (which examined over 170 deals signed between July 2014 and June 2016) as much as 46% of European deals included a locked box mechanism. 33% of deals included a completion accounts mechanism and 21% of deals did not provide for price adjustment. In contrast, locked box mechanisms are significantly less common in the US, where the majority of deals use completion accounts. Locked box mechanisms fix the deal price at an agreed date based on a set of accounts, with the seller giving undertakings that value will not be extracted, or leak, from the target before completion. In contrast, a completion accounts mechanism calculates the final deal price after completion, by reference to accounts relating to the target, drawn up to the date of completion. This allows the buyer to test and adjust its valuation by reference to the actual financials of the target. 

PEViews3By Neil Campbell and Leif Schrader

Warranty and indemnity (W&I) insurance products have been marketed as a “silver bullet,” which can bridge the gap between a buyer’s wish to receive proper deal protection and a seller’s aim of a clean exit. However, as the market continues to mature, insurers are becoming cautious and terms are tightening. In our view, recent developments in insurance practice pose new practical issues for buyout firms, particularly on German deals.

According to the Latham & Watkins 2016 European Private M&A Market Study, which examined over 170 deals signed between July 2014 and June 2016, the proportion of transactions employing W&I insurance has increased over 60% since Latham’s 2015 survey. As expected, W&I insurance is most prevalent in sales by private equity sellers. Recent claims data compiled by AIG (R&W Insurance Global Claims Study 2016) indicates that claims are filed against around one in seven W&I policies globally, suggesting real protection for buyers and also benefit for sellers, who would otherwise have been the addressees of such claims.

However, such claims have resulted in significant payouts, particularly against financial and tax warranties. A relatively large proportion of claims come from continental Europe, with insurers reporting further large European losses pending. Consequently insurers, particularly in Germany, are increasingly conservative and are reflecting their claims experience in the terms on offer. There is greater reluctance to cover matters outside the scope of due diligence (even on a knowledge qualified basis) and insurers are less willing to compromise on general exclusions such as property and pension payments. In addition, while W&I insurers have always required sight of transaction documentation, German W&I insurers are now reviewing deal terms in more detail and are imposing their own requirements, such as warranty bring-down at closing. While this is typically for insurer information purposes only, buyers and sellers must carefully review transaction documentation alongside the insurance policy to ensure that any seller disclosure does not inadvertently release the insurer or expose the parties to additional risk or liability.