Addressing common issues that arise during international corporate transactions

In this article, we explore the common issues that attorneys may encounter when working on an international corporate transaction and share best practices for navigating them to ensure the success of cross-border deals.

Due diligence pitfalls

When conducting due diligence, it’s important to be aware of potential restrictions enforced by data protection rules such as GDPR, business secrets, capital markets information, and other information covered under confidentiality agreements.

(Note: If your firm represents the purchaser, much of the information gleaned about the target company can be obtained from publicly available documents and registers, including the commercial register, beneficial ownership register, pledge/charge register, and insolvency register.)

Tip: The amount of due diligence will vary depending on the needs of a specific transaction. To ensure you have ample time for conducting searches and obtaining documents from foreign jurisdictions, develop a global due diligence plan early in the process.

Due diligence may be limited by available budget. In this case, you can adopt a more targeted approach and focus on essential searches and document retrievals. If budget is not an issue, you can scale your efforts appropriately by taking on less risk as each entity/person is thoroughly researched with the available tools in each jurisdiction.

Your global due diligence plan should also account for longer timelines, a lack of technology or user-friendly systems, language barriers, and little to no guidance from government agencies.

Depending on the jurisdiction where due diligence is being conducted, the menu of available options can be extensive or limited. For instance, the source of due diligence options can be challenging and may require an understanding of various corporate registries within a jurisdiction, different levels of courts, or other government authorities.

Common searches that your plan must focus on include liens, litigation or judgment, and bankruptcy. Performing lien searches in Canada, Australia, and New Zealand is straightforward as the lien filing systems in these countries are similar to UCC Article 9 of the United States. However, certain countries lack public lien filing systems and user-friendly corporate registries. As a result, U.S.-based attorneys often encounter problems with determining their approach in these jurisdictions and fail to reach an adequate degree of confidence in their global due diligence results.

Decentralized systems present further challenges because entity searches must be conducted on both local or state levels and federal levels. In these cases, your firm may benefit from partnering with service providers with local reach who can efficiently handle both the state and federal searches and document retrievals.

Adherence to foreign direct investment laws

Companies entering into an international corporate transaction may encounter issues with Foreign Direct Investment (FDI) regulations. FDI is a form of cross-border investment where the investor acquires control or a significant degree of influence on the management of an enterprise that is resident to a foreign country. This type of investment is typical of M&A transactions and is distinct from foreign portfolio investment, which is passive. 

To safeguard against a degree of foreign influence in an economy, countries have implemented FDI, regulatory, and merger control laws that must be considered for a given transaction.  For instance, many countries require mandatory FDI filings followed by a standstill period that lasts until approval is issued.  These requirements may be triggered by low thresholds of foreign ownership and the transaction amount. 

Furthermore, the sector in which the target company operates may trigger FDI filing requirements if it is deemed sensitive or vital to national security or critical infrastructure.  Sensitive sectors vary country-to-country, though consistently the sectors considered sensitive and ideal of FDI protections include aviation and rail, banking and finance, defense, energy, media, mining, telecoms, and utilities. Recently, the healthcare sector has fallen within this orbit of FDI restrictions due to the critical nature of COVID-19 vaccines and medical protective equipment. With further technological advances, foreign acquirers can expect to encounter new FDI filings and possible restrictions on the sectors of artificial intelligence, robotics, semiconductors, quantum technology, and biotechnology.

Tip: If your firm supports parties to an M&A, be sure to allow for longer timelines to accommodate the FDI screening processes by the government of the target company. This is particularly true if the target company operates in a sensitive sector and faces additional FDI scrutiny. 

Failure to follow notarization, authentication, or Apostille requirements

Another hurdle that can affect a transaction is a failure to follow proper notarization, authentication or Apostille requirements set by the local jurisdiction. Following the appropriate processes are commonly required for amendments to articles of association, use of foreign public documents, and to ensure efficient submission to consulates and embassies.

While Apostilles provide a streamlined way of certifying public documents for use abroad, attorneys must consider the jurisdiction where the transactions are taking place, as these certifications are only available between countries that are members or signatories of the Hague Convention. For all others, you must follow the often time consuming authentication process for validating public and corporate documents.

In addition, certain corporate transactions may need to be recorded in a notarial deed by a notary. For example, in the Netherlands, Dutch law requires certain corporate transactions be recorded in a notarial deed executed by a Dutch civil law notary whereas other events, such as resolutions, may not be subject to these formal requirements.

These may seem like small details, but each country has its own unique requirements. If even one step is missed in the process, it could delay your ability to start a global endeavor.

Lack of UBO due diligence

Before undertaking a transaction, you may be required to analyze an organization’s corporate structure to identify the ultimate beneficial owner (UBO) or owners. Depending on the size of the organization and the complexity of its structure, this task can consume a fair amount of time. 

Once the UBO(s) has been identified, many jurisdictions require new shareholders to the transaction to meet KYC requirements and compliance checks. Documentation required can include certified passports and proof of residence for the new shareholder, its officers, and the UBOs.

Identifying the ultimate beneficial owner of an organization is a key task that is often overlooked leading up to an international corporate deal. Failure to complete sufficient UBO due diligence can risk infringement of local laws and international standards and result in hefty fines in some countries. Not to mention risking time, money, and an organization’s reputation.

Failure to comply with employee or works council notification requirements

Certain European countries stipulate consultation rights for employees and employee representative bodies, such as a works council for companies with at least 50 employees. When working on global corporate transactions, you may be required to notify the works council prior to the signing of the letter of intent.

In addition, the target company may have a collective labor agreement that provides additional provisions surrounding the works council’s consultation procedure.

Any failure to adhere to the employee or works council notification procedures may seriously impact the completion of a transaction.

Summary

There are many issues that can arise from international corporate deals. Having the right insights and understanding of what these are, along with the support from knowledgeable resources, is an effective strategy to mitigate the risks.  Attorneys must consider:

•          Budgeting and how it can affect due diligence planning
•          Managing limited resources and experience in different countries
•          How to work around the limitations in smaller/less developed countries
•          Changing regulations
•          Account for how evolving economic and political disruptions can affect a deal

No matter where your client’s next cross-border deal takes you, CT Corporation’s global experts have the local know-how to help support you every step of the way - from due diligence work to document searches and retrievals and deal closure support. Contact CT Corporation to learn more about how our Global Transactional Services can help address your needs around the world through one central point of contact in the U.S.