Lost in translation: Select issues in M&A transactions involving foreign buyers

Therefore, it is imperative that both Australian sellers and foreign buyers in M&A transactions are aware of and effectively manage such issues. 

FIRB

Foreign buyers must consider whether Foreign Review Investment Board (FIRB) approval is required for M&A transactions. This can be complex, and depends on a number of factors, including the nature of the buyer and its ultimate beneficial owners, the nature of the target, and the size of the transaction.

The need to seek FIRB approval may delay the transaction (which by itself can give rise to uncertainty), and could jeopardise a foreign buyer’s ability to complete the transaction. In this way, FIRB is an issue for Australian sellers as much as for foreign buyers, and sellers should assess the potential impact on the sale process and execution risk associated with FIRB before advancing with a foreign bidder.

Scrip Consideration

A foreign buyer may offer to an Australian seller or sellers consideration in the form of shares or other securities in the buyer (or a related entity of the buyer), which will increase the complexity of the proposed transaction. Such a foreign buyer will need to ensure it complies with Australian laws regulating the offering of securities in Australia, including whether it is required to prepare a prospectus or other form of disclosure. This often requires a level of cooperation with the target or the seller. Also, a target or seller may need to engage foreign counsel to assess a number of issues that can arise out of an Australian seller being offered and holding securities in a foreign entity, including:

• the terms on which the seller will hold the shares in the foreign entity, which may be set out in a shareholders’ agreement, by-laws or company constitution of the foreign entity;
• any regulatory filings that may be required; and
• if the offered securities will be quoted on a foreign stock exchange, the terms of any relevant listing rules or similar securities laws.

Arbitration clauses

It is standard for sale agreements to set out the laws that govern the contract and nominate a jurisdiction for adjudicating any claims arising out of that contract (governing law and jurisdiction clauses).

However, where one party to the contract does not reside in Australia, judgments by Australian courts may not be enforceable against that party. Australia does not have a treaty in relation to the mutual recognition of court judgments with any country other than the United Kingdom and New Zealand, which in turn means that enforcing an Australian court judgment in any overseas jurisdiction other than the United Kingdom or New Zealand can be a complex, costly and ultimately futile process.

One solution is for the sale agreement to provide that any disputes in relation to the contract will be referred to arbitration. Pursuant to the New York Convention¹, signatory states must recognise foreign arbitral awards as binding. Over 160 countries are current signatories of the New York Convention, including, China, France, Canada and the United States of America. Accordingly, arbitration orders are often enforceable against foreign parties where court judgments (generally) are not.

Taking security for deferred consideration

Even with arbitration, resolving disputes through legal proceedings involving a foreign buyer can be complex, time consuming and costly. Accordingly, if an Australian seller is negotiating with a foreign buyer an earn-out or other form of deferred payment arrangement, it should consider insisting on a form of security for such payments that can be enforced by the seller without the need to commence legal proceedings.

The most preferable form of security will depend on the nature of the transaction and the buyer.

Differences in market practice

Parties to cross-border M&A transactions should be cognisant of differences in market practices to avoid misunderstandings during negotiations. What may be considered customary in one jurisdiction may not be considered customary in another. A common example is the difference in the disclosure regimes between Australia and the United States. Market practice in Australia is for all or substantially all of the seller warranties to be qualified by the contents of the data room AND a disclosure letter prepared by the sellers, whilst it is customary in the United States for the seller warranties to be qualified only by a disclosure letter.

It may be appropriate at the term sheet or non-binding indicative offer stage that the parties articulate certain terms to a degree that they may not do otherwise, instead of referring to “customary” terms, terms that are “consistent with market practice” or similar expressions.

Project management

Finally, project managing the sale process for M&A transactions involving foreign buyers will inevitably throw up challenges that do not ordinarily apply to transactions featuring Australian buyers.

The cadence of M&A transactions can be affected by parties in different time zones and limited windows for parties to engage. Further, it is not uncommon for foreign buyers to engage both Australian counsel and counsel in their own jurisdiction, which can also create inertia in the cadence of the transaction and the risk of double handling of documents. Therefore, parties should set realistic timeframes and milestones throughout the transaction, and seek to proactively manage these issues in a collaborative manner. A buyer’s Australian counsel can also help its foreign counsel in ‘translating’ and becoming more comfortable with local customs and market practice, which will assist the process and ultimately benefit both parties.

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