Doing Deals With A Non-U.S. Investor Or Buyer

Guest Post by Nancy Yamaguchi, Partner, Withers LLP

Every company, big and small, must operate globally these days because there are business opportunities and investors all over the world. In the previous years, venture capital investment seemed most active in the U.S., and the venture capitalists on Sand Hill Road in Silicon Valley were dominant players in providing early stage funding to successful companies such as Google and Cisco. As for an exit strategy, the typical path for almost every startup in the U.S. was an initial public offering (IPO) on Nasdaq or a sale to a large public company in the U.S. Today, we are seeing a lot of activity in Asia in terms of venture capital investment and acquisition of startups, and there are more and more venture capital investors in Asia, especially in Hong Kong, Singapore and Japan, as well as private investors in Europe, especially in the U.K., Norway, Finland and Denmark. Granted, these locations where we are encountering investors and buyers may be as a result of my firm’s presence or client base there, but nevertheless, the fact is that there is a new trend. This trend is that many of the U.S. technology startups and entrepreneurs are closing more deals with investors, buyers, customers and partners outside of the U.S. Any startup company in the U.S. currently seeking financing or looking to be acquired should not preclude themselves from financing sources outside of the U.S. or being acquired by a non-U.S. buyer, and as long as they are prepared to think “outside of the box” and adapt to other business cultures and legal systems, they would be well-advised to think globally and act globally.

From the U.S. Perspective: Legal Risks Outside the U.S.

From a U.S. seller’s perspective, U.S. litigation may be familiar territory but litigation risks outside of the U.S. should also be kept in mind when doing deals with non-U.S. buyers. In doing deals overseas, U.S. sellers, whether individual shareholders selling capital stock or corporate entities selling assets or contemplating a merger, will want to first and foremost shield themselves and their assets in the U.S. from liabilities arising in non-U.S. jurisdictions. In certain circumstances, judgments in foreign courts may reach U.S. individuals or companies. Many Americans tend to have a false notion that judgments against them in a foreign court, especially in jurisdictions where they have never set foot, cannot reach them in the U.S. While it is true that U.S. defendants may argue “lack of personal jurisdiction” to distance themselves against foreign litigation arising outside of the U.S., there is a body of U.S. law codified as the Uniform Foreign Money Judgments Recognition Act granting authority to U.S. courts to enforce foreign judgments against U.S. residents in the U.S. as long as the foreign judgment involves a sum of money and is final, conclusive and enforceable in the foreign jurisdiction.

During 2007 to 2010, when I was handling some complicated sell-side deals in France, the specter of U.S. management becoming subject to French labor and employment litigation was front and center. At the time, I came across a case handed down by the California Appellate Court in 2007 where the court relied on the California version of the Uniform Foreign Money Judgments Recognition Act to enter a French judgment of over 3 million francs, converted into U.S. dollars at the spot rate, against the U.S. defendants in the foreign litigation.[1] Understanding this risk, I strongly advised the U.S. seller to minimize litigation risks in France, not just the U.S., and collaborated closely with French counsel to do so.

Overall, it is worth remembering that foreign litigation can eventually spill over into the U.S., and therefore, U.S. sellers and target companies should seek various protections available to them under both foreign and U.S. laws to insulate themselves from these risks, which may include negotiating with the foreign investor or buyer that they indemnify and defend the U.S. sellers against foreign judgments that may be rendered against them. When seeking investment or sale to a foreign party, it will be key for U.S. entrepreneurs to conduct in-depth due diligence as to all of the possible litigation risks outside of the U.S., and with a clear understanding as to those risks, have a frank discussion with the foreign buyer or investor regarding ways to protect against, and recover any losses suffered as a result of, those risks.

From the Non-U.S. Perspective: Legal Risks in the U.S.

From the foreign investor or buyer’s perspective, one of their top concerns in doing deals in the U.S. is the sheer number of lawsuits, especially frivolous litigation that can be both time consuming and costly, [2] which drives down the value of the target company and ultimately may become a reason not to acquire or invest in the company. Relative to other countries, litigation is so frequent and pervasive in the U.S. such that it is an enormous cost of doing business here, which tends to turn away foreign investment. Although the litigious environment in the U.S. is well understood around the world, investors certainly do not want their target companies to suffer the massive losses and expenses, as well as reputational damage, resulting from lengthy and high profile litigation, especially class action labor and employment lawsuits and intellectual property infringement claims, which takes years to resolve and involves high stakes. Even if a defendant is able to prevail in litigation, the cost of victory may not be worthwhile. Just the legal fees in defending against a shareholder derivative suit or an IP infringement suit can range in the millions, and the extensive discovery process in U.S. litigation can be both distracting and expensive for any foreign investor. In an M&A context, the worst outcome of any deal is post-closing litigation, not only because of the resulting liabilities and costs but also because any deal that ends up in litigation is viewed as evidence of a bad deal.

To illustrate the depth of this problem in the U.S., as well as the validity of a non-U.S. buyer or investor’s concern, consider these statistics: For four consecutive years from 2010 to 2013, over 90% of M&A deals in the U.S. valued over $100 million resulted in litigation; and in 2013 alone, 94% of all such deals were litigated for a total of 612 lawsuits filed by plaintiffs across the U.S. [3] Although most of these lawsuits are settled, the hefty cost of defense and the negative PR that ensue can be alarming for foreign investors and often turn them away to acquisitions in the U.S. Even if a foreign buyer prevails in M&A litigation in the U.S., there is a lot of “face saving” that must be done in order to justify the deal to its shareholders and other stakeholders, and the corporate development manager who recommended the deal in the first place will invariably suffer internal pressure and even a demotion for a deal gone awry.

One way to address deal related litigation risks is through indemnification. Put another way, the key issue in negotiations between the buyer and the seller is not only risk mitigation but also risk allocation. Recognizing that litigation risk may always be lurking when doing deals in the U.S., a sophisticated foreign buyer or investor will demand full indemnification, plus reimbursement of attorneys’ fees and related expenses if the buyer or investor incurs losses due to deal related litigation that arise after the closing or even existing litigation that are pending at the closing. However, money remedies may not be enough if the entire deal becomes unwound by a court after the closing.

This was the unfortunate consequence in California where a minority shareholder sued to challenge a merger that closed in early 2011, and the California Court of Appeals issued a ruling three years later in early 2014 that the equitable claim to cancel the entire deal remained available to the plaintiff. [4] Typically, the award for plaintiffs in January 2014 who dissent to M&A deals in a shareholder lawsuit is called “appraisal remedy,” which gives the plaintiff the right to an independent appraisal of his or her shares, and if the price of those shares in the appraisal is found to be higher than the price at which those shares were sold in any deal, the plaintiff would have the right to be paid for his or her shares at the higher appraised value. The appellate case in California referred above is notable because it goes further than an appraisal and proffers the plaintiff another powerful weapon, to rescind the deal all together. Several years ago in Germany, this type of rescission remedy became a hot topic of discussion amongst M&A professionals because a deal pursuant to which Siemens sold its mobile phone business to BenQ, a consumer electronics company based in Taiwan, was challenged, one year after the closing date, by German employees whose employment transferred from Siemens to BenQ. [5] The employee plaintiffs prevailed, and all 1,500 of those BenQ employees returned back to Siemens as employees of Siemens. This was certainly an unfortunate and embarrassing outcome for Siemens, and while this was not a deal in the U.S., it taught all of us a lesson as to the possibility of a deal unraveling well after the closing when engaging in cross-border transactions.

With this backdrop of looming litigation in the U.S. and the risk of post-closing rescission, it is worthwhile to review both pending and potential litigation, and do everything possible to circumvent litigation in the U.S. For pending litigation, one approach that may be acceptable to the buyer is to exclude all on-going lawsuits from the deal and have the seller continue to defend these suits on its own. This approach may be what is necessary to get the deal done. For potential litigation, it will be essential to disclose the facts and circumstances of this potential risk so that the buyer is well aware of the risks and closes the deal with its eyes wide open. This disclosure will go a long way to preventing any post-closing attacks by the buyer in an attempt to unwind the deal based on non-disclosure of material risks. Remember that omission of important information regarding the business or key assets (both tangible and intangible) can be viewed as a type of fraud.

Different but Equal:

In general, doing cross-border deals requires that we educate ourselves of legal systems outside of the U.S. and to operate within those standards, without mandating the U.S. way as the only way or insisting that the U.S. dealmaking process is superior relative to other countries. The U.S. way may be different, but not necessarily superior and it is not the one and only way. Without engaging in an unproductive discourse of which system is better or worse, international dealmakers must simply accept the foreign system and learn to live with it.

In one deal that I worked on a few years ago, the selling shareholders in the U.S. agreed to sell and transfer their business to another U.S. buyer, but the business being sold was owned by a U.K. company and the sale took place in the form of Ordinary Shares (equivalent of Common Stock in the U.S.) in a private company registered under U.K. law. Although all of the deal documents were governed by Delaware law and drafted by competent U.S. lawyers, the principals neglected to involve U.K. counsel in an effort to reduce legal costs and the selling shareholders failed to follow the legally required mechanics of transferring U.K. shares, which involves many formalities, documents and public filings. What is worse, the U.S. sellers gave lengthy representations and warranties regarding the validity and effect of the share transfer at the closing, which were all instantly violated upon closing because they failed to observe any of the local requirements of selling and transferring shares in an U.K. company. I became involved a year later, when the U.S. sellers were grappling with some prohibitive U.K. and U.S. taxes resulting from their purported sale of shares, and discovered that those U.K. shares were never transferred to the buyer in the first place. Due to the lack of effective transfer, the U.S. sellers not only continued to own the business that they intended to sell but also breached the sale and purchase agreement with the buyer and committed material misrepresentation.

It is not uncommon to use U.S. style acquisition agreements governed under U.S. law to sell a business or assets located overseas. In fact, this approach is my preferred method of doing cross-border deals because U.S. law is relatively well-developed when it comes to M&A matters, and while I do everything I can as an attorney to avoid litigation, I do acknowledge that there is one upside in U.S. litigation: Due to persistent and frequent litigation in the U.S., there are a lot of legal precedents upon which sellers and buyers can rely and look to for legal guidance when planning, structuring and managing the deal process. What is often missed, however, is that the implementation of those deals involving non-U.S. businesses and assets, even if negotiated between U.S. parties and governed by an U.S. acquisition agreement, must be done pursuant to non-U.S. laws and practices, and tight coordination between the U.S. agreement and the non-U.S. implementation will be essential.

To sum up, business has always been global, and concomitantly, the art of deal making in the selling and buying of those businesses has become necessarily global as well. As an international deal lawyer, my objective is always to understand the rules of the game and win for my clients. Sometimes those rules are not what we know to be familiar in the U.S., and in representing U.S. sellers in a transaction with a non-U.S. buyer or in soliciting investment from foreign sources for U.S.-based startups, it is incumbent on me to study and learn how to play a different game that may be uncharted territory for me. Nonetheless, I will immerse myself in the law and rules of the non-U.S. jurisdiction, and while it is helpful at times to compare how deals are done outside of the U.S. to how deals are done here in the U.S., I have found it to be more productive and effective to simply embrace the non-U.S. legal standards and rules. In this article, I have broadly highlighted a couple of the legal risks for U.S. entrepreneurs to consider when selling to a foreign buyer or accepting foreign financing, but obviously there are many more traps for the unwary and the risks and examples that I raise in this article represent only the tip of the iceberg. While the world is full of opportunities, it is important for any U.S. entrepreneur to seek international legal, tax and financial advice when contemplating a sale to or taking investment from a non-U.S. buyer or investor.

[1] Societe Civile Succession Richard Guino v. Redstar Corp., 153 Cal. App. 4th 697, July 24, 2007.

[2] The famous case of the plaintiff who sued McDonalds over hot coffee and won a verdict of $2.9 million has captured the attention of many around the world. See e.g. A Matter of Degree: How a Jury Decided That a Coffee Spill is Worth $2.9 Million, The Wall Street Journal, September 1, 1994.

[3] See e.g. Cornerstone Research, Shareholder Litigation Involving Mergers & Acquisitions: Review of 2013 M&A Litigation,

[4] Busse v. United Panam Financial Corp., 222 Cal. App. 4th 1028 (Cal. App. 2014).

[5] Claudia Muller, The Siemens/BenQ Decision Revisited, German Labor and Employment News, Jones Day, 2010.

Nancy Yamaguchi, Partner

Full Biography

Nancy Yamaguchi, a partner in the San Francisco office of Withers Bergman, focuses her practice on cross-border mergers and acquisitions, venture capital financings and joint ventures involving technology companies, in particular those in the semiconductor, Internet and enterprise software industries. She assists US, EU and Japanese companies in strategic acquisitions, investments and all aspects of business and operations around the world.

Nancy was formerly director of M&A for a public company and chief legal officer for a technology company based in California. Having had many years of business experience, Nancy is able to provide customized legal advice and negotiate transactions that are specific and relevant to the technology industry. She also handles technology transactions, including technology and content license agreements, manufacturing services agreements and other supply chain agreements, and joint development or R&D agreements.

Withers LLP

Withers LLP is an international law firm dedicated to entrepreneurs, investors, successful people and their businesses.

With over 110 partners and more than 300 other lawyers, the firm has unparalleled expertise in corporate, securities, commercial, tax, trusts, estate planning, financial services, litigation and arbitration, real estate, charities, employment, family law and other legal issues facing businesses, investors, individuals and their families. The firm has advised 36% of the top 100 UK Sunday Times Rich List and over 20% of the top 100 US Forbes list, as well as numerous families in Asia.

Withers has offices worldwide in London, New York, New Haven, Greenwich (Connecticut), San Francisco, the British Virgin Islands, Hong Kong, Singapore, Sydney, Geneva, Zurich, Milan and Padua.

Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances, and reflects personal views of the author and not necessarily those of their firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from Withers Bergman. This work reflects the law at the time of writing in February 2015.

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