Buyer Protections in Cross-border M&A

In a cross-border deal the buyer may be entering unfamiliar territory and dealing with parties of whose standing it cannot be confident. Protections can include the following.

Legal opinion

A legal opinion should be obtained on any overseas seller, target or other company involved in the transaction to confirm that the company:

• Is validly incorporated. 
• Remains in existence. 
• Has validly executed the relevant agreement. 
• Has power to execute the agreement, including necessary approvals and authorisations. 
• Will not be in breach of any local laws in complying with the terms of the agreement. 
• Will be bound by the agreement and that the agreement will be enforceable against it. 
• Will be bound by the choice of law in the agreement. 
• Is not insolvent.

Buyer's counsel will also want to consider:

• Whether the law firm giving the opinion has adequate profes¬sional indemnity insurance in the event that the opinion is given negligently. 
• By what limitations and assumptions the opinion is qualified and whether these diminish the value of the opinion. 
• To whom the opinion is to be addressed and who is entitled to rely on it.

"Buyer beware" and good faith

In common law jurisdictions, business buyers have limited statu¬tory or implied protection. The general presumption is one of "buyer beware", so the buyer must generally rely on those pro¬tections that have been expressly agreed. Extensive warranties and indemnities are therefore a common feature of acquisition documents governed by the laws of common law jurisdictions.

In contrast, in many civil law jurisdictions, parties are under a general obligation to act in good faith to each other. For the seller, this gives rise to an obligation to voluntarily and compre¬hensively disclose any problems affecting the target, whether or not called for by a warranty.

Warranties and indemnities

A warranty:

• Is an assurance by the seller as to a particular fact or state of affairs in relation to the target. 
• The remedy for a breach of warranty lies in damages. 
• For the buyer to bring a warranty claim it will have to show that the effect of the breach was to reduce the value of the target. 
• The buyer can generally not bring a warranty claim for a matter of which it was already aware, for example by the sellers disclo¬sure, before signing the sale agreement. 
• Despite a claim for breach of warranty, the buyer must take measures to mitigate its loss.

By contrast, an indemnity:

• Is a promise to reimburse the buyer for a particular liability, and is therefore a claim for a debt rather than in damages. 
• On breach of indemnity the buyer's obligation to mitigate loss is less clear. 
• Indemnities are generally used where the buyer had knowl¬edge of the matter before signing the sale agreement, and still wanted protection, or where a damages claim would not be an adequate remedy.

Escrow accounts

If the buyer has concerns as to the ability of the seller to pay in the event of a warranty or indemnity claim, retaining an amount of the purchase price in an escrow account should be con¬sidered. Similarly, in the event of deferred cash consideration being payable by the buyer, the seller may require such deferred consideration to be placed in an escrow account. In either case, it may be appropri¬ate for a neutral bank of international repute to act as escrow agent to hold such sums pursuant to an escrow agreement.

Parent company guarantees

If the target will be coming out of a larger group, there may be a parent company within that group with greater financial resources and standing than the seller that the buyer will seek to join in the SPA as guarantor of seller obligations. Similarly, in the event of deferred consideration payable by the buyer, the seller may require a guarantee from the buyer's holding company.

Warranty and indemnity insurance

In the case of purchases from individuals or institutions or where the seller covenant is not strong, warranty and indemnity liability insurance for the benefit of the buyer is becoming increasingly common.

Cash fee-debt free and closing accounts

Price is typically agreed on a debt free, cash free basis subject to an agreed level of normalised working capital being left in the business. This will necessitate a close examination of the target's latest management accounts leading up to a closing balance sheet and post-closing price adjustment.

Earn-out

To the extent any deferred consideration is to be calculated by reference to an earn-out or other financial formula, care should be taken in the context of a cross-border acquisition not only in prop-erly defining the formula itself, but also in reconciling any differing accounting treatments or policies which may apply across the relevant jurisdictions. Similar care should be taken to the extent of any closing balance sheet adjustment which may apply.

Resolution of disputes

Where there is concern as to the impartiality, delay or costs of the courts with closest nexus to the transaction, the parties may select (local law permitting) resolution of their disputes before the courts of another jurisdiction or by arbitration. Even where the courts of jurisdictions such as England are acknowledged as afford¬ing a reasonably quick and economic forum, the parties may still select arbitration to preserve confidentiality. A party with deep pockets may cynically opt for arbitration in the anticipation that, when confronted with the delay and cost of arbitration, the counterparty will be more likely to settle.

Agent for service of process

To minimise procedural and logistical difficulties, especially in cross-border transactions, it is common for sale agreements to require parties to irrevocably designate an agent (typically a law firm) on whom notice of legal proceedings can be served on their behalf and constitute valid service of process on that party.

This insight formed part of a larger article on "Structuring and managing cross-border private acquisitions", published in Practical Law.