The Firm

Show Timings:

Friday: 10.30 pm, Saturday: 11.30 am

Sunday: 9:30am & 11.00pm


Cross-Border M&A: Different Trees In Different Forests

Published on Fri, Mar 14,2014 | 14:12, Updated at Fri, Mar 14 at 14:12Source : 

By: Adam Emmerich, Partner, Wachtell Lipton

More than 30% of global M&A in 2013 involved acquirors and targets in different countries, including US$135 billion of acquisitions in the U.S. by non-U.S. acquirors.  Cross-border M&A involving emerging economy acquirors is an increasingly significant part of this picture, having grown from approximately US$100 billion to US$140 billion over the last five years, with the percentage of acquisitions by emerging economy acquirors in the U.S. exceeding 15% in 2013.
Indian acquirors have become prominent players on the cross-border M&A scene, with overall outbound Indian deal activity exceeding US$10 billion in 2013.  Noteworthy deals involving Indian acquirors and foreign targets over the last decade have included Adani Enterprises’ acquisition of the Abbot Point Coal Terminal in Australia, Lodha Group’s acquisition of MacDonald House in the U.K. and Piramal Healthcare’s acquisition of Decision Resources Group in the U.S., not to mention blockbuster deals like Tata’s acquisitions of Jaguar Land Rover and Corus, Aditya Birla’s acquisition of Novelis, Bharti Airtel’s megadeal for Zain in Africa, and the globalization of such originally Indian groups as Arcelor Mittal.  This trend has extended into the U.S. market, where acquisitions of U.S. companies by Indian acquirors totaled US$3.1 billion in 2013, up from US$270 million in 2009.  As India and its companies continue to grow and globalize, we expect these trends to continue. 

U.S. deal markets are relatively hospitable to Indian acquirors and investors.  With careful advance preparation, strategic implementation and sophisticated deal structures that anticipate likely concerns, most Indian acquisitions into the U.S. can be successfully achieved.  That said, while there are a great many seeming similarities between the regulation of publicly traded companies and takeovers in India and in the U.S., the differences also run very deep, and Indian acquirers considering deal activity in the U.S. need to understand the very different landscape that exits in U.S., as compared to India if a sort of “Lost in Translation” phenomena is to be avoided.  (And the reverse being equally true, of course, as we are constantly reminding our own clients in the U.S.)

One of the great temptations for practitioners of M&A – as with any specialist – is to become so expert in the leaves on the trees in the forest as to confuse stepping back and taking in the landscape as a whole with taking a look at a big tree, but still missing the forest.  Specialists in M&A – in my experience a reasonably bright lot, working in a highly technical and heavily regulated area – are as prone to this failing as anyone, and precisely because of many of the things that make us good lawyers, and make the area so interesting and complicated.

No proper understanding of a system of M&A regulation can begin without taking account of the overall structure of the economy in which a particular M&A deal is taking place, including especially the role of the state, the rights of labor, social and political attitudes toward property and debt, and the nature and ownership of publicly traded companies.  Only once all of the crucial background against which M&A and investment in public companies takes place has been thoroughly understood can M&A rules and regulations be sensibly compared across jurisdictions and practitioners in one place hope to learn anything interesting from practitioners somewhere else, or assist in successfully assisting a client hoping to make a cross-border acquisition.
The specifics and details of U.S. M&A regulation and customary practices are well developed, as one would expect in an economy marked by a high level of deal activity, and in which the vast majority of public companies are widely held and do not have a controlling shareholder, or even a large inside shareholder or promoter.  If there is one key underlying aspect of the U.S. M&A market and system that must be understood in the context of any planned M&A activity – whether the acquisition of a public company in its entirety or a strategic investment in one – it is simply that profile, of the ownership profile of U.S. public companies, the nature of their shareholders, and the attitude of those shareholders to their holdings in such companies.  In many U.S. companies the top 10 shareholders will all be large fund managers, with hundreds of billions or trillions of dollars under management, who will collectively control between 30 and 50% of the outstanding equity of the company, but which will in each case represent only a tiny fraction of their assets under management, which will be invested in literally thousands of “names,” as the investee companies are known.  Generally, none of the shareholders will take any special responsibility for the management or supervision of the investee company, will not be represented in the boardroom, and will generally be amenable to a change-in-control transaction at a premium to prevailing market prices.
Whether because of this different complexion of the ownership of public companies in the U.S. or otherwise, the U.S. M&A regulatory framework differs significantly from other takeover regimes with which Indian companies may be more familiar, including not only the Indian regime, but also those in other economies with large public company sectors and common-law systems. 

To take but a few of the examples, a complete catalogue and description of which would far exceed both a reader’s patience and the space allotted in this column, would-be offerors in the U.S. are entirely free to publicly express their interest in a potential transaction whether or not they have the funds available to do the deal, and can do so for an indefinite period of time without being subject to any requirement to launch an actual bid.  There is no sort of “put up or shut up” rule, and would-be acquirors thus have a great degree of flexibility in determining when and whether to commence an offer, even if sabre rattling or specific public disclosure of an interest in making an offer has been made. 

Similarly, there are generally no price requirements in relation to prior share purchases or trading prices in connection with proposed or agreed transactions, regardless of the method by which they are effected, including by tender offer, and would-be acquirors are quite free to make pre-bid acquisitions of shares in public or private transactions, and are under no obligation to disclose their intention of making a bid in connection with any such purchases, if that intention has not yet been publicly disclosed.  (Third parties who learn of a possible bid which has been publicly disclosed, by contrast, would be advised to avoid using that information to engage in market transactions, which would generally be prohibited insider trading, carrying very severe penalties of imprisonment.)  In the context of an actual tender offer, acquisitions by the bidder outside of or during the offer are prohibited and all tendering shareholders must receive the same “best” price offered to any individual shareholder, only at the end of the offer period, but during which they will have been free to withdraw any tendered shares if they choose to or another more favorable bid comes along. 
Secrecy requirements are also not a feature of the U.S. system.  Subject only to the risk of a leak and its impact on the market in the target company’s shares, a would-be bidder can share its plans with any number of potential co-bidders, financings sources or others without being under any obligation to make a public announcement or inform the target company or any regulatory authority.

Takeover defense is also alive and well in the United States.  In the context of an actual or proposed bid, there is no blanket prohibition on frustrating action or other actions that might be characterized as defensive, nor any strict legal requirement that bidders be provided with equality of information or access, although such matters are regulated by a regime of state-law fiduciary duties and judicial review, under the general rubric of a board of directors being obligated to maximize in the context of a sale transaction and only taking defensive action that is “reasonable” in relation to the threat posed.  This places a huge amount of flexibility in the hands of boards of public companies in responding to bids, and in running processes involving the sale or merger of, or strategic investment, a company.
Equally, in the context of agreed transactions, permissible deal protection structures, pricing requirements and defensive measures available to U.S. companies also differ in many ways from other regimes.  Substantial break-up fees in the range of 2-4% are near-universal in negotiated transactions.  Protections such as reverse termination fees are also commonly-negotiated terms, as are a board range of conditions, including relating to the availability of financing, as there is no prohibition on an agreed transaction being subject to conditions, including as to financing, which may not have been committed prior to the announcement of the proposed transaction, and need not be available without contingencies (or even committed at all). 

Perhaps because of the lack of controlled companies (including of the pyramid variety so common in parts of continental Europe, which are virtually unknown in the U.S.), the U.S. takeover scene also does not include mandatory bid or open offer requirements common in many parts of the world.  As a result, acquisitions of stock positions in public companies by private equity funds or other investors are common at all levels of ownership, from non-controlling “toehold” positions up through very substantial positions of 30% or more.  Generally such transactions are effected on a negotiated, consensual basis, with protection for public or minority shareholders on an agreed basis, rather than being provided by a mandatory bid regime.  These agreed provisions often include privately negotiated limits on increasing ownership beyond a certain level (oftentimes in the neighborhood of the initial investment) or doing so only on the basis of an offer for all shares, with the permission of a special committee of independent directors, and/or with the blessing of a majority of unaffiliated shareholders.  Also present is an underpinning of certain state corporate law doctrines regulating the fairness of transactions between a controlled company and its shareholders also affording protection to the remaining public shareholders. 

Such block investment transactions will generally require shareholder approval only if 20% or more of the company’s already outstanding shares are to be issued in the transaction.  The same shareholder approval requirement is applicable in stock-for-stock transactions, which and only acquisition transactions involving the issuance of stock in excess of such threshold will generally require shareholder approval, regardless of size. If a company with a market capitalization of just over US$10 billion wishes to effect a purchase for US$2 billion in newly issued stock and US$10 billion in cash, all borrowed, no approval whatsoever of the buyer’s shareholders is required. 

Unsolicited acquisitions of large block positions by activist shareholders, often below 10%, but sometimes of much larger positions, are also common, and generally are made as a part of an investor’s strategy of effecting change in a public company, including in board composition, management or financial or business strategy.  In this connection, U.S. federal securities laws impose certain disclosure obligations on acquisitions of positions of 5% or more in public companies, under Rule 13D, and also contain so called “short-swing” profit recapture provisions on shareholders at the 10% level and above, under Section 16.  On a broader basis, given the lack of controlling shareholders in most U.S. public companies, the overwhelming institutional ownership of such companies, and the attitudes of the institutions to investee companies, such activism is very favorably received in the U.S. and has attracted a great deal of investment capital, and worked major changes in the relationship between companies and their shareholders.
On the front of transactional mechanics and terms, unlike in India and Europe, statutory mergers, including so-called triangular mergers, have long been common in the U.S., and allow for transactions in which a wide variety of forms of consideration can be offered to acquire shares, with great flexibility, including in cross-border transactions, which are freely allowed.  Active, direct negotiation between the acquirer and the target company in respect of transaction terms is the norm, and most transactions in the U.S. are effected pursuant to a negotiated merger agreement, even in cases where there may have initially been an unsolicited bid.  Requisite shareholder acceptance or approval of a proposed or agreed transaction can be pursued through either a tender offer or through a shareholder vote.  In either case, a very comprehensive disclosure document will be provided to target company shareholders, in accordance with U.S. federal securities laws.  At the same time, merger agreements are regulated by state law (usually Delaware), which provides an important set of additional rules and substantive law. 

So-called class action litigation is also a major feature of U.S. M&A transactions.  Virtually every transaction involving a public company will be met by the filing of lawsuits – almost always more than one, oftentimes five or ten – challenging the decision of the board to engage the transaction, the result obtained on behalf of shareholders, and the disclosures made to shareholders in connection with the transaction.  While generally such lawsuits can be resolved at relatively modest cost in the context of the transaction at issue, there are exceptions and careful planning and management are required in this specialized and uniquely American area.
As with any system, ours in the U.S. seems familiar to those steeped in it on a daily basis, and may equally appear bizarre or capricious to those familiar with other systems that have developed along other lines.  Approached on a collaborative basis, however, cross-border M&A in general and into the U.S. in particular can be mastered by Indian groups which see business opportunity in globalization. 

Adam Emmerich & Somasekhar Sundaresan, J Sagar Associates are co-chairing a session on New Takeover Code 2011 – New Era Or Damp Squib? at the IBA M&A Conference in Mumbai, 21-22 March 2014



Copyright © Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of is prohibited.