In Part I of this post, we looked at the importance of considering foreign investment issues at an early stage in the due diligence process to guard against FI risks, including sanctions for breaching FI rules, onerous and lengthy reviews by FI authorities, and the imposition of remedies on the parties as a condition for clearance. In addition, the timeline, process, and conditions for fulfilling the requirements under FI rules need to be reflected in the transaction documents, specifically by means of conditions precedent.
In Part II of this post, we look at some of the other provisions that may need to be considered, and how they can be structured to provide legal protection and commercial comfort to the parties.
Long stop date: how long should it be?
Given the suspensory nature of many FI regimes, reviews can significantly impact the overall transaction timetable. In practice, the process can take several months (approximately 2-4 months in standard cases, or up to a year or even longer for the most complicated matters) and may extend far beyond other closing conditions (e.g. merger control approvals in no-overlap cases). In addition, FI reviews are generally less predictable, especially for deals in the most sensitive sectors, not least due to stop-the-clock information requests and internal delays at the FI authorities themselves. Also, external geopolitical developments may well play a role, and create sudden and unpredictable delays to the review process.
As a result, it is crucial that the long stop date is tailored to provide a sufficient cushion for FI clearances. Parties committed to going ahead with the deal may wish to give themselves additional options – where possible and feasible from an economic perspective – by building in some (mutual or unilateral) flexibility to the long stop date. This would typically enable it to be extended in specific circumstances – for instance, to accommodate for FI investigations continuing beyond the deal’s agreed long stop date due to unforeseen issues (i.e. those which are not identified in due diligence) or other factors outside of the parties’ control. Equally, there may be a need for some flexibility regarding the long stop date in case an FI regime becomes effective and applicable to the deal after signing the transaction.
Given the sometimes long review timetables, another option is to conduct the FI process prior to signing the main transaction documents. Most regulators accept filings on the basis of a term sheet or other document showing a good faith intention to enter into a deal. Given that FI filings are not made public by most regulators around the globe (contrary to the publicity which is usually attached to merger control filings), this allows parties to conduct the full review process prior to signing the main agreement.
Cooperation covenants: timely information-gathering is key to success
FI filings generally require the parties to provide an extensive amount of information to the relevant authorities. Notably, the FI review period does not typically start to run until a complete notification has been submitted, and information requests issued in certain jurisdictions may stop the review clock until the requested information has been provided. The expedient provision of complete information by the buyer and seller to the authority can, therefore, materially advance the transaction closing date.
To avoid delays, the parties can insert cooperation covenants into the transaction documents which clearly specify the types of actions (and timelines) that are required to be observed by each party, as a minimum, to satisfy FI conditions. In particular, given that FI reviews are largely target-focused (meaning that information is primarily requested from the target company), covenants obliging the seller to cooperate fully, and in a timely fashion, by providing all necessary information can prove particularly helpful to the buyer in limiting its exposure to potential sell-side delays or a lack of involvement.
In more high-profile cases, there is usually merit in involving the seller and target to a greater extent vis-à-vis the authority, including in explaining the benefits of the transaction for the further development of the target.
‘Hell or high water’ and ‘reverse break fee’ clauses: get protected from remedy risk!
Most transactions are cleared without corrective remedies. However, where FI authorities identify concerns, they have the power to impose onerous remedies on the buyer.
Remedies tend to be tailored to the specific concerns arising in a case, and can be structural (e.g. asset divestment) or behavioural (e.g. a requirement to continue with supply contracts, or an obligation that home nationals are appointed to the target board), with behavioural remedies being the measure of choice in most cases. Either way, remedies can impose material costs and may have a substantial impact on the value of the target company and the buyer’s post-transaction control over the target.
To deal with these challenges, it is crucial for the parties (and the buyer, in particular) to have as clear an understanding as possible with regard to which remedies would be acceptable to them, and to agree appropriate protections against the risk that remedies are imposed early in the process. The most common avenues for managing such risks are ‘hell or high water’ and ‘reverse break fee’ clauses.
- Hell or high water (HOHW)
As the burden of compliance with FI restrictions tends to fall on the buyer (as the notifying party), sellers are likely to push for a full-blown HOHW clause, which obliges the buyer to accept any and all remedies necessary to gain FI clearance, no matter the impact.
Inserting commitments that set out how much effort the buyer is required to expend to obtain the relevant FI approvals can provide some flexibility (e.g. ‘best efforts’, ‘reasonable best efforts’ or ‘commercially reasonable efforts’). Other buyer-friendly risk-shifting options include carve-outs for remedies which: (i) are unacceptable to the buyer (e.g. because they would interfere with important governance rights or the commercial logic of the deal); (ii) have a material adverse impact on the target (noting however that quantifying such an impact may prove to be challenging in the FI context); or (iii) are not limited to the target company (but extend to other businesses of the buyer, which is a standard limitation in private equity deals and usually unproblematic from an FI perspective).
- Reverse break fee
We are increasingly seeing parties negotiate a reverse break fee, namely a fee paid by the buyer in the event that the transaction does not close due to a failure to obtain FI clearance. A hefty reverse break fee can keep the buyer on its toes and ensure that it honours the FI conditions. At the same time, it guarantees the seller compensation for the time and expense it has incurred during the course of the transaction. Whereas a lot will depend on the circumstances of each transaction and on the negotiating power of the parties, typically, the broader the remedy carve-outs a seller has agreed to, the more inclined the seller will be to push for a higher reverse break fee.
Withdrawing filings prior to prohibition
Another provision that we are increasingly seeing is a unilateral right for the buyer to pull a filing when a prohibition becomes very likely. The buyer may want this provision to avoid the negative publicity associated with a prohibition, and also because of the potential negative impacts on its future transactions. A consideration in this context is that it is often not sufficient to simply pull a filing – for example, if the parties have a notarised SPA, there may also be a requirement to have a notarised withdrawal agreement. In the United States, for example, more transactions are abandoned by the parties in the face of CFIUS objections than are formally blocked by the President, or subject to formal orders or agreements forcing divestment of US acquisitions. Even in these ‘soft block’ scenarios, however, CFIUS requires proof that the transaction has been formally terminated. In some countries, there have been instances where the authority was unsure about the legal quality of the withdrawal and issued a ‘declaratory’ prohibition as a ‘safety measure’.
Lessons for dealmakers: anticipate and manage potential FI risks in M&A
The increasing number and complexity of FI regimes is certain to remain a challenge for both buyers and sellers. To navigate through this fast-moving environment, parties will need to focus on FI early in the due diligence process and ensure that the transaction documentation accommodates sufficient timing for the satisfaction of FI conditions and clearly documents the extent of the parties’ respective obligations.
For further information, please contact:
Christoph Barth, Partner, Linklaters
christoph.barth@linklaters.com
