TerraLex Cross-Border Guide to Cross-Border Merger & Acquisition Guide

In general, there are no absolute restrictions on foreign investment. However, the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) gives broad authority to the U.S. government to review, and to prohibit or limit, investments by a foreign investor if the investment may affect national security. The Committee on Foreign Investment in the United States (CFIUS), an interagency committee of the U.S. government, has responsibility for reviewing such investments and to either approve the investment, propose steps to mitigate national security risk, or prohibit or unwind the investment. On February 13, 2020, final regulations to implement FIRMA will become effective.

CFIUS has jurisdiction over (i) transactions by or with a foreign person that could result in foreign control of any U.S. business, (ii) non-passive minority investments involving critical technologies, (iii) non-passive minority investments involving the sensitive personal data of U.S. citizens, and (iv) purchases, leases, or concessions of U.S. real estate near sensitive facilities.

A mandatory filing with CFIUS is required for (i) the acquisition of a 49% or greater interest in a U.S. business involved with critical technologies, critical infrastructure, or sensitive personal data of U.S. citizens by a foreign person in which a foreign government has a 25% or greater interest, and (ii) the non-passive minority investment by a foreign person in a U.S. business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies that are used in certain industries.

In addition, voluntary filings are permitted pursuant to which parties involved in transactions may obtain clearance of the transaction by filing a notice with CFIUS. If a voluntary notice is not submitted, CFIUS can investigate a transaction and block it or unwind it.

The rules and regulations that implement FIRRMA are very complicated and new regulations are expected to be issued over time.

There are no exchange control or currency regulations, except for those relating to money laundering.

There is a wide range of financial incentives available in the U.S. to support private sector investment by foreign and domestic investors. Financial incentives can cover capital expenditure, job creation, research and development, and energy projects. Typically, the financial incentives are provided by state and local (not the federal) government and are in the form of tax relief, job training, and infrastructure improvement grants and financing assistance.

Generally, employees are not entitled to management representation or to prior notification or consultation with respect to corporate transactions. A contract between a company and a labor union that represents some of its employees could provide the union with the right to prior notification and/or consultation. Federal law may require that an employer bargaining with the union about the effects of the transaction even if the union has no rights concerning the transaction itself.

Typically, employment is an “at will” arrangement between the employer and the employee and may be terminated by either party with or without notice or cause, provided that an employer may not terminate an employee if the reason for the termination is unlawful. Under federal law, an employer is prohibited from terminating an employee based on the race, color, religion, national origin, sex, age, or disability of the employee or in retaliation for certain legally-protected acts. Many states provide employees with additional protections.

The “at will” arrangement between an employee and an employer can be changed by contract. An individual employment contract or a collective bargaining agreement may limit the circumstances under which employment may be terminated or may provide for the payment of a severance benefit to the employee if the employee is terminated without cause. Employer severance policies (which have the force of a contractual commitment) also provide for severance benefits to the employee for a no-cause termination. In addition, many fixed term employment contracts permit the employer to terminate the employment arrangement without cause by paying the employee the contractual compensation for the remainder of the employment term.

The federal Worker Adjustment and Retraining Notification Act (WARN Act) requires that most employers with 100 or more full-time employees provide notification 60 calendar days in advance of plant closings and mass layoffs. An employer who fails to give the required 60 day advance notice may be liable to the affected employees for their regular wages and benefits during that portion of the required 60 day notice period for which the employees did not receive advance notice. Civil penalties also may be assessed. Some states have adopted legislation similar to the federal WARN Act that provides employees with additional protections. For example, these statutes may apply to employers with fewer than 100 employees, may have less stringent definitions of plant closings and mass layoffs, or may require longer notice periods than the federal law.

For unionized work forces, the collective bargaining agreements typically include contractual provisions regarding redundancies and layoffs.

Generally, there are no federal or state stamp duties, sales or excise taxes on the sale or issuance of shares. The State of New York has a stock transfer tax, but it is subject to a rebate of 100% of the tax. Many states impose sales, transfer, or excise taxes on certain transfers of certain types of assets. Some states impose these asset transfer taxes on the “deemed transfer” of real estate assets that occurs when there is a change in control of a corporation or other legal entity. In addition, under the Foreign Investment in Real Property Tax Act (FIRPTA), there is a federal withholding tax on the transfer of “U.S. Real Property Interests” (which may include certain share transfers) by foreign individuals and entities. Also, transfers by foreign individuals and entities of interests in an entity taxed as a partnership are subject to United States federal income tax withholding if such entity conducts a trade or business within the U.S.

Under the Hart-Scott-Rodino Act (HSR Act), generally, a pre-merger notification must be filed in any transaction in which both the “size of the person” test and the “size of the transaction” test are met. These tests are indexed to the U.S. gross national product and change annually. The next annual adjustment is expected in the first quarter of 2020.

As of April 3, 2019, the "size-of-person" test requires, generally, that at least one party has total assets or annual sales of at least US$180 million, and another party has total assets or annual sales of at least US$18 million. The "size of the transaction" test is satisfied by transactions in which the value of the voting securities or assets to be held as a result of the transaction exceeds US$90 million.

Transactions that result in holdings valued in excess of US$359.9 million are reportable, irrespective of the "size of the person" test (unless an exemption applies).

Both the “size of the person” test and the “size of the transaction” test take into account the size and holdings of the parties to the transaction as well as those of their commonly controlled affiliates and the “size of the transaction” test aggregates the value of the assets or securities transferred in the instant transaction with those transferred in previous transactions that are still held by the acquirer and its commonly controlled affiliates.

It should be noted that transactions below the filing thresholds are still subject to review by governmental authorities under the horizontal merger guidelines.

For transactions that satisfy the thresholds, notification is mandatory. The parties may not close the transaction until the waiting period has expired, or the government has granted early termination of the waiting period. Failure to file a pre-merger notification is subject to a civil penalty of up to US$42,530 per day, starting from the day the transaction closes in violation of the HSR Act and ending on the day the waiting period expires after a filing is made.

The fee for filing a pre-merger notification is as follows: US$45,000 for transactions valued at less than US$180 million; US$125,000 for transactions valued at US$180 million or greater but less than US$899.8 million; and US$280,000 for transactions valued at US$899.8 million or more.

Documents commonly produced and executed at signing meetings include the acquisition agreement and a disclosure document. Documents commonly produced and executed at closing meetings include: officers’ certificates from each party certifying that the transaction has been approved by requisite corporate action, that its representations remain true, and that it has complied with its covenants; stock or personal property, real property, and intellectual property, as applicable, transfer documents; resignation letters for the target’s officers and directors (if required); new employment agreements for retained officers and key employees of the target; ancillary agreements such as transition services agreements, escrow agreements, and commercial agreements; a representation and warranty insurance policy; a funds flow memorandum; and payment of cash consideration by fund transfers through the Federal Reserve Wire Network.

If there are many stockholders of the target, to avoid the need to have all stockholders sign the acquisition agreement, corporate acquisitions frequently are structured as a merger of the target with a subsidiary of the acquirer formed for the purpose of the transaction. In these cases, the merger must be approved by the requisite vote of the target’s stockholders, the acquisition is consummated by the filing of a corporate document with a public official of the applicable state or states and the target’s stockholders are paid the consideration when they tender the documents set forth in a letter of instruction provided to them by the acquirer or by a paying agent retained by the acquirer.

There is no legal requirement for a gap between signing and closing a transaction. Practically, many transactions require a gap in order to obtain stockholder or regulatory or other third party approvals or consents, and some transactions require a gap in order for the buyer to obtain financing. With respect to transactions that are subject to the HSR Act notification, in the notification document the parties must attest that a contract, agreement in principle or letter of intent to merge or acquire has been executed and that they have a good faith intention to complete the transaction.

There are no legal requirements for deposit monies or third party intermediaries.

Parties that are entities normally provide a certificate signed by an officer of the entity, attaching a certified copy of the resolutions approving the transaction and authorizing designated officers to execute the documents on behalf of the entity. The certificate often includes certification of the incumbency of the officers executing the documents and of the genuineness of their signatures. Banks frequently require proof of identity and have specimen signatures of officers authorized to conduct banking transactions.

The laws of the state of an entity’s formation determine the execution formalities. Generally, certain legal documents must be executed before a witness and certain others must be executed before a notary. Notarization typically is required only for M&A related documents that will be filed in a public record or with a governmental agency.

Although the corporate laws in the U.S. vary from state to state, generally, documents are executed on behalf of a corporation by those of its officers who have been authorized to do so. Such authorization may be provided for in the corporation’s charter or bylaws or by resolution of its board of directors or a committee thereof. Typically, simple contracts may be executed by a single corporate officer. In many states, corporate documents that will be recorded in a public record, including certain corporate documents that frequently are used in M&A transactions, must be signed in the presence of a notary.

Written documents must be signed by the the individuals who (and entities that) are parties thereto. In many states, documents that will be recorded in a public record, including documents that frequently are used in M&A transactions, must be signed in the presence of a notary.

Neither federal or state law require a foreign company to execute documents with a different level of formality than that required for a domestic company. However, the requirements of the jurisdiction of the foreign company will apply.

A notary public is an individual appointed by a state to act as an official witness to the execution of documents and to take oaths, especially those that are required in connection with the formal execution of certain documents. Certain legal documents executed in M&A transactions, such as deeds, must be executed in the presence of a notary.

A notary public cannot change the terms of a deal.

The fees of a notary public are nominal.

Most law firms have members of their staff who are notaries public and available to notarize documents that require notarization. The only time that a notarization requirement can be problematic is when one of the parties to a document requiring notarization is not present and is not otherwise able to execute the document before a notary public.

There are no taxes payable to change stockholders, officers, or directors.

In a stock transfer, certificated shares are transferred by the transferor executing a share transfer document such as a stock power or by endorsement of the stock certificate, presenting the stock certificate and the executed stock transfer document to the corporation, entering the stock transfer in the corporation’s stock ledger, and issuing a new stock certificate for the transferred shares in the name of the purchaser. If the original stock certificate is lost, the corporation may require a certification of the loss by and indemnification from the transferor.

In a merger, title to shares is transferred by operation of law after approval of the merger by the required stockholder vote and the filing of a certificate of merger with the applicable state(s). Best practices, however, require stockholders to exchange their share certificates for the merger consideration.

Limited liability company and partnership interests are often uncertificated and are transferred by the transferor executing an assignment document.

Yes, both individuals and corporations may appoint attorneys-in-fact to sign documents on their behalf. Generally, the power of attorney must be executed with at least the same level of formality that is required of the document that the attorney is being empowered to sign.

The powers of the attorney-in-fact are as broad as provided in the power of attorney document.

The federal Electronic Signatures in Global and National Commerce Act and the Uniform Electronic Transactions Act which has been adopted by most states (and the few that haven’t, have adopted similar statutes), provide that digital signatures are binding and enforceable. As such, they are admissible in court.

The federal Electronic Signatures in Global and National Commerce Act and the Uniform Electronic Transactions Act which has been adopted by most states (and the few that haven’t, have adopted similar statutes), provide that digital signatures are binding and enforceable. As such, they are admissible in court.

Documents may be executed in counterparts and the counterparts will be taken together as evidence of the agreement.

A lawyer can execute undertakings that impose independent obligations on the lawyer. Typically, such undertakings are to hold funds or documents “in escrow” for delivery upon the occurrence of certain specified events. Escrow undertakings by lawyers are strictly enforced and sanctions for breach of such undertakings are severe and include disbarment. The state agency that regulates lawyers in that state frequently has strict rules regarding what a lawyer must do with funds held in escrow and requires periodic reports from lawyers certifying compliance with those rules.

Such a mechanism can be structured as a “condition precedent” or a “condition subsequent.” If structured as a condition precedent, the closing does not occur until after the condition has been satisfied. If structured as a condition subsequent, the closing occurs at a time specified but will be rescinded if the condition is not satisfied by a specified later time. Closings employing conditions subsequent usually are conducted in escrow.

The stock certificate representing the transferred shares, together with the executed share transfer document, is presented to the corporation, the share transfer is recorded in the corporation’s stock ledger, and a new stock certificate for the shares is issued in the name of the purchaser.

In M&A transactions, the parties typically are content to rely on the representations of the other parties regarding due execution. Financial institutions providing financing for the acquisition, however, typically require legal opinions. Many associations of lawyers (e.g. the American Bar Association and the bar associations of many states and cities) have adopted model forms of legal opinions. These model opinions do not have legal effect but are intended to represent a fair balance of the interests of the lawyer who is giving the opinion and the recipient of the opinion.

Generally, there is no difference in the timetable for a share sale, a merger, or an asset sale. The structure of the transaction may implicate the level of stockholder involvement, which could affect the timetable. Factors that typically prolong the time until the acquisition agreement is signed include the level of due diligence required, the availability of due diligence materials, whether unexpected issues are raised in the due diligence process, the complexity of the business being sold, the number of ancillary agreements, and the negotiating behavior of the parties. Factors that prolong the time between signing the acquisition agreement and closing include the types and number of stockholders, required stockholder approval, required regulatory approvals, and required third party approvals.

The enforceability of non-competes incident to a sale transaction varies by state. However, non-competes incident to a sale are more likely to be enforced than those incident to employment. Generally, courts in all states evaluate non-competes based on a reasonableness standard. Courts assess the reasonableness of the market scope of the restriction, geographic scope of the restriction, and duration of the restriction, all in terms of whether they are reasonably necessary to protect the legitimate business interests of the buyer arising from the buyer’s purchase of the business. In addition, some states require adequate consideration for the non-compete (in addition to the purchase price, particularly for individuals who are not receiving a portion of the purchase price), require the non-competes not to interfere with the public interest, and/or apply a balancing of the equities test. If a non-compete is found to be overly broad, some states (i) may strike provisions determined to be unenforceable but enforce the others, (ii) may rewrite provisions they consider overly broad (such as reduce the duration) but enforce the others, or (iii) strike the entire non-compete. In light of the scrutiny applied to non-competes, non-compete covenants and agreements should be carefully drafted and customized for each person based on the applicable state law in order to withstand what will be a fact intensive analysis if their enforceability is challenged.