Treasury Today Country Profiles in association with Citi

M&A and the law

Shelf full of law books

As the number and value of M&A deals in and out of Asia rises, so the number of failed deals rises too. A strong legal team is essential to help ensure the success of a sale or purchase. We talk to Norton Rose Fulbright, an international law firm with a strong regional presence.

The notable uptick in mergers and acquisitions (M&A) activity for both volume and value of deals in the Asia Pacific region in the last couple of years has shown no sign of a let-up so far in 2015. Dealogic’s ‘M&A Review Full Year 2014’ reports that as global M&A volume reached $3.60trn in 2014, up 26% year‐on‐year (from $2.85trn) the figures for Asia Pacific show a market very much alive - with the region’s overall figure realising a targeted M&A volume of $656.8bn; the highest total on record.

The region’s FI sector, driven by increasing regulatory change, depressed prices and stockpiled corporate cash, has seen many opportunistic acquisitions, says Emma de Ronde, Partner and corporate lawyer for Norton Rose Fulbright Hong Kong. The technology and media sectors too have been particularly busy with mergers. “We’re also seeing more China outbound deals, coming into Hong Kong and increasingly across the region,” she reports. The private equity (PE) space in the region has been notably active too as the larger PE players have found it easier to raise funds in recent months with a lot of this cash targeting Chinese offshore investors, further fuelling the level of M&A activity.

Although large corporates and PE firms with strategic or corporate development teams focusing on M&A will typically monitor a particular sector or competitor for months or even years before making a move, firms without such a focus will likely operate within a much tighter timeframe. But in each case the moment has to be timed just right.

The point at which legal advice is required will vary from deal to deal, but in the interests of not incurring fees unless there is a good chance of a deal proceeding, usually this will happen after a buyer has identified a target and already undertaken some analysis or, for the seller, the formal process of acquisition has commenced.

Mistakes to avoid

The complexity of international commercial law is such that it requires expertise not just to get the best deal but also to avoid making potentially costly mistakes. A frequent error of judgement is to try to iron out contractual details of a merger before legal counsel has had a chance to advise on suitability. “Not involving counsel early enough can mean issues are not raised in good time which can lead to later difficulties,” states de Ronde. Clients are understandably reluctant to incur legal fees before they know they have got a commercially viable deal in place, but agreeing to any commercial or legal terms without legal advice could ultimately prove more costly.

It is often the case that once a client has sent a set of pre-agreed terms to its lawyers, it then falls to the lawyers to point out the consequences of going ahead under such terms and even try to extract the client from unfavourable agreements. Although these may not necessarily be legally binding, the client may find it very difficult to change what has been agreed because contract completion may be based on a ‘good faith’ obligation to stick to what has been agreed.

With this in mind, some companies may be comfortable tackling the preparation of key high-level commercial terms and only bring in legal counsel when they want to document what has been agreed commercially; for others there may be a need to consult at an earlier stage, particularly if there are complex structuring, legal, regulatory or taxation issues, or if there is a cross-border element to contend with, explains de Ronde.

Of course, each deal will have its own legal peculiarities but there will be some commonalities too, notably in terms of structuring a deal from a due diligence perspective. There will be an initial investigation of the scope of the business being bought or sold, looking at areas such as ownership, how the sale will take place and the regulatory requirements that must be met to enable the sale to go ahead. The target business will be subject to commercial and legal due diligence, typically including considerations such as its financials, business model, existing legal contracts (with key suppliers and customers, for example), employee and pension issues, Intellectual Property rights and, increasingly, any anti-bribery and corruption issues. The latter, notes de Ronde, is a big issue in Asia right now, especially in China. Once these point have been satisfied, the preparation of documents may commence.

In addition to the sale and purchase agreement, other documentation may include the acquisition financing agreement with banking partners, and perhaps a transitional service agreement where the seller provides services to the buyer, post-sale, for an agreed period. The final stage for counsel would be signing and completion. “Often there will be a gap between agreeing terms and completion where there may be a series of further external conditions that must be satisfied,” notes de Ronde. “These may be regulatory; for example, we might need to make Merger Control filings if there are competition or anti-trust issues, or there may be conditions specifically related to the business that need to be resolved; a financial services business, for example, may require prudential regulatory approval for the sale to go ahead.” Satisfaction of all conditions should lead to completion of the transaction at which stage counsel can advise on the mechanics of the transfer, guiding the new owner through a number of responsibilities it now has around filings, registrations, how it implements its own governance structure within the new business and so on.

Most developed jurisdictions with stock exchanges will have separate rules that apply to the acquisition of a listed company, notes de Ronde. The Hong Kong Takeovers Code, for example, is regulated by the local Securities and Futures Commission which governs the terms under which a buyer can acquire a listed company. It covers aspects such as the timing of the transaction, what has to be documented, and what can and can’t be said to shareholders pre-sale. In addition to Takeover Code rules there are controls on insider dealing and market abuse issues that must be adhered to.

From a practical point of view, although subject to strict regulatory controls, it is common for public transactions to involve less in the way of due diligence simply because a lot of information is publicly available. Buyers (actual or potential) are usually encouraged to find this information for themselves (although de Ronde notes that some target companies will open up their books for inspection). The process is far from straight forward though, the diversity of legal systems found in Asia often presenting issues for cross-border mergers. “On private deals, where parties are in different jurisdictions, each side will typically want to use the law of its own jurisdiction as governing law,” notes de Ronde. Some jurisdictions might dictate the applicable governing law for transfer of a particular asset, so it is essential to be aware of local rules.

A sticky situation

However, it is when a deal takes a turn for the worse that the real “hot debate” starts. It can be a major challenge to agree which jurisdiction will hear a claim; although arbitration is increasingly used in preference to the court system, even this raises a question of where arbitration will be heard and under which arbitration rules. It is strongly recommended that dispute resolution is tackled and finalised in the initial contract phase.

One aspect of M&A that is perhaps “more art than science” is the management of relationships where cross-border deals are subject to clashes of culture. It is, notes de Ronde, sometimes the case where one party expects a deal to be done in a certain way that may not accord with the counterparty’s expectations. Lawyers are able to explain how one party may need to submit to the law of another jurisdiction and what is required of each participant.

Whilst the focus is often very much on making the deal happen, the integration of the firms, from a legal perspective, should not take back-seat. To ensure this happens effectively, lawyers may be involved in discussions around staffing and supplier and customer contracts.

On the regulatory side, Charlotte Robins, Partner and financial services regulatory lawyer at Norton Rose Fulbright Hong Kong notes that whilst buyers and sellers are much more aware of their regulatory obligations around M&A than they were a few years ago, some still do not think about them “fully enough and early enough”. Where companies need to secure change of ownership approval from the regulator, for example, they should understand that this can take time. And where outsourcing is deployed, either at the transitional services stage or as part of the subsequent integration, it will inevitably invoke rules around the transfer of data – another hot topic in Asia.

Tackling the breadth and depth of regulation means that M&A teams will have more people and agencies to deal but, says Robins, “you have to get your timings right. It’s about knowing the regulators and the best approach to take with them.” Whilst she acknowledges that it may sometimes be more appropriate that the business, not the lawyers, deal them, she believes that knowledge on the ground “can be key in getting the necessary approvals in the time that you need them”. Ultimately, she feels that the diversity of legal and regulatory environments across Asia does not necessarily make M&A more difficult, “it’s just different”. Having the right legal counsel onside is clearly an advantage.