Key Takeaways
- Assemble a cross-border deal team early, including U.S. deal counsel, local counsel in the applicable foreign jurisdiction, tax advisors, and regulatory specialists.
- Conduct a regulatory mapping exercise to identify all mandatory filing obligations and estimate the resulting timeline impact.
- Understand local market norms for deal structure, including the likely purchase price mechanism and customary risk allocation.
- Budget adequate time and resources for local legal due diligence, recognizing that the scope and focus of diligence may differ from U.S. practices.
- Plan for post-closing integration from the beginning, including employment, data transfer, and regulatory compliance workstreams.
Cross-border M&A activity involving U.S. companies has accelerated markedly in recent years, driven by the pursuit of new markets, proprietary technologies, and strategic assets that are not always available domestically. And these transactions present a distinct set of structural, regulatory, and cultural complexities that can catch even sophisticated buyers off guard. Whether a company is making its first acquisition abroad or expanding an established international portfolio, early identification of cross-border-specific risks is essential to protecting deal value. This alert highlights several of the most critical issues that parties to a cross-border transaction should have on their radar.
Purchase Price: Locked Box vs. Completion Accounts
One of the most apparent structural differences U.S. companies encounter in cross-border deals is the approach to purchase price. U.S. practitioners are accustomed to a “completion accounts” model, in which the parties agree on a headline purchase price and estimate working capital and indebtedness at closing, followed by a post-closing true-up to arrive at the final price. In Europe and many other markets, the “locked box” mechanism predominates. Under a locked box, the purchase price is fixed by reference to a set of audited accounts as of an agreed reference date (the “locked box date”), with no post-closing adjustment. Instead, the seller provides contractual protections against value extraction between the locked box date and closing through “leakage” covenants that restrict dividends, management fees, and other unauthorized payments out of the target group. U.S. buyers should expect non-U.S. sellers to advocate for this model and should be prepared to negotiate within its framework. From a buyer’s perspective, the locked box can provide greater price certainty and eliminate post-closing accounting disputes, but it shifts economic risk to the buyer for the period between the locked box date and closing and requires trustworthy financials, robust diligence of the reference accounts, and careful drafting of the leakage provisions.
Regulatory Complexity
A single cross-border deal may trigger mandatory filings in multiple jurisdictions under multiple regulatory regimes. Beyond U.S. HSR antitrust review and CFIUS review, buyers should anticipate foreign merger control/antitrust filings, foreign direct investment (FDI) screening (which has expanded significantly in recent years across numerous jurisdictions), and sector-specific approvals in areas such as telecommunications, financial services, or defense. Failing to identify a mandatory filing obligation can result in significant fines, injunctive relief, or, in extreme cases, void transactions. Early regulatory mapping (identifying every jurisdiction in which a filing is required and estimating the resulting timeline impact) is critical to setting realistic signing-to-closing timelines.
- Foreign merger control filings. Many jurisdictions impose mandatory pre-closing merger control notification requirements like the U.S.’s HSR regime, but with their own thresholds, timelines, and substantive standards. The European Union’s merger regulation, for example, applies where the parties meet specified turnover thresholds regardless of the size of E.U. presence, and an in-depth Phase II investigation can add months to a deal timeline.
- Foreign direct investment (FDI) screening. An increasing number of countries have adopted or strengthened FDI review mechanisms in recent years. The E.U.’s framework regulation has encouraged member states to adopt national screening mechanisms, and jurisdictions such as the United Kingdom (through its National Security and Investment Act), Germany, France, Australia, and Canada each have their own review processes for foreign capital flowing into the jurisdiction. These regimes may apply based on the sector of the target (e.g., critical infrastructure, defense, advanced technology) or on the nationality of the acquirer.
The interplay among these regimes can be complex. A single transaction may require filings in several jurisdictions in which the target or its subsidiaries conduct business, each with its own procedural rules, review periods, and potential remedies. Coordinating the sequencing and timing of these filings, and building sufficient conditionality into the transaction agreement, is a key driver of deal timeline and structure.
Engage Local Counsel Early
Experienced local counsel in the target’s jurisdiction is not merely helpful, it is essential. Local counsel should be engaged early and should meaningfully contribute to legal due diligence, transaction structuring, preparation of documentation that must comply with local formalities, and post-closing integration planning. Issues that may seem routine from a U.S. perspective can be governed by complex and materially different legal frameworks abroad.
Legal due diligence. Local counsel is essential for diligencing the target's compliance with the laws of its home jurisdiction, including corporate law, employment law, real property matters, intellectual property registrations, tax, environmental compliance, and data protection (including the E.U.’s General Data Protection Regulation or equivalent local regimes). Issues that may appear straightforward from a U.S. perspective, such as the ability to terminate employees post-closing or to consolidate operations, can be governed by more nuanced regulations in other jurisdictions.
Contract negotiation and documentation. Even though acquisition agreements for cross-border deals can frequently be governed by Delaware or other U.S. law, certain ancillary documents (including real estate transfer instruments, equity transfer documents, employment agreements, and local corporate resolutions) must comply with local law requirements such as notarization, apostillation, or other formalities that U.S. practitioners may not anticipate. Additionally, transaction structure will depend on local corporate law, tax law, and regulatory considerations. The choice between an equity deal and an asset deal carries different consequences depending on the jurisdiction, and transfer taxes, capital gains treatment, and the ability to step up the tax basis of acquired assets can vary significantly across borders.
U.S. companies should resist the temptation to defer engaging local counsel until the later stages of a transaction. Local legal issues identified late in the process can derail timelines or require renegotiation of commercial terms.
The Bottom Line
Cross-border M&A offers significant strategic value, but success depends on early preparation: assembling the right advisory team, mapping regulatory requirements before signing, understanding local deal norms and pricing mechanisms, and planning for integration from day one.
For questions about how these considerations may apply to a specific transaction, please contact a member of Foley Hoag’s M&A team.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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