Cross-Border M&A: A Checklist of US Issues for Non-US Acquirers

Cross-border M&A transactions can be far more complex than purely domestic transactions. With advance planning and careful consideration of the relevant issues, however, it is possible to successfully navigate the complexities and achieve the parties’ commercial objectives. This article presents a high-level overview of certain key issues that should be considered by non-US acquirers contemplating acquisitions or other strategic investments in the United States.

Acquisition Structures and Tax Considerations, Acquisition Finance and Other Structuring Considerations

Acquisition structures and tax considerations

The choice of acquisition structure in M&A is typically driven by the characteristics of the entities involved in the transaction, including their respective entity type and tax classification, jurisdictions of organisations, and the nature of their capital structures and related shareholder base. These characteristics should be considered together with the unique tax features of the transaction and the parties’ commercial objectives.

Acquisitions of US public companies are usually structured as either a statutory merger or a tender offer (which is followed by a second-step statutory merger to “squeeze out” any remaining stockholders of the target company who did not participate in the first-step tender offer), both of which are subject to various regulatory requirements and to review by the US Securities and Exchange Commission (SEC). By contrast, acquisitions of US private companies provide far greater structuring flexibility because they are generally not subject to the same SEC review or regulatory requirements that apply to takeovers of US public companies.

Subject to certain exceptions, parties to a transaction structured as an acquisition of assets have the ability to select the assets and liabilities to be transferred to the acquirer and retained by the seller. Because an acquirer of assets generally does not inherit the US tax basis of the seller in the assets being sold, asset acquisitions may facilitate tax efficiencies for the acquirer.

Parties to a transaction structured as a merger or an acquisition of stock do not have this ability because the target company (which is the seller in an asset deal) continues to own the same assets, and accordingly, the target company’s historic liabilities (including for unpaid US taxes) and its US federal income tax attributes (such as net operating losses) generally remain with the target company – although subject to certain requirements, tax elections can be made to treat the purchase of stock as a purchase of assets. If an acquisition is structured as a share-for-share merger, then the target company’s historic tax liabilities and its US federal income tax attributes generally shift to the acquirer.

Non-US acquirers need to carefully consider the choice of acquisition vehicle, which will be based in part on the potential tax treatment of both the contemplated transaction (eg, whether the transaction is intended to be taxable or tax-deferred) and the combined business after the closing (eg, cross-border flows of goods and services, repatriation of cash and other distributions, availability of US tax treaties, etc). Non-US acquirers typically use a US corporation as the acquisition vehicle for asset acquisitions of a US business because it allows them to avoid tax complexities and being treated as being directly engaged in a US trade or business, and can instead have the US corporation make all the required US tax filings and payments. Alternatively, non-US acquirers can use non-US corporations (or non-corporate US entities) as the acquisition vehicle for acquisitions of stock of a US target company. If a non-US acquirer acquires the stock of a US target company and is eligible for the benefits of an applicable tax treaty with the US, then dividends, interest or royalties that it receives from the US target company may be subject to reduced or eliminated rates of US withholding taxes.

Tax

Recently enacted tax laws and reforms in the US and other countries can have a profound effect on cross-border M&A planning. For example, a 2022 tax law created a stock buyback excise tax that applies to a range of M&A transactions, including leveraged acquisitions where consideration is paid from the proceeds of debt incurred by the target corporation. Current budget proposals would increase this tax from 1% to 4%, and include changes to other tax rules applicable in cross-border M&A, such as imposing added limits on inversions (ie, relocations (on paper) of US-based companies overseas to reduce their US tax burden).

Additionally, reforms outside the US affect acquisitions of US companies too. In particular, the OECD’s global international tax reform initiative – known as “Pillar Two” – was adopted by the UK and EU member states as of 2024 (although not by the US) and establishes a multinational system of taxation to ensure large multinational companies pay a minimum level of tax in each country in which they do business. Under Pillar Two, if a large corporate group has operations in a country that imposes tax at less than a 15% rate on profits earned in that country, then it may need to pay a special extra tax in other countries in an amount equal to the shortfall below 15% in the tax that has been paid in the lower-tax country.

Acquisition finance

After years of low interest rates and robust borrowing, the current interest rate environment, challenging debt markets, and reduced confidence in the formal banking sector, have led to a slowdown in borrowing, leading many acquirers to pursue alternative acquisition financing options, including partnering with direct lenders such as sovereign wealth funds and private sponsors, accepting seller financing, or increasing equity financing. Cash has remained the currency of choice, particularly in cross-border transactions in which the equity of non-US acquirers is often viewed by US sellers as less attractive (notwithstanding the potential upside).

In contrast to many non-US jurisdictions, the US does not have a “certain funds” obligation requiring acquirers to demonstrate that they have sufficient funds to complete an acquisition. In practice, however, sellers in most US transactions require that the acquirer shows that it has sufficient financing to complete the acquisition or has otherwise entered into commitment papers with one or more lenders, pursuant to which such lenders provide a firm commitment at signing to provide the necessary financing for the acquisition to close. It is rare for a buyer’s obligation to close to be conditional on its obtaining financing for the transaction.

Other structuring considerations

If the contemplated transaction is potentially politically sensitive or likely to face regulatory resistance, alternative structural considerations could help facilitate a deal and may include one or more of the following:

• minority or other non-controlling investments;
• joint ventures;
• contractual partnerships with a US company or management team or partnering with a US source of financing or co-investor (eg, a private equity firm); or
• utilising a controlled or partly controlled US acquisition vehicle, including a board of directors largely comprised of US citizens.

Foreign Investment, Merger Control and Regulated Industries

Foreign investment (CFIUS)

The Committee on Foreign Investment in the United States (CFIUS) is an interagency committee authorised to review certain transactions involving non-US investment in the US and certain real estate transactions in the US involving non-US persons, in order to determine the effect of such transactions on US national security interests.

CFIUS filings are sometimes mandatory, but are often made on a voluntary basis given that CFIUS clearance, if obtained, means the transaction will not later be challenged by CFIUS. Careful advance planning of a legal and a political strategy in relation to CFIUS greatly enhances the likelihood of a successful outcome.

A 2023 executive order provides for the establishment of a so-called “Reverse CFIUS” to be administered by the US Department of Treasury to regulate certain non-US investments made by US persons, with implementing regulations expected to be issued during 2024.

Merger control

The Antitrust Division of the US Department of Justice (DOJ) and the US Federal Trade Commission (FTC) have the power to review the competitive aspects of proposed transactions that exceed certain reporting thresholds – even transactions that do not result in changes of control or involve US companies – pursuant to mandatory pre-merger notification requirements under the US Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. If a notification is required, a formal filing must be submitted to both the DOJ and FTC, and the parties must wait 30 days (15 days in the case of cash tender offers and certain bankruptcy situations) after the filing to complete the transaction, although if additional information is requested from the parties, such waiting period may be extended.

Co-ordinating antitrust/merger control filings across multiple jurisdictions can be a substantial undertaking and the commercial and timing implications for the transaction can be significant. In some cases, the DOJ or FTC might challenge a transaction as anticompetitive and sue to block the transaction, so non-US investors will want to have an understanding of the substantive risk profile of the proposed transaction when negotiating related risk allocation with the sellers.

Regulated industries

Various US federal and state regulatory requirements (including filings and consents) may apply to acquisitions of companies operating in particular sectors (eg, registered investment funds/advisers; banking/financial institutions; energy, power and natural resources; maritime; utilities; communications; aviation; transportation; gaming; defence; and insurance). Complying with such requirements, including obtaining any related approvals, should be factored into transaction timelines.

Securities Laws

Non-US acquirers that intend to offer and sell securities in the US in connection with a US investment may become subject to the SEC registration and ongoing periodic reporting requirements, and registration requirements under the securities laws of each state (known as “blue sky” laws), unless the securities being offered and sold, or the related transaction, are specifically exempted. Non-US acquirers seeking to use their stock as consideration in an acquisition of a private company (although probably not a US public company) may qualify for “private placement” exemptions, which eliminate the time and expense associated with an SEC-registered transaction.

Non-US acquirers seeking to purchase stakes in US public companies must take into account restrictions on insider trading, the potential requirement to publicly report beneficial ownership of shares (and other information about the acquirer and its intentions with respect to the target company) in excess of 5%, and the “short-swing profits” rules (which potentially can require disgorgement of profits from trading after the acquirer’s holding in the target company’s shares exceeds 10%).

Corrupt Business Practices, Economic Sanctions

First-time investors in the US should appreciate that their exposure to risk under the US Foreign Corrupt Practices Act (FCPA) could increase significantly. Generally, the FCPA’s anti-bribery provisions apply to US persons and businesses, companies listed on US stock exchanges or that are required to file periodic reports with the SEC, and certain foreign persons and businesses while acting in the US. A non-US acquirer may become subject to the FCPA’s anti-bribery provisions depending on the levels of entanglement between the US target company and its affiliates and the nature of the non-US acquirer’s business and geographic exposure.

In addition, US businesses must comply with US economic sanctions, which can extend to non-US acquirers if their activities involve US businesses or they otherwise have certain requisite touchpoints with the US.

Directors’ Fiduciary Duties

Although M&A deals are typically proposed by the senior executive team, the board of directors (or equivalent) of the US target company/seller must often determine whether a potential transaction can proceed beyond an initial exploratory phase. In making their determination, directors of Delaware corporations are subject to, and guided by, two primary fiduciary duties: the duty of care and the duty of loyalty. The duty of care requires directors to engage in an informed and deliberate decision-making process based on all material information reasonably available to them. The duty of loyalty requires directors to act on a disinterested and independent basis, in good faith and with an honest belief that the action proposed to be taken is in the best interest of the corporation and its stockholders. Notably, when a corporation becomes insolvent, the directors’ fiduciary duties shift, and the directors have a responsibility to direct the affairs of the corporation to maximise value for the benefit of the corporation and its creditors.

In general, under a standard of judicial review referred to as the “business judgment rule”, directors are entitled to a rebuttable presumption that in making decisions they acted in accordance with their fiduciary duties. If the business judgment rule is not rebutted by plaintiffs, it prevents a court from second-guessing board decisions on business matters, including M&A transactions, as long as those decisions are attributed to a rational business purpose. In M&A transactions, however, courts may more carefully scrutinise the decisions of the board and examine the overall decision-making process, including the quality of information consulted, the procedures followed, and the reasonableness of a board’s actions.

While fiduciary duties apply to directors of both private and public corporations, if the target company is a US public company there are many formalities and procedural protections that guide a board of directors’ participation in an M&A process, including with respect to the use of outside legal counsel, financial advisers and independent committees, or even obtaining an informed vote of minority shareholders.

Non-US acquirers need to be well advised as to the nuanced requirements, the role of boards, and the legal, regulatory and litigation framework and risks that drive a board’s actions.

Litigation

Non-US acquirers conducting business in the US must be prepared to operate within a robust litigation environment and to defend themselves against a wide range of potential complaints. This can sometimes be the case with respect to M&A activity, particularly in uncertain economic times, as market volatility tends to embolden activist shareholders. However, nuisance claims in which shareholders seek to delay or prevent the transaction, and related damages, are usually easily resolved and rarely arise in the context of private deals in any event.

Human Resources

Navigating US labour and employment-related considerations can sometimes be a challenge for non-US acquirers, particularly in cases where human capital represents a large percentage of transaction value. In addition to legal and regulatory compliance (such as benefit plan operational concerns, deferred compensation issues and compliance with labour unions), and integration of employees following the transaction, one of the most significant employment considerations is how to compensate and retain key employees of the target company. This is particularly acute when ultimate ownership changes from a US to a non-US jurisdiction. Developing solid people-management, incentive and retention plans that are put into effect at the outset of the transaction and carried out through closing and into the post-closing integration phase can be critically important.

Intellectual Property and Data Protection

Intellectual property

Intellectual property (IP) is protected in the US by a well-developed body of statutory and common law that is designed to protect the owner’s right to use IP and to prevent the unauthorised exploitation of IP by others. The scope and strength of the protection differ depending on the nature of the IP right and the industry in which the IP owner operates, so legal due diligence should be calibrated accordingly. Because the default laws designed to allocate IP ownership rights are not harmonised across jurisdictions or the different types of IP, the processes for conferring valid ownership of IP in the US do not necessarily ensure that the target company will enjoy valid ownership ex-US. Consequently, if a non-US acquirer’s business plan depends on certain IP rights conferring protection over a particular technology, the acquirer should carefully consider how that technology can be protected both within and outside of the US.

Additionally, diligence on business-critical IP licences from third parties needs to address whether such licences can be conveyed with the target business, adequate rights can be provided on a transitional basis, or a new IP licence or alternative arrangements need to be put in place prior to closing.

Data protection

In contrast to some non-US jurisdictions, the US does not have a single comprehensive federal data privacy and data security law. Instead, there is a fragmented and dynamic patchwork of federal and state laws and regulations (including sector-specific requirements), industry standards and “best practices” that apply differently across jurisdictions, industries and data subjects.

Since the EU’s General Data Protection Regulation (GDPR) took effect in 2018, however, the data regulatory landscape in the US has begun to shift significantly towards a more comprehensive regulatory regime. Certain states have adopted data privacy laws, which follow a similar GDPR framework, but each law has unique nuances that can make compliance challenging, particularly since companies must maintain compliance with existing sector-specific federal privacy requirements, such as for children’s data or financial information. Cybersecurity protections are more common, but similarly fragmented.

Transactional Risk Insurance

Representation and warranty insurance (RWI) has become increasingly popular in the US, and obtaining an RWI policy is now standard market practice for private M&A transactions. With the growth in the market and increased competition among underwriters, RWI policies are more affordable and prevalent, and can be implemented on an expedited basis in parallel with the primary deal negotiations.

In addition to standard RWI coverage of between 10–20% of transaction value, larger limits are being placed through the use of “tower” structures. This is where multiple RWI providers participate in a stack, and the insured receives the benefit of a blended premium rate, as the RWI providers higher in the tower charge lower premiums because providers lower in the tower have greater exposure. As the primary RWI insurer leads the RWI process, the use of a tower structure does not typically add any significant burden on the acquirer.

In order to limit a non-US acquirer’s (or taxpayer’s) potential downside risk if there is an adverse determination by a tax authority, the use of tax insurance has become more common to cover matters like the tax-free nature of a transaction or the tax consequences of a pre-closing reorganisation, which are not otherwise covered under the RWI policy.

Contingent risk insurance is used to cover potential losses associated with a known contingent liability, such as an adverse determination in a pending lawsuit, that typically would not be covered by RWI. Because the risk is known, contingent risk insurance tends to be expensive compared to RWI or tax insurance, but it can protect a non-US acquirer against potentially significant losses if the risk actually materialises.

Distressed Acquisitions

A financially distressed US target company may present opportunities for non-US acquirers to invest in the US on financially attractive terms, but can also present significant risks. An acquirer seeking to purchase assets from a financially distressed company should be aware that the transaction may be subject to unwinding in the two to six years following the transaction (depending on applicable state law) if the seller files for bankruptcy after the sale and the seller (i) sold the assets with the actual intent to hinder, delay, or defraud creditors, or (ii) received less than the reasonably equivalent value in exchange for its assets and was insolvent at the time or became insolvent as a result of the sale.

Potential acquirers sometimes seek to purchase a distressed company’s assets through a US bankruptcy process referred to as a “363 sale” or a plan of reorganisation whereby a debtor can sell its assets “free and clear” of all liens, claims and encumbrances, which provides significant protection against post-closing “successor liability” claims against the acquirer and the risk that the transaction will be unwound. However, bankruptcy sales also generally require broad public notice, a robust marketing process, and a public auction to ensure that the ultimate sale price reflects the “highest and best” offer available, which can cause delay, increased costs and competition, and third-party scrutiny.

Another strategy to acquire a distressed US company is “loan-to-own”, which involves lending to – or purchasing a controlling amount of the outstanding debt of – the distressed company (generally at a discount), with the goal of acquiring the company through an in-court or out-of-court debt-to-equity conversion or purchasing the company’s assets through a partial or full “credit bid”. Executing such a strategy can be complex, and if not done properly, can result in recharacterisation of the debt as equity, subordination of the debt, limitations on credit bidding, and lender liability, among other things.

Conclusion

Non-US acquirers seeking to invest in the US can navigate the related jurisdictional, cultural and commercial complexities with proper planning and consideration of the relevant issues. While non-US acquirers often prefer to engage advisers with whom they have worked in the past in their home markets, it is also advisable to engage local US advisers who are familiar with US concepts and market practice. Each cross-border M&A transaction presents a set of unique considerations, but an awareness of, and flexible and creative approach to, the most common issues that accompany US M&A transactions will help to secure a successful outcome, put a non-US acquirer on an equal footing with its US competition, and achieve the parties’ commercial objectives.