Largest Indian Outbound Deal Ever - Will it Happen?

Bharti Airtel had bid US$23 billion to take over MTN of South Africa, a major telecommunications company. If completed, the deal would become India's largest outbound deal to date, double the size of Tata Steel's $13 billion acquisition of Corus, the UK steel company, in 2006.

However, the deal talks have been extended until the end of August and there is a cloud of uncertainty over the price and terms of the deal.

The talks come at a time of a substantial decrease in India's cross border M&A activity - it was reported that as of May, India's outbound deal flow had decreased by 95 per cent as compared with the same period in 2008, falling from $7.4 billion to $370.8 million. We have been taking a periodic look at India's outbound investments and will offer an update shortly.

Photo credit to Swamysk, whose photos are posted on Flickr

Korean M&A Deals: Shedding Core Assets + Weak Won = Value

A May 20th Financial Times Article on Korean M&A is reasonably upbeat on the potential for further Korean deals and quotes a friend, Paul Kang, an investment banker who focuses on Korean M&A deals. Among the article’s observations (click the blog title above for the article and broader Korea report) are the following:

• Korean Companies Shed Non-Core Assets. As is true in the US and elsewhere, until a recovery gathers strength, some Korean companies are exploring the potential sale of non-core assets to further finance and strengthen their core businesses. Goldman’s head of Korean investment banking indicates that this will help drive both domestic as well as cross-border Korean deals, and the article reports that many expect Korean M&A to become more active in the second half of 2009 as the push for disposal of non-core assets gathers momentum.

• Actual Increase in Numbers of 2009 Deals. What do the numbers show? Korean M&A deals increased from 333 in the first quarter of 2008 to 406 in the first quarter of 2009, although their combined value fell from $14.1bn to $12.4bn. Not bad in a rough environment.

• Purchase of Prominent Korean Beer Company - An Example. As a recent cross-border deal example, Kohlberg Kravis Roberts agreed to buy Oriental Brewery from Anheuser-Busch InBev for $1.8bn. This will be the largest leveraged buy-out in Asia in the past two years. Who hasn’t enjoyed a cold “OB” during a visit to Seoul?

• A Weak Won Enhances Value to Foreign Investors. The Korean won has fallen about 18 per cent against the dollar in the past year, making Korean assets cheaper for foreign investors, and the currency play alone is creating deal opportunities as it did during the 1997 – 1998 Asian financial crisis.
  

However, Paul Kang, a former Goldman banker and something of a realist, is skeptical that the outstanding Korean opportunities will generate significant foreign buying given the global uncertainties impacting potential buyers.

That may be true, and too bad for the hesitant who are still kicking themselves for missing out on Asian financial crisis opportunities.

The image is of Namdaemun gate in Seoul, Korea's National Treasure #1, photo credit to Charles Chan.

Outstanding Value for Cross-Border Strategic Investment

Companies with the wherewithal to expand through acquisition and investment stakes may be finding once-in-a-career bargains. For example, Time Warner is purchasing a 31% stake in a Central European media company - a company whose share price was $106 last may and about $13 recently. Time Warner deal: another strategic capitalizes on downturn

Posted on March 23, 2009 at 1:27 PM

Compared to the price the target's shares commanded less than a year ago, Time Warner Inc. (NYSE: TWX) is getting quite a bargain in its purchase of a 31% stake in Central European Media Enterprises Ltd. (NASDAQ: CETV). Bloomberg has the story. As recently as May, CME's shares were around $106. Monday, even after a 31% rise driven by the deal's announcement, they were around $13. Time Warner is paying $241.5 million for the stake. Founded in 1993 by Ronald Lauder of the cosmetics family, CME has suffered from the fact that its markets have gone from boom to an especially severe bust because of the global financial crisis. But Time Warner obviously thinks there's long-term growth in the markets CME serves. The company has an audience of 97 million in Bulgaria, Croatia, Czech Republic, Romania, Slovenia, Slovakia and Ukraine, according to Reuters. Time Warner's move resembles deals by some other big strategic acquirers who are using the crisis to enter new markets at attractive prices. A previous example was Abbott Laboratories' (NYSE:ABT) acquisition of Advanced Medical Optics for nearly $2.8 billion in January. AMO's shares were way down because the recession has hurt its laser vision correction service. Look for more such deals in various sectors.-Kenneth Klee

Acquiring Troubled US Companies - Limiting Legal Risk

Here is the first page of our updated article published this month in India.

Let me know if you are aware of a US company in need of an investor or that is in search of a buyer - we are being asked by our contacts in India to pass-on opportunities that may be a good fit for an Indian buyer.

The investment range can be as low as a few million dollars and into the US$20 million range - on the small side but often overlooked by intermediaries. Feel free to contact me (David Laverty) directly at 312 575 0601 or at laverty@internationalcounsel.com.

Foreign Corporate Buyers of Troubled US Companies

Yes, there are excellent values among US companies that make this a very attractive time for those foreign buyers with the capital to acquire and invest. Yet, can a foreign corporate buyer hope to fully understand and participate in the process of purchasing a troubled US company?

Yes, with the proper advisers. The following video interview takes this a step further - why not partner with an experienced distressed investor? Jonathan Rosenthal of Saybrook Capital LLC offers his views on such partnering opportunities - taken from this month's TMA distressed investing conference in Las Vegas.

A pause for Mumbai

Real Value Through Acquisitions of Troubled US Companies

“Meltdown in the world financial markets has thrown open new opportunities for Indian firms to buy out under-valued overseas assets that fit well into their gameplan for achieving global ambitions, India Inc's top CEOs say.” Press Trust of India, October 5, 2008

Given the current state of the US economy, corporate India and other foreign buyers are recognizing that this is a critical time to consider the acquisition of undervalued US companies, including through the US bankruptcy process. Though a purchase of a troubled company is more complicated than the stock or asset purchase of a healthy US company, tremendous value can now be achieved through the purchase of low-priced US assets.

In response to the current economic environment in the US, we have put together an experienced team of corporate transactional, restructuring and bankruptcy lawyers to assist foreign buyers of US companies. We also operate in a cost-effective way that is all but impossible to match by larger law firms.

Not much more than a glance at financial headlines yields a very prominent example of the purchase by a foreign company of the assets of a US company through a Section 363 sale under the US Bankruptcy Code - Barclays’ purchase of certain assets of Lehman Brothers. On Sunday, September 14, Barclays had been negotiating with Lehman for the purchase of certain of its assets. The next day, Lehmans filed for bankruptcy protection. On Tuesday, September 16, Barclays was then bidding through a Section 363 sale process for the very assets it had sought, reportedly for several hundred million dollars less than the September 14 price. The sale would also result in the purchase of such assets virtually clear and free of any liens, encumbrances and liabilities. While the headlines blared the bankruptcy of Lehman, the story is also about a savvy foreign company making a play for cheap US assets through the US bankruptcy process.

What About an Asset Sale Outside of Bankruptcy Process – Better to Buy Before a Bankruptcy Filing? A conventional asset sale pursuant to an asset purchase agreement may be possible if the target company has not yet filed for bankruptcy - such as was pursued by Barclays prior to Lehman’s bankruptcy filing. However, while such a sale avoids the expense and procedural requirements of a bankruptcy sale, shareholders and creditors of the selling company may later seek to reverse the sale by claiming that the sale was a fraudulent transfer. For example, the US Bankruptcy Code permits the reversal of a sale as a fraudulent transfer if the company receives less than reasonably equivalent value for its sold assets and the company was insolvent at the time of the sale.

A Bankruptcy Sale Under Section 363 - Real Value for Foreign Buyers. This section of the US Bankruptcy Code allows a purchase of the assets of a company free and clear of liens and claims. This sale process under Chapter 11 of the US Bankruptcy Code involves an offer from an acquiring company (referred to as a “stalking horse”) to purchase the assets of the bankrupt company (the role played by Barclays in the Lehman transaction). The bankrupt company is then required to solicit competing bids and to conduct an auction to determine the highest and best bid. Even if the “stalking horse” loses the bid, it can be entitled to compensation for its time and expenses through a break-up fee and/or expense reimbursement that is approved in advance by the bankruptcy court.

• Advantages to the First Bidder (the "Stalking Horse"). If other competing bids can beat the initial bidder as the “stalking horse,” why not wait for someone else to act as the stalking horse if you may lose the bid even if you gain a break-up fee? The stalking horse has some real advantages: (1) it is able to negotiate its own deal terms - other prospective purchasers must accept the stalking horse’s asset purchase agreement terms with few changes, (2) it is able to perform greater due diligence than a latecomer, and (3) other prospective purchasers must make bids that exceed the stalking horse’s bid by at least a specified minimum amount, plus the amount of any break-up fee.

• A Deal Cleansed of Liabilities. The end result, unlike in a conventional asset purchase sale mentioned above, is that the terms of the Section 363 sale are approved by the bankruptcy court and offer the buyer some degree of certainty that it is getting the kind of assets it wants without the kind of liabilities it seeks to avoid. We have recently discussed ways in which Indian companies may be underestimating the legal risks of US acquisitions - click here for this discussion. Here is a way to gain great value and limit such risks.
  

• Asset Agreement and Diligence Process is Otherwise Similar. Though the asset sale agreement is subject to bankruptcy court approval, the process of negotiating and documenting the asset purchase agreement is no different from that of a conventional asset purchase sale. The parties enter into the same kind of confidentiality agreement and there is a due diligence process as in a conventional sale.

• Such Bankruptcy Sales are on the Rise. The numbers of these Section 363 transactions are increasing, with a greater share being pursued by foreign companies. As overall numbers, 32 Section 363 sales, worth $1.6 billion, were announced in the first quarter of 2008 as compared with 21 such sales, worth $888 million, in the first quarter of 2007. While an Indian buyer may be less familiar with the US bankruptcy process and may not move as quickly as an experienced US buyer, good US legal advice can help steer a transaction to conclusion. For example, in a recent sale of the assets of a US manufacturing company, an Indian buyer won the Section 363 auction process, and was able to navigate the compressed timing of the bankruptcy sale, even though it entered the bidding at a late stage.

Other options are also open to a company acquiring the assets of a troubled company, including the following:

Sale Under a Chapter 11 Plan. This avoids the competitive bidding process under Section 363 and requires the investor to co-sponsor the target’s Chapter 11 plan of reorganization. The Chapter 11 plan is then voted on by the target’s creditors.

Secured Creditor Foreclosure/Sale of Assets. Such an arrangement takes the form of a negotiated package with a secured creditor whereby the creditor would foreclose on a loan to obtain the assets and at the same time sell the assets to a foreign buyer.

Acquisition of Debt or Extension of Loan. A foreign investor could either extend a loan to a target company or acquire the debt of a target company, and then either exert some degree of control over the target through loan covenants or even exchange the debt for the target’s equity.

Foreign Subsidiaries - Set-Up Tips to Avoid Later Problems - Part 1

Our clients often enter new markets by contract or investment -- what are some of the legal issues in establishing a new foreign company or investment that will have an important impact on operating the company and possibly later selling it? This is Part 1 of our two-part observations on this subject.

Taking India as an example, these observations are meant as a follow-up to our articles in the last several months on acquiring and investing in Indian companies. Though our focus here is on choices that can help US companies better operate and later sell their Indian companies, the lessons can be applied in other international markets.

These comments were inspired by our recent work on the sale of a US company’s Indian subsidiary and are also relevant to the many US companies in the process of restructuring their foreign operations, whether due to the changing economics of manufacturing in China or business process outsourcing in India, and recent examples of “on shoring” back to the US or moving production to a third country.

Though India is Now More Open to Foreign Investment, Set Realistic Time and Budget Expectations. Our earlier articles emphasized the current relatively open Indian approach to foreign investment, whether through acquisition or otherwise. However, in establishing, operating and later selling an Indian company, US companies can find Indian procedural formalities to be frustrating. This is also true for companies operating in other developing economies, though the procedural formalities may be less daunting in China and substantially improved in countries such as Korea which have graduated from the “developing” roster over the past several years.

The Indian Companies Act of 1956 and its regulations govern the incorporation, operation and winding-up of companies in India. Procedures for director identification numbers (DINs), recording new or resigning directors, making changes in share capital, issuing notices of meetings and for properly conducting meetings and recording minutes - all can challenge company management. Outside of the incorporation and ongoing corporate requirements, an Indian company will need several regulatory licenses and registrations, such as a possible “shops and establishment license,” value added tax registration, tax account numbers, import and export licenses if these activities will be engaged in, and industrial approvals based on national and local requirements. Some - not much different from the most developed economies. Others – somewhat more daunting and time-consuming.

A China consultant recently told me that he assumed that our work with US companies in India must be relatively easy as compared with China given this UK-based system and use of the English language. While India indeed has these advantages, this can cause US companies to greatly underestimate the timing and level of detail for doing business in India. While in some sense the legal framework continues to be more open to interpretation in China, the great attention to legal and procedural formalities in India within a system that is less precise than many assume creates a different type of challenge.

Appointing Directors - Take Into Account Practicalities and Local Rules. An Indian private company is required to appoint two or more directors. They do not need not be Indian nationals or residents, and meetings can be held outside of India.

So far, so good. A US company may make the assumption that two US-based directors are sufficient, though it is advisable to appoint at least one India-based director to be able to sign forms and take India-based actions. Some may then opt for at least one director based in the US and one in India, with a quorum of 2 directors.

Yet, to smoothly operate the company, it is important to have a quorum of directors available in the same place in order to conduct board actions. The Indian Companies Act does not allow meetings through teleconferencing or videoconferencing. In order to constitute a valid quorum for a meeting, at least two directors are required to attend a meeting in person, though the meetings can be in either India or elsewhere. What happens if a quorum in either India or the US is not available and a board action is needed? There are ways around this problem (involving resignations, reappointments and carefully-described minutes), but it is best avoided up front.

So You Want to Sell Your Indian Subsidiary? A Few Stock Transfer Issues. Indian government approvals or reporting of share transfers are generally not required for a transfer from one foreigner to another (such as the sale by a US parent to another US parent), yet additional steps are required for the transfer from an Indian resident shareholder to a non-resident.

An Indian private company must have at least two shareholders -- a US parent company can be one shareholder and another subsidiary can be the second. If a minimum single share is held by an Indian resident with the remainder held by the US parent company, complications may result if the Indian resident must then transfer the single share to a non-resident. For example, Reserve Bank of India rules require that a local bank certify that filings have been made and money received for the share transfer. For such a sale from a resident to a non-resident, a valuation of shares is generally also required as a measure of fair market value. (Can these issues be avoided through an asset transfer? Perhaps, though asset as opposed to stock sales are uncommon in India due to high asset transfer stamp duties.)

Is Holding the Indian Company Through an Offshore Holding Company Really Worth Considering? In our February 2008 article, we noted the advantages of acquiring an Indian company through a Mauritius holding company. US companies may believe that this sounds a little exotic and unnecessary and may prefer a more straightforward holding of the Indian company directly by the parent or a US-based special purpose subsidiary.

Let's say that despite your best expectations, its time to sell that Indian company sooner rather than later. For example, many US companies have found that their India-based costs have increased due to an increase in labor costs and also an increased value of the Rupee. If the company is sold after 1-year as part of a stock sale, a long-term capital gains tax of more than 20% will be imposed as a withholding tax that must be paid by the buyer. Holdings of less than 1-year would increase the tax to over 40%. Allocations of the purchase price between the sale of the stock and license fees may be possible, but not easy, and a US foreign tax credit may apply, but cannot always be used. (By the way, if the buyer is to hold part of the purchase price in escrow until certain conditions are met, the escrow amount is also subject to the withholding tax since the transfer takes place upon the transfer of the ownership of the stock, not a transfer of the consideration.)

Hiring Employees – Hope for the Best, But Set Realistic Termination and Non-Compete Expectations. In India as in any country, adjustments to contract language can help limit the chances of a dispute with an employee, particularly post-termination, as well as help protect confidential information accessed by the employee. In addition, some countries (as well as some US States) do not allow a non-compete to extend beyond the period of employment. This is the case for India - post-employment non-competes are not enforceable, though are routinely included in employment agreements.

Also, US companies understandably feel more comfortable with the law of their home state and local courts, though such a dispute resolution clause for a non-US employee would require a US company to first obtain a US judgment and then enforce it in another country – which can be a very uncertain process. We often prefer local arbitration which gives the US company the ability to seek an injunction in local courts pending the outcome of the arbitration.

If the time comes for a downsizing or termination of employees, also keep in mind mandatory employment laws in India that apply to non-managerial workers and those who earn less than defined amounts. These laws impose additional compensation, employment terms and termination requirements.

Part 2 of these observations follow (click here)

Things you wish you had thought of when you established, invested in or acquired your foreign subsidiary - Part 2

This is a continuation of our prior comments, using India as an example. Our clients often enter new markets by contract or investment -- what are some of the legal issues in establishing a new foreign company or investment that will have an important impact on operating the company and possibly later selling it?

Following the Letter of the Law vs. Local Practices - How to Strike a Balance? In entering into a lease, other contracts or in gaining operating approvals, there is often a local way of getting things done and the “overly theoretical and cautious approach taken by foreign companies that do not really understand how business is done in my country.” We are not necessary speaking of questionable payments here, but the kind of approvals and arrangements that may not be in full compliance with the law but are followed by many if not most local companies. An example is in entering into a lease or a “leave and license” agreement (a form of non-leasehold lease) in fast-growth Indian municipalities with landlords that may not have full approval for the development of their sites and buildings.

Perhaps more need not be said about deals that depend upon the right officials looking the other way and would be harmed by a change in policy, landlords that may agree to take care of any future contingency through indemnity or otherwise and a later buyer of your subsidiary that may not be quite as understanding in inheriting a business built on questionable arrangements. Local (and national) officials don’t last forever, and (as a general principal of international business and not meant to single-out India) enforcement against visible foreign companies can serve as a convenient example to others.

Forming the Right US-India Legal Team. What is the right mix of in-house counsel, US-based counsel and in-country foreign local counsel? A team lead by India-experienced US counsel can help to minimize the day-to-day details that can distract US management yet also be familiar with the bigger-picture structuring issues that can save real dollars and rupees.

In today’s information-soaked environment, a little Googling will allow a sharp high school student to locate many well-regarded foreign local counsel for just about any country. No list of names or membership in yet another “world lawyers network” is a substitute for a track record of cross-border experience and more than a few good working relationships built with local counsel in more than a few local firms. And we mean experience by the lawyer in charge of your project and not the kind of fragmented “collective experience” within many of today’s large law firms that may be found by sifting through the transaction lists of a disparate group of colleagues in a disparate number of offices.

India is blessed with many fine lawyers, and the fact that India remains one of the few world commercial centers with a flat prohibition on foreign law firms (Korea is another) does not really impact the ability of experienced US lawyers to efficiently execute the vast majority of cross-border projects with the input of local counsel. (Apart from a smaller segment of mega-deals and special cases that may benefit from an integrated bricks-and-mortar multi-country law firm, most of the world’s cross-border projects are executed by a few lawyers in one market working with a few lawyers in the world’s independent law firms another market). We have found that some of the better local Indian accountants and consultants can also be a good practical supplement to local Indian lawyers

Indian Company Acquisitions in the US - 2008 Trends Thus Far

We have been avidly following outbound Indian company acquisitions, and the 2008 numbers thus far are below 2007's strong pace. However, the decrease has not been as dramatic as the media has tended to report.

Grant Thornton's excellent statistics and detailed breakdown of cross-border Indian acquisitions shows that, taking into account all destinations, there were 112 total outbound Indian acquisitions for the first half of 2008 with a value of US$8.5 billion, as compared with 119 total for the first half of 2007 with a value of nearly US$28 billion. While there were only 7 fewer outbound deals in the first half of 2008, the volume dropped by 70%, which Grant Thornton explains was due in part to some very large deals that took place in the first few months of 2007.

We have noted that a large percentage of Indian deals headed to the US are relatively small. While the total numbers of deals have been more constant, the total dollar or rupee volume of deals can be greatly skewed depending on whether a few large deals were closed during the period in question. For the first half of 2008, while the total volume has decreased in the range of 30%, the total numbers have declined by a more modest range of 15%.

In the first half of 2008, Virtus Global Partners reported a total of 34 US-bound acquisitions from India, a drop of 15% as compared with the 40 US deals Virtus reported for the first half of 2007. In the same period, Virtus reports the total volume was US$5.1 billion, a 30% decline from the first half of 2007.

The precise numbers may differ depending on who is compiling the statistics - Grant Thornton reported an added 7 acquisitions for the first half of 2008, for a total of 41 US-bound acquisitions. However, the overall point remains that the number of U.S.-bound deals remains healthy, and while the UK appears to be the country with the largest deal volume, the US leads the way as the top destination for Indian companies when measured by the number of companies acquired.

Many have pointed-out that the relative size of Indian deals is small by global standards. For example, of the 83 US-bound deals from India reported by Virtus in 2007, 76% of the deals were for less than US$25 million.

In Handling US Legal Matters, What Mistakes and Misperceptions Are We Seeing Among Indian Companies?

As described in our related blog entry, Indian acquisitions of United States companies may not be matching the pace of 2007, though the numbers are still significant. In managing the legal aspects of their US acquisitions, here are some of the challenges facing Indian companies:

Under-appreciation of US Acquisition Legal Risk. This can lead Indian companies to make harmful assumptions, such as by favoring stock purchases over asset purchases, and also by underestimating the importance of good legal input. For example, as we discussed in our February, 2008 article on Indian acquisitions by US companies (posted elsewhere in this blog), though an asset purchase in India would result in very high stamp duties and other consequences, an asset purchase is often considered in the US for tax reasons and to limit the liabilities that would be transferred as part of the business in a stock purchase.

Also due to the complex legal risk environment in the United States, stock as well as asset purchase agreements have evolved into a careful interplay of promises made by the seller regarding the condition of the business (representations and warranties), disclosures which make exception to these promises (as part of disclosure schedules attached to the agreement) indemnification provisions which set the terms for how any breaches of the promises will be paid for, and possible escrow amounts which are reserved to pay for the breaches.

An informed buyer needs to carefully decide what due diligence information is required from the US seller and be willing to take a careful look at the legal due diligence materials provided by the seller- not just cross this off the “to do” list once a seller provides initial information that may be inadequate. The seller’s representations and warranties then need to make meaningful statements that really reflect the underlying business, not just heavily-qualified and general statements that give the Indian buyer little ability to hold the US seller to its word.

These aspects of the agreement operate as a form of insurance policy which protects the buyer in the event the condition of the business is different than what was expected. Litigation from suppliers or employees, product liability claims from customers and other risks can undermine an attractive purchase price and lead to a drain in time and resources that the Indian buyer needs to use in integrating and running its US business.

The underestimation of such legal risk issues in the United States is natural for investors from countries that do not carry a similar level of risk at home – this is not unique to India and we have seen similar issues faced by investors from countries such as Korea (from the early 1990s) and Japan (from the mid-1980s) in their earlier stages of cross-border acquisitions. However, though also not unique to India, we are concerned over the longer-term fall-out from corporate India’s strong emphasis on cost as the primary factor in working with US lawyers.

Evaluation of US Counsel Based on Price Only. US legal costs can be intimidating for Indian companies. The process of performing US legal due diligence and documenting a US acquisition is a time-intensive process that can lead to significant cost savings through the containment of US legal risks. In part due to this increased legal risk component in the US, the documentation and due diligence process is a more intensive process as compared with acquisitions in India, and US legal costs are more expensive that legal costs in India.

Many Indian companies understandably try to contain these legal costs, though we have found a tendency to search for the lowest priced lawyers, preferably those that will offer a fixed overall cost. This limits the pool of experienced merger and acquisition lawyers who are at the lower end of the cost spectrum. Those with the lowest cost will not likely have the right mix of acquisitions experience, cross-border legal sensitivity and experience in India as well as the US which offers a perspective on the Indian company’s priorities and needs. The legal costs of deals between parties in two countries are also inevitably higher due to time zone and other reasons, one of the many factors that may not be taken into account by law firms without significant cross-border experience.

Will a firm willing to handle an acquisitions project for a very small fixed amount be able to devote its experienced team members to the project and enough effort to the details that require input? Most will say yes, but how realistic is this?

Limited Information Offered to US Counsel Submitting a Proposal. Since some Indian companies may view acquisition legal input as something of a fixed-price commodity service, companies may have limited sensitivity to the information that goes into the preparation of a meaningful proposal to handle the legal issues of an acquisition. A meaningful proposal will tell the Indian company what it will actually be receiving - for example, what level of due diligence and participation in document drafting and review? Indian companies should be more open to discussing their priorities and needs with US counsel to enable such counsel to provide a realistic proposal. If the proposal is not fixed but carries some level of assumptions, this may be more a mark of experience than an attempt to be vague and evasive.

The Good News - A Less Cumbersome US Regulatory Environment. We have also worked with US companies in India and recently assisted a US company with the sale of its Indian subsidiary. Indian companies are very familiar with the web of Indian rules that require at least two shareholders, demand physical board meetings (not teleconferences) and involve numerous filings, such as to obtain director identification numbers for new directors. At least for privately held companies, the legal process for creating and operating US companies is simpler and less expensive.

In-Bound Acquisitions of US Companies - Private Equity Losing Deals to Foreign Strategic Buyers?

Here is an example of how Apollo lost a deal to buy a GE unit - to foreign buyers. The video clip offers a flavor for how foreign buyers can afford to pay more, of course in part due to the weak dollar. The legendary dealmakers Bruce Wasserstein and Martin Lipton make a minor contribution to Leon Black's comments.

Foreign Direct Investment Slows in China, Grows in Other Parts of Asia

Note this interesting graphic from the June 17, 2008 New York Times. On the one hand, the chart shows that in 2007 foreign direct investment (FDI) grew by 14% in China but a whopping 136% in Vietnam and 36% in India.

More dramatically, the chart shows the continued enormous disparity in China's share of FDI compared with India and Vietnam - while China's FDI in 2007 was $80 billion, FDI was under $20 billion in each of India and Vietnam. Interestingly too, note that Vietnam's FDI is at similar levels to India, a much larger country.

If US States Were Countries - By GDP

Take a look at this map of the United States as you may have never seen it - the US state names have been replaced by countries with a similar level of GDP.

I credit this to Professor Christian Broda of the University of Chicago.

Investment in India - Further Evidence of Liberalization

As further evidence of India's quick market liberalization pace for acquisitions and overall foreign investment - a point made in our India articles noted elsewhere in this blog - the March 28 edition of India's The Economic Times reported that foreign investors in Indian real estate may soon be allowed expanded exit opportunities.

Though up to a 100% foreign equity interest is currently permitted in real estate as well as hotels and tourism, foreign investors are now subject to a three-year lock-in during which the investor cannot sell the equity stake without the approval of India's Foreign Investment Promotion Board (FIPB). Indian authorities have proposed a waiver of this three-year lock-in as well as the lifting of a minimum investment requirement of US$5 million for joint ventures or $10 million for wholly-owned ventures.

Get ready to pick-up your dream apartment overlooking the ocean on Marine Drive in Mumbai along with that land for your manufacturing facilities.

Midddle Market Growth in Uncertain World Markets - A Fine Conference

I had the pleasure of co-chairing a fine international conference yesterday –sponsored by the Association for Corporate Growth’s Chicago chapter– a group that brings together our very active community of private equity firms, investment banks, accountants, lawyers and other dealmakers. Many in this 1,000-member organization share a growing passion for international opportunities, and about 200 proved to be active enough to register for our event.

The focus was on mid-market companies expanding internationally in uncertain times. The overall message from our several panels of speakers: yes, capital and debt markets in the coming months will present some major challenges, but expanding companies and dealmakers that are not relying on high levels of debt are likely to find an excellent hedge against the US economy in growth markets elsewhere (as well as from non-US investors attracted by a weak dollar and more reasonable US valuations). You all know the markets – whether India or other BRIC countries, Central Europe, Dubai, Vietnam and elsewhere.

Our feedback was strongly positive, fueled by an excellent keynote presentation by Robert Reich (who happens to have a great sense of humor, including on a personal level around the lunch table), a breakfast keynote moderated by Fortune Magazine’s Global Editor, Stephanie Mehta (a rising journalism star of South Asian decent who happens to be from Chicago), and 5 panels of speakers from companies such as Boeing, Abbott Laboratories, Zebra and Littlefuse, private equity firms such as The Jordan Company, Baird, 3i and Audax, investment banks such as Brown Gibbons Lang, consultants such as A. T. Kearney and Visthar and other publications such as Business Week.

Can you guess InternationalCounsel’s professional interest in contributing to such an event? Our longstanding focus has been on internationally-expanding mid-market companies attracted by our cost-effective international legal team model - just the sort of audience who found their way to the Sheraton for yesterday’s event.

Acquisitions of Indian Companies - Our Recent Article

Prior to my recent India trip, the General Counsel of a Chicago-area company and I published an article on acquisitions of Indian companies by US companies.

As part of our cross-border legal advisory services, we work with US companies investing and doing business in India (and also with Indian companies doing business in the US).

Here is a copy of the article, as a follow up to my February, 2007 update on foreign equity investment in Indian companies - published in the Association for Corporate Growth's Cross-Border Transactions Bulletin.

We are active with the international activities of this mid-market-focused dealmakers' association, and I am co-chairing our 2008 international conference on March 18. Click on the images below to enlarge.

India Updates

I have just returned from Mumbai, Bangalore and Delhi (with stops in Pune and Mysore). We are seeing a good deal of acquisition and other activity with India. Stay tuned for updates.

The photo is of Marine Drive, Mumbai, otherwise known as the great city of Bombay - photo credit to Rakesh Krishna Kumar.

Looking for Greater Export Profits? Consider "Onshore" Options in Your Search for an "Offshore" Strategy

Can the formation of "offshore" companies offer tax benefits to an internationalizing US business, and are many companies overlooking the benefits of structures using US "onshore" entities?

The business press has left some of our clients with the sense that they are missing-out on great benefits though "tax haven" structures. Yet, clients often assume that such structures are used mainly by the likes of Tyco and Enron, are complex and risky, and may not be a good way to win friends at the IRS.

Offshore entities can be useful in some situations that have little to do with US tax savings. For example, companies investing in China or India can benefit by holding their local investment through an intermediate company established in Hong Kong (for China) or Mauritius (especially for India but also for China) or some other low-tax jurisdiction. The Hong Kong or Mauritius entity can more easily be sold -- local law restrictions on transfer of ownership may not apply since only the ownership of the "offshore" entity is transferred. The shares of the local Chinese or Indian company do not change hands. Even if the shares of the local company are later sold, the local withholding tax on capital gains may be reduced for a payment made to a jurisdiction like Mauritius than for a payment made directly to the US.

If a US company is not investing or forming an entity in another country but is exporting, licensing or otherwise selling to other countries, offshore entities offer at least the potential of deferring the impact of US tax. It would be difficult to reduce US taxes simply by routing payments though a third jurisdiction such as the Cayman Islands, no matter how attractive its tax laws. This is mainly since the US taxes a US company's or individual's income on a worldwide basis, even if the income source has nothing to do with US activities (this is not true for tax systems of most other countries). Parking income in low-tax country may be possible, though this defers but does not reduce the US tax burden (and will still require current US tax payments on many types of passive "subpart F/controlled foreign corporation" income, even if funds are not actually distributed back to the US).

Too great a focus on "offshore" structures can also cause US companies to overlook the benefits of US "onshore" structures. This can be as simple as the use of a US limited liability company for exporting US goods. Net income would then be taxable to owners of the LLC but would not be subject to the added US corporate tax that would apply to a corporate entity.

US exporters can also continue to achieve significant US tax savings through the formation of a separate US international sales corporation under special IRS rules. This technique is available to certain partnerships, S corporations and LLCs, which establish an export sales corporation and then pay it a commission of up to 50% of the export net income. The commission is deductible by the company paying the commission and is not taxable to the export corporation. The accumulated income in the export corporation is subject to a 15% dividend tax when distributed to the payer of the commission. Though there are a few other wrinkles, a savings of 10% or more off US taxes can easily be achieved so long as a company's exports are of US origin.

Better yet, the set-up costs are modest, and your family and friends won't likely be reading about your IRS troubles in the local business press!


CIRCULAR 230 DISCLOSURE: ANY STATEMENTS REGARDING TAX MATTERS MADE HEREIN CANNOT BE RELIED UPON BY ANY PERSON TO AVOID TAX PENALTIES AND ARE NOT INTENDED TO BE USED OR REFERRED TO IN ANY MARKETING OR PROMOTIONAL MATERIALS.

Enforcement of US Court Judgments in China - Even a Single Example?

As noted in my last posting, we seldom recommend that clients specify US courts as the choice for dispute resolution in cross-border agreements that may need to be enforced in another country. Arbitral awards are simply a better enforcement bet among the many signatory countries to the New York Convention.

Don Clarke, the George Washington Law School professor who moderates an excellent China law discussion group, is reviving his search for even a single example of a US court judgment that has been enforced in China, and I will report back on specific examples. Don's criteria are as follows - a typical scenario wherein the local party challenges the enforceability of the judgment:

"1. I'm talking about judgments, not mediated settlements.

2. I'm not talking about cases where both parties wanted the judgment recognized (e.g., consensual divorce cases). I want cases where one side argued that the judgment should not be recognized and enforced, and lost the argument.

3. I'm talking about cases where the issue was whether or not to enforce the judgment without going into the merits, not where the merits of the matter were litigated (since in that case it wouldn't really be a case of enforcing a US judgment).

4. I really need a specific and independently verifiable reference, not something you heard about from somebody else. This is important because so far, every time I hear about a case that I'm told meets my criteria, when I am able to look at the specifics it turns out that it does not.

Our last discussion failed to uncover any cases meeting the above criteria; are there really none that anyone knows of?"

Online Terms and Conditions - Binding in the US and Internationally?

We have worked with clients to help ensure that online terms and conditions are enforceable, both in the US and in other countries. Apart from online agreements accepted by clicking "I accept," some agreements are signed by parties yet refer to materials posted online as part of the agreement terms. Will such online terms be enforceable?

Not always. In a US court case in Florida, the parties signed a written agreement yet tried to make various online terms binding through the following language:

“This contract is subject to all of X's terms, conditions, user and acceptable use policies located at http://www.X.com/about/legal/legal.htm."

These online terms included an agreement to arbitrate, and the Florida court found that the agreement to arbitrate was not binding. Why? In essence, the incorporation of the online terms needed to be more specific than a simple reference that it is "subject to" the online terms. There was no specific reference in the "offline" written document that is meant to include the online document that contains the arbitration provision, and the web address link apparently did not directly point to the terms containing the arbitration provision.

Such a defect can be devastating in a cross-border context. We often recommend arbitration for international agreements, in part to stay out of unfamiliar local courts and in part due to the greater chances of enforceability in many other countries of an arbitral award as opposed to a foreign court judgment. If a US court is reluctant to enforce online terms which are not clearly meant to be binding by the parties, courts in many other countries may be even less likely to enforce terms, especially if they disadvantage a local party.

The decision is Affinity Internet, Inc., d/b/a SkyNetWeb v. Consolidated Credit Counseling Services, Inc. No. 4D05-1193 (Fla. Dist. Ct. App. 4th Dist., March 1, 2006)

We Don't Pay Foreign Officials - Why Are We At Risk?

As they expand internationally, our clients want to be good corporate citizens and understand that payments should not be made to foreign officials in order to get business. Yet, many mid-market companies would be surprised to learn that they are at risk for failing to recognize "red flags" and failing to follow even basic corporate compliance practices.

The reason is the Foreign Corrupt Practices Act and the heightened enforcement activity over the past 18 to 24 months - companies are facing the highest level of scrutiny since the Act's introduction in the 1970s.

Are employees on that trip to Beijing handing over fists of cash to ministry officials in order to land new business or obtain approval for a new venture? Perhaps not so likely. What about that recent distributor in New Delhi and its relationship with government officials - is "don't ask, don't tell" good enough? Are you confident that you are not dealing with government officials - have you really explored the ownership of that "private" company in Shanghai or that hospital system in Bahrain?

If a U.S. company is faced with a murky set of facts, it may have sufficient "knowledge" of a possible improper payment to open the door to an investigation and potential fines (or worse). "Red flags" can include the insertion of a local intermediary without a clear business purpose. Due diligence on relationships and transactions is an important part of the response. Contractual language piously prohibiting corrupt payments is advisable, but will not be sufficient without more, including evidence that the company took steps to implement a compliance program and educate employees (something more than "thou shall not hand over bags of cash").

Better a little up-front investment than a front-page Wall Street Journal or Crain's article and a cloud over the international team.

Abe's Shameless Malarkey Refuted

Do I now have your full attention? Ready to take a break from cross-border legal updates?

Yes, this is in fact a North Korean news headline, in one of those priceless English translations. Here are a few excerpts:


"Abe's Shameless Malarkey Refuted

Pyongyang, March 14 (KCNA) -- Japanese Prime Minister Abe's reckless remarks aimed to throw the past crimes committed by Japan into the limbo of oblivion remind one of the saying that "Leopards don't change their spots," observes a Minju Joson analyst Wednesday.

Noting that he totally negated Japan's past crimes, letting loose a string of rubbish woefully lacking common knowledge, the analyst goes on: . . . . "


The next time I am out of good arguments on a client's behalf, I will simply accuse the other side of spouting "shameless malarkey" and of "letting loose a string of rubbish woefully lacking common knowledge."

By the way, the satellite image of North and South Korea shows in the starkest terms how economic development can turn dark into light. Whatever your political persuasion, many of us can agree that our cross-border efforts and market liberalization can lead to something positive.

India's Growth - Don't Overlook Manufacturing (and the Consumer Market)

We just received an update from one of our India-based contacts - the Indian economy continues to steam ahead, and note the importance of manufacturing to this growth. This economy has much more in its favor than software and back-office outsourcing.

"Goldman Sachs has projected that India will sustain over 8% growth until 2020 and become the second largest economy in the world ahead of the United States, by 2050. In their words- “…we project India’s potential or sustainable growth rate at about 8% until 2020...”. Standard & Poor’s, the global rating agency, has raised India’s sovereign credit rating to ‘Investment Grade’ (BBB-/A-3).

Recent reports released by the Central Statistical Organisation (“CSO”) and the Reserve Bank of India (“RBI”) further affirm the above facts. According to CSO, real gross domestic product (“GDP”) growth accelerated to 9.2% in the second quarter from 8.9% the preceding quarter and 8.4 % a year ago, led by manufacturing and services sectors. The manufacturing sector with double digit growth of 11.5% maintained its position as key driver of industrial activity, contributing almost 91.2% of the growth in industry. Growth in the services sector accelerated to 10.6 %."

Middle Market Companies Go International - A Terrific Conference

How many conferences really focus on the special needs of middle market companies as they expand abroad through acquisition, manufacturing, distribution and otherwise? What about the exploding interest among private equity firms in helping their portfolio companies into new markets and in exploring direct investments in China, India and elsewhere?

I was pleased to be part of a fine group of international committee members who organized ACG Chicago's "Is the World Really Flat? Middle Market Companies Competing in the Global Economy."

The February 28 event drew about 300 participants and featured Fareed Zakaria as our lunch keynote speaker (congratulations on a fine presentation, Fareed) as well as Julie Sell of The Economist and her cross-border dealmaker roundtable with Jay Jordan of The Jordan Company and Steve Pagliuca of Bain Capital (which I thought really went to the heart of many of the middle-market's cross-border challenges).

In addition to working with Julie, Jay and Steve on their panel, I put together and moderated our "Sourcing Cross-Border Deals" session. As described below (click on the images to enlarge), I was joined by senior dealmakers from Illinois Tool Works (a very international Fortune 100 company), Cathay Fortune Corp. (a China-based private equity firm) and S.H. Lang & Co. (Scott Lang, formerly of Brown Gibbons Lang, the mid-market investment banking firm).

Our China Roundtable Discussion

InternationalCounsel hosted a China roundtable discussion at our offices on Monday, February 26. We had a good group of attendees, including some manufacturers, consultants, representatives from Illinois and Wisconsin trade organizations and others interested in or already doing business in China.

I spoke on manufacturing and distribution in China, and Shawn He of MeetChinaBiz moderated the discussion.

These roundtable discussions allow participants to voice their special problems and concerns and learn from each other. We are finding something of an oversupply of China events in Chicago and elsewhere - how many more lectures on direct foreign investment in China are you prepared to sit through?

A roundtable format offers a more interactive setting, and most companies entering China are facing contracting, investment and IP issues that are not rocket science but require small teams of experienced advisors.