Sunday, May 12, 2013

Chinese Investment in the US - Chicago Booth Emerging Markets Summit

As a second installment from the Chicago Booth Emerging Markets Summit which took place on April 27, one of the sessions focused on Chinese investment in the US. Many had anticipated a greater flow of investment flow into the US during the recession, and Chicago has been very interested in serving as a headquarters location for Chinese manufacturing and distribution with access to the entire country.

Zhao Weiping, Consul General of China in Chicago, offered a nice summary of the state of Chinese investment in the US, though expressed the concern that Chinese investors may be reluctant to act in greater numbers due to a perception that their increased investment may be politically unwelcome.

In his presentation, Consul General Zhao indicated that Chinese investment in the US has a short history - up from $2.7 billion in 2002 to $77.2 billion in 2012, for an increase of some 28 times. Here are some notable examples.

While Chinese officials are making a strong case to Corporate China that investment into the US should be increased, there is a perception among Chinese investors that the US is not open to Chinese investment, and Consul General Zhao provided several examples of investments that have been blocked.

I countered at the session and personally to Consul General Zhao that the US is actually very open to Chinese investors, that those investments that have been blocked are some of the small numbers of inbound US investments that allegedly raise national security concerns, and that the vast majority of investments coming to the US from China are of a kind and size that will encounter no resistance at the US national level and will be welcomed with open arms at the state and local level.

Moreover, I suggested that viewing US-bound investment through a lens of "government regulation/governmental review" may be understandable coming from an economy such as China with much more governmental involvement in regulating foreign investment. However, such a lens suggests much more governmental involvement in inbound investment in the US than is actually the case and may unnecessarily alarm potential foreign investors whose manufacturing, distribution and other activities are subject to absolutely no governmental regulation or interference.

Sunday, May 05, 2013

Private Equity in India - Chicago Booth Emerging Markets Summit

I will be offering a few blog entries from the Chicago Booth Emerging Markets Summit, which took place on April 27.  Let's start with India, and something of a personal and subjective synopsis of the views presented by Jahangir Aziz (Chief Economist, JP Morgan India), Jai Das (Managing Director, SAP Ventures) and Archana Hingorani (CEO and Executive Director, IL&FS Investment Managers)

New investment dollars into Indian PE funds were down by 73% from 2010 ($7.7 billion) to 2012 ($2.1 billion). Over the same period, this compares with a decrease of 25% for China (from $14.5 billion to $10.8 billion) and a decrease of 6% overall for Latin America (from $4.5 billion to $4.2 billion).

For India, there is still significant dry powder for new investments and capital is still being deployed, though it is the raising of fresh funds that is down. Why? Growth in India has declined from the range of 8 - 9% to about 5%.  The Rupee has decreased in value, making dollar investments worth less than they were a few years ago. Inflation is up to about 10%.

PE's reliance on debt to help finance deals has limitations in India (though India just announced some liberalization on debt that can be raised). Exits are hard - there are few IPOs and strategic investors are selective. Private equity continues to be a challenge since most businesses are run by families that do not like to relinquish control and don't want to submit to the outside influence as the cost of taking equity. Private equity in India dates only to 1991/1992 and many are still not used to the concept of capital in exchange for ceding part control.

What about the next few years?  Some promising trends: (1) a new Indian economic team is taking growth seriously and is rapidly gaining respect, and (2) the Rupee shows signs of strengthening and could be up significantly in the next 5 years. With growth potentially on the rise and the Rupee strengthening, this puts a tail wind behind all sectors. Even without this, here is an economy still in the early stages of potential, a bit overlooked compared to China and which even now is offering a respectable 5% growth. Moreover, even the present consumer class is in the range of 250 million people, and growing.

Monday, April 15, 2013

Overseas Operations Driving Profitability. The Largest US Companies Are Benefiting - What About the Rest?

Today's New York Times offers yet another summary of how earnings growth outside of the US can be an important contributor to company performance, yet can be harder to achieve for the under-resourced next tier of companies outside of the very largest. 

Similarly, our largest clients and contacts remained committed to their global operations over the course of the recession, though the middle market and smaller companies tended to pull in their ambitions and stick closer to their home markets. While we are seeing evidence of a thaw, it is just these fast-growth markets that are ever more important in offsetting slower-growth US and European economies. 

As the New York Times article observed: 

"In fact, the case of General Electric, which reports first-quarter earnings on Friday, neatly illustrates how overseas operations at many of the most familiar American companies have grown rapidly in recent years even as domestic activity has lagged. Total employment at the company dipped slightly to 305,000 in 2012 from 316,000 in 2005, but the number of workers it employs in the United States fell more sharply, to 134,000 from 161,000 in 2005. Over the same period, the proportion of sales that came from the United States fell to 47 percent from 55 percent."

Wednesday, January 11, 2012

Update: Foreign Investment in Retail - OK, Perhaps a Bit Less Than Half Full

I noted the other day that the Indian government is going ahead with the further liberalization of "single brand" retailing - to 100% foreign equity from the current 51% limit - despite backtracking on efforts to allow any amount of foreign equity in "multi-brand" retailing.

With a catch. Foreign retailers that opt for 100% equity in single brand retailing must source 30% of the goods sold in the retail outlets from Indian small-scale producers.

Here are some quotes from the Economic Times:

"'It is going to be a challenge for most brands. I don't know if brands will change their global manufacturing processes for India,' said Sanjay Kapoor, managing director of Genesis Luxury, the joint venture partner of Burberry in India, which also represents other luxury brands like Canali, Jimmy Choo and Bottega Veneta." .  .  .

and also:

"'The scale of the Indian market is small at the moment for it to make sense of the luxury brands to start manufacturing in India, only for India,' said Neelesh Hundekari, principal at consulting firm AT Kearney."

As cross-border lawyers representing companies entering India and many other countries, we have found that foreign equity liberalization is often only part of the story - other restrictions can impede investment opportunities. For example, some years ago in Japan a liberalization to foreign retailers was in effect blocked by the ability of local Japanese retailers to veto a foreign retailer's entry on a number of very broad grounds.

Friday, January 06, 2012

Foreign Investment in India - Half Empty for Retail, But More than Half Full Overall

Our clients and contacts have been expressing concern over some backtracking on the Indian cabinet's announcement of a further expected opening to foreign investors in the retail sector. Our view is that the spat over retailing should in no way overshadow the fact that foreign investors can hold up to 100% equity in the vast majority of industry sectors, and that many of these sectors are open through a streamlined automatic approval process.

The current retail status: 51% foreign equity is allowed in "single brand" retailing (think Armani) but no foreign equity allowed in "multi-brand" retailing (think Walmart). Walmart was still able to enter India through a joint venture in back-end operations and distribution even though its Indian partner, Bharti, owns 100% of the front-end retailing.

The November announcement was that 51% foreign equity would soon be allowed in multi-brand retailing and that the 51% in single-brand would be increased to 100%.

As with many countries, retail raises sensitive political issues due to the large numbers of small local retailers (and their bigger counterparts) that feel threatened by a foreign influx of retail sales. An outcry in India after the announced liberalization caused the Indian cabinet to put the multi-brand change on hold, and the foreign and local press have been spilling a lot of ink over this.

Not ideal, though we heard today that the Indian government is still moving ahead with the change to allow 100 per cent foreign direct investment in single brand retail.

Sunday, January 01, 2012

Audit 4: Take a Second Look at Arbitration for Contract Dispute Resolution

Whatever the type of your cross-border agreements, it is dangerous to assume that a court judgment from a convenient and familiar local court would be enforceable against a foreign party with assets in another country. 

It is one thing if the foreign party has in-country assets (say in the US) that can be attached locally (such as in domestically enforcing a US court judgment against assets in the US). If is another matter if one needs to rely on the generosity of foreign courts to enforce a judgment.

There are generally no treaties that will require the enforcement of a foreign court judgment (except among certain groups of countries), and local courts may look to uncertain concepts such as whether the foreign court offers reciprocal enforcement and may require a re-litigation of the underlying issues.

Audit 3: Online Business: Terms and Conditions, Privacy Policies and Marketing Practices

Sales terms and conditions are also embedded in web sites, whether or not your company’s site is e-commerce enabled. Many companies do not focus on the fact that these terms need to comply with cross-border laws and regulations. 

Opt-in and opt-out rules and a maze of privacy and data protection requirements in Europe and elsewhere also present lurking enforcement and liability problems if local-country rules have been ignored. Marketing rules in many countries also need some attention.

We suggest pulling your company further out its “home country centric” approach, especially if you have an important customer or supplier base in multiple countries. Your counterparts will also appreciate your international savvy and professionalism as a result.

Audit 2: "Internationalizing" Your Sales Terms and Conditions

We see too many companies depend on inadequate sales terms and conditions for their international sales. Do you really think that a judgment in a Chicago court can be readily enforced in China or India, and what about those warranty and limitation of liability provisions – are these unenforceable or do they otherwise fail to take into account local law requirements?

If distributors are also involved, these terms can also be inconsistent with the distributor agreement terms, leading to confusion and heightened liability. 

As a first step, and for a low fixed price, we assist clients by gathering together their purchase order or sales terms, analyzing them, and then offering options for implementing best-practice changes (with foreign local law adjustments) along with clear budgets.

Audit 1: Optimizing International Agency and Distribution Agreements

Businesses large and small appoint international agents and distributors to get their products to market. We often see that these relationships may be based on a US form agreement, on agreements that may be out-of-date or – even riskier – relationships based on a handshake. This is dangerous territory in Europe, parts of Latin America, the Mideast and parts of Asia that protect local dealers and can make termination very expensive.

Far better to keep your company out of local courts and help limit the impact of local dealer protections, such as by creating a best-practice cross-border distribution and agency agreement templates with adjustments for key international markets. Laws may also limit your ability to set prices and designate territories, as well as require unexpected taxation on revenues. The small amounts invested in agreement optimization can be repaid many times over in improving your dealer relationships, avoiding disputes and allowing early termination if necessary.

Thursday, December 15, 2011

Asia's Largest Law Firm - Announced Today

King & Wood, the well-regarded Chinese law firm, is "merging" with Australia's Mallesons Stephens Jacques to create what is being called Asia’s largest law firm.

The name:  King & Wood Mallesons.

A sign of the times that a significant Chinese law firm would help to lead such expansion.

Note that foreign and Chinese law firms are not allowed to share revenues and must be operated as separate law firms - hence the structure as alliances for McDermott's foray into China with MWE China Law Offices, a separate Chinese law firm.

How will the Chinese legal community react to this one?

Monday, November 21, 2011

Cross-Border Joint Ventures - A Word From Benjamin Franklin, Circa 1791

Yes, that Benjamin Franklin, United States founding figure and printer, writer, inventor, diplomat and scientist - the guy on the US $100 dollar note. While his observations were on partnership, they apply equally well to joint ventures, which after all are a form of partnership. Clients often observe, correctly, that good relationships are built on trust, but I counter that without something more to document and support the intention of the parties, those relationships are at great risk of dissolution, and especially so given the complexities and cultural disconnects in a cross-border venture. On to Mr. Franklin, from his Autobiography:

"Partnerships often finish in quarrels; but I was happy in this, that mine were all carried on and ended amicably, owing, I think, a good deal to the precaution of having very explicitly settled, in our articles, every thing to be done by or expected from each partner, so that there was nothing to dispute, which precaution I would therefore recommend to all who enter into partnerships; for, whatever esteem partners may have for, and confidence in each other at the time of the contract, little jealousies and disgusts may arise, with ideas of inequality in the care and burden of the business, etc., which are attended often with breach of friendship and of the connection, perhaps with lawsuits and other disagreeable consequences."

Friday, October 28, 2011

Why "Local" [Law and Practice] Matters in the Age of Globalization

After attending our November 8th event on challenges in doing business with India (see below), we thought we would put in a plug for our friends at the Chicago Council on Global Affairs for their November 9th event in Chicago:


The following quote caught my attention - it is exactly our role as a cross-border law practice to help businesses to understand the local dynamics of different countries - with a focus on foreign market entry, legal systems and taxation (hence my slightly modified title above):

"Marvin Zonis and Joseph Yackley argue that as global interconnectivity grows, understanding the local political, social, and cultural dynamics of different countries is critically important to the success of foreign policy and international business."

Sunday, October 23, 2011

Open Invitation to a November 8th India Gathering - Chicago

We are again hosting an event to help promote the Inter-Pacific Bar Association’s annual conference – November 8th in Chicago, and surrounding dates for Toronto, Los Angeles and New York. 

We are trying to gather as many interested lawyers and business people as possible for this substantive panel and a discussion of the IPBA annual conference to take place in New Delhi from February 29th to March 3rd.

Please pass this along to whomever you think would have an interest. 


Panel discussion, sponsored by the Inter-Pacific Bar Association, will address challenges facing U.S. companies doing business with India, including: Dispute Resolution from a Foreign Investor’s Perspective; India’s Progress with Corruption and Ways to Handle It; Perspectives on Working with Regulators and Bureaucracy; and Intellectual Property and Non-Competition Issues in Working with Employees and Partners. 5:45 – 8:00 p.m., 200 South Wacker Drive, Suite 3000, Chicago. No charge; advance registration required by November 4. For information & registration, please

Lalit Bhasin
Bhasin & Co., New Delhi
Incoming IPBA President

David Laverty and Chandini Prakash
InternationalCounsel, Chicago

Suhas Srinivasiah
Kochhar & Co., Bangalore

Praveen Agarwal 
Agarwal Jetley, New Delhi

Thursday, December 02, 2010

"Right-Sizing" Legal Services and Our Approach to Cross-Border Legal Practice

The legal profession in the US continues to struggle to find its way in the face of companies and capable in-house counsel who are taking firmer control of their legal needs and destinies.

The legal press has been abuzz in the last several months over the continued progress in "right-sizing" legal work, recognizing that fixed and alternative fee arrangements (no, not new, but now pursued with new-found urgency), legal process outsourcing form India (Thompson-Reuter's acquisition of Pangea3 is causing many skeptics to finally take serious notice), temporary lawyer services (in some cases delivered with increasing sophistication and marketing polish) and alternative law practices are part of a movement away from the traditional ways of doing legal business.

Welcome to our world, in our case by re-imagining how cross-border legal services can be delivered more effectively and efficiently. Not just since the beginning of this particular recession, but since our founding back in the mid-1990s.

In October, Hildebrandt Baker Robbins released a Law Department Survey of 252 companies in 23 industries that, as a Hildebrandt blogger describes it, "provides strong evidence of the economic drivers for the transformational changes rippling through the legal industry."

For example, favored in-house cost management techniques now include implementing alternative fee arrangements (by 76% of those surveyed), keeping more work in-house (by 69%), and using regional or boutique law firms (by 68% of those surveyed).

We have been strong believers in the need for change in the legal profession, and while our true secret sauce lies in our methodologies for delivering our senior, hands-on, more streamlined approach to solving cross-border legal issues, cost-effectiveness is an important outcome of our services.

And of course we hope to continue to be just that sort of "boutique" practice that is in increasing use by internationalizing companies!

Tuesday, November 02, 2010

Global Foreign Direct Investment on the Rise

Our November newsletter offered both statistics on the rise of global foreign direct investment from the lows of last year, as well as a link to our article on the use of the Netherlands as a holding company for foreign investors.

Tuesday, May 11, 2010

Mumbai Rises

I just returned from Mumbai (and Singapore), where I was joined by our Netherlands-based colleague for presentations to corporate audiences and individual meetings with clients and contacts.

The mood is optimistic. The Oberoi Hotel just re-opened. Breakfast at the Taj Hotel is a gracious as ever. Private equity is moving ahead with fresh rounds of investment.

My lost iPhone was rescued by a taxi driver and returned to the Four Seasons, where I was able to retrieve it. OK, all is not perfect - I missed my flight out of Mumbai.

Stay tuned for further updates.

Tuesday, March 02, 2010

Think Again Before Specifying US Courts in a Cross-Border Agreement

As I have written in the past, 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. Not to single out China, but the China research below confirms an enforcement issue that US parties face in most countries.

Arbitral awards are simply a better enforcement bet among the many signatory countries to the New York Convention – enforcement is required by the Convention in the absence of fraud and other specified instances. By contrast, the enforcement of US court judgments is discretionary and usually based in part on whether the US has enforced judgments from the other country on a reciprocal basis.

Back in June, 2007, I posted a blog entry referring to a search for even a single example of a US court judgment that has been enforced in China. The search was posted by Don Clarke, a George Washington Law School professor who moderates an excellent China law discussion group. As far as I know, nobody in the discussion group was able to produce a single example.

A member of the China discussion group just posted (on March 1) his own preliminary review of the 26 foreign court judgments and 16 arbitral awards that he could locate that requested enforcement in China through Chinese courts. The member is Wei Luo, Director of Technical Services and Lecturer in Law, Washington University School of Law Library.

Mr. Luo found that almost all of the Chinese courts agreed to enforce the foreign court judgments if requested by a Chinese applicant. Yet, he did not find a single instance of enforcement if the applicant was a foreign party and the Chinese party did not agree with the enforcement.

In contrast, Mr. Luo found that most of the Chinese courts granted the applications to enforce a foreign arbitral award.

Many are finding that Chinese courts are improving and are becoming more open to arguments presented by foreign parties, and the uncertainty over the enforcement of foreign court judgments is an issue in most countries, not just China.

Monday, November 09, 2009

"De-Globalization" vs. "The Wal-Mart Effect" in India and Beyond

A few weeks ago, Jim Valderrama from Grant Thornton and I presented at an international roundtable event at the University of Chicago Booth School of Business - our theme was whether we have been seeing a "de-globalization" of US mid-market companies that will extend beyond the recession. (Thus, the tie-in to the photo caption - "Robinson (American) falling into sea near Nice")

We looked at data on US direct foreign investment and cross-border acquisitions into many parts of the world, and there has clearly been a major drop in activity over the past 18 months. Yet, more of a drop in cross-border activity than in overall economic activity? Hard to tell, though I referred to evidence from some of our own clients and contacts that there has been a scaling back in ambitions among mid-market companies. For example, many have found that China has been more expensive and a greater drain on senior management than expected, and mid-market companies do not have the same level of resources to handle such far-flung expansion as do larger companies.

Surely much of the cross-border expansion among mid-market companies and otherwise will be returning in strength as the US economy thaws. Many of course are more motivated than ever to take advantage of higher growth rates in BRIC economies and elsewhere and the "portfolio effect" of multiple bets in multiple countries.

Wal-Mart is one of the many examples of companies placing great faith in international expansion, as is evidenced by recent moves in India. We have reported in the past on Wal-Mart's tie-up with Bharti in India to establish retail stores, though foreign retailers remain restricted in India from owning equity in "multi-brand" retailing (I was formerly the legal head of Kmart's international expansion in China and many other countries, and our blog entries have noted that market openings for retailing often lag behind other sectors - India's economy is otherwise quite open for most sectors).

As reported in the November 6th issue of the Economic Times of India, Wal-Mart's chairman recently met with Prime Minister Manmohan Singh in New Delhi to lobby for more access to the Indian market, the company's CFO recently noted that Wal-Mart is stepping up growth in its international operations to take advantage of growing economies and opportunities in emerging markets such as China and Brazil, and the head of its international operations referred to a US$5 billion fund set aside for its international expansion and "India can use as much as it wants."

We hope that the next tier of companies is paying attention to such aggressive faith in global markets and will not sit out the next round of revenue and profit opportunities outside of the US.

Monday, August 10, 2009

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

Tuesday, May 26, 2009

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.

Monday, March 23, 2009

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

prague.jpgCompared 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

Monday, January 26, 2009

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

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.

Sunday, November 30, 2008

Sunday, October 05, 2008

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.

Saturday, September 20, 2008

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)

Friday, September 19, 2008

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

Wednesday, September 03, 2008

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.

Tuesday, September 02, 2008

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.