United States: Advice Of Counsel - Q&A On Tech Transfer : Are There Unique Legal Problems Distinguishing European-American Biotech Acquisitions From Those In Which The Buyer Is An American Biotech?

by Michael Lytton

Answer: Yes. Although there have been increasing numbers of these deals (see table), transatlantic deals are generally more difficult to negotiate and close.

The first difficulty arises from valuation. The relative valuations of biotech companies at a comparable stage of development are higher in Europe than in the United States. Investor demand exceeds the supply of investment opportunities on local European stock markets such as the Neuer Markt in Germany, the Copenhagen Stock Exchange, and the Swiss Stock Exchange. Since most biotech acquisitions are structured as tax-free stock swaps, the artificially high valuation of the equity currency of a European company may make it difficult to structure a deal with a US target.

The new European stock markets are also considerably more volatile than Nasdaq when it comes to biotech valuations since there are few stocks traded among a small institutional investor community. Thus, if the acquirer and the target are public companies, the relative valuations of the two companies can change significantly from the time the deal is announced to the date of the closing, not to mention the date on which the US target company shareholders are finally free after a six-to-twelve month lock-up period to dispose of the stock of the European acquirer.

There are a variety of approaches for dealing with these issues, such as determining the exchange ratio between the two securities based on a thirty-day or longer average of their respective prices prior to public announcement of the transaction, which should be reflective of the relative worth of the two companies.

Market fluctuations are particularly important because transatlantic acquisitions take a great deal of time. The securities authorities in the acquirer's home country as well as the United States must approve the deal if both companies are publicly traded (and sometimes, in the US, when the US company is private and has a large number of unaccredited investors). And the timing of SEC reviewers is unpredictable since the examiners require disclosure documents to be rewritten if they do not fit within their new "plain English" guidelines.

On the European side, matters trivial in the US can also drag out approvals. For example, in Germany, an increase in the number of authorized shares of capital stock in connection with an acquisition must be approved by a commercial register or court. The European acquirer has to demonstrate that the value of the assets it will be acquiring is at least as great as the value of the contemplated capital increase, necessitating a formal valuation of the target company's assets and a lengthy dialogue with the European regulatory authority.

In addition to different corporate law requirements, European securities laws are far from identical to the US laws. In the United Kingdom, for example, an offering document is subject to "verification" as to the truth of every statement contained within it, which involves a lengthy process of due diligence by the underwriters and company counsel. US securities authorities are more interested in the completeness of disclosure, and do not invest comparable time and resources in requiring companies to demonstrate the truth of every statement in their offering materials.

Another complexity of transatlantic acquisitions involves stock incentives for the target company's employees. On the whole, stock options are far less prevalent in European companies and, where they exist, are subject to restrictive regulation. In Germany, for example, stock options are limited to 10% of authorized capital; in a US public company, 15-20% is typical and there is no comparable legal regulation.

A German company may issue stock options only to employees. Consultants and scientific founders, including the scientific founders of the acquired US company who must likewise continue to be incentivized, have to get their equity through roundabout means, usually consisting of debt instruments which are convertible to stock on maturity. Other burdensome requirements exist in Germany as well, such as a minimum two-year waiting period for exercise of stock options and the conditioning of exercise on the stock price of the company reaching a specified target level.

Also, it is difficult to make stock options in a European company available to US employees on the same tax-advantaged basis as the incentive stock options granted by US companies. Synthetic equivalents can be created to put the US employee on the same footing as if he were employed by a US company, but these are complex.

These are all technical issues, most of which can at least be solved with patience. Potentially thornier are the cultural issues which often divide European companies and their US subsidiaries. Still, there is emerging a common biotech culture which does cross borders, a culture fostered by the frequent representation of European scientists in American companies and academic institutions.

And this cultural cohesion is itself encouraging cross-border M&A. Bernd Seizinger, MD, PhD, for example, now the CEO of Martinsried, Germany-based GPC Biotech AG, was a former researcher at Harvard University and Bristol-Myers Squibb Co., and R&D chief at Genome Therapeutics Corp. Seizinger led GPC to acquire the Cambridge, MA-based cell-cycle specialists Mitotix.

For US companies, such transactions offer yet another important financial and strategic option in a tool-kit formerly restricted to US-based choices. Thus, while intra-US deals will always be more common, the internationalization of pharmaceutical and biotech enterprises will increase the number of transatlantic mergers.

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