Singapore: Issues to Consider in Cross-Border M&A Transactions

By Lian Jeng Yap; Yanni Long

The success of an M&A transaction lies not only in the meeting of minds on the commercial terms by the principals. Very often, it also hinges on the anticipation of potential legal issues, and careful structuring to navigate potential legal obstacles and to achieve the commercial objectives in a feasible and efficient way.

As the importance of transactional structuring may sometimes be overlooked, we thought it would be useful to set out some of the key considerations that should be taken into account when embarking on any cross-border M&A transaction.

• Deal structure. The deal structure depends on, among other things, the commercial objectives of the acquirer, and the financial, tax, and legal and regulatory considerations. At the macro level, a decision has to be taken as to whether the transaction should be an asset purchase or a stock purchase. At the micro level, a decision has to be taken as to the manner of implementation of the transaction. For example, a stock purchase could be implemented by way of private negotiation with an existing major shareholder, a tender offer (particularly in the case of public listed companies), or some form of merger (such as amalgamations or schemes of arrangement). Other aspects of deal structuring at the micro level include the assets/percentage of stock to be acquired, the form of consideration (such as cash, stocks or other securities), and whether to implement collaborative arrangements (such as with existing shareholder(s) or management familiar with the business with an option to gain full control in due course).
• Regulatory framework and political considerations. Legal advice should be sought early on the applicable laws and regulations governing M&A activities with a view to identifying key regulatory filings and/or approvals required. These include securities laws, tender offer rules, ndustryspecific regulations, foreign shareholding restrictions, labour laws and antitrust laws. Political considerations may play a key part in M&A transactions involving politically-sensitive industries, such as defence, security and energy. In certain jurisdictions, advance notification and consultation with labour unions and other employees' representatives may be required. Advance and informal consultations, where appropriate, may reduce execution risk.
• Due diligence. Due diligence is an essential part of the M&A process. In addition to the usual legal, financial and tax investigations, it is crucial in cross-border M&A transactions to be aware of the political, regulatory, currency, and infrastructure risks and other local issues. The results of a due diligence may drive the deal structure, affect the purchase price or at the very least, affect the acquisition terms such as conditions precedent to completion and warranties to be given by the seller.
• Anti-trust issues. Previously a consideration primarily in US and European jurisdictions, more Asian jurisdictions have in recent years introduced or will be introducing anti-trust laws. For instance, anti-trust laws were introduced in Singapore in 2006, China in 2008 and Malaysia in 2012, and Hong Kong anti-trust laws are expected to become effective in the next few years. In recent years, we have seen increasing intervention by anti-trust regulators in cross-border M&A deals. In 2009, PRC anti-trust regulators blocked Coca-Cola's proposed acquisition of PRC juice-maker, Huiyuan, and in 2010, Australian anti-trust regulators blocked National Australia Bank's proposed bid for AXA Asia Pacific Holdings. As filing thresholds differ across jurisdictions, it is important to ascertain the applicability of antitrust laws in the relevant jurisdictions early. Any anti-trust issues should be cleared with the relevant authorities prior to the execution of any crossborder M&A transaction.
• Anti-corruption legislation. It is also important in cross-border M&A transactions for acquirers to conduct due diligence on the existence of any bribery or corruption issues. In addition to the existing local and international anti-corruption legislation, acquirers should be mindful of the 2011 UK Bribery Act which has broad extraterritorial reach. The Act provides that a company is guilty of an offence if any person associated with it commits bribery with a view to obtaining or retaining business or an advantage in the conduct of business for that company. This is a strict liability offence and extends to any UK-incorporated or foreign company so long as it carries on business, or part of a business, in the UK. Hence, risks associated with inheriting liabilities for previous or continuing acts of bribery or corruption uncovered during due diligence should be properly addressed, such as by way of prior clearance with the relevant authorities or excluding the offending business or company from the acquisition.
• Tax. Tax considerations are critical in structuring an M&A deal. The issue of transfer taxes (such as stamp duty and VAT) is one relevant factor in onsidering whether to structure an asset or stock purchase. It is necessary to assess and possibly mitigate the tax risks of the target group which may flow through to the acquirer post-acquisition. Another aspect is to ascertain the tax attributes (such as tax losses, tax credits and tax incentives) of the target group and possibly adopt a structure that will allow such tax attributes to survive the transaction. The structuring of the acquisition financing in a manner that will "push down" the debt financing to the target group level, in order to utilise interest deduction to reduce the tax burden of the acquirer and possibly the target, should also be considered.

There are a myriad of other considerations that are relevant, and the above summary is by no means an exhaustive list, but rather meant to give a flavour of some of the key considerations that should be taken into account in crossborder M&A transactions.