This year has not only seen the most global M&A deals by deal value but also the highest number of Nordic outbound M&A deals in any six-month period since 2008. In light of this activity, we wanted to provide a brief background on U.S. M&A deal structure as compared to Finnish standards for companies still looking to expand into or grow in the U.S. market.
The process of U.S. M&A deals is quite similar to Finnish deals. The parties enter into a confidentiality agreement to negotiate and execute a letter of intent, which then kicks off the due diligence phase. As due diligence progresses, the parties draft (typically the seller makes the first draft) and negotiate agreements to close the transaction.
As in Finland, there is typically a period between signing and closing in the U.S. This period allows for third party contractual approvals and, in certain cases, for government review or approval, such as when related to competition (referred to as antitrust in the U.S.) or national security concerns (i.e. the Committee on Foreign Investment in the United States (CFIUS)). However, competition monetary thresholds that would require parties to file are fairly high, i.e. a purchase price over USD 84.4 million where one party has over USD 168.8 million and the other party over USD 16.9 million in annual net sales or total assets. Also, a deal is only subject to CFIUS review if the target presents a national security concern, which definition has expanded this past summer and covers, e.g. companies that are close to military bases, that collect personal data of U.S. citizens, or that operate in critical infrastructure (e.g. ports) or critical technology (e.g. cybersecurity, semiconductors, emerging technologies) industries.
Lastly, the structural pros and cons of asset acquisitions and stock acquisitions are generally similar between the U.S. and Finland. Asset acquisitions will likely require more formalities to transfer each asset category and may be subject to more anti-assignment clauses. Stock acquisitions would be subject to “successor liability” (i.e. continued liability from seller to buyer) and an unchanged tax basis in the target business after its transfer (generally, since in certain circumstances an election can be made to treat the stock acquisition as an asset acquisition for U.S. federal tax purposes). Stock acquisitions do tend to be more common.
The following differences are helpful to be aware of when contemplating a U.S. acquisition:
- In Finland, a seller’s representations and warranties are qualified by information that is fairly disclosed during the due diligence process (usually the data room), while in the U.S., a seller must make specific qualifications to its representations in the form of an attached disclosure schedules, which requires more front-end diligence from seller counsel. The Finnish general qualification may subject a buyer to greater risk in the due diligence process. Perhaps a result of this is that warranties and indemnity insurance is quite common in Finland, whereas this is not common in the U.S. but a growing trend despite the significantly higher costs of such insurance.
- In Finland, most agreements are subject to arbitration, whereas in the U.S., less than 1 in every 5 deals are subject to arbitration. In U.S. deals, due to differences in court structure and procedure, sellers may generally prefer federal courts, while buyers prefer state courts.
- It is more common in Finland to determine a purchase price from a locked-box mechanism that fixes the purchase price to a recent balance sheet. This mechanism shifts more of a target’s business risk to the buyer prior to closing. The more common U.S. post-closing purchase price adjustment mechanism instead allows a buyer to re-calculate the purchase price post-closing, which may cause certain price components to be negotiated, resulting in a possible reduction of price.
As a result of these and other different standards, Finnish buyers run the risk of accepting more seller-friendly terms in U.S. M&A deals because of the generally more seller favorable terms common in Finnish M&A deals.
Negotiating in a Seller-Friendly Market
Despite the current seller-friendly market in the U.S. (like in Finland), a well-represented buyer can negotiate provisions to lessen the effects of seller’s negotiation leverage. These provisions can, for example,
- include “diminution in value” as a type of loss that may be recoverable under an indemnification claim. This would allow the buyer to seek a larger scope of damages if a seller’s misrepresentation led the buyer to negotiate a different purchase price than it would have otherwise.
- include “materiality” scrapes to allow a buyer to more easily make a claim for damages based on seller’s misrepresentations. Materiality scrapes allow a contract claim to disregard the materiality qualifiers in certain warranties or in reaching certain thresholds in making such claim.
- include “sandbagging” provisions that expand the scope of claims a buyer may make to include claims for damages based on seller breaches that may have been disclosed prior to closing.
These and other unique U.S. provisions will be the subject of our new legal alert series Closer Look where we discuss how these and other provisions function in U.S. M&A deals.
Borenius’ lawyers are available to assist in addressing any questions you may have regarding this client alert. Please feel free to contact any of the Borenius attorneys listed in this alert or those with whom you usually work.