M & A transactions in the USA

M & A, mergers and acquisitions are being widely talked about. Many European entrepreneurs have already developed extensive experience with the acquisition of enterprises in Europe or Germany within the scope of their business activities. The fundamental difference between a share deal - acquiring the company by the way of purchase of all shares - and an asset-deal, where you only acquire all or selected assets, is well known. By this knowledge it seems to be that you are adequately equipped for a successful big jump across the Atlantic for M & A. However a number of special features have to be borne in mind, if you whish to acquire a company in the US. Due to the federal structure of legislation in the US it is in the end inevitable working with a legal consultant, who has extended experience in consultation in the relevant state. Even without this point, I would like to present some of the features in this column you should bear in mind when acquiring companies in the US.

It goes without saying but it is often overlooked: especially in the field of law language problems are a very important point. Due to fact that a lawyer always expresses himself very specific and connects different consequences to the use of a term than a non-lawyer, understanding legalese is not easy, even for a native speaker. Therefore, not only a native speaker but also lawyer should always participate in contract negotiations.

The United States are heirs to the common law and therefore follow a different legal philosophy than Germany. The precedential jurisdiction is mostly key to the understanding of legal terms used by the parties. This is different to the German legal system where the terms used in a contract may lead to interpretation and finding out on the party's real intentions in the entering into a contract. Furthermore, in US law it is assumed that the parties did only agree upon what is written in the agreement. The consequence is that an acquisition contract is far more complex and longer than in Germany. Also, contracts in common law states start with the well-known legal definitions. This way leads to a corresponding understanding of used wording in the contract. At first glance, this may be taken for granted. But this linguistic understanding leads to the fact, that the words "convey" and "transfer" both could be used for the same legal procedure. Thus, a standard provision for the sellers obligation under an asset deal may be:

„On the Closing Date, the Seller shall sell, convey, transfer and assign, as a going concern, to the Buyer,….".

Therefore the „Closing" not only refers to the reference date, but also to the date when the contract is effected. With a systematic approach this is comparable to the German legal distinction between the contractual transaction, which creates the obligation, and the material transfer agreement, which effects the change of ownership of the property. During an asset deal considerable care must be taken to ensure with sufficient lingual accuracy that the duties of the parties are precisely determined.

Besides, this also to a share deal relevant principle, you should at first pay attention to the basics of the US company law. In general, every state in the US can have its own law, which is intensively used. Although the Uniform Commercial Code (UCC) is meanwhile often applicable, many States still have
their own company law. Due to historic reasons, many companies have been established under the laws of the State of Delaware. This is because the State of Delaware has always had a liberal company law and an extensive jurisdiction. The advantage is a big legal certainty. In fact, during the last time this point slides into the background. However the question of the applicable law for the company is still a major question.

It is still indispensable identifying legal risks and liabilities before acquiring a company. Like in Germany for example, product liability is also in the US binding law. Responsibility for defective goods therefore cannot be abrogated by contract. As a result, it is recommended to keep an eye on which representations you provide during the negotiations to the contract.

Subsequent costs during an acquisition may also be considerable. It should be common knowledge that the German rules for annual financial statements do not apply in the US. Primarily, this should be kept in mind for business valuation of the company to be acquired, even if the costs of preparing the annual financial statement are mostly comparable to them in Germany. This immediately changes, if the American company is listed to a stock exchange. In this case, the requirements and the costs for an accounting adviser increases significant.

Last but not least the basic principle of the free choice of law in international business must be observed. That means the applicable right under the company shall be acquired can be chosen by the purchaser. Nevertheless, special features of the state concerned must be considered due to the fact of the „lex rei sitae" in the law of properties. According to this principle, the applicable law is the law of the state where the good is located. In addition to this, the provisions of the company law of the concerned state are binding, especially within a share deal.

As a summary, you should pay significant attention to exact wording in the contract, the governing law, liabilities and any subsequent cost during M & A in the US.

 

About the author:

Frank Jürgen Bernardi is specialized in the legal support of technology transfer for manufactruring companies as well as the legal support of national and international construction of industrial facilities. As a partner of Rödl & Partner, he leads the department for international trade and business law.

Contact: Frank.Bernadi(at)roedl.de, www.roedl.de