Jason Rabbitt-Tomita, Carrie LeRoy, Michelle Sayer

March 2017

Managing cross-border acquisitions of technology companies

Introduction Goal of our presentation is to help you as in-house counsel grasp the

process and framework for approaching a cross-border technology transaction

What is a cross-border transaction?

– Entity acquiring an entity or business in another country

– In technology transactions, domestic transactions often have significant cross-border elements

What is different about a cross-border acquisition?

– None of the usual rules apply

– Complexity increases burden on counsel

– Assess potential issues as early as possible 1

Overview

Process and timing

Due diligence

Intellectual property

Governmental approvals

Employment matters

Dispute resolution

Tax structuring

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Process and timing 3

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Counsel should quickly assess the key differences in process and timing raised by a cross-border acquisition and set expectations appropriately Structuring and tax analysis Communication is key How culture, time zones, and holidays affect negotiations and closing

mechanics First entry into a new jurisdiction may bring additional burdens post-

closing Complexity results in increased costs (legal, accounting, finance) Currency fluctuation issues Select appropriate external counsel

Process and timing – General

Process and timing – Corporate Approvals

Assess what approvals are needed at the shareholder and board level and how that affects timing

Non-US buyers may have lengthy or formal internal approval procedures – In some countries, even relatively significant transactions will only be

approved at a regular monthly board meeting; special board meetings are not called

– Transaction documents may need to be translated, which adds additional lead time to the final approval process

– In Japan, some acquirers will publicly announce upon board approval (prior to the agreement being signed)

US public company board processes may be unfamiliar to non-US counterparties

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Process and timing – Public company transactions Differing timelines for public company acquisitions When does the international jurisdiction require public

disclosure of the transaction discussions? Schemes of arrangement favored over mergers in

Commonwealth jurisdictions (e.g., England and Wales, Hong Kong, Singapore, Cayman Islands)

Takeover Panel in certain Commonwealth jurisdictions Ability to lock up shareholders may vary by jurisdiction

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Due diligence 7

Due diligence Clearly scope out what you need to know to move

forward at each stage and what information is critical or confirmatory at each stage

Need to be inquisitive – other side may be unfamiliar with scope of diligence requests

Importance of healthy dialogue between in-house counsel on both sides

What level of diligence does the buyer need in order to satisfy internal constituencies?

Integrating local counsel advice Privilege/commercially sensitive information

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Due diligence – FCPA

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Liability attaches from the moment of the acquisition

Conduct risk-based FCPA/anti-corruption diligence and look for red flags:

– Previous violations

– Weak anti-corruption policy or compliance program

– Accounting weaknesses (e.g., excessive use of cash; missing or inconsistent records; vague contracts and invoices)

Implement buyer’s code of conduct and anti-corruption policies as quickly as practicable

Conduct FCPA training for acquired entity’s directors, employees, third party agents and partners

Plan for FCPA audit and compliance integration as soon as practicable

Due diligence – Privacy and Security

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Privacy: Determine sensitive data types

– Assess jurisdictional differences regarding personal data

• How defined, collected, accessed, used, stored, secured, transferred and whether subject to breach reporting requirements

– Consider all relevant restrictions on the right to transfer personal data to the acquiring company

– Review privacy policies and procedures for compliance with applicable law

Cybersecurity: Review for compliance with law/regulation (jurisdiction and industry specific) and contractual requirements. How does the target:

– Protect data confidentiality?

– Protect data and systems integrity against unauthorized access?

– Protect data and systems availability against disruption or destruction?

Sufficiency of Representation and Warranties

Sufficiency of Remedial Actions

Due diligence – Intellectual Property

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Jurisdictional considerations

Compensation requirements for inventors

Sufficiency of IP licenses and upstream licensing “affiliate” issues

Sufficiency of assignment of IP rights by founders, employees and contractors of the target

Consideration of foreign government-funded research and development (e.g., Israel Office of Chief Scientist)

Transferability issues

Joint ownership of IP – rights of co-owners (e.g., Japan)

Assessment of policies and procedures regarding IP enforcement and protection

Intellectual property

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Intellectual property

Cross-border licensing models

– Maximize value of IP assets through:

• Limited fields of use (e.g., mobile devices in a limited territory) and licensees

• Capture period for licensed patents

• Term license model (e.g., Nokia’s US$2 Billion ten-year license to MSFT)

– Ensure freedom to operate:

• Grant-back license for retained businesses specified territories

• Fully transferrable rights

• Right to enforce against infringers of retained businesses

• Exclusive license

• Retention of ownership

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Regulatory approvals 14

Antitrust CFIUS

PRC: SAFE,

MOFCOM and NDRC

Other

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Regulatory approvals

Getting ahead of worldwide antitrust/competition law filings

Regulatory approvals – Antitrust

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□ Cross-border acquisition may trigger a multitude of pre-closing antitrust reviews in various jurisdictions

□ Buyer should be prepared to engage counsel early on to prepare accordingly

□ Counsel will need to know worldwide “turnover” of target by jurisdiction

□ Antitrust planning − Identify possible solutions to antitrust risks − Prepare in advance to address potential agency questions and

concerns − Be prepared to respond promptly to regulatory concerns if antitrust

risks exist − Consider antitrust risk shifting devices in acquisition agreement

Antitrust CFIUS

PRC: SAFE,

MOFCOM and NDRC

Other

Consider whether the transaction will invite scrutiny from CFIUS – particularly in tech acquisitions

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Regulatory approvals

Committee on Foreign Investment in the United States (CFIUS) CFIUS is a Treasury Department-led committee that conducts national security reviews

of foreign direct investment into the US.

The CFIUS risk-based analysis is premised on certain key factors: – Threat - whether the acquirer has the capability or intent to exploit vulnerability or cause harm

– Vulnerability - whether the foreign person in control of the US target business could take action that threatens to impair US national security

− Risk Profile - the national security consequence of the combination of the threat and vulnerability

Process may result in transactions being suspended, blocked, or modified, even after closing

Parties to a transaction may file a “Joint Voluntary Notice” to obtain formal clearance of a transaction and prevent CFIUS revisiting the transaction

Beyond customary defense-related assets, CFIUS also reviews deals not traditionally associated with national security, including: energy assets, telecommunications, identity authentication, cyber security, pharmaceuticals, real estate and semiconductors

The statistics published in 2016 for the 2014 calendar year indicate 147 reviews (highest since 2008), of which 12 were withdrawn and one was refiled; six percent involved mitigation. 18

CFIUS Timeline

CFIUS Process

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Preliminary Work

30-Day Initial Review

45-Day Investigation

15-Day Presidential

Review

– Consultations, including discussions with CFIUS to explain/introduce transaction

– Pre-filing: submission of Joint Voluntary Notice in draft for review by CFIUS staff

– CFIUS thoroughly vets the transaction, in particular the risks it potentially poses to national security

– CFIUS may clear transaction or, as is often the case, initiate an additional 45-day investigation

– CFIUS must clear transaction or recommend action to the President

– In some cases, clearance may be conditional on certain measures

– President decides to approve or deny the transaction

CFIUS Best Practices Conduct thorough due diligence

− This enables parties to assess potential national security concerns and develop possible solutions upfront—as well as to have a better foundation for negotiating CFIUS risk within the transaction

Consult with CFIUS prior to filing a joint voluntary notice – This can help shape expectations early on, and set the tone and direction of issues to be

considered

Brief stakeholders on issues related to a transaction – Specifically, discuss items of potential controversy with Congress and interested government

agencies – If the deal is likely to be high profile, a public relations campaign may also be appropriate

Advocate and focus on business – Demonstrate that the transaction is driven by a commercial rationale – Address the reasons why the transaction should not present national security concerns within

the CFIUS notice, with particular focus on the areas of potential concern learned during due diligence

Have a problem-solving mentality – Seek to address potential national security concerns proactively

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Antitrust CFIUS

PRC: SAFE,

MOFCOM and NDRC

Other

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Regulatory approvals

Assess how SAFE and MOFCOM approvals in the People’s Republic of China may affect your transaction

Regulatory approvals – SAFE SAFE is in charge of foreign exchange matters in the People’s Republic of

China

Chinese purchasers making outbound investments should register their outbound investment with SAFE to obtain foreign currency by converting from RMB for making outbound transactions and to remit the foreign currency outside China

SAFE registration is the last stop and can be made only after the Chinese purchasers complete filing procedures with outbound investment authorities (e.g., MOFCOM and NDRC)

Recent Observations – As of February 2015, SAFE has delegated the registration authority to qualified

commercial banks in an attempt to reduce the time required before funds denominated in RMB can be converted to foreign exchange and paid out of China

– Due to SAFE’s concern over capital flight and RMB depreciation, since Q3 of 2016 banks will not complete the registration procedure until the applicant completes all the required internal meetings and interviews with SAFE to prove the truthfulness of the transaction and payment request.

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Regulatory approvals – MOFCOM MOFCOM and its local offices are in charge of foreign investment projects in China

China regulates foreign investment in China following the Catalogue of Industries for Guiding Foreign Investment (2015 Revision)

Foreign investors require approval from MOFCOM or its local offices if their greenfield investment is on the “Negative List”, which covers certain industries that are attractive to foreign investors (such as telecommunications, media, education, medical institutions, theme parks)

MOFCOM and outbound investments

Outbound investments are subject to a filing requirement (with certain exceptions)

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Regulatory approvals – NDRC NDRC is China’s central policy planning maker, which focuses on the project itself

NDRC Project Information Report Confirmation

– For outbound investments that are at least US$300 million from China, a Chinese investor must first submit an information report (also known as a “Road Pass”) to the central level NDRC for approval at the initial stage of an acquisition transaction or bidding process

– No “material steps" can be taken without this Road Pass, such as signing of any binding agreements, making any offer with binding effect, or submitting any regulatory filings

A formal filing with NDRC is sufficient if the project does not involve sensitive countries or sensitive industries

– Same scope of “sensitive countries” and “sensitive industry” as under MOFCOM

– NDRC (state level) approval is required if any of the above conditions above cannot be satisfied

The filing with NDRC generally takes seven working days after accepting the application

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Antitrust CFIUS PRC:

SAFE and MOFCOM

Other

Assess how other regulations may affect your deal

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Regulatory approvals

Regulatory approvals – Other Take a step back and assess foreign investment regulations

– Assess whether you can actually consummate the transaction under foreign investment rules applicable to the target’s industry

– How will foreign investment regulations affect timing of the deal? Is either party required to make payments in Renminbi?

India – Regulatory approvals in India may lag behind the rest of a worldwide transaction

– It is not uncommon for the parties to close the India portion of a transaction separately

– Buyer and seller may enter into interim agreements giving economics of ownership to buyer upon the worldwide closing

– International deal counsel must work closely with local counsel to achieve the desired result in an accelerated timeframe

France – Due to employee consultation requirements, the French portion of a worldwide acquisition is

sometimes deferred—deal is signed up with a “binding offer” made for the French subsidiary

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Employment considerations 27

Employment considerations

Early in the process, determine whether the local jurisdiction allows buyer to implement its plans for employees

“For cause” jurisdictions

– Ability to terminate employees after closing may be costly and administratively burdensome

Special treatment of equity awards

– Section 102 trustee in Israel

Notice and consultation obligations in Europe

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Employment considerations – Notice and consultation in Europe

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Deal counsel should pay special attention to European employee regulations, which have significant effects on timing

France – Pre-signing consultation may be required – Prior to signing, consultative process with French staff representatives; obtain

opinions from councils and committees; without opinion, requesting party must wait 3 – 4 months

– French employees may be consulted on a confidential basis prior to signing and French component of the transaction is sometimes carved out from deal

UK TUPE (Transfer of Undertakings Protection of Employment) – Triggered on a transfer of assets, not on a sale of shares

– Information must be provided to employees long enough before transfer to allow for meaningful consultation to take place with employee representatives

– Often carried out between signing and closing (up to four weeks)

Similar consultation obligations may apply in other European jurisdictions

Dispute resolution 30

Dispute resolution Litigation vs. arbitration

– Consult with international arbitration experts and your deal team to determine whether an arbitration provision should be included

– Do not treat dispute resolution as “boilerplate”

Advantages of arbitration – Enforcement of awards (New York Convention)—where are the assets you will

enforce against? – Neutrality (tribunal, procedure, place, language) – Privacy (if not confidentiality) of proceedings – Procedural flexibility; expertise of the arbitral tribunal – Document production

Disadvantages of arbitration – No automatic right to appeal; less use of summary procedures; other procedural

considerations – Difficulty in dealing with multi-party and multi-contract disputes – Costs/efficiency 31

Tax structuring 32

Tax structuring Non-US company purchasing US target

– If Purchaser already has US operations purchase through current US structure

– If Purchaser does not have US operations:

• If target is taxed as flow-through, generally best to use new US corporation purchaser to prevent non-US purchaser from being subject to US tax

• If target is US corporation, can hold directly but might want to utilize debt (but there are limits on interest deductions for payments to related parties)

US company purchasing non-US target

– If Purchaser has non-US operations – generally beneficial to hold under single non-US parent

• Companies under non-US parent generally can transact with each other and move cash around without US tax consequences if they file “check-the-box” election to be disregarded for US tax purposes

Deal structure may be informed by considerations with respect to where the target’s IP is located and whether it can be transferred or exclusively licensed without increasing the target’s tax liability

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Thank you 34

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