Significant assets, intricate ownership structures, multinational operations, overlapping regulatory schemes, disparate time zones, and differing transaction customs are just a few of the macro challenges that make mergers and acquisitions in ocean shipping and related industries some of the most intricate and exciting transactions in the global economy.
Like any successful voyage, buyers, sellers, and financiers entering and exiting investments must plan ahead, account for the regulatory forecast, and plot a course to closing that achieves the desired business goals on a satisfactory timeline and budget. The following is an overview of some unique regulatory considerations and deal points that may be novel, particularly to those transaction participants based primarily outside of the United States and making their first investment with a United States nexus.
HSR—Pre-Merger Clearance Filing for Certain Transactions
The Hart-Scott-Rodino Act and the regulations promulgated thereunder (the “HSR Act”) require that U.S. federal antitrust authorities clear certain mergers, acquisitions (including an acquisition of assets), joint venture transactions, and certain entity formations before completion. The HSR Act requires that buyers and sellers in covered transactions each submit a detailed filing with the U.S. Federal Trade Commission (the “FTC”) and the Antitrust Division of the U.S. Department of Justice (the “Antitrust Division”), and refrain from closing the transaction until clearance is received.
Filing under the HSR Act is required for qualifying transactions where the acquiring or acquired Ultimate Parent Entity (as defined in the HSR Act) is, including any subsidiary or division thereof, engaged in commerce in the United States or in any activity affecting commerce in the United States. Non-U.S. businesses are deemed to engage in business activity in the United States for purposes of the HSR Act if they make sales in or into the United States.
If the transaction has a nexus to the United States, the parties and their counsel must consider whether the transaction meets certain size thresholds and consequently requires clearance. For 2023, transactions satisfy the size-of-the-transaction test where the value of the acquired assets, voting securities, and non-corporate interests exceed $111.4 million. This threshold adjusts annually based on inflation.
Next, the parties must consider their classification under a “size-of-person” test. If the size of the transaction is between $111.4 million and $445.5 million, one party must have worldwide total assets or annual net sales of at least $222.7 million to trigger the clearance requirement.
Of course, valuing the transaction and determining the size-of-person is a nuanced and detailed analysis at the margins, driven by guidance and regulations from the FTC and the Antitrust Division. Generally, as a transaction value approaches the $111.4 million threshold (as adjusted), counsel experienced with the HSR Act will review the deal economics and the parties’ composition to determine if a filing is required.
If an HSR Act filing is required, the parties must each submit an information package to the FTC and the Antitrust Division regarding the contemplated transaction, each party’s holdings, certain results of operations, and the identity of the submitting party’s equity holders. The HSR Act analysis, filing, and disclosure requirements are based on each party’s “Ultimate Parent Entity.” In the international maritime shipping industry, where assets and businesses are perhaps family owned, or part of a larger conglomerate, or comprising multiple entities organized in a variety of jurisdictions, the entire enterprise may be captured in this disclosure requirement. The parties will each submit the definitive transaction document(s); financial information; a list of subsidiaries; revenue data by North American Industry Classification System and North American Product Classification System codes; a list of owners of more than five percent equity; a list of minority holdings in certain other entities; and internal documents (such as board minutes and board materials) relating to the transaction that discuss competition-related matters, or synergies or efficiencies to be accomplished by the transaction. Note that the U.S. government may investigate transactions even if review under the HSR Act is not required.
Once all parties compile their respective notices, the buyer and the seller contemporaneously submit their respective filings and pay a filing fee to commence a 30-day waiting period. The investigating agency will either allow the 30-day waiting period to expire, in which event the transaction may proceed, or issue a second request for additional information, extending the waiting period an additional 30 days. In practice, complying with a second request is often a several-month exercise. Experienced counsel can advise the parties on a transaction’s potential to trigger a second request, and the ensuing response burden and associated delay. In Fiscal Year 2021, approximately two percent of transactions received a second request and in Fiscal Year 2020 approximately three percent of transactions drew a second request.
The current administration is particularly interested in consolidation among ocean shippers, one of the few industries named in this context in President Biden’s 2022 State of the Union address. Adding further uncertainty to the HSR Act’s impact on transaction cost and speed, on June 27, 2023, the FTC proposed an overhaul of the premerger notification process. The proposed changes are generally thought to increase the cost, burden, and time required to prepare notification filings. Commentators have described the proposed revisions as making every party effectively subject to an information disclosure akin to what is currently requested in a second request. The FTC estimates that adoption of this revised procedure will increase the filing burden from 37 hours to 144 hours per filing, with filings presenting competitive overlaps estimated to require approximately 222 hours to prepare.
Maritime transactions often involve multiple international jurisdictions, many with their own pre-merger clearance processes, some of which capture more transactions than the HSR clearance process. For example, certain jurisdictions do not have a size-of-transaction test or do not measure the amount of business impacted in that jurisdiction. This can create a significant burden for the parties, first in simply analyzing the jurisdictions with potential filing requirements, and then evaluating the compliance burden. Ocean shipping companies need to consider the jurisdictions where they and their acquisition targets have sales offices and ports of call when engaging in merger and acquisition activity to determine if any notices or approvals are required.
Federal Maritime Commission’s Increasing Participation in Pre-merger Clearance Filing and Antitrust Enforcement
In July 2021, the Federal Maritime Commission (“FMC”) and the Department of Justice signed a Memorandum of Understanding establishing a partnership between the FMC and the Antitrust Division. This created a formal mechanism to facilitate information exchange between the attorneys, economists, and technical experts at each agency. This exchange included increased FMC involvement in reviewing HSR Act filings relating to consolidation in the ocean shipping industry. In February 2022, the FMC and Department of Justice announced a deeper level of cooperation. In March 2023, several members of Congress introduced legislation to eliminate the ocean shipping industry’s exclusion from the antitrust laws with respect to certain agreements governed by the FMC, and to further increase the FMC’s involvement in the Antitrust Division’s merger review process. The proposed Ocean Shipping Antitrust Enforcement Act of 2023 was referred to the House Judiciary and House Transportation and Infrastructure committees, although no further action has been taken on the legislation.
The combined message of these actions is that regulators are focused on transactions in this industry. That is not to say transactions in the ocean shipping industry will not be completed. Indeed, transactions between ocean shippers have successfully applied for pre-merger clearance without drawing second requests or enforcement actions since these announcements. Moreover, the Antitrust Division has experienced some recent setbacks in high-profile cases seeking to prevent consolidation in other industries. However, parties’ antitrust counsel are becoming involved at an earlier stage in the transaction process to advise clients of potential risks, implement risk mitigation strategies, and prepare contingency plans. The cumulative effect of regulators’ enhanced focus on the ocean shipping industry, even for transactions that are unlikely to receive questions or challenges from regulators, is to anticipate increased legal review and allow the corresponding increase in time in the transaction schedule.
Separate from the FMC’s increasing involvement in the merger review process, the FMC reviews and monitors agreements among certain ocean carriers that set capacity or discuss rates. Marine Terminal Operators must also report certain information to the FMC as it relates to rates, operations, and joint contracting. As these may be integral or ancillary components of a transaction involving complex ocean shipping operations, the FMC is another source of regulatory review and oversight. Transactions involving international liner service or domestic terminal operations should therefore expect some or all of their deals to come before the FMC. Even if the transaction itself does not require an FMC filing or notice, follow-on restructurings or integration may require filings, for example, to conform carrier names or unify tariff structures.
CFIUS
The Committee on Foreign Investment in the United States (“CFIUS”) is an interagency committee of the U.S. government that reviews certain transactions where a foreign person seeks to acquire control of a U.S. business, whether through ownership of a majority of equity or the right to direct certain material actions, or to make a non-passive minority investment in certain U.S. businesses. Regarding minority investments, the Foreign Investment Risk Review Modernization Act of 2018 and subsequent regulations have expanded the scope of CFIUS review to include certain non-passive, non-controlling investments in U.S. businesses with a nexus to critical infrastructure, critical technologies, or sensitive personal data. Important to the maritime and related logistics industries, “critical infrastructure” includes liquefied natural gas terminals requiring licenses under the Deepwater Port Act, certain maritime ports and certain individual terminals at maritime ports (as part of CFIUS’s recently expanded real estate jurisdiction noted below), certain submarine cable systems and landing facilities, and rail lines and associated connector lines designated as part of the U.S. Department of Defense’s Strategic Rail Corridor Network, as well as other ground and air transportation services. CFIUS regulations also apply to the acquisition of certain rights (apart from investments) in certain real estate, including certain ports and real estate near military installations or offshore military operating areas. International investors in United States businesses will need to be mindful of whether their deal involves any of the covered industries and plan accordingly.
Certain transactions trigger a mandatory filing requirement, while others are subject to voluntary filing. CFIUS reviews the threat posted by the foreign investor, the vulnerability of the U.S. business, and the national security consequences of combining that threat and vulnerability. Notably, CFIUS has broad discretion to review “non-notified” transactions, even years after closing, so where a filing is voluntary, investors should consider whether it would be prudent to file to avoid unexpected future outreach from CFIUS.
When making a CFIUS filing, the parties may either submit a full joint voluntary notice or a short-form declaration. For a full notice, the CFIUS review process includes two distinct periods—a 45-day review period and a further 45-day investigation period at CFIUS’s option. If CFIUS determines that the proposed transaction threatens U.S. national security, CFIUS may (i) suspend the transaction, (ii) impose and enforce a mitigation agreement with conditions on the transaction parties, (iii) negotiate a voluntary abandonment of the transaction with the parties, or (iv) refer the transaction to the President to exercise authority under the Defense Production Act to suspend or prohibit the transaction.
Rather than filing a full voluntary notice, the parties may submit an abbreviated notification that CFIUS must respond to within 30 days. After assessing this abbreviated notification, CFIUS is authorized to (i) request that the parties file a full notice (starting the time period discussed above); (ii) inform the parties that CFIUS is unable to reach a conclusion on the information provided; (iii) initiate a unilateral review; or (iv) notify the parties that the Committee has concluded all action (i.e., cleared the transaction).
According to the most recent CFIUS annual report, CFIUS reviewed a record-high 440 filings (154 short-form declarations and 286 full joint voluntary notices) in 2022, a slight increase over the prior record of 436 filings that CFIUS reviewed in 2021. Practitioners infer that the increased filing volume in 2022, despite a softer M&A market during the latter part of that year, reflects a greater recognition of CFIUS’s jurisdiction and heightened vigilance.
Including counsel with CFIUS experience at the initial stages of evaluating a transaction allows the parties to identify the likelihood of a filing and incorporate any associated filing and review period in the deal schedule.
How to Get a Deal Done across Time Zones
Once deal teams reach agreement on the outlines of a transaction and successfully navigate complex multi-jurisdiction regulatory requirements, the principals and their advisers need to actually get a deal done. More so than other industries, maritime businesses and their operations by their nature are often spread across the globe. Video conferences, virtual data rooms, and electronic signatures have made it easier to collaborate. However, forcing one party to negotiate in the middle of their night, or waiting for business hours to align to move deal points forward are potential barriers to achieving a timely closing.
In-person negotiations can focus the deal teams and create a momentum to push through seemingly irreconcilable differences. Prior to gathering the principals and their advisers, the outstanding issues should be narrowed to a defined set of established positions. Schedules should be cleared and decision makers should be present to facilitate a negotiating environment where each side can focus on reaching an agreement. Ample separate meeting space should be reserved to allow the parties to caucus in private with their advisers. And, most importantly, large, comfortable, and well-equipped workspaces should be made ready for the lawyers to prepare drafts of definitive transaction agreements late into the night.
Buyers, sellers, and their advisers may have to deviate from the norms in their respective countries to get to “yes.” For example, parties may elect to use a European-style locked box transaction instead of an American-style purchase price adjustment (or completion account) mechanism, or parties may evaluate the use of representations and warranties insurance (or warranty and indemnity insurance in Europe). In a competitive M&A landscape, buyers will be expected to propose a deal structure with representations and warranties insurance, allowing the seller to “walk away” from most or all post-closing liability. In general, American representations and warranties insurance is considered to provide broader coverage with a less burdensome underwriting process than its European equivalent. Consequently, parties otherwise unaccustomed to U.S.-style deals may select U.S. law to govern a customary U.S.-style acquisition agreement to obtain a broad policy. At the same time, parties accustomed to certain forum selection and dispute resolution provisions may instead find themselves selecting international arbitration in Paris, London, Singapore, or Hong Kong.
The complexity and resulting creativity in deal structuring is what makes cross-border mergers and acquisitions exciting and fun (for those of us who enjoy that type of thing). Opportunities abound to expand in new markets, unlock synergies, obtain liquidity, and acquire new customers. Experienced transaction advisers can help deal participants close their transactions faster with reduced uncertainty in an ever-increasing regulatory environment.
