Almost one-third of the deals that M&A lawyers work on involve an international party, according to responses to Bloomberg Law’s most recent State of Practice survey.
Since investors tend to perceive cross-border transactions as being riskier than domestic transactions, the survey also asked the attorney respondents what strategies they’re using to guard against volatility in international deals. Most lawyers agreed that a heightened focus on due diligence was helpful to mitigate risk in these deals.
Top Deal Protection Strategies
More than 60% of the lawyers involved in cross-border M&A who responded to the survey said that they’re intensifying their due diligence efforts to protect international deals.
The focus on due diligence likely ranked highest because US lawyers working on international deals go beyond domestic due diligence practices to work with local attorneys and other professionals. In contrast to a couple of decades ago, local due diligence counsel relationships are now routine. This due diligence collaboration with local counsel allows the buyer to understand the legal, regulatory, market, and political landscapes of the foreign jurisdiction and to avoid missing a critical issue or assuming unwanted and unexpected liabilities.
The second-ranked category was earnouts, which have become increasingly popular in the M&A market. Forty-four percent of lawyers who answered the survey said that they use earnout provisions to guard against volatility in cross-border deals. Earnout provisions allow the buyer to pay a lower sales price at the closing of a deal and to condition any further payment, structured as a consulting payment to a former employee-shareholder, on the business attaining certain financial goals.
Representation and Warranty Insurance (RWI) isn’t far behind earnouts: 38% of lawyer respondents said that they use RWI to protect their cross-border deals. RWI, which has also gained traction in the M&A market generally and in private equity transactions in particular, protects a party to a merger or acquisition from losses suffered as a result of the other party’s breach of its representations and warranties in an M&A agreement.
Other Forms of Insurance
Other traditional forms of insurance aren’t as favored as is RWI among M&A lawyers, according to the survey. Only 11% of the respondents said that they use tax liability insurance, and another 11% said that they use intellectual property insurance.
A likely explanation for the lower percentages is that deal-makers are opting for RWI with coverage that includes breaches of tax indemnities and intellectual property infringement protection.
Only 2% of the attorneys said that they use insurance to protect against political risks, probably because deal-makers are prioritizing developed and stable jurisdictions where this form of insurance is rarely used.
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