Who’s Who Legal has brought together Nick Miller at Hunt & Hunt, Roman Shulyar at Phenomena and Sergio Michelsen at Brigard & Urrutia to discuss key issues facing corporate lawyers and their clients today.
Nick Miller: In Australia, the past two years have seen a series of new regulations and processes adopted in the foreign investment area, many focused on foreign investment in Australian agricultural land. New fees for foreign investment approvals have also been introduced. Notably, a small number of “politically sensitive” foreign investments have failed to obtain foreign investment approval. However, the number of affected transactions is very small and only large transactions have been impacted. The investors blocked have been predominantly (but not only) Chinese and the sectors involved have been mostly confined to agriculture, agribusiness and electricity networks.
The Personal Property Securities regime is a few years old, but it continues to have a significant impact on transactions. Widespread misunderstanding regarding the regime means more time spent on negotiations and working with financiers to secure releases. Combined with various inefficiencies in the system and legislative gaps, the regime often makes it difficult to quickly implement transactions.
Roman Shulyar: Although the continuing economic crisis and anti-terrorist operations in the east of the country keep the Ukrainian M&A market suppressed, the large-scale reforms taking place in various sectors of Ukrainian economy should create better conditions for business and, thus, increase the volume of M&A deals in the near future. The recent positive legal developments include increasing merger control thresholds, softening currency control restrictions, strengthening anti-raider provisions, improving legislation on joint stock companies and providing general online access to corporate and real estate registers. As regards the upcoming changes, businesses are expecting the Ukrainian Parliament to shortly adopt a new law on limited liability companies and laws setting out rules and procedures for squeeze-out and sell-out mechanisms, use of escrow accounts, and corporate agreements.
Sergio Michelsen: Recently, not much. The Colombian regulatory apparatus – at least to the extent relevant to M&A deals – has been in place for a while, and companies and practitioners, I would think, are already (or are becoming increasingly) familiar with it and have incorporated the resulting restrictions and timelines into their deal analysis. Antitrust approval, governmental approvals in regulated sectors (such as the banking and health industries), company oversight by the competent supervisory authorities (such as the Superintendence of Finance and the Superintendence of Companies, to name only the two most prominent ones), among other regulatory issues, are relatively well known and have been so for a while. Recent increases in the enforcement level of antitrust regulations have mainly dealt with cartel control and have not had a direct impact on M&A activity.
One notable exception – which some may hesitate to categorise as a regulation issue – may have to do with compliance regulations and enforcement. Recently enacted statutes incorporate FCPA-like requirements and impose relatively detailed obligations on a considerable number of companies – all of which is expected to have a significant impact on diligence requirements for many kinds of deals, including, of course, M&A deals. As is the case with FCPA and UK Bribery Act concerns for foreign investors, this may slow down or prevent deal activity. This, however, remains to be seen.
A non-regulatory (but somewhat similar) issue has to do with the increased judicial enforcement of decades-old corporate governance legal requirements. The market is becoming increasingly aware of the duties of directors and controlling shareholders, particularly in the context of M&A transactions, which may already be adding layers of complexity to transactional planning and implementation. I would also expect this to result in an increase in M&A litigation.
Nick Miller: Chinese investment in Australian resources, agriculture and some other sectors over the past few years has had an enormous impact. Often, Chinese bidders are front and centre in a sale process.
Roman Shulyar: Speaking about Ukraine, there have been relatively few M&A deals, and their volume could hardly have had a major impact on the global M&A landscape. Hopefully, the situation will be different in 2017. The main factors that could revive the Ukrainian M&A market are improvement of the general economic situation in the country, the start of the global privatisation process, and further softening of currency control restrictions. The principal risks that may disrupt these hopes are the escalation of armed clashes with terrorist groups in the eastern Ukraine and new internal political turmoil. The prospective economy sectors in which M&A transactions could be most expected include agriculture, infrastructure and energetics.
Sergio Michelsen: I can give the Colombian (which I believe could be a proxy of the Latin American) perspective.
As an emerging market, I would not say Colombia, or any of the deals conducted or somehow connected to Colombia, are setting or changing trends in the global M&A landscape—at least not from a legal perspective. While, from a business perspective, I think emerging markets present diversified investment opportunities, both in terms of size and risk and reward, and thus may be somehow driving changes in the M&A business, I would not say this has been necessarily reflected in the way deals are conducted globally.
Nick Miller: There has been a greater acceptance that M&A done well can be value accretive. Perhaps we are seeing the benefits of the learnings from the GFC and also many company-specific “near-death experiences” over recent years, making acquirers a bit better at avoiding some of the M&A traps. So, in many transactions, risk is now better identified, assessed and priced; many acquirers maintain price and risk discipline through the transaction process (resulting in longer, slower processes); and more acquirers are now much more focused on making an acquisition work after closing (investing resources and corporate energy in integration, etc).
Roman Shulyar: The previous year was full of events that made market players feel less comfortable and exercise particular caution. Civil war in Syria, an attempted coup in Turkey, the Brexit referendum and the US presidential elections are just selected examples of what made businesses all over the world put on hold the most aggressive plans they had. In this situation, market players made their choice in favour of smaller deals that allow diversifying risks and minimising losses in case of any kind of failure. Unless this year guarantees more stability and predictability, we are not going to see many big-ticket mergers in 2017.
Sergio Michelsen: My impression coincides with your research. I think this may be explained by several factors: first, I think many of the industries where you would expect to see big-ticket mergers (at least in Latin America), such as telecommunications, utilities and financial services, have reached acceptable levels of consolidation, which make new mergers more difficult – because of both the difficulty of finding suitable targets and potential regulatory hurdles (particularly from the antitrust perspective). Second, I would think that, in times of political uncertainty, firms may be more hesitant about spending their cash or leveraging the company to conduct bet-the-company deals.
On the other hand, local deals could be on the rise. The development of a private equity market, and signals of economic recovery after difficult 2015 and 2016, among others, could be factors driving M&A activity in the middle market.
Nick Miller: Yes and no – it always depends on the particular deal and the applicable business, economic and political issues. We’ve seen big changes in transaction processes since the GFC (a decline in what had become the standard “competitive” sale process) and technology is also driving new practices.
One new strategy that I have seen a little of (and would like to see a lot more of) is lawyers and other advisers engaging earlier and more intensively with larger privately owned businesses which are looking to be sold. My approach for many years has been to work with private business owners some time ahead of a sale to address the often value-destructive issues that build up over time in many such businesses. Some private businesses are starting to realise the significant value uplift that this can deliver – rather with doing no preparation and waiting for the “big offer” to land on their lap, only to see it shrink as their sophisticated buyer gets into serious due diligence.
Roman Shulyar: Tried and tested practices work best when they are wisely combined with the new creative approaches. It is not enough for M&A lawyers to know perfectly classics of M&A. It is also crucial that M&A experts constantly keep an eye on all new developments in the area. The market always comes up with new structures, fresh ideas and distinctive approaches, which give more flexibility to the transactions and more freedom to the parties. Thus, in Ukraine, it is expected that the upcoming changes in the corporate legislation (eg, adoption of the new law on limited liability companies and laws regulating squeeze-out and sell-out mechanisms, use of escrow accounts, and corporate agreements) will ensure wider usage of Ukrainian law in M&A transactions.
Sergio Michelsen: I do think tried and tested practices yield results – albeit maybe not in the most cost-effective fashion. But, as some of my colleagues point out, that does not mean there is no room for innovation or improvement.
Structuring, diligence and documentation strategies have been tried and tested (at least in some jurisdictions) and, to varying extents depending on the jurisdiction, have proven effective to allocate risk, gap valuation (and other) differences, and, I believe, create value. And these strategies, I also believe, provide some network benefits: M&A advisers (financial, legal and otherwise) “know the drill” – how transactions are structured, diligence and documented – which, I think, facilitates deal-making. I do not mean to say that everything is perfect; I am sure there is some path dependence here, and there are practices that we have inherited and which could be dispensed with or at least substantially improved. These practices, however, should be a minority. Also, there is always room for innovation: legal advisers should always be on the lookout for new diligence or readiness approaches, such as those suggested by Nick; or innovative structures based on legal developments, as indicated by Roman.
Finally, I also think there is a lot of room to innovate in order to make tested practices more cost-effective to the client. You cannot avoid conducting diligence over a target, but technological tools can surely be used to make this process shorter, more accurate and less expensive. The same could be said about the process of documenting a deal.
Nick Miller: Change, and some level of uncertainty, are always with us. The pace of change is only increasing. Continual uncertainty seems to be the new normal. Both are likely to increase significantly with the implementation of President Trump’s agenda and the unpredictable policy approach already witnessed during his short tenure. That, combined with a reasonably risk-averse approach from most participants, may well make M&A harder to execute in coming times.
Overall, corporate regulation is proliferating and changing at an amazing rate (and has been for some time) and this will be an ongoing challenge (for lawyers and companies) in 2017 and beyond. Regulatory complexity has a larger impact on transactions where a buyer (such as a private equity fund) is unfamiliar with the regulatory/compliance risks relevant to the target’s industry – due diligence becomes difficult and costly and the buyer often adopts a highly cautious approach which can jeopardise the feasibility of the deal.
Roman Shulyar: While the primary focus should remain on scrupulous and thorough approach to carrying out the due diligence exercise and to structuring the M&A transaction, it is also crucial to give particular attention to international sanctions and cultural/political issues. Close integration of the world markets as well as recent geopolitical challenges are making these issues even more important than they were in the previous years. The risk of unexpected economic/political crisis in any given part of the world also cannot be excluded, so having a backup plan would be of essence.
Sergio Michelsen: There are indeed many potential pitfalls. Regulations are becoming increasingly complex (and there’s just a lot more of them); certain acquirers or targets are subject to foreign regulations with extraterritorial scope; activists are becoming part of the scenario; and – at least in Colombia – courts seem more willing to scrutinise deals. In this scenario, companies and lawyers have to become increasingly sophisticated and their processes have to be more comprehensive and efficient. These are, of course, substantial challenges for both companies and the legal profession – but surely challenges that we can meet successfully.