Navigating Cross-Border Transactions: Practical Insights
Back to news archiveOur clients frequently undertake M&A deals and enter commercial contracting arrangements with international counterparties. The presence of cross-border parties can add further complexities to transactions and additional consideration points for commercial contracts. Not only does attention need to be elevated to critical matters such as the relevant regulatory landscape, including whether the transaction may lessen competition in the market and require merger clearance from the Australian Competition and Consumer Commission (ACCC), or whether approval from the Foreign Investment Review Board (FIRB) may be necessary, but attention also needs to be paid to the practical points.
These practical points, if missed or not adequately addressed pre-agreement, can percolate and lead to significant issues. In our experience, key aspects that frequently need to be considered and navigated appropriately as part of the deal or contract arrangements, include:
· Hosting arrangements: For commercial tech deals involving hosting solutions, consideration needs to be given to the requirements of the hosting solution and its location. For example, will it be a cloud hosted solution that must be hosted in Australia or abroad? If abroad, where and what are the security standards of that jurisdiction? Further, standard provisions should require that the hosting arrangements are not changed without prior written approval and must take into consideration the requirements and constraints of the deliverables and target market/audience.
· Data security: Where commercially sensitive data in commercial deals is to be shared or stored, the level of data security required or expected needs to be addressed. This may include imposing a minimum requirement to comply with a nominated standard such as ISO27001 for information security either with or without the need to be certified against ISO27001. If this level is not necessary in the context of the deal, it would usually be appropriate to empower the ability for regular independent audits of the relevant information management system, maintenance of an information security policy including regular review, communication and training of staff and breach notifications. Flow-on powers to terminate and be indemnified for relevant breaches should also be strongly considered.
· Currency: This would seem like a straightforward point, but the conversion calculation between currencies, and the timing of that conversion, can have a significant impact on the consideration payable. Far too frequently, however, this impact is overlooked. It is important to understand the currency risk, which party will bear it and ensure the transaction document clearly articulates the nominated currency and conversion process (if applicable).
· Tax and GST: Whilst it is generally accepted that tax and accounting advice should be obtained upfront prior to negotiating critical terms of the deal or the formal documentation, it is often the case that key transaction terms are agreed prior to obtaining tax advice. The timing of tax advice can significantly impact the costs of each party given its fundamental impact on such critical matters as deal structure and timing.
Further, considerations such as whether the transaction will create a taxing or duty event and whether the amounts payable under the deal are inclusive or exclusive of GST (or other international tax) should be known in advance of confirming the consideration payable. Sierra Legal has a great network of tax and accounting specialists to suit client needs and deal sizes and can connect clients with appropriate specialists as required.
· Foreign laws: Cross border counterparties may seek to oblige their Australian counterparties to comply with foreign laws, which may not be acceptable. A potential middle ground may be to require compliance with relevant international standards, recognition of similar thresholds in each party’s local laws, material compliance with each party’s local laws and notification of any breaches.
· Understanding local nuisance and customs: It is important to understand the cultural norms and values of the counterparty at the outset. Unfamiliarity with these can lead to a lack of cooperation, protracted negotiations and disputes following completion or binding agreement. Subject to the type of deal being contemplated, it may be appropriate to include investigation of cultural norms and values as part of the due diligence investigations.
· Governing law: We often get asked which jurisdiction should be imposed as the governing law, and what the consequences are if it is not Australia. There is no standard approach. The answer is often based on a number of considerations, such as the location of the parties (and assets if applicable such as for mining entities), jurisdiction reputation and similarities to Australia, costs and time zones.
· Who drafts the document: A common misconception is that the party drafting the document will incur higher legal costs. This isn’t necessarily the case, particularly if the cross-border party is not using local lawyers or specialists familiar with the nuances of M&A deals and commercial contracts. Further, not all countries adopt the simple, plain English approach. For this reason, we always recommend using documents drafted by Australian lawyers.
· Business day / time zone: Consideration and care needs to be had when dealing with multiple jurisdictions and time zones. It may not be practical (or sensible) to incorporate all jurisdictions in the definition of business day for example. Or if you do, that may require other clauses that require action within a specified number of business days to be increased or a simpler approach adopted, such as using calendar days (rather than business days).
· Language / translations: An obvious, but frequently overlooked matter, is the need to include provisions in the documentation with cross-border parties, requiring that all communications must be in English.
At Sierra Legal we work with our clients not only on the key issues like ACCC and FIRB approvals, but also on the practical components, to help our clients navigate the complexities of cross-border deals and ensure a smooth transaction process.