Arvin Abraham, Attorney, McDermott Will & Emery11.10.21
Cross-border acquisitions in the medical space are highly regulated and complex. They also offer incredible potential rewards for buyers and sellers—if an effective process is followed from due diligence through deal completion.
For the buyer, there are numerous benefits to a cross-border medical acquisition. If the buyer is not present in a geographic market and wants to establish a footprint, or lacks a particular product offering, an add-on acquisition can deliver significant new opportunities. For sellers, a cross-border transaction offers the chance to capitalize on unrealized value or team up with a partner who can help facilitate sought-after growth.
On either side of the equation, cross-border acquisitions require proper planning, patience and, in some circumstances, a measure of tenacity. For those pondering a cross-border sale or acquisition, heeding the following tips can smooth the process.
Understand the Objectives
At the outset, buyers and sellers should understand why they want to strike a deal, what the minimum threshold conditions would be to move forward, and the conditions that would end negotiations. The rationale to buy or sell a company will differ depending on the nature of the buyer or seller. For instance, a corporate buyer may seek synergies with the target and the chance to accelerate growth that could not otherwise be easily obtained by organic expansion. Private equity sponsors typically want assets that unlock value in ways the target or its parent had not been able to, for example, by way of a restructuring, through acquisitions, or having properly incentivized management (including new management, where appropriate).
On the sell side, a disposal is an opportunity to exit a business line that may no longer fit with a broader group’s strategic goals, divest a poorly performing asset, realize immediate value to address liquidity or other needs, or simply to exit because a company’s existing owners no longer want to run the business.
On both sides of the table, it is important to have in mind minimum criteria for closing a deal and factors that would negatively impact the outcome. Of course, one major criteria for both buyers and sellers is price—but other terms associated with the purchase contract must also be evaluated to determine whether they are acceptable. In particular, the allocation of pre-acquisition risks is one key area in which the buyer will want to minimize their assumption of such risks and will want to push as many risks as possible onto the buyer. These and other conflicting goals create inherent tension when negotiating terms.
At the outset of a deal, it is generally not possible to have a complete understanding of all the issues and complications that can arise. This is mostly a concern for the buyer, but it’s also relevant for the seller. The parties’ objectives may change and the bright lines to proceed or walk away from a deal may get blurry as more time, energy, and effort are invested in the process. It is important that both parties not get overly caught up in sunk costs—as with a game of poker or any other high-stakes process, it is sometimes better for either party to fold and walk away than continue with a deal that is becoming overly complicated or raising too many red flags.
Ask Key Questions
The due diligence process is generally, but not always, more involved in a cross-border acquisition, particularly when seeking to acquire a larger target. Cross-border acquisitions also require substantial coordination, where the target operates in several jurisdictions and law firms in each relevant jurisdiction may need to be retained to conduct local law due diligence.
As with all acquisitions, the due diligence process will need to assess the target’s operations, contractual commitments, financing and other liabilities, past merger and acquisition history, corporate governance, and other relevant factors. Material issues should be identified by counsel and appropriate questions posed to the target to flesh out the understanding of any risks and liabilities the acquirer will be taking on after making the purchase.
It is also important to note that the scope and focus of the due diligence process will differ depending on the acquiring entity’s nature. Having said that, reputational risks are critical for all buyers, as they’ll want to avoid stepping on any reputation-damaging landmines.
On the sell-side it is also important to evaluate the proposed acquirer and, depending on the transaction’s nature, determine if the acquirer is the right fit. Where the seller will continue to retain an interest in the target following the acquisition, an assessment should be made of whether the acquirer is the right strategic fit to be a long-term partner. In that evaluation, points to be considered include whether the buyer has the operational expertise to help grow and unlock value in the target. Both buyer and seller will also need to consider whether governance rights can be appropriately shared.
Where the seller is exiting completely, the key question will be about price. However, it is also important to consider the allocation of post-acquisition liabilities and transaction certainty. In some cases, a lower price may be worth considering if a buyer is willing to have less recourse to the seller for warranty breaches, is asking for fewer indemnities or doesn’t require an escrow, and if the buyer brings more certainty around funding its bid and the deliverability of that bid. In most cases, however, the top-line deal price will be the seller’s most important consideration.
Assess the Regulatory Landscape
Larger target enterprises in the healthcare space are likely to have operations in multiple jurisdictions, which introduces additional complexities that must be considered in the context of a deal. As with all cross-border deals, merger-control restrictions in the countries in which the buyer and target have overlapping operations, foreign investment restrictions in the countries in which the target operates, works council issues, and other factors should be assessed.
Merger-control approvals are likely to be more involved where the acquirer and target are both operating in the same space, i.e., where the acquirer is a strategic competitor rather than a private equity sponsor, unless the sponsor owns similar businesses. This reality is something to be considered by the seller in evaluating potential suitors, as a private equity bidder may offer more deal certainty and a swifter process to completion than a strategic bidder.
In addition, an acquisition in the healthcare space requires consideration of the healthcare regulatory frameworks in the countries in which the buyer and target operate. This can help ensure that applicable healthcare regulations do not impose any requirements for a change of control. In particular, notification or consent rights to a deal by healthcare regulatory authorities must be considered.
Regulatory approvals outside of the healthcare space may also need to be assessed. For example, where a healthcare target has a regulated subsidiary that provides financing or other regulated financial services, relevant financial conduct regulators may also need to be notified and provide approvals.
Works councils and similar processes, particularly in European jurisdictions that are more protective of employee rights, are another factor to be weighed. These requirements generally obligate the buyer and seller, before completing an acquisition, to consult with a representative body for employees in relevant jurisdictions where the target has operations. This can delay deal completion and require the parties to accommodate additional contractual documentation.
It is also important to assess the target’s regulatory compliance framework and its policies and procedures to ensure ongoing compliance. Hidden regulatory issues can be significant liabilities that an acquirer should assess carefully in order to make an appropriate determination of value and in the contractual allocation of pre-acquisition risks with the seller.
Utilize Deal Protections
Due partly to the additional required regulatory approvals, cross-border acquisitions can necessitate a significant period between signing and completion. A prolonged completion period can be challenging, as it gives competitors time to steal the deal, even when there is a signed sales and purchase agreement. A longer completion window also increases the possibility that intervening events will materially change the position of the buyer or seller, rendering the deal no longer desirable.
As a buyer, it is important to consider a no-shop clause and a break fee in the sale and purchase agreement. The no-shop clause will prevent the seller from proactively looking for new suitors during the completion window; however, in most jurisdictions it will not be possible to override a seller’s ability to consider unsolicited third-party offers, particularly where the seller is a public company.
The break fee (if set at a high enough level) is perhaps a more powerful tool to protect a signed deal and can be deployed by either side to ensure transaction certainty. As with a no-shop clause, the ability to obtain a break fee may be limited in certain types of transactions, e.g., in certain jurisdictions where a public company is being acquired. It also depends on each party’s bargaining position. However, a break fee generally would help to address situations where the target receives an unsolicited third-party offer, imposing an additional hurdle before that offer is viable. On the seller’s side, a break fee imposed on the buyer can help push them to complete a transaction despite cumbersome regulatory approvals.
A protracted period between signing and completion also can argue for the need for a material adverse change (MAC) clause, which is most commonly used by buyers to give a walk-away right if the circumstances have changed during this period. The enforceability of a MAC clause may also be limited depending on the jurisdiction of the sale and purchase agreement. Furthermore, proving that a MAC has truly occurred can be challenging and heavily litigated, which is why it is prudent to specifically enumerate, in as much detail as possible, the circumstances that would give rise to this right.
Arvin Abraham is an attorney in the London office of McDermott Will & Emery. He counsels clients on mergers and acquisitions, private equity transactions, fund formation and general corporate matters and has extensive experience in the healthcare and fin-tech sectors. A Harvard Law graduate, Abraham has been involved in numerous cross-border acquisitions with private equity sponsors and venture capital funds.
For the buyer, there are numerous benefits to a cross-border medical acquisition. If the buyer is not present in a geographic market and wants to establish a footprint, or lacks a particular product offering, an add-on acquisition can deliver significant new opportunities. For sellers, a cross-border transaction offers the chance to capitalize on unrealized value or team up with a partner who can help facilitate sought-after growth.
On either side of the equation, cross-border acquisitions require proper planning, patience and, in some circumstances, a measure of tenacity. For those pondering a cross-border sale or acquisition, heeding the following tips can smooth the process.
Understand the Objectives
At the outset, buyers and sellers should understand why they want to strike a deal, what the minimum threshold conditions would be to move forward, and the conditions that would end negotiations. The rationale to buy or sell a company will differ depending on the nature of the buyer or seller. For instance, a corporate buyer may seek synergies with the target and the chance to accelerate growth that could not otherwise be easily obtained by organic expansion. Private equity sponsors typically want assets that unlock value in ways the target or its parent had not been able to, for example, by way of a restructuring, through acquisitions, or having properly incentivized management (including new management, where appropriate).
On the sell side, a disposal is an opportunity to exit a business line that may no longer fit with a broader group’s strategic goals, divest a poorly performing asset, realize immediate value to address liquidity or other needs, or simply to exit because a company’s existing owners no longer want to run the business.
On both sides of the table, it is important to have in mind minimum criteria for closing a deal and factors that would negatively impact the outcome. Of course, one major criteria for both buyers and sellers is price—but other terms associated with the purchase contract must also be evaluated to determine whether they are acceptable. In particular, the allocation of pre-acquisition risks is one key area in which the buyer will want to minimize their assumption of such risks and will want to push as many risks as possible onto the buyer. These and other conflicting goals create inherent tension when negotiating terms.
At the outset of a deal, it is generally not possible to have a complete understanding of all the issues and complications that can arise. This is mostly a concern for the buyer, but it’s also relevant for the seller. The parties’ objectives may change and the bright lines to proceed or walk away from a deal may get blurry as more time, energy, and effort are invested in the process. It is important that both parties not get overly caught up in sunk costs—as with a game of poker or any other high-stakes process, it is sometimes better for either party to fold and walk away than continue with a deal that is becoming overly complicated or raising too many red flags.
Ask Key Questions
The due diligence process is generally, but not always, more involved in a cross-border acquisition, particularly when seeking to acquire a larger target. Cross-border acquisitions also require substantial coordination, where the target operates in several jurisdictions and law firms in each relevant jurisdiction may need to be retained to conduct local law due diligence.
As with all acquisitions, the due diligence process will need to assess the target’s operations, contractual commitments, financing and other liabilities, past merger and acquisition history, corporate governance, and other relevant factors. Material issues should be identified by counsel and appropriate questions posed to the target to flesh out the understanding of any risks and liabilities the acquirer will be taking on after making the purchase.
It is also important to note that the scope and focus of the due diligence process will differ depending on the acquiring entity’s nature. Having said that, reputational risks are critical for all buyers, as they’ll want to avoid stepping on any reputation-damaging landmines.
On the sell-side it is also important to evaluate the proposed acquirer and, depending on the transaction’s nature, determine if the acquirer is the right fit. Where the seller will continue to retain an interest in the target following the acquisition, an assessment should be made of whether the acquirer is the right strategic fit to be a long-term partner. In that evaluation, points to be considered include whether the buyer has the operational expertise to help grow and unlock value in the target. Both buyer and seller will also need to consider whether governance rights can be appropriately shared.
Where the seller is exiting completely, the key question will be about price. However, it is also important to consider the allocation of post-acquisition liabilities and transaction certainty. In some cases, a lower price may be worth considering if a buyer is willing to have less recourse to the seller for warranty breaches, is asking for fewer indemnities or doesn’t require an escrow, and if the buyer brings more certainty around funding its bid and the deliverability of that bid. In most cases, however, the top-line deal price will be the seller’s most important consideration.
Assess the Regulatory Landscape
Larger target enterprises in the healthcare space are likely to have operations in multiple jurisdictions, which introduces additional complexities that must be considered in the context of a deal. As with all cross-border deals, merger-control restrictions in the countries in which the buyer and target have overlapping operations, foreign investment restrictions in the countries in which the target operates, works council issues, and other factors should be assessed.
Merger-control approvals are likely to be more involved where the acquirer and target are both operating in the same space, i.e., where the acquirer is a strategic competitor rather than a private equity sponsor, unless the sponsor owns similar businesses. This reality is something to be considered by the seller in evaluating potential suitors, as a private equity bidder may offer more deal certainty and a swifter process to completion than a strategic bidder.
In addition, an acquisition in the healthcare space requires consideration of the healthcare regulatory frameworks in the countries in which the buyer and target operate. This can help ensure that applicable healthcare regulations do not impose any requirements for a change of control. In particular, notification or consent rights to a deal by healthcare regulatory authorities must be considered.
Regulatory approvals outside of the healthcare space may also need to be assessed. For example, where a healthcare target has a regulated subsidiary that provides financing or other regulated financial services, relevant financial conduct regulators may also need to be notified and provide approvals.
Works councils and similar processes, particularly in European jurisdictions that are more protective of employee rights, are another factor to be weighed. These requirements generally obligate the buyer and seller, before completing an acquisition, to consult with a representative body for employees in relevant jurisdictions where the target has operations. This can delay deal completion and require the parties to accommodate additional contractual documentation.
It is also important to assess the target’s regulatory compliance framework and its policies and procedures to ensure ongoing compliance. Hidden regulatory issues can be significant liabilities that an acquirer should assess carefully in order to make an appropriate determination of value and in the contractual allocation of pre-acquisition risks with the seller.
Utilize Deal Protections
Due partly to the additional required regulatory approvals, cross-border acquisitions can necessitate a significant period between signing and completion. A prolonged completion period can be challenging, as it gives competitors time to steal the deal, even when there is a signed sales and purchase agreement. A longer completion window also increases the possibility that intervening events will materially change the position of the buyer or seller, rendering the deal no longer desirable.
As a buyer, it is important to consider a no-shop clause and a break fee in the sale and purchase agreement. The no-shop clause will prevent the seller from proactively looking for new suitors during the completion window; however, in most jurisdictions it will not be possible to override a seller’s ability to consider unsolicited third-party offers, particularly where the seller is a public company.
The break fee (if set at a high enough level) is perhaps a more powerful tool to protect a signed deal and can be deployed by either side to ensure transaction certainty. As with a no-shop clause, the ability to obtain a break fee may be limited in certain types of transactions, e.g., in certain jurisdictions where a public company is being acquired. It also depends on each party’s bargaining position. However, a break fee generally would help to address situations where the target receives an unsolicited third-party offer, imposing an additional hurdle before that offer is viable. On the seller’s side, a break fee imposed on the buyer can help push them to complete a transaction despite cumbersome regulatory approvals.
A protracted period between signing and completion also can argue for the need for a material adverse change (MAC) clause, which is most commonly used by buyers to give a walk-away right if the circumstances have changed during this period. The enforceability of a MAC clause may also be limited depending on the jurisdiction of the sale and purchase agreement. Furthermore, proving that a MAC has truly occurred can be challenging and heavily litigated, which is why it is prudent to specifically enumerate, in as much detail as possible, the circumstances that would give rise to this right.
Arvin Abraham is an attorney in the London office of McDermott Will & Emery. He counsels clients on mergers and acquisitions, private equity transactions, fund formation and general corporate matters and has extensive experience in the healthcare and fin-tech sectors. A Harvard Law graduate, Abraham has been involved in numerous cross-border acquisitions with private equity sponsors and venture capital funds.
