1	LACBA International Law Section Structuring International Transactions February 4, 2009 LACBA Conference Center
2	"Michael Newman" Michael Newman Roger Loomis Jim Cigler Bob Campbell Bob Iritani Mark Hiraide Ann Longmore Jeffery Daar
3	Case Study A A Japanese-based multinational group (“JGrp”) proposes to acquire a California-based multinational technology company (“TechCo”); secure financing, including acquisition financing and for working capital; distribute JGrp products in the US.
4	Key Issues Pre-Acquisition Structure vs. Post-Acquisition Banking / Financing International Tax Planning & Compliance Structuring the Acquisition – Legal Considerations Insurance Considerations Choice of Law and Conflict Resolution
5	Other Issues Intellectual Property – Protection & Planning Alternative Structuring Joint Ventures Reverse Mergers IPOs Accounting and Financial Disclosures GAAP, IFRS, Statutory, Etc. Local D&O Indemnification
6	"Pre- and Post-" Pre- and Post- Acquisition Structures
7	Pre-Acquisition Acquirer - JGrp
8	Pre-Acquisition Target - TechCo
9	Post-Acquisition Structure
10	Structuring the Acquisition
11	US Holding Co. Structure Post-Acquisition
12	"Banking / Financing" Banking / Financing
13	Agenda
14	Capital Markets Overview
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16	Debt Multiple Trends
17	Purchase Price Multiples
18	Capital Structure Trends
19	Worldwide M&A Activity
20	Currency Analysis
21	Currency Analysis
22	Currency Analysis
23	Cross Border M&A
24	Financing the Acquisition A $20 million purchase price implies normalized operating earnings (EBITDA) of approx. $4.0 million (5.0x) We also assume there are no unusually significant assets to leverage (ie; land, large amounts of unleveraged capital equipment, etc.) Also assume no material pre-existing funded debt on the target company Adequate working capital is retained in the business post-acquisition
25	Sample Capital Structure Senior Debt $ 8.0 40% LIBOR + 4.0 – 4.0%, 3 year term Mezzanine Debt 4.0 20 10% to 12% coupon, 3 year term, 10%-15% warrants Equity 8.0 40 Total $20.0 100%
26	Sources of Capital Senior Debt City National Bank, or other less qualified lenders Asset based lenders (Foothill Capital/WFB), CIT, etc. Mezzanine Debt Many hedge funds are out of the market A number of specialized funds still exist to provide mezzanine capital Equity Acquiror’s existing cash Issuance of acquiror stock to seller (of publicly traded) Other capital sources in acquiror home country
27	Follow on IPO Reasons for foreign companies to issue subsidiary stock in the U.S. Ability to focus capital market interest on a faster growing segment of the company that is under-appreciated in the larger company Access to additional population of investors More direct motivation of subsidiary employees via stock option and other incentives Ability to use U.S. based public equity for other acquisitions Other
28	Stock Market Index Analysis
29	IPO Trends
30	IPO Requirements Historical earnings growth and THE ABILITY TO DEMONSTRATE FUTURE EARNINGS GROWTH POTENTIAL Proprietary or distinguishable product or service Growth potential in the Company’s market High quality U.S. management Infrastructure independent of the parent capable of supporting financial reporting and SOX requirements U.S. based Board of Directors Often a management agreement is required with the parent Spells out limits of parent’s involvement
31	Historical Notes Early 80’s – Theory Z: Land under Imperial Palace in Tokyo > state of Florida Late 80’s – Drexel Burnham can sell junk bonds without commensurate increase in risk 1999 – “the Internet bubble is riding on rock-solid fundamentals, perhaps stronger than any the market has seen before” – Henry Blodget 2006 – Mortgage backed bonds and CDO’s can transform large numbers of sub-prime mortgages into AAA paper 2009 – All U.S. banks will be nationalized, China will divest all U.S. debt and social order will break down
32	Senior Financing
33	Structure
34	Foreign Currency Risk Management
35	Interest Rate Risk Management
36	Financing Market
37	"International Tax" International Tax Planning & Compliance
38	International Tax Tax Impacts Most Integration Elements Coordinate All Jurisdictions Achieve Geographic Proximity Use Tax Free Reorganizations Identify and Manage Tax Attributes Technical Details – E&P, Methods, FTC
39	Key Post-Acquisition Integration Considerations
40	Key Operational Elements Foreign IP Rights Degree and timing of product integration Rights Territories Location – jurisdiction Foreign Principal (3 party structure) Sales Channel integration Location – jurisdiction Third party contract assignments to conform acquirer and target structures Foreign Production Sourcing decisions/ integration of product lines or supply chain Location – jurisdiction Contract manufacturing/ tolling (3rd party vs. related party) Intercompany Contracting Model Buy-sell (full vs. risk stripped) Commissionaire Commission agent Services
41	Legal Entity Tax Integration Building blocks for a tax-efficient integration: Tax-free movement of shares / operations – US Sub C considerations Tax free reorganization and contributions, use of disregarded foreign entities / disregarded intercompany sales, single member LLCs Local and Regional foreign tax considerations: Income – Capital gain – Transfer - Stamp Duty – Capital – VAT – Treaties Foreign Mergers or roll-over (tax-exempt) asset transfers May require grouping relief, brother-sister, parent sub alignment Design for Maximum Tax Value Capture NOL’s, credits Repatriation routes US FTC pool monetization – E&P deficit combinations Holding companies Entity capitalization – tax efficient internal debt
42	"Legal Considerations" Legal Considerations
43	Legal Considerations - Acquisition Methods
44	Legal Considerations Alternative Structures
45	Legal Considerations Documenting the Transaction
46	"Insurance Considerations" Insurance Considerations
47	Global Insurance Considerations Both the JCo and the TechCo operated internationally A number of these countries require locally admitted coverage for local persons or property Locally “admitted” coverage generally means a local policy of insurance with an approved insurer One, global, master policy covering these countries would be “non-admitted” coverage
48	Why We Care About Admitted Coverage Where non-admitted coverage is not permitted, the global policy would not be legally binding and enforceable in the local country
49	Insurance Carriers Care If an insurance carrier ignores local law: It may lose its license, be subject to fines and penalties Hence, they may be reluctant or unable to pay claims locally
50	Insurance Buyers Care Buyers of such insurance that is in violation of local law may be: Unable to collect in the local jurisdiction Repatriation issues In noncompliance with legal requirements for mandatory coverages or possible breach of contract Subject to fines, penalties, possible imprisonment Subject to substantial adverse tax consequences
51	How to Start / Which Countries The discussion starts with the location of subsidiaries: Japan, US, UK, France, Germany, Ireland (ROW?) Then the focus shifts to where non-admitted coverage is not permitted (+where there may be IPTs due as a separate issue) When considering D&O insurance, some look to their ability to indemnity their local execs Here: Japan, France, Germany and Ireland will be at issue
52	Next Step: Risk Transfer When you know where you might want coverage, you can then look at which insurers can be used to transfer the risk
53	Who Can Fulfill Your Strategy: Which Carrier(s) To Utilize
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55	Last, But Not Least: Taxes Local jurisdictions where JCo has people of property may assess local premium taxes – whether or not a local policy is purchased The EU Kvaerner decision demonstrated this for D&O insurance.
56	"Choice of Venue" Choice of Venue, Law and Conflict Resolution Provisions
57	Venue Issues Venue agreement types Location of one party Neutral location Reciprocal locations depending on who initiates dispute
58	Venue Issues Venue Strategy considerations include: Favorable forum Considering who is more likely to have a dispute The substantive law that could be applied Arbitration vs. Litigation Enforcement of Judgment or Arbitration Award Issues
59	Venue Issues (cont.) Forum selection clauses are prima facie valid when included in a freely negotiated private international agreement. The United States Supreme Court has identified three exceptions to the enforceability of a facially-valid forum selection clause: If the selected forum is so gravely difficult and inconvenient that the complaining party will for all practical purposes be deprived of his day in court; If the clause was a product of fraud, undue influence, or overweening bargaining power; and If enforcement would contravene a strong public policy of the forum in which suit is brought, whether declared by statute or by judicial decision.
60	Choice of Law Issues Strategy Considerations include: Knowing the differences between possible laws Considering who is more likely to have a dispute Whether choice of law would be enforced by a court or arbitrator Consider consulting with foreign lawyer for advice
61	Enforcement of Judgment/Award Issues Consider whether a California state or federal court judgment will be enforceable in other countries, particularly the country of the defendant. Consider consulting with a foreign lawyer from the country or countries at issue. Alternatively, if you end up suing the foreign defendant in another country, will a resulting foreign judgment be enforceable in the United States or elsewhere?
62	Enforcement of Judgment/Award Issues (cont.) Under California law, a foreign judgment will be deemed conclusive and enforced in California unless an exception to conclusiveness exists. The limited exceptions to conclusiveness include: (1) The judgment was rendered under a system which does not provide impartial tribunals or procedures compatible with the requirements of due process of law; (2) The foreign court did not have personal jurisdiction over the defendant; or (3) The foreign court did not have personal jurisdiction over the subject matter.
63	Enforcement of Judgment/Award Issues (cont.) Alternatively, an international arbitration award is usually grounded in the national legal order of the place of arbitration. It is not recognized per se worldwide; it needs first recognition by the state where enforcement is sought (“Exequatur”). Rules of recognition are contained: In the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards (more than 160 member states!); Sometimes in further international treaties; and Otherwise in the local legal orders (which are increasingly similar as more and more are based on Art. 34 of the UNCITRAL Model Law on International Arbitration).
64	Q & A
65	"Speaker" Speaker Contact Information
66	Contact Information Michael R. Newman, Partner Daar & Newman, A Professional Law Corporation 865 South Figueroa Street, Suite 2300 Los Angeles, California 90017-2565 Telephone: 213/892-0999 Facsimile: 213/892-1066 Email: mnewman@daarnewman.com Website: www.daarnewman.com
67	Contact Information Jeffery J. Daar, Partner Daar & Newman, A Professional Law Corporation 865 South Figueroa Street, Suite 2300 Los Angeles, California 90017-2565 Telephone: 213/892-0999 Facsimile: 213/892-1066 Email: jdaar@daarnewman.com Website: www.daarnewman.com
68	"Mark T" Mark T. Hiraide Roger D. Loomis, Jr. Petillon Hiraide & Loomis LLP 865 South Figueroa Street, Suite 2300 Los Angeles, California 9001-2565 Telephone: 213/622-0527 Facsimile: 310/543-0550 Email: mhiraide@phlcorplaw.com rloomis@phlcorplaw.com Website: www.phlcorplaw.com
69	"Robert M" Robert M. Iritani Executive Vice President, Specialty Banking City National Bank City National Plaza 525 South Flower Street Los Angeles, California 90071 Telephone: 213/673-9900 Email: robertiritani@cnb.com
70	"James D" James D. Cigler, Partner PricewaterhouseCoopers, LLP, 350 South Grand Avenue Los Angeles, California 90071 Telephone: 213/356-8441 Facsimile: 813/329-9602 Email: jim.cigler@us.pwc.com
71	"Robert W" Robert W. Campbell Managing Director B. Riley & Co., LLC 4675 MacArthur Court, Suite 1500 Newport Beach, California 92660 Telephone: 949/852-9911 x-234 Facsimile: 949/852-0430 Email: rcampbell@brileyco.com Website: www.brileyco.com
72	"Ann M" Ann M. Longmore Executive Vice President Willis HRH 1 World Financial Center New York, New York 10281 Telephone: 212/915-7994 Email: ann.longmore@willis.com