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International merger and acquisition transactions often involve a complex and unique set of legal issues for in-house counsel, particularly in emerging market countries, where the concept of “the rule of law” is not necessarily well developed.

Below is an overview of areas of concern that commonly arise in these matters, together with suggestions on addressing such issues.

” Local law considerations. Almost invariably, the implementation of international M&A transactions is fundamentally impacted by local laws such as 1. governmental approvals and regulatory requirements; 2. rules on perfecting title; 3. tax, currency or customs regimes; and 4. employment laws. As a specific example, the labor legislation of many formerly Communist countries retains certain elements of a workers’ state, which can create difficulties for acquirers in post-closing activities such as restructuring operations and reducing staff.

In addition, since reliable information may not be publicly available or otherwise easily obtainable, in-country due diligence takes on special significance.

Local law expertise, therefore, is critical to an in-house counsel’s ability to identify areas of focus for due diligence, evaluate applicable local law requirements and structure the transaction to achieve the maximum benefits available under local law.

Consequently, one of the first tasks for an in-house lawyer is identifying and obtaining the best available local law capabilities. Since certain foreign countries allow U.S. firms to practice local law, local law expertise may be available from the company’s regular outside counsel. More commonly, however, it is necessary to find a local firm to provide this advice. To find the most suitable local firm, the company can either work through outside counsel, if such counsel has worked in the country before and has relationships there, or seek references from other companies that have operations in the particular country. As would be the case with any local counsel, in-house counsel must clearly communicate the scope of work, monitor the cost of the services, and come up with a well defined system for supervising the local lawyers’ activities.

* Corruption issues. Several years ago, I attended a breakfast meeting in a foreign capital with the managers of a dozen or so American companies with offices in the capital. The breakfast honored a senior official of the U.S. Commerce Department who was visiting the country to promote U.S. trade. When the official asked the group what the U.S. administration could do to help facilitate foreign investment in the country, one executive immediately responded, “Repeal the Foreign Corrupt Practices Act.”

Although the executive made this comment in jest, it highlights what a critical consideration the Foreign Corrupt Practices Act of 1977 is for American companies engaging in international transactions. The FCPA generally prohibits U.S. companies from making payments to improperly influence foreign governmental officials in awarding business. FCPA issues often arise in the context of the hiring of local consultants or partners who promise great results for the company in-country, but who may use improper methods to achieve such results.

An inherent conflict often exists between project developers, who are highly motivated to get the deal done, and in-house counsel, who need to ensure that appropriate compliance guidelines are followed. To address these issues, it is critical that 1. the company have a written FCPA compliance program — including accounting controls — that in-house counsel or other executives clearly communicate to project developers; 2. in-house lawyers undertake extensive due diligence before hiring any local consultants or forming joint ventures with local partners; and 3. in-house lawyers include appropriate anti-corruption language in any relevant documentation.

Cultural Awareness

* Dispute resolution. Another critical issue for in-house counsel in international M&A transactions is ensuring that the client will have an appropriate mechanism to protect its legal rights. In many jurisdictions, however, especially in emerging market countries, using local courts to enforce legal rights poses problems because of local biases, corruption and, more generally, the lack of a sophisticated and reliable legal infrastructure.

In these situations, in-house counsel should ensure the relevant documentation provides that all disputes should be resolved through international arbitration in a neutral forum and that the governing law be the laws of a country other than the host country. In taking this approach, however, in-house counsel must first confirm that the country where the enforcement action would be taken is a party to the 1958 New York Convention on the Enforcement of Foreign Arbitral Awards, which generally requires the signatory countries to enforce validly issued foreign arbitral awards.

The issue of governing law can provoke significant debate. If the transaction involves a U.S. company, foreign parties are sometimes reluctant to choose American law to govern the contracts because of a concern that this will somehow favor the U.S. party. Often, parties choose English law because of a general perception internationally that English law is fair and impartial. But sometimes the other party in a transaction can reveal quite a different reason for wanting to select a given country’s law: A few years ago, I was debating this governing law issue with a senior official of a large Russian company, who was arguing in favor of selecting Swedish law. I told him that I didn’t know anything about Swedish law. He responded that he didn’t either, so “that’s why it would be neutral.” While fending off this kind of false compromise, in-house counsel should ensure that the transaction documentation provides for a governing law that establishes a comprehensive set of legal principles to regulate the parties’ rights and obligations.

While the method of successfully implementing an international M&A transaction varies with the nature of the project, in-house counsel can usually achieve the best results by evaluating the issues outlined above among other things. In addition, though this is less of a strictly legal consideration, demonstrating cultural awareness and avoiding inappropriate American condescension in dealing with foreign companies and governmental officials often is the single most important factor in achieving a good transactional result.

James L. “Jay” Cuclis, a partner in the Houston office of Vinson & Elkins, serves as the coordinator of the firm’s international practice. He spent five years working in the London and Moscow offices of the firm and, during the past 15 years, has worked on transactions in more than 40 countries throughout the Americas, Europe, Asia, the Middle East and West Africa.

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