Typical due diligence issues

Due diligence in the US is generally fulsome and, depending on the transaction structure, buyers of businesses in the US can inherit litigation, anti-bribery, environmental, employment and compensation, labor union and other risks upon completion of an acquisition. During the last few years, privacy, anti-bribery, import/export control, information/cyber security and related matters have risen in prominence as due diligence matters as a result of increased regulatory attention to compliance in the US.

Pricing and payment

Wire transfer of funds is the typical method for payment in the US. Wire transfers through the SWIFT Code international system are also common.

The US exercises few controls over foreign exchange transactions by US citizens or non-US persons. Generally, no approval from the US Department of Treasury or other finance authority is required to make an investment.

Signing/closing

Simultaneous signing of the purchase agreement and closing of the acquisition or merger is common, particularly in straightforward transactions where no antitrust (or other regulatory) approvals are required or where few (if any) third-party consents are necessary. 

Foreign acquisitions of US businesses are assisted by a general absence of exchange controls, government regulation, or licensing of foreign investment or foreign acquisitions in the US. Below are the typical approval requirements.

Foreign investment restrictions

The US maintains an open investment policy subject to the President’s authority to block or suspend transactions which he finds threaten national security. The President is assisted in reviewing transactions by the Committee on Foreign Investment in the United States (CFIUS), a multi-agency committee chaired by the Treasury Secretary.

CFIUS regulations require pre-closing filings for certain investments by any foreign person in US businesses developing critical technology, and by foreign state-affiliated investors in US critical technology, critical infrastructure and sensitive personal data businesses. Parties in other transactions may make voluntary filings to CFIUS to secure clearance, thus insulating the transaction from after the fact questioning by the President or CFIUS. There is no time limit on CFIUS reviewing a transaction that has not previously been cleared and the President, assisted by CFIUS, can force a foreign investor to divest itself of an acquisition post-closing if the President finds a risk to national security.

For further information, see the more detailed section on "Foreign investment restrictions".

Antitrust/merger control

The US has a mandatory and suspensory merger control regime, provided the filing thresholds are met (the deal must first have a minimum value and the parties must be a minimum size). Under the Hart-Scott-Rodino (HSR) Act, parties to mergers and acquisitions must file premerger notification and wait for agency review. The parties may not close their deal until the waiting period outlined in the HSR Act (30 days) has passed (expired), or the agency has granted early termination of the waiting period. Once the waiting period expires, or is terminated early, the parties are free to close their deal. If the agency has determined that it needs more information to assess the proposed deal, it will send both parties a Second Request. Once the companies have substantially complied with the Second Request, the agency has an additional 30 days to review the materials and take action. If the deal is challenged, the parties may enter into a negotiated consent agreement with the agency that includes remedies or provisions to restore competition, or the agencies may seek to stop the transaction by filing a preliminary injunction in federal court, pending an administrative trial on the merits. For further information, see the more detailed section on "Antitrust/merger control".

Other Approvals/Registrations

An acquisition or merger may trigger other regulatory or government approvals. The purchase and sale of securities, including the shares of a corporation and ownership interests in many other entities, are strictly regulated by both federal and state governments. Additionally, the transaction may require the approval of state or federal regulatory agencies overseeing the particular industry in which the target operates (e.g., food, healthcare or telecommunications).

A private merger or acquisition will also likely need corporate approvals that are required by the seller's (and sometimes buyer's) organizational or governance documents and the laws of the states of their incorporation.

A non-US company may issue shares or other securities in the US to finance an acquisition, for example, by exchanging its shares for the shares or assets of the target company. However, the shares or other securities must be issued pursuant to a registration statement filed with the Securities and Exchange Commission (SEC) (containing or incorporating detailed information regarding the issuer's business affairs and financial condition), unless an exemption from registration is available. A commonly used exemption in acquisitions of closely held companies is the private offering exemption - that is, an offering to a limited number of sophisticated investors.

The employment implications of share sales and asset sales should remain top of mind for US employers in an M&A transaction as they structure and carry out the deal.

Acquisition/disposal of shares

In general, under federal employment laws in the US, if a transaction involves a transfer or exchange of shares (or other equity interests) of the target business, there is no transfer of employees but simply a change in the ownership of the employer providing the buyer with inherited rights, duties and liabilities previously owed by (or to) the employees of the target company. The buyer also steps into the shoes of the seller with regard to a union or existing collective bargaining agreements (CBAs). “Change in control” provisions may be present in employment contracts and may trigger termination or payment rights (usually on behalf of executive or senior-management level employees). Though these rules will generally apply in a reverse triangular merger, in a forward triangular merger where there is a change of the employing entity, employees transfer to the buyer through a more complicated (and likely time-consuming) termination and rehire process akin to a transaction involving the sale of assets.

Acquisition/disposal of assets

If a transaction involves the sale or transfer of the assets and liabilities of a business, an asset buyer is not obligated to offer employment to the employees of the seller, unless the terms of the deal as negotiated by the parties require it. Instead, the buyer can choose certain employees to receive offers of employment based on the buyer’s needs. If there is an intention to transfer employees, the employees must be terminated by the seller and accept an offer of employment with the buyer. To the extent this does not happen, the employees will remain with the seller and the seller must decide whether to retain or terminate such employees.  As such, sellers often insist that the buyer offers employment to the in-scope business employees as part of the transaction, not only to secure employment for its employees but also to help the seller avoid potential claims and termination costs, and the administrative burden of conducting a reduction in force.

Other considerations

Additional considerations include whether the buyer is a “successor” employer for purposes of recognizing the union, whether the Worker Adjustment and Retraining Notification Act of 1988 (WARN Act) is triggered by the employee transfers, whether a buyer is able to take credit for the wages paid by the seller to its employees during the calendar year for purposes of meeting the wage base with respect to Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes, and whether new or amended visa petitions need to be filed and/or approved.

The US taxes the worldwide income of US persons. US persons are US citizens and US green card holders (regardless of where they currently reside), residents of the US, a corporation or partnership formed in the US and certain estates and trusts with connections to other US persons. For further information, see the more detailed section on “Agreeing to the acquisition agreement → Stamp duty and tax”.

OECD's Two Pillar Solution

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.

Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.

For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.