Today, global transactions present unique challenges for businesses seeking to obtain and analyze diligence information. Some of these challenges are as basic as language and cultural differences, while others are far more complex and require focused and creative inquiries, involving decentralized computer systems and document retention policies, different accounting systems, and regulatory frameworks regarding foreign investment in or ownership of domestic entities, bearer shares and nominee directors corporate entities, possessory and property rights and title registrations. Cross-border transactions also implicate potential Foreign Corrupt Practices Act and OECD Convention liabilities and the courts and legal systems of foreign jurisdictions. Careful due diligence regarding the enforceability of deal terms is essential to ensuring that each party is getting what it expects out of the deal. Legal counsel with experience in these transactions can help clients navigate through all of the traps that may be encountered by the unwary.
The Chart below, showing all the counties in red, represents the territory of heighted due diligence, because it covers the developing and emerging markets, plus a few of our allies in Europe and require careful analyses of each transaction.
Effective due diligence assures that a transaction achieves its anticipated benefits. It must identify (i) deal breakers, (ii) key risks and (iii) operational issues.
Due diligence process is always transaction-specific: there is no such thing as standard due diligence process – it must identify and allow for mitigation of risks in each specific case.
In the developing and emerging markets, due diligence is particularly important – asking the right questions is not enough as you may receive inadequate information.
Lastly, the nature of the transaction, an equity purchase of shares or the purchase of assets only, will impact how liabilities are apportioned under local law, which may differ from a standard Western model.
Political and market uncertainty;
Different legal, financial and accounting systems;
Less developed governmental institutions;
Opaque regulatory practices;
Uncertain labor laws or burdensome pro-labor regulations;
Corrupt and inefficient local courts.
1. Retain local counsel - preferably one affiliated with a major US law firm and visit your foreign jurisdiction.
2. Review formation and ownership of the local entity – establish identity of beneficial owners; type of shares (verification of ownership represented by bearer shares needs particular attention); voting rights agreements; shareholders agreements (in many developing jurisdictions shareholders agreements will not be executed and are not common); authority of people you are dealing with to represent the entity, provide information and to enter into the transaction.
3. Personal information and reputations of key players, directors and owners – in many jurisdictions, directors and officers are nominees who do not participate at all in the management of the entity; original executed resignations may be needed for each nominee to transfer ownership of the entity, identity of beneficial owners must be disclosed.
4. Financial and accounting matters – many companies keep two or ever three sets of books, some are for legitimate reasons, some are not so; make sure to compare all sets and convert to GAAP or IFRS, as feasible.
5. Foreign Corrupt Practices Act (FCPA) for U.S. companies - is one of the top priorities for due diligence; ask for compliance with FCPA in writing, whenever possible; review any unusual payment patterns, high commissions, underfunded business partners and vague accounting entries, such as ”entertainment.” Consider applicability of the OECD Convention on Combating Bribery of Foreign Pubic Officials,
6. Labor and employment matters – review local laws regarding severance pay, notices for firing for cause and without cause and other required payments under local Labor Codes; in many developing counties employment contracts may be implied and written contracts may be disregarded; employees may be entitled to as many as 14 months of compensation in one calendar year – be careful about budgeting for downsizing and firing of employees.
7. Environmental laws – review tort and criminal liability under the local laws; permitting may involve lengthy bureaucratic procedures; variable enforcement may be common; different standards for local companies and multinationals may be prevalent.
8. Real Estate issues – ownership of real estate; title to land; possessory rights will affect vesting and titling; ownership must be researched and verified for many years back; building codes and certificates of occupancy rules may vary widely from the US.
9. Intellectual Property (IP) – local protection and rights of ownership of IP; third party licensing issues, ownership of innovations – is it a licensor (as in the US ) or the licensee (in other jurisdictions) who owns rights to innovations to your IP?
10. Political risks – consider non-commercial risks; availability of political risk insurance and its impact on the cost of doing business in each jurisdiction.
11. Local Courts or Arbitration – we always opt for arbitration in a neutral forum with established arbitration procedures based on UNCITRAL model rules; local Courts may be ineffective and corrupt or outright hostile to foreign investors.
12. Indemnification provisions – best due diligence practice allows to discover hidden issues during the negotiations stage and thus provide for price adjustment and proper indemnification negotiated before the deal is closed; failed due diligence may lead to expensive and extensive litigation.
13. List f hidden issues to bear in mind:
a. Current and pending legislation;
b. Environmental non-compliance;
c. Corrupt practices;
d. Poor accounting and controls;
e. Poor maintenance and aging equipment and assets;
f. Product quality controls;
g. Product safely problems;
h. Disgruntled employees;
i. Disgruntled investors;
j. Disgruntled customers;
k. Technology and IP problems;
All in all, due diligence should be a cooperative process to the extent possible rather than a confrontational one. So, build a competent local team and be creative in pealing the proverbial onion of potential problematic issues.
By Juliette Passer, Esq. 2012
Our company provides legal and financial consulting to both US and foreign clients involved in many industries. Through our office in Panama City, we provide services to both individual and institutional investors interested in projects located in Panama Republic, including real estate transactions, wealth preservation and asset protection, international trade, equipment leasing, international licensing, trademark registration, sales and purchases of businesses, management of administrative and subsidiary offices registered in Panama and choices of passive investment vehicles. The clients of PanaManagement receive personalized and effective representation based on combination of major firms experience and quality at highly competitive rates. As a consulting company with an integrated in-house legal department, we have the capabilities to handle your projects from the inception to completion.
“The purpose of establishing an office in Panama is two-fold: first, to facilitate and safeguard the investments by US companies and individual investors in a deceptively familiar legal environment of Panama, which is based on the Delaware Corporations Law and similar to the Wyoming Limited Liability Company Law, but allows bearer shares and untitled real estate sales; and secondly, to bring legitimacy to wealth preservation services, based on Panama family foundations, which does not involve any US tax evasion or creditor fraud. “
The company is headed by Juliette M. Passer, a U.S. attorney, with over 21 years of broad international transactional experience, specializing in corporate and project finance, as well as new media transactions and e-commerce. Ms Passer holds a JD (cum laude) from Cardozo School of Law and studied Soviet Law at the Columbia University School of Law. She practiced law with the international law firms of Debevoise & Plimpton and Patterson, Belknap, Webb & Tyler in New York, specializing in corporate and project finance. She is a member of the Council on Foreign Relations and serves on boards of several companies. She is listed in Who’s Who in American Law and Who’s Who in American Women. As a pro bono undertaking, she represents Russian and Ukrainian artists, dancers and musicians. She is a frequent guest lecturer and an adjunct graduate faculty at the Russian Juridical Academy, Kaplan University, Moravian College and others.