Tag: Cross-border transactions


Regulatory Arbitrage and Cross-Border Bank Acquisitions

Alvaro Taboada is an Assistant Professor of Finance at the University of Tennessee, Knoxville. This post is based on an article by Professor Taboada and Andrew Karolyi, Professor of Finance at Cornell University.

In our forthcoming Journal of Finance paper, Regulatory Arbitrage and Cross-Border Bank Acquisitions, we examine how differences in bank regulation influence cross-border bank acquisition flows and share price reactions to cross-border deal announcements. The recent global financial crisis, caused in part by systemic failures in bank regulation, has sparked, among other things, a strong push for both stricter capital requirements and greater international coordination in regulation. For example, seven of the 10 recommendations of the 2011 Report of the Cross-Border Bank Resolution Group of the Basel Committee for Banking Supervision (BCBS) propose greater coordination of national measures to deal with the increasingly important cross-border activities of banks. Some argue this push for tougher regulations and increased restrictions on bank activities may create incentives for “regulatory arbitrage,” whereby banks from countries with strict regulations engage in cross-border activities in countries with weaker regulations. The purpose of the study is to shed light on the motives behind regulatory arbitrage by examining one of the most important types of investment decisions that banks can make—namely, cross-border acquisitions.

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SEC Re-Proposes Rules on Arranging, Negotiating or Executing Security-Based Swaps

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. The following post is based on a Davis Polk client memorandum; the complete publication, including appendices, is available here.

On May 13, 2015, the SEC published proposed amendments and re-proposed rules on the application of certain Title VII requirements to cross-border security-based swap activities of non-U.S. persons based on U.S. conduct. The proposed rules would modify numerous prior SEC proposals and final rules, including the May 2013 proposed rules on the cross-border application of security-based swap regulations, the August 2014 final cross-border definitions and de minimis rules and the March 2015 reporting final rules. [1]

Notably, the proposed rules would:

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What You Need to Know on Form BE-10

Avrohom J. Kess is partner and head of the Public Company Advisory Practice at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Kess, Lee A. Meyerson, Karen Hsu Kelley, and Mark Chorazak.

U.S. companies with “foreign affiliates” during their 2014 fiscal year will need to participate in a “benchmark survey” conducted every five years by the Bureau of Economic Analysis (“BEA”) of the U.S. Department of Commerce. The survey is conducted through a series of forms known as the BE-10. Filings are due by May 29 or June 30, depending on the number of foreign affiliates to be reported, but the BEA is granting extension requests on a case-by-case basis. As explained in the Background section below, the BE-10 is one of many forms that may need to be filed by a U.S. company having cross-border relationships or engaging in cross-border transactions. These forms are only statistical surveys and submitted information is accorded confidential treatment.

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Proposed Rules for US and Non-US Person’s Security-Based Swaps Dealing

Kara M. Stein is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Stein’s recent public statement, available here. The views expressed in the post are those of Commissioner Stein and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

During the financial crisis, the world witnessed how financial contracts known as swaps played a key role in creating a global financial hurricane. These financial contracts tied together the destinies of seemingly unrelated financial firms. The threat of a daisy chain of failures drove bailouts to companies no one dreamed would ever be risky. What’s more, the crisis and bailouts flooded across international borders. Indeed, over half of the largest recipients of the AIG bailouts were foreign organizations. [1]

Following the crisis, policymakers around the world committed to stop this from happening again. The resulting reform legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), directed the Securities and Exchange Commission (“Commission”) and its fellow regulators to bring the swaps marketplace into the light and to make it resilient enough to weather the next storm.

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Focusing on Dealer Conduct in the Derivatives Market

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The financial crisis of 2008 demonstrated the devastating effects of a derivatives marketplace that, left unchecked, seriously damaged the world economy and caused significant losses to investors. As a result, Title VII of the Dodd-Frank Act tasked the SEC and the CFTC to establish a regulatory framework for the over-the-counter swaps market. In particular, the SEC was tasked with regulating the security-based swap (SBS) market and the CFTC was given regulatory authority over all other swaps, such as energy and agricultural swaps.

The Commission has already proposed and/or adopted various rules governing the SBS market— such as rules that establish standards for registered clearing agencies; rules to move transactions onto regulated platforms; rules to bring transparency and fair dealing to the market for SBS; rules for the registration of dealers and major participants; rules to impose capital, margin, and segregation requirements for dealers and major participants; and rules for cross-border SBS activities.

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Freeing Trapped Cash in Cross-Border Deals

John Olson is a founding partner of Gibson, Dunn & Crutcher’s Washington, D.C. office and a visiting professor at the Georgetown Law Center. This post is based on a Gibson Dunn alert.

In private company transactions, dealmakers often spend significant amounts of time talking about how to treat the cash held by an acquisition target. For example, if the buyer and the seller are negotiating price on the assumption that the target will be sold on a cash-free, debt-free basis, how does the purchase price get adjusted for cash that the target continues to hold at the time of closing? If the deal includes a working capital adjustment, how will cash and cash equivalents be taken into account? What are the procedures for measuring how much cash the target holds at closing?

In cross-border deals, the issues about how to deal with target cash often become significantly more complex. Businesses that operate around the world may have cash in several different countries. Regulatory and tax concerns may limit both the seller’s and the buyer’s ability to transfer cash held by the target from one country to another. Questions about how to deal with the target’s cash must be answered with these constraints in mind.

The balance of this post discusses some of the solutions that buyers and sellers use to resolve trapped cash issues in cross-border deals.

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Do Institutional Investors Value the 10b-5 Private Right of Action?

The following post comes to us from Robert Bartlett, Professor of Law at UC Berkeley School of Law.

In my forthcoming article in the Journal of Legal Studies, I empirically test a claim made by institutional investors in the wake of the Supreme Court’s 2010 decision in Morrison v. National Australia Bank Ltd. In Morrison, the Supreme Court limited investors’ ability to bring private 10b-5 securities fraud actions to cases where the securities at issue were purchased on a United States stock exchange or were otherwise purchased in the U.S. Because many foreign firms’ securities trade simultaneously on non-U.S. venues and on U.S. exchanges, institutional investors claimed after Morrison that, such was the importance of the 10b-5 private right of action, they would look to such firms’ U.S-traded securities to preserve their rights under 10b-5.

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M&A Communications Challenges Posed by Tax Inversion Deals

Charles Nathan is partner and head of the Corporate Governance Practice at RLM Finsbury. This post is based on an RLM Finsbury commentary by Mr. Nathan and Kal Goldberg.

Tax inversion deals are clearly the most talked about M&A deal structure we have seen for many years. Unlike other hot-topic M&A deal structures (think LBOs or activist investor campaigns), inversions involve a highly charged political controversy in the context of the global competitiveness of corporations and their home economies. Although the recent Treasury Department rules have significantly or, in some cases, fatally crimped the economics of some previously announced inversions, many tax advantages of inversions remain. As a result, the structure retains its appeal for a number of cross-border acquisitions by U.S. companies and will likely continue to create business and political headlines in the U.S. and abroad.

Depending on the friendly or hostile nature of the deal, the parties’ home countries and the constituencies being addressed, tax inversion can be a plus to be celebrated, a minus to be exploited or, all too often, a combination of both. The many facets of inversion deals and their shifting nature create far more complicated communications challenges than any other type of M&A deal structure.

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New ISDA Protocol Limits Buy-Side Remedies in Financial Institution Failure

The following post comes to us from Stephen D. Adams, associate in the investment management and hedge funds practice groups at Ropes & Gray LLP, and is based on a Ropes & Gray publication by Mr. Adams, Leigh R. Fraser, Anna Lawry, and Molly Moore.

The ISDA 2014 Resolution Stay Protocol, published on November 12, 2014, by the International Swaps and Derivatives Association, Inc. (ISDA), [1] represents a significant shift in the terms of the over-the-counter derivatives market. It will require adhering parties to relinquish termination rights that have long been part of bankruptcy “safe harbors” for derivatives contracts under bankruptcy and insolvency regimes in many jurisdictions. While buy-side market participants are not required to adhere to the Protocol at this time, future regulations will likely have the effect of compelling market participants to agree to its terms. This change will impact institutional investors, hedge funds, mutual funds, sovereign wealth funds, and other buy-side market participants who enter into over-the-counter derivatives transactions with financial institutions.

Among the key features of the Protocol are the following:

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Cross-Border Recognition of Resolution Actions

The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication authored by Mitchell S. Eitel, Andrew R. Gladin, Rebecca J. Simmons, and Jennifer L. Sutton. The complete publication, including footnotes, is available here.

On September 29, 2014, the Financial Stability Board (the “FSB”) published a consultative document concerning cross-border recognition of resolution actions and the removal of impediments to the resolution of globally active, systemically important financial institutions (the “Consultative Document”). The Consultative Document encourages jurisdictions to include in their statutory frameworks seven elements that would enable prompt effect to be given to foreign resolution actions. In addition, due to a recognized gap between the various national legal resolution regimes that are currently in place and those recommended by the FSB, the Consultative Document sets forth two “contractual solutions”—that is, resolution-related arrangements to be implemented as a matter of contract among the private parties involved—to address two underlying substantive issues that the FSB considers critical for orderly cross-border resolution, namely:

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