Covid has wreaked havoc on deal numbers and the economy generally, but one light at the end of the tunnel we are all hopefully approaching quickly is that buyers with significant cash reserves will start to buy companies and assets that need to sell as a result of those economic troubles. Some of those buyers will be non-US individuals or entities coming to America to hunt for opportunities, and accordingly a good number of US in-house lawyers who have spent their entire careers doing purely domestic transactions will need to get up to speed on the “international” aspects of the sale of a company or assets that have always been purely domestic.
Although a lawyer on the sell side of such a transaction will have a considerably smaller number of “international” issues to think about than a lawyer on the buy side, of course, the issues a sell side lawyer needs to master are still important and very likely to be novel for someone who has always done domestic work. This piece discusses some of the main “international” issues you should consider if you find yourself on the sell side of such a transaction.
Prohibited Parties – A threshold issue for any sale to a non-US party is whether the prospective buyer is on any of the prohibited persons lists maintained by the US federal government. The Bureau of Industry and Security maintains lists of persons/entities prohibited from exporting from the United States (the Denied Parties List) or from receiving exports or re-exports of goods, software or technology that is subject to US export control laws (the Entity List and the Unverified List). The Office of Foreign Assets Control (“OFAC”) also has the Specially Designated Nationals list (“SDN List”) and other lists. Importantly, OFAC considers any company that is owned 50% or more by someone on the SDN List to be an SDN. Of note, if you manufacture or export defense articles or defense services, the Directorate of Defense Trade Controls has a Debarred Persons Lists as well as a list of countries that are subject to an arms embargo. Although it is relatively unusual for someone looking for US companies or assets to show up on one of these lists, it definitely happens. A quick check of these lists to make sure your counterparty – and in some cases its owners/principals - is not on one of them is definitely time well-spent.
CFIUS – The Committee on Foreign Investment in the United States (“CFIUS”) is an interagency committee of the federal government that reviews foreign investments in US businesses and real estate. The law makes some filings with CFIUS discretionary, while others are mandatory. Determining whether a filing is mandatory takes some analysis, of course, but determining whether a discretionary filing should be made takes both analysis and a good bit of judgment. Even if a filing was discretionary, the President may unwind a transaction if CFIUS determines that the transaction raises national security risks (whether a filing was made or not). Accordingly, the need for a CFIUS review is decidedly not just a buyer issue but also something a US seller should also examine closely. In addition, from a purely logistical perspective, the timing of the filing should be incorporated into the transaction closing timeline.
ITAR – If you are in the defense space, the International Traffic in Arms Regulations (“ITAR”) have pre-closing filing requirements that are similar to those under the CFIUS regulations when selling to a buyer that is owned or controlled by a foreign person or entity. Importantly, ITAR covers not only products that most people would consider “arms” but also products that many people would never expect to be covered. As a result, any company that sells products to the defense industry or defense contractors should ensure it has a solid grasp of its product classifications - for ITAR and other purposes.
Deemed Exports – Even if your company has never exported a single product or has no intention of doing so, you need to be aware of the deemed export rules if you plan on selling assets or a company to a non-US buyer. Under the Export Administration Regulations (and similar rules under the ITAR), a “deemed export” occurs whenever certain controlled technology and information is disclosed or made accessible to a non-US person – and a sale of an entity or assets that includes that technology or information, regardless of whether the buyer takes the assets outside the US, could qualify. If it does qualify, then the seller needs to obtain a license to consummate the transaction (assuming it would not be barred, which is also a possibility).
Some of these issues require a simple check in many/most cases, but some require more substantial analysis. Doing the appropriate diligence on all of them up front, however, can prevent a significant amount of cost and trouble later – and hopefully put you on the path to a successful closing.