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The M&A Perspective - III/2014

02 October 2014

Sanction Compliance - An Increasingly Important Risk Factor in Transactions
In early July of this year, the U.S. imposed a record fine of USD 8.8 billion on BNP Paribas following the French bank's guilty plea to charges for violation of American sanctions against Sudan, Iran and Cuba. The case shows the potentially severe consequences of non-compliance with international sanction regimes. At the same time, it has become increasingly difficult to keep track of the latest developments in international sanctions. For instance, in addition to the US and the EU, inter alia also Norway, Canada, Japan, Australia and New Zealand maintain a sanctions regime related to the situation in the Ukraine. Russia has retaliatory sanctions in place, and Switzerland introduced measures to prevent the circumvention of the international sanctions. Unfortunately for practitioners, the various sanction regimes do not correspond and they evolve and change constantly. Sanctions are today also in force regarding Belarus, Syria, Iraq, Iran and various African countries.

In the context of a transaction, appropriate pre-acquisition due diligence regarding sanction compliance is becoming more and more important, and increasingly complex. On the one hand, clients and counsel should very early in the process analyze the target's risk profile in that respect. Factors to be considered are, inter alia, the target's business (some business sectors are more exposed to sanctions than others, e.g. the oil and gas business), the geographic areas where the target is doing business, whether the target is trading in US dollars, and whether they have sanction compliance processes in place. Based on this analysis, the scope and depth of due diligence can be defined, striking the right balance between risk protection and cost efficiency. On the other hand, transaction counsel needs to constantly keep pace with the ever changing landscape of international sanctions in order to identify possible risks in the due diligence exercise.

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Inversion Transactions - Destination Switzerland or "Game over"?
A growing number of US domiciled corporate groups have been involved in M&A transactions which include a migration to a foreign jurisdiction, a so-called "corporate inversion". Given a relatively high corporate tax rate in the US and the taxation of foreign earnings when repatriated, the possibility for a newly established group to settle in a more tax beneficial environment is without doubt one of the main drivers behind such transactions. Recent deals included in particular medical and pharmaceutical companies moving their headquarters to Ireland or the UK, e.g. the acquisitions of Forest Laboratories (US) by Actavis (Ireland) and Covidien (Ireland) by Medtronic (US). Pfizer's (US) unsuccessful bid for AstraZeneca (UK) also would have included inversion.

It is not really surprising that with a relatively moderate tax rate, a well-engineered network of double taxation treaties and other advantages of location Switzerland ranks high on the list of destinations for inversion transactions. For instance, the media reported that Monsanto, the world's largest seed company domiciled in the US, held preliminary talks on a merger with its Swiss based competitor Syngenta. Allegedly, the transaction would have involved a relocation of the new group's headquarters to Switzerland for tax reasons. Although the rumors have not been confirmed, it is apparent that Swiss-domiciled corporate groups are attractive targets for inversion transactions. However, the topic has (again) become a public policy issue in the US, with policy makers labeling inversion as an unpatriotic tax-reduction maneuver. The latest development is the announcement of the US Treasury Department to consider administrative action to curb inversion transactions. The future will tell whether we will soon see the first inversion to Switzerland or whether the US Treasury Department and US policymakers will end up the "spoilsports".

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Equity Crowdfunding Platforms - The Future of Early Stage Venture Capital?
Generally speaking, crowdfunding is the raising of money from a huge number of people to fund a project or a business. Equity crowdfunding involves supporters making contributions by way of a convertible loan or for a direct equity stake in the business. Today, specialized crowdfunding platforms allow entrepreneurs to easily reach potential investors who might be interested in purchasing equity in their privately-held business. In 2013, the global online crowdfunding industry is said to have raised USD 5.1 billion for thousands of businesses, charities, and startups.

In Switzerland, online equity crowdfunding could be one way to efficiently match capital requirements of entrepreneurs and investment opportunities and to alleviate the limited availability of early stage financing. From a legal perspective, equity crowdfunding generally and crowdfunding platforms in particular raise a number of complex legal issues, not least the question of applicable law in an international context. In Switzerland, depending on the structuring of the investment process, several financial market regulations may apply. However, contrary to the US or the UK, the Swiss legislator and the Swiss Financial Market Supervisory Authority (FINMA) have not yet specifically addressed equity crowdfunding. As equity crowdfunding could be very useful in the Swiss venture capital world, the challenge in the future will be to provide sufficient investor protection and at the same time to avoid stifling the industry by overregulation.

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