Buying a company in the United States
Essential information on buying a company in the US with important tips for foreign investors.
1. What should I pay attention to when buying a company in the United States?
Buying a company in the US is a particularly attractive and promising option for German firms that are planning to expand. Often the legal, financial, and tax aspects of a company acquisition are the only things considered at first – and they are admittedly crucial elements. However, German entrepreneurs sometimes fail to consider US customs and do not pay attention to unique cultural specificities during negotiations. In practice, this is extremely important for successfully concluding a company acquisition. Many German managers are not aware of the cultural differences that exist between Germany and the US or underestimate them considerably.
2. What typical misconceptions do German negotiators have when negotiating corporate acquisitions with US companies?
Many US and German negotiators believe that their cultures are virtually the same or at least share many similarities.
This may be partly true, as both cultures have a distinctly Anglo-Saxon background, which means that they are usually quite pragmatic in their approach to doing business.
In addition, Germans and Americans tend to focus on one activity at a time. Both value punctuality, are focused on results and competition, and are practical. Also, many Germans speak English very well. The Western mindset that the two cultures share reinforces the impression that they are very similar. As a result, both sides expect the other to think, communicate, and act in the same way.
The mistaken assumption that there are no significant differences – and therefore none are expected – is called the trap of similarity. This phenomenon has a negative effect on the business relationship and is the most common mistake in German-American business.
3. Which unique intercultural features play a crucial role in corporate acquisitions in the United States?
It’s important to always keep in mind that the motto “time is money” is a key factor in social communication in the US and has a significant impact on negotiations. Getting to the point quickly and not exceeding the given time frame are the be-all and end-all of any successful transaction when negotiating with partners from the United States.
Building successful relationships and networking with American businesspeople starts with straightforward, informal, and goal-oriented conversations. It should be noted that certain topics, such as sexuality, religion, or skin color, should never be brought up in the US (and not in personal conversations either) – despite the perception of the country being very open-minded and informal. But despite this, American business negotiations are very much characterized by humor and friendliness.
The detailed nature of contracts represents a major difference: While German lawyers tend to prefer a concise and abstract type of contract, it is not uncommon in the US to draft very comprehensive and lengthy contracts.
Data protection law is another area with further differences that are significant for company acquisitions. In the US, data protection provisions are far less stringent than in Germany.
4. What are the key stages in acquiring a company in the US, and what special features need to be taken into account?
When it comes to purchasing a company in the US, it is a significant advantage if a US subsidiary already exists or one is established for the company acquisition. Using an acquisition vehicle as an intermediary can reduce the risk of liability for the parent company and maximize the tax advantages for the German company. The legal forms most commonly used for US acquisitions are the corporation and the limited liability company (LLC). A corporation registered in Delaware is by far the most commonly used corporate form for company acquisitions in the US.
If a German company decides to buy a US company, both a non-disclosure agreement and an exclusivity agreement should be signed, since the costs of the precontractual phase are borne by the prospective buyer – in most cases even if the transaction fails. By entering into an exclusivity agreement, the seller makes a commitment not to enter into parallel negotiations with third parties.
Once the financing for the purchase price has been secured, the transfer of ownership of the target company usually takes place. This is known as closing. The integration phase begins after closing. Ideally, preparations for the integration phase should already be made during the negotiation and purchase phase. In particular, labor law issues, such as integrating employees and continuing bonus or stock option plans, should have been considered in advance if possible. After closing, postcontractual non-compete clauses must be observed in particular.
In addition to the general specificities of purchasing a company in the US, wider difficulties that may arise also need to be considered. For instance, the exchange rate risk should be taken into account, and a suitable currency should be selected accordingly for the transaction. Another step is to clarify which law is to apply as well as the language in which the contracts are to be drafted and the negotiations are to take place. The contracting parties should also agree on whether a court of arbitration should make a ruling in the event of a dispute. Another important aspect to discuss is the formal requirements for the company purchase agreement.
It’s also essential to define what kind of legal protection data will be subject to, for example in the event of a merger.
5. What key tax considerations need to be addressed when buying a company?
In most cases, tax considerations are also crucial for the buyer in the context of a company acquisition. As the buyer of a company, you should also look at the tax structuring of a company purchase as early as possible.
The tax structure of the target company (C corporation, S corporation, or limited liability company/partnership) is of key importance for the taxes incurred on the buyer’s side. As a rule, the buyer’s tax base with respect to their acquired assets corresponds to the purchase price paid (including the liabilities assumed).
However, the buyer also has the option to increase its tax base as part of the company acquisition (known as a step-up in basis). This refers to increasing the value of the acquired assets (including goodwill). This type of increase in the tax base for tax reasons is permissible because the buyer generally receives the assets at a total tax base equal to the amount the buyer pays to the target company (purchase price), plus:
(i) the liabilities assumed by the target company, and
(ii) all transaction costs.
An increased tax base is beneficial for the buyer because it generally reduces the tax payable by the buyer after the transaction. This is due to higher depreciation and amortization deductions for the assets acquired.
6. What is representations and warranties insurance in merger and acquisition transactions?
Representations and warranties insurance is an insurance policy used in mergers and acquisitions, also known as M&A transactions, to protect against losses incurred if the seller breaches certain assurances in the acquisition agreement. Such policies are increasingly used in practice for corporate acquisitions.
7. Are there regulatory approval procedures to complete when buying a company in the United States?
Depending on the individual case and field of business, it may be necessary to obtain regulatory approvals or follow special public law procedures when acquiring a company in the US. Failure to comply with regulatory approval procedures may result in a delay in the acquisition of the company or liability for the parties involved.
The relevant legislation includes federal and state antitrust regulations and, in the case of planned layoffs of employees in the US, the respective state’s WARN Act.
Should the acquisition establish “control” of institutions engaged in regulated businesses in the US (such as banking and insurance), this may require separate regulatory approvals and filings with supervisory bodies.
As a result, a corporate acquisition that could result in foreign control of a US company (covered transaction) can be blocked by the president of the United States.
If an acquisition involves the purchase of a business subject to the International Traffic in Arms Regulations (ITAR), the parties to the transaction must submit at least two notifications to the US Department of State’s Directorate of Defense Trade Controls (DDTC). These include one notification before the acquisition and one notification after the transaction is completed.
When acquiring a publicly listed company, the parties have various specific filing and disclosure obligations. The purchaser may have to undergo an audit and obtain approval from US regulators. The specific approvals required depend on the size of the target company as well as the industry in which the target company and the purchaser work.