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Economic Attractiveness as Related to Law
Thomas Straub* and Georges A Cavalier**
In a Doing Business report published by the World Bank, the following statement was suggested: “From the economic point of view, common law is more efficient than civil law”. The objective of this research paper is to weigh two legal systems (French civil law and the US common law) and analyze the results of the economic analysis of the law of Mergers and Acquisitions (M&A). This is done by quantifying the impact on long-term performance. To carry out this research, a methodology was developed, and the results were evaluated. Two legal structures for M&A transactions were selected: the purchase of shares (share deal), and the purchase of assets (asset deal). Each of these acquisition structures was then subdivided into 11 steps—from preliminary information, letter of intent, due diligence, stock or asset purchase agreement and closing—to litigation with formal summons. Performance was then measured by taking into account time, cost and satisfaction factors. Time was broken down into person-days and the number of days, weeks, or months required to complete each step. French and US respondents were asked to fill out a questionnaire for a specific M&A transaction. Radar charts were used to compare the mean of each performance factor; an inter-factor analysis was carried out to check for correlations. The findings showed that a share deal in France is cheaper than in the US. Also, French participants express a greater degree of satisfaction than their US counterparts. The findings varied however, for the time factor. The authors conclude that the application of civil code and common law does not reveal substantial differences in either country for M&A transactions. One reason may be that in both France and the US, these transactions are carried out according to similar procedures.
The Doing Business report published by the World Bank suggests that, “From the economic point of view, common law is more efficient than civil law.” Is this somewhat alarming message also valid for Mergers & Acquisitions (M&A) transactions? This paper compares the economic attractiveness of common law (US) versus civil law (France), as related to these transactions. Because countries are competing more and more to attract business, this is an important aspect to consider. History shows M&A volume moves with stock market variations. Since the market is in a crisis, M&As could be on the threshold of a new boom (Figure 1). Does the law favor M&A transactions in France or in the US? The research is divided into two subparts: first, to compare the legal performance of Share Deal (SD) between the two countries, and second is Asset Deal (AD). It is therefore essential to quantify the impact of the French and the US legal systems on the long-term performance of SD and ADs.
* ** Professor, Strategic Management & Entrepreneurship, School of Business Administration Fribourg, Fribourg, Switzerland; and is the corresponding author. E-mail: firstname.lastname@example.org Associate Professor of Law, University of Lyon, Lyon, France. E-mail: email@example.com 49
Where is the All Rights Reserved. © 2011 IUP Best Place to do Mergers & Acquisitions? . Economic Attractiveness as Related to Law
400 1. In measuring performance time as such may be too vague.800 1. In general terms. which is satisfaction. but the same task may be carried out in five days by one person only.000 $1. 2.500 $1. in purchasing a company. 2011 .000 A 61% $500 $0 This paper measures the economic performance of time and the cost of legal operations.200 1. other variables influence the long-term performance of a company. VIII. brings further clarification: person-days measure the working hours and step-time measures the bureaucratic procedure of how long a process takes.. In order to fulfill these objectives. Several authors have demonstrated that for complex transactions such as M&A. 50 The IUP Journal of Business Strategy. Vol. In economic and social science. For instance.600 1. 2000). five persons can accomplish a task in one day. play an essential role in a company’s choice of strategy and determines the consequences of decisions.000 800 600 400 200 0 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Source: Morgan (2009) US M&A Volume Annualized Volume $2. Quantitative research that includes a large number of responses is required to obtain statistically representative and objective results. but the legal quality and security are unsatisfactory and could lead to complications.Figure 1: History Shows M&A Volume Moves with Stock Market Variations US M&A Volume and S&P 500 Levels ($ bn) S&P 500 (x%) M&A Volume Peak to Trough 1. The paper introduces an additional measurement of economic performance. recent change in the environment of companies. Dividing the time factor into person-days and step-time therefore. the transaction may be fast and cheap. that is to say rules and regulations. For instance. the degree of satisfaction is evaluated by interviewing business leaders and M&A specialists (Veiga et al. No. Time (person-days and step-time) and cost are also important but not sufficient for measuring economic performance.500 C 61% US Recessions: A 1990-1991 B 2001 C 2007-Present B 72% $2. the model designed by the research team is detailed below.
(4) share or asset purchase agreement. the buyer is purchasing stocks representing assets and liabilities. (8) postclosing. execution timetable—up to consulting the unions and the execution agreement (included). (3b) legal audit. • The ancillary document phase (5) starts with the negotiation of the ancillary documents. Details of these phases are provided below. • The share or asset purchase agreement phase (4) starts with the negotiation of the agreement and includes discussion of drafts. (7) closing.Methodology Three legal methods for implementing M&A transactions were identified: the purchase of shares (SD). • Due diligence starts with posting the request list. • To complete the transaction process. the buyer is—in principle—purchasing assets only: the risk inherent to purchasing liabilities (debts) is therefore excluded. the regulatory approval phase (6) requires obtaining the antitrust authority and other regulatory approvals. a distinction must therefore be made between a SD and an AD. the purchase of assets (AD) and the merger. business lawyers. balance sheet and profit and loss account validation. financial audit. The financial due diligence process (3a) includes accounting verification. at which time certificates or other documents are delivered and payment/share/assets are transferred. In the US. (5) ancillary documents. These two methods (SD versus AD) were divided into eleven phases: (1) preliminary information. whereas in an AD. minutes of the shareholders’ meeting. which include escrow and shareholder agreements. litigations evaluation and environmental issues assessment. the research team distinguishes the financial and the legal steps. legal implications. Where is the Best Place to do Mergers & Acquisitions? Economic Attractiveness as Related to Law 51 . including the investigating process in the data room—up to the share/asset purchase agreement (excluded). discussion on the external communication plan. In comparing France and the US. and (9b) litigation with formal summons. setting a timetable—up to the execution of the confidentiality agreement (included). a merger is considered as a type of SD. (9a) litigation without formal summons. • The closing process (7) starts a week preceding the closing date. investment bank. • The letter of intent phase includes (2) formalizing the confidentiality agreement. finance and labor contracts and intellectual property licenses—up to execution (included). In the due diligence phase. schedules. In a SD. deal structure—up to the letter of intent (included). (3a) financial audit. • The preliminary information phase includes (1) contact with the acquired company (Target). (6) regulatory authorizations. and—when relevant— negotiation of the representation and warranties. The legal due diligence process (3b) concerns the audit of contracts. (2) letter of intent. indemnification period.
Vol. The responses are reflected on a Likert scale. the second set of questions (9b) evaluates disputes which occur with formal summons. and the French society of Business Attorneys (Association des Avocats Conseils d’Entreprises) – http://www. detailed M&A secondary information1. • The litigation phase (9a and 9b) includes any disputes which occurred after the deal transaction. 1 2 3 4 Primary information allows the reader to access original and unedited information.avocatsconseils. The quality of the data is highly dependant upon the competency of the informant and is reflected by tenure and position.. Disputes are not included in this phase. Two types of disputes are identified: disputes without formal summons before a court or an arbitration court.com The French Society of General Counsels (Association française des juristes d’entreprises) – (<http://www. The following questions were formulated: • What is your estimate of the number of working days (person-days) to complete this phase? • What is your estimate of the time needed to complete this phase (days. Most informants were attorneys (partners or associates). No.afje. 2. or months)? • What is your estimate of the cost Euros (€) to complete this phase? • How satisfactory was this phase for you? The respondents were asked to reply in reference to a specific transaction (deal) closed between 2000 and 2004.org>). 2000). and where both the acquirer and the target were privately held companies located in the US or in France.” that is second-hand versions. and/or heads of M&A4 and therefore highly competent. time (person-days and step-time) and satisfaction (Veiga et al. In order to develop the questionnaire two pretest phases were performed: a sample of over one thousand informants in the US and in France selected from ‘The Leadership Library’2 and professional associations3. and disputes with formal summons. It requires the reader to interact with the source and extract information. 80% of the respondents to the questionnaire were partners of law firms and 40% in France.• Post-closing (8) is the phase after the closing date: this is typically where price adjustment (earn-out) occurs and indemnity requests are formulated. For instance. or deals where the Target was listed on a stock exchange were not included. Research shows that selfperception measures are dependent on the quality of the informant (Nayyar. VIII. 2011 52 . weeks. The IUP Journal of Business Strategy. C-level managers. ‘Primary’ information about the merger would be information from the merging companies themselves. each number corresponds to the respondents’ perception. Transnational deals. authors writing about the merger between Mercedes and Chrysler are providing ‘secondary’ information about the merger. They represent someone else’s thinking. See http: //www. The first set of questions (9a) evaluates whether disputes without formal summons occurred. see 9a and 9b which are dedicated to dispute assessments. Secondary information is “edited primary information.leadershipdirectories. The performance is measured by evaluating the above phases in relation to cost.org In the US. 1992). numbered 1 (low) to 5 (high).
• PurchAgree (step 4): share/asset purchase agreement. • LegalDueDil (step 3b): legal audit.USA _____ France AD3 FineDueDil Countries Scale: • 0 = “don’t know” • Scaling (Five-point Likert-type) AD9 Dispwith AD2 LOI AD3 LegalDueDil • PrelimInfo (step 1): preliminary information. The response rate was 5. • AnciDoc (step 5): ancillary documents. • RegApprov (step 6): regulatory authorizations. 41 responses were registered from the US and 34 from France. Where is the Best Place to do Mergers & Acquisitions? Economic Attractiveness as Related to Law 53 . No significant non-response bias was identified that could have affected the results of the survey. Over 60% were even ‘much’ or ‘very much’ involved in M&A transactions. the characteristics of transactions carried out within the same time period were similar and therefore comparable. In both the US and France. • FinDueDil (step 3a): financial audit...4% of the sample population. • Closing (step 7): closing phase. In the following paragraphs. • LOI (step 2): letter of intent. Radar charts present the results and identify all phases of the transaction process and are abbreviated as follows (see Figure 2): Figure 2: How to Read the Results Asset Deal – Euros AD1 PrelimInfo 3 2 AD9 Dispwithout 1 0 AD8 Post-Closing Steps AD7 Closing AD6 RegApprov AD4 PurchAgree AD5 AnciDoc . the research findings are presented.over 70% had worked for their company for more than six years and were highly involved in M&A transactions.
The main results (Figure 3) compare M&A legal performance in France and in the US.00 1. and • DispWith (step 9b): dispute with formal summons. The detailed results are then discussed based on the transaction structure (see chapter “Detailed Results Based on the Transaction Structure”) that is. the comparison of the performance of ADs and SDs in France and in the US.00 USA FR 9b DispWith 2 LOI 3a FinDueDil 8 Post-Closing 8 Post-Closing 3b LegalDueDil 7 Closing 6 RegApprov 4 PurchAgree 5 AnciDoc 7 Closing 6 RegApprov 4 PurchAgee 5 AnciDoc 54 The IUP Journal of Business Strategy. Vol.00 3b LegalDueDil 2 LOI 3a FinDueDil USA FR USA FR 7 Closing 6 RegApprov 4 PurchAgree 5 AnciDoc 7 Closing 6 RegApprov 4 PurchAgree 5 AnciDoc Euros 1 PrelimInfo 3.00 9a DispWithout 2.00 0.00 1.00 8 Post-Closing 0.. The results were reported on radar charts.. 2011 . Step-Time.00 2.00 0.-) for the US and a straight line (_______) for France.• Post-closing (step 8): post-closing phase. Cost (Euros) and Satisfaction Person-Days Step-Time 1 PrelimInfo 1 PrelimInfo 9b DispWith 4. An interfactor analysis (regression) was carried out to test the accuracy of the results (see chapter “Interfactor Analysis”). VIII. 2.00 3b LegalDueDil 3a FinDueDil USA FR 2 LOI 9b DispWith 9a DispWithout Satisfaction 1 PrelimInfo 3.00 9a DispWithout 1.00 3. 5 is a high score for satisfaction.00 3b LegalDueDil 3a FinDueDil 2 LOI 9b DispWith 9a DispWithout 8 PostClosing 4. but is low for cost and time (person-days and step-time) factors. results were scaled from 1 to 5.. No. where the result 1 indicates ‘very low’ and 5 indicates ‘very high’. using a hyphened line (. For instance. Figure 3: Research Findings Summary: Person-Days.00 2.00 2. As mentioned above. • DispWithout (step 9a): dispute without formal summons. irrespective of the deal structure.00 3.00 0.00 1.
the results show that neither country has an overall advantage in the time required to complete each step. The US requires less time for drafting the purchase agreement. Detailed Results Based on the Transaction Structure The results are detailed depending on whether the transaction is structured as a SD (1).Results and Analysis The objective was to compare M&A transactions. results show that M&A transactions in France are cheaper and require less person-days. 5 and 7). except for the dispute without formal litigation phase (9a) where person-days are about the same in both the US and France. However. As for cost. A SD in France requires fewer person-days for the exchange of preliminary information. 3 and 9). satisfaction is notably higher in the US from step regulatory approvals to dispute without formal litigation (6 through 9a). Figure 4 shows the response population for each deal type (AD and SD) in the two countries. purchase agreement and ancillary documents (steps 1. In summary. the step-time is shorter for the exchange of preliminary information. The results for satisfaction and step-time are not uniform. for due diligence Where is the Best Place to do Mergers & Acquisitions? Economic Attractiveness as Related to Law 55 . but this difference could be explained by the size of transactions. irrespective of their legal form. 2. negotiation and drafting of the letter of intent. due diligence and disputes (steps 1. civil law versus common law. However. With respect to step-time. • M&A appear cheaper in France. Satisfaction for steps starting with the exchange of preliminary information (1) up to the drafting of ancillary documents (5) is approximately the same in both France and the US. However. the ancillary documents and closing (steps 4. for person-days and step-time. the results can be summarized as follows: • No significant difference could be identified in the legal performance of M&A. or as an AD (2). However. and there is a greater amount of satisfaction in France than in the US. 2. the number of ADs in France (9%) is significantly lower than in the US (36%). 4 and 5). However. where costs are almost equal for both countries. The comparative analysis of both countries provided the following results: In general. M&A transactions in France are significantly cheaper for all steps except for dispute with formal litigation (9b). In France. drafting and negotiation of the letter of intent. for example M&A transactions in France need fewer person-days for all steps. The detailed results of the study are shown according to the transaction structure. This is also true for step dispute with formal litigation (9b). there is some variation. Share Deal Figure 5 shows that a SD tends to be slightly more expensive in the US. Note the different distribution of the deal structure percentage: The majority of deals were structured as SDs in both countries. results vary.
00 1.00 2. No.Figure 4: Deal Structure: AD and SD USA 36 AD SD France 9 64 AD SD 91 Figure 5: Research Findings for SD: Person-Days.00 SD 2 LOI USA FR Step-Time SD 1 PrelimInfo SD 9b DispWith SD 9a DispWithout SD 8 PostClosing SD 7 Closing SD 6 RegApprov 4.00 SD 2 Phase Surround SD 3a DueDiligence SD 3b DueDiligence b SD 4 Asset Purchase SD 5 AnciDoc SD 7 Closing SD 6 RegApprovals USA FR Share Deal-Satisfaction SD 1 Premilinary Info SD 9b Disputing b 4. 2.50 1.00 3.00 1.00 0.00 2. the US requires fewer person-days.50 1.00 1.00 2. Cost (Euros) and Satisfaction Share Deal-Euros SD 1 Premilinary Info SD 9b Diputing b SD 9a Diputing SD 8 PostClosing 3. 56 The IUP Journal of Business Strategy. a SD in France is shorter only for the beginning of the transaction process (steps 1.00 3.00 0. Lengths for all other steps are shorter in the US.00 0.00 SD 9a Disputing SD 8 PostClosing 2. Step-Time.00 0.00 1.50 0.00 SD 3a FinDueDil SD 3b LegalDueDil SD 2 LOI USA FR SD 3a Fin DueDil SD 3b LegalDueDil SD 7 Closing SD 6 RegApprov SD 4 PurchAgree SD 5 AnciDoc SD 4 PurchAgree SD 5 AnciDoc (steps 3a and 3b).50 2.50 0. 2011 . VIII. 2. As for the length of each step.00 SD 2 Phase Surround SD 3a DueDiligence USA FR SD 7 Closing SD 6 Reg Approvals SD 3b DueDiligence b SD 4 Asset Purchase SD 5 AnciDoc Share Deal – Person-Days SD 1 PrelimInfo SD 9b DispWith SD 9a DispWithout SD 8 PostClosing 3.50 2. For closing. the number of person-days is almost equal. and 3). Vol. post-closing and disputes (steps 7-9b).
and Where is the Best Place to do Mergers & Acquisitions? Economic Attractiveness as Related to Law 57 . satisfaction is greater for all steps. the radar diagrams for ADs do not have the same shape as they do for SDs. Although ADs in France require more person-days and longer step-time.Therefore. in order to cross-check for bias with regard to the origin of economic performance. 1999). • SDs tend to be slightly more expensive in the US. except for disputes (9a and 9b). Although ADs in France require more person-days and longer step-time. and • ADs are generally more satisfactory in France. Also. Asset Deal In both countries. The length of each step is longer in France for all steps except for the disputes (9a and 9b). This analysis was made using regressions. ADs require a greater number of person-days in France for all steps. except financial due diligence (3a) and dispute with formal litigation (9b). Therefore: • ADs are generally faster to complete in the US. An AD in France is cheaper but generally requires more person-days and is subject to lengthier step-time. The following potential side-effects were tested: • Relationship between cost (dependent variable) and company size (independent variable) was tested via linear regression. Interfactor Analysis Interfactor analysis was carried out to verify the accuracy of the above conclusions. • SDs are more satisfactory in France. and • Time to complete the SD transaction is about the same in France as in the US. The length of each step is longer in France for all steps except for the disputes (9a and 9b). but also by comparison of averages (Churchill. ADs require a greater number of person-days in France for all steps. • Relationship between satisfaction (dependent variable) and cost (independent variable) was tested via linear regression. • Radar diagrams for ADs do not have the same shape as they do for SDs. Also. except for disputes (9a and 9b) (Figure 6). satisfaction is greater for all steps. the following conclusions were reached: • There is no radical difference between France and the US in the legal performance of SDs. An AD in France is cheaper but generally requires more person-days and is subject to lengthier step-time. except financial due diligence (3a) and dispute with formal litigation (9b). • SDs tend to be slightly more expensive in the US.
Step-Time. Satisfaction is therefore an important measurement in this study. other factors must be evaluated as well. Cost (Euros) and Satisfaction Asset Deal – Person-Days AD1 PrelimInfo AD 9b DispWith AD 9a DispWithout AD 8 PostClosing 3 2 1 0 AD 2 LOI AD 3a FinDueDil USA FR Asset Deal – Step-Time AD1 PrelimInfo 5 4 AD 9a DispWithout 3 2 1 AD 8 Post-Closing 0 AD 3b LegalDueDil AD 3a FinDueDil USA FR AD 9b DispWith AD 2 LOI AD 3b LegalDueDil AD 7 Closing AD 4 PurchAgree AD 6 RegApprov AD 5 AnciDoc AD 7 Closing AD 6 RegApprov AD 4 LegalDueDil AD 5 AnciDoc Asset Deal – Euros AD 1 PrelimInfo AD 9b DispWith AD 9a DispWithout AD 8 PostClosing 3 2 1 0 SD 3b LegalDueDil AD 3a FinDueDil AD 2 LOI Asset Deal – Satisfaction USA FR SD 1 Premilinary Info AD 9b DispWith AD 9a DispWithout 4 3 2 1 AD 8 Post-Closing 0 AD 2 LOI AD 3a Fin Due dil AD 3b LegalDueDil USA FR AD 7 Closing AD 6 RegApprov AD 7 Closing AD 4 PurchAgree AD 5 AnciDoc AD 6 RegApprov AD 4 PurchAgree AD 5 AnciDoc • Comparison of person-days regarding the deal type was tested via comparison of averages. such as satisfaction. This result shows that measuring only the cost of a deal is not sufficient to evaluate the economic outcome.2) in both countries. Further. 58 The IUP Journal of Business Strategy. 2011 .34/6.Figure 6: Research Findings on AD: Person-Days. which does not require identification of existing assets and needs only one set of legal rules. This demonstrates that the cost to complete a deal is relative to the company size.04/–0.9) takes more person-days than a SD (2. Another result showed that an AD (2. Therefore. Vol. the authors observed that satisfaction has no significant relationship to cost and is therefore not a function thereof (–0. and (2) applying a particular set of transfer rules to each asset.64). VIII.66). This could be explained by the fact that an AD requires (1) identifying the assets. The results showed that a significant positive relationship exists between cost and company size (+0. No. 2. an AD is more complex than a SD.
768-769. the difference between asset and share deals could be explored further. The same study could be repeated to compare other countries. and a specific sample of informants. Esq. Effects are not mono causal. Research Limitations: Additional determinants and dimensions that might affect M&A performance were not taken into account for this study. 7. French Version. Thomson Reuters. pp. Marketing Research: Methodological Foundations. may represent additional limitations to this research. two countries. together with C Baker. Where is the Best Place to do Mergers & Acquisitions? Economic Attractiveness as Related to Law 59 . to Some Extent. New York. However. Additional research could broaden the geographic focus of the present study. Doing Business (2008). It was concentrated on a limited number of companies. the Methodology. neither legal system has a fundamental performance advantage. Esq. i. ADs are four times more frequent in the US (36%) than in France (9%). for example. Vol. General limitations of the statistical methods and the survey design. The results based on the structure of a transaction indicate a preference for SDs rather than ADs in both legal systems. Churchill G A (1999). as of May 31. and it is therefore interesting to check for interrelations. for their valuable input. and X Legendre. 72. the study did not capture all the interrelations among the variables. Harcourt.. Dealogic Enterprise Static. Acknowledgment: The authors would like to thank Professors O Moréteau (Louisiana State University) and Y Reinhard (University of Lyon) for their support and direction. Changed. One example is the similarity shown in the shapes of the main radar diagrams. A verification of industry effects with a cross-industry analysis could also be considered. References 1. 2009.Conclusion The research findings demonstrate that on an average. 3. Moreover. Doing Business. factors stemming from other disciplines such as social and economic sciences. Moreover. how one discipline impacts the other.. 2007). 2. variables in order to measure performance. Researchers could replicate this analysis within the same context to confirm the stability of these findings. the authors recommend developing new models including further disciplines (Straub.e. Morgan J P (2009). p. for example by taking other variables into account. Future Research: Because mergers and acquisitions are an interdisciplinary phenomenon.
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