Forced FX Conversion Rates–A Global Problem for M&A Deal Parties
As business opportunities continue to expand globally, deal parties and shareholder bases are becoming more diverse and cross-continental. In 2019, we saw a large increase in transactions that had at least one payment to an account located in a different country than the deal parties. These seemingly non-cross border transactions, which did not contemplate any foreign currency exchanges in the agreements, had shareholders whose payments may have been subject to currency conversion by their bank directly. Shareholders whose accounts are held in currencies other than that of the deal consideration find themselves a hostage to a system of forcible conversion at inflated exchange rates. These forced conversions often use rates that are more favorable for the beneficiary bank than they are for the customer. This results in the shareholder potentially receiving less for their shares than had they taken control to elect where and when the conversion takes place prior to payment. For a major shareholder this can result in a poor experience, starting the continuing relationship between the target and the buying company off on the wrong foot.
Costly Delays and Unfavorable Foreign Exchange Rates for Shareholders
For holders who reside in a country with a different currency than the transaction currency, receiving funds can be a costly and more time intensive process. At the root of the issue is the fact that not all of these holders have bank accounts that can accept a foreign currency. If their banks allow a deposit in a foreign currency to be passed through to the account, the funds are often forcibly converted by the receiving bank at an unfavorable exchange rate to the customer. If they cannot receive the funds, the funds are often tied up in a return process that may delay a holder’s payment by weeks. Of course, in instances where this happens it is an unnerving process for the shareholders, who cannot easily trace where the funds are. This can lead to an increased number of calls or emails to the company, counsel or the paying agent as the process is resolved.
The currency of a bank account and whether it can accept a specific currency cannot be derived from the wiring instructions. In fact, many of the payees themselves are not aware of specific rules regarding foreign currency and their bank account. Therefore, once a payment is processed by the Paying Agent, the beneficiaries are at the mercy of their own financial institution.
FX Hazards for Counsel and Vendors
It’s not only the shareholders who can be subject to the foreign currency hazards mentioned above, but also counsel and vendors who may hold accounts abroad. There could be vendors or debt holders whose relevant agreements require payment in local currency and on a specific date. To avoid any potential delays or breaches, it’s important to understand how funds will be remitted and whether they will be received. For transactions with cross-border payees, it is essential to find a paying agent that can handle the payments in both the main deal currency as well as any additional currencies specific to this subset. Otherwise, in some instances, the responsibility might fall back onto the buyer’s plate to facilitate the closing and post-closing payments, which can include managing payment instructions, communicating with payees regarding their specific rates and following specific currency exchange regulations. This is an unnecessary burden that can cause last minute delays and open deal parties up to additional risk if not addressed appropriately early in the payment process.