Key Considerations for a Foreign Buyer of a U.S. Business

Transaction Structure and Tax Matters

The parties should consider the structure and acquisition vehicle for the proposed transaction, both for legal and tax reasons.

Acquisition Vehicles

Non-U.S. buyers should carefully consider the type of acquisition vehicle to utilize in a proposed transaction, particularly in respect of the U.S. and non-U.S. tax treatment of the acquisition vehicle. The transaction structure (asset purchase or stock purchase) and the tax treatment of the target company (a corporation or flow-through) will often dictate whether a new acquisition vehicle should be formed and, if so, the jurisdiction and tax treatment of that acquisition vehicle.

For instance, when acquiring equity interests in a target company that is treated as a pass-through entity for U.S. tax purposes (i.e., a limited liability company that has not “checked the box” to be taxable as a corporation), forming a new U.S. corporation (or any entity that elects to be taxed as a corporation) would protect an upstream non-U.S. entity or owner to U.S. tax filing and payment requirements, and, potentially, the U.S. federal branch profits tax.

On the other hand, if the target company is treated as a corporation for U.S. tax purposes, a non-U.S. buyer may not need to form a U.S. acquisition vehicle.

The most commonly utilized entities are newly formed U.S. limited liability companies or corporations. The State of Delaware is often the preferred jurisdiction of formation, although other States should be considered in certain instances.

Transaction Structure

In an M&A transaction structured as an asset purchase, the buyer acquires only specific assets and liabilities from a distinct seller entity; therefore, the buyer has the opportunity to select the desirable assets and assume specified liabilities. In many cases (but not all), the buyer can leave behind certain known or contingent liabilities. For tax purposes, the buyer in an asset deal receives a new cost basis in the assets it acquires that is often higher than the tax basis that the seller entity had in the assets (known as a “step-up”). This basis “step-up” provides the buyer with higher depreciation and/or amortization deductions that can be used to reduce the buyer’s U.S. federal and state taxable income or gain on a subsequent sale of the assets.

In an M&A transaction structured as an equity purchase, the buyer acquires a fully-intact target company (or interest therein) from one or more of its equity owners and, as such, the buyer inherits the known and unknown liabilities of the target company (subject to any negotiated buyer protections in contractual indemnities and guarantees that may be negotiated). The buyer receives a new cost basis in the acquired equity of the target company. In some cases, however, the parties may be eligible to jointly elect to treat a stock purchase as an asset purchase for U.S. federal tax purposes by making a Section 338(h)(10) election.

Labor, Employment and Employee Benefits Matters

Labor & Employment

Compliance with federal and state labor law by the target company is a significant matter.  Buyers should ensure that the target company has properly classified its workers under the Fair Labor Standards Act (FLSA) and state law, and that workers are properly classified as either employees or independent contractors – failure to do so, in either instance, may result in the buyer inheriting responsibility for back pay, and related taxes and benefits, owed to the target company’s workers. In addition, a target company that has incurred a reduction in employee workforce, or which intends to following the purchase, should be mindful of the Worker Adjustment and Retraining Notification Act (the WARN Act). The WARN Act requires employers with one hundred or more employees to provide notice to their employees when conducting major workforce reductions, with certain exceptions. Again, failure to comply may result in the target company owing back pay to its employees.

Assessing agreements with key employees is also crucial to M&A transactions. While the enforceability of non-compete agreements varies among U.S. states and is currently being examined by the Federal Trade Commission, many employers will use non-compete agreements to preserve employee retention, particularly with respect to key employees. Buyers should examine the relevant rules of the applicable jurisdiction when seeking to enter into non-compete or similar restrictive covenant agreements with key employees, to ensure their enforceability. Similarly, buyers should consider how much weight to give to a target’s existing non-competes in light of the current enforceability climate.

Moreover, while not as common as in non-U.S. jurisdictions, target companies may be party to collective bargaining agreements with unionized workforces. Buyers should be aware of the National Labor Relations Board’s decisions, as well as applicable state law, in connection with potential successorship to collective bargaining agreements, as buyers may be subject to the terms of such agreements post-closing. The parties may also be required to provide separate and adequate notice to unions prior to the consummation of a transaction, in order to avoid breaching such collective bargaining agreements.

Immigration Matters

Employers in the U.S. are subject to certain requirements in connection with employees and their immigration status. Buyers may be subject to successor liability where the target company has failed to comply with work authorization verification rules, such as filing Form I-9 (Employment Eligibility Verification), and penalties may result. Thus, due diligence on the target company should include I-9 review.

M&A transactions may also affect the corporate structure of a target company, which may result in a disruption in the company’s ability to continue employment-based visas or permanent residence sponsorship for its workforce. Parties should review the impact of the transaction on existing visas, new applications, and permanent residence sponsorships, in order to ensure a smooth transition at closing and reduce potential additional or redundant costs for the parties.

Employee Benefits and Executive Compensation

It is common in the U.S. for companies to provide employees with a wide range of employee benefits, including health and welfare benefits, retirement plans, and incentive plans (which may be in the form of cash or equity). Employees will generally expect that their existing benefits will continue, or that substantially similar benefits will be provided following closing of a transaction. The structure of a transaction will affect whether a target company’s existing employee benefit plans can be assumed or terminated by the buyer.

Buyers should be aware, in particular, of a target company’s compliance with the Employee Retirement Income Security Act of 1974 (ERISA) when determining potential successor liability with respect to employee benefit plans. Certain pension plans, for example, are subject to employer funding requirements under ERISA – if a plan is under-funded by a target company or terminated after the transaction, the target and/or the buyer may be liable for later providing the requisite contributions to such plans, which can be a significant amount.

Buyers should also consider the target company’s executive compensation arrangements, including key employee agreements, equity arrangements, severance, and other agreements or arrangements that may be triggered by the transaction and its structure. In addition, Section 280G of the Internal Revenue Code imposes a 20% excise tax on parachute payments made to certain “disqualified individuals” of a corporation upon a change of control, if the parachute payments exceed three times the individual’s “base amount” (as each term is defined by the Internal Revenue Code). The parties should conduct an analysis of whether Section 280G applies to the transaction, and if the excise tax can be mitigated.

Regulatory Considerations

CFIUS

The Committee on Foreign Investment in the United States (CFIUS) reviews foreign investments in U.S. businesses (including M&A transactions) in order to assess their potential impact on national security, and has the authority to review any transaction that may result in “control” over a “U.S. business” by a “foreign person.” Upon review of a transaction, CFIUS may determine that national security risks exist in connection with a proposed transaction and may take actions to mitigate those risks by negotiating National Security Agreements with the parties. The agreements may include mitigation measures such as restrictions on sharing sensitive data, appointment of a third-party monitor to ensure enforcement, or forced divestiture of certain assets. CFIUS may also refer a transaction to the President of the United States, who may recommend blocking or unwinding the transaction altogether.

The scope of CFIUS’s authority includes transactions involving critical technology, critical infrastructure and the personal data of U.S. nationals (also known as T.I.D. U.S. businesses). Parties may choose whether to preemptively and voluntarily notify CFIUS of a transaction, which may result in a safe harbor letter that may limit CFIUS from reviewing the transaction later. CFIUS also requires mandatory filings when a transaction involves substantial foreign investment or control in a T.I.D. U.S. business, and U.S. businesses that develop critical technologies for which a U.S. regulatory authorization would be required for the export, reexport, transfer or transfer of such critical technologies to certain foreign entities involved in the transaction or in the foreign buyer’s ownership claim.

CFIUS compliance can significantly affect the timing of an M&A transaction. The review period following a CFIUS filing (which can take several weeks to prepare) ranges from 30 to 45 days and may be extended if CFIUS determines that a subsequent investigation is necessary. Parties should account for this potential extended timeline, as well as the risk of CFIUS action in response to the parties’ filing.

Antitrust

The U.S. Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) have the power to review transactions in terms of competition, even if the transaction does not involve U.S. companies. Accordingly, parties should be aware of filing requirements and the review process that may arise.

The Hart-Scott-Rodino Act (the HSR Act) governs the requirements involved in filing a notification (an HSR notification) to the FTC and DOJ. The threshold requirements for transaction and party size change annually[1].

Upon filing, an initial 30-day waiting period commences as the FTC or DOJ reviews the proposed transaction, and the parties may not close the proposed transaction until such period has ended. The reviewing agency will either grant an early termination of the waiting period, if requested by the parties and no competitive concerns remain, or the parties may proceed with closing the transaction upon expiration of the 30-day waiting period if no competitive concerns remain.

At the end of the 30-day period, the reviewing agency may issue a Second Request for additional information from the parties, which may extend the timeline for closing by months and involves substantial resources to produce the requested information. Parties also have the option of proceeding to litigation against the reviewing agency, rather than completing a Second Request, which may also be time-consuming and costly.

Sector-Specific Regulations

Transactions that take place in certain industries may have additional specific regulatory requirements or approvals that must be complied with in order to close. Examples of such industries in the U.S. include banking and financial institutions, registered investment funds and advisers, gaming, energy, public utilities, and mining. Clearing these additional regulatory hurdles may be time-consuming and incur extra costs for the parties involved in the transaction. Parties should be aware of any such additional rules and regulations that may impede on the timing of proposed transactions.

Corporate Transparency Act

As of March 2025, pursuant to an interim final rule issued by the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury, foreign companies registered to do business in the U.S. are subject to reporting requirements about beneficial ownership information of the company under the Corporate Transparency Act. Requirements are evolving, and FinCEN expects to publish a final rule in 2025. Foreign reporting companies owned only by U.S. persons, however, are not subject to reporting requirements under the CTA. Non-U.S. buyers may also consider the implications of the reporting requirements under the CTA in selecting an acquisition vehicle for a proposed transaction.

1 – The current minimum “size of transaction” threshold is $126.4 million in transaction value. If the size of the transaction is less than $505.8 million, the minimum “size of person” threshold is least $252.9 million in total assets or annual next sales for one party, and at least $25.3 million in total assets or annual next sales for the other party.

Data Privacy and Cybersecurity Issues

As with non-U.S. jurisdictions, data privacy and cybersecurity are trending topics in transactional matters in the United States. Buyers should be aware that multiple laws may apply to a transaction with respect to data privacy and cybersecurity issues; buyers should also note that non-U.S. data privacy laws like the GDPR may apply to U.S. targets that process personal data of citizens of foreign countries.

Major Data Privacy Laws

While the U.S. does not have one single comprehensive data privacy legal scheme akin to the GDPR, at the federal level, the FTC Act requires that a buyer must honor the data privacy and collection practices the target employed with respect to its customers; if the buyer wishes to materially change these practices, it must obtain the consent of the individuals affected before doing so. At the state level, the California Consumer Privacy Act (CCPA) is the first comprehensive data privacy law in the U.S. and is followed by others, including in states such as Colorado, Delaware, Florida, New Jersey, Oregon, Texas, and Virginia, among others. Additional states are in the process of introducing similar legislation, and data privacy is an ever-evolving space in U.S. law. As the CCPA was the first comprehensive data privacy law, many subsequent state laws are modeled after it.

With respect to state laws such as the CCPA, parties should be cognizant of consumer protection rules that buyers may become subject to, such as an individual’s right to opt out of the sale and sharing of personal information. Parties should also consider whether sector-specific laws apply with respect to data privacy as well. For example, the Privacy Rule under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) imposes certain requirements with respect to the protection of protected health information on healthcare providers and adjacent businesses.

Key Data Privacy Issues

Parties should also be aware of potential for successor liability with respect to data privacy and cybersecurity. In particular, breaches and security incidents should be scrutinized by buyers, including how the target company handled and mitigated such incidents; the target company may be required to notify affected individuals or regulators and governmental authorities, and failure to do so may result in penalties for the target and its successors. Buyers should also consider the target company’s privacy policies and risk monitoring scheme, even if the target has not had any previous data security incidents.

Another trending topic in data privacy laws is biometrics and biometric data processing. In particular, the Illinois Biometric Information Privacy Act (BIPA) covers the use and storage of biometric information by private entities operating in Illinois. BIPA is currently the only state law with a private right of action and statutory damages, which has resulted in class actions filed against companies in the last few years, some of which have resulted in multi-million-dollar settlements. Parties should therefore ensure compliance with BIPA and comparable state laws, as applicable, and the handling of biometric information by target companies.

As with many other industries, artificial intelligence (AI) is also increasingly becoming a trending subject as target companies begin to implement AI tools and solutions in products and operations. Buyers should conduct thorough due diligence on whether a target company utilizes AI products, and the potential for associated risk with respect to data privacy and cybersecurity. For example, if a target company uses an AI model provided by a third party, buyers should consider whether the data being provided to train the AI model is appropriately being protected and is being kept confidential. As AI is a quickly developing area, parties should be careful to stay aware of fast-moving changes in the legal landscape.

Risk Mitigation

Conducting Due Diligence

As with all transactions, conducting due diligence is a necessary step in mitigating potential risk for the parties in the future. Unlike public M&A, private transactions in the U.S. generally lack the ability to access readily available information on targets through databases such as EDGAR, as private companies are not subject to the same reporting rules as public companies. As a result, access to internal sources at the company will be key in conducting thorough due diligence.

Certain public information is still available to buyers in private U.S. transactions, however. It is common for buyers to run customary searches on targets, which will aggregate information from databases in different areas of the law. Common due diligence searches obtained by buyers during a transaction include: environmental surveys of the target’s real property (Phase Is and sometimes, Phase IIs), registered intellectual property searches (trademarks, copyrights, patents), and liens and litigation searches (conducted through a search of federal, state and local county records). Buyers should note that it is also customary to share the results of such searches with the target.

In addition to customary due diligence, buyers should consider key areas specific to the jurisdiction of the target, particularly as they may pose unfamiliar risks for buyers. As previously noted, if a business is situated in a highly regulated industry, there may be additional approvals, filings, tax considerations, and other concerns for the parties to be aware of and negotiate around.

Indemnification, Guarantees, Escrow and Holdback

Beyond conducting due diligence, buyers will seek to further mitigate risk through different commonly utilized remedies in U.S. purchase agreements. The first is indemnification for breaches of representations and warranties, covenants, and specific liabilities uncovered in the due diligence process. The parties may further negotiate a monetary threshold (commonly known as a “basket”) of the claims that buyer may bring against a seller for such breaches, as well as a limit (or “cap”) to any and all claims for breaches of representations and warranties. Typically, these limitations do not apply to a breach of covenants or specific liabilities agreed upon in the purchase agreement. If there is uncertainty that a seller will be able to make good on its indemnification obligations following the closing of a transaction, buyers may also require that a guarantor agree to step in and be bound by the purchase agreement for purposes of indemnifying the buyer.

Additionally, in order to ensure that any indemnification obligations will be fulfilled after closing, the parties may agree to set aside funds, often a small percentage of the purchase price, for a period of time following the closing in order to fund potential indemnification claims made by the buyer. The parties may agree to either establish an escrow account, which involves a separate agreement with an escrow agent, for an agreed period of time following closing, or a holdback of an agreed portion of the purchase price by the buyer, also for a set period of time following closing. Once the agreed period of time has ended, the buyer agrees to release the remaining funds, if any, to the seller.

Representations and Warranties Insurance

Representations and warranties insurance (RWI) has become very common in U.S. transactions. RWI is intended to allocate post-closing risk relating to indemnification, generally by acting as a backstop for a seller’s indemnification obligations for breaches of representations and warranties under a purchase agreement. Most typically, if there is a breach of a representation or warranty that a seller would typically be obligated to indemnify a buyer for, a RWI policy will provide such coverage instead. RWI policies are commonly purchased by buyers and may be useful in situations where indemnification by a seller is impractical or unavailable.

Buyers should note that RWI policies are not blanket policies for all representations and warranties and still contain exclusions, and the scope of coverage is in fact limited to breaches of representations and warranties. As previously noted, a typical purchase agreement will also obligate a seller to indemnify a buyer for breaches of covenants, or for specific liabilities uncovered by the buyer during the due diligence process. It is common for RWI policies to carve out such breaches from the scope of coverage, meaning that a buyer would still seek indemnification directly from the seller in such situations.

Buyers should also be aware that RWI underwriters will require close communication with regard to a buyer’s due diligence on the target in order to provide a policy. Buyers should be prepared to share any due diligence reports prepared in connection with the transaction and discuss the results of such reports in detail with RWI underwriters.

Post-Acquisition Integration

Following closing, the parties should consider the harmonization of the business with respect to different areas of law. For instance, it is common for the parties to review the target company’s material contracts against the material contracts of the buyer and consider whether any consolidation, termination, or amendment of either party’s agreements is efficient in light of the business consolidation. Buyers may also consider updating the corporate structure and governance practices of a target company following closing to align with existing practices, which may require review of the Internal Revenue Code and the corporate statutes of the applicable jurisdictions to ensure optimal structuring.

The parties will also need to consider the post-closing integration of policies, such as employee benefits, confidentiality and communications, and data privacy and transfer concerns across the buyer’s organization, in order to ensure a smooth transition at and after closing. Wherever practical, buyers may desire to update such policies to better align with their existing policies and customs but should always be aware of U.S. requirements (including federal, state, and local law, as well as any sector-specific rules and regulations) when making such post-closing updates.

Conclusion

In conclusion, cross-border acquisitions of U.S. businesses present a range of complex legal, regulatory, and operational challenges. Foreign buyers must carefully evaluate each of the key areas discussed above, among other legal issues. Given the evolving U.S. legal landscape and the potential for significant liability to a foreign buyer, it is essential to engage experienced U.S. legal counsel early in the process. Doing so can help identify and address potential risks, ensure compliance with applicable laws, and ultimately support a successful and efficient transaction.