Cross-Border Transactions: Why Deal Structure Matters Before Signing

A cross-border transaction can look simple at first.

There is a buyer, a seller, a price, a timeline, a due diligence process and a transaction agreement.

But in practice, when an Israeli company is involved in a transaction with a foreign company, the agreement is not the starting point. It is the result of decisions that should have been made earlier.

The real starting point is the structure of the transaction.

Before negotiating the detailed purchase agreement, before drafting representations and warranties, and often even before signing a term sheet, the parties should understand how the transaction should be structured from a legal, tax, regulatory and commercial perspective.

This early analysis can prevent expensive mistakes, unnecessary delays and last-minute surprises that may affect the price, the timeline or even the feasibility of the transaction.

The Common Mistake: Starting With the Agreement Instead of the Structure

Many companies entering an international transaction focus first on the contract.

They want to discuss the share purchase agreement, asset purchase agreement, escrow, indemnity, closing conditions, warranties and disclosure schedules.

All of these are important.

But in a cross-border deal, a well-drafted agreement cannot fix a poorly planned transaction structure.

For example, the parties may begin negotiations assuming that the transaction will be structured as an asset purchase. Several weeks later, after lawyers have already started drafting documents and conducting due diligence, the tax advisors may conclude that a share purchase would have been the correct structure.

That is not a minor drafting issue.

It can change the entire transaction.

It may affect the tax exposure, the purchase price, the required consents, the due diligence scope, the treatment of employees, the transfer of contracts, the handling of intellectual property and the closing mechanics.

In some cases, the parties may need to reopen commercial points that they thought were already agreed.

That is why the first legal question in a cross-border transaction should not be: “What should the agreement say?”

The first question should be: “What is the correct structure for this deal?”

Share Purchase or Asset Purchase: A Decision With Major Consequences

One of the first decisions in any acquisition is whether the deal should be structured as a share purchase or an asset purchase.

In a share purchase, the buyer acquires the shares of the company. The company continues to exist with its assets, liabilities, employees, contracts, permits and historical obligations.

In an asset purchase, the buyer acquires selected assets from the company, such as intellectual property, customer agreements, inventory, equipment, technology, goodwill or a specific business activity.

Each structure has advantages and disadvantages.

An asset purchase may allow the buyer to select which assets and liabilities it wishes to assume. A share purchase may preserve business continuity more easily, especially where employees, permits, customer contracts or ongoing operations are involved.

But in a cross-border transaction, this decision is not only legal. It is also tax, accounting, regulatory and operational.

Choosing the wrong structure too early can create costs that were not priced into the deal.

That is why tax advisors and legal counsel should be involved before the parties lock themselves into a term sheet that is too detailed or too difficult to change.

Why a “Transaction Map” Should Come Before the Term Sheet

Before signing a term sheet in an international transaction, the parties should prepare a short transaction map.

This does not need to be a long legal memorandum. It should be a practical working document that identifies the key issues that may affect the structure, timing and risk allocation of the transaction.

A good transaction map should address at least the following questions:

What is the recommended transaction structure: share purchase, asset purchase, merger, investment or another structure?
What are the main tax implications in Israel and in the foreign jurisdiction?
Are any regulatory approvals, filings or waiting periods required?
Has the Israeli company received grants or government support?
Are there restrictions on transferring intellectual property outside Israel?
Are there employee, option, executive compensation or collective employment issues?
Does foreign law apply because of the buyer, the target, shareholders, employees or operations abroad?
What are the realistic timing assumptions for signing and closing?

This early mapping exercise does not replace due diligence.

It makes due diligence more focused.

It helps the parties understand what they are really negotiating, what should be included in the term sheet, and which issues must be resolved before signing or closing.

Israeli Innovation Authority Grants and IP Transfers

One of the most important issues in transactions involving Israeli technology companies is whether the company has received grants from the Israeli Innovation Authority or from another governmental or public funding body.

Many buyers assume that Innovation Authority grants are relevant only to early-stage startups.

That assumption is risky.

Grants may also be relevant to mature technology companies, industrial companies, R&D-based businesses and companies that do not necessarily describe themselves as startups.

In a cross-border transaction, the issue becomes especially important if the foreign buyer intends to transfer intellectual property or know-how outside Israel.

Depending on the circumstances, the transfer of technology developed with government support may require approvals, repayment obligations, royalties or additional payments.

These issues can directly affect the economics of the deal.

For that reason, an Israeli company preparing for a sale or investment should review, at an early stage:

Whether it received any grants.
Which programs or funding bodies were involved.
What undertakings were given.
Whether there are restrictions on change of control.
Whether there are restrictions on transferring know-how or IP abroad.
Whether there are reporting or payment obligations.

From the buyer’s perspective, these issues should not be discovered late in due diligence. They should be identified before the deal structure and purchase price are finalized.

Competition Law: Foreign Buyer Does Not Mean No Israeli Filing

Another common mistake is assuming that if the buyer is foreign, Israeli competition law is irrelevant.

That is not necessarily correct.

If the transaction has an effect on the Israeli market, or if the parties have activity in Israel, the transaction may require analysis under Israeli competition law.

The relevant question is not only where the buyer is incorporated.

The relevant questions may include:

What is the parties’ activity in Israel?
What are their market shares?
Do they operate in the same or adjacent markets?
Does the transaction strengthen market power?
Are turnover thresholds or other filing requirements met?
Even where the transaction would ultimately be approved, failing to make a required filing can create delays, penalties and unnecessary legal exposure.

In cross-border transactions, regulatory review is rarely limited to one country.

A transaction involving an Israeli company and a foreign company may require analysis in Israel, in the buyer’s jurisdiction, and sometimes in additional jurisdictions where the parties operate.

Tax Planning Should Not Be Left to the End

Tax is often the issue that changes the structure of a transaction.

It affects the seller, the buyer, the shareholders, the employees and sometimes the company itself.

In cross-border transactions, tax analysis should be conducted before the term sheet becomes too detailed.

Issues that may need to be reviewed include:

Capital gains tax.
Withholding tax.
Tax rulings.
Treatment of options and equity awards.
Transfer of intellectual property.
Asset versus share sale consequences.
Tax residency.
Payments to foreign shareholders.
Post-closing integration.

If tax advisors are brought in too late, the parties may discover that the chosen structure is inefficient or unworkable.

That can result in revised deal documents, delayed signing, renegotiated economics or even loss of deal momentum.

In international transactions, tax is not a technical item to be checked at the end.

It is part of the foundation of the deal.

Employees, Options and Local Employment Rules

Employees are often one of the most valuable assets in a transaction.

They are also one of the most sensitive areas in due diligence.

In an acquisition involving an Israeli company, the parties should review employment agreements, compensation arrangements, social benefits, severance arrangements, confidentiality undertakings, non-compete provisions, assignment of intellectual property, options and equity incentives.

In addition, foreign buyers may not be familiar with local Israeli employment concepts, collective arrangements or the practical influence of employee committees or unions.

Even when employees do not have the legal ability to block a transaction, employment-related issues can affect timing, integration, retention and cost.

In technology transactions, options and equity awards require particular attention.

If employees or founders hold options under an Israeli equity plan, the tax treatment may be important. If any of them are also US persons, additional US tax considerations may arise even if they live in Israel and the company is Israeli.

The practical point is simple:

Employee issues should be reviewed early, especially where key employees are essential to the value of the transaction.

Foreign Law May Apply Even When the Company Is Israeli

A transaction involving an Israeli company may still involve foreign law in several ways.

For example:

The Israeli company may be incorporated in Delaware.
The buyer may be a US corporation.
The Israeli company may have employees, subsidiaries, customers or operations abroad.
The purchase price may be paid in shares of a foreign public company.
The company may have US investors.
The target may hold sensitive data, technology or infrastructure in a foreign jurisdiction.
The buyer may be subject to foreign regulatory approvals.

US law is a common example.

A transaction may raise issues under Delaware corporate law, US securities laws, US tax rules, employment laws, employee benefits laws or national security review regimes such as CFIUS.

But the same principle applies beyond the United States.

A cross-border deal may involve European privacy law, UK regulatory issues, Chinese antitrust review, financial services regulation, defense-related approvals or sector-specific requirements in another jurisdiction.

The key is to identify early which jurisdictions matter.

Not every foreign connection creates a major legal issue.

But ignoring foreign law until late in the transaction can be costly.

The Real Risk Is Not the Issue. It Is Discovering the Issue Too Late

Most legal and regulatory issues in cross-border transactions can be managed.

Approvals can be obtained.

Filings can be made.

Tax rulings can be requested.

Risk can be allocated in the agreement.

Specific indemnities can be negotiated.

Closing conditions can be added.

Purchase price adjustments can be built into the deal.

IP can remain in Israel where necessary.

Employee retention arrangements can be planned.

The real problem is not always the existence of the issue.

The real problem is discovering it too late.

At an early stage, a legal issue is a planning point.

At a late stage, it becomes a deal problem.

Late discovery can delay closing, increase costs, damage trust between the parties and give one side leverage to reopen commercial terms.

This is why legal advice at the beginning of a cross-border transaction is not intended to complicate the deal.

It is intended to make the deal possible.

Practical Tip: Before Signing a Term Sheet, Ask These Five Questions

Before signing a term sheet in a cross-border transaction, ask the following five questions:

1. What is the correct deal structure?
Should the transaction be structured as a share purchase, asset purchase, merger, investment or another structure?

2. What are the main tax consequences?
Have Israeli and foreign tax advisors reviewed the structure before the commercial terms are locked in?

3. Are regulatory approvals or filings required?
Does the transaction require review by competition authorities, sector regulators, foreign investment authorities or other governmental bodies?

4. Are there grants, IP restrictions or government undertakings?
Has the company received Innovation Authority grants or other support that may affect change of control or transfer of technology?

5. Which foreign laws may apply?
Does the transaction involve US, European or other foreign legal issues because of incorporation, shareholders, employees, operations, data, technology or consideration?

If the answer to any of these questions is unclear, the term sheet may be premature.

A Well-Structured Transaction Saves Time, Money and Leverage

In cross-border transactions, the differences between legal systems are not just technical.

They affect deal economics, risk allocation, timing, leverage and execution.

A buyer may expect one market standard.
A seller may assume another.
Israeli law may impose a local rule.
Foreign law may require an additional process.
Tax may change the preferred structure.
Regulation may affect closing.
Employment issues may affect integration.
IP restrictions may affect the value of the acquired business.

When these issues are identified early, they can usually be managed.

When they are discovered late, they can become expensive.

The best cross-border transactions are not necessarily the ones with the longest agreements.

They are the ones that are structured correctly from the beginning.

Conclusion

A cross-border transaction does not begin with the purchase agreement.

It begins with a clear understanding of the structure, the tax implications, the regulatory landscape, the treatment of intellectual property, the employee issues and the foreign law elements that may affect the deal.

For Israeli companies negotiating with foreign buyers, and for foreign companies acquiring Israeli businesses, early legal planning is not a formality.

It is a commercial advantage.

Before signing a term sheet, prepare a transaction map.

Before drafting the agreement, understand the structure.

Before negotiating the details, identify the risks that could affect price, timing and closing.

A strong agreement is important.

But in an international transaction, the strongest agreement is the one built on the right deal structure.

FAQ

What is a cross-border transaction?

A cross-border transaction is a business transaction involving parties from different countries. In the corporate context, this often includes acquisitions, investments, mergers, joint ventures or asset purchases between an Israeli company and a foreign company.

Why is deal structure important in a cross-border transaction?

Deal structure determines how the transaction is carried out and affects tax, regulatory approvals, liabilities, employees, contracts, intellectual property and closing mechanics. Choosing the wrong structure can create delays and additional costs.

What is the difference between a share purchase and an asset purchase?

In a share purchase, the buyer acquires the shares of the company and indirectly acquires the company with its assets and liabilities. In an asset purchase, the buyer acquires selected assets and may avoid assuming certain liabilities, subject to applicable law and the terms of the transaction.

Why are Israeli Innovation Authority grants important in international M&A?

If an Israeli company received Innovation Authority grants, there may be restrictions on transferring know-how or intellectual property outside Israel. The transaction may require approvals, repayments, royalties or additional payments.

When should legal counsel be involved in a cross-border transaction?

Legal counsel should be involved before signing a term sheet. Early legal review helps identify tax, regulatory, employment, IP and foreign law issues before the parties commit to a structure that may later need to be changed.

If your company is negotiating with a foreign buyer, considering an international acquisition or preparing for a cross-border investment, early legal planning can prevent costly mistakes.

Our firm advises companies, entrepreneurs and investors on commercial transactions, cross-border agreements, M&A transactions, investment agreements and legal structuring of international deals.

Contact us before signing a term sheet, and we will help you map the transaction, identify the key risks and build the right legal structure from the start.