Structuring cross-border financing deals can be complicated due to differences in local laws regarding issues like security interests, perfection requirements, and tax treatment. Some key challenges include: 1) Local laws may not recognize certain types of security arrangements common in other jurisdictions, such as the transfer of beneficial interest in receivables. 2) The appropriate method of securing an asset depends on its location, and may require control over the asset to create a fixed rather than floating security interest. 3) Retention of title clauses can mean that inventory ostensibly secured may still belong to suppliers until invoices are paid. 4) Perfection requirements like notarization can be an expensive process in some European countries

1. © 2005 ABF Journal, 409 East Lancaster Avenue Wayne, PA 19087. All rights reserved. Reproduction in whole or in part is not permitted without written permission.
G
lobal corporations increasingly require access to facilities in more
than one jurisdiction and financiers are facing more than just a
language barrier in order to live up to expectations. It is all too
easy to fall into the embarrassing trap of assuming a particular loan and
security package is workable only to learn a few weeks into negotiations
that implementing it globally may be unduly onerous on one or other of
the parties because of local law and practice, or worse still, that it is
simply not possible in certain jurisdictions. A little forward planning early
on in a deal usually pays considerable dividends.
Structuring the Deal
When working with familiar jurisdictions, financiers are adept at tailoring
the package they offer according to the borrower’s credit standing and
finance needs. The lawyers’ role in these cases tends to be more focused
on documenting the agreement than advising on the feasibility of the
arrangements. However, in most cross-border financing, planning the struc-
ture of the deal can be less straightforward than one might expect.
Take, for example, a straightforward undisclosed receivables
financing, a common form of finance in both the U.S. and the UK, but one
which is not so easy to implement for a borrower in, for example, Holland
because Dutch law does not recognize the transfer of the beneficial interest
in a receivable. Undisclosed invoice discounting is simply not compatible
with Dutch law. Even within the UK itself similar problems can arise because
Scottish law does not recognize the transfer of a beneficial interest either.
Complications such as this do not prevent the financing from going
ahead entirely, but they do influence its structure. It is also important to
remember that these hurdles may relate not only to putting the finance
in place, but also to the ongoing administrative burden on the borrower.
Securing the Debt
The appropriate method of securing a particular asset depends on
its location and may not be consistent across the jurisdictions where the
borrower is based. For example, securing a bank account in the UK is
harder than securing one in the U.S. because of the English law distinc-
tion between ‘fixed’ and ‘floating’ security interests (or ‘charges’ as they
are commonly known).
By way of background, a charge will only constitute a fixed security
interest so far as the chargee is able to deny the chargor freedom to deal
with the charged assets. If the degree of control exercisable is not complete
then the security will operate as a floating security regardless of how it
is described in the documentation. Fixed security is more desirable from
a lender’s perspective because fixed security holders rank above all other
security interests upon the insolvency of the chargor.
The requirement for control over the charged assets means that
‘springing dominion’ lockbox arrangements would not create a fixed secu-
rity interest over an English bank account. The fact that the borrower has
access to its funds until there is an event of default means that the secu-
rity holder can have no more than a floating security interest over the account.
A fixed interest can be achieved in English law by setting up a new
operating account to be used for working capital. All payments from debtors
are required to be paid into the lockbox account that is controlled by the
lender. Monies received into the account may then automatically repay
outstandings, so freeing up availability under the facility that the borrower
can draw down into its new operating account. Since access to the funds
in the lockbox account is only available to the lender there is sufficient
control over the asset for a fixed charge to exist.
The requirement for control causes similar issues when securing inven-
tory. In practice, it will only be possible to take a floating security, since
the borrower needs the freedom to deal with its inventory in the ordinary
course of business (pending a default). While on the subject of inventory,
it is worth mentioning that English law permits the use of retention of title
You Say Tomato,We Say…
Looking at the Pitfalls of Cross-Border Finance
Global corporations increasingly require access to facilities in more than one jurisdiction and lenders are facing more
than just a language barrier in order to live up to expectations. It is all too easy to fall into the trap of assuming a loan
is workable only to learn that implementing it globally may be unduly onerous, or worse still, impossible in certain
jurisdictions. A little forward planning early on can avoid cross-border deals ending in the dreaded refrain “let’s call the
whole thing off!”
By Graham Wedlake and Andrew Stanfield
Reprinted from the May 2005 Issue, Vol. 3, No. 5
The requirement for control over the
charged assets means that ‘springing
dominion’ lockbox arrangements would
not create a fixed security interest over
an English bank account.

2. clauses (“ROT”), which at their simplest provide that title to goods does
not pass to a buyer until a seller has been paid. The clause can go further
and provide that title remains with the seller until all debts owed by the
buyer have been paid. It is also possible to provide for the seller to have
a right to the proceeds of the charged assets, though this is more diffi-
cult in England than in some other jurisdictions such as Germany where
suppliers’ ROT is common and can give rise to extensive tracing rights
including co-ownership of finished goods and proceeds of sale.
The consequences of ROT provisions for financiers can be wide
reaching. It is possible that inventory that is ostensibly charged as secu-
rity by a borrower may not in fact fall within the security package, because
it is still owned by the borrower’s suppliers pending discharge of
outstanding invoices.
The practical concern for financiers is that, unlike in the U.S. where
the UCC requires a filing in respect of a lien arising from contractual ROT
provisions, many jurisdictions have no such registration requirement and
so in order to be sure whether there are any ROT issues relevant to the
deal financiers will need to review the underlying supply documentation.
This can sometimes be a lengthy exercise and the contracts themselves
may be confidential and provide that their terms may not be disclosed
without the consent of both parties. If the borrower has a large number
of suppliers it may not be realistic to approach them all for consent to
review the contracts to which they are a party, so the degree of due dili-
gence available to the financier will vary from one deal to another.
It is worth bearing in mind that certain jurisdictions, particularly those
with a common law background such as Hong Kong and England, often
have local restrictions on providing financial assistance in connection with
the acquisition of shares.
The position in England is that all English companies are prohibited
by statute from taking any action that would discharge or reduce the liability
of any entity intending to acquire shares either in the company giving the
assistance or in any of its holding companies. The penalties for providing
unlawful assistance are severe and include fines and custodial sentences
for officers of the company concerned. Fortunately, although public compa-
nies are unable to circumvent the restrictions, private companies can under-
take a ‘whitewash procedure’ by which the assistance is approved by the
shareholders of the company.
The whitewash procedure is time consuming and requires, amongst
other things, an auditors’ report to be annexed to a statutory declara-
tion of the directors relating to the assistance. Depending on the circum-
stances, financiers sometimes take the view that the benefits of the
security in question do not warrant the additional time and expense of
completing a whitewash.
Statute provides for a certain period of time during which dissenting
shareholders may object by challenging the approval in court. There is a
long-stop date, after which approval for the assistance lapses and the entire
procedure must be carried out again. There is therefore a potential for
financial assistance issues to affect the timing of completion of a deal,
but their impact can be minimized provided they are identified early on.
Terminology, Timing & Time Differences
The potential complications caused by a language barrier are easy
to identify, but even parties that speak the same language can fall foul
of a ‘terminology barrier’.
For example, U.S. based financiers often refer to “liens” as a generic
term for a security interest. In the UK, a lien is a specific type of secu-
rity interest, distinct from a charge, mortgage and pledge, each of which
confers a security interest of a different nature in a different class of
assets. Care needs to be taken when structuring a security package that
all parties understand the exact nature of the security interest proposed
in relation to each asset.
Even if terminology is not an issue, timing can be. Legal restrictions
and local practice differ substantially from jurisdiction to jurisdiction in
terms of the amount of time that is required to prepare security docu-
mentation and opinions. Further, as noted above, if a whitewash or similar
procedure is required, a substantial amount of time must be allowed for
the process to be completed.
While not nearly as critical to the process as other items mentioned
above, it is worth noting that significant issues can arise if time differ-
ences are not accounted for early in the process. For example, a notary
may require an original document rather than a fax copy. This causes
complications if the European security package needs to be in place prior
to funding because the time difference between the U.S. and Europe can
mean the loan documents are not signed until after close of business in
Europe. Similar issues arise if funds from the financing are needed in
Europe and the loan documents are being signed in the U.S.
Tax Matters
The tax treatment of a loan and security package is often instrumental
to its structure. Deemed dividend issues arising in U.S. law under section
956 of the Internal Revenue Code are particularly relevant to cross-border
work. Section 956 provides that in certain circumstances the accumu-
lated earnings and profits of foreign subsidiaries will be deemed to have
been distributed to their U.S.-based holding company for the purposes
of income tax liabilities. The trigger events include liens over subsidiaries’
assets to secure debt obligations of the holding company, a guaranty by
a subsidiary of a holding company’s debt and pledges of more than 66
2/3% of a subsidiary’s voting stock.
Section 956 does not however apply to the grant of security or pledges
of assets to secure debt of a non-U.S. company. Accordingly, where the
loan will be used for an acquisition by a non-U.S. company or will be used
partly for working capital purposes of a non-U.S. company, it is often
worth considering whether to make a loan directly to a company based
outside of the U.S. because the collateral provided by it and its subsidiaries
can be taken in respect of its own direct borrowings. This is not always
a perfect solution for the borrower or the financiers. Among other issues,
syndication of the facility may be complicated by such a structure, the
borrower may not desire debt at that level of their capital structure and/or
tax legislation in the foreign jurisdiction concerned may result in with-
holding tax or other consequences.
Whether the deemed dividend rules give rise to a significantly adverse
tax consequences for the U.S. borrower will depend on the financial circum-
stances of the group. Where the loan was partly for a subsidiary’s working
capital purposes it is often worth considering whether to make a loan
directly to that subsidiary because the collateral provided by it can be
taken in respect of its own direct borrowings so avoiding a trigger event
under section 956. This is not always a perfect solution because tax legis-
lation in the foreign jurisdiction concerned may result in withholding tax
or other consequences.
Foreign tax legislation can have practical as well as financial conse-
quences. For example, if the security package for a deal included a charge
over the shares in a company incorporated in the Philippines, it would
be worth checking whether the entity giving the charge already owns the
shares being charged or whether they are yet to be transferred. A transfer
of shares may require the consent of the Philippine tax authorities, a
process that can take months.
Perfection Issues
When all is said and done, security is only worth having as long as
it can be enforced if things go wrong. Local perfection requirements, partic-
© 2005 ABF Journal, 409 East Lancaster Avenue Wayne, PA 19087. All rights reserved. Reproduction in whole or in part is not permitted without written permission.

3. ularly in certain European jurisdictions, often involve the services of a
notary public in certifying the terms of a document. The process is expen-
sive because the notary’s fees are usually linked to the monetary value
of the underlying document. The process can also be time-consuming.
For example, notarizing a security document in Germany can involve the
notary reading out every single word of the document being notarized
together with the text of the underlying credit agreement.
The idiosyncrasies of local laws in cross-border financing mean that
it is not always possible to foresee the potential issues that can arise.
There is almost always a way around any problems, but repeat business
from global corporations will probably be more forthcoming if lenders
are able to produce a feasible loan and security package first time. It is
not usually necessary to instruct local lawyers from the outset in order
to avoid mistakes, but not doing so will entail a greater risk that the struc-
ture will not be completely workable. The trick is to know when to ask
for advice.
Graham Wedlake (pictured) is a partner and Andrew
Stanfield is an associate in the London office of Winston &
Strawn LLP.
The information in this article is not intended as a comprehensive statement of the law
in relation to the matters discussed and specialist legal advice should always be sought
in all circumstances.
© 2005 ABF Journal, 409 East Lancaster Avenue Wayne, PA 19087. All rights reserved. Reproduction in whole or in part is not permitted without written permission.