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Europe Poised for Flood of Iran Deals as U.S. Can Only Watch

05 February 2016

The recent lifting of sanctions against Iran won’t cause a significant increase in mergers and acquisitions involving the region for U.S. companies, which must remain cognizant of remaining restrictions, but the change could prompt an outbreak of activity from European corporations that have far more freedom to deal with the country, experts say.

The peeling back of layers of sanctions that for years isolated Iran from the rest of the corporate world is noteworthy for companies around the globe, as the country is no longer completely blocked off from buying and selling. But the enduring and stark differences in what U.S. and European companies are allowed to do means the latter are the only ones for which the eradicated sanctions will have significant effects, attorneys say.

“Frankly, the mindset [in Europe] is a lot different [than in the U.S.],” said Mario Mancuso, a partner at Kirkland & Ellis LLP who leads the firm’s international trade and national security practice. “Companies [in Europe] are sort of racing out the door.”

After the International Atomic Energy Agency recently determined that Iran had taken sufficient initial steps to wind down its nuclear program, the U.S. and European Union each began repealing sanctions.

Although the initial headlines may have made it appear as though Iran had essentially been removed from a no-trade list of sorts, that’s not exactly the case, especially for U.S. companies, explained Eric Shimp, a policy adviser in Alston & Bird LLP’s international trade and regulatory group, as they are still not allowed to deal with Iran in any capacity except in specific circumstances.

“The early headlines were ‘sanctions are gone in Iran,’ but that’s not really the case,” Shimp said. “There’s a lot of misleading stuff. We’re certainly not the only law firm that had a rash of questions [from clients] saying, ‘So can we go into Iran now?’”

Even with the lifting of so-called secondary sanctions, only foreign subsidiaries of U.S. companies are allowed to ink deals with Iran, but even that is more complicated than it sounds because, under the remaining restrictions, a deal is no-good if anyone involved is an American citizen. That means that no one involved in the deal process, from initial contact to negotiations and through the actual putting of pen to paper, can be a U.S. citizen, Shimp said.

“How companies are now, there are Americans scattered throughout the world,” said Shimp, who is a former U.S. diplomat and trade negotiator.

Baker & McKenzie LLP partner Janet K. Kim, who is a member of the firm’s international commercial practice steering committee, said that while the lifted sanctions open the door, “in theory,” for foreign subsidiaries of U.S. companies to work out M&A deals with Iran, the reality is that most foreign units require a nod from their parent company in order to effectuate a transaction.

“Almost all U.S. companies, certainly publicly traded ones, will require U.S. parent company approval,” Kim said. “That’s where it gets difficult.”

“The practical challenges are pretty considerable,” she added, referring to a U.S. company’s foreign subsidiary inking a deal with an Iranian company without needing any American citizen involved at some point during the process. “I wouldn’t totally rule it out, but I think it would be difficult.”

Mancuso, who is a former U.S. undersecretary of commerce and senior U.S. national security official, believes that deals between U.S.-based corporations and Iranian companies will eventually begin to take place, but “it’ll be slow to start.”

That’s because there is still much to be done in order for U.S. companies to determine how they can, and if they should, navigate the tightrope of restrictions that still exists when it comes to inking agreements with Iran, he explained.

“That homework will just take time,” he said. “Just because it takes time doesn’t mean it’s not a significant change, though. It is a significant change.”

It’s a different story in Europe, where sanctions against Iran were almost entirely kiboshed and deal-making activity has already begun. For example, Iran Air, the country’s national airline, agreed this week to buy up to 40 turboprop airplanes from a French-Italian joint venture between Airbus Group and Finmeccanica.

Just a few days before that, Swiss bank Reyl & Cie SA announced that it is partnering with Iranian financial services firm Turquoise Partners on a $200 million private equity fund that will look to invest in consumer businesses in Iran in industries including consumer goods, pharmaceuticals and hospitality.

“It’s already underway,” noted Shimp, who said to expect the first slew of deals to be mainly in the areas of aviation, automotive, durable goods, telecommunications and consumer technology.

Michael Casey, counsel in Ropes & Gray LLP's government enforcement practice, told Law360 that the lifted sanctions have indeed "opened up a whole range of new possibilities for European companies" to deal with Iran, adding that the firm is anticipating a chunk of deals that mark first entries into Iran for European companies. Still, he cautioned that complications could arise for European companies that have U.S. operations, employ U.S. citizens or deal with U.S. financial institutions.

"Unless the business opportunities in Iran are significant, [European Union] companies may decide that doing business with Iran is more trouble than it's worth at this point in time," Casey said.

Meanwhile, Shimp said, ramifications for the U.S. concerning the fact that European companies have the jump on business dealings with Iran could be far-reaching, because years down the road, when and if the U.S. decides to completely open the floodgates and let companies do regular business with Iran, there will be a lot of catching up to do.

“Let’s say eight to 10 years from now, remaining sanctions are lifted. That’s a long time in terms of business generation,” he said. “U.S. companies will be starting from behind.”

Mario Mancuso, P.C.

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