The MCA/Ministry of Corporate Affairs on February 03, 2020, notifies the Companies (Compromises...
There is a large scale increase in cross border merger and acquisition as an impact of globalization. In 1990’s there were nearly around 200 % jump in the volume of deals in matters relating to cross border merger and acquisitions (M &A) in the Asia-Pacific Region. Cross-border M & A is a combination with other trends such as increased deregulation, privatization, corporate restructuring. Globalisation brought a boost in cross border M &A activity. The cross border M&A’s are taking place in all the sectors such as services, manufacturing, chemical, pharmaceuticals, telecommunications and financial industries. A cross border M & A occurs between two companies existing in different nations by way of purchasing or amalgamating two companies.
Mergers and Acquisitions are explained as companies’ consolidation. The terms mergers and acquisition are defined below:
A merger combines two companies in one. Such transactions take place between two businesses/ companies of the same size. Additionally, the terms of the merger are amicable and also mutually agreed by the two companies to become equal partners in the new venture.
Acquisition occurs when a company buys another company. Sometimes, the purchase is friendly whereas sometimes it is hostile. Thus, a large company acquires a small company to diversify its business.
In simple words, mergers and acquisitions are defined as a combination of businesses of two or more companies which are incorporated in two or more than two countries. Companies incorporated in different jurisdictions go through this process in order to enhance their growth and increase their standard in the international market.
According to section 234 of the Companies Act, 2013 read with Rule 25A of Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2017– defines it as a merger and amalgamation between companies’ registered under the Companies Act, 2013 or under the previous Act i.e. Companies Act, 1956 and also the company incorporated outside India in the notified foreign jurisdictions or vice versa.
A local company can be acquired by another company located in other countries. The company can be a private company, public company or a state-owned company. The merger and acquisition by foreign investors also referred to as cross border merger and acquisition, results in the transfer of authority and control in operating the merged or acquired company.
Assets and liabilities of two companies incorporated in two different countries are combined as a new legal entity in terms of the merger.
While a transformation process of assets and liabilities of the local company to a foreign company and automatically, the local company will be affiliated in the acquisition process.
As per legal terminology:
The country where the company to be acquired or where the target company is situated is referred to as Host country.
Various factors affecting firms for getting in cross border merger and acquisition are as follows:
The procedure for cross border merger and acquisition in India are as follows:
Rule 25 A of Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2017 also specifies some procedures as follows:
Jurisdictions for the purpose of cross border merger and acquisition are specified in clause (a) of sub-rule (2) of 25A:
As per Section 6 of the Competition Act, 2002 requires the merging companies to meet the threshold limit qualifying under section 5 to give notice to the Competition Commission of India (CCI) within thirty days of approval of the proposed scheme of merger and acquisition by the Board of Directors of the companies involved or execution of any agreement pr document in furtherance of acquisition proceedings.
A waiting period of 210 days from the day of giving notice for the purpose of investigating section 29 and section 30 must be provided to check the existence of any possibility of its adverse effect on the competition.
If the Competition Commission of India (CCI) under Section 31 of the Act, is satisfied regarding the negative affect after the approval of M&A, it shall approve it. Whereas, if it concludes after thorough analysis that the merger is likely to bring an adverse effect in the market, it will disapprove the scheme or send it for modification as to make it fit for the approval.
The following are the benefits of cross border merger and acquisition:
Cross border M & A supports an increase in the capital on a long term basis. To expand their businesses, it not only undertakes investment in plants or buildings and equipment’s but also in the incorporeal assets such as technical skills rather than just the capital.
Mergers and acquisition that are undertaken to drive restructuring may lead to downscaling but would lead to employment gains in the long term. This downsize sometimes is essential for the continued existence of operations. In case the businesses expand and become successful, it would create new employment opportunities.
When businesses across countries join together, it brings transfer of technology, sharing of best management skills and practices in the host country. This results in innovations and has a better influence on the operations of the company.
The issues and challenges are discussed below:
The political scenario plays a crucial role in cross border merger and acquisitions. Basically, for industries which are politically sensitive such as defence, security etc.
A cultural challenge can be a considerable threat to cross border M&A. To deal with this challenge, businesses need to spend the right amount of time to get knowledge of the local culture and also of the employees.
The merging companies must look into the various legal and regulatory issues that they are likely to face. While going through the process of reviewing these concerns, it could indicate that the potential merger or acquisition would be incompatible. Hence, it is recommended to not go ahead with the deal.
Tax-related matters are critical, particularly when it comes to structuring the transactions. Many countries are yet to implement International Financial Reporting Standards (IFRS). The parties in the merger should be aware of the financial and accounting terms in the deal.
Due diligence affects the terms and conditions under which the M&A transaction would take place, influence the deal structure affects the price of the deal. There are various other issues as every agreement has its favour and differences.
The corporate sector in India is moving towards the stage where globalisation and its principles are intended to be accepted by the state through favourable legislation but, due to existence of multiple technical legislation governing the concerned subject, it is almost impossible to attain the most desirable stage with one attempt. Though there is very little progress in the research literature to explore the role of culture in the success of these ventures of M&A. Cross-border M&A has added challenges of dealing with both national and organizational culture differences.
Also, Read: Inbound and Outbound Investments: A Detailed Guide.