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Cross Border Merger and Acquisition: A Complete Analysis

Deepti Shikha

| Updated: Mar 19, 2020 | Category: Mergers and Acquisitions

Cross Border Merger and Acquisition

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.

What are Merger and Acquisition?

Mergers and Acquisitions are explained as companies’ consolidation. The terms mergers and acquisition are defined below:

Merger

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

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.

What is Cross Border Merger and Acquisition?

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.

Concept of Cross Border Merger and Acquisition

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 state where the origin of the companies that makes an acquisition is also termed as the acquiring company (In other countries, it is referred to as the Home Country).

The country where the company to be acquired or where the target company is situated is referred to as Host country.

What are the Factors to be Considered in Cross Border Mergers and Acquisitions?

Various factors affecting firms for getting in cross border merger and acquisition are as follows:

  • The globalisation of financial markets.
  • Due to market pressure and the decreasing demand because of competition in the international market.
  • To seek new market opportunities because of fast-growing technology.
  • Due to geographical diversification which would provide opportunities in exploring the assets in other countries.
  • Increase the efficiency of companies’ in producing goods and services.
  • Fulfilling the objective to increase profitability.
  • To increase productivity or scale of production.
  • Sharing technology or any innovation which can help in reducing the costs.

What is the Procedure for Cross Border Merger and Acquisition in India?

The procedure for cross border merger and acquisition in India are as follows:

  • An application regarding cross border M & A must be made to the tribunal by either party as prescribed in Section 230 to Section 232 of the Companies Act, 2013.
  • The tribunal, after receiving the application, may call the meeting of members or creditors or both, to obtain approval of the proposed scheme by the members and creditors. The tribunal will also look into the objections (if any) raised by the members and creditors.
  • Certain important information relating to the company and its business must be attached along with the application. Certificate of companies’ auditor regarding the accounting treatment of the company must be filed before the tribunal to ascertain the nature of the proposed scheme.
  • The notice of the meeting to be conducted must be sent to Central Government of India, Reserve Bank of India (RBI), Security and Exchange Board of India (SEBI), Competition Commission of India(CCI), the Registrar of Companies (ROC), respective stock exchanges and the official liquidator; and if any of them has any objection they have to raise it within thirty days of receiving the notice.
  •  The merger will come into force if three-fourth of the creditors in debt value or members in their share values, votes in favour of the cross border merger and acquisition.
  • The requirement of ‘meeting of creditors’ is not needed if the creditors holding at least 90% value of total outstanding debt, approves the scheme of cross border M&A by way of an affidavit.

Rule 25 A of Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2017 also specifies some procedures as follows:

  • A foreign company which is incorporated outside India may merge with an Indian Company only after receiving prior approval from RBI.
  • The merging company needs to comply with the provisions specified in section 230 to section 232 of Companies Act, 2013.
  • The valuation must be conducted by the transferee company in their respective jurisdiction.
  • The concerned company must apply to the tribunal as per provisions under section 230 to section 232 of the Act.

What are the Jurisdictions Specified for Cross Border Merger and Acquisition?

Jurisdictions for the purpose of cross border merger and acquisition are specified in clause (a) of sub-rule (2) of 25A:

  • Jurisdiction Where the securities market regulator is a signatory to an International organization of securities commission Multilateral memorandum of understanding or MOU or a signatory to the bilateral memorandum of understanding with SEBI.
  • Jurisdiction not identified in the public statement of Financial Action Task Force (FATF).
  • Jurisdiction where Central Bank is a member of Bank for International Settlements (BIS).
  • Jurisdiction with strategic Anti-money laundering or combating the financing of terrorism deficiencies to which counter measures apply.
  • Jurisdiction which has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the financial action task force.

Compliance to be followed by Companies During  Cross Border Mergers and Acquisitions

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.

What are the Effects of Cross Border Merger and Acquisition?

  • Cross border merger and acquisitions are a reformation of industrial assets and production structures on a worldwide basis.
  • It empowers global transferring of technology, goods and services and integrates it for overall networking.
  • Cross border M&A’s leads to economies of scale and also scope, which helps in gaining expertise. It benefits the economy, such as increased productivity of the host country, an increase in economic growth and development, mainly if the policies used by the government are favourable.

The following are the benefits of cross border merger and acquisition:

benefits of cross border merger and acquisition

Capital build-up

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.

Employment creation

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.

Technology handover

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.

Issues and Challenges on Cross Border Merger and Acquisition

The issues and challenges are discussed below:

Issues and Challenges on Cross Border Merger and Acquisition

Political concerns

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.

Cultural Challenges

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.

Legal considerations

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 and Accounting Considerations

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

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.

Why Enterslice?

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Conclusion

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.

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Deepti Shikha

Deepti is a Law graduate with an avid interest in reading and very proficient in summarizing legal cases. She has enough experience in handling legal affairs of the company. In the initial days of her career, she has worked as a legal researcher and has 3+ years of experience.

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