Mergers and Acquisitions

What are the Legal Issues In Cross-Border Mergers And Acquisitions?

A merger or acquisition is a great tool to raise your company’s value. A merger is the strategy of choice for many business owners, regardless of their goals, whether to scale and grow, reduce expenses, get access to new markets, or eliminate a rival. Although cross-border Mergers and Acquisitions are common, there are difficulties, particularly complex tax laws and legal/regulatory obstacles. Additionally, India is steadily moving up the ranks for business friendliness and is emerging as a popular location for conducting business. An atmosphere conducive to business has fuelled a rise in international mergers.

Cross-Border M&A

When a company buys or merges with another company in a different country, this is referred to as a cross-border merger or acquisition. Cross-border mergers and acquisitions are used when a corporation seeks to merge with or overtake another company in order to expand internationally without creating a new entity from the beginning. It is also called an overseas merger and acquisition.

In such a deal, the operations and assets of two (or more) businesses from different countries are combined to form a new legal company. As a result, a foreign firm gains control of the assets and activities of a local company, turning the former into an affiliate of the latter. 

Technology developments, affordable financing options, and healthy market circumstances have made deal-makers for cross-border Mergers and Acquisitions. Companies from various jurisdictions go through this procedure to accelerate their growth and develop their bar so they can compete in the global market.

Types of Cross-Border Mergers

The most common merger types are horizontal, vertical, conglomerate, congeneric, product extension, market extension or marketing/technology related concentric, and reverse. Section 234 of The Companies Act 2013 recently included language introducing the ideas of inbound and outbound mergers. 

Inbound Merger & Acquisition: When the company formed out of this procedure is an Indian company. It happens when a foreign firm merges with or acquires an Indian enterprise. 

Outbound Merger & Acquisition: When the company formed out of this procedure is a foreign company. It happens when an Indian company merges with or acquires a foreign company. 

Companies Act 2013

As stated in the Companies Act of 2013, “subject to the provisions of any other law for the time being in force, a foreign company may with the Reserve Bank of India’s prior approval, merge into a company registered under this Act or vice versa”.

• A foreign corporation may merge into an Indian business incorporated under this Act or the other way around, with the Reserve Bank of India’s prior consent. 

• After receiving the Reserve Bank of India’s prior clearance and according to the rules in sections 230 to 232 of the Act, a foreign company formed outside India may merge with an Indian firm. 

• After getting the Reserve Bank of India’s prior clearance and according to the regulations and provisions of sections 230 to 232 of the Act, a corporation may merge with a foreign company formed in any of the jurisdictions listed in Annexure B.

• The transferee company must ensure that the valuation is carried out by valuers who are members of a recognised professional body in the transferee company’s jurisdiction and that it complies with generally accepted accounting and valuation principles. The application presented to the Reserve Bank of India for seeking its approval under clause (a) of this sub-rule shall include a declaration to this effect.

What are the benefits of international Mergers and Acquisitions?

Despite the numerous difficulties that can arise in a cross-border transaction, it is a tool that promotes business expansion and raises shareholder value. Access to new markets and clients is made simple by cross-border M&A. The following are a few advantages of cross-border business: 

• More quickly than if a company decide to launch a new business, the company can expand into new markets.
• A company might expand gradually by incorporating a new business into the organisation.
• The company may increase brand recognition by going global and focusing on the target market.
• A company can eliminate an international competitor by acquiring its company.

Different factors influence cross-border M&A. These factors primarily involve the need for diversification and market saturation or slowdown in core areas. Regulatory uncertainty in domestic markets, high repatriation costs for earnings earned abroad, technology, and productivity increase are further significant factors. 

By increasing revenues, an acquisition in a new market can aid businesses in becoming more cost-effective. In addition, new markets offer a new client base and support scaling more quickly (scale efficiencies). Additionally, businesses may benefit from gaining access to fresh talents, expanding their distribution channels, or acquiring cutting-edge product technology.

What disadvantages are there to a cross-border M&A?

These are the likely difficulties you will encounter if you are thinking of expanding the business abroad:

• Some nations may restrict takeovers in specific industries because they want to restrict foreign investment in such areas.
• For various reasons, such as linguistic barriers or difficult access to market information, you might be unable to obtain trustworthy information about the target.
• Complex red tape, including disclosure and reporting obligations, could be understood and followed.
• Local tax laws may be complicated.
• You might not be familiar with the legal procedures involved, and consulting an expert can be expensive.

Legal Issues in Cross-Border Mergers and Acquisitions

The process for cross-border M&As is highly desirable and occurs on a worldwide level. The difficulties encountered will not be the same as those in domestic transactions. Legal ramifications, cultural differences, customer likes and preferences changes, etc., could make these cross-border transactions challenging. Due diligence must be conducted at every cross-border merger or acquisition stage to ensure and avoid issues. The following are the difficulties that cross-border mergers and acquisitions face:

Reforms Are Needed for Regulatory Compliance – India’s corporate governance is relatively challenging in international M&A deals. After liberalisation, Indian regulators pushed through a number of rather extensive corporate governance reforms that assisted companies in luring foreign investment. However, the role that these reforms play in facilitating outbound M&A is generally unstudied. It makes cross-border mergers and acquisitions more problematic.

Legal Concerns and Gaps – The first issue is pretty obvious. There may be numerous inconsistencies in the compliance laws of the relevant jurisdictions. Not every nation even gives cross-border mergers formal status. They are subject to a variety of legal and regulatory constraints. This deters many businesses from choosing such transactions and frequently results in international businesses pulling out of merger and acquisition agreements.

Concern about Stamp Duty – In mergers and acquisitions, stamp duty is an important aspect to consider. It generates revenue for public exchanges. The asset transfer document is subject to stamp duty, which varies from state to state. Therefore, a foreign company will be compelled to pay taxes in India regardless of whether it merges with an Indian company, a subsidiary of an Indian company, or a subsidiary outside of India. In this sense, it appears that the stamp laws are unclear. It needs to be reviewed once more for a better understanding of cross-border Mergers and Acquisitions.

Due Diligence – Due diligence is the key element of a Mergers and Acquisitions transaction. Due diligence is a procedure that aids in verifying, investigating, and gathering the necessary facts and information in order to help parties close a deal. As a result of the due diligence procedure, a deal’s structure and conditions may change. A detailed analysis gives a complete history of any risks and opportunities that might arise in the trade. The buyer must take full advantage of this process to thoroughly investigate the target company and carry out crucial acquisition-related tasks. Due diligence is essential to avoiding the problems associated with international mergers and acquisitions.

Tax Considerations – Tax laws are essential and basic components of legislation from the standpoint of cross-borderMergers and Acquisitions. India’s legal framework for corporate consolidations consists of numerous statutory provisions for tax advantages and tax neutrality for particular sorts of reorganisations. Reviewing the provisions of the Indian Income Tax Act, 1961^[1], with relation to mergers, demergers, capital gains, setoff, etc., is necessary during the M&A process. The Double Taxation Avoidance Agreement (DTAA) is essential. The tax shall be calculated in accordance with either the ordinary Act provisions or the DTAA when assets are transferred between a transferor and a transferee firm, depending on which is more advantageous for enterprises.

The Incompetent Competition Act, 2000 – The Act prohibits enterprises that are merging from abusing their dominant position. Due to the “Combination” laws’ threshold requirements on assets and turnover, which restrict how broadly the law may be applied, businesses must adhere to them while engaging in cross-border transactions. The Competition Act forbids companies from entering into agreements that will have a negative impact on competition in the relevant Indian market.

Political and Cultural differences – The political environment between India and other nations significantly impacts cross-border mergers and acquisitions in the defence and other security-related sectors. Cultural variations across nations present a variety of risks to successful cross-border mergers and acquisitions. Foreign businesses entering India are failing because they are unable to adjust to cultural differences.

Conclusion

Cross-border mergers and acquisitions present many difficulties. In this era of globalisation, economies’ technological, economic, political, and cultural integration is progressing. As a result, legal frameworks everywhere in the globe are changing to reflect this tendency. When these concerns are examined, it may become clear that the proposed merger and acquisition are incompatible, in which case it would be advisable to postpone the deal. Therefore, it is advised to exercise caution to avoid legal problems in international mergers and acquisitions.

Read our Article: Mergers And Acquisitions in the Banking Sector of India