A merger or acquisition (M&A) can happen across the border. Entrepreneurs often opt for growth and multiplying benefits. These benefits can be monetary gains or economies of scale, integrating a variety of products, access to resources, and winning a monopoly in the market.
But, cross-border mergers and acquisitions are risky. Before understanding how and what top legal risks are, let’s discover what it is.
Cross Border Merger and Acquisition
Typically, the integration of two or more business entities forms a new institution, which can be a merger or acquisition. With the setup of a new entity, the target company loses its original identity. A cross-border M&A deal refers to incorporating a target company in another country. Simply put, it involves the union of businesses located in different countries.
The problem arises when it comes to interacting with the legal system of various countries. For compliance, it’s necessary.
Here, we would discuss the topmost concerns related to cross-border mergers and acquisitions.
Top Concerns for Mergers and Acquisitions
The list of these concerns can be endless. But here, we would focus on the most significant concerns associated with M&A opportunities.
When the acquirer takes charge of the target company, it is called a cross-border deal. This change of control can be risky because it involves the merger of assets. Even, its operations are executed under the leadership of a new entrepreneur. So, it’s a new experience for the entire workforce, which may not be ready to interact or adapt to its company culture. As a result, the attrition rate can spike. Controlling it can be a big challenge, which would certainly impact the production, and furthermore, the revenue of the company.
In addition, the variation in customer tastes or preferences may make the condition severe for the acquirer. The transactions may decline. That’s why it’s a big risk. Here, due diligence can prove a true saviour. So, it’s a must-to-follow exercise at every step.
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Regulatory Compliance Lacking Reforms
There can be a big difference in the regulators and corporate governance reforms. Typically, these reforms attract businesses to come and invest a part of their capital. If these reforms or laws are clearly defined, only those who agree would invest. It certainly attracts more foreign currency because of that investment.
On the flip side, unclear government reforms or lenient reforms attract more foreign investors. It may be just because the country is weak in defining clear policies. But here, the role of these reforms is uncertain. If you consider their roles in relation to outbound mergers & acquisitions, their leverages are largely unexplored. This is where the concern arises.
Stamp duty refers to a legal tax, which is paid in full when you sell or purchase a property. It can be a crucial concern because the state or town makes money via this duty. However, it may vary from state to state or city. Since it is used for the transfer of assets, it becomes compulsory for a foreign firm that merges with or becomes a subsidiary outside the country to pay this duty (which is actually a tax). Sometimes, the stamp laws may not be clear, which often requires clarity. Unless you check it, it’s hard to avoid legal issues in the future.
From the perspective of compliance, taxation laws are really significant. They are the fundamental blocks of income tax or company laws. There are some statutory provisions regarding tax breaks and tax neutrality. The acquirer must tap them, which are differentiated as per line of businesses. You cannot skip them, as practicing them can push you to pay penalties for breaching the provisions of the Income Tax Act with regard to mergers, demergers, capital gains, setoffs, etc.
Besides, you can avoid the conflicts of double taxation for doing business in two different countries. Here, certain agreements like the Double Taxation Avoidance Agreement (DTAA) should be known. With this knowledge, assessing tax becomes easier. It is simply because you know the agreements whose provisions are applied when assets are transferred between a transferor and a transferee company. Thereby, you may decide if it would be advantageous or not.
Act for Incompetent Competition
Some countries have laws to prevent such mergers that happen from abusing their dominating position. During discovering any M&A deal, entrepreneurs must comply with the “merger regulations in cross-border transactions”. Such regulations set the limit for assets and turnovers, which prohibit the application of such laws. In the nutshell, the Competition Act saves businesses from signing such deals that can adversely impact competition within specific (relevant) market dimensions.
Due diligence is an integral part of M&A transactions. This is basically helpful in confirming, discovering opportunities, and acquiring relevant facts or details about both parties to close the deal. However, a trustworthy deal-discovery platform can make it easier. Finding these details can lead to its restructuring or redefining its terms of transactions. This happens because due diligence helps in getting deep into insights into the opportunity, which reveals all risks, possibilities, and opportunities that can be there. Therefore, the buy-side company ought to put effort into examining the liabilities, documentation, and other aspects of the target firm. This action ensures actions that are essential from the perspective of acquisition. But doing it all is itself a challenge.
The aforementioned challenges clearly state that cross-border mergers and acquisitions are not easy. There are a ton of hassles, which can be associated with technology, economics, politics, cultural integration of economies, etc. The governing laws prevent such hassles around the world. You need to look into and address these challenges. A thorough revision of these matters can reveal untapped dark sides, which may reveal that the deal is incompatible. In all, looking into these aspects can help in going ahead or calling off the transaction.
Looking into legal aspects before mergers and acquisitions is a must. This practice can help you to discover up and downsides during due diligence, incompetency, tax-based challenges, regulatory compliance issues, and more.