Introduction
Cross-border mergers and acquisitions are a crucial part for economic growth and development of the country. Cross-border mergers and acquisitions means when companies from a different country merge or one company takes over another. In today’s competitive world all the industries are always looking for opportunities to expand their business and cross-border mergers and acquisitions is one of the best ways which provides these opportunities.
With cross-border mergers and acquisitions, companies can diversify, expand markets, have access to a larger consumer base, talent and technologies. However, cross-border mergers and acquisitions is not easy. There are many legal challenges faced by the company when cross-border mergers and acquisitions take place.
Legal framework for cross-border mergers and acquisitions
Companies Act, 2013
The Companies Act, 2013 is the key legislation of corporate regulation in the country. The Act governs the entire process for mergers, amalgamations and demergers. Section 230, 231 and 232 outline the requirements for the company when they are going through mergers and amalgamations. The approval from the National Company Law Tribunal is also required. For example a merger between two huge telecommunication companies – Vodafone and Idea. This merger was done under the compliance of the Companies Act, 2013.
Foreign Exchange Management Act (FEMA)
FEMA oversees all the foreign exchange transactions which happen in India. FEMA plays a crucial role in cross-border mergers and acquisitions as it helps in finding whether the global mergers and acquisitions will happen or not. FEMA also ensures that all prescribed rules and regulations are followed for foreign exchange transactions.
Securities and Exchange Board of India (SEBI)
SEBI helps in regulating the securities market in the country. This also includes the shares of the listed companies who have gone cross-border merger and acquisitions. There are many compulsory requirements laid by SEBI like requirements of open offer, disclosures etc to ensure the interests of all companies are protected.
Legal challenges in cross-border mergers and acquisitions
Let’s take a look at some of the legal challenges which are faced during cross-border mergers and acquisitions in india:
Legal and regulatory compliance
All the countries have their own set of legal and regulatory compliances like different limits for foreign investments, competitions laws, company laws etc. At the time of cross-border mergers and acquisitions, it is vital to navigate the multiple and often conflicting legal regulations. It takes a lot of time and money when it comes to obtaining the approvals from banks, industry authorities etc. if there are any errors in the documents it can lead to cancellation or stalling of merger and acquisitions deals. To avoid this challenge it is crucial to work under the guidance of a legal expert, plan everything in advance and stay updated.
Taxation and transaction structuring
Taxation plays a key role in cross-border mergers and acquisitions. A well detailed and thorough planning is required or else the company can end up paying a lot of taxes. There are many other rules related to internal transfer, audits etc which are to be dealt with utmost care to ensure that the company does not make any loss. Taxes on interest, dividends or royalties of anything also affects many other aspects.
Cultural, operational, and labor integration
When a merger or acquisitions takes place the cultures of the two companies are also blended. It brings two totally different working departments together and this takes detailed planning. Another key aspect to oversee are the labour laws and its related contracts to ensure everything is aligned when the companies merge.
Due diligence
Due diligence is very crucial before cross-border mergers and acquisitions. It’s like doing a deep check on the company before the final deal is closed. In this check the company’s finances, legal issues, contracts, pending legal suits, and other practices are covered. This helps in tackling all the future legal challenges which the company might face after merger or acquisitions.
Information technology and data privacy
The next legal challenge faced during cross-border mergers and acquisitions is related to data privacy and information technology. It is very costly and risky to merge two systems. The company has to ensure that it follows the data protection laws in each country. If any data is mishandled it may lead to legal suits and hefty penalties. It is vital to check the cybersecurity of the company before the cross-border merger or acquisition happens.
Intellectual property (IP) rights
When a cross-border merger or acquisitions is taking place the patents acquired by the company, their trademark and trade secrets hold an important place. It is crucial to discuss and include in the contract whether who will own all the IP rights. Many times this aspect is missed which later causes legal challenges.
Political and economic risks
If there is a change in the rule of government it can potentially lead to the cross-border merger and acquisitions deal falling apart. The economy of the country may weaken or trade tensions can arise. The bans and checks on certain things may also be increased. There can be currency swings or limitations on moving money. So it is vital to observe the economical and political aspect beforehand or the company should have a plan B in case anything happens.
Dispute resolution and governing law
There should be a dispute resolution clause in the mergers and acquisitions contracts. In the majority of the countries the most used dispute resolution methods are mediation and arbitration. There should be a clear mention of which country’s law will be followed in these scenarios.
Recent developments in cross-border mergers and acquisitions
During the recent few years India has become a popular choice of foreign investors. The main hero behind this are the new policies, initiatives, and treaties. The Atma Nirbhar Bharat initiative by the Indian Government was introduced with the motive of easing and improving business India. This has attracted a lot of foreign investors. There have been huge cross-border mergers and acquisitions as a result of this in industries like pharma or technology.
India’s startup ecosystem is currently in its full bloom which has increased global mergers and acquisitions. The Foreign Direct Investment (FDI), the registration process of companies, online and aligned procedures for mergers and acquisitions are all introduced by the government to make business easy for foreign investors. This has provided more opportunities for global mergers and acquisitions.
Suggestions for effective cross-border mergers and acquisitions
For an effective cross-border mergers and acquisitions following steps can be taken:
- The companies must conduct a comprehensive due diligence which would help in identifying legal, financial, and other operational risks.
- The tax planning should also be done in advance to avoid any tax related legal challenges. The company can utilise the benefits of tax treaties and save some money.
- The company can take expert advice and prepare a regulatory strategy. It can engage with all authorities and ensure that all the paperwork is prepared in advance.
- For an effective cross-border merger and acquisition, post merger monitoring is also very crucial. It can help in addressing the problems at the initial stage.
Conclusion
In short, handling cross-border mergers and acquisitions in India have to be planned in detail after careful considerations – especially when it comes to legal rules and regulations. It is very significant to stay updated as laws change frequently. Expanding the business in new countries can open many opportunities for the business. Hence it is important to take advice and guidance from legal experts when cross-border mergers and acquisitions are taking place.
Frequently Asked Questions (FAQs)
What are the advantages of global mergers and acquisitions?
Some of the advantages of global mergers and acquisitions are:
- Diversification
- Market expansion
- Talent & technology acquisition
- Increased synergy
