A transaction involving two or more companies from different countries is known as a cross-border merger & acquisition It’s also known as an international merger and acquisition. In this type of deal, the holding and the assets of different entities are combined to form a new entity. After that, the domestic firm transfers its all control to the foreign company. As a result, ownership of assets and activities shifts from a domestic firm to a foreign one, with the former becoming an affiliate of the latter.
TYPES OF CROSS-BORDER MERGERS-
- Inbound mergers
The foreign corporation merges with or buys shares in an Indian company in this technique. Daiichi’s acquisition of Ranbaxy is an example of an inward merger.
- Outbound mergers
An Indian corporation combines with or buys shares in a foreign company using this strategy. Tata Metal’s acquisition of Corus is an example of an outward merger
MOTIVES BEHIND CROSS-BORDER MERGER-
- Easy to enter a foreign market-
Acquisitions, as opposed to new business, allow a company to join a new market more quickly. It is believed that establishing a worldwide organization and a competitive presence is costly, complicated, and time-consuming because of cultural differences and various business methods. In this regard, cross-border mergers and acquisitions save a lot of time.
- Increase market power-
When a corporation acquires: (a) a competitor in the same industry (b) a supplier or distributor, or (c) a business in a strongly connected industry, cross-border acquisitions are utilized to increase market power. If a firm exists in a highly concentrated market with few competitors, merging through horizontal integration could give it an even more market presence.
- Access to new resources and technologies, as well as their acquisition-
When an established overseas company is acquired by another company, giving the buyer access to resources like patented technology, superior management and marketing skills, and special government regulations that prevent competitors from entering the market.
Diversification is a technique for business expansion, and it has been identified as the most common motivation for cross-border mergers. International mergers are said to have assisted businesses in lowering the costs and risks associated with entering new foreign markets in addition to giving them access to important resources.
Synergies are created by merging operations and activities previously conducted separately by two organizations, such as marketing and research and development. M&As can boost the capacity of a firm and potential to cut costs through economies of scale.
CHALLENGES OF A CROSS-BORDER M&A-
- Foreign investment caps in some areas may be imposed by the country where the target is situated.
- Obtaining reliable information about the target may be tough.
- Tax systems can be cumbersome.
- Legal procedures differ from those in the home country and can be complicated.
- There may be more rigorous employment laws in place, as well as broad duties to interact with unions or work councils.
MODE OF ACQUISITION-
An acquisition might take the shape of a stock purchase, an asset purchase, or a control acquisition. In most cases, an acquisition entails the purchase of a company’s business. It is up to the acquirer to determine whether the acquisition should be of stock or assets. The decision is usually made based on the target company’s financial situation regarding its liabilities. In an asset acquisition, the acquirer chooses to buy all of the target company’s assets but not its liabilities. On other hand, in share acquisition, the acquirer buys the target company’s ownership and inherits both its assets and liabilities.
APPLICABLE INDIAN LAWS-
The Companies Act-
Provisions for mergers and acquisitions are found in the Companies Act of 2013. It also addresses connected subjects including compromises, reorganizations, and creditor agreements, and it is relevant when structuring a private equity deal.
Competition act, 2002-
The Indian government enacted the Competition Act, of 2002 (the “CA”), which aims to foster healthy competition in India by outlawing business practices that have a significant negative impact on competition in Indian markets. The CA established a quasi-judicial agency known as the Competition Commission of India (the “CCI”) for this purpose, which has to take timely measures to promote competition advocacy, raise awareness, and give training on competition concerns.
The Tax Laws-
The Income Tax Act of 1961 governs and supervises mergers and acquisitions, two significant business activities (the “IT Act“). According to the IT Act, if the merging firm possessed an industrial activity, a hotel, or a ship, the assessment of the combined company may include the operating losses and depreciation of the merging company; For a minimum, continuous period of five years from the date of the merger, the merged company retains at least three-fourths of the book value of the combining company’s fixed assets, and the merged company maintains the combining company’s operations for at least five years.
Foreign Exchange Management Act-
The Foreign Exchange Management Regulations, 2000, contain the “FEMA regulations“, Once a court has approved a merger, demerger, or amalgamation scheme, the transferee company (whether the survivor or a new company) is allowed to issue shares to the transferor company shareholders who are based outside India, subject to the condition that the percentage of non-resident holdings in the company does not exceed the limits set by the Reserve Bank of India or the prescribed sectoral ceiling.
Securities Laws of India
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, govern takeovers and acquisitions in India. These rules aim to control the entire acquisition and takeover process, based on the principles of transparency.
WHY CROSS-BORDERM&A DEALS FAIL-
Every business has a black-and-white site. When it comes to showing a transaction, the corporation puts forward the brighter side quickly, but the darker side takes longer. There’s a potential that the purchasing company has hidden secrets, such as concealed debts or financial loss. Even during the due diligence process, these points are not provided.
INCOMPLETE FINANCIAL INFORMATION-
Many businesses have released false financial statements to persuade potential buyers. The seller frequently reports inaccurate financial statistics and for future projects, strategies would be devised. When the merger’s foundation is weak, the merger is certain to fail.
LIMITED OWNER INVOLVEMENT-
Merger failure can be caused by a lack of owner involvement or a limited role played by the owner. In most cases, the company’s owner should be an active member who participates in all decision-making processes. The owner’s job is to strategize, structure, and advise the members about the company’s operations. When the owner is not actively involved, he loses some influence over the company’s operations.
NO DUE DILIGENCE-
Most businesses, particularly purchasers, like to go through a due diligence process to learn everything there is to know about the seller. There are times when the due diligence procedure is disregarded and the agreement is broken. At different times, there are long-term implications. The buyer company is unfamiliar with the opposing company’s functioning structure, legal structure, internal management, and so on, which could result in consequences and confusion once the transaction is completed.
It is critical to bind a merger to the regulatory structure in place in the country. To enter into a merger, a legal framework must be followed. If there is any sloppiness, the entire procedure is nullified.
Cross-border acquisitions have become an increasingly essential strategy for a huge number of companies in a variety of locations throughout the world. However, little research has been conducted on this form of strategic activity. While cross-border mergers and acquisitions have many characteristics with domestic mergers and acquisitions, they also have significant differences. Cross-border mergers and acquisitions offer several different and beneficial options. Because of the unique potential and significant obstacles associated with cross-border acquisitions, as well as their growing importance in the global competitive landscape, more research is needed to comprehend this phenomenon.
Author(s) Name: Sourabh Kumar Singh (Army institute of law, Mohali)
Vincenzo Pisano, ‘The Cross-Border Merger and Acquisition Strategy: A Research Perspective’ (Research gate, July 23, 2003) <https://www.researchgate.net/publication/235302158_The_Cross-Border_Merger_and_Acquisition_Strategy_A_Research_Perspective>accessed 5 August 2022
Sayantan Gupta, ‘Cross-Border Mergers and Acquisitions in India’ (SSRN, October 25, 2008) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1461372> accessed on 10 August 2022
 Companies Act, 2013, ss 230 – 240
 Income Tax Act, 1961, Section 2(1B)
 Foreign Exchange Management Regulations, 2000, Regulation 7 (The FEMA regulations)
Shobhit Seth, ‘Top Reasons Why M&A Deals Fail’, (Investopedia May 25, 2021)
<https://www.investopedia.com/articles/investing/111014/top-reasons-why-ma-deals-fail.asp> accessed on 13 August 2022
Nicolas Coeurdacier, ‘Cross-Border Mergers, and acquisitions Financial and institutional Forces’ (ECB. Europa, March 10, 2009) <https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1018.pdf>accessed on 10 August 2022
G. Shukla, ‘Emerging Trends in Cross-Border Mergers and Their Tax Implications in India: A Critical Appraisal’, (BRICS law journal, 8 November 2021) <https://www.bricslawjournal.com/jour/article/view/453/194> accessed on 15 August 2022