A merger or an acquisition is a great way to leverage value from your business. Whether you’re wanting to scale and grow, cut costs, gain access to new markets or just absorb a competitor, M&A is the tool of choice for entrepreneurs.
For those companies wanting to expand overseas or acquire a company that’s not located in the UK, a cross border M&A may provide a straightforward answer. However, while cross border M&A’s remain popular, there are challenges involved in these kinds of deals, notably legal/regulatory issues, and taxation complexity.
What are the advantages of cross border M&A?
According to this article from Deloitte, these are the principal benefits that can be achieved from cross border M&A:
- Quicker time to market and access to new markets
- Ability to scale through acquisition
- Expanding brand recognition in new territories
- Absorbing a competitor
What are the disadvantages of a cross border M&A?
In terms of general issues that arise in the cross border M&A context, the principal challenges according to Deloitte are market assessment, regulatory complexity, cultural and tax issues. More specifically, they identify the following challenges that arise in the typical cross border deal:
- The country in which the target is located may impose caps on foreign investment in certain sectors.
- It may be difficult to obtain reliable information about the target.
- There may be disclosure and reporting requirements to be untangled and complied with.
- Tax structures may be complex.
- Legal processes can be complicated and different from those in the home country.
- Employment law may be more stringent and there may be extensive obligations to consult with unions or work councils.
What are the current challenges relating to cross border M&A?
The most pressing challenge for UK companies seeking to merge with or acquire foreign entities is Brexit and, indirectly, the effect of COVID-19.
Additionally, the trade difficulties between the United States and China are significant because of new legislation that has an impact on M&A transactions, and the ripple effect into other markets such as those in Europe, Latin America and Canada.
The net effect of these political crosswinds is that transactions may increase in cost and length, with some countries taking a more protectionist approach. For example, governments may require greater oversight and scrutiny of M&A deals with foreign entities and impose additional regulation and approvals. And certain governments such as the US have reformed tax laws such that the landscape for M&A deals has changed substantially.
What’s critically important is to plan ahead and get specialist legal and tax advisors involved at an early stage so that they can investigate the legal issues and hopefully seek creative ways to mitigate or resolve these.
The legal challenges you can expect in a cross border deal
Legal, political and regulatory challenges often have a critical effect on M&A that take place across borders, so engaging a specialist team of corporate solicitors at an early stage is of the utmost importance.
Here are some of the main challenges you can expect to encounter:
- A more complex and therefore costly due diligence procedure.
- More nuanced negotiations arising from possible cultural differences and approaches.
- The possible need for regulatory approval to proceed with the deal, for example, because of competition law and/or anti-trust concerns.
- A potential conflict between the respective countries’ regulatory and/or taxation regimes.
- The length and expense of compliance with the target’s regulatory regime.
- A clash of employment laws, and more stringent employment laws in the target’s country, with the potential for difficulties to arise in harmonising employment contracts.
- The need for extensive consultation with employees.
- Political challenges in the target company’s jurisdiction, and the potential for government interference.
- National or local challenge from politicians if the target provides an essential public service or a substantial number of jobs in a particular region that could complicate or scupper the deal.
- A different legal landscape in the target country that could increase operating costs such that the acquisition might not be profitable in the long run.
The impact of Brexit on cross border deals
If you’re planning a merger with a country that’s a member of the European Union, the relevant legislation that will govern the deal is, at present, the Companies (Cross-Border Mergers) Regulations 2007 (the CBMR). The CBMR provides that a UK company can merge with another European Economic Area state country using the process described that simplifies the transaction. Now that the UK has left the EU, we don’t currently know what procedure might supersede or replace the CBMR, and at present this legislation can be used until the end of the transition period (31 December 2020).
The cross-border merger process under the CBMR provides that, once the merger is completed:
- The assets and liabilities of the target pass automatically to the acquirer
- The target entity will be dissolved
The advantage of this procedure is that assets and liabilities of whatever nature, even if they can’t be clearly identified, will automatically transfer without a complicated and costly transfer process, and there is no need to engage in a complex liquidation or strike-off procedure in respect of the target.
Under the CBMR, there are three types of cross border merger:
- Merger by absorption. This is where one EEA member state country absorbs another, where the companies are each members of a group.
- Merger by absorption of a wholly owned subsidiary with its parent, where the subsidiary is wholly owned by its parent, and where there’s one UK and one EEA company.
- Merger by forming a new company.
The CBMR can be used for both private and public companies and can also be used by LLPs. The UK Takeover Code may also apply.
Cross border merger process
To effect a merger under the CBMR, this is the process you’ll follow:
- A set of draft merger terms and a directors report will be prepared, and these must contain certain information required by the CBMR, such as financial and corporate details, the grounds for the merger in legal and economic terms, and a description of the likely effect on employees and creditors. These merger terms will need to be translated into both relevant languages, and you may need to attach a set of accounts.
- You and the target then apply to courts of your respective countries for a pre-merger certificate, in which you state that you’ve completed the necessary steps for the merger to take place. Creditors then have two months to object to the merger. After that, the courts will decide whether to grant permission for the merger to go ahead. You may need a shareholder meeting to approve the merger, and you may also need to consult with employees.
- Once you’ve each obtained your pre-merger certificates, you must both apply to the UK court (if your UK company is the buyer) for a final approval. If this is granted, then the merger will take place on a specified date, the assets and liabilities of the target will transfer, and that company will cease to exist.
It will normally take around 6 months to complete a transaction under the CBMR, but this can be longer if you need to consult with employees.
While the timing to complete a cross-border merger will depend on the EEA jurisdiction involved, 4-6 months should be allowed to complete the process, although it can take longer where an employee consultation process is required.
For more answers to commonly asked questions and advice on cross border mergers and acquisitions, consult our corporate solicitors. If you’re considering a cross border merger with an EEA country, we recommend that you act without delay, given the new deadline.