A merger or an acquisition is a great way to increase the value of your business. Whatever your ambitions – to scale and grow, cut costs, gain access to new markets or absorb a competitor – a merger is the tool of choice for many entrepreneurs.
If you’re looking to expand overseas by acquiring a foreign company, a cross-border M&A may provide a more straightforward answer than setting up in a new territory from scratch. And after Brexit, expanding into Europe can solve some of the challenges involved in trading with our nearest neighbours.
Although cross-border M&As are popular, there are challenges involved, notably legal/regulatory issues and taxation complexity.
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What are the advantages of cross-border M&A?
Here are some of the principal advantages of a cross-border M&A:
- You can reach new markets for your products or services quicker than if you choose to start a new company
- You can grow incrementally by absorbing a new company into your group
- You can grow your brand recognition by expanding overseas and aligning your business with the target
- You can eliminate an overseas competitor by acquiring its business
What are the disadvantages of a cross-border M&A?
If you’re considering expanding overseas, these are the likely challenges you will face:
- Because certain countries seek to limit foreign investment, they may impose limits on takeovers in certain sectors
- You may not be able to get reliable information about the target for a variety of reasons, including language issues or because market data is opaque or hard to get
- There may be tricky red tape involved, including disclosure and reporting
- requirements to be untangled and complied with
- Local tax laws may be complex
- You may be unfamiliar with the legal processes involved and obtaining expert advice can be expensive
- Protections offered to foreign employees may be more stringent than in the UK, and you may have to consult extensively with unions or work councils
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What are the current challenges relating to cross-border M&A?
The current weakness of sterling is probably the most pressing challenge for UK companies seeking to merge with or acquire foreign entities. In addition, the departure of the UK from the EU has meant that the streamlined M&A process available to European-based companies is no longer available.
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. In addition, the war in Ukraine, the related sanctions and inflationary pressures have reduced company margins and harmed global M&A activity.
Political crosswinds have increased the cost and length of corporate transactions, and some countries are taking a more protectionist approach. For example, governments may take a closer look at deals with foreign entities, imposing additional regulations and approvals. And certain governments such as the US have reformed tax laws such that the landscape for M&A deals has substantially changed.
What’s critically important is to plan, and get specialist legal advisors involved at an early stage so that they can seek creative ways to mitigate or resolve any issues.
The legal challenges you can expect in a cross-border deal
Legal, political and regulatory challenges often have a critical effect on cross-border M&A, 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:
- Due diligence is more difficult and expensive
- Cultural differences may lead to more nuanced and lengthier negotiations
- You may need regulatory approval to proceed with the deal, for example, because of competition law and/or anti-trust concerns
- Your target’s regulatory or tax regime may conflict with the UK’s
- There may be a clash of employment laws, and you may find it difficult to harmonise the terms and conditions of foreign employees with UK employees
- You may be challenged, either nationally or locally, by foreign officials, particularly if the target provides an essential public service, or the deal could affect local jobs
- The different legal landscape in the target country may make it more expensive to do business, reducing the attractiveness of the deal
The impact of Brexit on cross-border deals
Before Brexit, the UK takeover code had partial oversight of deals involving EU companies, its jurisdiction being shared with its European counterpart. Post-Brexit, this situation no longer applies unless the target has its place of central management and control in the UK (the residency test).
In addition, the simplified merger regulations available to European companies seeking to merge are no longer available to UK companies.
For more answers to commonly asked questions and advice on cross-border mergers and acquisitions, consult our corporate solicitors. Get in touch on 0800 689 1700, email us at enquiries@haperjames.co.uk, or fill out the short form below with your enquiry.
