Cross- border Merger and Acquisition refers to a merger of two companies located in different countries resulting in a third company. The companies having a merger can either be a private or public or a state- owned company. The cross- border results in the transfer of control to the merged or acquired company whereas on the other hand, in cross- border acquisition, there is transformation of assets and liabilities of domestic company to the foreign company. The laws governing the cross- border merger and acquisitions in India are:-

• Companies Act, 2013,
• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011,
• Foreign Exchange Management (Cross Border Merger) Regulations, 2018,
• Competition Act, 2002,
• Insolvency & Bankruptcy Code, 2016,
• Income Tax Act, 2016,
• The Department of Industrial Policy and Promotion (“DIPP”),
• Transfer of Property Act, 1882,
• Indian Stamp Act, 1899,
• Foreign Exchange Management Act, 1999 (“FEMA”), and
• IFRS 3 Business Combinations.

Issue to consider while Cross- border Merger and Acquisition

• Political Intervention- The intervention of various governmental provisions and political laws during or after the transactions has been serious issues which companies may go through.
• Financial Markets Instability- Cross- border transactions are affected due to economic instability in various ways. For instance, economic instability may put pressure on the companies in such transactions to restructuring process, both internally and externally.
• Intellectual property regime in target country
• During cross-border M&A transactions, Intellectual Property (“IP”) due diligence is often brought up either too late in the process to be effective or not at all, although the due diligence process shall be conducted as early as possible.
• Furthermore, there may be disputes which may lead to exposure problems. In the course of pending litigations, third party claims, licencing agreement obligations, existing liens or encumbrances, security measures regarding data protection, etc. may disable the buyer company to exercise the power of disposition. Such cross-border transactions which involve IP have a higher risk of exposure to allegations of infringement. 
• Cultural Compatibility
  • The culture of the target company indicates the culture of the market being entered. Therefore, one way to gain an understanding of the market is by analysing or conducting due diligence of the company being acquired or merged with. 
  • There are various factors which define the culture integration such as awareness of partner’s corporate and national culture, leadership & leadership support, sufficiency and consistency of communication, etc. Culture clashes are already a given in any international or cross-border M&A. They could make or break the entire M&A process. Thus, it is important to pay as much attention to culture as you do to other aspects of M&A.
• Tax considerations

Various countries’ tax reform’s fundamental changes to the taxation of multinational entities could particularly affect planning for cross-border deals. For instance: 

Tax losses cannot be passed on the buyer of a business. The difference between proceeds and tax value is usually taxable to sellers where the value of assets (some of them) realized exceed their tax values. 

• Key debt considerations
  • In India, the Reserve Bank of India (“RBI”) regulates the cross-border debt raised by Indian companies. Indian companies can access foreign debt through the external commercial borrowings route, or by issuing debt capital to foreign portfolio investors. This method is typically known as direct offshore funding. 
  • The firms with higher leverage are less likely to acquire foreign targets, whereas firms with lower leverage tend to be targets acquired by foreign firms. 
  • Firms adjust their capital structure after the acquisition by issuing more equity if they were overleveraged, or issuing more debt if they were underleveraged before the acquisition.
• Undisclosed liabilities
  • The acquirer company often insists on a wide No Undisclosed Liabilities representation because from the point of view of the buyer, the seller shall bear at least certain risk of undisclosed or unknown liabilities. 
  • The acquiree may argue that if the purchase agreement covers in detail all aspects of the target’s business, then why is broader representation needed or appropriate. 
  • Soft issues related to target company 
• Lack of proper communication channels
  • Communication is also required to enhance knowledge transfer and to help the integration of merging corporate structures and cultures. Lack of communication may lead to culture clash, sometimes termed ‘merger syndrome’ and subsequently M&A failure.
  • Continuous rather than intermittent fragmented communications are likely to help build a sense of trust, particularly if they are interactive.
  • Strategic responsibility is a powerful idea and something that is fabricated or sabotaged during the M&A cycle. Communications may encourage obligation to the procedure of the merger going advances and impact representatives emphatically whenever conveyed in an ideal, nonstop and intelligent style.
• Other issues and Challenges
  • Tax policy if not stable and listed out clearly will scare away overseas acquirer.
  • Currency fluctuations keep changing the valuation for acquirer (NRI) in the home country.
  • Antitrust issues make obtaining antitrust approvals a key part of the overall transaction process for many Merger and Acquisition transactions.
  • The complexity of the legal system where a lack of information about a legal system could lead to deadlock and a partial understanding of all parameters poses a risk of failure.

Analysis of Etihad-Jet Airway deal

In 2013, Etihad Airways PJSC acquired a stake of 24% in Jet Airways (India) Ltd. for $379 million (INR 2,060 crores). This cross- border acquisition set a stage for the Mumbai-based airline (Jet Airways) to become the first beneficiary of a policy change that allowed foreign airlines to invest in domestic airlines company. The board of Jet Airways is controlled by Mr Naresh Goyal, a Non-ResidentIndian (NRI), who eventually approved the sale by way of preferential allotment of 27 million shares to Etihad at a price not less than INR 754.74 per share.

Legal, regulatory & tax considerations

1. Investment in Indian airlines is permitted up to 49%, however, Etihad purchased only 24% stake in Jet Airways. This is because under the Takeover Code if an acquirer acquires 25% or more of the voting power of the target company, it is required to make an open offer for a minimum of additional 26% shares from public shareholders. Hence, Etihad’s only 24% stake in Jet is to avoid the open offer obligations under the code.
2. Any investment into a domestic airline shall be first approved by the Foreign Investment Promotion Board (FIFB). Therefore, Jet had filed for approval from the FIPB for the preferential allotment of shares to Etihad.
3. As no open offer was made by Etihad as per Regulation 3(1) and 4 of the Takeover Code, the deal was inspected by Securities and Exchange Board of India (SEBI) and finally on May 2014, SEBI held that an open offer would not be required under the Takeover Code. 
4. Competition Commission of India (CCI) approval: The issue that arose before the CCI was whether the Deal will cause an appreciable adverse effect on competition in India under Section 3 of the Competition Act. CCI with a 2:1 majority approved the combination, which crossed the threshold limit under Section 5 of the Competition Act. 
5. Under the FDI policy, any proposal with total equity inflow of more than INR 12,000 million requires the approval of the Cabinet Committee on Economic Affairs (“CCEA”). Thus, the arrangement got approved by CCEA. 
6. The entities also took into consideration the Bilateral Air Services Agreement (“BASA”) which was executed between India and UAE in 2013. 
7. Tax implications: The issuance of shares was done by way of preferential allotment; hence, there was no tax incidence on the parties. 

Therefore, the companies took into consideration all the above issues/challenges that were required to structure such a cross-border deal. 

Suggestions

The following are the possible suggestions to consider while structuring cross-border M&A deals:

1. There should be comprehensive Due-Diligence which may often involve a simple investigation or human resource due-diligence. Thus, reasonable steps shall be taken not only by the acquirer but also by the acquiree. 
2. The team set for cultural integration purposes in cross border mergers and acquisitions will have to ensure that new business culture is developed that will be inclusive of all the aspects as previously held by the cultures of the involved businesses.
3. The monopoly controlling policies shall be fully understood wherever there is a task to initiate a cross-border M&A exercise.
4. All the specifications and guidelines on how and when tax should be remitted to authorities once the cross-border merger and acquisition venture has been initiated must be fully understood.
5. There should be a win-win strategy in a cross-border M&A transaction and both the companies shall be benefited with the same.
6. There may be strong communication or town hall meetings which can be fundamental to success. 
7. The acquirer shall strive to understand where the key and operational decision making in the target lies, i.e, whether at the promotional level or management level.
8. Flexible organizational structures are essential to ensure the ability to adopt cultural, social and other factors that vary across markets.

Conclusion

Besides the above issues or challenges during a cross-border M&A transaction or before structuring such a deal, another impactful issue which is to be considered is the on-going COVID-19 pandemic. 

The current pandemic situation has changed all the aspects of a corporate transaction in every country and every state. However, the M&A activity has not come to a complete standstill. During the ongoing lockdown period, buyers should maintain focus on due diligence that can be achieved remotely, and sellers should ensure that they both set up and maintain an easy to use and comprehensive virtual data room. 

The current crisis represents an opportunity for the buyers to renegotiate the purchase price down, even late in the transaction timetable, and shall aim to shift the payment obligation as late as possible whether by way of earn-outs or other purchase price adjustments to counteract any forecast reduction in profits of the seller in the period following completion. The global business lockdown has created opportunities for Indian firms waiting with cash eyeing quality international assets. The telecommunication sector grew 220x in comparison to 2019 and the deal value increased by 19% primarily due to the deal in which Facebook acquired Jio Platforms from Reliance Industries for $5.73 billion. In the first half of the calendar year 2020, out of all deal categories like inbound, outbound and domestic, the greatest M&A deal activity was witnessed in the domestic category which recorded 179 deals compared to 38 inbound and 24 outbound deals. 

In China, the situation was different because, in the first five months of 2020,Chinese outbound M&A activity collapsed compared to previous years.

The number of newly announced transactions dropped from around 90 per month in the 2016-2018 period to barely 30 per month between January-May 2020. Compared to the same period in 2019, new outbound deal-making by Chinese firms is down 71% in volume and 88% in value terms. Average monthly transaction values dropped from a peak of more than $20 billion in 2016 to $12 in 2018 and a mere $1.3 billion in 2020. So far this year, all companies in China combined have spent around the same amount on overseas acquisitions as HNA Group did in 2016 on one transaction – its purchase of a 25% stake in Hilton Worldwide Holdings ($6.5 billion).

This article is an attempt to analyse the issues while structuring a cross-border M&A. These points underscore how important it is for the domestic party and the international party to consider these issues while making a cross-border deal.