Cross - Border Mergers, Acquisitions, and Valuation

The Driving Force: Shareholder Value Creation

What is the true motivation for cross-border mergers and acquisitions? The answer is the traditional one: to build shareholder value.

In many of the developed country markets today the growth potential for earnings in the traditional business lines of the firm is limited. Competition is fierce, margins are under continual pressure. Senior Management of the firm cannot ignore these pressures. Indeed they must continually undertake activities to promote brand, decrease inventory investments, increase customer focus and satisfaction, streamline supply chains, and manage all other drivers of value in global business.   Nevertheless, they must also look outward to build value. In contrast to the fighting and scraping for market shares and profits in traditional domestic markets, the global marketplace offers greater growth potential –greater “bang for the buck”. Why are the mergers and takeovers happening at such a rapid pace” The history of the world, my sweet, is who gets eaten and who gets to eat.”

Cross Border Mergers and Acquisition Drivers: There are a variety of drivers and motivating factors at play in the M& A world.

1. Expansion is one of the primary reasons to cross the borders as the national limits fail to provide growth opportunities. Becoming larger, and then reaping the benefits of size in competition and negotiation.

2. Gaining market power and dominance i.e. to gain monopoly. The Company which has been acquired by the acquirer is always a Company which is trembling financially but had something to offer to the acquiring Company.

3. Achieving synergies in local/global operation and across industries and gaining access to strategic proprietor assets are other major reasons for Cross Border merger and acquisition.

Globalization is a key to help in the rapidity of the Merger and Acquisition as it is globalization that integrates world economies together and many nations have opened themselves, by making laws and regulations that attract new companies to come into the country to easily perform the operation of Merger & Acquisition. In this context let us have a Bird’s eye view of the prevalent International Merger laws.

European Merger Law

European Union has many countries and each country has its own company law provisions relating to amalgamation or merger. However all European countries are required to adhere to the competitive regulation-Council Regulation (EC No. 139/2004 as modified from time to time. Following are the broad features of the Council Regulation relating to concentration and the Company Law provisions of the Companies Act, 2006 as applicable to England & Wales.

The EU Commission welcome corporate reorganization so along as these are “in line with the requirements of dynamic competition and capable of increasing the competitiveness of European industry, improving the conditions of growth and raising the standard of living in the Community”. Hence any reorganization which may significantly impede effective competition in the common market or in a substantial part of it will be regulated.   

It is the duty of both the parties to the merger or acquisition of joint control to notify the European Commission and seek its approval for the merger or change of control.

Part 26 of Companies Act, 2006 deals with arrangements and reconstructions including amalgamations while Part 27 deals with mergers and divisions of public companies. The provisions of section 895 are very similar to section 390 of Companies Act, 1956 in that the definition of the term arrangement is verbatim the same as in section 390 (b) of Companies Act,1956 and that of a Company is similar to section 390(a) i.e. it includes a Company capable of being wound up under the Act. In addition to the above, one needs to be aware of the provisions of the Takeover Regulations in the UK before venturing to acquire control of any listed Company.

 CYPRUS LAW

 Since Cyprus is now a part of the EU, mergers must be in conformity with the EU Merger Regulations. Consequently the Companies Act, 1951 was amended to include the provisions relating to merger of public Companies in section 201A to section 201X. The existing provisions of section 198 to 201 govern the amalgamation of private Companies .These sections also apply to merger of public Companies in addition to sections 201A to 201X.The law relating to compromise with creditors & members and amalgamation are very similar to the Indian & English laws.

PEOPLE’S REPUBLIC OF CHINA LAW

People’s Republic of China (China) is now open for foreign investment. In accordance with the existing laws of China ,the establishment of enterprises with foreign investment is subject to project-by-project examination ,approval and registration by the government.

After the initial project application is approved in writing by the examination and ratification authorities, the investors may submit a formal application, with articles of corporation and other required documents. On receipt of the Approval certificate they can proceed with the registration formalities by presenting the Approval certificate.

In accordance with China’s existing laws the State adopts a classification administration system for foreign investment. The provinces, municipalities, autonomous regions and cities listed as independent units in state plans have the authority to examine and approve investment less than US $30 million in areas encouraged and permitted by the State. When an investment exceeds the amount ,the project application & feasibility study report shall be examined and approved by the State Department Planning Commission or the State Economic & Trade Commission while the contract and articles of cooperation shall be examined and approved by the Ministry of Foreign Trade & Economic cooperation

Government Agencies play an important role in Chinese M& A transactions .Despite the recent relaxation of foreign investment restrictions, pervasive approval requirements remain a distinctive feature of M& A transactions in China. Foreign investors should however apply for approval from the Ministry of Commerce (MOC) if their purchases of domestic companies affect national economic security, take place in key sectors or cause a transfer of the operating rights of famous domestic brands.

Merger Laws of United States of America (USA)

The Merger laws of USA mainly consist of anti-trust or anti monopoly laws and the Regulation under the law relating to securities. The first anti-trust law was passed as far back as 1890 called the Sherman Act. This Act is still the basic law affecting mergers if such mergers result in a monopoly or fetters competition. It is said that this Act is a “comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade.” Later in 1914 two additional antitrust laws viz. the Federal Trade Commission Act & the Clayton Act were passed.

Thus today effectively the three Acts viz, The Sherman Act, 1890, The Federal Trade Commission Act, 1914 & The   Clayton Act, 1915 govern all the antitrust or antimonopoly law (competition law) which any acquisition of merger should conform to.

The Federal Trade Commission & the Department of Justice are the two federal agencies charged with the responsibility of enforcing the antitrust laws. The Clayton Act prohibits any merger or acquisition of stock or assets “where in any line of commerce or in any actively affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition or to tend to create a monopoly .

The Cross-Border Acquisition Process

The process of acquiring an enterprise anywhere in the world has three common elements:

1)     Identification and valuation of the target, 2) Completion of the ownership change transaction-the tender, and 3) management of the post acquisition transition

Exhibit

Strategy and Management	Stage 1 Identification and Valuation of the target	Stage 2 Completion of the ownership change transaction (the tender)	Stage 3 Management of the post acquisition transition; Integration of business ad culture
Financial Analysis and Strategy	Valuation and negotiation	Financial Settlement and compensation	Rationalization of operations ; integration of financial goals; achieving synergies

Strategy

Stage I: Identification and valuation: Identification of potential acquisition targets requires a well-defined corporate strategy and focus

Identification: The identification of the target market typically precedes the identification of the target firm. Entering a highly developed market offers the widest choice of publicly traded firms with relatively well-defined markets and publicly disclosed financial and operational data. Emerging markets frequently require the services of acquisition specialists who can aid in the identification of firms-generally privately held or government owned firms-that not only possess promising market prospects but may be amenable to suitors.

Valuation: Once identification has been completed, the process of valuing the target begins. A variety of valuation techniques are widely used in global business today each with its relative merits. In addition to the fundamental methodologies of discounted cash flow(DCF) and multiples (earnings and cash flow) ,there are also a variety of industry-specific measures that focus on the most significant elements of value in business lines.

 ¾     The DCF  (Discounted Cash Flow) approach to valuation calculates the value of the enterprise as the present value of all future free cash flows less the cash flows due creditors and minority shareholders.

 ¾     The P/E ratio is an indication of what the market is willing to pay for a currency unit of earnings. It is also an indication of how secure the market ‘s perception is about the future earnings of the firm and its riskiness.

 ¾     The market-to-book ratio (M/B) is a method of valuing a firm on he basis of what the market believes the firm is worth over and above its capital ,its original capital investment, and subsequent retained earnings. Like the P/E Ratio, the magnitude of the M/B ratio as compared with its major competitors, reflects the market’s perception of the quality of the firm’s earnings, management, and general strategic opportunities. 

The completion of a variety of alternative valuations for the target firm aids not only in gaining a more complete picture of what price must be paid to complete the transaction ,but also in determining whether the price is attractive,

Stage 2: Settlement of the Transaction

The term settlement is actually misleading. Once an acquisition target has been identified and valued, the process of gaining approval from the management and ownership of the target, getting approvals from the regulatory bodies, and finally determining method of compensation can be time-consuming and complex.

Tender process: The acquiring firm will approach the management of the target company and attempt to convince them of the business logic of the acquisition. If the target’s management is supportive they may then recommend to stockholders that they accept the offer of the acquiring company. One problem that does occasionally surface at this stage is that influential shareholders may object to the offer, either in principle or based on price and therefore feel that management is not taking appropriate steps to protect and build their shareholder value.

The process takes on a different dynamic when the acquisition is not supported by target company management-the so-called hostile takeover. The acquiring company may choose to pursue the acquisition without the target’s support and go directly to the target shareholders. In this case the tender offer is made public, although the target company may openly recommend that its shareholders reject  the offer. During this confrontational process it is upto the Board of the target company to continue to take actions consistent with protecting the rights of the shareholders.

Regulatory Approval: The proposed acquisition of Honeywell International by General Electric (USA) in 2001 was something of a watershed event in the field of regulatory approval. General Electric’s acquisition of Honeywell had been approved by management, ownership and U.S. regulatory bodies. The final stage was the approval of European Union antitrust regulators. After a continuing series of demands by the EU that specific businesses within the combined companies be sold off to reduce anticompetitive effects, the CEO Jack Welch withdrew the request for acquisition approval, arguing that the liquidations would destroy most of the value-enhancing benefits of he acquisition. The acquisition was canceled. This case must have far-reaching effect on cross-border M&A for years to come, as the power of regulatory authorities within strong economic zones like the EU to block the combination of two MNEs, may foretell a change in regulatory strength and breadth.

Compensation Settlement

The last act within this second stage of cross-border acquisition is the payment to shareholders of the target company. The shareholders of the target Company are typically paid either in shares of the acquiring company or in cash. If a share exchange occurs the stockholder is typically not taxed. A variety of factors go into the determination of type of settlement. The availability of cash, the size of acquisition, the friendliness of the takeover, and the relative valuations of both the acquiring firm and target firm affect the decision. One of the most destructive forces that sometimes arise at this stage is regulatory delay and its impact on the share prices of the two firms. If the regulatory body approval drags out over time, the possibility of a drop in share price increases and can change the attractiveness of the share swap.

One of the major drivers of cross-border M& A growth in 1999 and 2000 was the lofty levels of equity values. But 2001-2004 was different. Falling equity process in most of the major equity markets of the world made acquisitions much more costly prospects than in the previous years. Shareholders of target firms were no longer interested in being paid in shares, demanding cash payments at significant premiums.

With slower economies and lower growth prospects, even the banking sectors were increasingly critical of grandiose promises of M& A synergies and benefits in general. As banks and other potential cash providers looked upon potential M& A deals with increasing scrutiny, sources off debt for cash payments also became scarce. The financing for settlement made cross-border M& A activity much tougher to complete.

Stage 3: Post acquisition Management

Post acquisition Management is probably the most critical of the three stages in determining an acquisition’s success or failure. If the post transaction is not managed effectively, the entire return on investment is squandered. Post acquisition management is the stage in which the motivations for the transaction must be realized.  Those reasons, such as more effective management, synergies arising from the new combination, or the injection of capital at a cost and availability previously out of the reach of the acquisition target, must be effectively implemented after the transaction. The biggest problem, however, is nearly always melding corporate cultures. As in the case of merger of British Petroleum (United Kingdom) and Amoco (United States), a clash of corporate cultures and personalities pose both the biggest risk and the biggest potential gain from cross-border mergers and acquisitions. Although not readily measurable like price/earnings ratio or share price premiums, in the end the value is either gained or lost in the hearts and minds of the stakeholders.

The complexities of post acquisition management are related to the creation of value. Cross Border mergers, acquisitions and strategic alliances, all face similar challenges: They must value the target enterprise on the basis of its projected performance in its market. This process of enterprise valuation combines elements of strategy, management and finance.

The Legal and institutional issues regarding corporate governance and shareholder rights as they apply to cross-border acquisitions

One of the most controversial issues in shareholder rights is at what point in the accumulation of shares is the bidder required to make all shareholders a tender offer. For example, a bidder may slowly accumulate shares of a target Company by gradually buying shares on the open market over time. Theoretically, this share accumulation could continue until the bidder had 1) the single largest block of shares among all individual shareholders 2) majority control; or 3) all the shares outright

The market for corporate control has been the subject of enormous debate in recent years. The regulatory approach taken towards the market for corporate control varies widely across  countries.

Regulation of Cross-border takeovers

 It consists of the following elements:

1. Creeping Tenders: Many countries prohibit creeping tenders, the secret accumulation of relatively small blocks of stock, privately or in the open market, in a preliminary move towards a public bid. This prohibition is intended to promote public disclosure of bids for takeovers.

2. Mandatory Offers: Many countries require that the bidder make a full public tender offer to all shareholders when a certain threshold of ownership has been reached. This requirement is intended to extend the opportunity to all shareholders to sell their shares at a tender price to a bidder gaining control, rather than have the bidder pay the tender price only to those shareholders it needs to garner control.

3. Timing of Takeovers: A wide spectrum of different time frames applies to takeover bids. This is typically the time period over which the bid must be left open for each individual tender ,withdrawal of tender ,or revision of tender. The purpose of establishing a time frame is to allow bidders and targets alike to consider all potential offers and for information regarding the tender to reach all potential shareholders.

4. Withdrawal Rights: Most countries allow any security to be withdrawn as long as the bid is open. The right of revocation is to protect the shareholders against tendering their shares early at lower prices than may be garnered by waiting for a latter offer by any competing bidder.

5. Market Purchases during bid: Some countries allow the bidder to purchase shares in the open market during the public tender with public disclosure. Many countries however prohibit purchases absolutely during this period. This prohibition is to protect against any potential market manipulation by either bidder or target during the tender period.

6.     Market Sales during bid: Some countries prohibit the sale of the target company’s shares by the bidder during the tender offer period. This rule is to protect against any potential market manipulation by either bidder or target during the tender period.  

7. Limitation of Defenses: Some jurisdictions limit the defensive tactics a target  may take during a public tender offer. In many countries this limitation has not been stated in law but has been refined through shareholder law suits and other court rulings subsequent to measures taken by target company management to frustrate bidders. It is intended to protect the shareholders against management taking defensive measures that are not in the best interests of shareholders.

8. Price Integration: Most countries require that the highest price paid to any shareholder for their shares be paid to all shareholders tendering their shares during the public tender. Although intended in principle to guarantee equity in price offerings, this is a highly complex provision in many countries that allow two-tier bids.

9. Target Responses: Many countries require that the Board of Directors of the target company make a public statement regarding their position on a public tender offer within a time frame following the tender. This requirement is intended to disclose the target’s opinions and attitudes toward the tender to the existing shareholders. The complexity of issues over minority shareholder rights and the constant changes in regulatory policy continue globally.

Vodafone Hostile Acquisition of Mannesmann:

Once a firm has gained majority control of a target, many countries require that the remaining minority shareholders tender their shares. This requirement is to prevent minority shareholders from hindering the decision-making process of the owners. Vodafone’s acquisition of Mannesmann of Germany in 2000 is a case in example. By 2001 Vodafone had gained ownership of 99.4 % of Mannesmann’s outstanding shares. Since minority shareholders holding a total of 7000 shares refused to sell and were not required to sell under German law even though the majority of the shareholders had decided to sell the firm, Vodafone was required to continue to hold stockholder’s meetings in Germany for their benefit. Under German Corporate Governance laws, because this was a cross-border acquisition, minority shareholders could not be forced to tender their shares. If, however, the acquisition had been domestic, these same minority shareholders would have been required to sell their shares at the publicly tendered price.

 The Vodafone acquisition of Mannesmann marked the first large-scale cross-border hostile takeover in recent times.

What are the challenges in cross-border mergers and acquisitions?

“Marriage of two lame ducks will not give birth to a race horse”

Legal Issues

Despite the rosier environment for foreign buyers, the challenges they face remain considerable. By necessity, cross-border acquisitions implicate multiple legal and regulatory regimes, which in turn require compliance with different rules. Some of those rules may be unique to a jurisdiction or may be incompatible with each other, including with respect to fiduciary duties, securities laws requirements and deal structures. For example, some jurisdictions follow a statutory merger paradigm, while others follow court-mandated schemes of arrangement, and nearly every jurisdiction has its own stock exchange rules, securities laws and corporate law statutes.

Despite some harmonized rules, taxation issues are mainly dealt within national rules and are not always fully clear or exhaustive to ascertain the tax impact of a cross-border merger or acquisition .This uncertainty on tax arrangements sometimes require seeking for special agreements or arrangements from the tax authorities on ad hoc basis, whereas in the case of a domestic deal the process is much more deterministic.

In some cases, there may be discriminatory tax treatments for foreign products or services, i.e. products or services provided from a Member state different from the one where it is sold. Therefore, a cross-border group will be at a disadvantage when trying to centralize the “industrial functions” (e.g. asset management functions) as in the case of overall domestic group. Since the latter may keep all its value chain within the country and still benefit from synergies.

Political considerations, such as competing national security interests as well as differing policies on foreign investment, antitrust and labor and employment priorities, further complicate M&A deals and may result in conflicting requirements. Moreover, overseas protectionism and xenophobia compound execution and integration challenges that already make M&A difficult.

Cultural differences   and the lack of local knowledge to operate in foreign markets and retain local talent decrease the likelihood of success. Inexperience with cross-border investments generally, and with integrating foreign businesses specifically, further decreases the likelihood of success. According to KPMG study ,”83% of all the mergers and acquisitions failed to produce any benefit for the shareholders and over half actually destroyed value.” Interviews of over 100 senior executives involved in these 700 deals over a two year period revealed that the overwhelming cause of failure is the people and the cultural differences. Up to the point in the transaction, where the papers are signed, the merger and acquisition business is predominantly financial valuing of the assets, determining the price and due diligence. Before the ink is dry however this financially driven deal becomes a human transaction filled with emotions and trauma and survival behavior, the non linear, often the irrational world of human beings in the midst of changes. In the case of international mergers and acquisition ,the complexity of these processes is often compounded by the differences in national cultures . A company involved in international merger or acquisition needs to consider these differences right from the design stage if it is to succeed. 

Flowback, Or ‘I Don’t Want Your Stock’: Flowback may be the biggest obstacle to the feasibility of cross-border mergers. Put simply, flowback is the unwillingness of target-company shareholders to hold foreign-domiciled equity of the acquirer. This sentiment is common among indexers and quasi-indexers; if the merged firm will not be indexed in the target’s country; there is little incentive for these investors to hold the shares and a large incentive to sell. Many important stock indices, including the S&P 500, no longer admit foreign-domiciled issuers. Other factors that may trigger flow back include conflict with an investment mandate, if the merger takes the target out of a sector or country; the need to match index weightings; or profit-taking. Determining how much flow back a merger will generate is more art than science. While some will sell, other investors will buy to track weightings and indices in their home country or sector, or just because they find the deal compelling. Whatever the calculation, managing flow back is a critical part of any cross border transaction, because investors in the acquirer’s home country will have to absorb the additional supply. Flow back can depress the acquirer’s share price for a long time.

FACING THE CHALLENGES

How can a foreign buyer improve the likelihood of success for its cross-border deals? With respect to deal execution, the acquirer  should understand the target's goals, even if the acquirer cannot accommodate each of them. All Targets prefer a fast, easy and non-disruptive process, with certainty of closing once the deal is signed, with as much purchase price paid up front in cash, and with limited post-closing obligations. A foreign acquirer can enhance its attractiveness to a target through advanced planning and by presenting itself as an experienced buyer with the ability to complete complex cross-border acquisitions quickly and cleanly. A foreign acquirer therefore needs to fully understand how the M&A process will be conducted in the target's home country and should retain sophisticated international advisers to help navigate it through the process. Advanced planning and a detailed review of the target will also help to increase the likelihood that the deal will be successful after closing. Careful due diligence should reveal danger areas that will require post-closing attention, especially if the target business is a carve-out of a larger business of the seller. Due diligence will also help the buyer to better understand the financial statements of the target business, assess its working capital needs, identify cash trapped in offshore subsidiaries, reconcile accounting differences, and facilitate preparation of combined financials. Lawyers, bankers, accountants and other advisors are critical to the due diligence process.

In addition, the foreign acquirer should, as early as possible:

·    develop working relationships with regulatory authorities in its home country and obtain "outbound" approvals,

·    thoroughly understand the regulatory environment of the target's home country (including "inbound" foreign investment rules, securities laws and disclosure obligations), and reconcile it to the requirements of the regulatory regime in its home country,

·    give careful thought to potential deal structures in order to anticipate issues, including tax issues and antitrust considerations,

·    involve financing sources early in the process, if acquisition financing will be needed,

·    consider collaboration with target management, private equity groups, and other partners, and  develop a public relations strategy and, in certain circumstances, retain a public relations firm to manage public opinion for particularly sensitive transactions.

Foreign acquirers should also conceive a well-thought out integration plan that is sensitive to cultural issues and local practice and that involves local management. As part of the development of the integration plan, the foreign acquirer must work to thoroughly understand the local market as well as the relevant stakeholders in the target business, including government and regulatory authorities, employees, suppliers, customers and the local community.

Successfully completing cross-border M&A transactions has never been easy, and it is even more difficult under current economic, geopolitical and financial market conditions. Nevertheless, cross-border M&A activity will continue to increase as buyers and sellers become more comfortable and experienced at working through the issues that have traditionally made such deals complicated and risky, and the global financial crisis will likely accelerate this process by enticing foreign buyers with discount prices. For a number of reasons, Chinese companies, in particular, may lead this next wave of cross-border deals, and, with careful advanced planning, they and other foreign buyers can mitigate the risks and challenges for cross-border acquisitions and improve the likelihood of success.

LEGAL DUE-DILIGENCE-AN IMPORTANT ASPECT OF CROSS -BORDER MERGERS

 

Due Diligence would help to:

a)     build up a picture of the legal and administrative affairs of the target

b)     identify any problems affecting the target

c) review the legal and regulatory environment in which the target operates to check on compliance ,particularly if the acquirer is going into a new and unfamiliar sector of business

d)     highlight the risks associated with the target company

e)     know the business so that the acquirer can hit the floor running post completion

 

Cross Border ‘Trade Company’ jurisdiction due diligence

 

a) Understand the law across the border : For a transaction involving trading companies operating across borders, a transaction lawyer should consult competent and efficient local counsel. If you are dealing with common law jurisdictions, the advantage is that you speak the same legal language. However there are in all cases, without exception, significant local differences, particularly in the realm of tax/revenue ,employment, land law and sector regulation and consequently lawyers from one jurisdiction should be wary of assuming they have knowledge of the laws of another jurisdiction to any significant extent.

 

b)   Obtain quality of information: The transaction lawyer needs to ensure that comprehensive information requests are made, and given the quirky nature of each jurisdiction, it is recommended that input is obtained from local counsel at the outset to ensure that all of the right questions are asked in the information request that is submitted to the other side.

If possible, a transaction lawyer should obtain a certificate of good standing from the authorities. The acquirer should apart from the legal front, should carry out a financial due diligence, with particular emphasis on accounting and tax. A transaction lawyer needs to know whether there are any issues arising from the manner in which the target company prepares its accounts. Some questionswhich have to be asked-

 §    Is it subject to specific financial reporting standards?

§    What are the principle tax risk areas?

§    Is there a transfer pricing problem?

§    Have the revenue authorities carried out any investigation?

§    What did it reveal?

Additionally are there any specific regulatory issues that could affect your transaction, particularly where there is a change of control, such as in the realm of competition or other sector specific areas of regulation? If the acquirer deal with a listed group then it has to take into account the capital markets regulations.

Another issue to consider is the consent of leaders to a change of control in the borrower entity. Conversely perhaps the discharge of securities is what is required if the incoming parties are to make their own banking arrangements for the target post closing.

The increasingly sophisticated realm of environment law is another area to be looked into by the acquirer. The acquirer needs to understand the environmental risks that it may be assuming and looking forward for its mitigation.

 

Other areas to be examined

i. Corporate status: What is the existence and standing of the Company ? If it is not compliant, could it be struck off or should proceedings be commenced to ’wind up’.

ii. Capital structure: Consider all loan/share capital/rights.

iii. Share ownership : Does the other shareholder have pre-emption rights if you are not buying 100% of an existing company ?IS there a shareholders’ agreement between those shareholders to which you are to be bound?

iv. Group Structure: Understanding group structure is necessary to make

 sure that the target Company owns the right assets.

v. Agreements/commitments: What has the Company committed to? Has there been a change of control i.e. will the change in ownership  trigger specific rights of termination/duration of the contract /termination ?

vi. Asset only deals: If the deal is an asset only deal,is it possible for the acquirer to not be liable for the excluded liabilities or is there a situation under the local law where liabilities are deemed to pass in any event or only for certain periods of time in certain given situations.

vii. Litigation: Are there any actual or threatened disputes/court cases/assessment of merit of the claims. If they do exist the how best to deal with these risk contractually.

vii. Human Resources: What are the terms of employment? How does the local law affect a Company’s ability to terminate with/without cause? What are the consequences of contractual notice periods? How enforceable are restrictive covenants in the jurisdiction e.g. accrued leave, terminal dues etc.

 

Cross Border ‘Holding Company’ Jurisdiction Due Diligence

There are challenges of due diligence to be carried out in a jurisdiction which merely acts as the home for the holding company and where no trading takes place. If a company really is just a holding Company then we will need local counsel to guide through investigating the target company, obtaining a certificate of good standing, and probably a legal opinion too. There may be regulatory approvals required for the transaction. It is recommended that the existing structure is placed under the microscope from a tax planning perspective. This assessment would consider issues such as:

§    How and where are the flows of revenues around the group taxed?

§    Is there a more efficient structure that could be put in place?

§    What are the tax consequences of collapsing an existing structure/

§    Is there any double taxation treaty relief

§    Is there a transfer pricing risk

§    Does the group have a transfer pricing policy that will withstand the scrutiny of the revenue authorities

Another important area to consider in cross border transactions is the way the group is managed and controlled. This could give rise to further tax issues. Under laws of the other country, there could be an adverse consequence on for example, a structure that is put in place so that a significant part of the revenue is received in an entity incorporated in a tax efficient jurisdiction, or where effective control is exercised over that entity from another country.

There are other issues that are relevant in the context of a holding company jurisdiction due diligence:

§    Consider carrying out some due diligence into the selling entity; ensure that it is able to sell the shares and that all necessary authorizations have been granted. One may rely on warranties for eliciting comfort in this regard if a firm is dealing with a reputable vendor.

§    Who are the Company directors? If they are representatives of a trust or management company ,on what terms do they operate as such, and are they prepared to continue to do so?

§    If the acquirer is entering a shareholders'  agreement, consider the extent to which it is necessary to have the Articles reflect the agreement between the shareholders agreement word for word rather than just relying on a clause in the shareholders’ agreement which declares that in the case of any inconsistency between the Articles and the shareholders agreement ,the latter prevail.

Cross-Border due diligence undoubtedly present significant challenges. However,provided they are approached in a methodical and considered way , a transaction lawyer should sill be able to ensure that the acquirer is either fully aware of what he is buying and/or has taken appropriate measures to manage any risks.

MARKET SNAPSHOT -Focus on Cross Border Activity

Inbound Transactions

v Sistema, Russian Joint Stock Company’s acquisition of 74% stake in Shyam Telelink-Telecommunications

v French banking major BNP Paribas’s acquisition of 45% stake in financial services firm Sundaram Home Finance for $ 45.81 million

v Standard Chartered Bank bought 49 % stake for $ 34.19 million in UTI Securities and Interpublic Group hiked its stake in Lintas India to 100% for $100 million

v Fursa Mauritius’s acquisition of 42.63% equity in Gayatri Starchkem

v UBS Global Management’s Acquisition of Standard Chartered Asset Management Company for $ 117.78 Million.

v EMC Corporations Acquisition of Valyd Software Pvt. Ltd.

v Orkla’s Acquisition of MTR foods for $ 100 Million.

INDIA INC. GOES GLOBAL

v Tata Steel acquired UK based Corus for $8 billion

v Suzlon Energy Ltd. acquired German firm Repower Systems AG for $1.7 billion

v United Spirits bought Scotch whisky distiller Whyte & Mackay for US$ 1.11 billion

v Hindalco acquired Novelis for $6 billion

v TATA Chemical acquires US based Soda Ash Maker General Industrial Products for $1 billion

v Indian Shipping company Great Offshore acquires UK based Sea Dragon for US $ 1.4 billion

v Essar Energy acquires 50% stake in Kenya Petroleum refineries ltd.

v Banswara Syntex to acquire France firm Carreman Michel Thierry for around US$ 125 million.

Merger & Acquisition (M&A) in Asia

At the beginning of the subprime mortgage crisis in 2007,the global M&A market reached around USD 4trillion with 31,303 deals. In 2008 while the number of deals increased 0.7% to 31,512,the value declined 40.5% to USD2.854 trillion. In 2009,the number of deals and value decreased 11.4% and 57.6% respectively. Asia's M&A  deals increased slightly in number in 2008 after the subprime mortgage crisis,but began to decrease in 2009.In terms of transaction value, M&A's in the Asia Pacific Region has recently showed signs of a rebound.. In the 1^st quarter of 2010,the value of M&A in the region surged 54.8% to USD 84 billion whi;e the number of deals slightly decreased 11.8% to 1709 compared to the same period from the previos year.

Conclusion

Looking back at the 1999-2000 peak, M&A as a percentage of GDP reached its upper limit after 7 years of continuous growth and stagnated for 2 years at 10% to finally collapse and return within 2 years to 4%. In contrast, between 2006 and 2007, whilst M&A was at an all time high level, the same ratio found a new upper limit at 8% and followed the same 2 year high-plateau pattern before suddenly collapsing with the credit crisis in 2008.” …

 “Based on the hypothesis that the M&A/GDP pattern could repeat itself global activity as % of GDP could reach 3.6%, 3.7% & 4.5% in 2009, 2010 and 2011 respectively, mirroring the upturn of 2002, 2003 and 2004. When matched with IMF GDP forecast for the same years this could mean that M&A activity could return to slow growth as early as this year and next and eventually reach US$2,622bn by 2011.”

SUHITA MUKHOPADHYAY, Company Secretary