Effect and Challenges of Cross-Border Mergers & Acquisitions
The globalization of the world economy has increased the opportunities for business organizations to expand by entering new markets. International business transactions have been affected by technological developments and changing political, social, economic, and legal environments.
Mergers and acquisitions are one of the most common forms of strategic international business transactions. M&A activity has been increasing over the past years as foreign firms transition into new markets by acquiring local firms and vice versa.
Mergers between firms from different countries can bring about various issues. There are cultural differences between employees, language barriers, different work styles, tax laws, and many more aspects to consider.
Furthermore, when a company acquires another company located in a different country, they will face challenges like currency exchange rates and logistics for items being shipped overseas.
With these factors in mind, this article will discuss the challenges you can expect during these transactions and their effects on your business.
When attempting to do business in another country, you’ll first need to understand the political atmosphere of that government.
Because governments can directly affect how a business is run, you should research the international political climate. What is the current economic situation in that part of the world? Is there any history of hostility towards particular industries or companies doing business within their countries? Is there generally positive political sentiment towards foreign investment?
By reaching out to a third-party specialist, you can learn more about the political customs in another country and plan to create a business model that’s both ethical and legal in that region.
That way, you can be sure you’re operating a legitimate business without fear of legal and political correction, as many countries work significantly different from the United States.
U.S. Law Compliance
In the United States, it’s essential to consider how a merger or acquisition will affect compliance.
A merger conducted in another country could violate similar antitrust laws in yours, even if the two don’t “touch” directly.
Compliance with U.S. law is critical when doing business overseas (as it is here at home). Any international acquisition or merger should be analyzed from a U.S. legal perspective. Ensure that your company will not be exposed to any potential liability under the Foreign Corrupt Practices Act, anti-boycott provisions, and other international and U.S. laws, including those dealing with the protection of private information and export controls.
Doing business without these considerations could lead to fines and penalties down the line.
This is just one example of the issue companies might face during mergers & acquisitions. In addition, there are many others, including issues related to tax law and other regulations from both countries involved in this cross-border activity which needs particular attention for transactions outside your borders.
Cultural & Communication Barriers
Cross-border M&A transactions often come with cultural and communication barriers.
Unfortunately, these challenges can be crippling to your company’s success as they may hinder employees from different cultures from working together productively.
For example, in a merger or acquisition between two different countries that speak other languages, there could be issues related to translating documents onto paper, affecting day-to-day operations of any business function requiring written documentation.
The potential language barrier within a company after this type of transaction could also make it difficult for workers who need information translated into their native tongue when they cannot read another language fluently enough without translation services.
These logistical difficulties will likely require more time and energy on behalf of those spearheading an M&A transaction.
U.S. Attorney-Client Privilege
U.S. Attorney-Client privilege applies to cross-border M&A transactions as well, but the scope of that protection may not be what you expect.
Suppose a U.S.-based company acquires an international firm and employees are located in different countries on either side of this transaction. In that case, there could potentially be some limitations put into place when it comes to attorney-client confidentiality for workers abroad who were employed by the foreign company before this merger or acquisition took place.
To ensure these individuals receive the complete legal protection they need from both companies involved in the merger or acquisition, specific information related to their work may have restrictions under law enforcement authority no matter the jurisdiction.
Employment & Labor
Another thing to consider when merging or acquiring another company is how the changes in employment and labor laws will affect your employees.
If you are the buyer in a cross-border acquisition, you’ll need to ensure that your company is operating within the laws of each country. Can employees from both countries legally work for your company? Do they have permission to live and work abroad? Will there be any tax implications or restrictions on relocating their home country assets (i.e., life insurance policies, retirement funds)?
You may be able to take on additional staff with this new acquisition. Still, you’ll need to ensure that your employees’ work visas are up to date. An issue could arise if they’re from outside the U.S. require approval by immigration authorities.
Tax & Accounting Challenges
Mergers and acquisitions can also bring with them new tax and accounting challenges. Accounting and tax considerations can be different when dealing with a merger or acquisition outside your home country. For example, if you buy an American company with assets in Britain, how will those assets (and their management) be handled? You need to understand these tax and accounting issues before making any international cross-border mergers and acquisitions.
This includes changes to company ownership or classification, which could be something you need to address for your business operations to run smoothly.
For example, suppose a U.S.-based corporation acquires a foreign entity that operates globally but has employees who reside outside of our country’s borders. In that case, there are some things you will need to take into consideration, such as what type of entity they should become under IRS regulations when filing their taxes here at home (C-Corp vs. S-Corp).
Antitrust & Anti-Competition Issues
Antitrust and anti-competition issues can also arise during a merger or acquisition.
This could be something to consider if you’re thinking about acquiring another company in the same industry, which would make it difficult for them to compete with you when they were just doing business on their own before this transaction took place.
For example, one country may have more lenient enforcement of antitrust law. Another might have stricter oversight of these types of activities. Various possible law interpretations of competition rules should be carefully considered.
Due diligence is a crucial component when it comes to completing this type of transaction.
This includes getting an in-depth understanding of the company you’re purchasing and how they operate on a day-to-day basis. Take the time to research and talk to your attorneys before committing. This will minimize any possible issues in the future.
Contact Us Today!
Navigating the troubling waters of an M&A transaction can be extremely challenging for all parties involved. If you need a trusted partner in your corner, contact us today to speak to a member of our team.