Planning and agility key to sealing cross-border deals

By Manish Gupta and Alok Sonker, Link Legal India Law Services
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Overseas mergers and acquisitions (M&A) and investment deals are highly susceptible to risks and failures, for a variety of reasons. While planning remains key, the secret sauce for a successful overseas deal is agility, i.e. flexible implementation of strategies and the ability to react quickly to unforeseen issues.

Manish Gupta Partner Link Legal India Law Services
Manish Gupta
Partner
Link Legal India Law Services

Indian entities looking to invest in overseas markets should consider the issues and points set out below.

Investment practices

As the first step, Indian entities need to understand the target market well. This would include a study of prevalent market practices and regulatory barriers. In addition, other soft issues, such as communication expectations and language, are also extremely important. Careful planning, early on-boarding of advisers (legal/financial) and continuous discussions with the advisers during the gestation period generally ensure seamless completion of a negotiated deal and discourage competitors in a bid situation.

Structuring

An Indian entity or its advisers should have sophisticated knowledge of the following, to enjoy more credibility in overseas markets:

  • Prevalent structures and the extent of flexibility possible, taking into account legal concerns associated with the various structures, such as full management control, no or low management control, joint ventures or bid with a financial partner (with a right to increase ownership).
  • Taxation-related factors such as tax-efficient strategy, deductibility of acquisition costs (including interest), and withholding tax affect payments towards interest, dividends, royalties, etc. Indian entities should also get expert views on anti-avoidance, anti-inversion rules, etc., in the investment jurisdiction.
  • General regulatory issues or approvals, such as foreign investments, antitrust, securities market, etc., as well as relevant sector-specific approvals. This will ensure that time and delivery expectations are set at the outset and reduce friction between the parties. In addition, depending on the target market, trade unions may be a big regulatory obstacle and may need to be factored in.
  • Relevant disclosure requirements (primarily for public market deals), including whether the requirements are time based (as prevalent in India) or based on the judgement and analysis of the acquirer (as prevalent in US and other developed markets).
Alok Sonker Associate partner Link Legal India Law Services
Alok Sonker
Associate partner
Link Legal India Law Services

Due diligence

Blanket application of Indian diligence standards or methodology to a cross-border transaction may result in delays, is likely to be perceived as a lack of sophistication on part of the Indian entity and may also increase cost (particularly in developed markets). It is crucial to use customized due diligence methods considering the target’s legal regime, which gains more significance in a bid situation, given the constraints. In addition, Indian entities should ensure inclusion of issues surrounding applicable foreign exchange regime, anti-bribery and corruption laws, data privacy laws and protection, and sector-specific requirements, other than the general indemnity, warranties and insurance, to protect any downside.

Corporate/securities laws and governance

In an acquisition scenario, an Indian entity should develop understanding of local corporate/securities laws, particularly the issues relating to internal control, independence of directors, related-party transactions or loans/services to and from the directors, to ensure compliance and compatibility with Indian laws, to the extent relevant.

Collaboration/integration and crisis preparedness

Keeping a cordial relationship with existing/continuing management, involving an integration expert for bridging cultural differences or respecting historic business methods and practices, to the extent they are not detrimental to the business, may avoid conflict between the existing management and new owners. In addition, the Indian entity should have a disaster management plan, which often includes an internal team, external public relations agency and a legal adviser, which can quickly defuse an escalating situation.

While cross-border M&A and investment is a highly lucrative strategy for creating value, diversification, and increasing expertise, such deals remain susceptible to failure. Thus, the following are key to successful completion of a cross-border deal and integration of business: (i) initial and continuing attention to detail; (ii) realistic assessment of risks and benefits; (iii) bridging financial, regulatory and legal conflict within the jurisdictions involved, and (iv) assembling a formidable team of financial, legal and cultural integration professionals.

Manish Gupta is a partner and Alok Sonker is an associate partner at Link Legal India Law Services.

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