Cross Border Mergers and Acquisitions

In corporate capital scheme, there are two ways for a company to raise its capital, through loan
and equity. A company can raise its capital by issuing shares on the stock market as the quickest
and easiest ways to finance its operation. With this initial reason and based on economic
perspectives (market mechanisms), further, the concept of merger and acquisitions (Abbreviation
of M&As) is developed.

M&As, in the context of corporate strategy, is an integration of two companies with a certain
mechanism in particular business area that ultimately result in a large capitalization in the market
economy. The goals to be achieved in the implementation of M&A are the availability of
financial aid, other assistances, and to leverage a company's capital in a rapidly growing industry
without having to form a new company from scratch, simply combining two entities to increase
opportunities in the given market.

Theoretically, there are three primary methods of M&As; those were merger, sale of assets, and
tender offer. Merger and Acquisitions are usually simply referred to as merger, the condition or
process in which a company buys another (the target). This condition usually can be done in two
ways, either friendly or hostile. In the former case, the two companies involved in a negotiation
to merger-related matters in terms of the merger itself, in hostile mergers, typically the target
company is unwilling to sell its shares to buyer (bidder), or the target's boards are not known the
purchases process made by other entity, and this process usually more complex and even
involves the proxy which will play a role in purchasing shares or at any even to influence the
shareholders.

Pursuant to article 2:309 BW (Dutch Law), a legal merger is defined as:

“The merger is the juridical (legal) act of two or more legal persons, whereby one acquires the
property, rights and interests and the liabilities of the other by universal succession of title or
whereby a new legal person, formed or incorporated by them jointly by such juridical (legal) act,
acquires their property, rights and interests and the liabilities by general (universal) title.”

According to article above, it says that a merger is the process (universal succession) of
transferring assets and liabilities from one company to another and forming a new legal entity by
legal framework. Legal act refers to the process of M&As usually consists of 6 (six) process,
namely: Meeting of possibly takeover parties, Confidentiality agreement and stand-still
agreement, Letter of Intent, due diligence investigation, the Shares Purchases Negotiating
Agreement (SPA), and Closing meeting. Further, much literature stated in different terminology
for the process related with M&As, but the outcome of the process is relatively similar.

The term of M&As sometime used as a pair word (synonymously), however, basically these two
words have different meaning and purposes. Pure merger is usually performed between two

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companies to form a single new company in which both owners have agreed to jointly develop,
own, and operate the new company. This is called a merger of equals, in which the two
companies generally have the same size, and the existing shares merged into one new share in
the same stock market. For example, the merger between Glaxo Wellcome and SmithKline
Beecham, and ultimately the two companies merged and a new company GlaxoSmithKline was
formed.

However, in practice, merger of equals is rarely going to happen, and during the process, usually
there is a deal between both companies, in which the process of acquiring will be announced as a
merger of equals, instead of the process of acquisition, because of the term of an acquisition
often refers to as negative connotation.

Acquisition is essentially an acquiring of a company by another, where the buyer, based on the
legal point of view, buys shares of the target in a majority amount, as a result the target's shares
will be ceased, and consequently, the buyer takes control of the target's business. In general, the
shares value of the buyer company would lead to an increase in the market trading (leveraged
recapitalizations), even though the process need to be considered with substantial ownership
changes.

Concept of Cross-Border Merger and Acquisitions

A company in one country can be acquired by an entity (another company) from other countries.
The local company can be private, public, or state-owned company. In the event of the merger or
acquisition by foreign investors referred to as cross-border merger and acquisitions will result in
the transfer of control and authority in operating the merged or acquired company.

Assets and liabilities of the two companies from two different countries are combined into a new
legal entity in terms of the merger, while in terms of acquisition, there is a transformation process
of assets and liabilities of local company to foreign company (foreign investor), and
automatically, the local company will be affiliated.

Since the cross border M&As involving two countries, according to the applicable legal
terminology, the state where the origin of the companies that make an acquisition (the acquiring
company) in other countries refer to as the Home Country, while countries where the target
company is situated refers to as the Host Country. The trend of increasing cross border M&A has
accelerated with the globalization of the world economy. Indeed, the 1990s were a “golden
decade” for cross border M&A with a nearly 200 percent jump in the volume of such deals in the
Asia Pacific region. This region was favored for cross border M&A as most countries in this
region were opening up their economies and liberalizing their policies, which provided the much,
needed boost to such deals.

Factors to be considered in Cross Border Mergers and Acquisitions

Having said that, it must be remembered that cross border M&A’s actualize only when there are
incentives to do so. In other words, both the foreign company and the domestic partner must gain

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from the deal as otherwise; eventually the deal would turn sour. Given the fact, that many
domestic firms in many emerging markets overstate their capabilities in order to attract M&A,
the foreign firms have to do their due diligence when considering an M&A deal with a domestic
firm. This is the reason why many foreign firms take the help of management consultancies and
investment banks before they venture into an M&A deal. Apart from this, the foreign firms also
consider the risk factors associated with cross border M&A that is a combination of political risk,
economic risk, social risk, and general risk associated with black swan events. The foreign firms
evaluate potential M&A partners and countries by forming a risk matrix composed of all these
elements and depending upon whether the score is appropriate or not, they decide on the M&A
deal. Third, cross border M&A also needs regulatory approvals as well as political support
because in the absence of such facilitating factors, the deals cannot go through.

The Ministry of Corporate Affairs of the Government of India (“MCA”) by way of a

notification1 has notified Section 234 of the Companies Act, 2013 (“Act”) enabling cross-border
mergers with effect from April 13, 2017. The MCA has also notified the Companies
(Compromises, Arrangement and Amalgamation) Amendment Rules, 2017 (“Amendment”) to
make suitable changes to the Companies (Compromises, Arrangement and Amalgamation)
Rules, 2016 (“Rules”), to operationalize the said provision.

In view of these notifications, an inbound merger (i.e., a merger of a foreign company into an
Indian company with the Indian company as the surviving entity) as well as an outbound merger
(i.e., a merger of an Indian company into a foreign company situated in certain permitted
jurisdictions with such foreign entity as the surviving entity) is now possible. This is of course
subject also to the host jurisdiction of such a foreign company permitting such schemes with an
Indian company. It is important to note that implementation of the provision on cross-border
merger fulfills one of the recommendations of the Expert Committee on Company Law under Dr.
Jamshed J. Irani, which was constituted to suggest corporate law reforms in India.

Such merger will be subject to approval of the Reserve Bank of India (“RBI”), India’s central
bank and administrator of exchange control regulations, and compliance with the provisions of
the Section 230 to 232 of the Act.

Only recently, on December 7, 2016, merger related provisions of the Act (i.e. Sections 230-233,
235-240 of the Act) were made effective which replaced similar provisions of the Companies
Act, 1956 (“1956 Act”). However, Section 234 (which enables cross-border mergers) was not
brought into force. As a result, until now, Indian companies desirous of an outbound cross-border
merger were unable to undertake such a transaction.

WHAT DOES THE NOTIFICATION ENTAIL?

The newly notified Section 234 provides that the provisions of Chapter XV (Compromises,
Arrangements and Amalgamations) of the Act shall apply, mutatis mutandis (with appropriate
changes), to an inbound or outbound cross-border merger. The provision envisages a scheme of
amalgamation providing for, amongst others, payment of consideration, including by way of cash

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or depository receipts or a combination of those. Further, it is important to note that a cross-
border merger may be subject to multiple parallel scrutiny and will have to be approved by the
RBI, the jurisdictional National Company Law Tribunal (“NCLT”), and if applicable the
relevant sectoral regulator in India, and the relevant competent authority(ies) in the foreign
jurisdiction, if necessary in such jurisdiction.

Section 234 also empowers the Central Government to frame rules in consultation with the RBI
to deal with such mergers. In exercise of this power, the MCA has notified the Amendment,
amending the Rules, with effect from April 14, 2017 by inserting a new Rule 25A to
operationalize Section 234. Based on the new Rule 25A, the following are the mandated steps for
Indian companies involved in a cross-border merger:

▪ Prior approval of RBI for undertaking any cross-border merger;

▪ Surviving entity to ensure valuation by a valuer who is a member of a recognized

professional body in its jurisdiction and in accordance with internationally accepted
principles on accounting and valuation. In this regard, a declaration is required to be
submitted by the transferee company along with the application to RBI for obtaining its
approval for the merger;

▪ Procedure as specified in Section 230-232 of the Act to be undertaken (similar to as

applicable to a domestic merger);

▪ In case of outbound cross-border merger, foreign entity involved should be from a

permitted jurisdiction.

Further, any cross-border merger under Section 234 will have to comply with the requirements as
laid down in Sections 230-232 (requirements applicable to domestic transactions). This will
include procedural requirements such as, for e.g., filing an application before the jurisdictional
NCLT, conducting meeting of shareholders/creditors, notification to income tax authorities, other
sectoral regulators etc.5, publication of advertisement in respect of the merger, etc.

Additionally, in line with Section 234, the Amendment requires that any further amendment to
the relevant rules on cross-border merger should be undertaken only after consultation with RBI.

Some Recent Examples of Cross Border M&A

If we take some recent examples of cross border M&A deals, the Jet-Etihad deal and the Air Asia
deal in the aviation sector in India are good examples of how cross border M&A deals need to be
evaluated against the points mentioned previously. For instance, there is both support and
resistance to the Jet-Etihad deal as well as for the Air Asia deal. This has made other foreign
companies weary of entering India. On the other hand, if we consider the cross border M&A
deals in the reverse direction i.e. from emerging markets to the developed world, the Chinese oil
major SNOPC had to encounter stiff resistance from the US Senate because of security concerns
and potential issues with ownership patterns. Of course, the recent Unilever takeover of its

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subsidiaries around the world is an example of a successful deal. The clear implications of these
successes as well as failures is that there must be a process that is structured and standardized in
each country and by each firm on how to approach the M&A deal. Otherwise, there are chances
of hostility creeping into the process and vitiating the economic atmosphere for all stakeholders.
More than this, the due diligence must be carried out before any such deals are considered.

Conclusion

The notification of the provision on cross-border merger and the Amendment is a welcome
development. Although there remain a few issues as highlighted above, cross-border mergers
will present an additional structuring avenue for undertaking corporate transactions in an
efficient and flexible manner. Further, such a move should improve the accessibility of
companies to access capital in overseas market. However, considering the involvement of
multiple agencies and laws (primarily RBI and NCLT in India, and the competent authority, if
applicable, and the laws of the relevant foreign jurisdiction), the timelines and implementation
will have to be calibrated in order to achieve the commercial objective.

Internationally, cross-border mergers have remained a relatively uncommon phenomenon;

however, they have received some traction in multilateral single markets like the European
Union, where a formal legal framework for undertaking cross-border mergers was introduced in
20059 and migration of companies is possible due to recognition within the legal and tax
framework. Based on the learnings in the European Union, it appears to be a success although
certain scope of improvement exists.10 It is important that MCA and RBI analyze the available
knowledge internationally on implementation of legal framework for regulating cross-border
mergers and fine-tune the domestic legal framework. One can be cautiously optimistic that cross-
border mergers may turn-out to be an efficiency enhancing avenue for corporates in India.