CENTRAL UNIVERSITY OF SOUTH BIHAR

SCHOOL OF LAW AND GOVERNANCE

SUBJECT: COMPETITION LAW

PROJECT ON: SIGNIFICANCE OF CROSS-BORDER EFFECT

FOR MERGER & AMALGAMATION: TRENDS & ISSUES

SUBMITTED TO-

DR. S.P SRIVASTAV

FACULTY (PROF.),

SLG CUSB

SUBMITTED BY-
VISHAL RANJAN
B.A. LLB 10TH (SEMESTER)
CUSB1613125059
SESSION: 2016-2021
CONTENT:

Sr TITLE Page
No. No.

1 Acknowledgement 3

2 Research Methodology 4

3 Objectives 4

4 Introduction 5

5 Meaning of cross-border merger and acquisition 5-6

6 Legal Terminology in cross-border merger and acquisition 6

7 Factors to be considered in cross-border merger & acquisition 6

8 Effects of cross-border merger & acquisition 7

9 Issues in cross-border merger & acquisition 7-9

10 Types of cross-border merger and acquisition 9-10

11 Recent examples in cross-border merger and acquisition 10

12 Trends in cross-border merger and acquisition 10-11

13 Law governing cross-border merger & acquisition in India 11-12

14 International Growth in relation with cross-border M&A 12

15 Conclusion 13

16 Bibliography 14

2
 ACKNOWLEDGEMENT

At this point of time I would like to express my gratitude to all those who gave me their support
to complete this project.

I am grateful to my Competition Law teacher who is Dr. S.P Srivastav (Prof.) SLG, for giving
me permission to commence this project in the first instance and to do necessary study and
research. I want to thank law faculty members and other faculty members for all their
professional advice, value added time, effort and enterprise help, support, interest and
valuable hints that encouraged me to go ahead with my project.

I am deeply indebted to my colleagues for their meticulous planning, layout, presentation and
above all for their consideration and time.

My heartfelt appreciation also goes to seniors and my classmate for their stimulating
suggestions and encouragement which helped me at each level of my research and in writing
of this project.

Especially, I would like to give my special thanks to my parents, family members and god
whose patient love enabled me to complete this project in this ongoing pandemic situation in
the world.

I have tried my best to enclose practical approach of Competition Law and also theoretical
approach to my project.

(Signature of the Student)

Vishal Ranjan

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RESEARCH METHODOLOGY

The research is based on Significance of Cross-Border Effect for Merger & Acquisition: Trends
& Issues. Basically the data which has been collected for the research purpose is particularly
of doctrinal in nature. It has been collected from various books, sites, magazines and newspaper
articles. So basically the analysis has been done through case study.

OBJECTIVES OF RESEARCH
❖ To understand the concept of Cross-Border Merger & Acquisition.
❖ To understand the significance of Cross-Border Merger & Acquisition.
❖ To understand the Effect of Cross-Border Merger & Acquisition
❖ To understand the Trends & Issues in Cross-Border Merger & Acquisition.

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INTRODUCTION

Cross-border mergers and acquisitions have shown tremendous growth over time primarily due to
a desire to circumvent tariffs and nontariff barriers arising from arms-length international trade
and taxes; to obtain new options for financing; to access technology; and to distribute research and
development costs over a broader base. Several factors put in place to moderate this growth include
protecting key industries, limiting controlling interest levels, and restricting remittances of profits
and dividends. We need to focuses on cross-border M&A1, and their financial and economic (both
macro and micro) underpinnings, which affect their direction and magnitude. In general terms,
empirical analysis supports the fact that both host countries and the foreign country’s stock and
bond prices are major causal factors that influence cross-border mergers and acquisitions. A
company must have a clear vision and strategy as to why it should expand globally. The due
diligence and analysis that is required will make it easier to find the right M&A target in a foreign
market that matches the buying company’s profile, and one that can be successfully integrated. It’s
common to see companies bring in independent advisors to support M&A activities at this stage,
and even earlier, as these advisors are not tied to the success of the deal and can provide their
expertise throughout the lifecycle.

MEANING OF CROSS-BORDER MERGER & ACQUISITION

A cross-border merger explained in simplistic terms is a merger of two companies which are
located in different countries resulting in a third company. A cross-border merger could involve
an Indian company merging with a foreign company or vice versa. A company in one country can
be acquired by an entity2 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.

Cross-border merger 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 Cross-border acquisition,

1
Merger & Acquisition
2
Another company

5
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.

LEGAL TERMINOLOGY IN CROSS-BORDER MERGER & ACQUISITION

It involves two countries according to the applicable legal terminology: -

A) “Home Country”3.
B) “Host Country”4.

FACTORS TO BE CONSIDERED IN CROSS-BORDER MERGER & ACQUISITION

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

3
The state where the origin of the companies that make an acquisition (the acquiring company) in other countries
4
A country where the target company is situated

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EFFECTS OF CROSS-BORDER MERGER & ACQUISITION

Generally, it has been observed that cross border merger and acquisitions are a restructuring of
industrial assets and production structures on a worldwide basis. It enables the global transfer of
technology, capital, goods and services and integrates for universal networking. Cross-border
M&A’s leads to economies of scale and scope which helps in gaining efficiency. Apart from this
it also benefits the economy such as increased productivity of the host country, increase in
economic growth and development particularly if the policies used by the government are
favorable. Let’s look at those effects in detail:

1. CAPITAL BUILD-UP- Cross-border merger and acquisitions contribute in capital

accumulation on a long-term basis. In order to expand their businesses, it not only
undertakes investment in plants, buildings and equipment’s but also in the intangible assets
such as the technical know-how, skills rather than just the physical part of the capital.
2. EMPLOYMENT CREATION- Sometimes it is seen that the M&A’s that are undertaken
to drive restructuring may lead to downsizing but would lead to employment gains in the
long term. The downsizing is sometimes essential for the continued existence of operations.
When in the long run the businesses expand and becomes a successful it would create new
employment opportunities.
3. TECHNOLOY HANDOVER- When companies across countries come together it
sustains positive effects of transfer of technology, sharing of best management skills and
practices and investment in intangible assets of the host country. This in turn leads to
innovations and has an influence on the operations of the company.

ISSUES IN CROSS-BORDER MERGER & ACQUISITION

Looking at the underlying dynamics cross border merger and acquisitions are quite similar to that
of domestic M&A’s. But because the former is huge and international in nature, they pose certain
unique challenges in terms of different economic, legal and cultural structures. There could be
huge differences in terms of customer’s tastes and preferences, business practices, the culture
which could pose as a huge threat for companies to fulfill their strategic objectives. Let’s discuss
the issues briefly:

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 ➢ POLITICAL CONCERNS: Political scenario could play a key role in cross border
merger and acquisitions, particularly for industries which are politically sensitive such as
defense, security etc. “Not only considering these aspects it is also important to concerns
of the parties like the governmental agencies5, employees, suppliers and all other interested
should be addressed subsequent to the plan of the mergers is known to public. In fact, in
certain cases there could be a requirement of prior notice and discussion with the labor
unions and other concerned parties. It is important to identify and evaluate present or
probable political consequences to avoid any probability of political risk arising.
➢ CULTURAL CHALLENGES: This could pose a huge threat to the success of cross-
border merger and acquisitions. History has seen huge mergers that have failed because of
the cultural issues they have had. When there are cross border transactions there are issues
that arise because of the geographic scope of the deal. Various factors such as differing
cultural backgrounds, language necessities and dissimilar business practices have led to
failed mergers in spite of being in the age where we can instantly communicate. Research
proposes that intercultural disagreement is one of the major pointers of failure in cross-
border merger and acquisition. Hence irrespective of what the objective behind the alliance
is businesses should be well aware of the of the intercultural endangerment and prospects
that come hand in hand with the amalgamation process and prepare their workforce to
manage these issues. In order to deal with these challenges businesses need to invest good
amount of time and effort to be well aware of the local culture with the employees and
other concerned parties. It is better to over communicate and conforming things tirelessly
would be the key.
➢ LEGAL CONSIDERATIONS: Companies wanting to merge cannot overlook the
challenge of meeting the various legal and regulatory issues that they are likely to face.
Various laws in relation to security, corporate and competition law are bound to diverge
from each other. Hence before considering the deal, it is important to review the
employment regulations, antitrust statute and other contractual requirements to be dealt
with. These laws are very much part of both while the deal is under process and also after
the deal has been closed. While undergoing the process of reviewing these concerns it could

5
(federal, state and local)

8
 indicate that the potential merger or acquisition would be totally incompatible and hence it
is recommended to not go ahead with the deal.
➢ TAX & ACCOUNTING CONSIDERATIONS: Tax matters are critical particularly
when it comes to structuring the transactions. The proportion of debt and equity in the
transaction involved would influence the outlay of tax; hence a clear understanding of the
same becomes significant. Another factor to decide whether to structure an asset or a stock
purchase is the issue of transfer taxes. It is very important to alleviate the tax risks.
Countries also follow different accounting policies though the adoption of IFRS6 has
reduced this to an extent; many countries have yet to implement it. If the parties in the
merger are well aware about the financial and accounting terms in the deal, it would aid in
minimizing the confusion.
➢ DUE DILIGENCE: Due diligence forms a very important part of the M&A process. Apart
from the legal, political and regulatory issues we discussed above there are also
infrastructure, currency and other local risks which need thorough appraisal. Due diligence
can affect the terms and conditions under which the M&A transaction would take place,
influence the deal structure, affect the price of the deal. It helps in revealing the danger area
and gives a detailed view of the proposed transactions. There are countless other issues as
every deal has its own favor and differences. But it is of course very important to identify
and tackle those challenges to help close a deal.

TYPES OF CROSS-BORDER MERGER & ACQUISITION

The most popular types of mergers are horizontal, vertical, market extension or
marketing/technology related concentric, product extension, conglomerate, congeneric and
reverse. Recently, the concept of inbound and outbound mergers was also introduced in the
Companies Act, 2013 as part of Section 2347 of the Act.

1. Inbound M&A’s8
In this process foreign company mergers with or acquires an Indian company.

6
International Financial Reporting Standards
7
Merger & Amalgamation of a Company with foreign company
8
In this foreign company mergers with or acquires an Indian company

9
 Example- Daichii Acquiring Ranbaxy
2. Outbound M&A’s9
In this process an Indian company merges with or acquires a foreign company.
Example- Tata steel Acquires Corus

RECENT EXAMPLES OF CROSS-BORDER MERGER & ACQUISITION

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.
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 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 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.

TRENDS IN CROSS-BORDER MERGER & ACQUISITION

In spite of the issue, we have discussed above the number of cross border transactions have
increased quite radically over the past few decades. Though there have been a few economic crises
and the situation has not been so conducive, it had not disturbed the upward trend in cross border
M&A activity. More and more companies want to go global as they offer great opportunities which
are comparatively cheaper option for companies to build itself internally. Looking at the M&A

9
In this Indian company merges with or acquires a foreign company.

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sentiments around the world it shows that the businesses acquisition emphasis is changing from
domestic to cross border transactions because of the various benefits it offers.

According to the IBR10 two out of five businesses that are preparing to grow through acquisitions
over the next three years are contemplating cross border opportunities. Last year this equation was
one in three and before the financial crisis it was one in four. It’s no surprise with the things
pacifying in the euro zone to see almost 44% of Europe and 38% of North America who seek
business opportunities abroad.

Talking about the BRIC countries who are also looking at cross border merger and acquisitions in
order to gain entry to new markets. In this China is leading the way and are getting involved in
M&A transactions in a big way and are ardent to show themselves as a striking option for investors
globally.

The other markets in Asia and following suite and are up for lucrative M&A activity in various
emerging markets in order to grow.

LAW GOVERNING CROSS-BORDER MERGER & ACQUISITION IN INDIA

Section 23411 of the Companies Act, 2013 notified by the Ministry of Corporate Affairs provides
the legal framework for cross border mergers in India. This has been brought into effect from 13th
April, 2017, hence operationalising the concept of cross border merger.

The following laws govern cross border mergers in India:

• Companies Act, 2013

• SEBI12 Regulations, 2011

• Foreign Exchange Management (Cross Border Merger) Regulations, 2018

• Competition Act, 2002

10
International Business Report
11
Merger of Amalgamation of the company with foreign country
12
(Substantial Acquisition of Shares and Takeovers)

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 • Insolvency and Bankruptcy Code, 2016

• Income Tax Act, 1961

• The DIPP13

• Transfer of Property Act, 1882

• Indian Stamp Act, 1899

• FEMA, 199914

• IFRS15 3 Business Combinations

INTERNATIONAL GROWTH IN RELATION WITH CROSS-BORDER MERGER &

ACQUISITION

The most fundamental motives to conduct cross border M&As is growth. Companies who seeking
for expand have two options and should choose between internal growth and M&As growth. In
the former case, if a company seeks to expand within its own business, the company could face
that internal growth is not reluctant to be a satisfaction alternative. For instance, the company may
find difficulty in maximizing the opportunity because of a limited period of time, whereas internal
growth may not suffice. As the company grows slowly, the competitors could respond very quickly
and might be taken as dominant in given market share that a company may have dissipated over
time by the actions of competitors. Thus, to balance this condition, a company could choose M&As
growth by acquiring company which has the resources, such as facilities, well established
managements, and other resources available for additional competition purpose in the market.

13
Department of Industrial Policy and Promotion
14
Foreign Exchange Management Act
15
International Financial Reporting Standards

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CONCLUSION:

Thus, I would like to conclude that, there has been a huge outcry from civil society in almost all
the emerging markets in recent months. This has been mainly due to public anger at crony
capitalism and tiny elite cornering all the benefits. Therefore, the most essential condition before
cross border M&A is actualized is that there must be regulatory scrutiny about the ownership
patterns and the holding structures.0n a whole cross border merger and acquisitions can provide
great benefits to companies and also increase its share price but as we saw there are a lot of factors
which need to be taken into consideration to avoid any glitches. It is extremely vital for the business
structures of both the countries involved in M&A transactions and learn from cases like that of
Daimler-Chrysler. Most critical factors which separate the successful M&A transactions from the
others, who fail, are thorough and planned preparation and commitment of time and other
resources. Considering all this the prominence and importance of cross border transactions has
clearly illustrated the business mindsets to access the global markets and grow.

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BIBLIOGRAPHY

• https://taxguru.in
• https://managementsstudyguide.com
• Competition Law, Dr. H.K Saharay, 2nd edition, Universal Law Publications
• Company Law, Avatar Singh, 17th edition, Eastern Book Publication

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