This article has been written by Gaurav Dhingra pursuing a Diploma in Law Firm Practice: Research, Drafting, Briefing and Client Management course from LawSikho.
This article has been edited and published by Shashwat Kaushik.
Table of Contents
Introduction
In the current globalised financial world, corporate administration issues in cross-border mergers and acquisitions (M&A) are getting more and more vital. Straightforwardness, responsibility, and shareholder security are all subordinate to successful administration, especially when managing cross-border exchanges.
Cross-border mergers and acquisitions show challenges in dissimilar legal, administrative, and social settings. Businesses have to adjust the interface of numerous partners, oversee clashing corporate administration guidelines, and ensure that, beyond any doubt, nearby and worldwide laws are followed.
Coherent administration is further complicated by the mixing of dissimilar company societies and administration styles. The victory and supportability of cross-border M&A depend on tending to these issues, which call for cautious arrangements, solid administration systems, and in-depth information of the administrative situations in both the domestic and foreign countries.
Corporate governance
Corporate governance can be summed up as a collection of procedures, guidelines, and practices that guarantee a business is run with the interests of all parties involved in mind [1]. It is a framework as to how an organisation shall function and run and defines the power structure, decision-making process, and accountability structure of the business setting. Other aspects such as risk management, environmental awareness, business strategy, and ethical behaviour also fall under the ambit of corporate governance. The governance framework proves helpful as it saves the company from potential risks and associated damages, increases investor and bank confidence, gathers improved access to capital, and enhances the overall goodwill and reputation of the organisation.
Infrastructure of corporate governance
The infrastructure of corporate governance is based on five broad principles:
Responsibility
The board is accountable for carrying out the wishes and requirements of the shareholders. This includes shielding the organisation from potential risks and leading it towards success while staying true to its mission and policies. The board must appoint a CEO, who will then steer the company and its employees towards achieving their full potential.
Accountability
This envisages the accountability of the Board of Directors of the company for matters relating to strategy formulation, management, and oversight of the company’s execution. It also envisions the directors’ accountability to all shareholders in compliance with applicable laws.
Awareness
This is a very important principle, as an organisation needs to know the changing landscape and dynamism of the environment in which it exists. The company has to constantly adapt and be flexible according to the changes that are taking place in the market to be on par with its competitors.
Impartiality
The company commits to upholding the rights of its investors and treating each one fairly. If the rights of the shareholders are violated, the Board of Directors makes it possible for them to get effective protection.
Transparency
The company is required to promptly disclose all relevant information about its operations, including financial information, social and environmental measures, activity results, ownership and management structures, and results. All interested parties will have free access to this information.
Cross-Border M&A
Cross-border mergers are those that take place between organisations of different nationalities or countries. In the simplest terms, a merger takes place between two geographically isolated companies and results in a third company [3]. The process by which a company in one nation purchases a foreign company or its assets for any bona fide purpose is known as cross-border acquisition.
Cross-border mergers are divided into two types:
Inbound mergers: It is said to happen when a foreign company merges with or acquires any Indian company and a resultant Indian company is formed.
Ex: Acquisition of Ranbaxy by Daichi
Outbound mergers: An outbound merger occurs when an Indian firm merges with a foreign corporation, creating a foreign company as a result.
Ex: Acquisition of Hamleys by Reliance Group
There are various advantages to cross-border amalgamations, one of which is tapping into new markets and opportunities. Cross-border M&A is an excellent way for companies to gain new customers and create growth overseas. Another benefit is the diversification of products or services and capturing a good market share. The shared synergies can also help develop innovations and technology transfer for revenue generation and profit-making. Distribution is a key advantage that companies get when entering into synergies, as distribution expands more efficiently in the case of mergers rather than exploring launching businesses in new markets and then developing distribution channels. Other advantages, like cost savings, production capacity, and talent acquisition, are also present.
Factors that motivate cross-border mergers and acquisitions
Factors that motivate cross-border mergers and acquisitions are:
- Market expansion:
- Access new markets and customers in foreign countries, expanding the company’s reach and revenue potential.
- Gain a foothold in emerging markets with high growth potential.
- Diversify the company’s geographic presence, reducing dependence on a single market.
- Cost reduction:
- Achieve economies of scale and scope by combining operations, reducing production costs, and improving efficiency.
- Optimise resource allocation by eliminating duplicate functions and processes.
- Leverage lower labour costs or favourable tax rates in the target country.
- Access to resources and expertise:
- Acquire specialised technologies, patents, or intellectual property from the target company.
- Gain access to skilled talent pools, enhancing the company’s innovation capabilities.
- Benefit from the target company’s established distribution channels and networks.
- Synergies and competitive advantage:
- Combine complementary products, services, and capabilities to create a more competitive and diversified portfolio.
- Enhance market power and bargaining positions with suppliers and customers.
- Cross-pollinate best practices and knowledge, leading to improved operational efficiency.
- Financial considerations:
- Access cheaper financing and capital markets in the target country.
- Optimise tax structures by utilising favourable tax regulations.
- Enhance shareholder value by increasing stock prices through successful mergers and acquisitions.
- Regulatory and political factors:
- Comply with changing regulatory landscapes and legal requirements in the target country.
- Gain political influence and strengthen relationships with local governments.
- Mitigate trade barriers and tariffs by establishing a presence in the target market.
- Risk mitigation and diversification:
- Reduce exposure to economic downturns or political instability in a single country.
- Diversify revenue streams by entering new markets, buffering against fluctuations in demand.
- Spread financial risks across multiple geographies.
- Industry consolidation:
- Participate in industry consolidation trends to gain market share and economies of scale.
- Eliminate competition and create a more dominant position in the global marketplace.
- Cultural and social factors:
- Embrace cultural diversity and incorporate global perspectives into the company’s operations.
- Enhance employee morale and motivation by providing opportunities for international exposure and growth.
- Build stronger relationships with customers and partners in different countries.
Corporate governance challenges
Cross-border mergers and acquisitions seem exceptionally fascinating looking at the advantages that they bring, but there may be some challenges that the companies might face. The success of cross-border mergers depends upon a variety of factors that ought to be met to ensure success. These challenges include:
Short-term business strategies
Short-termism has been a matter of worry for a long time and it has recently been under scrutiny as one of the main contributors to the financial crisis. Although corporate governance laws and best practices have evolved to give more power to shareholders, these pressures have increased. The tussle between short-term and long-term growth is enhanced when hedge funds and shareholders press upon the board of the company for actions like special dividends, stock buy-backs, spin-offs, and other business transactions. Short-term strategies can interrupt the blending of diverse corporate cultures, resulting in difficult integration. The need to cater to stakeholder expectations is key, and short-term objectives and strategies are never reliable to do so. Stakeholders need a solid long-term plan and vision to keep them interested in a business; therefore, the company needs to have a long-term vision and objective. Short-term focus can also lead to operational disruption that might result in instability within the workforce.
Appointing the CEO of the resultant company
This is a big challenge for the board of any organisation to select an appropriate CEO for the company and plan his succession. The board is entrusted with this responsibility for the appointment of CEO and prolonged delays in finding a suitable person can affect the stability and ability of the company to evolve decisively. In cross-border amalgamations, it can be exceptionally challenging for the BOD to appoint a CEO due to cultural integration with regards to corporate culture clashes between the two companies. Also, the CEO needs to have a deep understanding of international laws and other regulatory compliances. Balancing the external corporate environment proves to be a big challenge for the board.
Unbalanced board
The talent of a company’s board members is a critical aspect in determining the efficacy of the board. It is necessary to have a balanced board that reflects an assiduous emphasis on qualities such as integrity, character, commitment, judgement, energy, competence, and professionalism, as well as the appropriate mix of industry and financial expertise, objectivity, diversity of perspectives, and business backgrounds. When companies that exist in different countries merge, they blend with diversified corporate cultures and workforces, regulatory environments, and management styles. This diversity can create a barrier to the formulation of an effective and coherent board. There might be biases involved or regulatory requirements for the appointment of the board.
Crisis management
Effective crisis management is key to the corporate governance of cross-border mergers and acquisitions. Many directors’s crisis management skills have been put to the test by the financial crisis upheaval and volatility, which has resulted in a variety of challenging situations, including the sudden departure of CEOs and other senior executives, a sharp decline in business conditions, approaching liquidity shortages, major disasters or failures in risk management and many more. The management of the new company formed or acquired by the acquirer company, as the case may be, should be able to identify any potential risks and vulnerabilities that may arise during the M&A process. Issues related to legal and regulatory impediments, cultural mismatches, sensitivity, or other intellectual inclinations can prove to be major challenges in such transactions.
Regulatory and legal issues
Individually and collectively, they have enormous power to directly shape not only the corporate governance profiles of publicly traded companies but also the makeup of boards and committees, executive pay practices, and even game-changing mergers and other deals that need to be approved by shareholders. Adherence to the regulatory standards of varied jurisdictions can be complex and very important to comply with to avoid getting fined and penalised. Different countries have varying competition and antitrust policies, merger laws, and rules that require the approval of the concerned authorities of the countries. Challenges such as mandatory disclosures and reporting and foreign investment restrictions can make it hard to merge or acquire companies.
It is worthwhile to talk about the well-known example of corporate governance issues that Tata Steel and Corus Steel encountered following their acquisition. The acquisition between the two companies began on September 20, 2006, and ended in July 2007. Although the acquisition occurred smoothly, it was found to be a big mistake due to reasons like lack of control after acquisition, high losses incurred by Corus, lack of knowledge transfer, high energy costs, expensive acquisition, poor management, and cultural issues.
Conclusion
To conclude, the issues of corporate organisation in cross-border mergers and acquisitions are complex and require critical thought. Businesses must manage various legal frameworks, bearings, and social guidelines while maintaining obligations and openness. Solid organisational structures that can suit distinctive circumstances and guarantee compliance are fundamental for productive integration. Businesses may increase shareholder regard, development accomplice acceptance, and success over the long run by proactively taking care of these issues. The capacity to successfully handle these complications sets productive businesses around the world apart from unsuccessful ones, highlighting the basic role that sound corporate organisation plays in cross-border M&A.
References
- https://www.cgi.org.uk/about-us/policy/what-is-corporate-governance
- https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-are-the-five-principles-of-corporate-governance/
- https://knmindia.com/cross-border-mergers-and-acquisitions-a-roadmap-for-international-growth/
- https://singhania.in/blog/inbound-and-outbound-mergers
- https://online.law.pitt.edu/blog/corporate-governance-what-it-is-and-why-it-matters
- https://blog.benchmarkcorporate.com/how-your-company-can-benefit-from-cross-border-ma
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2115535
