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This article is written by Nikunj Arora who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.


COVID-19 has had a significant impact on Mergers & Acquisitions (“M&A“) activity around the globe. While some countries saw an upward trend in the M&A activities during the pandemic, some countries initially saw low growth in the M&A activity but gradually witnessed a good amount of deals. In India, a ‘cross-border merger’ means any merger, amalgamation or arrangement between an Indian company and foreign company by Companies (Compromises, Arrangements and Amalgamation) Rules, 2016 notified under the Companies Act, 2013.  

In 2004, there was a cross-border merger between Air France and KLM as a result of which The Franco-Dutch airline Air France-KLM was formed which ultimately became a huge player in the global airline business. To overcome the barrier of cultural differences, the managers from both the French and the Dutch side created a cultural programme which resulted in overcoming the cultural differences. 

This is an example of a successful cross-border merger between the two European countries which overcame the cultural, social and political differences. Cross-border M&A transactions are driven by a variety of factors such as growth through market expansion, utilization of lower labour cost and raw materials, new technologies, tax benefits and liabilities, geographic diversification, etc. 

The determinants 

The cross-country determinants of cross-border determinants play a vital role in deal structuring of cross-border M&A. There are various regulatory issues, taxation issues and contemporary issues in cross-border transactions and the parties need to analyze these issues before finalising the deal. For example, if an Indian company merges with a foreign company (outbound merger) then it will not be a tax-neutral merger as in the case of an inbound merger. Such transaction shall attract the Income Tax Act, 1961, Companies Act, 2013 and the Foreign Exchange Management Act (FEMA) Regulations. 

Therefore, the following are the major cross-border determinants of M&A:

Target country analysis

In M&A, The companies usually build a target list and go about finding these companies and reaching out to them. The cross-border deals are generally higher in those countries where investor protection is low. According to a research report given by Stefano Rossi and Paolo Volpin, London Business School (see here), if there is a raise in accounting standards by one standard deviation, the cross-border ratio decreases by 9 %. Again, if there is a rise in shareholder’s protection by one standard deviation, then the cross-border ratio decreases by 7.8%. According to the above theory, the investor’s protection is negatively correlated with the cross-border ratio and companies in the countries where the investor protection is low are likely to be targeted by foreign companies because of their poor governance standards. 

The foreign countries usually merge or acquire their subsidiaries in the other country so that there are less cultural differences between the two companies. If an Indian company merges or acquires a foreign company, not being its subsidiary and vice-versa, there are chances of more complexities such as cultural differences, language hindrances, and poor management. 

Taxation factors

Different countries have different taxation laws and the companies should adhere to such laws if they want the M&A transaction/deal to be successful or gain any tax benefit, whatsoever the case may be. For example, US companies have a slight disadvantage in the global market for cross-border M&A deals as the US is the only developed country with high statutory corporate income tax. Taking another example, according to Austrian law, if assets are transferred from Austria to a foreign company in an M&A transaction and Austria loses its taxation right regarding the hidden reserves, then such hidden reserves are subjected to taxation, regardless of a sale. In India, a cross-border M&A shall be done by the Income Tax Act, 1961, for taxation purpose.  

Therefore, taxation is the most important determinant in any cross-border border M&A deal. 

Legal/regulatory issues

To make a cross-border M&A transaction smooth without any hindrances, then the acquirers should beforehand analyse the legal or the regulatory issues of such transaction by the target country. The acquirer should understand the implications of the said transaction on the stakeholders of the company from the viewpoint of legal/regulatory angle. The approvals from various tribunals/commissions, implications of the statutes, etc. are carefully observed before making the deal. Now, in the context of the COVID-19 pandemic, the acquirers have to recognise the likelihood of potential penalties or claims.

Political uncertainty

As against domestic mergers or acquisitions, the cross-border m&a deals are likely to get affected by the uncertainty of the politics or local politics in both acquirer and target countries. If there is any target country political uncertainty then it can hamper the inbound foreign acquisitions through the change in fiscal and taxation policies, changes in regulatory regime or nationalisation of foreign-owned assets. For example, there are cross-border tensions between India and China due to which the foreign direct investment has been restricted from China to any Indian company. 

Acquire(s) perspective

It has been seen in various cross-border deals that if the acquirer is a firm that is big in terms of its employment or capital stocks usually performs or engages in an international acquisition. The result of such international acquisition will result in sales growth and shows that firms that invest abroad display a higher domestic growth rate before the acquisition. The international acquirers possess to have a higher number of employees with higher innovative skills, thus, fulfilling the idea of technology and knowledge which are driving factors for cross-border M&As. 

Employees perspective

When the two companies merge in a cross-border M&A, the employees of both the companies need to work together although they are from the different cultural background. The employees of both the companies belong to the different work environment, culture and policies and if they are not comfortable with the policies after a merger or an acquisition, they end up quitting jobs as the new learning environment may become challenging. Sometimes, the cross-border deals also lead to layoffs which may affect the lives of the employees of the current organisation or the target organisation. The happens because, at the time when the transaction/deal takes place, the merging companies never look for having two CE0s or two HR departments. 


In a cross-border M&A transaction, due-diligence has a very important role to play. Without, the due-diligence report not only the M&A transaction is incomplete but the acquirer companies are also not aware of any in-depth information about the target. Once the information has been collected and examined, the final due-diligence report shall be prepared which involves sorting and reporting on the conclusion reached during the document review process. The due-diligence report should include fiscal matters including the target’s present and past financial statements or statutory findings of these financial statements, etc. A good due-diligence report shall give all the past and current insights of the target. 

FDI & cross border M&A transactions

Foreign Direct Investment (“FDI”) refers to a long term investment by an investor in an enterprise in another economy, resulting in lasting interest with significant influence over the overseas enterprise, and typically occurs through M&A activity. In India, FDI is most common in private and public limited Indian companies. Recently, in the FDI regime, the FDI has been restricted from the countries that share their borders with India with the intent to curb opportunistic takeovers. This move was taken to minimise the incoming investments from China.

Stock considerations

The buyers need to keep in mind that the majority of M&A transactions done in the bank space include buyer stock. In an industry focused on capital levels, issuing stock in the transaction allows the buyer to capitalise on the deal without access to the capital markets. The stock also provides alignment to selling shareholder interest as well as a key retention tool for key personnel. In the banking field of the cross-border M&A market, the sellers desire a high premium on liquidity. 

Risk factor

The foreign firms before finalising the M&A deal will certainly analyse the risk associated with such transaction/deal as a cross-border M&A deal can be associated with political risk, economic risk, social risk, and general risk associated with the black swan events. For example, if a foreign firm is looking to merge or acquire with an Indian firm or vice-versa then it needs to primarily adhere to the FEMA regulations. Apart from the FEMA regulations, the transaction/deal mustn’t violate the provisions of General Anti-Avoidance Rules (“GAAR“) which means that such transaction should not lack commercial substance. The risk is also associated with the amount of risk factor to the deal, i.e, whether the deal would have a positive or negative impact on financial statements/shares/stocks.

Case study: Ranbaxy-Daiichi

Parties to the transaction

  1. Daiichi Sankyo Co. Ltd. (“Acquirer”):
  • Japanese Company.
  • P&A Law offices as the legal advisor in India.
  • Jones Day as the legal advisor outside India.

2. Ranbaxy Laboratories Ltd. (“Target”):

  • Indian company. 
  • Vaish Associates as the legal advisors.

The deal

  1. On 11th June 2008, the acquirer acquired a 34.8% stake in the target company and made an open offer to its shareholders for another 20% acquisition. 
  2. The acquirer acquired another share for 9.12% through preferential allotment.
  3. The size of the deal was US $4.9 billion and as per the deal, the total value of the target company was US $8.5 Billion. 
  4. The acquirer paid a higher valuation to the target due to its strong infrastructure, presence across geographies, robust product pipeline, etc. 
  5. The deal took place through a mix of debt and existing cash resources of the acquirer. 

The failure

  1. Ranbaxy’s plants came under scrutiny by the US Food and Drug Administration (“FDA”), which banned the entry of 30 Ranbaxy products in the USA.
  2. According to the FDA, the scientists who performed quality control in the target’s company took shortcuts on the stability tests for 2 major drugs. The target also had submitted manipulated data in its application to market new drugs in the US. 
  3. The target was accused to have poor human resource practices which led to high employee turnover.
  4. In the original agreement between the parties, the CEO and the promoter of the target company, Mr. Malvinder Singh had to stay in the target company after the acquisition. But in May 2009, he left the company. 
  5. After the acquisition, the expenses of the acquirer company had grown to 21.9% of sales from 18.6% of sales.

The problem

  1. The acquirer company failed primarily in the due-diligence process. 
  2. The acquirer was aware of the US FDA invocation but ignored it as it expected the matter to get resolved. 
  3. In its eagerness to tap the expertise of a generic drug dealer, the acquirer took the risk and paid a higher valuation for the target company.
  4. The pre-acquisition due-diligence was important to understand that corporate governance and integrity shall not be assumed in the emerging markets. 
  5. There was an assumption by the experts that the cultural differences and different management style also became the reason for the failure as the Japanese are very process-oriented and always has an upper hand in the quality of their services. 

Legal determinants/issues

  1. Approval of the Foreign Investment Promotion Board (“FIPB”).
  2. Approval under Press Note No.1 (2005) from the Securities and Exchange Board of India (“SEBI”).
  3. Approval of Cabinet Committee on Economic Affairs (“CCEA”).

Corporate determinants/issues

  1. The nomination of the Independent Director as per the agreement. 
  2. The target’s board of directors would consist of 10 directors in a combination of the following:
  • 4 independent and non-independent directors nominated by the Promoters.
  • 6 independent and non-independent directors nominated by the acquirer company. 

The lesson(s) learnt

  1. There should be a proper due-diligence process and a report of the same shall be analysed carefully before finalising such risky deals.
  2. There should be alignment in culture, in similar values of the employees and the business(s).
  3. The deal-structure shall be identified.

Case study: Wipro-its subsidiaries

Parties to the transaction

  1. Wipro Limited (Indian company) (“Acquirer”).
  2. Wipro Technologies (wholly-owned subsidiaries of acquirer domiciled in Austria) (“Target”).
  3. Wipro Information Technology (wholly-owned subsidiaries of acquirer domiciled in Austria) (“Target”).
  4. New logic Technologies (wholly-owned subsidiaries of acquirer domiciled in France) (“Target”).
  5. Appirio India Cloud Solutions (wholly-owned subsidiaries of the acquirer) (“Target”).

The deal

  1. The acquirer through its scheme proposed a merger with its wholly-owned subsidiaries (target companies) by way of amalgamation according to Sections 230 to 232 read with Section 234 of the Companies Act, 2013. 
  2. The amalgamation scheme enabled the acquirer/transferee company access to assets of target(s)/transferor(s) companies which lead to the synergy of operations, organisational efficiency, and optimum utilization of resources.
  3. The Board of Directors of the acquirer company approved the same on April 25, 2018.
  4. As per Regulations 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the National Company Law Tribunal (“NCLT”) approved the said scheme of amalgamation on March 29, 2019.
  5. There was no change in the shareholding pattern since the four targets/transferor companies were a directly or indirectly wholly-owned subsidiary of the acquirer.

Legal determinants/factors

  1. Approval by the NCLT.
  2. Target/Transferor Companies 2 & 3 were incorporated under the laws of Austria 
  3. Section 2 of the Federal Law on the Conversion of Commercial Companies (UmwG) of Austria was taken into consideration. 
  4.  Target/Transferor Company 4 was incorporated under the laws of France. 
  5. French law doesn’t regulate cross-border mergers between a French company and another company located outside the European Union. However, the said law does not prohibit such mergers where mergers are permitted by other jurisdiction and where the French company follows the French law.

Taxation Determinants/factors

  1. The said scheme of amalgamation complied with and came within the definition of “Amalgamation” under Section 2(1B) and Section 47 of the Income Tax Act, 1956. 

Corporate determinants/factors

  1. The scheme is approved by the shareholders of the acquirer company under Sections 230-232 of the Companies Act, 2013and was deemed to be approved under Section 13 and 61 of such Act.
  2. The entire share capital of the targets/transferors companies was held by the acquirer and no shares of the acquirer company were allotted in exchange for the shares of the transferor’s companies. 
  3. The acquirer company was not required to pay any fee/stamp duty for the increase in the authorized share capital of the target/transferor company 5. 

The lesson(s) learnt

  1. The above cross-border transaction was a success, thereby, inculcating higher profits for the acquirer company.
  2. The acquirer targeted its wholly-owned subsidiaries and merge with the same. This means that the target analysis shall be done carefully for a successful cross-border M&A transaction. 
  3. The merger resulted in no change in the shareholding pattern which resulted in shareholder’s protection. 

The scheme of the amalgamation can be accessed here.


In the year 2018, it was predicted by 89% of the deal advisors that the year would see a significant rebound in cross-border M&A transactions/deals. Mr Frank Aquila, Partner at Sullivan & Cromwell, New York, in an interview said that with the synchronised global economic growth, there should be high volumes of M&A deals. On the other hand, Ms. Anu Aiyengar, Head of North American M&A, JP Morgan, opined that cross-border deals are harder and more complex and that geopolitical issues and local politics could impact such deals. Therefore, the determinants of a cross-border M&A deal have a huge impact on such transactions/deals and should be carefully understood, analysed and scrutinised to attain the maximum efficiency from the deal. 



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