Others would always say that there’s nowhere to go but up. In the corporate world, that can also mean going out, such as rigorous expansion either within one’s country or internationally. For the latter, that would mean engaging in cross-border mergers and acquisitions.
What are cross-border mergers and acquisitions?
Cross-border mergers and acquisitions (cross-border M&As) are transactions that involve two companies from different countries. In some jurisdictions, it’s one of the famous forms of foreign direct investments (FDIs), as always compared to greenfield investments.
In Canada, a cross-border M&A can refer to either:
- a Canadian company merging with or acquiring a company in another country; or
- a foreign company merging with or acquiring a Canadian company
It still follows the usual process of doing M&As — from corporate planning, to conducting due diligence, and integration processes. What differs is that there’s an added international element to the M&A, which makes this somehow a unique transaction.
Here’s a quick explainer of what is an M&A and how does cross-border M&A works:
Know more about cross-border M&As by consulting the best M&A lawyers in Canada as ranked by Lexpert.
Cross-border merger vs. Cross-border acquisition
Mergers and acquisitions are usually lumped together as similar transactions, and the same goes when these are done beyond one’s borders. However, these two differ in the following ways:
- cross-border merger: two companies from different sectors or industries combine to establish a new entity, such as through purchase of stocks and/or assets, and where one of the two companies ceases to exist
- cross-border acquisition: one local company’s assets and operations are controlled by the foreign company after the acquisition, such as through full or minority acquisitions or portfolio investments, and where the local company becomes an affiliate of the foreign company
Why do companies engage in cross-border mergers and acquisitions?
The main reason for cross-border M&As is to reach out to new markets and customers. It can also be for diversification of one’s portfolios and accessing new technologies. However, there would also be risks that accompany these rewards when companies enter these types of deals.
Entry of foreign entities
One of the easiest ways for a foreign company to enter the market of another country is through a cross-border M&A. Depending on the laws of the host country, certain laws that make it difficult for foreign companies to establish a presence are legally bypassed.
For instance, there may be countries whose laws are more relaxed when it comes to cross-border M&As compared to establishing a foreign branch or entity. This depends on every jurisdiction, which is why it’s important to first consult a cross-border lawyer for M&As.
International expansion
Another reason for a foreign entity acquiring or merging with a local company is that it’s part of their global expansion. Operation-wise, it would be easier and cheaper to do the following activities since everything is done within the host country:
- manufacture and produce products
- distribute products
- do marketing and public relations activities
Expansion through cross-border M&As is not only constrained in the host country. A foreign company’s expansion can also flow to nearby countries or within the host country’s international region.
Government-supported investments
Looking at the grander scheme of things, cross-border M&As are good for a country’s economy. To encourage an influx of foreign investments and improve their economy, some governments would loosen up on their regulations regarding cross-border M&As. This becomes advantageous for the foreign entity, who will find it effortless in completing the transaction, legally and operationally.
Issues with cross-border mergers and acquisitions
As easy as it may sound on paper, doing a cross-border M&A involves a lot of risks and issues. Aside from the legal element when it comes to M&As, here are the other considerations for both the foreign and domestic companies involved in the transaction:
- financial costs: aside from the purchasing price, planning the M&A until its actual implementation and integration will entail a lot of costs
- cultural barriers: this refers both internally (e.g., during the integration period) and externally (e.g., the target market’s reception of the foreign entity)
- geo-political stability: as with any other investments, the success of the merged or acquired company depends on the politics in the host country
All of these reinforce the need for a strong legal team, such M&A and cross-border lawyers, to assist throughout the whole process of the M&A transaction.
What laws apply to cross-border mergers and acquisitions?
Whether it’s a cross-border merger or acquisition, both are still subject to the laws of the local host country pertaining to foreign investments. For instance, in Canada, the counterpart law for that would be the Investment Canada Act (ICA). Under the ICA, the government can review investments that reach certain thresholds or of any size when there are concerns about national security.
This is why cross-border M&A lawyers are hired by a company, not just locally, but also in the local host country. It helps ensure that the transaction is legally compliant, even though additional costs in hiring the legal team may be entailed.
Considerations for foreign entry to Canada
Aside from the ICA, there are many laws that foreign companies should take notice when entering the Canadian markets. This includes competition laws, which the ICA is also a part of. Corporate and securities laws, which are not just governed by federal laws, but also by provincial and territorial statutes.
Corporate and securities laws
Companies establishing its presence in Canada can incorporate either federally or provincially. However, regulation of securities is mainly done provincially. Hence, choosing the right province or territory to operate in would be a major factor for foreign entities.
Competition laws
In addition to the ICA, foreign companies should be aware of the Competition Act’s review processes for M&A transactions in Canada. Along with this is compliance with the Competition Bureau’s regulations. Otherwise, the cross-border M&A may be challenged by the Bureau, before or even after its completion.
If you want to know more about cross-border mergers and acquisitions, you can reach out to the Lexpert-ranked best cross-border lawyers and law firms in Canada.