As the global economy becomes more connected and digital companies need to find growth in new markets and a common method is through M&A. While still common domestically, global M&As are an important process that can be rife with special conditions and circumstances that make international cross-border deals difficult.
According to the IMAA Institute, more than 63,413 mergers & acquisitions transactions have been completed in Canada since 1985 with a known value of almost 3,689.7B. As we can see mergers are a very important part of business in Canada and abroad – but there are some key differences to understand about how this process works for companies across the globe.
So how do M&A practices at home compare to that of European countries and others across the world, and how can companies minimize their risk?
In order to do this, it is essential to understand how M&A practices can differ.
Just as it is in the U.S., M&A in European markets also consists of a contractual process where the buyer acquires either the shares of the target company from shareholders or the underlying business and assets from the target company itself. In the U.S, buyers often prefer asset sales because this allows them to avoid potential liability that they would inherit through a stock sale. Asset sales also allow for buyers to avoid potential disputes such as contract claims, product warranty disputes, product liability claims, employment-related lawsuits, and other common claims.
Compared to the U.S., share purchases are the most common form of acquisition structure in European jurisdictions. This involves the buyer acquiring the issued shares in the target company from the shareholders. In a share purchase, the buyer assumes all liabilities of the target company whether they know about them or not – often referred to as a “warts and all” situation.
While asset purchases do require much more paperwork and third-party involvement, this extra effort results in less liability for the company that is completing the merger or acquisition.
Mergers are common in some European jurisdictions – such as Spain and the Netherlands – but not others. Notably, unlike the US, the UK does not have a domestic merger regime.
While this true, there is the potential for some companies to engage in mergers across Europe. This streamlined process allows for a merger between two or more companies registered in at least two different EEA states, but these types of cross-border mergers do not happen very often. It is important to keep in mind that
In Europe, as in the US, the share purchase agreement (or “stock purchase agreement”) is the principal acquisition document that records the terms of the transaction. The style of agreement and drafting approach can vary across different countries throughout Europe.
UK agreements tend to be longer with extensive warranties and indemnities, which is similar to US agreements. This is due to the common law system which applies in those jurisdictions. Most other European countries (including France, Germany, Italy, and the Netherlands) have a civil law system – where much of the law is codified – and they tend to have shorter agreements because the civil codes already contain protections for buyers.
Having said that, most civil law jurisdictions are familiar with US/UK style agreements and there is an increasing amount of convergence between the two, particularly in cross-border transactions.
M&A Best Practices
Now that we have taken a look at some of the most common similarities and differences among M&A transactions that different countries employ, let’s discuss some best practices and companies minimize risks.
Assess the Risks
It is crucial to evaluate the risk of the markets where the target does business. Does the target do business in Brazil, Russia, India, China, or in a more high-risk country that has generated FCPA enforcement actions in the past?
Also, make sure that you are looking into the target company’s industry. Is the industry one with foreign government customers, heavy government regulation, or substantial government contact? Make sure the company does not have any reputation for illicit acts such as bribery, corruption, or other criminal or unethical conduct.
To get this information, the acquirer should require prospective targets to complete a detailed FCPA questionnaire at the beginning of the process. An acquirer can also bring on a reputable law firm or investigative firm to learn more about the target.
How is M&A viewed in the context of the target?
European deals often feature greater formality around closing compared with US deals. In the UK, acquisition documents are usually executed as “deeds” instead of simple agreements. Deeds are a special form of document which must be signed in front of a witness. This notarization process is required in some European jurisdictions such as Germany, the Netherlands, Italy, and Spain (though not in the UK). This usually requires the final documents to be presented to and to be read out by a notary in the presence of the parties in person (or by their representatives).
Understanding the target’s country and how the system is set up and their unique formalities can help you to be able to adapt and prepare for how this process may unfold. This will allow for a much smoother transition process.
Overall, it is crucial to do your due diligence and understand the key differences between the M&A process you are used to and what the target company may be expecting. By abiding by these best practices, you can ensure that the M&A deals you engage in result in positive, sustained growth.