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What do cross-border transactions involve exactly?
A cross-border transaction (or "international" or "multi-jurisdictional" transaction) is a transaction involving two or more jurisdictions, compared to a domestic transaction which involves a single jurisdiction. In order to expand or seek new business opportunities, companies can use different types of corporate transactions including mergers, acquisitions, disposals, joint ventures or other major transactions. While commercial factors normally dictate the type of transaction and the way it is subsequently structured, tax and legal issues are also likely to have a strong influence on this. The main focus of this article is on cross-border acquisitions and the practical, legal and tax issues that are increased and further complicated when crossing international boundaries.
Recently, there have been significant changes in the global political and economic climate. Despite this, both mergers and acquisitions are still a popular strategic tool for growth. Although domestic acquisitions remain as the most popular tool for most businesses, research shows that there is an increasing desire to make cross-border acquisitions by businesses of all types and sizes, not just large corporations, as was previously the case. Generally, businesses in Europe continue to show a growing interest in cross-border acquisitions, but this varies from country to country; Spain has shown an increasing appetite for cross-border transactions while, in contrast, Germany has increased domestic acquisitions. At the same time, the United Kingdom and Ireland, despite primarily focusing on domestic acquisitions, are still accounting for a high number of cross-border acquisitions.
Why companies pursue cross-border transactions
Cross-border transactions, particularly in the case of mergers and acquisitions, can help facilitate domestic growth in revenue and size, as well as provide access to new domestic markets, industries and customers. Meanwhile, disposals of companies or certain assets can help generate cash or help the business focus on core operations and rationalise operations in other areas. Other types of transactions such as joint ventures are particularly helpful for gaining access to new markets or technologies.
By crossing international boundaries, companies can exploit many such opportunities; they can gain access to new global markets, customers and relationships. This may be particularly desirable if there is limited growth in the domestic market where the company operates because, for example, the business has already exploited domestic opportunities or if the company is operating in a very competitive and already saturated domestic market. Before realising these opportunities, it may be necessary to overcome certain practical, legal and tax issues that commonly arise on cross-border transactions. Unfortunately, sometimes these may become barriers to certain business strategies.
Practical and legal issues
A number of legal difficulties may arise on a cross-border transaction and understanding the domestic law in each jurisdiction involved is critical to ensure the execution of the transaction within a (sometimes very tight) timeframe. Ideally, local lawyers should be identified and instructed at the outset of any cross-border transaction to ensure that any local legal issues can be identified and factored into the deal timetable to help legal advisers manage their client’s expectations. Even within the European Union, many legal systems remain nationally based, with some countries adopting the civil code and others the common law. This means that, although the European Union has helped to facilitate cross-border transactions, legal differences are still likely to arise between such jurisdictions and further differences remain even between countries that share similar legal systems.
Typical issues that arise when crossing boundaries include exchange control provisions as well as different formalisation requirements, (eg, the form and execution of the documents and the need for notarial deeds or legalisation as further detailed below). In addition, restrictions in the constitution of companies are common in certain jurisdictions, (eg, the transfer of shares in most jurisdictions is subject to restrictions in the target company’s constitution). French SARL and Dutch BV companies are seen to have the most restrictive provisions.
Practically and legally, the complexity of the transaction can depend on a number of commercial decisions and variables such as the identity of the target (ie, private or public), whether the transaction is structured as a share or asset sale (which itself will depend on tax and legal considerations), how the acquisition will be financed and whether it will be structured as an auction sale or private treaty sale (which may be possible in some jurisdictions, but not in others). In relation to the structure of the sale, share purchases are more common than asset purchases. A share sale is where the shares of the target are transferred to the buyer and therefore all the target’s liabilities automatically pass to the buyer. In comparison, on an asset sale, only certain agreed and identified assets and liabilities are acquired and so each asset will need to be individually considered in the context of the local law of each jurisdiction. Generally, a share purchase is therefore more straightforward, particularly when crossing borders.
Language and governing law
The language and choice of governing law of the main transaction document (eg, the share purchase agreement in a share purchase acquisition and any supplemental agreements), commonly known as the "umbrella agreement", will usually be considered by the parties at the outset of any transaction. English is often used in international transactions, even where there are no UK-based companies involved in the transaction. However, local laws may require key documents implementing the acquisition in each jurisdiction to be in the native language and governed by local law, as well as other ancillary documents (eg, any powers of attorney or corporate authority documents, such as board and shareholder resolutions) approving the transaction and security release documents (where, for example, the security is already governed by local law). Even if the umbrella agreement is governed by English law, the local lawyers in each jurisdiction should still review it and, where necessary, a provision should be included to specify which language and law would prevail in the event of conflict. However, even with such provisions in place, there are different styles and ways of documenting transactions in civil and common law jurisdictions, and the way provisions are interpreted may also vary. In the United Kingdom and other common law jurisdictions, there is more emphasis on the precise wording of each specific contractual provision, as opposed to the approach taken in civil jurisdictions where greater emphasis is placed on the general intentions of the parties.
Executing a cross-border transaction
Signing and closing
Although signing and/or closing of the acquisition of a company incorporated in the United Kingdom can take place in a foreign jurisdiction, certain restrictions apply in a number of other jurisdictions. For UK companies, there is no real incentive to execute the transaction (acquisition) agreements outside the United Kingdom. In the case of a share purchase, before the company’s books are updated with the new owner (ie, the buyer), the instrument of transfer of shares is stamped in the United Kingdom. In relation to asset sales, stamp duty is no longer payable on most assets other than land and, although it is paid on real estate, where the agreement is signed is irrelevant. In comparison, some mainland European jurisdictions require the transaction (acquisition) agreement to be notarised and legalised, while further restrictions may be set out in a target company's constitution. Furthermore, closing in a particular jurisdiction may be undesirable for tax reasons, such as transfer duties.
In many jurisdictions, it is common to have a split exchange and completion where the transaction is, for example, conditional on third-party approval. This will largely depend on the commercial circumstances of each transaction, but this can also depend on whether there are any controls and/or restrictions that apply in the relevant jurisdiction.
Proof of signature
In the United Kingdom, the directors are commonly required to certify (by using a director’s certificate) the constitutional documents and a board resolution which approves the transaction and authorises certain individuals, usually directors, to execute the documents on behalf of the company. The directors signing will also usually add their specimen signatures on (or as a schedule to) the director’s certificate. Alternatively, a power of attorney can be used where a party to the transaction grants authority to a third party to execute the document on its behalf. If this is the case, the board minutes approving the transaction should also approve the use and execution of the power of attorney. Although a power of attorney is permitted under English law, one must check whether it is permitted in other jurisdictions and, where it is permitted, it is important to determine the formalities for execution and whether there are any restrictions on the powers of the attorney. In the United Kingdom, an individual or company can appoint a third party to execute documents on its behalf by way of power of attorney under section 47 of the Companies Act 2006, subject to the constitution of the company. However, unlike other jurisdictions, the appointment of an attorney must be by deed.
Form of documents
In most jurisdictions, there are two forms of documents: "simple contracts", which do not require any formal requirements, and other documents (eg, deeds) where formal requirements apply. Under English law, if a document is executed as a deed, the document must clearly state that it is a deed and the execution formalities will depend on the identity of the signatory. Under English law, certain documents (eg, a transfer of land or interest in land such as a mortgage) need to be executed as a deed and different execution formalities are likely to apply depending on whether the signatory is (i) a domestic company, (ii) an individual or (iii) a foreign company. A foreign company must execute documents by common seal or, alternatively, provided that execution complies with the law of incorporation or any other form permitted by the law of incorporation. This emphasises the importance of seeking local legal advice, as it is essential to ensure that the document has been executed correctly by each party to the transaction. It is also important to determine the practical norms in each jurisdiction (eg, whether documents can be signed in counterparts and whether it is possible to have a virtual signing and closing where electronic signatures may be required). Under English law for example, the case of R (on the application of Mercury Tax Group Ltd and another) v HMRC & Others (2008) led to a period of some uncertainty about how different forms of documents need to be executed and the procedure to be followed for a virtual signing and closing.
Notarisation and legalisation
Other jurisdictions have more formalistic requirements and it is also important to determine which jurisdictions require documents to be notarised, legalised or otherwise approved by government authorities. The role of a notary varies between jurisdictions and generally English and Welsh notaries have a more limited role than those in civil law jurisdictions. The notary will be able to certify the due execution of the relevant document in his/her presence and then affix his/her notarial certificate to the document being notarised (this is then signed by the notary and sealed with his/her official seal). Where a notary is required, the parties should ask what documents will need to be notarised, whether there is a form of notarial certificate required by the parties or by any relevant law or regulation, the fees of the notary, the timing and how this may impact the deal timeline and, finally, whether the document will also need to be legalised after being notarised to confirm the status of the notary.
It is important to have an understanding and appreciation of the cultural differences between the parties involved in the transaction. The conduct and approach taken during negotiations may differ from jurisdiction to jurisdiction and this could result in potential misunderstandings. Local advisers can assist with this and help to prevent unnecessary negotiations about points that are linked to cultural norms and this will ultimately save time and costs. Cultural differences are also seen in the approach to the confidentiality of business information, particularly when dealing with family-owned companies which are very common in Italy, for example. Certain jurisdictions may have legal restrictions on the disclosure of information.
Other than the commercial rationale behind the transaction, tax implications are likely have the most influence over the structure of the transaction. In a share purchase transaction, both parties need to consider the immediate tax costs and the post-acquisition tax costs; the buyer must determine the tax implications once the target is part of the buyer’s group and the seller must check what tax issues may arise from the target leaving its group. Often, complex structures are required for tax reasons. In any event, the initial consideration for both parties will be whether to structure the acquisition as an asset or share sale, as the tax implications differ for each structure. Certain exemptions apply only to share purchases, transfer duties are generally lower on a share purchase and past tax losses may be carried forward on a share purchase, but not on an asset purchase. In addition, the buyer will need to consider whether it should acquire the target directly from its home jurisdiction or set up a new company to minimise any tax leakages and, when determining how to finance the transaction, it is important to note that it is rarely possible to consolidate profits and losses of companies in different jurisdictions for tax purposes. Although in the United Kingdom, cash considerations can be paid outside of the country and do not need to be paid direct to the seller, this may not be the case in other jurisdictions and further restrictions may apply.
All parties and advisers involved in a cross-border transaction ultimately all aim for the same goal - ie, to ensure a smooth, effective and efficient transaction. Logistical problems are almost always greater in a cross-border transaction as there are often more parties, more jurisdictions and therefore more laws and regulations to conform with. In this context, transaction management is even more critical to the success of the transaction. The key to success is identifying the important issues early on and then planning and managing expectations accordingly. It may be helpful to have one adviser in control of managing the transaction or alternatively, where the transaction is very large and complex, different advisers can help manage different aspects and one adviser can help to coordinate everyone.
As a trainee, transaction management is something that I am heavily involved with. A document list is helpful to list the documents required for the transaction, the parties to each document, whether there is a specific signatory or whether the document can be signed under power of attorney, the number of originals and, very importantly, whether the document needs to be notarised and legalised. Separate signing checklists should also be used for each party to ensure that each party knows what documents they need to sign and any requirements they need to satisfy. Where a number of documents are required to be signed at completion (and in many cases, where these need to be signed in a specific order), the buyer’s lawyers will usually prepare a closing agenda that will specify all actions required before closing can take place and all items to be produced at the closing meeting. Prior to this, the parties may also decide to have a pre-completion meeting a few days prior to the scheduled closing date, especially where there are third parties involved in the transaction who may have certain technical issues/requirements in relation to the process or certain documents.
Crossing borders can be a very exciting time for businesses looking to exploit certain opportunities that are not necessarily available to them domestically. Although practical, legal and tax issues arise in domestic transactions, it is clear that these issues are exacerbated when there is more than one jurisdiction involved and managing these issues is crucial to the success of any such cross-border transaction.
Chrissy Vassiliou is a trainee solicitor at CMS Cameron McKenna.