Cross border corporate transactions are frequently hot news in the business press but the ones that catch the lion’s share of headlines are typically those carried out by listed multinational companies. That neglects the fact that private companies whose shares are not available to the public also frequently engage in cross-border transactions, either to raise finance or to seek deal flow.
Foreign markets increasingly provide attractive opportunities for UK private companies, in large part made up of small and medium sized businesses (SMEs), looking to raise capital or to expand. The UK also attracts foreign private businesses to invest here. A 2014 study by the Economics Intelligence Unit on behalf of DHL Express found globally that SMEs expected to generate 50 per cent of their revenues internationally by 2019.
Why would a private company carry out cross-border corporate transactions?
Perhaps the most significant factor explaining why a UK private company would look abroad for a merger or acquisition comes from the increasing inter-connectivity of the global economy. With technological advances making the world a much smaller place, companies willing to venture outwards are now well-equipped to navigate between different geographies.
This factor is compounded by the fact that within certain emerging markets, economic growth is comfortably outstripping domestic GDP in advanced economies. Business opportunities within those regions are therefore more plentiful. From a strategic point of view it is also rational for a business to seek to hedge risk by ensuring it is not overly-exposed within any one particular market. International trading enables a company to mitigate the risks of sudden contractions in domestic demand or capital flows.
What issues arise from private company cross border transactions?
Any private company seeking to enter into business arrangements such as merger across foreign borders must address a variety of issues. First, it is imperative that any contractual arrangements are clearly governed by an agreed-upon law and language, and that all legal document filing obligations mandated within the target market are fully understood and complied with.
Secondly, different legal jurisdictions present differing substantive rules about the permissibility of any particular cross border transaction. For example, competition laws or foreign investment regulations may render illegal a proposed private company cross border takeover.
Thirdly the tax arrangements of a multi-regional transaction will also need to be carefully assessed. The underlying goal is to minimise the tax liability of the transaction stakeholders, and this may in turn require the use of non-domestic special purpose vehicles.
Finally, it is important that cultural formalities are accounted for. A successful business transaction will not take place if the domestic private company is unable or unwilling to learn about the way in which business is conducted in a target foreign market. No business will be won if the unwritten rules governing negotiation and courtship are ignored. This is particularly important in areas such as the Middle East where business customs require an understanding of practices like ‘wasta’.
What are the key rules for companies considering entry into the UK market?
Private companies considering entry into the UK market must note that the Enterprise Act 2002 and the Industry Act 1975 contain restrictions on the foreign ownership of shares. Although rarely used, they permit the Secretary of State to intervene in a transaction where the public or national interest is at stake.
More broadly, domestic industries such as broadcasting and railways are heavily regulated and may require government or regulatory body approval. If competition laws are triggered, no deal closure can occur without clearance from the EU, where it has jurisdiction, and the UK Competition and Markets Authority, which now has enhanced powers of intervention where its own jurisdictional thresholds are met.