July 27, 2023
In the dynamic world of mergers and acquisitions (M&A), companies navigating cross-border deals encounter countless unique regulatory hurdles due to diverse legal systems, cultural nuances, competition, and political considerations. Understanding and navigating these issues becomes essential as they significantly influence the M&A landscape and determine deal outcomes.
To delve deeper into these factors, Translink Corporate Finance South Africa Partner Wendt Saurma-Jeltsch; Translink Corporate Finance France Partner, Tanguy du Chesnay; and Dinan & Co Director (exclusive partner to Translink Corporate Finance) Mohit Mehta, discuss the role of M&A advisors in helping to navigate these challenges:
Europe: Navigating European foreign investment roadblocks
Navigating regulatory challenges is critical for successful cross-border M&A deals when entering the European market. Du Chesnay says these challenges encompass multiple dimensions, including national regulations and specific legal provisions under French and European laws.
Du Chesnay says one of the challenges acquirers can expect to face when navigating the French market are regulations by the French Civil Code and Commercial Code regulation, one of which necessitates the involvement of employees in the decision-making process during the sale of a company (also known as “Loi Hamon”).
“This regulation stipulates that employees must be informed of any contemplated transaction involving the company transfer when a company – or most of its share capital – is sold. The employees have the right to formulate a counteroffer to buy the business – the law stipulates they have two months to study and submit this offer. An alternate option to this lock-up period is to obtain a letter from all employees indicating their intention to renounce this right, which is not always easy. While this right is quite theoretical, you must include it in your transaction timeline considerations.”
Countries in Europe and the U.S. have become more concerned about foreign investors acquiring advanced technologies and data that the government deems significant to national security or business sovereignty. As a result, the Foreign Direct Investment (FDI) law has become another facet of European regulations that acquirers must be aware of.
Du Chesnay says FDI law initially applied to sensitive sectors like defence, security, artificial intelligence… but was considerably enhanced in 2020 and can now impact most of the businesses dealing with large amounts of data. “As M&A advisors, we must anticipate as soon as possible potential roadblocks and prepare comprehensive documentation to streamline the process. Our role extends beyond financial advice, requiring us to understand the company’s position in its market, product processes, and the technology involved.”
The United States: Understanding the sheer market size and complexity of the U.S. market
Mehta says for companies unfamiliar with the M&A process or those without in-house M&A teams, entering the U.S. market poses its first challenge – sheer size. “Compared to other countries, where you may find a handful of businesses producing a certain product or service, the U.S. may have hundreds or even thousands of such companies. This is particularly daunting for mid-market and small businesses, who often don’t know where to begin. As such, it’s critical to have a partner with a strong track record and a dedicated team of researchers, senior deal advisory executives, associates, and analysts.”
Mehta adds, “Most importantly, a team of experienced advisors (including legal, tax, and due diligence) play a crucial role in navigating the regulatory landscape, potential tax implications, financial due diligence, and regulatory requirements across state and federal laws. The complexity and size of the market make the assistance of a seasoned advisor crucial in ensuring smooth navigation of the process, from the initial search to the agreement on valuation and the structure of the deal.”
Mehta says the Hart-Scott-Rodino (HSR) Act is also crucial in determining anti-trust compliance for certain large transactions. “Companies must be aware of whether they fall within the scope of HSR, and if so, must file an HSR filing to ensure they do not breach anti-trust laws.”
“The motivation for companies to buy in the U.S. varies – from geographic presence, market access, to acquiring a particular technology or service. However, understanding and navigating the challenges and regulations associated with such a venture is crucial to its success.”
Africa: Considering cultural and socio-economic complexities
Translink South Africa is an essential player in Africa. While transactions in the region can be challenging, Saurma-Jeltsch says partnering with an M&A expert with deep knowledge of the region’s cultural nuances and history ensures acquirers achieve a common understanding with sellers.
“The region has intricate corporate social responsibility aspects underpinning many transactions, such as Black Economic Empowerment. South Africa is Africa’s economic powerhouse and, for many of our multinational clients, serves as a platform for further expansion into a continent with a growing population and rising GDP per capita.”
Saurma-Jeltsch says a regulatory challenge foreign acquirers must consider is public interest consideration in the South Africa Competition Act of 1998. “The provisions in the Act require an assessment of the effect a merger may have on a particular industry or on aspects such as employment, the ability of small/black-owned firms to compete, the ability of national industries to compete internationally, and the promotion of a greater spread of ownership.”
The Heineken example
Saurma-Jeltsch refers to another instance in 2022 where the Commission required conditional public interest commitments for the approval of Heineken Group to acquire a controlling interest in Namibian Breweries Investment Holdings Limited (NIH) and the flavoured alcoholic beverages (FABs), wine, and spirits operations of Distell Group Holdings Limited.
“Here, the merging parties had to agree to maintain aggregate employee headcount for five years following the merger and avoid retrenching employees below specified managerial grades. The merged entity also committed to considering employees for suitable vacancies in Newco for three years following the merger should retrenchments be unavoidable.”
Cross-border M&A involves complex regulatory hurdles, cultural nuances, and socio-economic considerations. Whether it’s Africa’s socio-economic factors and local empowerment, the legal and regulatory environments of Europe, or the sheer scale and diverse regulatory landscape of the United States, it’s clear that strategic navigation through these unique challenges is non-negotiable.
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