Cross-border Investment Risk Legal Aspects, Labeling
We may believe that everyone has played one of the classic Windows games “minesweeper”. As the name suggests, you must uncover all non-mine grids and you will win. If you step on the landmine grid, you will lose. This requires the method of marking minefields to eliminate. This is similar to the situation when companies go abroad to invest in different places like India. How to mark the “minefield” to win depends on whether you can mark out the risks and eliminate or prevent them, so as to achieve the purpose of investment income.
Many companies go abroad to invest abroad to strengthen themselves, but they still lack sufficient understanding of foreign politics, economy, culture, legal systems, and business strategies. The way for domestic companies to “go global” is basically the way of “carrying a car”, merging and acquiring overseas resources to carry out project development. This method requires a comprehensive review of how to construct investment structures, cross-border financing, and conduct cross-border mergers and acquisitions.
The different cultures, politics, economic systems, and legal environments of other countries all pose major challenges to investors.
Some Asian companies have both opportunities and challenges in the process of going global. Therefore, like Chinese companies must fully understand the various possibilities they may face. Kinds of problems and risks.
Challenges and risks of companies going out
Differences in language, culture, and business philosophy
The first problem that these companies encounter when they “go global” is the cultural shock. Each country has its own cultural traditions and ways of thinking and behavior. Even countries in Asia have cultural differences.
If these companies that conduct overseas M&As do not fully understand the country’s culture, they will often feel at a loss when they come abroad. Therefore, the primary task of these companies’ overseas investment is to understand their culture, ways of thinking and behavior.
These companies need to understand the local culture as much as possible, understand their ways of thinking and behavior, and adjust their work methods according to their characteristics to ensure timely, effective, and smooth communication channels.
At the same time, they should be aware of possible misunderstandings and misunderstandings due to cultural differences and lack of communication.
There is sufficient mental preparation for omission. Facts have proved that whether the localization problem can be solved well often determines the successful operation of a project.
Insufficient grasp of the overall situation and later management capabilities
Cross-border mergers and acquisitions are high-risk but accompanied by high-yield investment methods. Chinese companies must have sufficient psychological expectations and sufficient control capabilities during and after the completion of the merger.
But so far, most companies have insufficient experience in cross-border investment, and do not have clear and complete ideas and the experience and ability to ensure the success of mergers and acquisitions. This makes these companies face more challenges than investors in other countries.
The success of post-merger integration is one of the biggest risks for most overseas mergers and acquisitions. Completion of settlement does not mean the end of M&A transactions, on the contrary it is the starting point for cross-border investment and operations.
Therefore, these companies need to have sufficient preparations and plans for employee retention, capital chain, management team, and business integration after the transaction is completed in the early stage of mergers and acquisitions to achieve business integration and synergy, and ultimately create value and gain benefits.
The political environment and risks of the investment target country
these companies “going out” also need to have a clear understanding of the local political environment of the investment target country. In developing countries, there are many domestic political changes, sometimes leading to sudden political events, which have a considerable negative impact on social stability.
Some countries have unstable currencies and severe inflation, which is also a major risk for these companies’ investment and trade. In addition, local protectionism, corruption, low administrative efficiency, backward infrastructure, frequent administrative interference with foreign companies, and foreign exchange control are also issues that need to be considered.
Potential risks of the target company or business
Due to the asymmetry of information between buyers and sellers, even if due diligence is conducted on the target company, it is impossible for the acquirer to fully understand its assets and operations. In order to successfully sell assets, sellers often try their best to package the target company and fully demonstrate the bright spots.
Are there problems and risks behind the exquisite packaging?
The acquirer must fully understand the actual situation of the target company through due diligence as much as possible, and repeatedly consider the transaction structure and merger agreement to prevent possible risks.
Due to the particularity of the M&A target, many problems are not intuitively available. For example, a well-equipped factory may have a mortgage on its property rights, advanced technology and intellectual property rights may have many restrictions, the target company may also have potential responsibilities for environmental protection and taxation, etc.
The road to “going out” may be full of pitfalls, requiring a full investigation and assessment of the risks involved in overseas acquisitions. If you cannot fully understand the risks implied by the target company, you cannot make a true judgment on the value of the target.
Risks in the legal system and foreign investment policy of the investment target country
In developing countries, the policy and legal risks are manifested in policy change and undependable, while in developed countries, they are manifested in the complicated and diverse laws and regulations, and various defenses against foreign investment.
If these companies are not familiar with the legal environment of the country or region where the M&A target company is located, and lack legal service organizations and personnel with international experience and familiar with the laws of the two countries, their M&A transactions and post-merger operations will be very risky and unpredictability.
For example, the lack of a good understanding of the local legal system at the stage of mergers and acquisitions results in errors in the design of the merger structure or insufficient transaction conditions to protect the interests of investors, which will have a long-term negative impact on post-merger operations. Cross-border investment and mergers and acquisitions involve a wide range of laws. The following are some key legal areas that need attention:
What Tax laws and tax treaties should companies investing abroad consider?
Countries have different tax laws and tax systems. China has signed agreements to avoid double taxation with 89 countries and regions.
Whether tax payment and tax behavior meet the requirements of local tax authorities, and how to legally avoid taxes and save tax costs are one of the important issues that these companies face in overseas investment.
Many cross-border investments are made by setting up holding companies in tax havens that have preferential tax avoidance and have tax treaties with the investment host country and target country to achieve the optimal tax structure.
Labor and Social Security Law
Relevant labor and social security are one of the important issues in overseas investment. When the control of the target company changes, or when it needs to lay off or reorganize after the transaction is completed, a huge amount of employee compensation may be incurred, leading to a direct increase in acquisition costs.
In order to retain the key personnel of the target company, it is sometimes necessary to arrange an incentive mechanism or pay a certain cost, so that the return on investment of the transaction is different from the expected.
What Environmental Protection Laws should corporate consider while going overseas for investment?
For a long time, some of these companies have been relatively indifferent to environmental protection. When conducting M&A transactions, it is necessary to check the environmental records and compliance of the target company during due diligence to avoid potential risks.
For industries with high environmental risks, such as chemicals and mineral resource development, special environmental due diligence is required. After the completion of the merger, operations must also comply with local environmental protection standards, otherwise it is easy to cause environmental disputes or liabilities in the country where they are located, and cause losses.
What Intellectual Property Law should corporate consider while investing abroad?
Seeking the protection of corporate intellectual property rights is an important area that should be paid attention to in overseas investment, but it is often overlooked.
Before investing abroad, these companies should make long-term plans for the protection of their intellectual property rights and take timely measures.
For example, timely inquiries and registrations of trademarks and patents, and copyright registration in the target country, to avoid preemptive registration of one’s own intellectual property rights or unknowingly infringing others’ intellectual property rights that have been protected by local laws.
Therefore, it is necessary to conduct due diligence in the early stages of acquisition to ensure the validity and legality of these intellectual property rights, and to discover possible infringement litigation risks in a timely manner.
In addition, it is necessary to understand whether these intellectual property rights are restricted by the local government, and whether there is a possibility that technology export cannot be carried out.
Financial and financing risks should corporates consider while making investment abroad?
Because of the huge amount involved in overseas investment and corporate mergers and acquisitions, external financing is often needed to solve the funding problem.
M&A financing is sometimes very complicated, and the choice of financing structure is directly related to the financial burden of the company and the transfer of operating control after the merger is completed.
The target company may have some off-balance sheet financing projects and overly optimistic profit forecasts, which will give the acquirer an illusion about the target company’s real assets and liabilities and future cash flows. Only a reasonable estimate of the financial risk can effectively avoid the risk.
The financial statements of the target company are usually provided by the seller or the target company, but it cannot be ruled out that the truth is concealed artificially.
In addition, the financial statements only reflect the financial status, operating results and cash flow of the company at a certain point in time or a certain period in the past, which makes some important contingencies and future events ignored or deliberately concealed, such as pending Litigation, major post-sale returns, natural losses, external guarantees, etc.
What currency risk should companies consider while making overseas investment?
An overseas M&A project may involve multiple currencies. For example, the target company’s assets, liabilities and income, and the purchase price may be calculated in U.S. dollars, while the target company’s operating expenses may be mostly calculated in local currency units.
In addition, these companies may borrow and repay loans for acquisitions in Renminbi or U.S. dollars.
Fluctuations in foreign exchange rates may cause exchange losses for the acquirer and the target company, which may have a material adverse effect on its financial status.
Therefore, these companies should make appropriate arrangements for hedging the foreign exchange risks in overseas investments.
What Overseas Fraud?
In the process of cross-border investment and mergers and acquisitions, there will be some international scammers who use the weaknesses of these companies’ lack of understanding of foreign situations to lure foreign investors and companies into the bait with attractive profits and conditions.
Overseas fraud is particularly evident in developing countries. In order to avoid this situation, the best way is to hire professional legal and financial service intermediaries to conduct comprehensive due diligence to control risks.
Just like the classic game minesweeping, what is eliminated is risk and what remains is opportunity. The control of risks is not a “cold day”. It requires the participation of professionals from multiple parties, and each of them conducts specialized risk mining and establishes defense lines in their familiar areas.
These companies have both opportunities and challenges in the process of going global. Therefore, foreign companies must fully understand the various problems and risks they may face, and discovering and solving problems is the best medicine for worry-free benefit in the later period.
Name: Ajay Rastogi
Educational Qualification: LLB
Profession: Advocate / Lawyer
Work Experience: 20 Years of Legal Practice
Profile Link: https://lawjc.com/members/advajayrastogi/