Cross-border deals have been an important driver of a corporate expansion strategy, but now more than ever, they could take center-stage as the new economic powers of the world consolidate their positions. Cross-border transactions have seen underlying growth for the past two decades despite economic cycles and this looks set to continue and increase even more. With a surplus of capital searching for a home, investors are increasingly finding deals in countries beyond the usual choices in North America and Europe, and are looking to Africa, Asia and other frontier markets.
The types of cross-border deals vary, but the most common ones are Joint Ventures, Licensing, Mergers and Acquisitions, Employee and Immigration issues, Financing and Investments, Leasing, Distribution, Share offerings, Franchising, Outsourcing, Restructuring, setting up an overseas branch/entity.
Business fundamentals drive investment cases, but deal making depends on softer factors: people, connections, collaboration, sentiment and confidence. All of these factors have been altered by COVID-19 and the lockdown and restrictions imposed in various jurisdictions. COVID-19 has caused fundamental changes to working practices in most industries, and one of the most significant is in technology and the shift to virtual working.
Cross border transactions are complex and considered hugely challenging by organizations. The legal risk is higher in cross border deals than in domestic deals. The challenges are many and varied, but led by compliance risk. The risk and complexity of cross-border transactions means the most trusted and confident cross-border lawyers will be in high demand.
Some of the key challenges include: i) Compliance risk; ii) Conflict of laws; iii) Unfamiliarity of overseas lawyers with local laws and regulations; iv) Third party rights; v) Working with foreign lawyers qualified in various countries; vi) IPR issues; vii) Data protection; viii) Approach of courts: enforcement and recognition of awards and judgements; ix) Transactional challenges: agreeing on the governing law, dispute resolution mechanism, choice of court, negotiations on mutually agreeable terms and conditions; x) Diverse tax regimes and its implications; xi) Complexities of the money/investments moving from one country to another and various regulations around the same; xii) Finding a local counsel suited and capable of assisting in the transaction; xiii) Drafting a document that suits and matches requirements of various jurisdictions involved – producing internationally resonant documents/agreements that the parties can engage with easily; xiv) Approach/friendliness of the target State towards foreign entities and foreign investments and interference in the legal system; xv) Practical challenges: language, culture, time zone.
A major challenge faced in cross border deals is failing to truly understand each other. Not because the parties literally speak different languages, but because when they use an expression they may mean something different than the counterparty or a response may be couched in terms that are culturally appropriate for one party but leave the other party not understanding the response. For instance, in a joint venture context, it’s critical to make sure everyone understands which actions need the approval of both parties, which need approval of just one, and why, even if it is different from the governance traditions of one of the parties. Another issue is when both parties to the transaction are not taking a broad view of the potential issues and they hold back the breadth of ongoing activities. Failing to take the big picture into account from the outset can mean you only discover some issues late in the transaction, which can cause a scramble and waste resources.
Owing to the above challenges, both companies and law firms turn down on working on or getting involved in certain cross border transactions. Companies look for an all-round advisory and assistance on the aspects from law firms/external counsel with an expectation that the challenges would be overcome. Law firms are resultantly expected to be adept with handling and managing the challenges and delivering to the expectations of the company. This expectation, owing to the remote functioning during the pandemic, has increased manifold.
In cross-border transactions, which have been ever-growing, there are numerous factors involved – two domestic legislations and the international aspects of the transaction, multiple entities from varied nationalities. The companies expect a quick turn around on the deliverables, while the external counsel/law firms, endeavouring and employing their best efforts, attempt to deliver the desired assistance within the time frame.
One way of tackling the challenges is by adopting internationally accepted standards around the world. One way companies and law firms have tried to reduce the risk involved in doing a cross border transaction has been by agreeing the governing law of a deal. Reports suggest that companies and their advisers also saw a rise in commonality of drafting language as another means to reducing risk, with the most common being the US and UK drafting styles/language. It has been observed that a common or standard approach is emerging to manage the deal process, structuring and due diligence involved in cross-border deals.
The pandemic has given a chance to rethink and realign our working strategies and adopt mechanisms that are universally suited. Reliable sources of information and insight are hard to find and so most practitioners rely on personal networks and many a times, online resources tools, have also been put to use.
The best strategy for closing a deal usually is to make sure the company has experienced counsel – somebody who’s done that kind of deal in other markets numerous times and can explain issues to their clients. Otherwise, the company hears a diligence question, for instance, and may find it offensive or contrary to their practices. The best advisor for companies will say, “This is why they’re asking. This is why it’s important to them. This is why it’s in your interest to answer this diligence question up front in a very fulsome way.”
When working in any of the countries, it’s critical to have local counsel with experience both in the country and in the cross-border context. Compatibility between the main law firm and the local counsel is one of the keys to a successful transaction.
In arriving at a decision, it is important that the company listens to its advisers on the risks that are presented and taking a sober look at major red flags that are likely to present a significant liability that cannot be mitigated or that will prevent the business goals from being achieved. In these markets, there’s a very fine line. The only deals that get done are those where the businesspersons are persistent believers who are willing to go the extra mile and push when most people would give up. On the other hand, businesspersons need to have their eyes wide open. The most successful players in these markets are the ones who are willing to walk away, but who continue to apply the pressure needed to get to closing.
Apart from desiring the best and most sound legal advice companies also hope for competitive billing and rates from the law firms and external counsel. With this in mind, clients would expect that the hourly rates charged by a law firm is capped at a certain number of hours that are anticipated to be put in for the transaction or agree on a lump sum fee for the transaction or agree on blended hourly rates for the transaction or agree upon a hybrid system with hourly rates being charged and the fee being capped at a maximum. This can be worked out on the basis of the transaction, the complexity thereof, the relation between the client and the law firm, previous working arrangement between the client and law firm, quantum of work involved etc. As a result of the pandemic, companies prefer a cost effective, pocket friendly billing arrangement.
The emergence and evolution of the present times, where the world has become a global village, people at large distances connected with one another in real time, goods and services available at the click of a button, has been supplemented and driven by businesses being conducted across the globe without any jurisdictional boundaries. Despite the numerous challenges faced in conducting cross border transaction, these have grown exponentially and continue to enhance, thereby boosting the economies and achieving greater heights each day. The outbreak of the COVID-19 pandemic, no doubt halted the businesses and life as a whole, however, soon enough the companies were able to gather up and resume their transactions and deals, although some sectors more than the others. It will be interesting to see how these transactions unfold and what changes are noticed in them and how the businesses continue to expand keeping in mind the experiences of the pre COVID-19 period and the application of the learnings from the COVID-19 period, when the post COVID-19 era dawns.
