Business Law on Merger and Acquisition - Research Paper Example

Business Law on Merger and Acquisition Name Institution Table of Contents Table of Contents 2 Introduction 3 Material and Methods 4 Analysis and Results 4 Legal Issues 4 Tax Issues 6 Attitudinal Issues 7 Conclusion 8 References 9 Business Law on Merger and Acquisition Introduction Mergers and acquisitions (M&A) often represent the ultimate change within the business. There is no other event that is more difficult, chaotic, and challenging as M&A. therefore, it is imperative that the involved parties within the process have adequate understanding of the way the process works. Within increasingly competitive business environment, mergers are sometimes the only means for businesses for long term survival1. However, in some cases, mergers present strategic component for generation of long term growth. Merger refers to merging of two businesses in which one of the businesses continues to exist while acquisition is acquisition of the assets by a business from the other; however, in acquisition, both the businesses might continue to exist. The acquiring company often remains in the business while the acquired company or Target Company would be integrated within the acquiring company; as a result, the acquired business stops to exist after merging2. Cisco Systems presents a type of merger for generation of long term. In India, the volume of M&A transactions increased between 2009 and 2010 from USD 21.3 billion to USD 67.2 billion respectively. Virtually, most companies in the US have experienced major acquisition at certain point in history. Hence, at any given time, thousands of such businesses are adjusting on post-merger reality. Material and Methods The study used exploratory research method in investigation the mergers and acquisition in business. The study primarily relied on the secondary data from the annual reports of companies, internet sources, academic journals, and text books while the analysis used was descriptive method. Based on the data collected, businesses have different reasons for merging including creation of values, dubious motives, and cross-border mergers. The motives for merger are influence by various factors and partly the industrial stage in the life cycle. The data also revealed other motivational factors to include the need for capital, resources, and the level of competition, growth opportunities, and opportunities for synergies3. Analysis and Results Corporate mergers could have profound impact across the businesses globally. Mergers often occur when two or more businesses combine with an aim of creating new and large business entity through combination of the resources; however, the process could go off without any hitch though that is never the case. Based on the data collected, the challenges could result from different sources. Legal Issues Legal issues presents the major challenge that businesses could run into during the merger process. In the US, since the country passed Sherman Anti-trust Act of 1890, businesses have been forbidden in forming any type of business entity that could result in the restriction of fair trade. The law is applicable to even mergers at corporate level. According to the Act, any combinations that restrain trade are illegal4. The Act has performed well over the century for the US policymakers in spelling out fully what that means; however, it is a vital consideration that businesses need to make while moving forward with the merger process5. The application of Sherman Antitrust Act varies for mergers and acquisitions depending on the interpretation by the Supreme Court. For example, in the case of the Northern Securities Co. v. United States, 193 U.S. 197, 24 S. Ct. 436, 48 L. Ed. 679 (1904), the court made a ruling that mergers between businesses that are competing directly constitute a combination in restraining trade; as a result, they violated Section 1 of the Act. Such a ruling by the court hindered the creation of new monopolies through horizontal mergers. Mergers could have hurdles from within both the business and Antitrust Act or elected officials of the government. For example, the Standard Oil in the US faced the Antitrust intervention in the 19th and 20th century. In Canada, the competition bureau reported that the merger between the Royal Bank of Canada and Montreal would result in reduction in competition in the 104 out of the 204 existing local markets. In addition, in Europe, the European Commission turned down the proposal for international merger between Switzerland’s Algroup, Canada’s Alcan, and France Pechiney which makes it important to consider the regional laws on international mergers. In the US, the district court found Microsoft guilty of natural monopoly through combination of the its internet operating system and internet browser. There are restrictions in the amount of shares that the merger company can hold for the process to be accepted legally6. In Canada, the government restricts holding more than 10% of the share by one shareholder within the bank; as a result, there is restriction in the foreign entry through acquisition of the foreign banks with internal growth of the firm attracting the Antitrust Act. Tax Issues There are execution risks associated with mergers and acquisitions. As mentioned earlier, M&A processes are complex. Despite the harmonized rules, issues associated with taxation are dealt with within the national rules and are never fully exhaustive in ascertaining some tax impact of the cross border merger and acquisition7. To some extent, the uncertainty in the in the tax arrangement could require special arrangements from the tax authorities on the ad hoc basis while within the domestic case deal the process is a bit deterministic. In Europe, the Merger Directive (90/434/EEC) provides for the deferred taxation associated with the capital gains that arise from cross-border corporate restructuring undertaken within the merger forms, assets transfers, divisions, and exchange of the shares8. However, in October 2010, the European Commission met with an aim of forwarding the proposal for improving the Merger Directive to clarify the scope of the Directive and ensure that it is applicable to the European Corporate Societies and European Companies. It is important to note that the uncertainty associated with the VAT regime applicable to the financial products and services could put the business model and envisaged synergies to risk. In regards to M&A, the VAT legislation of the European Union is dire need of modernization and considering such inadequacies, there have been increasing tendency of resorting to litigation. Therefore, the outcome is usually uncertain which could result in tax implications placing a question mark over the otherwise proper business strategies. Recently, there have been increments in a number of ECJ cases associated with VAT and financial services. Hence, individual judgment could clarify the law in certain circumstances though at the cost of consequences which might not be compatible with the general policy objectives of the community9. For example, a case C-8/03 that involved Banque Bruxelles Lambert SA vs. Belgian State, the ECJ made a ruling on VAT treatment of open-ended investment companies (SICAVs) that has the potential of creating tension in the achievement of equality objective in the treatment and sustaining the level of playing the field for the operators across the European Union. Without the legislative measures, it is inevitable that the court would contribute greatly to the rising uncertainty in consequences. Attitudinal Issues Openly or not, countries with united countries their Member States are likely to promote “the national industrial policy” that aims to create “national champions.” Some of the possible justifications for such countries could be argument that such policies ensure adequate financing of the national economy. In additional, the political factors might as well play important role in the recently privatized business which gained from the public finances; as result, political interference blocks cross-border mergers although such transactions are compatible with the existing rules. In addition, such interferences might need materialization of formal powers or rules10. Within the local and cross-border M&A, there are many obstacles to overcome which is realistic to think that there is merger to be achieved when there is existence of strong political opposition within the country. The existence of such policy could as well lead to tolerance of high tolerance of concentration within the local markets which in turn allows or encourage domestic consolidation. For example, in the US and EU, encouraging domestic consolidation over cross border could make it difficult in accepting foreign takeover of the national organizations within a significant share of the market. M&A might as well result in reluctance of the employees especially those within the target company posing the threat of successfully achieving the outcome of the transactions11. Furthermore, the workers might not accept their management from another business. In the case of cross-border mergers, the process could imply changes in the quotation place or the currency quotation; therefore, the acceptance of the shareholders to the quotient changes might be limited. The challenges presented by cross-border mergers are often very complex and require overcoming numerous execution risks to yield successful results12. Conclusion Within the current competitive business environment, mergers and acquisitions are receiving great deal of attention. With the rapid development of the economies, there have been increments in the inbound and outbound investments for both the foreign and domestic investors and corporate restructuring of the transactions within an aim of improving the operational efficiencies of the investments. Based on the analysis of the secondary data, it is evident from the analysis that M&A experiences several issues both domestically and cross-boundary. Hence, while negotiating the transactions, it is important to address these issues up front preferably at the later intent stage. From the analysis, the study found that the major issues associated with M&A transactions are legal, tax, and attitudinal. References Calipha, R., Tarba, S., & Brock, D. (2010). Mergers and acquisitions: A review of phases, motives, and success factors. Advances in Mergers and Acquisitions, 4(6), 1-24. China Briefing. (2013, April 8). Issues Affecting Cross-Border Mergers and Acquisitions in China - China Briefing News. Retrieved December 22, 2016, from http://www.china-briefing.com/news/2013/04/08/issues-affecting-cross-border-mergers-and-acquisitions-in-china.html DePamphilis, D. M. (2007). Mergers, acquisitions, and other restructuring activities. Amsterdam: Elservier/Academic Press. Ebimobowei, A., & Sophia, J. M. (2011). Mergers and Acquisitions in the Nigerian Banking Industry: An Explorative Investigation. The Social Sciences, 6(3), 213-220. Euromoney Institutional Investor PLC, & Deloitte & Touche. (2003). Mergers & acquisitions. London: Euromoney Institutional Investor PLC. European Union. (2005, April). Obstacles to cross-border mergers and acquisitions in the financial sector. Retrieved from http://ec.europa.eu/internal_market/finances/docs/cross-sector/mergers/consultation_en.pdf Medikundam, P. (2002, December 9). Current Legal Issues In Mergers, Acquisitions and Take-Overs Of Indian Companies - Goals For Corporate Law In The Millennium - Finance and Banking - United States. Retrieved December 22, 2016, from http://www.mondaq.com/unitedstates/x/19105/Commercial+Law/Current+Legal+Issues+In+Mergers+Acquisitions+and+TakeOvers+Of+Indian+Companies+Goals+For+Corporate+Law+In+The+Millennium Taneja, M., & Saxena, N. (2014). Mergers and Acquisitions with reference to Ethical, Social, and Human Resource. IOSR Journal of Business and Management, 16(3), 69-72. Retrieved from http://iosrjournals.org/iosr-jbm/papers/Vol16-issue3/Version-2/I016326972.pdf West's Encyclopedia of American Law. (2005). Acquisitions and mergers facts, information, pictures | Encyclopedia.com articles about Acquisitions and mergers. Retrieved December 22, 2016, from http://www.encyclopedia.com/social-sciences-and-law/economics-business-and-labor/money-banking-and-investment/acquisitions-and Read More