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Legal Focus

JULY 2013

The Legal Compliance Challenges in

M&A Transactions in Looking further into the compliance challenges that arise within M&A transactions, this time from a Swiss perspective, we speak to Dr. Thomas Bähler, LL.M., Partner, and Dr. Anna- Antonina Gottret, LL.M. from Kellerhals Attorneys at law, one of Switzerland’s leading full service law firms.

Please introduce yourself, your role and your firm.

With the extensive knowledge and expertise of more than 80 legal professionals, Kellerhals supports international and domestic clients regarding all aspects of Swiss law, in particular M&A transactions.

A recent report by the Economist Intelligence Unit shows that compliance and governance standards in takeover targets are a major concern for dealmakers as cross-border M&A activity picks up. What are your thoughts on this?

The number of cross-border M&A transactions has increased significantly in the past few years. Much of the increased cross-border M&A activity involved companies from the U.S. and Europe, nevertheless such deals are also becoming more popular in developing countries, which are beginning to liberalize their trade and investment markets. However, the compliance and governance standards in the emerging markets have not yet reached the standards of those in high-growth markets. Despite the numerous restrictions – in particular cultural and language barriers – it is not to expect in the near future that cross-border M&A activity pick ups are about to slow down due to compliance and governance standards. Compliance and governance standards are indeed a considerable concern for dealmakers, however, they do not impose a huge obstacle when it comes to cross-border M&A. As a matter of fact, compliance standards nowadays are very important. The role of due diligence in this regard has quite rightly increased significantly. Companies are required to comply with the laws of their home country. A lack of transparency and differing legal standards in many countries can create significant challenges and risks for companies,

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especially in emerging markets where the level of compliance differ from high-growth market standards. Companies must insure themselves against a risk before they decide to allocate their capital abroad and in different jurisdiction. Due diligence seems to be, thus, a necessary step before each M&A transaction.

What are the potential risks facing investments expanding into new markets and high risk jurisdictions?

Companies face several risks and challenges when expanding into new markets. Cross- border M&A transactions require high investments and a high involvement in the target country. Additional risks and complexities as a matter of course arise.

Countries of the acquirer and target differ often in political and economic condition. When expanding into new markets, especially into emerging markets with unstable political or economic position, some safety measures must be taken and issues such as for instance the interest rate and the inflation rate must be seriously considered before allocating capital. Additionally, the host country may impose exchange controls, preventing a foreign investor from repatriating profits from its operations. Or, the host country might impose regulations that make the investment less profitable than expected. The host country might even nationalize or expropriate the foreign investor’s assets.

Furthermore, cultural barriers and language may cause a big challenge in cross-border M&A transactions. A common language indicates lower transaction costs, companies communicate more efficiently with each other and misunderstandings are avoided. On the other hand, the fact of cultural differences in respect to the working environment should not