Cross-border M&A transactions in emerging economies: international legal harmonisation and the viability of an international corporate legal order

Wednesday 17 January 2024

Gaurav G Arora
JSA, Gurugram, Haryana

Aditi Richa Tiwary
JSA, Gurugram, Haryana

Thanks to globalisation, the assimilation of legal principles across jurisdictions is not uncommon. Assimilation is not a novel concept, as laws, being statutory responses to states’ socio-economic needs, cannot be perceived in isolation given international trends drifting towards globalisation.

Assimilation comes with specific advantages for emerging economies, as their commercial legal systems are relatively nascent and, consequently, flexible enough to mould themselves towards garnering investments. Assimilation can also be instrumental in securing protections and facilitating the interests of emerging economies if tailored appropriately. However, the limited shreds of assimilation traceable in corporate legal systems are unstructured, unregulated and fragmented. If harnessed productively, assimilation has the potential to sprout synergic waves of constructive outcomes, creating relatively friction-free exchanges among jurisdictions involved in cross-border mergers and acquisitions (M&A) transactions.

Identifiable traces of inter-jurisdictional assimilation in the evolution of corporate law in emerging economies

As most emerging economies share a common colonial past, their corporate legal systems can be observed to have taken in colonial corporate laws into their legal systems to various degrees. Those that were immune to colonial inheritance took inspiration from established corporate legal systems to structure their corporate laws. Consequently, the evolution of corporate laws and corporate legal systems in emerging economies during the latter half of 19th century reflects a clear influence primarily from four jurisdictions: England, France, Germany and the United States.[1] While most emerging economies opted for a rationalised collage of the best traits from a combination of these four jurisdictions, others chose to inculcate the laws from established jurisdictions by transplanting the entirety of such laws with minor variations within their own jurisdiction.

The jurisdictions that chose to transplant French corporate law inter alia include Chile, Columbia and Spain, while English corporate law was transplanted by Israel and Malaysia amongst others. Japan transplanted the corporate laws of Germany until the early 1950s, but later grew its own unique corporate governance model. The colonies of England, including India, transplanted the corporate law of England and thereafter blended it with other internationally inspired laws, including securities regulation from the United States. Other Asian jurisdictions (which form the majority of emerging economies) also ventured into blending their transplanted laws with more regulated corporate legal regimes[2], particularly after the Asian financial crisis in 1997.

After a period of relative stability in the corporate legal system, corporate governance occupied the central stage. While the initial phase in the evolution of corporate law reflects the influence of England, France, Germany and the United States, later phases of the inculcation of corporate governance principles within corporate law demonstrate that Germany, Japan and the United States emerged with distinct identities and established varied models of corporate governance for other jurisdictions to follow.[3] The corporate governance models in the United States and England, categorised under the common nomenclature of the Anglo-American or Anglo-Saxon model, respectively, with the board and shareholders calling the shots, the Japanese model with institutional investors and affiliated banks owning a majority of the stocks and the German model with a dual-board structure, emerged as the central models of corporate governance guiding other jurisdictions.[4] While the Anglo-American model shaped the corporate governance structure in numerous jurisdictions, including Australia, Canada and New Zealand, the German model was adopted by jurisdictions such as Austria, the Netherlands and in Scandinavia. Other jurisdictions adopted the established models with rational moderations (as in the case of India, being a moderated version of the Anglo-American model with dominance by family-run businesses) or developed their own customised corporate governance model (similar to the Italian model of corporate governance).

While emerging economies took different routes to manifest their corporate laws, the core principles of corporate governance, including among others shareholder protection, transparency in corporate governance, accountability of the board and profitability-centric revenue models, remain the same.

The developed jurisdictions have established their corporate legal systems in synchronisation with the dynamic needs of stakeholders and are progressing towards catering to the larger goals of stakeholder protection, including environmental, social and governance (ESG) aspects. However, emerging economies, having taken inspiration from established corporate legal systems, continue to assimilate the best attributes from jurisdictions around the globe. Such continuous assimilation without a structured channel for development has the potential to create unnecessary impediments for companies based in emerging economies in terms of obstructing investments and blocking the retention of profits. Further, the lack of a structured approach can compromise the simplicity and efficacy of corporate legal procedures. 

Harmonisation as a mechanism to harness assimilation: serving cross-border M&A transactions involving emerging economies

As the evolution of corporate law shows, evident traces of assimilation can be found in the corporate laws of emerging economies. However, those laws are majorly fragmented and unstructured. Harmonisation offers a structured approach to channelise assimilation, thereby harnessing the true potential of globalisation. In the context of cross-border M&A transactions, harmonisation refers to the standardisation of domestic corporate laws to achieve international coordination and cooperation, facilitating cross-border M&A transactions and regulating any related unwarranted practices.

While jurisdictions show a sufficient degree of assimilation to enable their mutual coordination, a harmonised apparatus of corporate laws around the globe is needed. However, manifesting harmonisation to the extent that the convergence of procedural and substantive domestic laws occurs is not necessary, as it would rob jurisdictions of their own unique internal corporate legal and regulatory forces. Consequently, the unrestrained convergence of procedural and substantive corporate laws should not be attributed to harmonisation. Quite simply, the standardisation of domestic laws and practices to enable easier cross-border transactions by employing mechanisms fostering international cooperation is the only goal.

For the purpose of evoking the true essence of harmonisation, it's relevant to revisit the contribution of international organisations on cross-border commercial transactions. Major international organisations, including the United Nations Commission on International Trade Law (UNCITRAL) and the World Trade Organization (WTO), have appreciably achieved a harmonised legal order paving the way for standardised laws facilitating cross-border commercial transactions. While the need for harmonisation is relevant for all categories of cross-border transactions, including cross-border M&A transactions, most efforts by international organisations are centred on harmonising international trade. However, such models of harmonisation provide substantial insights on the significance and success of harmonisation in cross-border transactions, thereby serving as signposts for a harmonised corporate legal order concerning cross-border M&A transactions.

Harmonisation: a deeper dive through the lens of international organisations

While assessing the contribution of international organisations in cultivating the spirit of harmonisation concerning cross-border commercial transactions, the contribution of the WTO cannot be discounted. The WTO, established with the aim of standardising international trade by creating hassle-free cross-border transactions, is the most concrete example of harmonisation. It mandates jurisdictions to cooperate for the purpose of securing the greater interest of standardisation in cross-border international trade. It has 164 member countries and oversees their cross-border trade relations, representing 98 per cent of world trade.[5] It contains binding substantive and procedural laws, inter alia, including obligations concerning non-discrimination among international goods, applicable to all jurisdictions equally, and possesses the power to impose sanctions in cases of breaches of the obligations by jurisdictions. Most significantly, it provides for special and differential treatment for emerging economies concerning the implementation of their obligations, in furtherance of which emerging economies are inter alia provided with longer transition periods to implement their international obligations as compared to developed economies. It also provides for dispute resolution forums with the ability to issue binding decisions, thereby providing a holistic statutory force to realise cross-border international trade.

Another international organisation serving as an apt model for harmonisation comes in the form of UNCITRAL[6], which has the declared aim of harmonising and modernising the rules on international business through its model laws. As an example of one of its model laws, the UNCITRAL Model Law on Cross-Border Insolvency issued in 1997 (‘the Model Law on Insolvency’) facilitates cross-border insolvency concerning companies that have assets or creditors in multiple jurisdictions. The Model Law on Insolvency is founded on four pillars, namely access to the courts of foreign jurisdiction, recognition of foreign proceedings, the unambiguous specification of relief available and forging international cooperation on locating assets in other jurisdictions.[7]

While the assimilation of corporate laws around the globe reflects the clear potential of harmonisation concerning cross-border M&A transactions, there is a lack of globally coordinated efforts to crystallise a harmonised corporate legal order to serve cross-border M&A transactions.

Owing to the lack of a harmonised structure, emerging economies continue to accommodate either the most stringent laws without undertaking a needs-based assessment or provide unwarranted exemptions in regard to fundamental areas of compliance in order to garner investments. Both approaches are extreme ends of the spectrum in regard to the need to establish efficient corporate laws and this situation calls for regulation concerning the larger interests of stakeholders, shareholders and the ownership of companies established in emerging economies.

A harmonised corporate legal order: a necessity for emerging economies

Harmonisation comes with advantages for both developed and emerging economies, as the facilitation of cross-border operations is foundational to the core of harmonisation. However, considering the practices concerning cross-border M&A transactions involving emerging economies, it is contended that harmonisation should be employed as an instrument to protect emerging economies against unwarranted practices that such economies undertake in order to attract investments.

There are numerous examples that demonstrate practices that are contrary to a welfare-oriented approach in certain jurisdictions, including a lack of sufficient labour welfare standards, unwarranted tax exemptions, poor employment protection and an overall absence of state surveillance on corporations. While such relaxations of the legal requirements attract M&A deals and ease out due diligence, these exemptions compromise the welfare-oriented objectives of emerging economies, thereby leading them to a race to reduce protections and paving the way to a ‘race to the bottom’, in which emerging economies compete with each other to create the most conducive environment for investors, but rob themselves of achieving their welfare-oriented objectives in the process. As one of the most recent examples, owing to the global technological advancement, contemporary technology and data-oriented companies are surging. The global spending on digital transformation is projected to be US$3.4tn by 2026.[8]

Considering the enormous proliferation of data dependence, emerging economies including India can be seen to be focused on easing cross-border data transfers even at the cost of privacy of their own citizens[9], while many other countries including Myanmar, Sudan and Venezuela, etc, are delaying the implementation of comprehensive data protection legislation in order to entice tech-oriented and data-driven companies.[10]

A harmonised corporate legal order could resolve the issues concerning the race to the bottom through the inculcation of minimum standards on stakeholder protection that would be expected to be ensured by the transacting jurisdictions, which could assist in removing the lack of robust regulatory forces in certain emerging economies.

Another issue for companies based in emerging economies is that investors and/or acquirers from developed economies impose ESG standards on corporations in emerging economies. Such standards come at exorbitant capital and operational costs, which add to the burden on revenue models in emerging economies, causing them to suffer from a financial perspective.[11] This is especially true for the Global South, which is home to several major emerging economies.

Environmental concerns are bound to occur in emerging economies, as the manufacturing units of most corporate giants are situated within the territories of emerging economies, which serve developed economies at the cost of environmental harm to their biodiversity. Adding the additional burden of employing environmentally sustainable methods of operation might destabilise the revenue models of companies based in emerging economies. While it is vital to address environmental concerns, these can be catered to during later stages of the process, after a relatively stable revenue model has been achieved.

Harmonisation can assist in incorporating relevant transition periods for the accommodation of ESG standards by companies based in emerging economies, which can provide considerable remedy to the unwarranted imposition of ESG norms by developed economies, while retaining investments.

Further, cross-border M&A deals are majorly reliant on negotiations and mutual agreements in which larger corporations can be fairly assumed to have greater powers. Generally, there is an absence of neutral authority, especially prior to the conclusion of deals. Consequently, the time period for due diligence is often unregulated, and the terms of the agreement often favour the most powerful player. Harmonisation can provide a level playing field through efficient negotiation and disclosure requirements and can also involve wider scrutiny by courts and tribunals through apt inter-jurisdictional cooperation.

Considering the knowledge of market forces by the target company is a significant determinant of efficient due diligence, harmonisation can reduce the cost of due diligence through facilitating international cooperation concerning inter-jurisdictional market forces and by mandating relevant disclosure requirements concerning regulatory compliance, thereby providing an advantage to companies involved in cross-border M&A transactions.

The way forward

Harmonisation has the potential to link up all jurisdictions as a concrete whole for the purpose of facilitating a structured, organised, standardised and objective statutory force, devoid of fragmented rules, concerning cross-border M&A transactions. As developed economies continue to exert ESG norms, and emerging economies continue to sink down in the race to the bottom, robust international regulatory intervention is the need of the hour. Such intervention is necessary for the purposes of infusing appropriate corporate governance values within cross-border M&A transactions to prevent the unwarranted exploitation of emerging economies and to induce momentum to combat the international inertia concerning the harmonisation of cross-border M&A transactions.

As harmonisation has found considerable acceptance in other areas of cross-border commercial transactions, inspiration can be taken from the established models for harmonised cross-border commercial transactions. While the provision of special and differential treatment for emerging economies is vital, unworkable timelines for the completion of due diligence and the efficient negotiation of a level playing field can be counted as necessary inclusions. In addition to this, the exact substance and procedure concerning international coordination and cooperation needs to be decided in the context of prevalent issues and the extent of procedural coordination possible among jurisdictions in order to facilitate cross-border M&A transactions.

The views expressed in this article are the personal views of the authors.



[1] Katharina Pistor et al, The Evolution of Corporate Law: A Cross-Country Comparison (University of Pennsylvania Journal of International Law, Volume 23, Issue 4, 2014), available at: https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1287&context=jil

[2]  Umakanth Varottil, The Evolution of Corporate Law in Post‐Colonial India: From Transplant to Autochthony (National University of Singapore, Working Paper 2015/001, 2015) available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2557809

[3]  See n 1 above.

[4]  Carsten van de Sande et al, The Corporate Governance Review: Germany (The Law Review, 2023), available at: https://thelawreviews.co.uk/title/the-corporate-governance-review/germany

[5] World Trade Organization, What is the WTO, available at: https://www.wto.org/english/thewto_e/whatis_e/whatis_e.htm

[6]  United Nations, About UNCITRAL, available at: https://uncitral.un.org/en/about

[7] UNCITRAL, UNCITRAL Model Law on Cross-Border Insolvency (1997), available at: https://uncitral.un.org/en/texts /insolvency/modellaw/cross-border_insolvency

[8] Statista, Digital Transformation: Statistics and Facts (2023), available at: www.statista.com/topics/6778/digital-transformation/#topicOverview

[9] S 17, 18(1)(d), 18(2), 18(3), The Digital Personal Data Protection Bill, 2022, India.

[10] United Nations Conference on Trade and Development, Data Protection and Privacy Legislation Worldwide (December 2021), available at: https://unctad.org/page/data-protection-and-privacy-legislation-worldwide

[11] Sarah Murray, Making funding flows fair: Must ESG be bad news for emerging markets? (The Financial Times, October 2022), available at: www.ft.com/content/15008f52-0fcd-4b8e-a70e-b64316030588