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Landscaping Cross-Border M&A Transactions in Emerging Economies [Mergers and Acquisitions].

M & A, Mergers and Acquisitions, Law, Investment, Finance, Corporate Law, Company Restructuring.

Associate, Udo Udoma & Belo-Osagie.

Business, Advertising, Marketing, Entrepreneurship.
Oyemaja; Landscaping Cross-Border M&A Transactions in Emerging Economies [Mergers and Acquisitions].

Prefacing M&A Transactions in Emerging Economies.

Emerging economies are characteristically interesting, yet delicate. They offer good prospects due to population growth and spreading technology utilisation — ideal conditions for Mergers & Acquisitions (“M&A”) expansion. However, the volatile political and legal regimes in emerging economies impact the speed and, in some cases, size of M&A deals. Thus, the first point of action for an acquiring party is commissioning streamlined market research on the relevant jurisdiction. This is essential to an overall deal objective. Emerging markets are individually unique in their macroeconomic outlay; they are aptly described as ‘diverse’ and as defying a ‘uniform narrative’.[1] This feed into the need to survey each market, and determine sectoral risks, exit options, policy changes, economic thresholds, exchange control factors, and inflation.

Where a merger or acquisition cuts across multiple countries, the survey should seek to identify dissimilarities within the same sectors in each of those countries, for example, in mining, financial services, or manufacturing. This is because market entrance requirements and investment risks could vary. For instance, exchange control rules are generally stringent in emerging markets, but the limit on restricting foreign exchange importation and repatriating profit on capital is contextually different per country.

The survey should equally analyse the socio-cultural peculiarities as these countries generally lean towards conservative norms. A risk could arise regarding a burgeoning deal if regulators withhold approvals on socio-cultural influenced public policy. Cultural and social perceptions could equally affect the long-term sustainability of a post-M&A vehicle. In some cases, officials may need assurance that, overall, the deal will be good for the country.[2] Being mindful of cultural differences, particularly in communication styles is essential. One must, to the extent practicable, adopt the customs or approach of the counterparty.[3]

The outcome of a granular economic survey will put the buyer in a vantage position to determine the desired target, sector, and M&A structure for investing.

A final point in this preface will be to investigate and conduct a valuation on the target company or group. One of the key reasons mergers and acquisitions fail is a poor understanding of the target and the target’s business.[4] This may, however, be challenging because the valuation for companies in some emerging markets may be speculative. This is more so for private companies not trading shares on stock exchanges or companies that do not make extensive regulatory and public reporting.

From a transaction standpoint, the concern of speculative valuation naturally arises given that surveys and market factoring are conducted pre-negotiation with the target making it challenging to arrive at a financial assumption until the buyer reviews the target’s financials and records. The buyer’s valuation should account for this margin of error.

M&A Structuring Involving Companies in Emerging Economies.

An international buyer must choose the framework of a specific transaction structure, with the context of jurisdictional nuances in mind. In Nigeria, the M&A structure could be done by way of buying sufficient shares or assets to transfer effective control to the purchaser.[5] In Kenya, this could be by share purchase, share subscription or asset purchase agreements.[6] In South Africa, the options are the sale of shares in the target company from the vendor shareholders to the acquirer, a sale of the target company’s business (or a portion thereof) to the acquirer, or a merger[7]; direct acquisition of equity interests as in Brazil[8]; or through court-driven mergers, demergers, bilateral share purchases, business and asset transfers as in India.[9]

The transaction framework should inform the commercial negotiations between the parties which will be captured in a term sheet. Negotiating the term sheet may not necessarily create legal obligations on the parties unless expressed otherwise, although, depending on the country, commencing M&A negotiations may raise legal and reporting obligations on both the buyer and seller. The buyer must therefore engage local counsel to understand if, at the negotiation stage, shareholders and employees of the target must receive notifications, whether regulatory approval is required, or a court-ordered action is necessary to proceed with negotiations. The purchaser must ensure the seller obtains these notifications and approvals where applicable to prevent the risk of future litigation or sanction.

Companies in emerging economies often have historic tax exposure which is discovered from tax due diligence; however, in pre-due diligence, the purchaser could obtain adequate representations and warranties on the seller’s tax liabilities. This serves the purpose of clawing back indemnities should the tax representation (along with other representations) turn out inaccurate.

The purchaser should ensure the cost of the transaction, including the share purchase price or asset price, reflects the position of a fair valuation. The seller would usually push back on the pricing, but the counteroffer is expected to stay within the range of the valuation threshold.

The purchaser should utilise exclusivity and non-circumvention mechanisms either through a letter of intent or as a separate agreement. This will protect the purchaser against incurring expenses in negotiating with the target and eventually losing the target due to the target’s circumvention. The mechanisms will prevent the target from soliciting offers, breaching confidentiality, and engaging in discussions with other buyers, except to the extent required by law or under a fiduciary duty.[10]

The finalised term sheet will form a substantial basis for drafting the acquisition agreement or documentation. The agreement could be the share purchase agreement, an asset sale agreement, or business combination agreement. In addition to addressing tax issues, asset transfers and employee transfer clauses should be included in the relevant agreement. Similarly, the representation of obtaining shareholders’ consent should be repeated to forestall minority actions, and the term sheet or agreement should reserve certain rights to the buyer, for example, to make a final purchasing decision subject to the outcome of due diligence.

A successfully negotiated term sheet and contract documents is predicated on a positive, collaborative synergy between local and foreign advisors, especially legal counsel. Differences in legal systems and market practice require counsel to the counterparties to focus on achieving a commercial-oriented deal within the bound of legal compliance. Thankfully, legal practice in emerging jurisdictions has developed to accommodate complex cross-border transactions. Today, lawyers in emerging countries are well-equipped to resolve key negotiation issues in M&A transactions. Engaging local lawyers who are well-versed in the target’s industry and who are plugged into the market’s latest political, legal, and regulatory developments is critically important. It is also advisable for buyers to initiate a dialogue with local authorities early and often throughout the transaction to align expectations and minimise the risk of unpredictable regulatory or legal action at a later stage.[11]

On the assumption that parties have struck a deal in principle, the next stage is conducting a comprehensive due diligence exercise on the target.

Due Diligence.

Cross-border M&A is layered with intrinsic information asymmetry, that is, difficulty in accessing information buried within the target’s records.[12] The asymmetry creates a gap between the standard of disclosures typical of developed jurisdictions and that of emerging jurisdictions. Closing this gap requires comprehensive due diligence on the target’s operations. The specific nature of the deal will determine the scope of the exercise. For instance, a heavily regulated sector will require a more delicate approach and expanded scope.

Although document management is of administrative consequence, it is nevertheless a vital part of the due diligence process as counterparties require full document disclosure from the target in real-time. The standard workaround is creating virtual data rooms to upload documents, records, certificates, and regulatory correspondence for the purchaser’s counsel to review.

Legal and tax compliance are important areas to focus on because of the implication of governmental involvement (in the event of non-compliance), and fiscal uncertainties (which require some legal handholding). The political framework of emerging markets increases the probability of changes in these environments which may influence the business model of the acquired entity.[13] These are the pitfalls which may affect M&A deals making comprehensive due diligence invaluable. On the other hand, technical due diligence is useful, but relatively solvable with capital injection and management strategy.

The legal due diligence should achieve the following –

  • be risk-spotting to review red-flag issues or concerns;

  • be high-level to analyse important issues with precision; and

  • provide appropriate recommendations for mitigation.

The purchaser will ideally seek to confirm title to the shares or assets that are to be acquired; identify any change of control provisions or assignment restrictions in material contracts that may be triggered by the proposed transaction; and identify any material undisclosed risks and liabilities.[14] The level of the target’s compliance with regulatory filings, tax payments, and employment obligations has a material impact on the purchaser’s eventual liability. The diligence should disclose the status of regulatory compliance along with assessing existing debt or secured charges on the target’s assets. For M&A transactions involving the transfer of assets, an independent investigation in the relevant registry is necessary to verify the ownership status of such assets. There is an interesting asset classification in Nigeria with respect to movable assets; a separate investigation may be required to be conducted at the National Collateral Registry for targets owning movable assets.[15]

The buyer may accept certain risks if they are not fundamental risks that would lower the value of the asset in question. The buyer must quantify the risks, weigh their impact against the value of the transaction and determine the probability of achieving the target return on investment.[16]

Regulatory Approvals and Anti-trust Vetting.

The last frontier for M&A deals is obtaining the requisite regulatory approvals within statutorily provided timelines. Also, the transaction must satisfy the competition law vetting and get a positive nod from competition authorities. Certainly, failure to notify the competition authorities is fatal to the transaction. A Merger in the Common Market for Eastern and Southern Africa (“COMESA”), for instance, must be notified to the COMESA Competition Commission (“CCC”) and the Federal Competition and Consumer Protection Commission (“FCCPC”) in Nigeria. A merger that has not been notified to the CCC will have no legal effect and no rights or obligations imposed on the parties will be legally enforceable.[17] In China, antitrust infringements may be criminally punishable.[18] The parties should comply with the permissible threshold for change of control in the target, and for a sector with national interest elements, the buyer may need to access the risk of objection from regulators on grounds of public policy or local content restriction. Some jurisdictions prescribe majority local ownership of a company operating in extractive sectors; therefore, a foreign purchaser cannot acquire a majority stake in such companies.

Contractually, parties should agree on who will file clearance or approval requests and pay the associated fees and local taxes. Emerging markets have exchange control measures, therefore practically, the seller should pay the fees and make the filings given its proximity to domestic authorities and it can make payment in the applicable local currency unless otherwise provided by law. Contractual clauses on timing for making appropriate filings should mirror the timing provided in the laws, to prevent late filing or late notification.

Closing the M&A Transaction: Key Considerations.

The parties should agree on conditions that each must satisfy (or waive) as completion or closing obligations. The seller, at this stage, should procure the buyer updates its records to reflect the ownership interest of the purchaser, execute corporate authorisations or resolutions in favour of the buyer, and file necessary documents with regulators. Execution formalities must also comply with applicable rules. In turn, the buyer will be required to pay the purchase price and should note the exchange control implications of importing capital into the target’s jurisdiction. Regulatory approval may be required to document capital importation and currency conversion.

Governing law and dispute resolution mechanisms will be dealt with in the transaction structuring phase; however, parties must be clear on the appropriate forum for resolving disputes as the transaction closes. The governing law has wide-ranging repercussions on the transaction. The ideal choice is to select the law of a stable, predictable, and well-developed legal environment.[19] Unfortunately, emerging jurisdictions are reputed for having volatile legal regimes and protracted litigation. Parties should, therefore, hedge this risk with arbitration clauses which will select a neutral, stable law. Parties should note that mandatory provisions of local law may supersede the choice of laws on specific substantive areas.[20]

Sustainability Post-M&A.

The buyer’s ‘day-one readiness’ is critical for the successful completion of the deal, especially if the buyer, by virtue of a change of control, will make key management decisions. The buyer should plan for business integration before the deal closes.[21] An aspect of integration is quantifying the cost of assimilating the new venture into the target’s existing operations and improving the corporate governance framework. Buyers who adopt a tactical approach to sustainability are often those who create the best long-term value and positional advantage in emerging markets.[22]

The outcome of M&A structuring should lead to the target being run efficiently to extract profit and maximum value for shareholders.[23] For emerging economies, M&A vehicles could be used for the greater good – to acquire new technology, expand innovation, and disrupt market competition.[24]


[1] Rupa Duttagupta and Ceyla Pazarbasioglu. “Emerging markets must balance overcoming the pandemic, returning to more normal policies, and rebuilding their economies.”

[2] Baker & McKenzie – Opportunities Across High-Growth Markets: Trends in Cross-Border M&A.


[5] Fidelis Adewole and Oluwatosin Omobitan: Nigeria: Mergers & Acquisitions Comparative Guide

[6] Gachini Macharia and Christopher Ndegwa: Kenya: Mergers & Acquisitions Comparative Guide

[8] Campos Mello Advogados At a glance: M&A structures and regulation in Brazil.

[9] Kosturi Ghosh: India Negotiated M&A Guide 2022.

[11] Financier Worldwide Magazine: Q&A: M&A in emerging markets – managing risk and creating value.

[12] Alen Sacek - Due Diligence in Mergers and Acquisitions in Emerging Markets: Evaluated Risk Factors From the Academic and Practical View.

[13] Alen Sacek (Supra).

[14] Ezra Davids and David Yuill: South Africa Negotiated M&A Guide 2022 (Supra).

[15] The NCR is a system that allows lenders to determine any prior security interests, as well as to register their security interests over movable assets provided as collateral. Under the Secured Transaction in Movable Assets Act 2017.

[16] Baker & McKenzie – Opportunities Across High-Growth Markets: Trends in Cross-Border M&A.

[19] Matthew Gemello, Christian O’Connell and Marc Paul – International Business: Mergers and Acquisition in a Cross-Border Context.

[20] Matthew Gemello, Christian O’Connell and Marc Paul (Supra).

[21] Baker & McKenzie – Opportunities Across High-Growth Markets: Trends in Cross-Border M&A.

[22] Financier Worldwide Magazine: Q&A: M&A in emerging markets – managing risk and creating value.

[23] Joan Lilian Ogendo and Jared Ariemba: Mergers and Acquisitions for Business Sustainability in Emerging Markets During a Vague Era: A Literature Analysis.

[24] Supra.

Originally published by Markanthony Ezeoha on Linkedin

Oyemaja Law.

Oyemaja Executives.


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