Cross-border reverse takeovers: practical steps to consider

Businesses and stakeholders should be aware of some of the challenges that may arise during the transaction and after it has been completed, particularly when dealing with RTOs that involve multiple branches and entities.

While every RTO is different, here we set out some of the most common issues to be aware of during these transactions.  

Financial due diligence

Reporting accountants must carry out multi-faceted financial due diligence when an RTO is being carried out.

Thorough due diligence of the target companies is an important step, including a review of historical financial statements, liabilities and contingent liabilities. Sufficient time should be allowed for the financial due diligence because of the complexity of cross-border deals where different accounting standards may apply. 

Financial regulations have a major impact on a deal, including currency exchange controls, cross-border payment structures and the regulations in each jurisdiction. Such matters can also affect the company’s valuation. 

A lack of understanding of how cross-border financial regulations can complicate the movement of money and assets can cause issues to capital flow or currency conversions and impact the business.

Legal due diligence 

Legal due diligence should also take place to mitigate legal risks and liability that could undermine the transaction or future business operations.

This involves reviewing the corporate structure and governance of both parties involved in the RTO, ensuring that all entities comply with corporate laws in their respective jurisdictions, verifying the legitimacy of incorporation, reviewing shareholder agreements and understanding the governance framework.

Hidden liabilities related to shareholder disputes, governance issues or unresolved compliance obligations in each jurisdiction must be scrutinised to avoid undisclosed liabilities that could result in costly disputes, reputational damage or future issues.

Any potential back taxes, outstanding audits or tax disputes should be clearly understood to avoid a situation where the post-deal financial position of the company is affected or impacted.

A thorough review of intellectual property rights, including patents, trademarks, copyrights and licenses, should be performed to ensure all IP is properly registered and there are no ongoing or potential IP disputes.

Employee contracts, benefit plans and the overall framework for labour law in the relevant jurisdictions should also be evaluated, alongside any potential workforce reductions, employee claims or union agreements if any are in place.

Cross-border RTOs often result in employee-related issues, including severance, pensions or workplace rights. Ensuring that local labour laws and international employment standards are complied with helps avoid costly legal claims or potential union disputes. 
Another area for review is regulatory requirements and approval needed for the deal, including foreign investment laws, competition laws and industry specific regulation or legislation.

Failing to meet regulatory requirements or obtain necessary approvals can delay or result in termination of the transaction, with the best way to avoid this situation being to engage with regulatory bodies early in the hope of streamlining approvals and ensuring compliance with foreign investment restrictions.

Data protection laws in each jurisdiction, such as the GDPR in Europe, must also be considered alongside both companies’ data privacy practices.

Non-compliance with data privacy laws can result in significant fines, reputational damage or regulatory intervention, especially when data is transferred across borders. A robust and comprehensive data privacy compliance check is necessary during an RTO to ensure future legal complications are avoided.

The cultural and operational aspects of the integrated companies should be examined and assessed. Legal teams should collaborate with human resources and management to address any potential challenges that may occur because of corporate culture, management styles or differing operational procedures.

A proactive approach to integration ensures a smoother transition once the deal is completed and legal advisers should be regularly engaged with throughout the process to ensure that the regulatory requirements in each country are understood. 

Documentation 

A well-organised and secure virtual data room will help streamline due diligence process by ensuring that all relevant documents are uploaded and accessible to parties involved in the RTO. 

Up-to-date financial statements, legal contracts and intellectual property records should be added in a timely manner.

All documentation, including sale and purchase agreements, relationship agreements, employment related documentation, consent letters and disclosure letters, should be carefully drafted. This includes ensuring terms are clearly defined and contingencies are outlined to avoid future disputes. 

Other steps 

Tax experts should be engaged throughout the process, to ensure the most effective structure for the deal, particularly when multiple jurisdictions are involved.

Culture differences and language issues are also common in cross-border transactions and must be proactively managed to ensure that effective integration is possible once the transaction is complete.

Independent experts should also be involved in the process to ensure an unbiased, third-party evaluation of the target company that considers market conditions and industry trends to ensure that overpaying or undervaluing the deal does not occur.

The potential risks of currency fluctuations and exchange rates, and how they can affect the valuation and financial terms of the deal, should also be considered. Engaging in currency hedging strategies, if necessary, can help alleviate future issues when significant cross-border capital movement occurs.

Finally, the utilisation of technology and the establishment of robust communication protocols between teams in different jurisdictions can help avoid misunderstandings and delays.