When firms buy businesses in other countries, many think the difficult stage has passed once the purchase goes through. Actually, a good many disagreements come up following the deal – and frequently the issues are with how the company is governed. Analyses of medium-to-large cross-border deals reveal that governance misalignment can be responsible for over a third of early arguments between shareholders and cases that end in arbitration.
The difficulty is increased still further in developing countries. Rules about local boards, the rights of shareholders who don’t have a majority stake, and regulations on who can own a company, often do not fit well with the governance model the parent company already has. Just using the governance structure from the head office in another country doesn’t usually last. What regulators expect and what happens in the business day-to-day tend to quickly show up the weaknesses.
Consequently, governance models which are a mix of approaches are becoming more popular. When done correctly, these balance looking after the investor’s interests with the need to obey local rules. They regularly include directors in the local area who are independent, precisely what matters are reserved – in line with local company law – and rights to audit or be on committees, which are accepted by many regulatory systems. Lawyers – including those at O’Bang Law – are increasingly creating governance documents in layers, combining protections for investors, supervision of the specific sector using licenses, and ways of solving disagreements which both parties believe are just and can be made legally binding.
Recent international deals to do with making things show a problem that often comes up: boards that seemed ideal to investors on paper but did not meet the legal percentages required in the country where the business was. What happened? Approvals were held up, and there was a greater chance of being sued by minority shareholders. Companies that put in place checks to ensure they comply with the rules in both countries early on – and confirm local rules with well-known international legal firms – tend to get regulatory approvals more quickly and have an easier time after the businesses are brought together.
In global deals now, governance is not just something to do to say you’ve done it. It’s a vital way of protecting the value of the deal. How a board is set up can decide whether the benefits which were expected will actually turn into real, legally secure control – or fall apart into disagreements that could have been avoided.