Will the increasing trend for companies based in developing nations to acquire G7-based competitors re-write the rule-book on corporate ethics?

It used to be so simple: large multinational companies, typically based in a "G7" industrial nation, would expand into new territories - often by acquiring leading domestic companies. Following the acquisition, the G7 company would require its new subsidiary to adopt its own working practices, language, and corporate ethics - normally based on the company's "home state" laws. Time and time again, local in-house lawyers working for US-based multinationals complained about being asked to impose working practices based around compliance with the US Foreign Corrupt Practices Act, even though the Act placed them at a disadvantage compared with domestic competitors. In much the same vein, local corporate counsel often complained how global corporate policies, designed to promote head office values around the world, often proved incompatible with the laws of the countries where they worked.

These concerns remain, and are frequently heard at meetings of in-house lawyers around the world. But, as an ever greater number of G7 multinationals find themselves being acquired by companies based in "developing" nations - an interesting question occurs. What happens if a G7 company's new "head office" - perhaps based in Shanghai, Sao Paulo, Moscow or Delhi - starts to assert its authority, and its own "national" values? And what happens if these values are incompatible with the laws and working practices prevalent in California, or England, or France?

At first glance, this issue may appear too esoteric for most in-house counsel to give a moment's thought to. But then consider this: in the past few years, leading G7 multinationals around the world have been acquired by companies based in "BRIC" (Brazil, Russia, India, and China) nations. Acquired G7 companies include the Anglo-Dutch steel manufacturer, Corus Group, which was purchased by India's Tata for ?6.2 billion following a BRIC-led competitive bid between Tata and Companhia Siderurgica Nacional of Brazil, and IBM's PC business, acquired by China's Lenovo Group for US$1.25 billion. Among other BRIC nations, Russia's Severstal recently agreed to buy Esmark Incorporated's extensive steel manufacturing operations in the US for $775 million, while Cemex, a Mexican cement company, acquired Britain's RMC in a ?2.3 billion takeover. Nor are these acquisitions isolated examples. Both the KPMG's Emerging Markets International Acquisition Tracker, and also research carried out by the United Nations Conference on Trade and Development, report that BRIC nation companies are increasingly willing to engage in M&A activity with G7 companies.

So, given this clear trend towards BRIC-nation acquisitions, should general counsel at G7 companies be worried about this development?

Preliminary considerations

In all probability, the short answer to this question is likely to be "no" - at least not in most situations. As a starting point, some of the main reasons that many BRIC acquisitions are taking place is because the acquiring companies want access to G7 markets and technology - but also to corporate expertise. As a result, few BRIC-led acquisitions lead to an immediate "regime change" of senior personnel within the target company. "Many BRIC acquirers are often happy to leave incumbent management of the target in place," comments corporate finance partner Chris Parsons, who chairs Hebert Smith's India Group.

Internally, the legal department of the G7 target is likely to find the subsequent takeover negotiations to be a surprisingly conventional affair. Specifically, it is extremely unlikely that they will find themselves negotiating with an unfamiliar BRIC-nation law firm, using unfamiliar negotiating techniques or working practices. Local firms may serve BRIC companies' local markets very well, but once large BRIC companies step outside their home markets, many immediately switch to relying on large Anglo Saxon legal advisors (see box - A selection of BRIC advisors to G7 acquisitions). There are two main reasons for this: with the notable exception of Brazil, a common factor among many BRIC nations is that their local law firms have not generally expanded overseas. Such firms are therefore physically incapable of leading such cross-border transactions. Secondly, whatever the nationality of the acquiring company, the actual "nuts and bolts" of a G7 acquisition will inevitably be run under the law of the place where the deal is taking place - be it in England, France or California. Therefore, for the foreseeable future, it is likely that only G7 law firms will have the physical capacity, and the G7 law expertise, to advise their BRIC-based clients on such takeovers.

What is more, anecdotal evidence suggests that "big ticket" multinational acquisitions by BRIC-based companies will continue to be run under New York or English law, as they are now. Both English and New York law continues to be respected around the world for their flexibility and enforceability, so their continued dominance in facilitating cross-border deals is not currently in question. BRIC acquisitions run out of South America may have a slight preference for New York law because it is comparatively "local". Equally, Indian acquirers may have a slight preference for English law, because they have confidence with the common law system, and because of historical and cultural ties between India and the UK.  "India is a common law jurisdiction, and Indian companies are comfortable using English law to document their international acquisitions," says Herbert Smith's Chris Parsons. Herbert Smith has previously acted for members of the Tata Group on its numerous acquisitions of G7-based multinationals.

Exposure to G7 regulators

It is perhaps self-evident that any BRIC-based company who can afford to acquire huge G7 multinationals are likely to be large and sophisticated.  As a result, it is probable that such companies will already have some exposure to the G7 regulatory framework. China specialist David C. Buxbaum, who works for Anderson & Anderson LLP, says: "Many Chinese companies are now looking to list on G7 stock exchanges. In terms of developing their exposure to G7 business practices, that's a step in the right direction." Indeed, it is increasingly common for G7 stock markets to actively promote their services to BRIC-based companies. For example, the London Stock Exchange now has regional offices in both Hong Kong and Beijing, and has at least 100 clients based in the Commonwealth of Independent States, and a further 50 based in India. Listed companies are, of course, also subject to regulatory oversight by that nation's securities regulator.

Of course, cultural and regulatory differences between a G7 target and their BRIC national acquirer may be more pronounced if the G7 target finds itself being acquired by a large - but private - company based in a developing nation. Such companies may not bring with them the same level of corporate accountability and transparency that their publicly-traded equivalents' enjoy. Likewise, problems may occur if a G7 company is acquired by a company based in a country where even public companies have a poor reputation for transparency, adherence to the rule of law, and good corporate governance.  But such difficulties are not unique to BRIC-originated takeovers - many commentators have raised similar concerns in relation to G7 companies being acquired by sovereign wealth funds.  Around the world - and not just among G7 and BRIC companies - the level of corporate sophistication tends to decrease in parallel with the company's global turnover figures or headcounts.

Post-acquisition convergence

Once an acquisition is completed, it would be useful for local counsel to familiarise themselves with the key domestic laws and regulators of the country where their new parent company is based. Here, the head office legal function is an obvious source of information and advice.  By using this resource, local counsel can better understand the culture and business imperatives of their new employer. Just as companies with US headquarters tend to base their global policies and procedures on their domestic regulatory framework, so BRIC nation companies are also likely to base their own internal procedures on their "home state" laws and business culture.

Of course, just because a branch office understands the culture and operational priorities of their new head office function, it does not mean that it can afford to neglect the essential role of enforcing compliance with the company's domestic law obligations. Therefore, if a local counsel believes their country's laws are fundamentally irreconcilable with the policies and working practices promulgated by head office, they must immediately alert their superiors. They must request that their employers' global policies are amended, to allow them to comply with their local law requirements. The request should be carefully supported by arguments and list sanctions for failure to comply.

Regulatory convergence

Of course, it is always possible to overstate the extent to which regulatory differences between countries pose insurmountable barriers to cross-border acquisitions. Directors from G7 nations often believe - quite wrongly - that developing nations have lower regulatory standards, or standards that bear no resemblance to G7 working practices. In fact, this is not the case, especially where developing and G7 nations share a common history or landmass. "Many concepts of corporate law in Brazil, especially in relation to company managers' fiduciary duties and the rights of minority shareholders, are based on common law principles," says Eduardo Salomao Neto, a banking and capital markets partner at Brazilian law firm Levy & Salomao Advogados, by way of example. "These principles have largely been bought over from the USA. As result, US laws are not strange to us here in Brazil." Besides working as a private practice lawyer, Mr Salomao is also a board member of Brazil's Embraer, one of the world's largest aircraft manufacturers. Embraer has extensive operations in the US, Europe, China and beyond.

More generally, BRIC nations are becoming increasingly committed to adopting internationally accepted standards of behaviour. "Brazilian regulators have been pushing for the adoption of Generally Accepted Accounting Practices like those in the USA, as well as International Financial Reporting Standards (IFRS) convergence," adds Cristina de A. Salvador, head of corporate law at Brazilian law firm Miguel Neto Advogados Associados. Indeed, both Ms Salvador and Mr Salomao point out that Brazil has had its own corporate governance programme for several years, promoted by both the Brazilian Stock Exchange (the BM&FBOVESPA) and by private civil institutions, such as the Brazilian Corporate Governance Institute. Anderson & Anderson's David C. Buxbaum adds a Chinese perspective: he says that China's attitude towards copyright infringement had improved since the country joined the World Trade Organisation.

Even where considerable differences still remain between G7 and BRIC practices, there appears to have been a degree of convergence between the two groups of nations in recent years. For example, G7 companies have long been extremely conscious of the need to comply with strict competition laws, because they feared the possibility of dawn raids and massive fines if they didn't. Until recently, China and India did not have comparable laws - so this issue was simply less of a priority for company directors based in those two countries. However, this key regulatory difference between east and west is rapidly becoming less pronounced. In August 2007, China implemented its own anti-monopoly law. In India, enforcement of the country's much-delayed reforms to its own anti-trust laws is finally due to commence in 2009. Both China and India's new competition law are loosely modeled on the EU's own anti-trust provisions.  Within both countries, governments and local trade groups are now actively raising awareness of these new laws with their local business communities - as are domestic and international law firms, such as Herbert Smith.

Conclusions

In general, any cross-border acquisition invariably results in a degree of legal and cultural uncertainty, both while the deal is progressing, and during the subsequent integration process. But one thing is certain - international acquisitions are no longer a "one-way" street between G7 and developing nations. In future, G7 counsel will increasingly have to accept that "their way" is not the only possible method of running a multinational company.

Furthermore, G7 counsel should avoid lazy stereotypes in relation to the BRIC invasion. The presence of international law firms on BRIC acquisitions, together with the acquiring company's adherence to international regulatory standards, may well make the whole process less traumatic that G7 counsel may initially fear. There will, invariably, be specific areas of friction between the company's new head office and the newly relegated G7 branch office. But such friction between countries is not new phenomenon, and is not normally a fundamental barrier to the deal's success. To a large extent, it does not matter in which country governing laws and policies originated. What matters most is that a cross-border acquisition can be made to work from a legal perspective, and that the merged company' policies can be accepted and implemented by all of its employees.

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