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Cross-country M&A deals and creditor rights: 4 FAQs

Merger and acquisition (M&A) deals that involve businesses from two different countries make up over one-third of all worldwide M&A transactions. These transactions can have legal ramifications that impact not just the businesses and their shareholders, but also impacts creditors who are attempting to collect on debts.

Having a basic understanding of some of the more common issues that can arise in these situations can help creditors understand the best course of action to better ensure they receive payment.

Are creditor rights really important to M&A transactions? First, it is important that creditors understand the role they play in the M&A world. Strong creditor rights play a crucial role to M&A transactions. A publication by NYU touched on this, noting a strong set of creditor right regulations allows for creditors to have assurance that the risk they take on an investment will be supported.

If the investment pays off, everyone benefits. In fact, the ultimate conclusion in the NYU piece noted above was that when countries have strong creditor rights, firms act more responsibly. They take fewer risks by diversifying their acquisitions, generally benefiting all involved.

However, the creditor may only be willing to take that initial gamble and offer financing because if the investment falls through, the creditor can have some recourse. Without strong creditor rights, the investment may not have been made in the first place.

Who has jurisdiction over the assets? If creditors find themselves dealing with an M&A deal that involves businesses in other countries, a big question involves jurisdiction. A recent publication out of Harvard discussed this question, touching on jurisdictional issues creditors can face when attempting to gain payment from a debtor.

When a creditor for a secured interest is involved, jurisdiction often falls to the physical location of the asset. However, this is not always the case. A number of things can impact the jurisdiction of the case. Global reform of bankruptcy laws has increased the ability of creditors to arbitrage, essentially buy and sell assets, across various jurisdictions. As a result, in some situations creditors can use this to their advantage and posture themselves into creditor friendly jurisdictions.

Are some jurisdictions better than others? Yes, some countries have better protections for creditors than others. However, it is important to note that the simple presence of creditor protection regulations is not enough. Countries must also have a history of enforcing these regulations in order to be deemed creditor friendly.

How can creditors be sure to receive payment? Making an investment is always a bit of a gamble, but legal protections are available to help better ensure that both parties meet their obligations. If the debtor fails to do so, creditors can benefit from the legal counsel of an experienced creditors' rights attorney. This legal professional will help guide you through the process, better ensuring your business interests are protected.

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