Buying a Business Abroad Can Expose Hidden Liabilities

The most expensive aspect of an overseas acquisition could be a liability that never appeared in the seller’s valuation. A customer contract could allow termination on change of ownership, a bank may hold security over core assets, and a licence may require regulatory consent before control changes. Each could undermine an otherwise profitable business or prevent the purchase from proceeding as planned.

 

Legal due diligence examines what a buyer will acquire and whether the business can continue operating after completion. The initial choice is between buying the company’s shares and selected business assets. In a share purchase the company generally retains its contractual obligations and past liabilities; an asset purchase offers more control over what is acquired, although employment, tax and other statutory rules may still attach obligations to the transfer.

 

Ownership Beyond The Registry

 

Corporate diligence begins in the entity being sold, its subsidiaries and the seller’s authority to act. Incorporation documents, constitutional rules, shareholder registers, board minutes and past share transfers should be reconciled with official filings. Shareholder agreements, options and pledges can reveal rights that restrict a sale or alter the stake available. Earlier share issues need checking for proper authorisation, along with unpaid capital commitments and any shareholder waivers required before completion.

 

Beneficial ownership requires a separate inquiry into the individuals who ultimately own or control the business. Nominees, trusts and intermediate holding companies can strip the registered shareholder from the person exercising control. The review should reconcile ownership declarations with voting arrangements and independent records, then assess applicable reporting and sanctions requirements. Definitions and disclosure thresholds vary by jurisdiction; a familiar percentage from the buyer’s home market is an unsafe substitute for the local test. Where US sanctions apply, an entity is treated as blocked if blocked persons together own at least 50%, directly or indirectly, even when it is not listed. Control alone does not trigger that particular rule.

 

Licences And The Right To Acquire

The licence schedule should match the activities actually generating revenue, including operations conducted through subsidiaries. Buyers need to establish which entity holds each permission, its expiry and whether the deal triggers notification, consent or a fresh application. Foreign ownership limits and sector-specific suitability requirements also need checking before the proposed ownership structure is settled. Licence conditions, inspection findings and enforcement correspondence can reveal restrictions that are not apparent from an expiry date or a record of renewals.

 

Competition clearance and investment screening are separate issues. Transactions requiring notification under the EU Merger Regulation generally cannot be implemented before clearance. Under Britain’s National Security and Investment regime, an acquisition subject to mandatory notification is void if completed without approval. Legal teams must identify filing requirements early and build the necessary clearances into the completion timetable, including time to answer regulators’ questions.

 

Contracts And Debt Can Alter The Price

 

Revenue forecasts deserve to be read alongside the contracts supporting them. Customer, supplier, distribution and lease agreements may contain termination rights, exclusivity obligations or consent requirements. A share sale can trigger a change-of-control clause although the contracting company remains the same; an asset sale may require consent to assign rights or replace the seller as a party to the contract. Amendments and side letters also matter: an expiry date or a rebate agreed outside the main document can undermine the revenue forecast even where transfer is permitted. If an important customer can leave after the acquisition, the buyer has a valuation problem as well as a drafting issue.

 

The loan balance is only the starting point for debt diligence. Finance documents should reveal security over assets, shareholder loans, guarantees for other group companies and restrictions on further borrowing. Property and security searches must be matched to the relevant jurisdiction and asset. Where financing is to be repaid, completion arrangements should provide for repayment and effective releases. A seller’s assurance that an asset is paid for is insufficient if a lender retains enforceable security over it.

 

Employees And Intellectual Property

Employment costs can also change the economics. Accrued leave, bonuses, pensions and severance need examining alongside collective arrangements, contractor status and work permissions, with local advice on consultation duties. In Britain, qualifying transfers under the Transfer of Undertakings (Protection of Employment) rules can preserve employment terms and carry responsibility for earlier breaches of employment rights to the new employer. An asset purchase should not be priced on the assumption that the buyer can simply choose which staff obligations to retain.

Intellectual property presents a different ownership problem. A target may use software, branding or technical designs without owning the rights the buyer expects. In the UK, commissioned copyright works generally belong initially to their creator unless otherwise agreed in writing. Buyers should examine assignments from founders and contractors, licence restrictions, registrations and territorial coverage. The commercial question is whether the acquired rights permit the intended use and expansion, and what it would cost to secure any missing rights.

Litigation And The Tax Position

 

Litigation searches need to be supplemented by a schedule of pending and threatened claims, arbitration, settlements and regulatory investigations. Outstanding judgments and continuing obligations under earlier settlements also belong on that schedule. Public records cannot reveal every dispute: private arbitration materials may remain confidential under the applicable rules, while a threatened claim may not yet have been filed. The assessment should consider the remedy sought as well as potential damages. An injunction affecting a core product can be more disruptive than a larger claim payable in money.

 

Tax diligence should reconcile returns, accounts and correspondence with the authorities across the jurisdictions where the business operates. Corporate income tax is only part of the exposure; payroll deductions, VAT or sales taxes, customs and withholding taxes may need attention. Open audits, related-party transactions and the conditions attached to tax reliefs warrant particular scrutiny. The review period should follow local assessment rules and identified risks, rather than an arbitrary request for a fixed number of years.

 

An asset transaction is no universal shield against historic tax. California’s sales and use tax rules, for example, can impose successor liability on a purchaser of a business or stock of goods, making tax clearance and purchase-price withholding relevant before funds are released. Tax treatment of the acquisition itself also matters. Transfer taxes, available reliefs and financing costs should be modelled before the buyer commits to a structure.

 

Putting The Findings Into The Agreement

 

The diligence report should lead to specific decisions in the purchase agreement. Missing approvals may become conditions to completion; quantified liabilities may justify a price reduction or funds held in escrow. A known tax dispute may require a targeted indemnity covering the specified loss, with rules on who controls the defence and settles the claim. An indemnity allocates loss between the parties; it does not by itself extinguish the underlying liability to a tax authority. General warranties about the business still matter, but their protection depends on the governing law, wording, disclosures, liability caps and deadlines negotiated.

 

Recovery deserves equal attention. A promise from a seller with no remaining assets offers little practical protection, particularly if enforcement must take place abroad. Buyers should examine the governing law, dispute forum and location of assets before relying on an indemnity, and refresh material searches before closing. Where an essential permit or revenue contract will not survive the transaction, negotiating a lower price may leave the buyer paying less for a business it still cannot run.

Dr. Sunil Ambalavelil is the Global Executive Chairman of Kaden Boriss, an international law firm specialising in franchise and business agreements. A seasoned legal adviser, he has advised and supported the international growth of numerous global brands, helping them navigate the legal complexities of cross-border expansion.

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