Posted in M&A

By Tony Liu, Founder and Principal Business Trial Attorney 

In Summary 

Expanding through an international acquisition can open new markets, strengthen a company’s competitive position, and accelerate growth. However, cross-border acquisition legal issues often extend far beyond the purchase agreement itself. California businesses considering the purchase of a foreign company should evaluate foreign investment laws, regulatory approvals, tax planning, employment obligations, and cross-border due diligence before committing to a transaction. Addressing these issues early with the help of a Newport, CA business litigation lawyer can reduce unexpected risks and help keep the acquisition on track.

Understanding the Legal Challenges of Buying a Foreign Business

Growing beyond the United States has become an increasingly attractive strategy for California companies looking to reach new customers, diversify operations, or acquire valuable technology and intellectual property. An international acquisition may appear similar to purchasing a domestic business, but in practice, the legal landscape is considerably more complex.

Unlike a transaction involving two companies operating solely within the United States, an international acquisition may require compliance with California law, federal regulations, and the laws of one or more foreign jurisdictions—all at the same time. A deal that appears straightforward during negotiations can become delayed or significantly more expensive if regulatory approvals, ownership restrictions, or hidden liabilities are discovered late in the process.

For that reason, businesses often benefit from involving experienced legal counsel before signing a letter of intent rather than waiting until definitive agreements are being drafted. At Focus Law, assisting companies with international business transactions frequently involves coordinating legal issues across multiple jurisdictions while helping clients understand how California and federal laws interact with foreign legal requirements. Businesses navigating these complex transactions can benefit from working with an international transaction lawyer who understands the legal and regulatory considerations involved in cross-border acquisitions.

Key Legal Issues to Evaluate Before Buying a Foreign Business

Cross-border acquisition legal issues encompass the legal and regulatory considerations that arise when a California company acquires a business in another country. These issues typically involve multiple legal systems, government agencies, tax authorities, and contractual requirements that do not exist in a purely domestic acquisition.

While financial performance often receives the greatest attention during negotiations, many of the largest post-closing problems arise from legal issues that were either overlooked or misunderstood before the transaction closed.

These may include:

• Foreign ownership restrictions
• Government approval requirements
• Intellectual property ownership
• Employment obligations
• International tax planning
• Currency and financing risks
• Sanctions compliance
• Cross-border due diligence

Understanding how these issues fit together is often just as important as negotiating the purchase price.

Why Are International Acquisitions More Complex Than Domestic Deals?

One misconception is that buying a foreign business simply means adding another legal team or translating contracts into another language.

In reality, international acquisitions often involve several legal frameworks operating simultaneously. A California company may still be governed by the California Corporations Code while also complying with U.S. federal laws regulating foreign investments, sanctions, export controls, and anti-corruption requirements. At the same time, the target company remains subject to its own country’s corporate, tax, labor, and regulatory laws.

This overlap creates legal questions that rarely arise in domestic transactions, including:

• Does the foreign government require approval before the acquisition can close?
• Can a U.S. company legally own the target business?
• Will existing licenses transfer to the buyer?
• Do local employees receive statutory protections that increase transaction costs?
• Are there restrictions on transferring intellectual property or customer data across borders?

These questions often determine whether a transaction proceeds smoothly or becomes delayed after months of negotiations.

What Legal Issues Should a California Company Evaluate Before Buying a Foreign Business?

1. Foreign Investment Regulations May Limit the Transaction

One of the earliest questions many buyers should ask is whether the country permits foreign ownership of the business being acquired.

Many countries regulate or restrict foreign investment in industries considered strategically important, such as telecommunications, defense, banking, healthcare, transportation, energy, and natural resources. Even where foreign ownership is permitted, government approval may be required before the transaction can close.

Similarly, certain U.S. regulations may also become relevant depending on the transaction’s structure and industry. For example, the U.S. Department of Commerce’s SelectUSA Investor Guide discusses how limitations on foreign investment and government review processes may affect transactions involving sensitive industries. In addition, the Organisation for Economic Co-operation and Development (OECD) publishes its Foreign Direct Investment Regulatory Restrictiveness Index, which illustrates how countries impose varying levels of statutory restrictions on foreign investment across different sectors.

Waiting until definitive agreements have been negotiated to investigate these requirements can delay closing, increase transaction costs, or even require the deal to be restructured if regulatory approval is denied or additional conditions are imposed.

2. Cross-Border Due Diligence Requires Looking Beyond Financial Statements

Most buyers understand the importance of reviewing financial records before acquiring a business. However, cross-border due diligence extends far beyond accounting documents.

A comprehensive legal review may include evaluating:

• Pending litigation
• Government investigations
• Regulatory compliance history
• Environmental liabilities
• Tax disputes
• Existing licenses
• Customer contracts
• Supply chain obligations
• Data privacy compliance
• Anti-corruption policies

One issue that receives surprisingly little attention is the reliability of publicly available information.

In some countries, corporate filings are readily accessible and regularly updated. In others, ownership records, financial filings, and litigation history may be incomplete, decentralized, or difficult to verify. This makes local legal knowledge particularly valuable when confirming the accuracy of information provided during negotiations.

Buyers also should not assume that accounting standards or financial reporting practices are identical to those used in the United States. Differences in reporting rules can significantly affect valuation and post-closing expectations.

3. Intellectual Property Ownership Is Often More Complicated Than Expected

Technology, software, trademarks, patents, and proprietary processes frequently represent some of the most valuable assets being acquired.

Unfortunately, many buyers discover too late that intellectual property ownership is not always as straightforward as it appears.

Questions that deserve careful review include:

• Are trademarks properly registered?
• Are patents enforceable in the applicable jurisdictions?
• Have employees properly assigned inventions to the company?
• Are software licenses transferable?
• Does a third party own any critical technology?

Unlike physical assets, intellectual property rights are governed by the laws of individual countries. Registration in one jurisdiction may not provide protection elsewhere.

The World Intellectual Property Organization (WIPO) explains how international intellectual property protections differ across jurisdictions.

Carefully confirming ownership before closing may prevent disputes that are significantly more expensive to resolve after the acquisition is complete.

4. Employment Laws Can Change the Economics of the Entire Deal

Employment obligations often receive less attention during negotiations than revenue projections or purchase price adjustments. Yet they can become one of the highest unexpected costs following an acquisition.

Many countries provide employee protections that differ substantially from U.S. employment practices. Depending on the jurisdiction, employers may face obligations involving mandatory notice periods, statutory severance, collective bargaining agreements, pension liabilities, employee consultation requirements, or restrictions on workforce reductions.

For example, multinational employers may also need to consider country-specific labor protections discussed by the International Labour Organization.

These obligations may affect integration plans, operating costs, and even whether certain post-acquisition restructuring efforts are legally permissible.

5. Tax Structure Can Significantly Affect the Overall Cost of the Acquisition

The purchase price is only one part of an international acquisition’s financial impact. How the transaction is structured can significantly influence taxes, future operations, and the buyer’s ability to realize the anticipated value of the investment.

For example, buyers often need to evaluate whether an asset purchase or stock purchase is more appropriate under the laws of the applicable jurisdictions. The answer may affect tax obligations, liability exposure, regulatory approvals, and the treatment of existing contracts or licenses. What works well in a domestic acquisition may not produce the same outcome when multiple countries and tax systems are involved.

Other tax considerations may include:

• Withholding taxes on cross-border payments
• Value-added tax (VAT) or goods and services tax (GST)
• Tax treaties between the United States and the foreign jurisdiction
• Transfer pricing rules for related-party transactions
• The tax consequences of repatriating profits to the United States
• The structure of acquisition financing

These issues are often interconnected. A transaction structured to minimize taxes in one country could create unintended tax consequences in another or increase administrative burdens after closing.

The Internal Revenue Service provides guidance on international tax considerations for businesses, including resources addressing cross-border transactions and reporting obligations. Because international tax laws are highly fact-specific, businesses often benefit from involving legal and tax advisors early in the planning process rather than attempting to address tax issues after the transaction structure has already been established.

6. Sanctions Compliance and Anti-Corruption Laws Cannot Be Overlooked

Even if the target company operates legally in its home country, the transaction may still expose a California buyer to U.S. compliance obligations.

For example, businesses involved in international M&A should determine whether the target company, its owners, customers, suppliers, or business partners are subject to U.S. sanctions or export control restrictions. They should also assess whether the company has maintained appropriate compliance programs and whether any past business practices could expose the buyer to future regulatory scrutiny.

Two areas frequently evaluated during cross-border due diligence include:

• Economic sanctions, administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), which restricts certain transactions involving sanctioned countries, organizations, or individuals. 
• The Foreign Corrupt Practices Act (FCPA), a federal law that generally prohibits bribing foreign officials to obtain or retain business and requires certain companies to maintain accurate books and records. The U.S. Department of Justice offers detailed guidance in its Foreign Corrupt Practices Act Resource Center.

While every transaction is different, identifying potential compliance concerns before closing may allow the parties to address them through additional due diligence, negotiated contractual protections, or adjustments to the transaction structure.

How Do Currency Risk and International Financing Affect an Acquisition?

Legal issues are only part of the equation. International acquisitions also introduce financial variables that may affect the value of the transaction between signing and closing.

For example, exchange rates can fluctuate significantly over the course of several months. If the purchase price is denominated in a foreign currency, changes in exchange rates could increase the buyer’s actual cost even though the negotiated purchase price has not changed.

Businesses should also evaluate questions such as:

• Will the purchase price be paid in U.S. dollars or the local currency?
• Should currency hedging strategies be considered?
• Will financing come from U.S. lenders, foreign lenders, or both?
• Are escrow arrangements needed to address post-closing adjustments or contingent liabilities?
• How will purchase price adjustments be calculated if exchange rates change before closing?

Although these issues are often viewed as financial considerations, they can also influence the negotiation and drafting of the acquisition agreement. Addressing currency and financing risks early may help reduce uncertainty and minimize disputes after closing.

Why Is Local Counsel Essential in an International Acquisition?

One of the most common misconceptions is that addressing cross-border acquisition legal issues requires only a single legal team. In reality, international acquisitions often involve multiple jurisdictions, each with its own legal and regulatory requirements.

In reality, international acquisitions often require coordinated advice from professionals in multiple jurisdictions. California counsel may oversee the overall transaction strategy and help ensure compliance with applicable U.S. laws, while local counsel in the foreign jurisdiction can advise on country-specific corporate, regulatory, employment, tax, and property laws.

This collaborative approach can help buyers identify issues that might otherwise go unnoticed, such as restrictions on transferring licenses, mandatory employee consultation requirements, or filing obligations that are unique to the foreign jurisdiction.

At Focus Law, international transactions frequently involve coordinating legal strategy across multiple jurisdictions while working alongside local counsel and other professional advisors. This collaborative approach helps businesses address potential legal issues before they become obstacles to closing. Businesses considering an international acquisition can learn more about working with an international transaction lawyer as they evaluate cross-border opportunities.

8 Legal Steps to Take Before Buying a Foreign Business

Every international acquisition is unique, but a structured legal review can help identify potential issues before they become obstacles to closing. The following cross-border M&A legal checklist outlines several steps California companies should consider before completing the purchase of a foreign business.

1. Identify Every Jurisdiction Involved in the Transaction

The laws governing the acquisition may extend beyond California and the country where the target company operates. Depending on the transaction, buyers may also need to consider U.S. federal regulations, the laws of other countries where the target conducts business, and industry-specific regulatory requirements. Identifying every applicable jurisdiction early can help prevent unexpected legal issues later in the process.

2. Determine Whether Foreign Investment Approvals Are Required

Before committing significant time and resources to negotiations, determine whether the transaction is subject to foreign investment restrictions or government approval requirements. Certain industries and jurisdictions require regulatory approval before ownership can transfer, and failing to account for these requirements may delay or even prevent closing.

3. Conduct Comprehensive Cross-Border Due Diligence

Legal due diligence should extend beyond reviewing financial statements and corporate records. Buyers should also evaluate pending litigation, regulatory compliance, tax obligations, intellectual property ownership, employment matters, contractual liabilities, and any country-specific legal risks that could affect the transaction after closing.

4. Verify Ownership of Intellectual Property and Other Key Assets

Businesses should confirm that the target company owns—or has the legal right to use—the intellectual property and other critical assets that contribute to its value. Reviewing registrations, licensing agreements, assignment documents, and ownership records before closing may help avoid future disputes over valuable business assets.

5. Evaluate Employment and Workforce Obligations

Employee-related liabilities can significantly affect the cost of an acquisition. Buyers should understand applicable employment laws, collective bargaining obligations, statutory benefits, pension liabilities, and any employee consultation requirements that may apply before implementing post-closing operational changes.

6. Develop a Tax-Efficient Transaction Structure

The way an acquisition is structured may affect taxes, liability exposure, financing, and future business operations. Coordinating legal and tax planning early in the transaction can help businesses evaluate available options before the structure becomes difficult to change.

7. Assess Compliance With U.S. and Foreign Regulations

International acquisitions often require compliance with U.S. sanctions laws, anti-corruption regulations, export controls, data privacy requirements, and country-specific regulatory obligations. Identifying compliance issues before closing may reduce the risk of future investigations or enforcement actions.

8. Coordinate Experienced Advisors Across Jurisdictions

Successful international acquisitions often depend on effective coordination among legal counsel, accountants, tax professionals, financial advisors, and local counsel in the applicable jurisdictions. Establishing clear communication among these professionals early in the process can help identify potential issues before they delay the transaction.

What Can Happen If Cross-Border Acquisition Legal Issues Are Overlooked?

Most acquisition problems do not arise because the parties failed to negotiate a purchase price. Instead, they often result from assumptions made during the early stages of the transaction.

For example, a buyer may discover after signing the purchase agreement that a required government approval has not been obtained, that key intellectual property was never properly assigned to the company being acquired, or that local employment laws significantly limit planned operational changes. In other cases, previously undisclosed tax liabilities, compliance concerns, or contractual restrictions may reduce the value of the business after closing.

These issues do not necessarily prevent an international acquisition from succeeding, but they can lead to:

• Delayed closings
• Increased transaction costs
• Additional regulatory review
• Unexpected tax liabilities
• Contractual disputes
• Post-closing litigation
• Business interruption
• Reduced return on investment

Many of these risks become more difficult—and more expensive—to address once the parties have signed definitive agreements. Identifying potential concerns during the planning and due diligence stages generally provides greater flexibility to negotiate solutions before they affect the transaction.

Why Early Legal Planning Often Improves International Transactions

International acquisitions are rarely successful because one issue was handled perfectly. More often, they succeed because dozens of legal, financial, and operational issues were identified and addressed before they became obstacles.

Early legal planning allows buyers to evaluate transaction structures, identify regulatory requirements, coordinate due diligence across jurisdictions, and negotiate agreements that more accurately reflect the risks involved. It also provides an opportunity to resolve potential issues before significant time and resources have been invested in a transaction that may ultimately require substantial revisions.

At Focus Law, businesses exploring international growth strategies often seek guidance before negotiations are finalized so that potential legal issues can be evaluated alongside the commercial objectives of the transaction. Working with an international transaction lawyer early in the acquisition process can help businesses coordinate California, federal, and foreign legal considerations as the transaction moves toward closing.

Frequently Asked Questions

1. What are the biggest legal risks when buying a foreign business?

Some of the most significant risks include foreign investment restrictions, inadequate cross-border due diligence, undisclosed liabilities, tax exposure, employment obligations, intellectual property ownership issues, and compliance with U.S. and foreign regulations. The specific risks depend on the industry, transaction structure, and the countries involved.

2. Does a California company need local legal counsel when buying a foreign business?

In many cases, yes. While California counsel can help coordinate the overall transaction and advise on applicable U.S. laws, local counsel is often needed to interpret country-specific corporate, employment, tax, regulatory, and property laws that may affect the acquisition.

3. What is cross-border due diligence?

Cross-border due diligence is the process of investigating the legal, financial, operational, and regulatory aspects of a foreign business before completing an acquisition. It often includes reviewing corporate records, contracts, litigation history, intellectual property, employment matters, tax obligations, and compliance with applicable laws.

4. How do foreign investment regulations affect international acquisitions?

Some countries restrict foreign ownership in certain industries or require government approval before a foreign buyer can acquire a domestic business. Understanding these requirements early may help avoid delays, additional costs, or changes to the transaction structure.

5. Can U.S. sanctions laws affect an international acquisition?

Yes. Depending on the countries, businesses, or individuals involved, U.S. sanctions laws and export control regulations may apply even when the target company operates outside the United States. Evaluating these issues during due diligence can help identify potential compliance risks before closing.

Navigating Cross-Border Acquisition Legal Issues With Confidence

Acquiring a business outside the United States can create valuable opportunities for California companies seeking to expand into new markets, strengthen their operations, or diversify their investments. However, cross-border acquisition legal issues often involve much more than negotiating a purchase price. Foreign investment regulations, cross-border due diligence, tax planning, employment obligations, intellectual property rights, and regulatory compliance all play an important role in the success of an international transaction.

Carefully evaluating these issues before signing definitive agreements can help businesses reduce uncertainty, avoid costly surprises, and position the transaction for a smoother closing.

If your company is considering purchasing a foreign business, working with an experienced international transaction lawyer can help you navigate the legal considerations involved in cross-border acquisitions while coordinating California, federal, and foreign legal requirements throughout the process.