Why Governing Law Matters in Cross-Border M&A
In any cross border M&A deal, buyers, sellers and their advisors devote significant energy to valuation, due diligence and deal structure. Yet the governing law provisions across the definitive transaction documents often receive far less attention. The law the parties choose - and the laws the parties cannot contract around - will shape how the deal terms are interpreted, how disputes are resolved and ultimately how risk is allocated between the parties.
What is a Governing Law Clause?
A governing law clause (sometimes called a "choice of law" clause) specifies which jurisdiction's laws will be used to interpret and enforce the contract. For example, a clause might state that the agreement is governed by the laws of the State of New York or the laws of England and Wales.
In practical terms, this means that if a dispute arises over (i) the meaning of a provision, (ii) the obligations of the parties, or (iii) the remedies available for a breach, the chosen jurisdiction's legal framework will generally apply. It provides a common reference point for both parties, regardless of where they are located.
Why the Choice of Governing Law Matters
Not all legal systems interpret contractual language the same way or apply the same rules of construction. The chosen jurisdiction will affect how contractual terms are interpreted, what implied obligations exist, how damages are calculated, and whether certain clauses (such as limitation of liability or indemnification provisions) are enforceable. For example, Delaware law recognizes an implied duty of good faith, but the laws of England and Wales do not, making express good faith provisions critical in UK-law deals.
For businesses, this creates both opportunity and risk. Selecting a well-established commercial jurisdiction — one with a large body of case law and predictable outcomes — can give both parties greater certainty. Conversely, an unfamiliar jurisdiction may introduce unexpected interpretations or limitations that undermine protections the parties assumed were in place.
In cross-border M&A transactions, the choice of governing law also affects representations and warranties, indemnification mechanics, and the enforceability of restrictive covenants. Getting this wrong can directly impact deal value and risk allocation.
Local Law Still Governs Key Parts of the Transaction
While the governing law clause will establish which jurisdiction's law will generally govern the transaction documents, mandatory local laws in the jurisdictions where a party operates may still apply, regardless of what the transaction documents state. For instance, if a contract is governed by Delaware law but the target employs staff in Germany, German employment law will still protect those employees working in Germany. Similarly, consumer protection regulations, data privacy rules, corporate law, tax obligations and sector-specific regulatory requirements in a target's home jurisdiction may override or supplement the contractual terms. This is particularly important in transactions involving multiple countries or regulatory environments. A governing law clause cannot contract around mandatory local law protections.
It is crucial for the business parties and their advisors to understand the interplay between governing law and mandatory local law requirements at the beginning of the transaction. For example, consider an asset purchase transaction governed by Delaware law, where the target has employees in the United Kingdom. While buyers typically have discretion and flexibility in determining which employees will be hired post-closing in the United States, in the United Kingdom, employees generally transfer automatically to the buyer on their existing employment terms under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). Without understanding this local law requirement in the United Kingdom and proactively addressing it at the early stages of the transaction, the buyer may incur financial penalties and litigation around unfair dismissal of UK employees buyer fails to hire post-closing.
Deal Teams Should Build a Local-Law Roadmap Early
Given the local law considerations discussed above, once a cross-border transaction is under consideration, buyers and sellers should identify which jurisdictions are legally relevant to the deal and map each jurisdiction to the workstream it affects — whether that is corporate authority, employment, data privacy, regulatory approvals, or contract enforcement. In practice, this means asking where the target is organized, where its assets and employees are located, where its data is processed, and where approvals or disputes are likely to arise. Mapping these issues early helps deal teams determine whether local counsel, specialist advisors, or regulatory filings are required, and reduces the risk that a local-law issue will interfere with the negotiations and closing.
Coordination Across Multi-Jurisdictional Deal Teams is Critical
Effective execution of a multi-jurisdictional deal requires close coordination among deal team members, local counsel, and advisors across different jurisdictions. Differences in language, legal culture, and deal practices can create misunderstandings or delays if not managed proactively. Deal teams should establish clear lines of communication early and create a framework for surfacing issues quickly and collaboratively as they arise — ensuring that a local-law question in one jurisdiction does not become a last-minute obstacle to closing.
Mandatory Regulatory Regimes Cannot Be Drafted Around
As discussed above, the governing law clause tells you which jurisdiction's law will govern the transaction documents. What it does not tell you is which regulatory regimes will apply to specific aspects of the transaction. Those regimes apply based on the specific issue and where the target operates, where its assets are located, and where its employees work. No amount of careful drafting can change these facts.
Antitrust is a familiar example. Most jurisdictions require pre-closing merger notifications once a deal meets local monetary or market share thresholds. The filing obligations and waiting periods are set by local law. Foreign merger control regimes often examine indirect subsidiaries and the corporate group, not just the direct acquisition vehicle — which means that even a transaction between two U.S. companies can trigger foreign filing requirements if the target has subsidiaries or significant operations abroad. Foreign investment and national security review regimes work the same way, and many countries screen inbound acquisitions in sensitive industries.
Data protection has become a major consideration in cross-border deals. Transfers of personal data may be subject to the rules of the jurisdictions where that data was collected or processed or where various data subjects reside, and those rules can vary significantly. For example, the EU's General Data Protection Regulation (GDPR) imposes strict requirements on cross-border data transfers that have no direct equivalent under U.S. law. Post-closing data integration often requires its own legal analysis, and the definitive acquisition agreement's governing law clause has nothing to do with it.
Employment law also operates on its own terms. In many jurisdictions, employees transfer automatically with the target business. The buyer inherits their employment terms, benefits, and any consultation or notification obligations. Tax works the same way. Transfer taxes, withholding, and the overall tax treatment of the deal are all governed by local tax law. Whether the parties structure the deal as an asset purchase or a share purchase can produce very different tax results depending on the jurisdiction. Regulated industries like financial services, healthcare, energy, and defense may also require separate approvals or license transfers.
None of this means that choice of law is unimportant. It absolutely governs how the acquisition agreement is interpreted and enforced, and getting it right still matters. However, it is only one piece of the puzzle. Deal teams that pair their governing law analysis with early, jurisdiction specific regulatory planning are the ones who tend to avoid surprises down the road.
Practical Takeaways for Buyers and Sellers
Addressing governing law early and treating it as a core pillar of the transaction's overall structure is essential for cross border deal teams to identify and allocate risk at the outset. At the LOI or term sheet stage, buyers and sellers should surface choice-of-law and mandatory local-law questions so those issues can be addressed before they affect valuation, timing, or deal certainty. Where a local-law issue could affect valuation, timing, consents, remedies, or post-closing operations, local counsel should be involved early enough for the parties to understand the issue's practical effect before committing to the deal's structure and timeline.
How Venable Can Help
Venable helps clients navigate cross-border transactions by pairing cross-border deal execution experience with practical coordination across regulatory, tax, diligence, documentation, closing, and integration workstreams. Our Corporate and Tax groups can help buyers and sellers structure transactions, assess the implications of U.S. and foreign legal regimes, coordinate with local counsel, and translate jurisdiction-specific issues into practical deal terms.