Title: KEY ISSUES IN DOING M
1- KEY ISSUES IN DOING MA TRANSACTIONS IN INDIA
- Shivpriya Nanda
- Partner
- J Sagar Associates
- Advocates Solicitors
- New Delhi Mumbai Bangalore
- August 4, 2006
2Definitions Backdrop
- Merger Target is usually subsumed and loses
corporate identity - Acquisition Target or its business is acquired
but Target continues to maintain its legal entity
status - Cross border merger of a foreign body corporate
in to an Indian Company permissible - but is
rare in practice - Cross border merger of an Indian company in to
foreign body corporate not permissible - Cross border acquisition in bound and out bound
permissible
3Presentation Context Focus
- Acquisition of an Indian company by a foreign
entity - Foreign entity merger in to an Indian company
- Regulatory Contractual Issues
4Regulatory Issues AcquisitionsForeign Exchange
Regulations
- FOREIGN DIRECT INVESTMENT POLICY (FDI POLICY)
FEMA - FDI upto 100 is permitted through automatic
route in all sectors except - Activities / items that require an Industrial
License (e.g. Cigarettes, Electronic Aerospace
and Defence Production). - Where the Foreign Collaborator has an existing
financial / technical collaboration in the same
field. - Acquisition of shares in an existing Indian
company in - financial service sector
- where the Takeovers Code is attracted
5Regulatory Issues AcquisitionsForeign Exchange
Regulations
- Proposal falling outside notified sectoral policy
/ caps (e.g. Asset Reconstruction Companies 49,
Broadcasting 49, Defence Production 26,
Insurance 26, Refinery 26 in case of PSU, Print
Media (newspapers and periodicals) 26). - Prohibited Sectors
- Retail (except single brand product retailing)
- Atomic Energy
- Lottery Business
- Gambling and betting.
- Foreign Investment of more than 24 for
manufacture of item reserved for Small Scale
Sector. - All investment proposals not covered by Automatic
Route require approval of Foreign Investment
Promotion Board.
6Regulatory Issues AcquisitionsForeign Exchange
Regulations
- Pricing Norms
- Minimum pricing norms apply equal to or greater
than the value of the shares as per CCI guidelines
7Regulatory Issues Acquisitions
- Indian policy prescriptions and practice make a
hostile bid for a listed entity an
impossibility!! - FEMA Rules provide that any acquisition which
triggers Takeover Code requires prior approval
of FIPB - Practice requires that FIPB application be
supported by Resolution of the Board of the Target
8Regulatory White Knight!
- Dont worry about his reputation as a corporate
raider. Our white knight is FEMA
9Regulatory Issues in Acquisitions Takeover Code
- Listed Indian Companies subject to Takeover Code
- Acquirer (and persons acting in concert)
acquiring 15 or more of equity shares or voting
rights to make a tender offer for at least an
additional 20 of shares of the Target - Pricing norms for tender offer highest of
- contracted price
- average of weekly high and low closing price for
last six months - average of daily high and low closing price over
the last two weeks and - price at which acquirer may have made any
acquisition in the last six months - Off shore change in control of holding company
triggers Takeover Code of Indian listed entity
10Regulatory Issues in Acquisitions Takeover Code
- Off shore merger of holding structure one of the
exceptions to the Takeover Code - Provisions for creeping acquisition 15 to 55
_at_ not more than 5 a year - Specific obligations triggering at various levels
of holdings - Comprehensive code provides for competing bids
- Strict requirements for public announcement,
disclosures and compliance timelines - Tough penalties for breach of the Code
- Private agreement to acquire enforced only after
compliance with applicable provisions of Takeover
Code
11Regulatory Issues in Acquisitions Takeover Code
- Pricing
- Pricing of Shares subject to valuation under CCI
Guidelines
12Regulatory Issues Acquisitions Companies Act
- Competition Law amendments pending
- But Section 108A to G of the Companies Act
prescribes prior approval requirement if
acquisition - is by a dominant undertaking
- will create a dominant undertaking
- Relevant market definitions not perfect and
dominance precedents under Sections 108 A to G
do not exist
13Merger
- Companies Act description of common parlance
merger - amalgamation of two or more companies
- under a Scheme of arrangement
- which provides for undertaking of the
transferor (merging company) to be transferred
to transferee (the merged company or the
resultant entity) - Court sanctions scheme of arrangement highly
process driven - Court would not go in to commercial merits though
it seeks to ensure that the scheme is not
detrimental to the interest of the shareholders
and creditors
14Regulatory Issues in Mergers FEMA
- Merger of two or more Indian companies merged
entity shares issued automatically to non
resident shareholders of merging entity subject
to percentage holding, meeting the criteria set
out in approval.
15Regulatory Issues in Mergers SEBI Stock
Exchange
- Listing Agreement requires one month prior
submission of scheme with Stock Exchange for
approval if refused appeal to SAT - Exemption from Takeover Code for acquisition of
shares pursuant to a scheme of arrangement or
reconstruction under any law, Indian or foreign - Disclosure required
- Compliance with Delisting Guidelines if public
shareholding in merged entity falls below
requirement of listing agreement usually 25
16Regulatory Issues in Mergers Companies Act
- Section 391-394 Complete code on Mergers
- Detailed procedure and forms under the Company
(Court) Rules 1959 - Transnational scheme of arrangements only if
Indian entity is the merged entity not the
other way around - Squeeze out provisions for compulsory acquisition
of dissenting shareholders up to 10
17Contractual Issues
- Key commercial and contractual issues are about
the same in a merger or acquistion - The intended end commercial result is usually the
same money or moneys worth (stock) is paid for
acquiring a business - Determination, certainty, accuracy and
preservation of value is at the core of it - Due diligence, reps and warranties and
indemnities and covenants rule the landscape of
contractual issues -
18Due Diligence
- Usual
- corporate records
- property title check
- liabilities
- contingent liabilities
- pending and potential legal claims etc
- Regulatory compliances
19Lawyers Delight Reps, Warranties Indemnities
- Who represents and warrants more complex
question in case of merger - Absolute or qualified - match the concerns raised
in the Due Diligence - Limitation different levels e.g., tax
liabilities 7 or more years - Enforceability of liquidated damages - In India
LD becomes a cap - penal damages will not be
enforced. - Threshold for invoking indemnity claims-
individual and aggregate thresholds - Cap on indemnity liability
- Use of Escrow by acquirer to recover indemnity
claims
20Non-compete
- Usual to insert a non-compete but enforcement
specific or otherwise a big question mark
though Indian law different from usual common law
rule of reasonable restriction acceptability - Section 27 of Contract Act renders void a
non-compete restrictions except in case of sale
of a business with goodwill and that too with
specific limitations on duration, scope and
geographic extent - Exception not helpful in cases of share
acquisition - E.g., Selling Shareholders cannot be prevented
from undertaking employment in a competing
business but a back ended consulting agreement
could work - Confidentiality obligations are enforceable
21Some other critical points
- Usually more relevant in an acquisition
- Continuing or transferring employee benefit
plans - Notifying parties to contracts
- Dispute resolution
22- THANKS FOR YOUR ATTENTION
-
- shippi_at_jsalaw.com