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KEY ISSUES IN DOING M

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Shivpriya Nanda Partner J Sagar Associates Advocates & Solicitors New Delhi Mumbai Bangalore August 4, 2006 Definitions & Backdrop Merger : Target is usually subsumed ... – PowerPoint PPT presentation

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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

2
Definitions 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

3
Presentation Context Focus
  • Acquisition of an Indian company by a foreign
    entity
  • Foreign entity merger in to an Indian company
  • Regulatory Contractual Issues

4
Regulatory 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

5
Regulatory 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.

6
Regulatory Issues AcquisitionsForeign Exchange
Regulations
  • Pricing Norms
  • Minimum pricing norms apply equal to or greater
    than the value of the shares as per CCI guidelines

7
Regulatory 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

8
Regulatory White Knight!
  • Dont worry about his reputation as a corporate
    raider. Our white knight is FEMA

9
Regulatory 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

10
Regulatory 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

11
Regulatory Issues in Acquisitions Takeover Code
  • Pricing
  • Pricing of Shares subject to valuation under CCI
    Guidelines

12
Regulatory 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

13
Merger
  • 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

14
Regulatory 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.

15
Regulatory 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

16
Regulatory 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

17
Contractual 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

18
Due Diligence
  • Usual
  • corporate records
  • property title check
  • liabilities
  • contingent liabilities
  • pending and potential legal claims etc
  • Regulatory compliances

19
Lawyers 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

20
Non-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

21
Some 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
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