The contents of this document are confidential

KEY ISSUES IN

CROSS BORDER M&A

Upasana Rao

Partner

27 May, 2016

• M&A Structures

• Regulatory Landscape

• Key Transactional Issues

• Due Diligence Issues

• Exchange Control Laws

• Issues relating to Listed companies

• Other Transaction Issues

• Competition law approval

• Court Approved Mergers

• Director Liabilities

• Sector-Specific M&A

• Outbound M&A

OVERVIEW

Cross-Border M&A

Acquisitions

Share Purchase

Primary Subscription

Secondary Transfer

Business Purchase

Slump Sale Asset Sale Demerger

Court approved mergers

M&A Structures

Control

Share Purchase Slump Sale Asset Purchase Demerger

Purchase of shares

of target company

Purchase of undertaking as

a ‘going concern’

Purchase of identified

assets

Business undertaking hived off to

a new company through court

process and shares acquired

Acquirer May be non-

resident

Domestic entity Domestic entity Domestic entity

Past Liabilities

and

Employees

Remain in the

target

Transferred with

undertaking

Can be excluded Transferred

Licenses and

contracts

Prior consent for

‘change of control’

Consent of

authority/counterparty

generally needed to assign

Consent of

authority/counterparty

generally needed to assign

Transferred through court-

approved scheme unless specific

consent requirement

Capital Gains

Tax

Capital gains tax on

sale of shares

Capital gains tax on

difference between sale

consideration and net worth

of undertaking

Capital gains tax on each

asset transferred

Demerger into SPV tax neutral,

but subsequent sale of SPV

shares to acquirer subject to

capital gains tax

VAT/Sales Tax No No On sale of movable assets

and goodwill

No

Stamp Duty Stamp duty on

transfer of shares

Stamp duty on each

instrument of conveyance

for immovable property

Stamp duty on each

instrument of conveyance

for immovable property

Stamp duty on the court orders

sanctioning scheme of demerger

M&A Structures

Regulatory Landscape

Exchange Control Laws

SEBI Regulations

(listed companies)

Competition Law

Sector Specific

Regulations

Company Law

Tax Laws LabourLaws

Anti –corruption /

bribery Laws

Due Diligence Issues

• Compliance under labour, environment laws critical

• Validity and transferability to be checked

• Sector specific license conditions in telecom, infra, information andbroadcasting, insurance, banking

Licenses and Environment

• Title chain system makes title verification time consuming andcumbersome

• Permission from lessor for transfer generally required

Immovable Property/Land

Public searches • Limited public searches possible on land, litigation, IPR, corporate filingswith RoC

Contracts • Restriction on assignment without counterparty consent

• Existing default, termination rights

Financing • Lender consent for change of control / business transfer

• Repayment or price adjustment for debt absorbed

Employees• Workmen protected under statutes; non-workmen governed by

employment contract

• Itemized asset sale – selected employees transferred

FCPA & POCA• India considered a high risk destination• Difficult to detect corrupt practices – requires careful review of accounts,

interviews with management• Anti – bribery provisions in most government RFPs and contracts

Competition Analysis • Whether prior approval of Competition Commission needed

• Identifying anti-competitive agreements or practices

• Sharing commercial terms, prices with competitor in due diligence considered anti-competitive

Due Diligence Issues: Listed companies

• “Unpublished Price Sensitive Information (UPSI)” – information that is not generally available to thepublic and may materially affect the price of the securities of the company. E.g. unpublished financialresults, expansion of business, litigations etc.

• Any person having, or expected to have, access to UPSI is an “insider” under the Insider TradingRegulations, 2015. Directors, officers, employees and their relatives deemed to be insiders.

General Rule: Insiders barred from communicating or allowing access to any UPSI. All persons

prohibited from procuring UPSI and trading in securities of company while in possession of UPSI.

Safe Harbor provisions enabling due diligence:

• For transactions which entail an open offer under the Takeover Regulations and the board

of directors of the target is of the opinion that the transaction is in the best interests of the

company.

• Where an open offer under the Takeover Regulations is not triggered, but the board of

directors of the target is of the opinion that the transaction is in the best interests of the

company and the UPSI is disclosed to the general public two trading days prior to the

transaction being effected

Exchange Control Laws

•Price Restrictions in Share Transactions –

•Non-Cash Consideration - Structures involving non-cash consideration (share swap)permitted without government approval in automatic route sectors, with governmentapproval in sectors under approval route

•No Assured Returns - ‘No assured returns’ on equity participation through put options.However, liquidity event waterfalls agreed between shareholders are enforceable.

•Lock In - Put options in favour of non-resident investors would be subject to lock in for a

period of one year from date of allotment.

•Break Costs - Could be seen as liquidated damages. Important for parties to agree that the

costs are genuine pre-estimate of loss.

Floor for Resident to Non-resident share transfer/subscription

Ceiling for Non-resident to Resident share transfer

For unlisted shares:• Valuation of shares as per any

internationally accepted pricingmethodology on arms’ length basis

For listed shares:• Market price on the exchange

Exchange Control Laws

Post Closing Price Adjustment

• Post closing price adjustment based on verification of

net asset value and working capital is permitted

without Reserve bank approval to the extent

adjustment is completed within 18 months and within

a range of 25% of the price stated at closing

Pre Closing Price Determination

• Completion accounts and locked box adjustments

prior to closing common in India

Earn Out to Seller contingent on future performance

of target company

• Commercial intent is to incentivize the Seller to

contribute to the business

• Payment of earn-out by non-resident to resident or

vice versa requires Reserve Bank approval

• Earn-outs sometimes structured as remuneration/

service fees under bonafide service contracts

Indemnity

• Generally post closing indemnities negotiated against tax, environmental, employee liabilities

• Indemnity escrow requires Reserve Bank approval

• Indemnity payout requires Reserve Bank approval but generally granted if pursuant to arbitral or court order

.

Deferred Consideration/ Purchase Price Holdback

Recent relaxation by RBI

• Up to 25% of purchase price

consideration in share acquisitions may

be paid on deferred basis within 18

months

• 18 month escrow or indemnity may be

implemented

• Total consideration finally paid should

comply with pricing guidelines

Issues relating to Listed Companies

TAKEOVER REGULATION

Mandatory Open Offer – triggered by acquisition of 25% Shares or Voting Rights in, or Control over a listed Indian

company, by acquirer (and any person acting in concert).

•Control defined as right to appoint majority directors or control management or policy decisions including under

shareholder agreements.

•Applicable to global acquisition if it results in an indirect acquisition of 25% shares/voting rights or control of Indian

target

•Acquirer may directly launch a delisting offer instead of an open offer

•Timing – Public announcement simultaneous with signing of ‘agreement’ or ‘decision’ to acquire

• Minimum offer size – 26% of public shareholding

• Public offer price is higher of negotiated price under Share Purchase Agreement and average historical market

price

• Minimum public float of 25% to be maintained. Acquirer to divest within 12 months if stake crosses 75% unless

declared intention to delist

• Public offer may be withdrawn if any transactional condition is not met beyond the control of the acquirer.

•SEBI Discussion Paper on ‘Control’: List of protective rights not amounting to control OR numerical threshold test

DELISTING / GOING PRIVATE

•High threshold for successful Delisting under SEBI Delisting Regulations – Acquirer should have reached 90%

shareholding in the target company

•Reverse Book Building Process at the price at which the acquirer would reach the 90% threshold to enable fair exit for

shareholders. Floor price aligned to floor price for open offer under Takeover Regulations.

•After delisting, remaining minority shareholders may be offered exit under Squeeze Out provisions under Companies Act.

2013 Act includes valuation rules for exit price (to be notified). Minority shareholders may or may not participate.

Other Transaction Issues

Acquisition Financing

• Bank lending norms do not permit

financing onshore leveraged buy

outs. Exception to infrastructure

sector with conditions

• NBFCs generally do not have capital

adequacy to finance large

acquisitions

• Proposal to allow leveraged buy out

for specialized entities to acquire

stressed companies

Dispute Resolution

• Arbitration (Ad-hoc or institutional) commondispute resolution method

• Institutional arbitration under LCIA or SIACgenerally considered more efficient

• Parties to international commercial arbitrationmay seek interim relief in India unless specificallyexcluded through contract.

• 2015 amendment reduces timeline for arbitrationproceedings under Indian Arbitration Act

Minority Protection

•Reserved Matters – Common for minority

shareholders to negotiate list of matters

requiring minority shareholder’s consent

•Board Representation - Shareholder

nominee on the board and sub-committees

•Quorum-Board and Shareholder meetings

•Full Tag Right- Below a threshold

Tax Implication in Indirect Transfers

• Share transfer in overseas holding company liable to capital

gains tax in India if such shares derive substantial value (more

than 50% value) from underlying assets in India (exceeding a

value of INR 100 million)

• CGT applicable only in respect of proportion of the total value

of the shares transferred attributable to underlying Indian

assets

• Draft valuation rules for determination of fair market value of

assets in India

• Notification to CCI for its prior approval in case value of assets and turnover of the acquirer, acquirer’s group

and target exceed prescribed thresholds as stated in their latest audited financial statements, subject to any

applicable exemption or relaxation.

• Target exemption (in case of acquisitions): if the size of the acquired enterprise is at least INR 3.5 billion in terms of

assets in India and INR 10 billion in terms of turnover in India

• Notify within 30 days of signing acquisition agreement or board resolution approving merger scheme

• 30 working day timeline for approval in most cases. Maximum period of 210 days for CCI to reach its decision.

• CCI has extra-territorial jurisdiction. Offshore M&A transactions that have a significant nexus to India by virtue of

assets or turnover in India may require notification to CCI.

Competition Law Approval

ASSETS TURNOVER

Purely domestic

transaction

Acquirer and target Rs. 20 billion Rs. 60 billion

Acquirer's group together

with the target

Rs. 80 billion Rs. 240 billion

Cross border transaction Acquirer and target Global assets of US$ 1 billion

including assets of at least Rs. 10

billion in India

Global turnover of US$ 3 billion

including a turnover of at least Rs.

30 billion from its/ their operations

in India

Acquirer's group together

with the target

Global assets of US$ 4 billion

including assets of at least Rs. 10

billion in India

US$ 12 billion worldwide including

a turnover of at least Rs. 30 billion

from its/ their operations in India

Court Approved Mergers

Current Position under Companies Act, 1956

• Court approved scheme of amalgamation

• Requires consent of majority (in number) and 3/4th (in value)

of shareholders and creditors

• Only in-bound cross-border mergers (foreign company

merging into Indian company) permitted.

Key changes under the Companies Act, 2013

• Forum will be the National Company Law Tribunal

(to be constituted)

• Both in-bound and out-bound cross border

mergers permitted (jurisdictions to be notified)

• RBI approval required for cross-border mergers.

Rules for cross-border mergers to be formulated in

consultation with RBI.

• Consideration- cash or Indian Depository Receipts

• Notice of scheme to be provided to Central

government, RBI, SEBI, CCI, RoC, Official

Liquidator, stock exchanges, Income Tax

authorities, sectoral regulators etc. (these

authorities may make representations in 30 days)

• Right to make objections- only to shareholders

holding at least 10% equity or creditors whose debt

represents 5% of the debt of the company.

Recent Stamp Duty Decision

• Merger requires approval of High Courts in both states at

which the registered offices of the two merging companies

are situated. HC order is stamped as an ‘instrument’ of

conveyance.

• Whether upon stamping in one state, only the difference in

stamp duty needs to be paid in the other state.

• Bombay High Court (Reliance Industries Limited-

Reliance Petroleum Limited merger)- each High Court’s

order is separate instrument. Stamp duty would be fully

payable in the second state (and not merely the difference

in the stamp duty).

Director Liabilities

Director’s responsibilities and liabilities have been codified recently

Care to be taken regarding nominee directors becoming officers in default

Liabilities also for compliance under labour, environment and tax laws

Whole time director and KMPs automatically become officers in default -liabilities on other directors if there is no WTD or KMP

Indemnity from company - against liabilities incurred by any officer (notavailable if fault can be attached to such officer).

Important to have certain processes, delegation and identification of peopleresponsible for key actions

Officer’s Insurance – limited products.

Sector-Specific M&A

• MMDRA 2015 permitted transfer of mining leases acquired through auction.

Amendment to MMDRA (May, 2016) permits transfer of captive mining leases

(granted other than through auction)

• Enables acquirer to access the raw materials under the mining leases held by

the target. Expected to spur M&A in steel and cement industries

Mines & Minerals

Insurance

Defence

• Foreign investment limit raised to 49% subject to ‘Indian owned and controlled’.

• ‘Control’ defined under IRDA guidelines

• IRDA approval for transfer of insurance license required.

• Foreign investment limit is 49%, ‘state of the art technology’ may be permitted

higher limit

• Board majority, management control and CEO should be with Indian residents

• Change of ownership pattern requires prior Govt. approval

Telecom• FDI up to 49% automatic. FDI above 49% up to 100% through approval route.

• Strict DOT guidelines for transfer of telecom licenses make M&A difficult. Ceiling

on market share (50%) and spectrum held (25%) by transferee in any access

service area.

Banking

Construction & Development

• Prior approval of RBI needed for acquisition of shares/ voting rights above 5% in

private banks.

• 3 year lock-in from the investment date

Exchange Control Restrictions:

• Sectors under RBI approval route: Real estate, banking

• Additional conditions to be met for ODI in financial services sector (approval from relevant regulators, capital

adequacy requirements, profitability track record etc.)

• ODI by Indian companies- Automatic route:

• Total overseas direct investment/ financial commitment capped at 400% of net worth of Indian company.

• Financial commitment in a financial year capped at USD 1,000,000,000

• Investment permitted to be made through:

• Foreign currency

• Share swap (permitted with FIPB approval)

• Capitalisation of exports/ fees/ royalties

• ECB/ FCCB proceeds

• ADRs/GDRs

• Indian listed companies permitted to invest in shares/ rated bonds/ fixed income securities of overseas

company (up to 50% of its net worth)

Outbound M&A

These are presentation slides only and are intended solely for private circulation. The information within these slides does not purport to becomprehensive or provide legal advice and should not be used as the basis for giving definitive advice without checking the primary sources.

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