G R Bhatia Partner & Head Competition Law Practice Group, Luthra & Luthra Law Offices, New Delhi
OVERVIEW - Luthra & · PPT file · Web view · 2014-08-08Court Approved...
Transcript of OVERVIEW - Luthra & · PPT file · Web view · 2014-08-08Court Approved...
NEW DELHI | MUMBAI | BANGALORE
August 9, 2013
LEGAL ASPECTS OF MERGERS & ACQUISITIONS
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Sameen VyasPartner
Luthra & Luthra Law Offices
OVERVIEW
Modes of Acquisitiono Stock Deal Vs Asset/Business Deal
Transaction Process Stock Dealo Due Diligenceo Definitive Documentationo Key Approvals
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MODES OF ACQUISITION
Acquisition of securities of an existing target company (“Target Company”)
o Primary investment - by way of subscription to fresh securities (shares, debentures, preference shares, warrants etc.) of the Target
o Secondary investment - by way of acquisition of equity/ preference shares from existing shareholders of the Target
Acquisition of an entire business/ undertaking as a going concern on a
“slump sale” basis
o Contractual slump saleo Court approved scheme (Section 391- 394 of the Companies Act)
Application to jurisdiction High Court to convene shareholders’ and creditors’ meetings
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MODES OF ACQUISITION …contd
Scheme has to be approved by 3/4th majority of shareholders’ and creditors’ present and voting- and thereafter by High Court
• In case Target is listed entity, scheme can be acted upon only if the votes cast by the public shareholders approving the scheme is twice the number of votes cast by public shareholders against it
In case Target is a listed entity, scheme has to be submitted (for approval) to stock exchange, one month prior to submission with High Court
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MODES OF ACQUISITION …contd
o Court Approved Slump sale: Indicative Types Of Structures
Structure 1: Demerger
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Target Shareholders of the Target
Target Subsidiary
Transfer of “business” to Target Subsidiary
Target Subsidiary issues shares to shareholders of Target in lieu of transfer of “business”
Acquirer acquires shares of Target Subsidiary
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MODES OF ACQUISITION …contd
Structure 2: Hive-off
Acquirer acquires shares of Target Subsidiary
o Structure 3: Slump sale directly to Acquirer
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Target Target Subsidiary
Transfer of “business” to Target Subsidiary
Target Subsidiary issues shares to Target in lieu of transfer of “business”
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MODES OF ACQUISITION…contd
Acquisition of certain select assets / liabilities of the Target
Mergers and amalgamations under Section 391 - 394 of the Companies Act
Formation of a fresh joint venture – and incorporation of a joint venture company
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KEY DIFFERENCES BETWEEN A STOCK DEAL AND AN ASSET/ BUSINESS DEAL
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Stock Deal Asset / Business Deal Identity of Acquirer
Can be Indian or foreign
(subject to compliance with FDI policy)
Acquirer can be only an Indian
entity
Consideration (and title) has to pass directly between Indian Acquirer and Indian Seller
Contracts
No transfer of contracts
Check for change -in- control
provisions
Contracts need to be novated /
assigned
Consent of counterparties for assignment/ novation
Immoveable Property / Intellectual Property / Assets
No transfer of immoveable
property / intellectual property / assets
Immoveable property / intellectual
property / assets need to be transferred to Acquirer
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KEY DIFFERENCES BETWEEN A STOCK DEAL AND AN ASSET/ BUSINESS DEAL ...contd
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Stock Deal Asset / Business Deal Licenses / Approvals
No transfer of licenses /
approvals
Check for change- in – control provisions
Licenses / approvals need to be
sought afresh by Acquirer (as most cannot be transferred)
Employees No transfer of employees
For employees satisfying definition
of “workmen” under Industrial Disputes Act, 1947, notice and retrenchment compensation needs to given, except in certain cases
Stamp Duty
On agreement to transfer
shares, usually nominal (except in some States which have ad-valorem duty)
On share transfer deeds: 0.25% of the consideration in case of physical shares, and zero in case of dematerialized shares
Approximately 5 to 8% of the
consideration
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TRANSACTION PROCESS: STOCK DEALAN OVERVIEW
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Term Sheet Due diligence Definitive Documentation
Procurement of approvals
and satisfaction of
other conditions precedent
Closing
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DUE DILIGENCE: KEY ASPECTS
Structure and design the due diligence exercise depending on the:
o Business of the Targeto Nature of the transactiono Determination of materiality from a commercial perspectiveo Listed Companies
Purpose of a due diligence exercise:
o Risk Matrixo Identification of potential value depletorso Determination of conditions precedent o Critical for evaluation of representations and warrantieso Identification of items for specific indemnities
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Area
Relevance
MATERIAL CONTRACTS
Pre / post facto consent requirements from relevant
counterparties
Termination rights of relevant counterparties eg. change-in-control
Contracts with unusual or extremely onerous conditions
Term/ duration of key contracts INDEBTEDNESS
Approval or other requirements emanating out of loan / financing
agreements such as lock-in restrictions, change-in-control, dividend restrictions, pledge, sponsor undertakings
Encumbrances or other securities created or required to be created over assets of the Target
Events of default / acceleration rights of the lender
DUE DILIGENCE: KEY ASPECTS ...contd
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Key Areas to be covered in a legal due diligence exercise
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DUE DILIGENCE: KEY ASPECTS ...contd
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Area
Relevance
IMMOVEABLE PROPERTY
Title to properties
Title documents have been duly
registered / stamped in accordance with relevant laws
Change-in-control provisions in lease / license agreement
INTELLECTUAL PROPERTY
Intellectual property has been duly and
validly registered
Registration is valid and subsisting
Change-in-control provisions in license agreement
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DUE DILIGENCE: KEY ASPECTS ...contd
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Area
Relevance
MATERIAL LITIGATION
Contingent liabilities of the Target
Litigation which may have a material
adverse effect
TAX
Outstanding dues / claims / proceedings
Compliances and filings
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DUE DILIGENCE: KEY ASPECTS ...contd
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Area
Relevance
EMPLOYEES
Compliance with applicable labour laws such
EPF, Payment of Gratuity, Contract Labour etc.
Employment contracts of key employees
Other peculiar aspects such as ESOPs
COMPLIANCES & APPROVALS
Approvals required for business of Target have
been duly obtained and maintained
All compliances required under applicable law have been duly complied with
Statutory dues, fines, penalties (if any) potential liabilities on directors etc.
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TRANSACTIONAL ISSUES: LEGAL DOCUMENTATION
Confidentiality /non-disclosure agreements
o Covers financial, technical, legal and other information disclosed to Acquirer o Duration of confidentiality obligations
Information Memorandum
o Overview of operations, financials and prospects of the Target Term Sheet
o Broad contours of parties’ understandingo Binding or non-binding (with some binding provisions such as confidentiality,
governing law, non-solicitation ) Acquisition Agreement Shareholders’ Agreement
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DEFINITIVE DOCUMENTATION: ACQUISITION AGREEMENT
Key terms
o Conditions Precedento Purchase Price & Adjustmentso Covenants between signing and closingo Closing o Representations & Warranties o Indemnification o Limitation of Liability o Non-compete & Non-solicitation o Confidentiality
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DEFINITIVE DOCUMENTATION : ACQUISITION AGREEMENT …contd
Conditions precedent
o From Acquirer’s perspective, conditions precedent represent walk-out right – if all the conditions precedent are not satisfied by a specified date i.e “Long Stop Date”
o From Target / Seller’s perspective, conditions precedent should be as precise (and objective) as possible
o Some common examples:
Statutory approvals such as Competition Act, FDI policy related
Consents from counterparties (in case of contracts having change-in-control provisions)
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DEFINITIVE DOCUMENTATION: ACQUISITION AGREEMENT …contd
No breach of representations, warranties, covenants and undertakings of Sellers
No event having material adverse effect having occurred No-objection certificate under Section 281, Income Tax Act,
1961 Tax withholding certificate (especially if Seller is a non-
resident entity) Conduct of a satisfactory due diligence by Acquirer
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DEFINITIVE DOCUMENTATION: ACQUISITION AGREEMENT…contd
Covenants of Target / Sellers between signing and closing
o Carry on business in the ordinary course, and in accordance with applicable law
o Not incur any material indebtednesso Not issue or allot securities of the Target, or grant to any
person, the right or option to acquire the sameo Not sell, transfer or create encumbrances over the assets of
the Targeto Not enter into, terminate or amend any material contract
including with key employeeso Not declare any dividends o Not amend the charter documents of the Target
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DEFINITIVE DOCUMENTATION: ACQUISITION AGREEMENT …contd
Purchase Price Adjustments : Key issues
o Post-closing purchase price adjustments may pose certain challenges:
If Acquirer is a non-resident entity:• any upward revisions to purchase price post closing
may be seen as “deferred payment of consideration”- and would require prior RBI approval
• Form FC-TRS has to be filed within 60 days of receipt of
consideration; and transfer of shares can be recorded by the Target
only after the same has been certified by AD-Bank
If Target is a listed entity and open offer is triggered
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DEFINITIVE DOCUMENTATION: ACQUISITION AGREEMENT …contd
Representations and warranties
o Walk-out right prior to Closing- and indemnification right post Closing
o Repetition as of effective date / closing dateo Some common examples:
Title to shares, and no prior encumbrances thereon Requisite corporate power and authority and consents
to carry on business Due authorization to execute, deliver and perform Target has good and marketable title to assets
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DEFINITIVE DOCUMENTATION: ACQUISITION AGREEMENT …contd
Financial Statements
• Have been prepared in accordance with Indian GAAP;• Same fairly and accurately represent position of Target
All licenses required for business have been duly procured and the same are valid;
Compliance with applicable law Foreign Corrupt Practices Act, 1977 / Prevention of
Corruption Act, 1988
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DEFINITIVE DOCUMENTATION: ACQUISITION AGREEMENT …contd
Representations and warranties
o Knowledge qualifierso Disclosure Schedule
Updation of disclosure schedule between signing and closing
All information disclosed during due diligence constitutes disclosure?
o Survival Period for representations and warranties
Title Tax Environmental Others
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DEFINITIVE DOCUMENTATION: ACQUISITION AGREEMENT …contd
Indemnity
o General indemnity for breach of representations / warranties / covenants
o Specific indemnities on account of particular items such as non-compliances, tax issues such as withholding, pending proceedings against Seller
Limitation of Liability
o Aggregate cap on liabilityo De-minimus thresholdo Time limitation on claims
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DEFINITIVE DOCUMENTATION: SHAREHOLDERS’ AGREEMENT
Key Terms
o Management & Quorum Rights- at Board and Shareholder’s meetings
o Funding Commitment and Business Plano Information rightso Liquidation preferenceo Transfer of Shares & Restrictions thereono Future Funding and anti-dilutiono Deadlock and mechanisms for exito Events of default & exit on account of the sameo Non-competeo Confidentiality
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DEFINITIVE DOCUMENTATION: SHAREHOLDERS’ AGREEMENT...contd
Management rights
o Board representation (including at committee level) Concept of “control” under FDI policy- “right to appoint
majority directors”
o Quorum in Board and Shareholder’s meetingso Affirmative vote items
Concept of “control” – FDI Policy, Take Over Codeo Right to appoint / nominate key management personnelo Deadlock resolution mechanismso Information rightso Minimum shareholding thresholds linked rights
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DEFINITIVE DOCUMENTATION: SHAREHOLDERS’ AGREEMENT ...contd
Restrictions on transfer of shares
o Lock- ins and Escrow Mechanismo Right of first refusal / right of first offer
Restrictions on sale to competitor
o Call / put optionso Tag- along rights (usually minority / private equity)o Drag along rights (usually majority partners)
Restrictions on sale to competitor
Validity on restrictions on transfer of shares in case of a public company
o Different High Courts have taken different views
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DEFINITIVE DOCUMENTATION: SHAREHOLDERS’ AGREEMENT …contd
Future funding and anti-dilution rightso Funding Commitment linked to business plan
Default/ Deadlock Exito Valuationo Pricing regulations stipulated under FDI policy
Exit mechanisms (particularly for private equity investors)o Put Option
Concerns from an FDI perspective Enforceability in case of public companies: Securities Contracts
(Regulation) Act, 1956o Buy-back by Targeto IPOo Sale to another financial /strategic investor
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DEFINITIVE DOCUMENTATION: SHAREHOLDERS’ AGREEMENT ...contd
Non-compete and non-solicitation obligations during and post termination of agreement
o Enforceability of non-compete/non-solicit obligations under Indian law; Section 27 of the Indian Contract Act, 1872
o Enforceable only when linked to sale of goodwill- and when such restriction appears reasonable (in time and scope) to the Court having regard to the nature of business.
Dispute resolution mechanisms
o Litigation vis-à-vis arbitrationo Choosing the seat of arbitration and the governing law thereofo In case seat of arbitration is outside India, parties to arbitration
cannot approach Indian courts for interim relief etc
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KEY APPROVALS /REQUIREMENTS
Companies Act, 1956
Competition Act, 2002
Take Over Code / Listing Agreement Foreign Direct Investment Policy Sector specific regulations
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KEY APPROVALS /REQUIREMENTS: COMPETITION ACT, 2002
Applicable to “combinations” defined as:
acquisition of shares, voting rights, assets and control over an enterprise
acquisition of control over an enterprise when the acquirer already has direct or indirect control over another enterprise engaged in production, distribution or trading of a similar/substitutable good/services
mergers and amalgamationswhere certain thresholds are met
Thresholds linked to value of assets or turnover of:
Individual parties to the acquisition or the group in India or globally
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KEY APPROVALS /REQUIREMENTS: COMPETITION ACT, 2002
Importantly, transactions where the Target entity has either:
o assets of not more than INR 2.5 billion in India; oro turnover of not more than INR 7.5 billion in Indiahave been exempt till March 2016
India is a suspensory jurisdiction
o no notifiable transaction can be consummated without obtaining the prior approval of the Competition Commission of India (“CCI”)
o Certain transactions have been exempted from the requirement of giving notice
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KEY APPROVALS /REQUIREMENTS: COMPETITION ACT, 2002 ...contd
Any person who proposes to enter into a combination is required to give notice of the same to the CCI within 30 days of:
o approval of proposal relating to the merger/amalgamation, by the board of directors of the entities involved in the merger/amalgamation
o execution of any agreement or other document for acquisition of shares, voting rights, assets or control
No notifiable transaction can be consummated until the expiry of 210 days from the date on which notice has been given to the CCI, or the CCI has passed orders, whichever is earlier
CCI examines whether combination causes or is likely to cause appreciable adverse effect on competition
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KEY APPROVALS/REQUIREMENTS: TAKE OVER CODE
Applicable to direct and indirect acquisition of shares/ voting rights in, or control over the Target
o Concept “negative control”
Mandatory open offer to public shareholders triggered upon:
o Initial Threshold: Acquisition of 25% or more voting rights in the target
o Creeping Acquisition: For any person holding (individually and with persons acting in concert) between 25%-75% of the share capital, acquisition of more than 5% shares in any financial year
o Direct or indirect acquisition of control
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KEY APPROVALS /REQUIREMENTS: TAKE OVER CODE
Minimum Offer Size: 26%
Public Announcement to be made on:o the date of agreeing to acquire shares or voting rights in or control over
the target company.
Offer Price o Highest of:
Negotiated price per share under the agreement which attracted the requirement to make open offer- which will also include any control premium/non-compete fee etc. agreed to be paid to the promoter
Volume weighted average price paid or payable by acquirer for acquisitions during 52 weeks preceding date of public announcement
Highest price paid or payable by acquirer for acquisitions during 26 weeks preceding date of public announcement
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KEY APPROVALS /REQUIREMENTS: TAKE OVER CODE
o If shares are frequently traded, volume weighted average market price of such shares for a period of 60 days immediately preceding the date of public announcement
o If shares are not frequently traded, price determined by acquirer and manager to offer
o Where acquirer has any outstanding convertible securities, the conversion price of such securities also taken into consideration
Withdrawal from open offer allowed in limited circumstances
Voluntary Offer:
o person holding between 25-75% of the shares/voting rights can make a voluntary offer for acquiring atleast 10% additional shares/voting right subject to certain condition
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KEY APPROVALS/ REQUIREMENTS: FOREIGN DIRECT INVESTMENT POLICY
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Highly liberalized policy
FDI permitted in almost all sectors other than:
o lottery business o gambling and betting o chit funds o nidhi companieso manufacturing of cigarettes, cigars
etc, or of tobacco and tobacco substitutes
o trading in transferrable development rights
o real estate business or construction of farm houses
o atomic energy, ando railway transport
•Prior governmental approval required for very few sectors such as:
o Defenceo Single brand retailo Multi-brand retail
o Aviationo Pharmaceuticals (Brownfield)o Print media
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KEY APPROVALS/ REQUIREMENTS: FOREIGN DIRECT INVESTMENT POLICY…contd
• Only equity shares, fully and compulsorily convertible debentures or fully and compulsorily convertible preference shares can be issued by Indian companies
o Dividends (net of taxes) are freely repatriableo Price/conversion formula of convertible capital instruments to be
determined upfront at the time of issuance of instruments
Price at time of conversion of the instrument cannot be less than fair value (DCF value for unlisted companies, and SEBI (ICDR) valuation for listed companies) of the instruments at the time of issuance
o Rate of return / interest on CCPS/CCD capped under the FDI policy.o All other instruments such as optionally convertible preference
shares etc. treated as external commercial borrowing
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KEY APPROVALS/REQUIREMENTS: FOREIGN DIRECT INVESTMENT POLICY ...contd
Pricing Guidelines :Computation of fair value (“Fair Value”) on the basis of : Unlisted companies: Discounted Free Cash Flow Method Listed Companies: SEBI guidelines
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Price Reporting & Other Requirements Issuance Of Shares
At the time of initial
subscription to the MOA, issue price can be equal to face value
In all other cases, issue price cannot be lower than Fair Value
FIRC to be filed within 30 days of
receipt of inward remittance
Form FC-GPR to be filed within 30 days of issuance of instruments
Instruments to be issued within 180
days of receipt of inward remittance Transfer of shares From a resident to a non-resident
Cannot be lower than
Fair Value
Form FC-TRS to be filed within 60
days of receipt of consideration
Transfer can be recorded by Company only once FC-TRS has been certified by AD
Transfer of shares from a non- resident to a resident
Cannot be higher than
Fair Value
-same as above-
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THANK YOU
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