KEY ISSUES IN DOING M

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• KEY ISSUES IN DOING MA TRANSACTIONS IN INDIA
• Shivpriya Nanda
• Partner
• J Sagar Associates
• Advocates Solicitors
• New Delhi Mumbai Bangalore
• August 4, 2006

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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

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Presentation Context Focus

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

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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

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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.

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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

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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

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Regulatory White Knight!

• Dont worry about his reputation as a corporate
  raider. Our white knight is FEMA

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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

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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

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Regulatory Issues in Acquisitions Takeover Code

• Pricing
• Pricing of Shares subject to valuation under CCI
  Guidelines

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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

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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

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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.

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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

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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

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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

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Due Diligence

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

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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

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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

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Some other critical points

• Usually more relevant in an acquisition
• Continuing or transferring employee benefit
  plans
• Notifying parties to contracts
• Dispute resolution

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• THANKS FOR YOUR ATTENTION
• shippi_at_jsalaw.com