Cross- Border

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Cross- Border
Bharat Vasani Group General Counsel Tata Sons
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Scope of the Presentation

• Overview of Cross-Border M A transactions
• Process involved
• Deal structuring issues
• Due Diligence issues
• Legal aspects
• FEMA Provisions
• Transaction Documents
• Emerging Trends
• Key Challenges

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Objectives

Greater Economies of Scale
Access to Markets
Access to Raw Material
Diversification of Business
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Cross Border Transaction Imperatives
Business Environment
Cultural Issues
Business Dynamics
Accounting treatment
Legal regulatory framework
Tax regimes treaties
Identifying and delivering synergies
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Key Tax And Financial Considerations
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Categories Of Cross Border Acquisitions

• Corporate Partnering
• Public to Private
• Supporting Management Buy Outs
• Leveraged Buy Outs
• Strategic Investments
• Earn Out Acquisitions
• Distress Sale

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Applicable Laws

• India
• Companies Act Section 372A,
• FEMA Regulations
• Tax
• Target jurisdiction
• Company Law Competition law
• Exchange Control Regulations
• Takeover Regulations
• Tax

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Process

• Assemble Team
• Limited Due Diligence
• Purchaser obtains financing commitment
• MoU / LoI
• Detailed due diligence
• Definitive Purchase Agreement
• Purchasers firm financing
• Seller and Purchaser comply with covenants
• CLOSING

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Structuring Issues

• Tax
• Financing
• Corporate Veil
• Regulatory constraints (host target countries)
• Exchange Control Regulations

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First Steps

• Appointment of Advisor
• Investment Banker
• Attorneys (Local and Offshore)
• Public Relations Agents

• Identify Due Diligence Areas
• To achieve commercial objectives
• Acquisition
• Strategic Investment

• Preliminary Documentation
• Review of Information Memorandum
• Entering into mandate letter with Advisors
• Executive Non-Disclosure Agreement
• Exclusivity Arrangements

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LoIs / MoUs

• Pros
• Binding v/s. Non-binding
• Reduces basic understanding to writing
• It may look different in written form
• From buyers perspective
• Exclusivity may cut-off sellers negotiations
  with third party
• Provides basis for expense reimbursement
• Cons
• Leaks
• Duty to disclose
• Contents

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Due Diligence
Methodology

• Physical Data Room
• Virtual Data Room
• DD list needs to be carefully tailored to meet
  the needs of specific transaction and
  jurisdiction
• Specific inputs needed from local lawyers and tax
  advisors

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Due Diligence

• Effective Due Diligence Process should address
  the following-
• Strategy Assumptions
• Identify operational, legal, financial and other
  significant issues
• Assessment of Risks
• Effect of assessment on Valuation (e.g. Fair
  Price for the Target Company)

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Illustrative Due Diligence issues (1)

• Onerous obligations/covenants
• Payment of ongoing fee/royalty
• Restriction on activities
• Rights of first refusal/put/call option
• LDs/ penal provisions/any liability which flows
  through

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Illustrative Due Diligence issues (2)

• Exclusivity provisions
• Confidentiality
• Assignability / change of control/ consent of the
  counter party for transactions
• Regulatory Approvals

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Impact of Due Diligence

• Impact on MA Agreements
• Representations, warranties, indemnities,
  covenants
• Conditions precedent, conditions subsequent
• Holdback / escrow (mechanism for retention) of
  purchase price, bank guarantee, milestones for
  payment
• Functions as an internal audit for post
  acquisition strategy
• In cross-border deals - Impact of applicable law
  to Transaction (Competition Law issues, Dominant
  Undertaking, Takeover Regulations, Insider
  Trading, etc.)

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Results of Due Diligence

• What can the purchaser do?
• Require the seller to remedy the problem
• Obtain an indemnity/other contractual protection
• Restructure deal to exclude asset or liability
• Reduce purchase price
• Insurance in respect of risk price the risk
• Pull out
• Limitations of liability
• Cap on liability
• Threshold basket
• De-minimis
• Others
• What should limitations apply to?
• Creditworthiness of person giving warranties
  consider guarantee

• Allocation of Risks
• Representations and Warranties
• Who gives?
• All shareholders Institutional shareholders
• Involvement of management
• Extent

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Cross Border Deals - Agreements
Shareholders Agreement
Stock Purchase/ Subscription Agreement
Technology Collaboration Agreement
Brand Licensing Agreement
Loan/ Security Agreement
Product Supply Agreement
Information Memorandum
Feeder Stocks Supply Agreement
Exclusivity Arrangement
Code of Ethics
Labour Union Settlement
Employment Agreement
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Typical Regulatory Approvals

• Competition Authority
• Stock Exchange
• Board of Target Company
• Lenders
• Foreign Investment Authority
• Sector Regulators

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Issues under Companies Act

• Section 372A Inter corporate loans investment
  beyond 60 of paid up capital and free reserves
  or 100 of reserves to be approved by
  shareholders
• Complications in International bidding due to
  disclosure requirements

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ODI - Issues under FEMA (1)

• Overseas Direct Investment (ODI)
• Permissible in
• overseas Joint Venture (JV) or
• overseas Wholly Owned Subsidiary (WoS)
• ODI not permitted in real estate business or
  banking business
• Conditions for investment under the automatic
  route
• Total permissible financial commitment 200 of
  the net worth
• Bona fide business activities

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ODI- Issues under FEMA (2)

• Eligibility norms for Investor
• not on RBIs exporters caution list / list of
  defaulters
• not under investigation by investigation /
  enforcement agency or regulatory body
• Filings in respect of ODI (in Form APR) to be
  up-to-date
• All transactions with the JV/WoS to be routed
  through 1 AD branch
• Form ODA (with details of ODI under automatic
  route) to be submitted to the AD
• Total Permissible Financial Commitment (post
  August 12, 2005)
• ECBs different views

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ODI- Issues under FEMA (3)

• Cash remittance by market purchase
• Capitalization of
• export proceeds, and
• fees, royalties, commissions or other
  entitlements due from foreign entity for supply
  of technical know-how, consultancy, managerial or
  other services
• 50 of the value of guarantees issued to or on
  behalf of the JV / WoS
• Direct and indirect investment in agricultural
  operations

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Financing an Acquisition

• Funding
• Methods
• Drawal of foreign exchange from AD
• Swap of ADRs/GDRs
• Utilization of proceeds of ECBs / FCCBs
• Balances in EEFC account
• Utilization of foreign currency funds raised
  through ADR / GDR issues
• 200 net worth ceiling not applicable in case of
  funding by
• Balances in EEFC account
• Utilization of foreign currency funds raised
  through ADR / GDR issues

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Valuation of Shares

• Investment more than USD 5 MN
• By a Category 1 Merchant Banker registered with
  SEBI or
• By an Investment Banker / Merchant Banker
  registered with the appropriate regulatory
  authority in the host country
• Investment less than USD 5 MN
• By a Chartered Accountant or a Certified Public
  Accountant
• Where consideration is fully / partly paid by
  issue of Indian Partys shares
• By a Category 1 Merchant Banker registered SEBI
  or
• By an Investment Banker / Merchant Banker
  registered with the appropriate regulatory
  authority in the host country.

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Post Investment Changes
Post investment changes / additional investment
in existing JV / WoS
Step Down Subsidiary
JV / WoS

• Post investment changes / additional investment
  in existing JV / WoS
• JV/WoS may diversify its activities
• Set-up step down subsidiaries
• Alter shareholding pattern in the overseas entity
• Reportings to be made to the RBI in Form APR

Step Down Sub (1)
Step Down Sub (2)
Step Down Sub (3)
Parent Co
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Acquisition in Financial Services Sector (1)
(Additional) Conditions for Investment in
Financial Services Sector under automatic route

• Net profit earned during last 3 years from
  financial services activities
• Registration with appropriate authority for
  conducting financial services activities
• Approval from concerned regulatory authorities,
  both in India and abroad, for venturing into such
  financial service activity
• Fulfillment of prudential norms relating to
  capital adequacy
• Above applicable to JV/ WoS or its step down
  subsidiary for making additional investment in
  the Financial Services Sector

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Acquisition in Financial Services Sector (2)

• Recent Development
• Compliance with above conditions by regulated
  Indian entities engaged in financial services for
  investing overseas in any activity
• Trading in commodities exchanges to be reckoned
  as a financial service and require prior approval
  of the Forward Markets Commission

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Certain other FEMA Issues (1)

• Earnest Money Deposit Or Issue A Bid Bond
  Guarantee
• Remittance of earnest money deposit or issue a
  bid bond guarantee permitted for acquisition of a
  foreign company through bidding and tender
  procedure
• Subsequent remittances through AD also permitted
• Pledge of Shares / Hedging
• Indian Party may pledge shares of JV/WoS to AD /
  financial institution for credit facility for
  itself or JV/WoS abroad
• Indian Parties with ODI permitted to hedge the
  exchange risk arising on such investments

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Certain other FEMA Issues (2)

• Sale of Shares
• Listed through stock exchange
• Unlisted price not less than fair value
  certified by CA
• No outstanding dues (dividend, technical
  know-how, royalty, consultancy etc)
• No write-off except in certain specified
  circumstances
• Overseas entity in operation for at least 1 year
  and proper filings in Form APR
• Indian party not under investigation by CBI / ED
  / SEBI / IRDA or other Indian regulatory
  authorities

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Certain other FEMA Issues (3)

• Annual Performance Reports (APR)
• Indian party to submit APR to RBI (in Form APR)
  in respect of ODI
• Time period within 60 days of prescribed date
  for finalization of the audited accounts of
  overseas company
• Detailed report containing various disclosures
  including details of the line of activity,
  financial structure and performance of the
  overseas company

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Leveraged Buy- Outs (1)
Borrowing without Recourse
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Leveraged Buy- Outs (2)

• Background
• Limitation on Indian Parent Co for making
  overseas investments upto 200 of its net worth
  under the automatic route
• Borrowing without recourse, an option to overcome
  this limitation
• Salient features
• Indian Parent Co sets up a wholly owned indirect
  subsidiary Bid Co
• Bid Co borrows money from lenders and utilizes
  that money to acquire the Target
• Loan secured by the dividend stream of the Target
• Shares of the Bid Co and the Target are usually
  pledged in favour of the lenders
• No recourse or financial commitment on Parent
  Co

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Leveraged Buy- Outs (3)

• Advantages
• No recourse on Parent Co
• Not counted towards 200 cap
• Parent Cos balance sheet clean for further
  investments
• Parent can raise further money for investment
• Disadvantages
• Costly form of borrowing
• Stringent conditions on up streaming of dividends
  and cash sweeps by Parent Co
• Works best if target is de-listed, otherwise
  dividend leakage

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Certain Grey Areas
Round Tripping
JV / WoS (1)
JV / WoS (2)

• Offshore

• Onshore

Investor Co
Target Co
Condition for outbound investment Bona fide
business activity (offshore)Round Tripping
Money from India is being routed back into India
from another jurisdiction.Concept not enshrined
in any rule or regulation issued by RBI. Round
tripping if identified investments could be
ordered to be unwound.
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Share Purchase Agreement

• Key issues
• Reps and Warranties based on due diligence
  reports
• Conditions Precedent Subsequent
• Closing mechanism
• Indemnity from seller
• Statutory approvals CPs to closing
• Hold back, brand usage and non-compete
• Competition law issues

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Purpose of Representations

• Disclosure
• Termination Rights
• Indemnification
• Disclosure Termination Rights Indemnificati
  on
• Signing Closing

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Indemnification Issues (1)

• Buyers knowledge of Sellers breach
• Protection beyond Representations and Warranties
• Joint and several liability
• Creditworthiness of the Seller
• Offset for tax or insurance benefits
• Interest on damages
• Separate environmental and tax indemnification

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Indemnification Issues (2)

• Time limitations
• Basket
• Minimum
• Cap
• Escrow
• Control of litigation
• Representation and Warranty Insurance

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Governing Law Dispute Resolution

• Choice of Law - Domestic/Neutral
• Mediation
• Informal
• Institutional
• Mechanism Courts v. Arbitration
• Domestic/Neutral
• Costs
• Interim relief
• Appeal rights
• Enforcement

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Emerging Trends

• Aggressive Indian presence in Global M A market
• High level of sophistication in structuring of
  deals
• Competing bids in high value transactions
• Deal Protection Mechanism (Break fees etc.)
• Insurance of Reps and Warranties
• Virtual Data Rooms
• Use of Media and PR agencies
• Steep increase in parachute payments
• Steep increase in transaction costs

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Key Challenges

• Operational issues post merger / acquisition
• Integration of the cultures of the organizations
• Realisation of synergies
• Alignment of HR policies and practices
• Optimum utilization of manpower
• Optimum utilization of other infrastructural
  resources

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Any Questions
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Thank You
bvasani_at_tata.com