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KEY ISSUES IN DOING M&A TRANSACTIONS IN INDIA

Shivpriya NandaShivpriya Nanda Partner

J Sagar AssociatesAdvocates & 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!

“Don’t 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% @ 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 money’s 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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Lawyer’s 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@jsalaw.com