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    Bharat Anand | New


    | 19 September 2013

    New Rules of the Game!

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    1. Concepts relevant for Mergers & Acquisitions

    1. Enforcement of Shareholders Agreements

    2. Court approved schemes & Squeeze Out

    3. Restrictions on Slump Sale

    4. Buy-back

    2. Other Key Changes

    1. Private companies | Increased compliance burden

    2. One Person Companies

    3. Layered Investments

    4. Related Party Transactions

    5. Financial Assistance

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    Out of Scope!

    Corporate Social Responsibility

    Governance, Disclosures & Transparency

    Independent Director - Role & Responsibility

    Directors & KMPs - Duties, Responsibilities & Liabilities

    Audit and financial statements

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    Concepts relevant for Mergers &


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    Enforcement of Shareholders

    Agreement Background

    Under CA1956, share transfer restrictions inshareholders agreement between shareholders of a public

    company challenging (S 111A; no safe harbour for transfer

    restrictions inter-se existing shareholders)

    Key Change

    CA2013 recognises that arrangements in respect oftransfer of securities (even in case of a public

    company) shall be enforceable as a contract [S 58(2)


    A public subsidiary can continue to be in the nature of aprivate company in its articles i.e. it can have

    transferability restrictions [S 2(71) Proviso]


    The change finally settles the position onenforceability of agreements providing for pre-emptive

    rights inter-se shareholders of a public company such as

    lock-in period, ROFR, ROFO, tag-along, drag-along

    As CA2013 requires all transfers of securities to be incompliance with SCRA [S 59(4)] | Enforceability of

    put/call options is still an issue?

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    Enforcement of Shareholders

    AgreementS 5

    Flexibility to specify that certain provisions of thearticles may only be altered if specified conditions or

    procedures more restrictive than a special resolution are

    complied with

    For a private company, entrenchment provisions must beinserted at the time of formation or by a unanimous

    shareholders resolution

    For a public company, entrenchment provisions must beinserted at the time of formation or by a special


    ROC will need to be notified of entrenchment provisionswithin 30 days of incorporation or amendment to articles

    [R 2.7]

    Unclear how this would dovetail with S 6(b) of CA2013(Articles cannot be repugnant to the provisions of



    Super-majority voting provisions preferred over vetorights?

    Statutory sanction to entrenchment provisions willstrengthen the enforceability of those provisions

    Watch outs

    Entrenchment provisions should be incorporated in compliance with special

    /unanimous approval requirements of CA2013, depending on type of company

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    Court Approved Schemes

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    Court Approved Schemes

    Broadly still requires 75% approval from the shareholders

    Wide powers of NCLT to sanction

    Procedural Issues

    Application to Tribunal by company/members/creditors for a scheme ofcompromise, arrangement, reconstruction or amalgamation | Scheme for

    reorganisation of share capital included [S 230 read with S 232]

    Application to contain prescribed disclosures | Disclosureobligations increased [S 230(2), S 232(2) in case of reconstruction

    or amalgamation]

    Tribunal shall call meeting of members/creditors

    Notice for meeting to be accompanied with: (a) statement disclosingdetails of scheme; (b) copy of valuation report; (c) effect on

    creditors, key managerial personnel, promoters and non-promoters [S

    230(2)] | Additional documents to be circulated in cases of

    reconstructions or amalgamations [S 232(2)]

    Notice to be given to Central Government, IT authorities, RBI, SEBI,CCI, Official Liquidator, Registrar or stock exchanges or other

    sectoral regulators [S 230 (5)]

    If Central Government, IT authorities, RBI, SEBI, CCI, OfficialLiquidator, Registrar or stock exchanges do not represent on a

    scheme of compromise or arrangement, within 30 days of notice, then

    presumption of no representation [S 230 (5)]

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    Court Approved Schemes

    Procedural Issues (Contd)

    Objection to scheme of compromise or arrangement can now

    be made by: (a) shareholders holding at least 10% of

    shareholding; or (b) 5% of total outstanding debt per

    latest audited financial statements [S 230(4), Proviso]

    Dispensation from calling of creditors meeting by the

    Tribunal if 90% in value agree and confirm [S 230 (9)]

    Approval of 75% member/creditors required for Tribunal tosanction the scheme

    Creditors, members or debenture holders can also vote byproxy within 1 month from receipt of notice | Voting to be

    in person or postal ballot or by proxy [S 230(6)]

    Filing of certificate from companys auditor on conformityof accounting treatment as proposed in the scheme with the

    accounting standards under CA2013 is pre-requisite to

    sanction [S 230 (7), Proviso, 232(3), Proviso]

    Filing of order with the Registrar within 30 days ofreceipt of order [S 230(8), 232(5)]

    Tribunal has power to set-off stamp duty paid againststamp duty payable for increase in authorised share


    Scheme not whitewash for offences by officers-in-defaultof the transferor company [S 232(3)(c)]

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    Court Schemes | Overall (Contd)

    Other Changes

    Order for compromises and arrangements to include: [S 230(7)

    Option to preference shareholders to either obtain arrears ofdividend in cash or equity shares of equal value

    Variation of shareholder rights

    Abatement of SICA proceedings before BIFR if scheme approved by3/4th of creditors in value

    Exit offer to dissenting shareholders

    Appointed date finds its place; scheme to be effective from thedesignated appointed date and not a date afterwards [S 232(6)]

    Where any scheme or contract approved by 90% shareholders,transferee company has the option to acquire the shares of the

    dissenting shareholders [S 235]

    Payments held by transferor company on trust for thedissenting minority

    Drag along clauses : enforceable after 90% shareholdersapprove?

    No treasury shares can now be issued; to be cancelled /extinguished [S 232(3)(b)] | Tax implications on continuing

    shareholders pursuant to change of rule relating to treasury

    shares to be analysed

    X merged with it's subsidiary Y; the merged entity ended up

    with its own stock held by a trust, specially created for the

    purpose. Separate ownership so full voting rights, full dividends,

    right to participate in meetings | Now no longer possible

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    Listed company mergers

    Scheme of a listed transferor with an unlisted transferee [S


    No backdoor listing permitted: If listed company merges with unlisted company, then transferee company will remain


    Shareholders of listed company have right to opt out of the transferee company by payment of the value of shares and other

    benefits in accordance with pre-determined formula or post

    valuation (subject to floor price specified by SEBI);

    arrangements for this to be made by the Tribunal


    Potential to make the process efficient and less time consuming

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    Short-Form Merger

    New Concept

    Short-Form Merger permitted for merger between:

    holding company and its wholly-owned subsidiary

    2 or more small companies

    other specified companies [S 233]

    In Brief

    Option for eligible companies to use short-form process or the

    usual process

    Need 90% shareholders approval at general meeting

    Need approval of majority of lenders representing 9/10th in value of creditors in a meeting convened with 21 days notice

    Declaration of solvency to be filed

    Registrar and Official Liquidator call for objections within 30 days; if no objections then approval, and, if objections,

    then referred to Central Government for consideration by



    Positive development, but needs to be tested for practical challenges

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    Cross-Border Merger


    Concept of Indian company merging with foreign company recognised [s. 234]

    Consideration can be mix of cash and depository receipts


    If works, then can greatly benefit structuring cross-border M&A transactions

    Blind Spots

    Companies of countries that will be entitled to regime are to be notified by the Government

    RBI regulations on such mergers will be determinant

    Several issues, like holding of real estate, and other FDI issues may need to examined / tested

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