LEGAL & REGULATORY ASPECTS OF M & A

INTRODUCTION TO MERGERS & ACQUISITIONS

A merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. When one company takes over another and completely establishes itself as the new owner, the purchase is called an "acquisition".

KEY TERMS IN M&A

Merger

Horizontal Merger (eg- Lipton India & Brooke Bond) Vertical Merger (eg- Reliance & Flag telecom group) Conglomerate Merger (eg- L&T and Voltas Ltd.)

Acquisition (PVR acquiring Cinemax) Reverse Merger (eg- Godrej soaps Ltd & Gujrat Godrej Innovative Chemicals Ltd) Joint Venture (eg- Sony Erickson) Strategic Alliance (eg- Siemens & Huwaie Technologies)

MOTIVES & DRIVE FORCES OF M & A

Market opportunities Risk reduction External opportunities Economies of scale Cross selling Corporate synergy Taxes Geographical or other diversification

RELEVANT PROVISIONS RELATED TO M&A

SEC 391 0F THE COMPANIES ACT

Gives the Tribunal the power to sanction a compromise or arrangement between a company and its creditors/ members subject to certain conditions. This section talks about

Scheme of compromise between a company and its creditors or any class of them, or Scheme of arrangement between a company and its members or any class of them.

All material facts relating to the company, should be disclosed to the Court/Tribunal before an order is passed sanctioning a scheme.

SEC 392 0F THE COMPANIES ACT

Gives power to the Court to implement a compromise or arrangement It further empowers the Court to order winding up of the company where the scheme cannot be satisfactorily implemented with or without modifications

SEC 393 0F THE COMPANIES ACT

Contains provisions regarding information to be furnished and the manner of furnishing the information in relation to a scheme of compromise or arrangement. This section further requires every director, managing director, manager and debenture trustee to provide to the company all details as may be necessary for the purpose of the said section. It also stipulates a penalty provision if the requirements of the section are not complied with.

Section 394 -Provisions for facilitating reconstruction and amalgamation of companies

Where an order provides for the transfer of any property, then that property and liabilities shall be transferred to the liabilities of the transferee company Documents Section 394(4)(b) of the Companies Act, 1956 definesTransferee company to include any company within the meaning of this act Transferor company to include anybody corporate, whether a company under this act or not. Foreign company can be a transferor company but cant be a transferee company

Section 395 - Power and duty to acquire the shares of shareholders dissenting from the scheme
Dissenting

shareholder - any shareholder who has failed to transfer his shares to the transferee company in accordance with the scheme. Notice of Dissenting shareholder
Transferor

company Transferee company Duration - 6 months from the offer Minimum Share requirement 9/10th of the total value of shares that are to transferred Same term to all shareholders

Maximum time for the transferee company to give notice to all respective shareholder = 1 months

Section 396 -Power of the central government to provide for an amalgamation of companies in the national interest

Rights of members shouldnt change . Any member whose rights are affected can appeal to
Company law board

Copy of proposed order to be send to both company. Either company can appeal for a modification of the draft Government within 2 months of receiving this appeal may decide on such modifications After the order is finalized , it should be laid to both Houses of Parliament

SEBI Provision
Guidelines on Mergers and Acquisitions Disclosure - acquirer should disclose its holdings at every stage when it exceeds 5%,10% and 15% of the total holdings Trigger point - Can hold above 15% but to the extent of 20% only if he makes public announcement to acquire shares through public offer Merchant banker - acquirer needs to appoint category 1 merchant banker Public announcement- acquirer should make announcement within 4 working days Number of shares Minimum offer price Object of acquisition Date by which the letter will be posted Opening and closing date of the offer

Offer price - Shall not be less than the highest of: Negotiated price Average price paid by acquirer Preferential offer price if made in last 12month The avg of the weekly high and low for the 26months

Obligation of acquirer - letter of offer should reach the shareholders within 45 days from announcement Shareholders should get the payment within 30 days from date of closure Obligation to board - cannot dispose or issue capital etc unless approval is given from the general body of shareholders

Competitive bids - Bids should be made within 21 days of public announcement Provision of Escrow - company should deposit at least 25% of the consideration payable for up to 100cr and 10% if exceeding 100cr

Impact of FEMA on M&A

The relevant regulations under FEMA from an M&A perspective are: Foreign Exchange Management Regulations, 2000 (FDI Regulations)

Foreign Exchange Management Regulations, 2004 (Foreign Security Regulations)

Foreign Exchange Management Regulations, 2000 (FDI Regulations)

Regulate the investments made by any persons resident outside India. It regulates the all of acquisitions and investments in India by foreign entities. The investment allowed is regulated by FIPB & RBI In FDI cap is decided on the sector in which investment is made.

Foreign Exchange Management Regulations, 2004 (Foreign Security Regulations)

Outbound investments by residents in India are regulated by the Foreign Security Regulations. The regulation is important from the perspective of raising money through FCEB . Directs the way in which the issued funds are to be used . FIPB and RBI guide the entire process of raising funds.

Indian stamp duty act

Power of Parliament in respect of stamp duty - rates prescribed by parliament in respect of various assets - different states different rates Instruments chargeable to stamp duty - document by which any right or liability - Any instrument mentioned in Schedule I to Indian Stamp Act - if an instrument is not listed in the schedule, no stamp duty is payable Duty payable when several instruments

- In case of sale, mortgage or settlement, if there are several instruments for one transaction, stamp duty is payable only on one instrument.

Powers to reduce stamp duty Mode of payment of stamp duty

- The payment of stamp duty can be made by adhesive stamps or impressed stamps. Adjudication as to stamp duty payable -Adjudication means determining the duty payable What is meant by duly stamped - Instrument cannot be accepted as evidence if not duly stamped

DIFFERENT STRATEGIES

POISON PILL Series of possible strategies designed to defend a hostile takeover. Example : Offering discounted shares to current shareholders in order to dilute whatever stake the acquirer may hold and increase the cost of an acquisition. People pill : The threatened resignation of the whole management team in the event of a successful takeover. Suicide pill : A term for any high-risk poison pill strategy that may discourage a potential acquirer but also place the takeover target under severe financial pressure. Example Ruias led Indian conglomerate, Essar Group, has received a boost to its proposed acquisition of US steel firm, Esmark, with the target company adopted poison pills to protected itself against any hostile takeover.

Staggered Board

Staggered Board Get representation on the targeted companys board inorder to take control over target company. Attaining representation and voting power on the board of directors. Influence the other board members to accept the bid or influence the shareholders to take a more positive stance towards the takeover. 60 per cent of the U.S corporations and almost one-half of the Standard & Poors 500 firms list have adopted a staggered board.

Golden Parachutes Aims to stagger and make hostile takeovers more expensive by distributing what is usually a lump-sum payment to the board of directors of the target company. Primary function in a hostile takeover is to align incentives between shareholders and the executives of the target company as there generally are concerns about executives who face a hostile takeover while risking losing their jobs, oppose the bid even when it increases the value for shareholders. Example - Pearce & Robinson, (2004).

White Knight Require and involve a third party. The targeted firm seeks for a friendly firm which can acquire a majority stake in the company. Can be chosen for several reasons such as; friendly intentions, belief of better fit, belief of better synergies, belief of not dismissing employees or historical good relationships. Example A good example of this is the acquisition of Bear Stearns by white knight JPMorgan Chase in 2008. At the time of the acquisition, Bear Stearns' market cap had declined by 92% on concerns of its vulnerability to the global credit crisis at that time, making it extremely vulnerable to hostile takeover and even insolvency.

Greenmail If the bidders interests are short-termed profit rather than long-termed corporate control then an effective and simple defense measure could be to use a so called greenmail, also known as targeted repurchase or a goodbye kiss. Involves repurchasing a block of shares which is held by a single shareholder or other shareholders at a premium over the stock price return for an agreement called a standstill agreement. In this standstill agreement it is stated that the bidder will no longer be able to buy more shares for a period of time, often longer than five years. It is effective for short termed profit seekers and not for long termed.