Presentation 06-8-13 - Merger

LEGAL ASPECTS OF MERGERS &
ACQUISITIONS
NEW DELHI | MUMBAI | BANGALORE

August 9, 2013
Sameen Vyas
Partner
Luthra & Luthra Law Offices
© Luthra & Luthra Law Offices www.luthra.com

OVERVIEW
 Modes of Acquisition
o Stock Deal Vs Asset/Business Deal
 Transaction Process Stock Deal

o Due Diligence
o Definitive Documentation
o Key Approvals

2
MODES OF ACQUISITION
 Acquisition of securities of an existing target company (“Target

Company”)
o Primary investment - by way of subscription to fresh securities

(shares, debentures, preference shares, warrants etc.) of the Target
o Secondary investment - by way of acquisition of equity/ preference
shares from existing shareholders of the Target
 Acquisition of an entire business/ undertaking as a going concern on a

“slump sale” basis
o Contractual slump sale

o Court approved scheme (Section 391- 394 of the Companies Act)
 Application to jurisdiction High Court to convene shareholders’

and creditors’ meetings

3
MODES OF ACQUISITION …contd
 Scheme has to be approved by 3/4th majority of shareholders’ and

creditors’ present and voting- and thereafter by High Court
• In case Target is listed entity, scheme can be acted upon only if the
votes cast by the public shareholders approving the scheme is twice
the number of votes cast by public shareholders against it
 In case Target is a listed entity, scheme has to be submitted (for

approval) to stock exchange, one month prior to submission with High
Court

4
o Court Approved Slump sale: Indicative Types Of Structures
Structure 1: Demerger
Transfer of “business” to
Target Subsidiary
Shareholders Target Target
of the Target Subsidiary
Target Subsidiary issues shares to shareholders of Target in

lieu of transfer of “business”
 Acquirer acquires shares of Target Subsidiary

5
Structure 2: Hive-off
Transfer of “business” to
Target Subsidiary
Target Target
Subsidiary
Target Subsidiary issues shares to Target in lieu of transfer of

“business”
 Acquirer acquires shares of Target Subsidiary
o Structure 3: Slump sale directly to Acquirer

6
MODES OF ACQUISITION…contd
 Acquisition of certain select assets / liabilities of the Target
 Mergers and amalgamations under Section 391 - 394 of the Companies

Act
 Formation of a fresh joint venture – and incorporation of a joint

venture company

7
KEY DIFFERENCES BETWEEN A STOCK DEAL
AND AN ASSET/ BUSINESS DEAL
Stock Deal Asset / Business Deal
Identity of Acquirer  Can be Indian or foreign  Acquirer can be only an Indian

(subject to compliance with entity
FDI policy)
 Consideration (and title) has to
pass directly between Indian
Acquirer and Indian Seller
 No transfer of contracts  Contracts need to be novated /

Contracts assigned
 Check for change -in- control
provisions  Consent of counterparties for
assignment/ novation
Immoveable Property /  No transfer of immoveable  Immoveable property / intellectual

Intellectual Property / property / intellectual property / property / assets need to be
Assets assets transferred to Acquirer

8
KEY DIFFERENCES BETWEEN A STOCK DEAL
AND AN ASSET/ BUSINESS DEAL ...contd
Stock Deal Asset / Business Deal
Licenses / Approvals  No transfer of licenses /  Licenses / approvals need to be

approvals sought afresh by Acquirer (as most
cannot be transferred)
 Check for change- in – control
provisions
Employees
 No transfer of employees  For employees satisfying definition
of “workmen” under Industrial
Disputes Act, 1947, notice and
retrenchment compensation needs
to given, except in certain cases
 On agreement to transfer  Approximately 5 to 8% of the

shares, usually nominal (except consideration
Stamp Duty in some States which have ad-
valorem duty)
 On share transfer deeds: 0.25%

of the consideration in case of
physical shares, and zero in
case of dematerialized shares

9
TRANSACTION PROCESS: STOCK DEAL
AN OVERVIEW
Procurement of
approvals and
Definitive
Term Sheet Due diligence satisfaction of Closing
Documentation
other conditions
precedent

10
DUE DILIGENCE: KEY ASPECTS
 Structure and design the due diligence exercise depending on the:
o Business of the Target

o Nature of the transaction
o Determination of materiality from a commercial perspective
o Listed Companies
 Purpose of a due diligence exercise:
o Risk Matrix
o Identification of potential value depletors
o Determination of conditions precedent
o Critical for evaluation of representations and warranties
o Identification of items for specific indemnities

11
DUE DILIGENCE: KEY ASPECTS ...contd
 Key Areas to be covered in a legal due diligence exercise
Area Relevance
 Pre / post facto consent requirements from relevant

counterparties
MATERIAL CONTRACTS  Termination rights of relevant counterparties eg. change-in-

control
 Contracts with unusual or extremely onerous conditions
 Term/ duration of key contracts
 Approval or other requirements emanating out of loan / financing

agreements such as lock-in restrictions, change-in-control,
dividend restrictions, pledge, sponsor undertakings
INDEBTEDNESS
 Encumbrances or other securities created or required to be
created over assets of the Target
 Events of default / acceleration rights of the lender

12
Area Relevance
 Title to properties
IMMOVEABLE PROPERTY  Title documents have been duly

registered / stamped in accordance with
relevant laws
 Change-in-control provisions in lease /

license agreement
 Intellectual property has been duly and

INTELLECTUAL PROPERTY validly registered
 Registration is valid and subsisting
 Change-in-control provisions in license

agreement

13
Area Relevance
 Contingent liabilities of the Target

MATERIAL LITIGATION
 Litigation which may have a material
adverse effect
 Outstanding dues / claims / proceedings

TAX
 Compliances and filings

14
Area Relevance
 Compliance with applicable labour laws such

EPF, Payment of Gratuity, Contract Labour etc.
 Employment contracts of key employees

EMPLOYEES
 Other peculiar aspects such as ESOPs
 Approvals required for business of Target have

been duly obtained and maintained
COMPLIANCES & APPROVALS
 All compliances required under applicable law
have been duly complied with
 Statutory dues, fines, penalties (if any) potential

liabilities on directors etc.

15
TRANSACTIONAL ISSUES: LEGAL
DOCUMENTATION
 Confidentiality /non-disclosure agreements
o Covers financial, technical, legal and other information disclosed to Acquirer

o Duration of confidentiality obligations
 Information Memorandum
o Overview of operations, financials and prospects of the Target
 Term Sheet
o Broad contours of parties’ understanding

o Binding or non-binding (with some binding provisions such as confidentiality,
governing law, non-solicitation )
 Acquisition Agreement
 Shareholders’ Agreement

16
DEFINITIVE DOCUMENTATION:
ACQUISITION AGREEMENT
 Key terms
o Conditions Precedent
o Purchase Price & Adjustments
o Covenants between signing and closing
o Closing
o Representations & Warranties
o Indemnification
o Limitation of Liability
o Non-compete & Non-solicitation
o Confidentiality

17
DEFINITIVE DOCUMENTATION :
ACQUISITION AGREEMENT …contd
 Conditions precedent
o From Acquirer’s perspective, conditions precedent represent

walk-out right – if all the conditions precedent are not satisfied
by a specified date i.e “Long Stop Date”
o From Target / Seller’s perspective, conditions precedent should

be as precise (and objective) as possible
o Some common examples:
 Statutory approvals such as Competition Act, FDI policy

related
 Consents from counterparties (in case of contracts having
change-in-control provisions)

18
 No breach of representations, warranties, covenants and

undertakings of Sellers
 No event having material adverse effect having occurred
 No-objection certificate under Section 281, Income Tax Act,
1961
 Tax withholding certificate (especially if Seller is a non-
resident entity)
 Conduct of a satisfactory due diligence by Acquirer

19
ACQUISITION AGREEMENT…contd
 Covenants of Target / Sellers between signing and closing
o Carry on business in the ordinary course, and in accordance

with applicable law
o Not incur any material indebtedness
o Not issue or allot securities of the Target, or grant to any
person, the right or option to acquire the same
o Not sell, transfer or create encumbrances over the assets of
the Target
o Not enter into, terminate or amend any material contract
including with key employees
o Not declare any dividends
o Not amend the charter documents of the Target

20
 Purchase Price Adjustments : Key issues
o Post-closing purchase price adjustments may pose certain

challenges:
 If Acquirer is a non-resident entity:

• any upward revisions to purchase price post closing
may be seen as “deferred payment of consideration”-
and would require prior RBI approval
• Form FC-TRS
 has to be filed within 60 days of receipt of
consideration;
 and transfer of shares can be recorded by the Target
only after the same has been certified by AD-Bank
 If Target is a listed entity and open offer is triggered

21
 Representations and warranties
o Walk-out right prior to Closing- and indemnification right post

Closing
o Repetition as of effective date / closing date
o Some common examples:
 Title to shares, and no prior encumbrances thereon

 Requisite corporate power and authority and consents to
carry on business
 Due authorization to execute, deliver and perform
 Target has good and marketable title to assets

22
 Financial Statements
• Have been prepared in accordance with Indian GAAP;

• Same fairly and accurately represent position of Target
 All licenses required for business have been duly procured

and the same are valid;
 Compliance with applicable law
 Foreign Corrupt Practices Act, 1977 / Prevention of
Corruption Act, 1988

23
 Representations and warranties
o Knowledge qualifiers
o Disclosure Schedule
 Updation of disclosure schedule between signing and
closing
 All information disclosed during due diligence constitutes
disclosure?
o Survival Period for representations and warranties
 Title
 Tax
 Environmental
 Others

24
 Indemnity
o General indemnity for breach of representations / warranties /

covenants
o Specific indemnities on account of particular items such as non-
compliances, tax issues such as withholding, pending proceedings
against Seller
 Limitation of Liability
o Aggregate cap on liability

o De-minimus threshold
o Time limitation on claims

25
SHAREHOLDERS’ AGREEMENT
 Key Terms
o Management & Quorum Rights- at Board and Shareholder’s

meetings
o Funding Commitment and Business Plan
o Information rights
o Liquidation preference
o Transfer of Shares & Restrictions thereon
o Future Funding and anti-dilution
o Deadlock and mechanisms for exit
o Events of default & exit on account of the same
o Non-compete
o Confidentiality

26
SHAREHOLDERS’ AGREEMENT...contd
 Management rights
o Board representation (including at committee level)

 Concept of “control” under FDI policy- “right to appoint
majority directors”
o Quorum in Board and Shareholder’s meetings

o Affirmative vote items
 Concept of “control” – FDI Policy, Take Over Code
o Right to appoint / nominate key management personnel
o Deadlock resolution mechanisms
o Information rights
o Minimum shareholding thresholds linked rights

27
SHAREHOLDERS’ AGREEMENT ...contd
 Restrictions on transfer of shares
o Lock- ins and Escrow Mechanism

o Right of first refusal / right of first offer
 Restrictions on sale to competitor
o Call / put options

o Tag- along rights (usually minority / private equity)
o Drag along rights (usually majority partners)
 Restrictions on sale to competitor
 Validity on restrictions on transfer of shares in case of a public company
o Different High Courts have taken different views

28
SHAREHOLDERS’ AGREEMENT …contd
 Future funding and anti-dilution rights

o Funding Commitment linked to business plan
 Default/ Deadlock Exit

o Valuation
o Pricing regulations stipulated under FDI policy
 Exit mechanisms (particularly for private equity investors)

o Put Option
 Concerns from an FDI perspective
 Enforceability in case of public companies: Securities Contracts
(Regulation) Act, 1956
o Buy-back by Target
o IPO
o Sale to another financial /strategic investor

29
SHAREHOLDERS’ AGREEMENT ...contd
 Non-compete and non-solicitation obligations during and post

termination of agreement
o Enforceability of non-compete/non-solicit obligations under Indian

law; Section 27 of the Indian Contract Act, 1872
o Enforceable only when linked to sale of goodwill- and when such
restriction appears reasonable (in time and scope) to the Court
having regard to the nature of business.
 Dispute resolution mechanisms
o Litigation vis-à-vis arbitration

o Choosing the seat of arbitration and the governing law thereof
o In case seat of arbitration is outside India, parties to arbitration
cannot approach Indian courts for interim relief etc

30
KEY APPROVALS /REQUIREMENTS
 Companies Act, 1956
 Competition Act, 2002
 Take Over Code / Listing Agreement
 Foreign Direct Investment Policy
 Sector specific regulations

31
KEY APPROVALS /REQUIREMENTS:
COMPETITION ACT, 2002
 Applicable to “combinations” defined as:
acquisition of shares, voting rights, assets and control


over an enterprise
 acquisition of control over an enterprise when the
acquirer already has direct or indirect control over
another enterprise engaged in production, distribution or
trading of a similar/substitutable good/services
 mergers and amalgamations
where certain thresholds are met
 Thresholds linked to value of assets or turnover of:
 Individual parties to the acquisition or the group

 in India or globally

32
COMPETITION ACT, 2002
 Importantly, transactions where the Target entity has either:
o assets of not more than INR 2.5 billion in India; or

o turnover of not more than INR 7.5 billion in India
have been exempt till March 2016
 India is a suspensory jurisdiction
o no notifiable transaction can be consummated without obtaining

the prior approval of the Competition Commission of India
(“CCI”)
o Certain transactions have been exempted from the
requirement of giving notice

33
COMPETITION ACT, 2002 ...contd
 Any person who proposes to enter into a combination is required

to give notice of the same to the CCI within 30 days of:
o approval of proposal relating to the merger/amalgamation, by

the board of directors of the entities involved in the
merger/amalgamation
o execution of any agreement or other document for
acquisition of shares, voting rights, assets or control
 No notifiable transaction can be consummated until the expiry of

210 days from the date on which notice has been given to the
CCI, or the CCI has passed orders, whichever is earlier
 CCI examines whether combination causes or is likely to cause

appreciable adverse effect on competition

34
KEY APPROVALS/REQUIREMENTS:
TAKE OVER CODE
 Applicable to direct and indirect acquisition of shares/ voting rights
in, or control over the Target
o Concept “negative control”
 Mandatory open offer to public shareholders triggered upon:
o Initial Threshold: Acquisition of 25% or more voting rights in the

target
o Creeping Acquisition: For any person holding (individually and with
persons acting in concert) between 25%-75% of the share capital,
acquisition of more than 5% shares in any financial year
o Direct or indirect acquisition of control

35
TAKE OVER CODE
 Minimum Offer Size: 26%
 Public Announcement to be made on:

o the date of agreeing to acquire shares or voting rights in or control
over the target company.
 Offer Price
o Highest of:
 Negotiated price per share under the agreement which attracted
the requirement to make open offer- which will also include any
control premium/non-compete fee etc. agreed to be paid to
the promoter
 Volume weighted average price paid or payable by acquirer
for acquisitions during 52 weeks preceding date of public
announcement
 Highest price paid or payable by acquirer for acquisitions
during 26 weeks preceding date of public announcement

36
TAKE OVER CODE
o If shares are frequently traded, volume weighted average

market price of such shares for a period of 60 days
immediately preceding the date of public announcement
o If shares are not frequently traded, price determined by acquirer
and manager to offer
o Where acquirer has any outstanding convertible securities,
the conversion price of such securities also taken into
consideration
 Withdrawal from open offer allowed in limited circumstances
 Voluntary Offer:
o person holding between 25-75% of the shares/voting rights can make

a voluntary offer for acquiring atleast 10% additional shares/voting
right subject to certain condition

37
KEY APPROVALS/ REQUIREMENTS: FOREIGN
DIRECT INVESTMENT POLICY
 Highly liberalized policy
 FDI permitted in almost all sectors other than:
o lottery business o trading in transferrable

o gambling and betting development rights
o chit funds o real estate business or
o nidhi companies construction of farm houses
o manufacturing of cigarettes, cigars o atomic energy, and
etc, or of tobacco and tobacco o railway transport
substitutes
•Prior governmental approval required for very few sectors such as:
o Defence o Aviation
o Single brand retail o Pharmaceuticals (Brownfield)
o Multi-brand retail o Print media

38
KEY APPROVALS/ REQUIREMENTS: FOREIGN
DIRECT INVESTMENT POLICY…contd
• Only equity shares, fully and compulsorily convertible debentures or
fully and compulsorily convertible preference shares can be issued by
Indian companies
o Dividends (net of taxes) are freely repatriable

o Price/conversion formula of convertible capital instruments to be
determined upfront at the time of issuance of instruments
 Price at time of conversion of the instrument cannot be less

than fair value (DCF value for unlisted companies, and SEBI
(ICDR) valuation for listed companies) of the instruments at the
time of issuance
o Rate of return / interest on CCPS/CCD capped under the FDI

policy.
o All other instruments such as optionally convertible preference
shares etc. treated as external commercial borrowing

39
KEY APPROVALS/REQUIREMENTS: FOREIGN
DIRECT INVESTMENT POLICY ...contd
 Pricing Guidelines :Computation of fair value (“Fair Value”) on the basis of :
 Unlisted companies: Discounted Free Cash Flow Method

 Listed Companies: SEBI guidelines
Price Reporting & Other Requirements
Issuance Of Shares  At the time of initial  FIRC to be filed within 30 days of

subscription to the MOA, receipt of inward remittance
issue price can be equal
to face value  Form FC-GPR to be filed within 30
days of issuance of instruments
 In all other cases, issue
price cannot be lower  Instruments to be issued within 180
than Fair Value days of receipt of inward remittance
Transfer of shares From  Cannot be lower than  Form FC-TRS to be filed within 60
a resident to a non- Fair Value days of receipt of consideration
resident
 Transfer can be recorded by Company
only once FC-TRS has been certified
by AD
Transfer of shares from  Cannot be higher than -same as above-

a non- resident to a Fair Value
resident

40
THANK YOU
9th Floor & 103, Ashoka Estate,

Barakhamba Road, New Delhi-110001
Tel: 91-11-41215100 Fax: 91-11-23723909 e-mail: svyas@luthra.com

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LEGAL ASPECTS OF MERGERS &

NEW DELHI | MUMBAI | BANGALORE

© Luthra & Luthra Law Offices www.luthra.com

 Transaction Process Stock Deal

© Luthra & Luthra Law Offices www.luthra.com

 Acquisition of securities of an existing target company (“Target

o Primary investment - by way of subscription to fresh securities

 Acquisition of an entire business/ undertaking as a going concern on a

o Contractual slump sale

 Application to jurisdiction High Court to convene shareholders’

© Luthra & Luthra Law Offices www.luthra.com

 Scheme has to be approved by 3/4th majority of shareholders’ and

 In case Target is a listed entity, scheme has to be submitted (for

© Luthra & Luthra Law Offices www.luthra.com

o Court Approved Slump sale: Indicative Types Of Structures

Target Subsidiary issues shares to shareholders of Target in

 Acquirer acquires shares of Target Subsidiary

© Luthra & Luthra Law Offices www.luthra.com

Target Subsidiary issues shares to Target in lieu of transfer of

 Acquirer acquires shares of Target Subsidiary

o Structure 3: Slump sale directly to Acquirer

© Luthra & Luthra Law Offices www.luthra.com

 Acquisition of certain select assets / liabilities of the Target

 Mergers and amalgamations under Section 391 - 394 of the Companies

 Formation of a fresh joint venture – and incorporation of a joint

© Luthra & Luthra Law Offices www.luthra.com

Stock Deal Asset / Business Deal

Identity of Acquirer  Can be Indian or foreign  Acquirer can be only an Indian

 No transfer of contracts  Contracts need to be novated /

Immoveable Property /  No transfer of immoveable  Immoveable property / intellectual

© Luthra & Luthra Law Offices www.luthra.com

Stock Deal Asset / Business Deal

Licenses / Approvals  No transfer of licenses /  Licenses / approvals need to be

 On agreement to transfer  Approximately 5 to 8% of the

 On share transfer deeds: 0.25%

© Luthra & Luthra Law Offices www.luthra.com

© Luthra & Luthra Law Offices www.luthra.com

 Structure and design the due diligence exercise depending on the:

o Business of the Target

 Purpose of a due diligence exercise:

© Luthra & Luthra Law Offices www.luthra.com

 Key Areas to be covered in a legal due diligence exercise

 Pre / post facto consent requirements from relevant

MATERIAL CONTRACTS  Termination rights of relevant counterparties eg. change-in-

 Contracts with unusual or extremely onerous conditions

 Term/ duration of key contracts

 Approval or other requirements emanating out of loan / financing

 Events of default / acceleration rights of the lender

© Luthra & Luthra Law Offices www.luthra.com

IMMOVEABLE PROPERTY  Title documents have been duly

 Change-in-control provisions in lease /

 Intellectual property has been duly and

 Registration is valid and subsisting

 Change-in-control provisions in license

© Luthra & Luthra Law Offices www.luthra.com

 Contingent liabilities of the Target

 Outstanding dues / claims / proceedings

© Luthra & Luthra Law Offices www.luthra.com

 Compliance with applicable labour laws such

 Employment contracts of key employees

 Approvals required for business of Target have

 Statutory dues, fines, penalties (if any) potential

© Luthra & Luthra Law Offices www.luthra.com