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The contents of this document are confidential
KEY ISSUES IN
CROSS BORDER M&A
Upasana Rao
Partner
27 May, 2016
• M&A Structures
• Regulatory Landscape
• Key Transactional Issues
• Due Diligence Issues
• Exchange Control Laws
• Issues relating to Listed companies
• Other Transaction Issues
• Competition law approval
• Court Approved Mergers
• Director Liabilities
• Sector-Specific M&A
• Outbound M&A
OVERVIEW
Cross-Border M&A
Acquisitions
Share Purchase
Primary Subscription
Secondary Transfer
Business Purchase
Slump Sale Asset Sale Demerger
Court approved mergers
M&A Structures
Control
Share Purchase Slump Sale Asset Purchase Demerger
Purchase of shares
of target company
Purchase of undertaking as
a ‘going concern’
Purchase of identified
assets
Business undertaking hived off to
a new company through court
process and shares acquired
Acquirer May be non-
resident
Domestic entity Domestic entity Domestic entity
Past Liabilities
and
Employees
Remain in the
target
Transferred with
undertaking
Can be excluded Transferred
Licenses and
contracts
Prior consent for
‘change of control’
Consent of
authority/counterparty
generally needed to assign
Consent of
authority/counterparty
generally needed to assign
Transferred through court-
approved scheme unless specific
consent requirement
Capital Gains
Tax
Capital gains tax on
sale of shares
Capital gains tax on
difference between sale
consideration and net worth
of undertaking
Capital gains tax on each
asset transferred
Demerger into SPV tax neutral,
but subsequent sale of SPV
shares to acquirer subject to
capital gains tax
VAT/Sales Tax No No On sale of movable assets
and goodwill
No
Stamp Duty Stamp duty on
transfer of shares
Stamp duty on each
instrument of conveyance
for immovable property
Stamp duty on each
instrument of conveyance
for immovable property
Stamp duty on the court orders
sanctioning scheme of demerger
M&A Structures
Regulatory Landscape
Exchange Control Laws
SEBI Regulations
(listed companies)
Competition Law
Sector Specific
Regulations
Company Law
Tax Laws LabourLaws
Anti –corruption /
bribery Laws
Due Diligence Issues
• Compliance under labour, environment laws critical
• Validity and transferability to be checked
• Sector specific license conditions in telecom, infra, information andbroadcasting, insurance, banking
Licenses and Environment
• Title chain system makes title verification time consuming andcumbersome
• Permission from lessor for transfer generally required
Immovable Property/Land
Public searches • Limited public searches possible on land, litigation, IPR, corporate filingswith RoC
Contracts • Restriction on assignment without counterparty consent
• Existing default, termination rights
Financing • Lender consent for change of control / business transfer
• Repayment or price adjustment for debt absorbed
Employees• Workmen protected under statutes; non-workmen governed by
employment contract
• Itemized asset sale – selected employees transferred
FCPA & POCA• India considered a high risk destination• Difficult to detect corrupt practices – requires careful review of accounts,
interviews with management• Anti – bribery provisions in most government RFPs and contracts
Competition Analysis • Whether prior approval of Competition Commission needed
• Identifying anti-competitive agreements or practices
• Sharing commercial terms, prices with competitor in due diligence considered anti-competitive
Due Diligence Issues: Listed companies
• “Unpublished Price Sensitive Information (UPSI)” – information that is not generally available to thepublic and may materially affect the price of the securities of the company. E.g. unpublished financialresults, expansion of business, litigations etc.
• Any person having, or expected to have, access to UPSI is an “insider” under the Insider TradingRegulations, 2015. Directors, officers, employees and their relatives deemed to be insiders.
General Rule: Insiders barred from communicating or allowing access to any UPSI. All persons
prohibited from procuring UPSI and trading in securities of company while in possession of UPSI.
Safe Harbor provisions enabling due diligence:
• For transactions which entail an open offer under the Takeover Regulations and the board
of directors of the target is of the opinion that the transaction is in the best interests of the
company.
• Where an open offer under the Takeover Regulations is not triggered, but the board of
directors of the target is of the opinion that the transaction is in the best interests of the
company and the UPSI is disclosed to the general public two trading days prior to the
transaction being effected
Exchange Control Laws
•Price Restrictions in Share Transactions –
•Non-Cash Consideration - Structures involving non-cash consideration (share swap)permitted without government approval in automatic route sectors, with governmentapproval in sectors under approval route
•No Assured Returns - ‘No assured returns’ on equity participation through put options.However, liquidity event waterfalls agreed between shareholders are enforceable.
•Lock In - Put options in favour of non-resident investors would be subject to lock in for a
period of one year from date of allotment.
•Break Costs - Could be seen as liquidated damages. Important for parties to agree that the
costs are genuine pre-estimate of loss.
Floor for Resident to Non-resident share transfer/subscription
Ceiling for Non-resident to Resident share transfer
For unlisted shares:• Valuation of shares as per any
internationally accepted pricingmethodology on arms’ length basis
For listed shares:• Market price on the exchange
Exchange Control Laws
Post Closing Price Adjustment
• Post closing price adjustment based on verification of
net asset value and working capital is permitted
without Reserve bank approval to the extent
adjustment is completed within 18 months and within
a range of 25% of the price stated at closing
Pre Closing Price Determination
• Completion accounts and locked box adjustments
prior to closing common in India
Earn Out to Seller contingent on future performance
of target company
• Commercial intent is to incentivize the Seller to
contribute to the business
• Payment of earn-out by non-resident to resident or
vice versa requires Reserve Bank approval
• Earn-outs sometimes structured as remuneration/
service fees under bonafide service contracts
Indemnity
• Generally post closing indemnities negotiated against tax, environmental, employee liabilities
• Indemnity escrow requires Reserve Bank approval
• Indemnity payout requires Reserve Bank approval but generally granted if pursuant to arbitral or court order
.
Deferred Consideration/ Purchase Price Holdback
Recent relaxation by RBI
• Up to 25% of purchase price
consideration in share acquisitions may
be paid on deferred basis within 18
months
• 18 month escrow or indemnity may be
implemented
• Total consideration finally paid should
comply with pricing guidelines
Issues relating to Listed Companies
TAKEOVER REGULATION
Mandatory Open Offer – triggered by acquisition of 25% Shares or Voting Rights in, or Control over a listed Indian
company, by acquirer (and any person acting in concert).
•Control defined as right to appoint majority directors or control management or policy decisions including under
shareholder agreements.
•Applicable to global acquisition if it results in an indirect acquisition of 25% shares/voting rights or control of Indian
target
•Acquirer may directly launch a delisting offer instead of an open offer
•Timing – Public announcement simultaneous with signing of ‘agreement’ or ‘decision’ to acquire
• Minimum offer size – 26% of public shareholding
• Public offer price is higher of negotiated price under Share Purchase Agreement and average historical market
price
• Minimum public float of 25% to be maintained. Acquirer to divest within 12 months if stake crosses 75% unless
declared intention to delist
• Public offer may be withdrawn if any transactional condition is not met beyond the control of the acquirer.
•SEBI Discussion Paper on ‘Control’: List of protective rights not amounting to control OR numerical threshold test
DELISTING / GOING PRIVATE
•High threshold for successful Delisting under SEBI Delisting Regulations – Acquirer should have reached 90%
shareholding in the target company
•Reverse Book Building Process at the price at which the acquirer would reach the 90% threshold to enable fair exit for
shareholders. Floor price aligned to floor price for open offer under Takeover Regulations.
•After delisting, remaining minority shareholders may be offered exit under Squeeze Out provisions under Companies Act.
2013 Act includes valuation rules for exit price (to be notified). Minority shareholders may or may not participate.
Other Transaction Issues
Acquisition Financing
• Bank lending norms do not permit
financing onshore leveraged buy
outs. Exception to infrastructure
sector with conditions
• NBFCs generally do not have capital
adequacy to finance large
acquisitions
• Proposal to allow leveraged buy out
for specialized entities to acquire
stressed companies
Dispute Resolution
• Arbitration (Ad-hoc or institutional) commondispute resolution method
• Institutional arbitration under LCIA or SIACgenerally considered more efficient
• Parties to international commercial arbitrationmay seek interim relief in India unless specificallyexcluded through contract.
• 2015 amendment reduces timeline for arbitrationproceedings under Indian Arbitration Act
Minority Protection
•Reserved Matters – Common for minority
shareholders to negotiate list of matters
requiring minority shareholder’s consent
•Board Representation - Shareholder
nominee on the board and sub-committees
•Quorum-Board and Shareholder meetings
•Full Tag Right- Below a threshold
Tax Implication in Indirect Transfers
• Share transfer in overseas holding company liable to capital
gains tax in India if such shares derive substantial value (more
than 50% value) from underlying assets in India (exceeding a
value of INR 100 million)
• CGT applicable only in respect of proportion of the total value
of the shares transferred attributable to underlying Indian
assets
• Draft valuation rules for determination of fair market value of
assets in India
• Notification to CCI for its prior approval in case value of assets and turnover of the acquirer, acquirer’s group
and target exceed prescribed thresholds as stated in their latest audited financial statements, subject to any
applicable exemption or relaxation.
• Target exemption (in case of acquisitions): if the size of the acquired enterprise is at least INR 3.5 billion in terms of
assets in India and INR 10 billion in terms of turnover in India
• Notify within 30 days of signing acquisition agreement or board resolution approving merger scheme
• 30 working day timeline for approval in most cases. Maximum period of 210 days for CCI to reach its decision.
• CCI has extra-territorial jurisdiction. Offshore M&A transactions that have a significant nexus to India by virtue of
assets or turnover in India may require notification to CCI.
Competition Law Approval
ASSETS TURNOVER
Purely domestic
transaction
Acquirer and target Rs. 20 billion Rs. 60 billion
Acquirer's group together
with the target
Rs. 80 billion Rs. 240 billion
Cross border transaction Acquirer and target Global assets of US$ 1 billion
including assets of at least Rs. 10
billion in India
Global turnover of US$ 3 billion
including a turnover of at least Rs.
30 billion from its/ their operations
in India
Acquirer's group together
with the target
Global assets of US$ 4 billion
including assets of at least Rs. 10
billion in India
US$ 12 billion worldwide including
a turnover of at least Rs. 30 billion
from its/ their operations in India
Court Approved Mergers
Current Position under Companies Act, 1956
• Court approved scheme of amalgamation
• Requires consent of majority (in number) and 3/4th (in value)
of shareholders and creditors
• Only in-bound cross-border mergers (foreign company
merging into Indian company) permitted.
Key changes under the Companies Act, 2013
• Forum will be the National Company Law Tribunal
(to be constituted)
• Both in-bound and out-bound cross border
mergers permitted (jurisdictions to be notified)
• RBI approval required for cross-border mergers.
Rules for cross-border mergers to be formulated in
consultation with RBI.
• Consideration- cash or Indian Depository Receipts
• Notice of scheme to be provided to Central
government, RBI, SEBI, CCI, RoC, Official
Liquidator, stock exchanges, Income Tax
authorities, sectoral regulators etc. (these
authorities may make representations in 30 days)
• Right to make objections- only to shareholders
holding at least 10% equity or creditors whose debt
represents 5% of the debt of the company.
Recent Stamp Duty Decision
• Merger requires approval of High Courts in both states at
which the registered offices of the two merging companies
are situated. HC order is stamped as an ‘instrument’ of
conveyance.
• Whether upon stamping in one state, only the difference in
stamp duty needs to be paid in the other state.
• Bombay High Court (Reliance Industries Limited-
Reliance Petroleum Limited merger)- each High Court’s
order is separate instrument. Stamp duty would be fully
payable in the second state (and not merely the difference
in the stamp duty).
Director Liabilities
Director’s responsibilities and liabilities have been codified recently
Care to be taken regarding nominee directors becoming officers in default
Liabilities also for compliance under labour, environment and tax laws
Whole time director and KMPs automatically become officers in default -liabilities on other directors if there is no WTD or KMP
Indemnity from company - against liabilities incurred by any officer (notavailable if fault can be attached to such officer).
Important to have certain processes, delegation and identification of peopleresponsible for key actions
Officer’s Insurance – limited products.
Sector-Specific M&A
• MMDRA 2015 permitted transfer of mining leases acquired through auction.
Amendment to MMDRA (May, 2016) permits transfer of captive mining leases
(granted other than through auction)
• Enables acquirer to access the raw materials under the mining leases held by
the target. Expected to spur M&A in steel and cement industries
Mines & Minerals
Insurance
Defence
• Foreign investment limit raised to 49% subject to ‘Indian owned and controlled’.
• ‘Control’ defined under IRDA guidelines
• IRDA approval for transfer of insurance license required.
• Foreign investment limit is 49%, ‘state of the art technology’ may be permitted
higher limit
• Board majority, management control and CEO should be with Indian residents
• Change of ownership pattern requires prior Govt. approval
Telecom• FDI up to 49% automatic. FDI above 49% up to 100% through approval route.
• Strict DOT guidelines for transfer of telecom licenses make M&A difficult. Ceiling
on market share (50%) and spectrum held (25%) by transferee in any access
service area.
Banking
Construction & Development
• Prior approval of RBI needed for acquisition of shares/ voting rights above 5% in
private banks.
• 3 year lock-in from the investment date
Exchange Control Restrictions:
• Sectors under RBI approval route: Real estate, banking
• Additional conditions to be met for ODI in financial services sector (approval from relevant regulators, capital
adequacy requirements, profitability track record etc.)
• ODI by Indian companies- Automatic route:
• Total overseas direct investment/ financial commitment capped at 400% of net worth of Indian company.
• Financial commitment in a financial year capped at USD 1,000,000,000
• Investment permitted to be made through:
• Foreign currency
• Share swap (permitted with FIPB approval)
• Capitalisation of exports/ fees/ royalties
• ECB/ FCCB proceeds
• ADRs/GDRs
• Indian listed companies permitted to invest in shares/ rated bonds/ fixed income securities of overseas
company (up to 50% of its net worth)
Outbound M&A
These are presentation slides only and are intended solely for private circulation. The information within these slides does not purport to becomprehensive or provide legal advice and should not be used as the basis for giving definitive advice without checking the primary sources.
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