Legal Issues in M & A

Provisions of Companies Act, 1956SEBI (Substantial Acquisition of Shares and Takeovers), 1997Listing Agreement NormsSEBI (Delisting of Shares) Corporate Governance IssuesProvision of Income Tax Act, 1961FEMACompetition ActSEBI (Buyback of Securities) Regulations, 1998
Provisions governing M & A:

Provisions related to mergers and amalgamations contained in Sections 391 to 396A in Chapter V, Part VI of the Companies ActSection 390 (a, b and c): Sections deals with Arrangement that includes reorganization of the share capital of the company.Done either by consolidation of shares of different classes or by the division of shares into shares of different classes or both.

Section 391:
Deals with CompromiseIs an arrangement that is carried out at the behest of the Court on an application made by the company or any creditor or member or the liquidator where a company is being wound-up.Is generally carried out between the company and its creditors or between a company and its members.
Companies Act 1956:

Section 393 (1):
Section deals with disclosure of terms of arrangement and compromiseNotice calling the meeting of creditors or members should clearly state the terms of arrangement and compromise and its effectsCopies to be provided by the company free of cost.
Companies Act 1956:

Section 393 (2):
Section states that if the arrangement and compromise is going to affect the rights of the debenture holders, a statement giving information and explanation relating to the trustees of the deed for securing debenture capital needs to be given. If the above provisions are violated the company and every officer of the company shall be punishable with a fine that may extend up to Rs.50000/-
Companies Act 1956:

Section 391 (2) to (7):
Sections state that every scheme of arrangement and compromise should be approved by of creditors or members present and voting either in person or by proxy.
Companies Act 1956:

Section 394:

Section states that the Court has powers to sanction compromise or arrangement scheme proposed in connection with a scheme for reconstruction of the company or amalgamation of two or more companies

The approval of the Court is subject to the condition that the scheme is not prejudicial to the interests of the members or to public.

Sanction of the Court may provide for:

Transfer of whole or part of the property or liabilities of the transferee (target) to the transferor (acquirer).

Allotment or apportionment of the shares, debentures or other like interests amongst the transferor or transferee.

Disagree by any person to the scheme of compromise or arrangement and be filed with the Court within stipulated time and in stipulated manner.

Companies Act 1956:

Once the scheme is approved, All the property and liabilities shall transferred to the transferee company.
Once the order is passed, the company to file a certified copy of the order with the Registrar of Companies, failing which every Officer who is at default is punishable with a fine that may extend up to Rs.500/-
Companies Act 1956:

Section 394 A
States that the Court should communicate the details of all the notices of compromise and arrangement to the Central Government and seek and consider the representations made by the Central Government before passing any order. Court should ensure all material facts pertaining to the company and its functioning have been duly disclosed in the application before making any order.
Companies Act 1956:

Section 376:

Section states that reconstruction or amalgamation shall be void (Cenceled) when it is prohibited under any provision of:
The Memorandum or Articles of Association Resolution passed in the General Body Meeting or by the Board of DirectorsAn agreement between the company and any other person
Companies Act 1956:

Court can use powers and make provisions in the order on the following matters:
Transfer of the whole or any part of the undertaking, property or liabilities of any target to the acquirerAllotment or appropriation of any shares, debentures or other like interests in that company by the acquirer under the compromise or arrangement Any legal proceedings pending by or against each other Making provisions for any person who shows disagree to the compromise or arrangement provided such disagree has been filed within the stipulated time and in the manner prescribedAny other issues necessary to ensure that the reconstruction or amalgamation is carried out fully and effectively
Powers of the Court with regards to sanctioning the scheme of amalgamation:

Report of Registrar of Companies and the Official Liquidator needs to be considered prior to sanctioning the scheme of amalgamation or reconstruction Report should state the affairs of the company are being conducted in a manner that is damaging to the interest of members or the public, in general.Court can sanction the scheme with retrospective effect provided the effective date is not too far in the past for can have adverse implication for the new entity such as non-compliance of various laws

Once the Court receives a request for the meeting it can issue directions on:Date, time and place of meetingsAppointment of chairperson for the meetingsContents of notice and the manner of service of NoticeDetermination of the class/classes of members and creditors whose meetings are to be heldDetermination of gatheringAny other matter as the court may deem fit.

Where the transferee proves before the Court that the creditors and members have given their consent to the scheme of amalgamation with their interest not adversely affected, the Court can exercise its discretion and grant approval to the proposed scheme

Section 391(2) states the resolution approving the scheme of amalgamation should be passed by majority in number representing 3/4th in value of the creditors or members The strength includes members or creditors present in person or through proxies at the time of meetingChairperson of the meeting is required to submit to the Court a report of proceedings of the meeting stating :The number of persons present at the meetingThe number of persons voting in person and through proxyThe value of shares amount

When an acquirer acquires substantial quantity of shares or voting rights of the Target CompanyActing in concert is a takeover strategy whereby individuals and companies acquire substantial number of shares in the target company in a disguised manner and thus avoid legal complications.
SEBI (Substantial Acquisition of Shares and Takeovers), 1997

Public AnnouncementLetter of offerDetermining the Offer PriceDuration of the OfferDischarging the dues of the shareholders
Procedure for Substantial Acquisition of Shares

Means admission of securities to the trading privileges/ dealings on recognized stock exchanges through a formal agreement. Listing Agreements needed when:A Public Issue that may be an Initial Public Offering (IPO) or Further Public Offering (FPO)Preferential Issues Amalgamation that implies mergers and acquisitions and reconstruction of companies
Listing Agreement Norms

To provide liquidity to securitiesTo protect interest of investors by ensuring full disclosures by listed entities To provide a mechanism for effective management of trading in securitiesTo provide cost-effective access to capital
Objectives of Listing

BSE Norms:Listing Requirements for Companies through initial public offering (IPO) and further public offering (FPO)Listing requirements for Companies already listed on Other Stock ExchangesRequirements for Companies delisted by BSE seeking re-listingPermission to use the name of BSE in the Company's ProspectusSubmission of Letter of ApplicationAllotment of SecuritiesPayment of Listing FeesCompliance with the Listing Agreement
Norms of Listing

Improves ability to raise additional capitalProvides LiquidityIndependent valuationImproves companys profileDisclosuresAutomated tradingRegular flow of information
Benefits of Listing

Delisting of sharesCompulsory DelistingVoluntary Delisting
SEBI (Delisting of Securities) Guidelines, 2003

The securities of the company have been listed on any stock exchange for a minimum period of 3 yearsThe investors have been given an exit opportunity before the shares are de-listed from the stock exchange. The exit price in such cases needs to be determined in accordance with the book building process.
Voluntary Delisting of Securities of a Listed Company

Pass a special resolution at the general The votes cast in favour of the delisting proposal must be at least twice the votes cast against the proposal Make an application in the specified format along with a copy of the special resolution to the Stock ExchangePublic announcementComply with the other additional conditionsAcquirer must buyback adequate number of shares Acquirer needs to provide the public shareholders an exit opportunity at a price determined by the book building process
Procedure for Voluntary Delisting

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Is about the whole set of legal, cultural, and institutional arrangements that determine what public corporations can do, who controls them, how that control is exercised, and how the risks and return from the activities they undertake are allocatedPrinciples:Honesty, trust and integrityPerformance OrientationResponsibility and accountabilityMutual respect and Commitment to the organization.
Corporate Governance Issues

Systems relating to internal controls Procedure to be followed while appointing internal auditorsThe independence of the companys external auditors and the quality of their auditsManagement of risk associated with the businessFinancial Statements to be prepared by the entityProcedure for reviewing the compensation of the CEO and other senior executivesResources to be made available to directors for carrying out their duties effectively The manner and procedure for nominating individuals for positions on the boardDividend policy to be adopted by the company
Issues Covered:

Merger is a process where one company join with another company and ensures that the following conditions are met:All properties are transferred to the amalgamated company.All liabilities are transferred to the amalgamated company.Shareholders holding at least 3/4th in the value of shares of the amalgamating company become shareholders of the amalgamated company.
Provision of Income Tax Act, 1961

The competition act provides the development of the economy.

The section governs anti-competitive agreements and prohibits agreements that are capable of generating adverse effect on competition like:
ProductionSupplyDistributionStorageAcquisition or control of goods orProvision of services
Competition Act, 2002

SEBI (Buy- back of Securities regulations)

Conditions Of Buy-back And
General Obligations Of The Company

A company can buy back its shares or other specified securities only by any of the following methods

From existing share/security holders on a proportionate basis through tender offer

From open market through:
Book building processStock exchange
From odd lot shares

A company cannot buy back shares or other specified securities through negotiated deals.

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A company cannot buy back its shares or other specified securities in such a manner that it would be required to delist.

Consideration for buy-back has to be paid in cash only.

A company cannot withdraw the offer to buy back after the draft letter has been filed with SEBI or the public announcement of the offer for the buy-back has been made.

A company cannot issue any shares or other specified securities including by way of bonus shares till the date of the closure of the offer.

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The promoters or their associates cannot deal in the shares or other specified securities of the company in the stock exchange during the period when the buy-back offer is open.

No public announcement of a buy-back can be made during the pendency of any scheme of amalgamation or arrangement or compromise.

A company intending to buy back its shares or other specified securities has to appoint a compliance officer and investor service centre. Normally, the company secretary is appointed as the compliance officer.

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Details of shares bought back and extinguished and destroyed have to be informed to the concerned stock exchange (s) within seven days of the extinguishment and destruction.

A company cannot buy back locked-in securities during the lock-in period.

Within two days of the completion of a buy-back, a company has to issue a public announcement giving certain details and in a prescribed manner.

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Requirements of The Special
And Board Resolutions

In case where a special resolution is passed in the general meeting, the explanatory statement to the notice of general meeting, should contain information as per schedule I of the regulations.

A copy of the special resolution passed should be filed with SEBI and the relevant stock exchange(s) within seven days of the passing.

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Buy-back Through Tender Offer

Procedure

1. The starting point is the passing of the special resolution by the general body or the board resolution as the case may be. Thereafter, the company is required to make a public announcement in at least one English national daily, one Hindi national daily and one regional language daily.

2. The draft letter of offer is required to be filed with SEBI.

3. In case, the number of securities offered by the security holders is in excess of the securities to be bought back, the acceptances from all the security holders are required to be on a proportionate basis.

4. Regulation 11(2) requires a company to make the payment of the consideration in cash to those security holders whose securities have been accepted and return the securities not accepted within seven days of the completion of verification.

5. Regulation 12 (1) prescribes the manner in which accepted securities which are in the physical form, are to be destroyed and extinguished within seven days of the date of the completion of the buy-back.

Escrow Account

Regulation 10 (1) requires that the company should open an escrow account and deposit in it such sum of money as is specified in regulation 10 (2) on or before the opening of the open offer.

Regulation 10 (2) specifies that in case, the total consideration payable under buy-back does not exceed Rs.100 crore, the amount to be deposited in the escrow account shall be 25 per cent of the consideration payable. However, if the consideration payable is in excess of Rs.100 crore, the amount would be 25 per cent of the first Rs.100 crore and 10 per cent of the excess over Rs.100 crore.

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Buy-Back from the Open Market

A company can buy-back its shares from the open market by
Stock ExchangeBook Building Process
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Buy-back Through
Stock Exchange

The resolution passed by the general body or the board has to specify the maximum price.

The Company shall appoint a merchant banker.

Public announcement has to be made at least seven days before commencement of purchase from the stock market and within two days of the announcement a copy, thereof, needs to be filed with SEBI.

Additionally, the public announcement shall disclose the names of stock exchanges and brokers through which buy-back is to be affected.

Buy-back can be done only through nationwide exchanges and through the normal order matching mechanism.

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Buy-back through book building

The resolution passed by the general body or the board has to specify the maximum price.

The company shall appoint a merchant banker.

Public announcement has to be made at least seven days before commencement of buy-back and within two days of the announcement a copy, thereof, needs to be filed with the SEBI.

The Public announcement has to contain details about the book building process, the manner of acceptance, the format of acceptance to be sent by the security holder and the details of the bidding centers.

Book building process has to be made through electronically linked transparent facility.

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Buy-back through book building

The number of bidding centers shall not be less than thirty.

The offer has to remain open for a minimum of fifteen days and a maximum of thirty days.

The final buy-back price, being the highest accepted price, shall be paid to all the shareholders.

The provisions relating to the verification of securities, opening of a special account for making payment of the consideration and extinguishment of securities shall apply as in the case of buy-back through tender offer.

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Obligations Of The Merchant Banker

Ensuring that the company has an ability- financial or otherwise- to carry out the buy-back and firm arrangements have been made for the payment of consideration.

Ensuring adequacy of the escrow account and releasing it only after all obligations of the company under the regulation have been met with.

Ensuring that the contents of the public announcement and letter of offer are true, fair and adequate.

Ensuring compliance with the SEBI regulations, the Companies Act, 1956, and any other applicable laws, rules and regulations.

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Documents

Legal Issues in M & A