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IMPACT OF NEW COMPANY LAW

ON M&A ACTIVITIES OF INDIAN


COMPANIES
VAIBHAV KAKKAR
Managing Associate
Corporate/ Regulatory Practices

New Delhi | Mumbai | Bangalore

COMPANIES ACT, 2013


A NEW REGIME
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Received Presidential assent on August 29, 2013

98 sections have been notified as on September 12, 2013


Operation of a majority of the provisions are subject to rules

which are yet to be formalized


Significant steps and introduction of contemporary provisions

toward improving corporate governance standards and


shareholder democracy in companies
Sweeping changes to M&A provisions and considerable

impact on forthcoming M&A activities of companies

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Acquisitions

TRANSITION TO THE 2013 ACT


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S. 465: Anything done or any action taken under the 1956 Act (extends also to any

rule, notification, instrument, document, agreement and any proceedings pursued


by the authorities etc.) shall continue to be valid and in force only if such action is
not inconsistent with the provisions of the 2013 Act
Does not prejudice general application of S. 6 of General Clauses Act, 1897 which

provides inter alia that the repeal of an enactment should not unless a different
intention appears affect any right, privilege, obligation or liability acquired,
accrued or incurred under any enactment so repealed
Unclear whether past transactions would be required to be restructured to be in

compliance with 2013 Act


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Acquisitions

SHARES WITH DIFFERENTIAL RIGHTS


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History
Under 1956 Act, private companies could issue shares with differential

rights as to dividend, voting or otherwise without being subject to any


conditions
Suggestion of Parliamentary Standing Committee on Finance (Report

on Companies Bill, 2011) that this exemption be retained in new Act


MCA favoured notifying any such exemptions after holding due

consultations with stakeholders as opposed to incorporation by

codification in 2013 Act

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SHARES WITH DIFFERENTIAL RIGHTS (CONTD.)


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S. 43: All companies (including private companies) have to comply with

any rules, as may be prescribed, in relation to shares with differential


rights as to dividend, voting or otherwise
Impact Areas
Government clarification in this regard and exemption to

private companies by notification is awaited


Concerns on validity and enforceability of differential rights

attached to shares of private companies issued under 1956 Act,


especially since such share issuances were not subject to any
conditions under the same
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Acquisitions

LIMITS ON NUMBER OF SUBSIDIARIES AND INVESTMENT


COMPANIES
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History

No limit in 1956 Act on number and nature of subsidiaries that company could have

Parliamentary Standing Committee on Finance in backdrop of Satyam scam made


recommendations aimed at preventing convoluted structures and siphoning off of funds
(particularly through inter-corporate investments)

S. 2(87) and S. 186/ Restriction on number of subsidiaries and investment


companies

Government has power to prescribe the number of layers of subsidiaries that a class(es)
of holding companies can have

Definition of subsidiary broadened to include all those companies in which holding


company holds more than half of the total share capital (instead of total voting power
under 1956 Act) expands universe of what is regarded as subsidiary

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Acquisitions

LIMITS ON NUMBER OF SUBSIDIARIES AND INVESTMENT


COMPANIES (CONTD.)
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S. 2(87) and S. 186/ Restriction on number of subsidiaries and

investment companies (contd.)


2013 Act provides that a company shall unless otherwise prescribed,

make investment through not more than 2 layers of investment


companies
Exemptions to this provision are only in respect of: (i) ODI involving

more than 2 layers of investment subsidiaries as per laws of country


where company is incorporated, and, (ii)

when the company is

required by law to have more than 2 layers of investment subsidiaries

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Acquisitions

LIMITS ON NO. OF SUBSIDIARIES AND INVESTMENT


COMPANIES (CONTD.)
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Impact areas
Existing corporate group structures may need to be restructured to

comply with provisions of 2013 Act; government intervention much


needed to prevent unwinding of genuine past transactions
Lesser flexibility in structuring of investments
Ability of India Inc. to monetize at various subsidiary levels taken

away
Requirement of demonstration of operations in subsidiaries leading

to factoring in of operation and compliance costs when structuring

investments
Affects genuine multi-layered investment structures particularly in

infrastructure sector
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ENFORCEMENT OF SHARE TRANSFERABILITY


RESTRICTIONS
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History
Commonplace for shareholders to enter into arrangements involving put and

call options, other pre-emption rights like ROFR, tag-along and drag-along
Three-fold challenge to such arrangements relating to shares:
(i)

SCRA restricted such arrangements as were neither permitted traded

derivatives nor spot delivery contracts


(ii)

1956 Act provided that shares and any interest therein of a public
company are freely transferable, hence any restrictions on share
transferability not enforceable against company

(iii)

RBI practically views put options involving non-residents, particularly


cases concerning "guaranteed" returns as debt arrangements disguised as
equity

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ENFORCEMENT OF SHARE TRANSFERABILITY


RESTRICTIONS
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Legally,

position unclear as some courts held such restrictions on free

transferability of shares of public company to be not enforceable (even if


incorporated in AoA); conflicting decision by Bombay High Court in Messer
Holdings Limited v. Shyam Madanmohan Ruia that private arrangements
between

shareholders of public limited company

not violative of free

transferability provision
2013 Act provides respite as position under Indian law unclear given conflicting

court decisions and pending appeal against Messer Holdings in Supreme Court
MCA intended to facilitate such commercial practices from a company law

perspective
Now, under S. 58 of 2013 Act, any contract or arrangement between two or more

persons in respect of transfer of securities shall be enforceable as a contract


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Acquisitions

ENFORCEMENT OF SHARE TRANSFERABILITY


RESTRICTIONS (CONTD.)
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Impact Areas
Statutory recognition to private arrangements such as put and call

options and contracts for pre-emption including ROFR, or tag-along


and drag-along rights
Watershed moment for M&A activity in India with more shareholder

autonomy given recent removal of restrictions by SEBI regarding


SCRA-

such

arrangements

now

permitted

subject

to

certain

conditions including inter alia price payable for sale or purchase of


underlying securities pursuant to exercise of any option being in
compliance with all laws

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Acquisitions

ENFORCEMENT OF SHARE TRANSFERABILITY


RESTRICTIONS (CONTD.)
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Impact Areas (contd.)


Explicit guidance from RBI regarding such arrangements,

especially in relation to option pricing awaited to conclude


enforceability debate

Inclusion of share transfer restrictions in AoA


While parties free to enter into such share transfer
arrangements, care to be taken that such restrictions are
not inconsistent with provisions of AoA (as per S. 44 of 2013
Act)
Would still be advisable to capture essential provisions of
share transfer restrictions in AoA- comply with doctrine of
constructive notice

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DEFINITION OF CONTROL
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History
No specific definition of control in 1956 Act (apart from provision for when

company may control composition of BoD of another company)


S. 2(27): Control shall include the right to appoint majority of the directors

or to control the management or policy decisions exercisable by a person or


persons acting individually or in concert, directly or indirectly, including by
virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner

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DEFINITION OF CONTROL (CONTD.)


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Impact Areas
To protect value of their investment, investors typically negotiate veto

and governance rights on key decisions regarding operations


SEBI tasked with responsibility in listed companies of ascertaining

control on the basis of rights acquired under a contract


Jurisprudence on veto rights unsettled particularly due to SC order that

SATs ruling on whether certain veto rights of the investor amounted to


control in Subkham Ventures v. SEBI would not have binding value in
other cases
Investors to be mindful of wider definition of promoter under 2013 Act

while structuring and negotiating veto and other governance rights in


private equity transactions
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DEFINITION OF CONTROL (CONTD.)


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Impact Areas (contd.)

Government recently amended definition of control under FDI Policy to align


with definition in 2013 Act

Given that contractual rights can be participatory and protective in nature,


different government agencies need to agree on a consistent approach toward
defining and determining control so as to avoid confusion and variations in
their approach [Ex: Jet-Etihad deal]

One way to address this is for the government to clarify that certain rights

would be protective in nature and not lead to control by themselves

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DEFINITION OF CONTROL (CONTD.)


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Implications on who constitutes a promoter


Promoter" includes a person who has control over the affairs of the

company, directly or indirectly whether as a shareholder, director or


otherwise
Impact Areas:
Under

2013 Act promoters are required to make certain

disclosures in relation to prospectus and are under certain


other obligations in relation to public offering
Depending upon the treatment and scope of veto rights and

other governance rights, investors may face a risk of being


classified as a promoter under the 2013 Act
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DEFINITION OF CONTROL (CONTD.)


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Implications on associate company


An associate company has been defined as a company in which another

company has significant influence, which means control of at least 20% of


total share capital or of business decisions under an agreement

Impact Areas
Consolidation of financial statements of subsidiary and associate

company now mandatory


Scope of related party transactions extended to associate companies

and their directors, KMP etc.

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TRANSFER OF UNDERTAKING
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History

Under 1956 Act, ordinary resolution required for BoD of public company/ subsidiary of

public company to sell, lease or otherwise dispose of undertaking/ substantially the whole of
the undertaking of company
S. 180/ Restrictions on powers of Board

Special resolution now required for all companies to transfer the whole/ substantially the

whole of their undertaking

Undertaking means an undertaking in which investment of the company exceeds 20% of its
net worth as per the audited balance sheet of the preceding financial year or an undertaking
which generates 20% of the total income of the company during the previous financial year

Substantially the whole of the undertaking in any financial year means 20% or more of the
value of the undertaking as per audited balance sheet of the preceding financial year

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TRANSFER OF UNDERTAKING (CONTD.)


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Impact Areas

Notwithstanding the new materiality test involved the undertaking will still
have to fulfill the requirement of being an undertaking

Jurisprudentially, courts in various cases have interpreted an undertaking to


mean the business/ activity of the company as a whole

Courts have opined that transfer/ sale of shares cannot be interpreted as


transfer of an undertaking

even if controlling interest in a company is

transferred or even when the shares transferred are the only assets or a
substantial portion of the assets of the company

Remains unclear whether disposal of investment by a company in another


company will be regarded as transfer of undertaking under 2013 Act

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OTHER ISSUES (CONTD.)


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Insider Trading
Under S. 195 of 2013 Act, prohibition on any person including directors and key

managerial personnel from:


(i)

subscribing, buying, selling or dealing in securities if such person is


reasonably expected to have access to any non-public, price-sensitive

information in respect of securities of the company


(ii)

engaging in an act of counselling about procuring or communicating directly


or indirectly any non-public price-sensitive information to any person.

Price-sensitive information means any information which relates, directly or

indirectly, to a company and which if published is likely to materially affect the


price of securities of the company
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OTHER ISSUES (CONTD.)


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Impact Areas

While SEBI regulations impose similar restrictions on insider trading in respect of


listed companies this provision now extends prohibition to private and unlisted
public

companies;

no

carve-out

made

for

private

companies

despite

recommendations of Parliamentary Standing Committee Report on Finance on


Companies Bill, 2011

Difficulty in determination of what constitutes price sensitive information in case


of private companies and how to make public disclosure of such information

Negotiated information rights under agreements impacted as may be construed to


be insider trading

Will impact sharing of non-public price sensitive information by management of


unlisted investee company with potential investors during due diligence process

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OTHER ISSUES
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Mandatory Valuation
Under S. 247 of 2013 Act, when the requirement of valuation arises
in respect of any property, stocks, shares, debentures, securities,
goodwill or any other assets, the same is to be valued only by a
registered valuer in accordance with prescribed terms and conditions

Impact Areas
Extremely relevant in context of preferential allotment of
shares which now have to take place at a price determined
by the registered valuer
Private companies now require a special resolution for
making preferential allotment

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OTHER ISSUES (CONTD.)


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Entrenchment

Any change to AoA only after obtaining shareholders approval by special resolution

2013 Act introduces concept of entrenchment whereby certain entrenched provisions in AoA
can be altered only through more restrictive processes than a special resolution passed by
shareholders of a company

Impact Areas

Investors can now specify in AoA that certain provisions cannot be altered
without obtaining prior written approval thus providing legal recognition to veto
rights of investors regarding amendment of AoA of investee company

Entrenchment provisions can be inserted in AoA either on formation of company


or by unanimous consent of all members in a private company or special
resolution in a public company

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OTHER ISSUES (CONTD.)


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Buy-back
2013 Act allows for a one year cooling off period between two buy-

backs whether initiated by the Board of Directors or the shareholders


Restriction will apply even where buy-back is achieved through court

scheme
Impact Areas
Multiple buy-backs not permitted in the same year even if the

buy-back

is

within

the

25%

limit

which

can

impact

transactions where multiple buy-backs are required

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MERGERS

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Mergers

NOTICE TO REGULATORY AUTHORITIES


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History

Regulatory authorities raised concerns suo motu or when required under the relevant
statute- no requirement of separate notice to be given by companies

S. 230/ Power to compromise or make arrangement with creditors and members

Notice (with relevant documents) required to be sent to Central Government, income-tax


authorities, RBI, SEBI, RoC, respective stock exchanges, Official Liquidator, CCI, if
necessary and any other sectoral regulators or authorities likely to be affected by the
compromise or arrangement

Representations, if any, by such authorities to be made within a period of 30 days from


the date of receipt of such notice failing which presumed that the authorities have no
representations to make

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Mergers

NOTICE TO REGULATORY AUTHORITIES (CONTD.)


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Impact Areas
Provision appears to be intended to streamline process of mergers by

creating defined timelines for regulatory authorities to work under


Practically, outcome may differ since provision does not provide for a

deemed approval but only a presumption that the authorities have no

representations after expiry of the 30 day time period


Other statutes may have differing timelines for making objections to the

scheme which may not be overridden by the 2013 Act


Ex: CCI has 210 days under the Competition Act, 2002 to make
objections to a proposed combination

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Mergers

THRESHOLD TO OBJECT TO COMPROMISE/


ARRANGEMENT
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History

No specific threshold prescribed for persons to make objections to a scheme of

compromise/ arrangement

S. 230/ Power to compromise or make arrangement

Under S. 230(4), objections to a scheme of compromise or arrangement can be made only by


persons holding at least 10% of the shareholding or having outstanding debt amounting to
not less than 5% of the total outstanding debt as per latest audited financial statements
Impact

Particularly in case of listed companies minority shareholders will now need


to commit significant efforts in aggregating their stake if they have to raise
objections unless large institutional shareholders take up their cause

Will eliminate frivolous litigation by shareholders with negligible stake thus


avoiding unnecessary delays
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Mergers

CROSS-BORDER MERGERS
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History
1956 Act permitted merger of foreign companies with
companies registered in India but not vice-versa
S. 234/ Merger or amalgamation with foreign company
Indian company can merge into foreign company and vice
versa
Foreign companies are required to be incorporated in
jurisdictions of countries notified by Central Government
Prior approval of RBI required
Payment of consideration to shareholders of merging
company in cash/ depository receipts
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Mergers

CROSS-BORDER MERGERS (CONTD.)


Impact Areas

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Positive step as Indian companies can now utilize this route to

restructure their shareholding by migrating ownership to overseas


structures thus increasing access to foreign capital
Effect of provision can be determined only once RBI comes out with

regulations in this regard


Remains to be seen whether such mergers would be permitted only for

an Indian holding company to merge with a foreign company or


whether Indian operating company also permitted to merge with
foreign company, in which case clarity required on manner in which
such entity will be allowed to hold employees and carry out operations
in India
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Mergers

TREASURY STOCK
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History
Companies not prohibited from holding treasury stock under 1956
Act
Utilized by companies to control voting rights and manage
profitability and cash flows

S. 232(3)/ Mergers and Amalgamation of companies


Transferee company cannot, as a result of compromise or
arrangement, hold any shares in its own name or in the name of any
trust whether on its behalf or on behalf of subsidiary or associate
companies
Any such shares would be cancelled/ extinguished

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Mergers

MINORITY SQUEEZEOUT
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S. 236/ Purchase of minority shareholding


If

acquirer/ person acting in concert with acquirer becomes

shareholder of 90% or more stake in a target company then such


person/ group shall compulsorily notify target company of their
intention to acquire the balance stake held by the minority
shareholders- minority shareholders may also initiate this process
Payment to be made within 60 days of minority shareholders

tendering shares
Provides exit opportunity to minority shareholders at a fairly

determined price and facilitates consolidation of shareholding by


majority shareholders without any long drawn out litigation
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Mergers

MINORITY SQUEEZEOUT (CONTD.)


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Impact Areas
Clarity required whether such an offer is intended to

be a one-time offer or whether there could be multiple


offers at different points beyond 90%
No

minimum

threshold

prescribed

for

minority

shareholders to make offer

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Mergers

SPECIAL TYPES OF MERGERS


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Fast-track mergers

Option of simplified and fast-track merger/ demerger in cases of


(i) small companies and
(ii) between holding company and wholly-owned subsidiary

Merger/ demerger approved by Central Government with no requirement to approach

NCLT
Reverse Mergers
When a listed company merges into an unlisted company the resultant company is to

remain unlisted unless it becomes a listed company


Minority shareholders of transferor company to be provided an exit option
Aimed at preventing backdoor listing of companies
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THANK YOU

Disclaimer: This presentation is intended for general information purposes only. It is not
a substitute for legal advice. Consultation with counsels at the Firm is recommended
regarding addressal of specific queries.
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