Mergers & Acquisitions

October 7, 2016

Lalit Kumar, Partner

J. Sagar Associates
advocates & solicitors
Ahmedabad | Bengaluru | Chennai | Gurgaon | Hyderabad | Mumbai | New Delhi

Kinds of M&A
Acquisitions

Friendly takeover
Negotiated takeovers
Sale through bidding

Hostile takeover

Not a negotiated acquisition

Indian Hotels (Tata group) $1.8-billion bid for Orient Express

Jupiter Metals bid for Kalindee Rail
No such term in Indian Takeover Regulations but is permitted
Hurdles to hostile takeovers Not popular in India

Leveraged buyouts
borrowed funds

Apollos acquisition of Cooper Tire

Bailout takeovers / Bankruptcy

Generally a profit
Takeover
making entity acquires
a loss making entity

Acquisition funded through

Kinds of M&A
Joint Ventures (Incorporated JVs and unincorporated JVs)

Collaboration of two or more entities for a specific venture

Tata-Pepsi joint venture for Mineral Water Business
Tata-Starbucks joint venture for coffee chains in India
Tata-Air Asia joint venture

Demergers / spin off / spin out

Splitting of entity into two or more entities

Assets and Business transfers / Slump Sale

Acquisition of specific identified assets or business unit /

division as a whole on a going concern basis

Merger and Amalgamation

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Key Laws / Policies

Private M&A
Slump Sale / Merger / Demerger / Amalgamation / Share
Sale/ Assets Sale
Public M&A
Takeover through open offers / Insider trading regulations / listing
agreement / hostile takeover / Block and Bulk Deals (large shares
deals)/ Delisting and Minority Squeeze out

The applicable laws depend upon the nature of M&A deal

Different kinds of acquisitions attract different laws

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Key Laws / Policies

Broadly, the applicable laws are:
Corporate Laws
Contract Law important to govern the contractual agreements
Foreign exchange regulations / FDI Policy (applicable in cross
border M & A)
Securities Law Takeover Code / Insider Trading / Listing
Regulations / ICDR Regulations / SCRA (applicable in cases of
Public M & A)
Anti-Trust laws (i.e. Competition laws and regulations)
Taxation Both direct and indirect taxes (e.g. transfer taxes,
capital gains, withholding taxes, etc.) including tax treaties
(applicable in cross border M & A) and potential tax liability
post acquisition, tax indemnities

Key Laws / Policies

Stamp duty both Central Levy and State (local levy)

Employment Laws
Sector Specific Laws including local laws
Environment Laws
Anti Corruption Laws Prevention of Corruption Act, 1988
Judicial Precedents and Regulators Orders

Share Subscription Agreement

Primary issuance of securities
Leads to dilution of the existing shareholders
May be done by: (i) rights issue; (ii) private placement; or (iii) preferential
allotment
Relevant provisions are:

Subscription and consideration

Conditions precedent
Standstill protection
Closing mechanism
Representations and warranties and disclosure letter
Indemnity
Termination
Confidentiality
Non-compete and non-solicitation
Governing law and jurisdiction
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Share Purchase Agreement

Acquisition of shares from existing shareholders
The company does not get funded and there is no dilution of existing
shareholders
Provisions similar to those in the share subscription agreements
Who will be the party of this agreement - the target company,
promoters and the sellers or only the sellers?
Need to ensure that the existing articles of association and
shareholders agreement do not prohibit such sale of shares by the
seller
Inclusion of provisions on regulatory compliances (in relation to
compliance with the Takeover Code, 2011) and the right of
termination to the purchaser upon the non-fulfilment of conditions
precedent, leading to withdrawal of open offer
Certificate under Section 281 of the Income Tax Act, 1961
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Shareholders' Agreement
Governs and regulates the inter-se rights of the shareholders vis--vis
conduct of the affairs of the company
The rights of the shareholders need to be in line with the provisions
of the Companies Act, 2013
Some of the major rights include:
The right to nominate and remove/replace directors on the board
Observer Seat on Board not counted for quorum and voting rights
The affirmative vote rights/veto rights
Mechanism for conduct of board and shareholders meeting (including
provisions on notices for meetings and quorum)
Resolution of deadlock on affirmative vote items
Anti-dilution protection
Exit rights and restriction on transfer of shares (typically in case of
private companies)
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Pooling Agreement
Contractual arrangement by which shareholders
agree that their shares will be voted as a unit
A voting trust is created between a group of
stockholders and the trustee to whom they transfer
their voting right
Typically individuals who own shares which carry
voting rights, transfer the shares to another party
for voting needs. This is done to control the
corporate affairs
Such pooling agreements may also provide the
method by which stockholders can direct how the
shares are to be voted

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Some controversial issues

Call and Put Options
Reserved /Veto Matters
Concept of Control with respect to Reserved
Matters
SEBI v. Subhkam Ventures (I) Private Limited
Transferability of Shares and Valuation thereof
Non-compete / Non-Solicitation
Representations and Warranties
Indemnity
Liquidation Preference

Structuring the Exit

Dividend payment Earnings not really capital exit

Interest payment - Earnings not really capital exit

Share Sale Secondary Exit

Trade Sale

Capital Reduction Buy-back of shares

Put Option

Listing of Securities Exit through IPO

Winding up/ Dissolution of the company

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Structuring an Acquisition
Objectives to be achieved
Structuring depends on the nature of acquisition Share Acquisition Vs.
Business Acquisition Vs. Assets Acquisition Vs. Other Forms of acquisition
Nature of the target company private, public, listed, unlisted, presence
of minority and existing shareholders, etc. and their rights how to structure
the new investment)
Level of acquisition
Minority (<50% - popular limits 26%, 49%)
Majority (>50% - popular limits 51%, 74%, 76%)
Equal (50 % :50 %)
Nature of the instruments used equity, preference, convertible securities,
warrants
Board and management rights in subsidiaries
Decisions regarding subsequent funding
Dividend Policy

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Structuring an Acquisition

Rights and restriction in Shareholders Agreement

Transfer of shares issues detailed and lengthy negotiations!

Rights such as ROFR/ROFO, Tag along rights, Drag Along
rights, lock in period, restriction on sale to a
competitor/mandatory transfer provisions/change of
control

Management, Board Rights and Control Issues

Caution to be exercised to ensure it does not result
into change of control unless specifically intended
Change of control issues in contracts and licenses

Reserved Matters/Veto Rights/Affirmative Votes

Are they enforceable?
Do they result in giving control?

Amendment of articles of association is a must to be

enforceable against the company Recent case of Delhi High14
in World Phones case

Structuring an Acquisition

Is it a debt funding or equity funding?

Resolution of Deadlock 50:50 Joint Venture One option is buyout

auction

Clarity whether Investor / acquirer to be classified as promoter or not

Issuance of Promoter and Corporate Guarantees

Acquisition of operation control - generally till the approval of scheme

of amalgamation is obtained

Check for exemptions under statutes such as Takeover Code (Regulation

10), Competition law (Schedule I, Assets and Turnover Criteria),
contract law and structure to fit within the exemptions

Directors and Officers Insurance Policy

Governing Law and Arbitration Provision

Seat/Venue of arbitration
Check for Reciprocating Territories

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Special Care in Public M&As

A.

Shares or voting rights acquisition

Acquisition less than 25% (only certain
disclosures to be made at 5% and thereafter
at every change of 2% or more)

No Trigger ()

Acquisition of 25% or more

Triggers ()
(also yearly disclosure to be made as of March
31 within 7 days)
Additional acquisition when the acquirer
already holds between 25% and 75%
Upto 5% in a financial year
More than 5% in a financial year
B.

No Trigger ()
Triggers ()

Acquisition of control
Acquisition of control irrespective of acquisition
or holding of shares or voting
rights

Triggers ()

C.

Indirect acquisition of
shares or control

Triggers ()

Be prepared for making the Public Announcement and Detailed Public Statement

Compliances with Block and Bulk Deals requirements

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Special Care in Public M&As

Enforceability of call and put options
Immediate delisting upon acquisition not permitted waiting period of 12
months
Look for exemptions in Takeover Code and structure to fit within the
exemptions
Compliance of SEBI / Stock Exchanges circular in scheme of amalgamation /
arrangement
Ensure not to disseminate unpublished price sensitive information not
applicable to communication required in ordinary course of business or
profession or employment or under law
Execution of Confidentiality Agreements/ NDA with the acquirer
Standstill provisions to be incorporated
Potential acquirer to ensure that information is kept confidential and does
not deal in securities even if the deal is aborted until the information is made
public
New SEBI Insider Trading Regulations, 2015 (with effect from May 15, 2015)

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Other Issues

Applicability of Section 186 of Companies Act, 2013

Applicability of Section 179 (3) (e) of the Companies Act, 2013 - to

invest the funds of the company

Restriction under Section 67(2) of the Companies Act, 2013 to public

companies to give loan, guarantee, or provide security or otherwise,
give any financial assistance for the purpose of, or in connection
with, a purchase or subscription made or to be made, by any person
of or for any shares in the company or in its holding company

Fresh issue of shares does not trigger related party transaction under
Section 188 of Companies Act, 2013 but transfer of shares to a
related party does trigger Section 188

Converting the physical shares into demat shares before acquisition

to save the cost of stamp duty

Ensure that the share certificate or DP statement showing the

acquired shares is taken on the closing date and all relevant forms
are filed and the statutory registers are updated to reflect the issue /
transfer of shares to the acquirer

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Other Issues

Rights of the party(ies) of the foreign jurisdiction

Seeking lawyers opinion / certification of the relevant jurisdiction
Review of contracts from lawyers of each jurisdiction
Language of the Contract English or local language or both
Currency denominated in the contract
Location of the performance of the contract
Place of signing and execution
Stamp duty issues
Proper drafting is very essential to mitigate future risk and avoid
litigation

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Reps, Warranties & Indemnities

Who represents and warrants company or promoter or both?

Whether absolute or qualified best knowledge qualifiers

Limitation : different levels e.g., tax liabilities 7 or more years

Enforceability of liquidated damages - In India liquidated damages becomes a cap penal damages will not be enforced

Threshold for invoking indemnity claims- individual and aggregate thresholds

Cap on indemnity liability

Use of escrow by acquirer to recover indemnity claims

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Non-compete / Non-Solicitation
Usual to insert a non-compete but enforcement specific or
otherwise a big question mark though Indian law different from
usual common law rule of reasonable restriction acceptability
Section 27 of Contract Act renders void a non-compete
restrictions except in case of sale of a business with goodwill
and that too with specific limitations on duration, scope and
geographic extent
Selling Shareholders cannot be prevented from undertaking
employment in a competing business
Confidentiality obligations are enforceable

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Jet-Etihad
Etihad acquired 24% shares of Jet Airways
Under the Commercial Co-operation Agreement (CCA)
between Jet and Etihad, Etihad had certain rights where
the issue of control arose
CCA was entered to lower administrative costs, sharing of
joint resources, better customer service and efficient
administration of their respective businesses
SEBI scrutinized the deal to verify if Etihad acquired
control over the target or if it was acting in concert with
the promoters

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Jet-Etihad

Many amendments were proposed before clearing the

case that Etihads acquisition did not result in control

Interestingly, Etihad did not have any affirmative vote

rights / veto or blocking rights at board or general
meetings, so the issue whether affirmative vote rights /
veto or blocking rights lead to control did not arise in
this case

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Sun-Ranbaxy

Domestic acquisition
Deal Size - around $4 billion
Merger all stock deal
Ranbaxy shareholders to get 4 shares of
Sun Pharma for every 5 shares held by
them in Ranbaxy
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Sun-Ranbaxy
Post acquisition Sun promoters stake to fall
from around 63% to around 55%, Daichis
(Ranbaxys promoter) to hold around 9%
CCI approved the deal with a rider to
divest/sell 7 brands which could have
appreciable adverse effect on competition
in India
Structure of divestment not finalised, could
be demerger or assets sale
6 months time given by CCI to sell the brands
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Reliance Network 18

Domestic
acquisition

including
acquisition of subsidiary TV18 Broadcast
Limited
Deal size around Rs.4000 crore or
$730 million
Acquisition through Independent Media
Trust (IMT), of which Reliance Industries
Limited (RIL) is the sole beneficiary
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Reliance Network18

Share acquisition
RIL had made its first investment in
Network18 in year 2012 with minority
stake through IMT, but only as an
investor
Acquisition triggered open offer under
the Takeover Code
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Bharti Airtel Loop Mobile

Domestic acquisition
Deal size - around Rs.700 crore
Slump Sale
Aborted deal-failure to obtain
regulatory clearance

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Flipkart - Myntra

Domestic acquisition
Deal size not disclosed
Flipkart-Myntra to be kept independent
and operate as separate entities
Share Swap and share acquisition

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Thank You

lalit@jsalaw.com

Disclaimer:
This presentation has been compiled for general information and does not constitute professional
or legal opinion. Readers should obtain appropriate professional advice.