LEGAL ASPECTS OF MERGERS &
ACQUISITIONS
NEW DELHI | MUMBAI | BANGALORE
August 9, 2013
Sameen Vyas
Partner
Luthra & Luthra Law Offices
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OVERVIEW

Modes of Acquisition
o

Stock Deal Vs Asset/Business Deal
Transaction Process Stock Deal
o
Due Diligence
o
Definitive Documentation
o
Key Approvals
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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
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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
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MODES OF ACQUISITION …contd
o Court Approved Slump sale: Indicative Types Of Structures
Structure 1: Demerger
Transfer of “business” to
Target Subsidiary
Shareholders
of the Target
Target
Target Subsidiary issues shares to shareholders of Target in
lieu of transfer of “business”
 Acquirer acquires shares of Target Subsidiary
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Target
Subsidiary
MODES OF ACQUISITION …contd
Structure 2: Hive-off
Transfer of “business” to
Target Subsidiary
Target
Subsidiary
Target
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
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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
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KEY DIFFERENCES BETWEEN A STOCK DEAL
AND AN ASSET/ BUSINESS DEAL
Identity of Acquirer
Stock Deal
Asset / Business Deal


Acquirer can be only an Indian
entity

Consideration (and title) has to
pass directly between Indian
Acquirer and Indian Seller
Can be Indian or foreign
(subject to compliance with
FDI policy)

No transfer of contracts


Contracts need to be novated /
assigned
Check for change -in- control
provisions

Consent of counterparties for
assignment/ novation

Immoveable property / intellectual
property / assets need to be
transferred to Acquirer
Contracts
Immoveable Property /
Intellectual Property /
Assets
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
No transfer of immoveable
property / intellectual property /
assets
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KEY DIFFERENCES BETWEEN A STOCK DEAL
AND AN ASSET/ BUSINESS DEAL ...contd
Stock Deal
Licenses / Approvals
Employees

No transfer
approvals

Licenses / approvals need to be
sought afresh by Acquirer (as most
cannot be transferred)

Check for change- in – control
provisions

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
shares, usually nominal (except
in some States which have advalorem duty)

Approximately
consideration

On share transfer deeds: 0.25%
of the consideration in case of
physical shares, and zero in
case of dematerialized shares
Stamp Duty
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Asset / Business Deal
of
licenses
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/
5
to
8% of
the
TRANSACTION PROCESS: STOCK DEAL
AN OVERVIEW
Term Sheet
Due diligence
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Definitive
Documentation
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Procurement
of approvals
and
satisfaction of
other
conditions
precedent
Closing
DUE DILIGENCE: KEY ASPECTS

Structure and design the due diligence exercise depending on the:
o
o
o
o

Business of the Target
Nature of the transaction
Determination of materiality from a commercial perspective
Listed Companies
Purpose of a due diligence exercise:
o
o
o
o
o
Risk Matrix
Identification of potential value depletors
Determination of conditions precedent
Critical for evaluation of representations and warranties
Identification of items for specific indemnities
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DUE DILIGENCE: KEY ASPECTS ...contd

Key Areas to be covered in a legal due diligence exercise
Area
MATERIAL CONTRACTS
Relevance

Pre / post facto
counterparties

Termination rights of relevant counterparties eg. change-incontrol

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

Encumbrances or other securities created or required to be
created over assets of the Target

Events of default / acceleration rights of the lender
consent
requirements
from
relevant
INDEBTEDNESS
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DUE DILIGENCE: KEY ASPECTS ...contd
Area
IMMOVEABLE PROPERTY
Relevance

Title to properties

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
validly registered

Registration is valid and subsisting

Change-in-control provisions in license
agreement
INTELLECTUAL PROPERTY
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DUE DILIGENCE: KEY ASPECTS ...contd
Area
Relevance

Contingent liabilities of the Target

Litigation which may have a material
adverse effect

Outstanding dues / claims / proceedings

Compliances and filings
MATERIAL LITIGATION
TAX
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DUE DILIGENCE: KEY ASPECTS ...contd
Area
Relevance

Compliance with applicable labour laws such
EPF, Payment of Gratuity, Contract Labour etc.

Employment contracts of key employees

Other peculiar aspects such as ESOPs

Approvals required for business of Target have
been duly obtained and maintained

All compliances required under applicable law
have been duly complied with

Statutory dues, fines, penalties (if any) potential
liabilities on directors etc.
EMPLOYEES
COMPLIANCES & APPROVALS
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TRANSACTIONAL ISSUES: LEGAL
DOCUMENTATION

Confidentiality /non-disclosure agreements
o
o

Information Memorandum
o

Covers financial, technical, legal and other information disclosed to Acquirer
Duration of confidentiality obligations
Overview of operations, financials and prospects of the Target
Term Sheet
o
o
Broad contours of parties’ understanding
Binding or non-binding (with some binding provisions such as confidentiality,
governing law, non-solicitation )

Acquisition Agreement

Shareholders’ Agreement
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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
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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)
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DEFINITIVE DOCUMENTATION:
ACQUISITION AGREEMENT …contd





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 nonresident entity)
Conduct of a satisfactory due diligence by Acquirer
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DEFINITIVE DOCUMENTATION:
ACQUISITION AGREEMENT…contd

Covenants of Target / Sellers between signing and closing
o
o
o
o
o
o
o
Carry on business in the ordinary course, and in accordance
with applicable law
Not incur any material indebtedness
Not issue or allot securities of the Target, or grant to any
person, the right or option to acquire the same
Not sell, transfer or create encumbrances over the assets of
the Target
Not enter into, terminate or amend any material contract
including with key employees
Not declare any dividends
Not amend the charter documents of the Target
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DEFINITIVE DOCUMENTATION:
ACQUISITION AGREEMENT …contd

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
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DEFINITIVE DOCUMENTATION:
ACQUISITION AGREEMENT …contd

Representations and warranties
o
o
o
Walk-out right prior to Closing- and indemnification right post
Closing
Repetition as of effective date / closing date
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
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DEFINITIVE DOCUMENTATION:
ACQUISITION AGREEMENT …contd

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
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DEFINITIVE DOCUMENTATION:
ACQUISITION AGREEMENT …contd

Representations and warranties
o
o
Knowledge qualifiers
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
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DEFINITIVE DOCUMENTATION:
ACQUISITION AGREEMENT …contd

Indemnity
o
o

General indemnity for breach of representations / warranties /
covenants
Specific indemnities on account of particular items such as noncompliances, tax issues such as withholding, pending proceedings
against Seller
Limitation of Liability
o
o
o
Aggregate cap on liability
De-minimus threshold
Time limitation on claims
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DEFINITIVE DOCUMENTATION:
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
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DEFINITIVE DOCUMENTATION:
SHAREHOLDERS’ AGREEMENT...contd

Management rights
o
Board representation (including at committee level)
 Concept of “control” under FDI policy- “right to appoint
majority directors”
o
o
Quorum in Board and Shareholder’s meetings
Affirmative vote items
 Concept of “control” – FDI Policy, Take Over Code
Right to appoint / nominate key management personnel
Deadlock resolution mechanisms
Information rights
Minimum shareholding thresholds linked rights
o
o
o
o
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DEFINITIVE DOCUMENTATION:
SHAREHOLDERS’ AGREEMENT ...contd

Restrictions on transfer of shares
o
o
Lock- ins and Escrow Mechanism
Right of first refusal / right of first offer

Restrictions on sale to competitor
o
o
o
Call / put options
Tag- along rights (usually minority / private equity)
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
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DEFINITIVE DOCUMENTATION:
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
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DEFINITIVE DOCUMENTATION:
SHAREHOLDERS’ AGREEMENT ...contd

Non-compete and non-solicitation obligations during and post
termination of agreement
o
o

Enforceability of non-compete/non-solicit obligations under Indian
law; Section 27 of the Indian Contract Act, 1872
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
o
o
Litigation vis-à-vis arbitration
Choosing the seat of arbitration and the governing law thereof
In case seat of arbitration is outside India, parties to arbitration
cannot approach Indian courts for interim relief etc
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KEY APPROVALS /REQUIREMENTS

Companies Act, 1956

Competition Act, 2002

Take Over Code / Listing Agreement

Foreign Direct Investment Policy

Sector specific regulations
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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
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KEY APPROVALS /REQUIREMENTS:
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
o
no notifiable transaction can be consummated without obtaining
the prior approval of the Competition Commission of India
(“CCI”)
Certain transactions have been exempted from the
requirement of giving notice
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KEY APPROVALS /REQUIREMENTS:
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
o
approval of proposal relating to the merger/amalgamation, by
the board of directors of the entities involved in the
merger/amalgamation
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
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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
o
o
Initial Threshold: Acquisition of 25% or more voting rights in the
target
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
Direct or indirect acquisition of control
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KEY APPROVALS /REQUIREMENTS:
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
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KEY APPROVALS /REQUIREMENTS:
TAKE OVER CODE
o
o
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
If shares are not frequently traded, price determined by acquirer
and manager to offer
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
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KEY APPROVALS/ REQUIREMENTS: FOREIGN
DIRECT INVESTMENT POLICY

Highly liberalized policy

FDI permitted in almost all sectors other than:
o
o
o
o
o
lottery business
gambling and betting
chit funds
nidhi companies
manufacturing of cigarettes, cigars
etc, or of tobacco and tobacco
substitutes
o trading in transferrable
development rights
o real estate business or
construction of farm houses
o atomic energy, and
o railway transport
•Prior governmental approval required for very few sectors such as:
o Defence
o Single brand retail
o Multi-brand retail
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o Aviation
o Pharmaceuticals (Brownfield)
o Print media
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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
o
Dividends (net of taxes) are freely repatriable
Price/conversion formula of convertible capital instruments to be
determined upfront at the time of issuance of instruments

o
o
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
Rate of return / interest on CCPS/CCD capped under the FDI
policy.
All other instruments such as optionally convertible preference
shares etc. treated as external commercial borrowing
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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
Issuance Of Shares


Transfer of shares From
a resident to a nonresident
Transfer of shares from
a non- resident to a
resident
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

Reporting & Other Requirements
At the time of initial
subscription to the MOA,
issue price can be equal
to face value
In all other cases, issue
price cannot be lower
than Fair Value
Cannot be
Fair Value
lower
than
Cannot be higher than
Fair Value
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
FIRC to be filed within 30 days of
receipt of inward remittance

Form FC-GPR to be filed within 30
days of issuance of instruments

Instruments to be issued within 180
days of receipt of inward remittance

Form FC-TRS to be filed within 60
days of receipt of consideration

Transfer can be recorded by Company
only once FC-TRS has been certified
by AD
-same as above-
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