MASTERCLASS ON THE NEW
COMPANIES ACT
Special Focus on PE/VC and M&A
Impact on Term Sheets & Investments
Khaitan & Co LLP
IVCA Masterclass
|
New Delhi
|
17 December 2013
Background
Company: XYZ Limited (public unlisted)
Investor: You (through Mauritius)
Promoter: One Promoter with several family
members holding shares
Existing Investors: Angel investor and VC
collectively holding 10%
Business: 100% FDI permitted under the automatic
route
Your Investment: 26%
Note: Language in this font indicates term sheet extracts
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2013
Background – What we are
covering
1. Pre-Investment
Considerations:
•
•
Structuring your
investment
Making the right
choice of instrument
2. Conditions Precedent
•
•
Financial Assistance
Insider Trading
3. Management
•
•
•
•
•
Board Composition
Board Committees
Board Powers
Board Meetings
Reserved Matters
4. Further Funding
•
•
•
•
•
Further Issuances of
Capital
Pre-emptive Rights
Anti-Dilution Rights
Conversion
Penal Ratchets
5. Exits & Transfer
Restrictions
•
•
Term Sheet Issues
IPOs
6. Transaction
Documentation
•
•
Enforceability
Entrenchment
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2013
PRE-INVESTMENT CONSIDERATIONS
• Structuring your Investment
• Making the Right Choice of
Securities
Structuring – Layered Investments
New Restriction | Layered Investments
•
A company cannot make investments through
more than 2 layers of investment companies [S
186 (1)]
•
“Investment company” means a company whose
principal business is acquisition of shares,
debentures or other securities [Explanation,
S 186]
•
Whether the restriction is applicable only to
‘investment subsidiaries’?
Exemptions [Proviso, S 186 (1)]:
•
Offshore acquisition possible if the offshore
target has investment subsidiaries beyond 2
levels, as per the laws of such country
•
Subsidiary can have investment subsidiary to
meet regulatory requirements
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Structuring – Layered
Investments
Permissible
Structure
Investor Co
HoldCo
Workable Structure?
Investor Co
Investor Co
HoldCo
HoldCo
HoldCo
OpCo
OpCo
HoldCo
Workable Structure?
HoldCo
HoldCo
OpCo
X
30%
60%
HoldCo
Target
10%
Target
Target
Y
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2013
Structuring – Layered
Investments
Impact
•
Takes
away
investments
•
Genuine
transactions
will
be
severely
impacted, in particular, investments in the
Infrastructure sector
•
Ability of India Inc to monetise at various
subsidiary levels will be impaired
•
Companies will have to demonstrate operations
in the subsidiaries | operation and compliance
costs
flexibility
to
structure
Outbound Acquisitions
Watch
Statutory recognition
ofouts
more than one layers
for structure
offshore should
acquisitions
Your
be in conformity with the above
•
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2013
Structure – Right Choice of
Security
INSTRUMENT:
EQUITY SHARE
CCPS
CCD
ECB (OCPS / OCD)
OWNERSHIP
Yes
Yes
No
OCPS: Yes
VOTING RIGHTS
Yes [S 47(1)]
• Voting right on matters
CCPS, winding up,
reduction of capital
• Voting right on all
dividend is paid for 2
[S 47(2)]
No [S 71(2)]
OCPS: Same as CCPS
OCD: Class Voting
NATURE OF RETURN
RETURN
Dividends from Profits
to Transfer of Profits to
Rules [S 123]
• Preferential dividend
• Participating / Nondistinction possible
• Cumulative / Nondistinction removed
Interest
OCPS: Same as CCPS
OCD: Interest
ISSUANCE
REQUIREMENTS
• Rights issue through
resolution
[S 62(2)(a)]
• Preferential allotment
special resolution [S
Special resolution
[R 4.7(1)(a)]
Special resolution
[S 71(1)]
Special resolution
[S 71(1) r/w R
PRICING
RESTRICTIONS
UNDER FEMA
Listed: SEBI Guidelines
Unlisted: DCF Method
Listed: SEBI Guidelines
Unlisted: DCF Method
Listed: SEBI
Unlisted: DCF
No
|
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OCD: No
2013
Structure – Right Choice of
Security
INSTRUMENT:
EQUITY SHARE
CCPS
CCD
ECB (OCPS / OCD)
VALUATION FOR
PREFERENTIAL
ALLOTMENT UNDER
UNDER CA2013
Valuation by
Registered
[S 62]
Valuation by Registered
[S 62]
Valuation by Registered
[S 62]
N/A
VALUATION UNDER
INCOME TAX ACT
• Listed- Price
which it is
stock exchange
• Unlisted- Fair
Market Value
• Listed- Price for which
on stock exchange
• Unlisted- Fair Market
• Listed- Price for which
stock exchange
• Unlisted- Fair Market
• Listed- Price for which
stock exchange
• Unlisted- Fair Market
CONVERSION UNDER
UNDER FEMA ETC
N/A
• Conversion formula to be
upfront limited by DCF
• Price of resultant
go below DCF at the time
issuance
• Conversion formula to be
upfront limited by DCF
• Price of resultant shares
go below DCF at the time
issuance
• Upfront conversion
mandatory
• Price of resultant shares
go below DCF at the time
issuance and FDI sectoral
complied with; FC-GPR and
2 to be filed
CONVERSION UNDER
UNDER CA2013
N/A
• Possible
• Price of resultant
fixed upfront if CCPS
preferential allotment
4.11(2)(h)]
• More onerous than FDI
• Possible
• Price of resultant shares
fixed upfront if CCDS
preferential allotment [R
4.11(2)(h)]
• More onerous than FDI
•
•
• Consider taking some
take voting rights
• Tenure of 18 months for
issued by listed
OTHER
CONSIDERATIONS
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Possible
Price of resultant
fixed upfront if
issued at preferential
[R 4.11(2)(h)]
Preference
which are not compulsorily
convertible are treated as
under FEMA and need to
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with ECB norms
Structure – Differential Rights
Voting: The Series A
Equity Shares shall carry
voting rights equivalent to
26% (Twenty Six percent)
of the Share Capital.
Example
If a member holds
10% of the share
capital
with
51%
voting rights, will
he be deemed to have
“control”?
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10
•
Equity shares with differential rights
as to dividend, voting or otherwise
continue
to
be
recognised
[S
43(a)(ii)]
•
No differentiation between private and
public companies:
•
Is the investee company public or
private?
•
Will rules be enacted similar to
the existing rules for issuance of
shares with differential rights by
public companies?
•
Shares with differential rights not to
exceed 25% of the total post-issue paid
up equity share capital [R 4.2(1)(c)]
•
Can
differential
voting
arguably
trigger
“control”
under FDI regulations?
•
Definition of “Control” under Press
Note 4 of 2013 is wide and includes
control by virtue of shareholding,
management
rights,Copyrightshareholders
© Khaitan & Co 2013
agreements or voting agreements
rights
issues
CONDITIONS PRECEDENT
• Financial Assistance
• Insider Trading
Conditions Precedent
Conditions Precedent:
The Closing of the Transaction shall be subject to the fulfilment of
the following conditions (“Conditions Precedent”) to the
satisfaction of the New Investor:
a) Completion of legal, financial, environmental, technical and
business due diligence processes to the satisfaction of the New
Investor;
b) The Promoter shall purchase all securities held by the
remaining members of the Promoter Group at a price to be
determined inter-se the Promoter Group and the Promoter
Group shall no longer have any legal or beneficial interest in
the Company upon the conclusion of such purchase;
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Financial Assistance
No financial assistance [S 67]
• “No public company shall give, whether directly
or indirectly and whether by means of a loan,
guarantee,
the
provision
of
security
or
otherwise, 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.”
Expenses: The Company
shall bear all costs and
expenses relating to any
due diligence exercise to
be conducted in the
course
of
the
• This section was present in the 1956 Act as well,
Transaction and any
but the interpretation may well be re-opened
legal or other fees
Issues?
relating
to
the
• Payment of due diligence costs or advisor’s fees
negotiation
and
by target
finalization
of
the
• Indemnity by target in the underwriting agreement
Transaction Documents
and the Closing of the Any exception?
Transaction.
• Provisions not applicable to private companies
• Financial assistance to subsidiary company not
prohibited
Impact
• One of the most severe consequences on default
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13
• To
consider
whether
diligence
Copyright © Khaitan & Co
costs
should
be
2013
Insider Trading – Mop-up
Transactions
New Concept [S 195]
The Promoter shall
purchase all securities
held by the remaining
members
of
the
Promoter Group at a
price to be determined
inter-se the Promoter
Group
and
the
Promoter Group shall
no longer have any
legal or beneficial
interest in the Company
upon the conclusion of
such purchase
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• Seems
to
be
applicable
to
all
companies
• Prohibits persons, including directors
and KMP from entering into insider
trading
(with
exemption
for
communication in course of employment
/ profession, or under law)
• “Insider trading” refers to the act of
buying, selling, or otherwise dealing
in
securities
by
person
who
is
reasonably expected to have access to
non-public price sensitive information
in respect of securities of the
company
• On contravention, person punishable
with imprisonment upto 5 years or fine
between INR 5,00,000 and INR 25,00,000
or 3x of profit made out of insider
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© Khaitan
& Co
trading, whichever is higher,
or
both
2013
Insider Trading – Mop-up
Transactions
Impact | Unclear Concepts
• There was no requirement for this legislation
to legislate on insider trading since listed
companies are already covered under SEBI
Insider Trading Regulations
• Defines “insider trading” which is not defined
under SEBI Insider Trading Regulations
• May apply even to unlisted companies, absurd
consequences – clearly not intended!
Blind Spots
• “Mop-up” transactions under cloud?
• How will test of “published information” be
met for unlisted companies?
• What about subsequent rounds of funding?
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2013
MANAGEMENT
• Board Composition
• Board Committees
• Board Powers
• Board Meetings
• Reserved Matters
Board Composition
Board Composition:
On and from the Closing Date, the board of directors of the Company (the
“Board”) shall comprise of 5 (Five) directors such that:
(i) The Promoter will be entitled to nominate 2 (Two) directors; and
(ii) The Existing Investors shall jointly be entitled to nominate 1 (One)
director (the “Existing Investor Director”); and
(iii)The New Investor shall be entitled to nominate 2 (Two) directors (the
“New Investor Directors”);
The Existing Investor Director and the New Investor Directors shall
hereinafter collectively be referred to as the “Investor Directors” and each
shall individually be referred to as an “Investor Director”).
The Investor Directors shall be appointed to each committee of the Board.
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2013
Board Composition – Matrix
TYPE OF
COMPANY
CSR
TRIGGERS
Private
Company
Independent
Director
required on
CSR
Committee
if:
Public
Unlisted
Company
• Net worth
≥ INR 500
Crores
• Turnover
≥ INR
1000
Crores
• Net
profit ≥
INR 5
crores
[S 135(1)]
Listed
Company
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INDEPENDENT DIRECTOR
WOMAN DIRECTOR
1 Independent on CSR Committee
if CSR requirement is triggered
Required if
paid-up share
capital > INR
100 crores (to
be appointed
within 3 years)
[R 11.1(ii)]
SMALL SHAREHOLDER
DIRECTOR
RESIDENT
DIRECTOR
Not applicable
1 Independent on CSR Committee
if CSR requirement is triggered
1/3rd of the Board to be
Independent if the Company has:
• Paid-up share capital of INR
100 crores or more;
• Turnover of INR 300 crores or
more; or
Required if
paid-up share
capital > INR
100 crores (to
be appointed
within 3 years)
Not applicable
[R 11.1(ii)]
• Aggregate outstanding loans,
borrowings, debentures or
deposits exceeding INR 200
crores [R 11.2]
• All listed companies to have
1/3rd of the Board comprised
of independents [S 149(4)]
• Requirement increases to half
of the Board if there is an
executive chairman
One director
required to
be resident
in India for
at least 182
days in a
calendar year
[S 149(3)]
All listed
Companies to
have a woman
director (to be
appointed
within 1 year)
[R 11.1(i)]
Mandatory? Suo
motu option
Request of 1/10th
the number of
small
shareholders or
500 Copyright
small
© Khaitan & Co
shareholders
2013
Board Committees: Applicability
TYPE OF
COMPANY
AUDIT COMMITTEE
PRIVATE
COMPANY
Not applicable
NOMINATION &
REMUNERATION
COMMITTEE
Not applicable
Both Committees required if the
Company has:
• Paid-up share capital of INR 100
crores or more; or
PUBLIC
UNLISTED
COMPANY
• Aggregate outstanding loans,
borrowings, debentures or deposits
exceeding INR 200 crores [R 12.4]
LISTED
COMPANY
CSR COMMITTEE
Applicable
Independent
Director required
on CSR Committee
if:
• Net worth ≥ INR
500 Crores
• Turnover ≥ INR
1000 Crores
STAKEHOLDER
RELATIONSHIP
COMMITTEE
Unlikely to apply
since the
requirement is
only triggered
where a company
has 1000
shareholders or
more
Applies if the
Company has 1000
or more
shareholders
• Net profit ≥ INR
5 crores
Applies if the
Company has 1000
or more
shareholders
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Board Composition
• Check the following parameters against the matrices
above:
•
•
•
•
•
Company’s
Company’s
Company’s
Company’s
Company’s
net worth;
net profit;
turnover;
paid-up share capital; and
outstanding borrowings.
• Restructure the Board and introduce committees to
comply with requirements
• Importance of proportionate representation instead of
fixed number of directors
Watch outs on Board Composition
Investor nominee directors should not be used to comply with requirements
Change in size and composition of the Board will be an essential Reserved
Matter Right
Compliance with requirements will need to be ensured as the Investee Company
grows over the course of the investment life
Keep a special watch in relation to listed companies
Residency test may be important for nominee directors
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Director’s Duties [S 166]
The Investor Directors shall not be liable for
any failure by the Company to comply with
applicable law and shall not be considered as
‘officers in default’. The Company will
indemnify the Investor Directors to the
greatest extent permitted under applicable law
and shall obtain directors and officers liability
insurance to the satisfaction of the New
Investor providing adequate insurance
coverage to the Investor Directors.
• To act in accordance with the
articles of association of the
company;
• To act in good faith to promote the
objects of the company for the best
interests of the company and for
the benefit of the members as a
whole and in the best interests of
the employees, shareholders, the
community and the environment;
• To exercise his duties with due and
reasonable care, skill, diligence
and independent judgment;
• To avoid situations where he may
have a direct or indirect interest
which conflicts or may conflict
with the interests of the company;
• To avoid any undue gain to himself
or his relatives, partners, or
associate (if found guilty of this,
the director may be required to pay
an amount equal to such gain to the
company);
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2013
Board Powers
• Key Changes – Restrictions [S 179]
Addition to the list of powers which
exercised only at a Board meeting:
can
be
• Approval of financial statements and Board
reports
• Diversification of business
• Approval of amalgamation, merger or
reconstruction
• Approval of takeover of another company or
for Directors
acquisitionWatch
of aouts
substantial
stake in another
companyrights exercised at Board level may conflict with
Affirmative
duties, preference for shareholders’ level/written consent
affirmative rights | Most items should require shareholder’s
approval
Conflict with several interests of a nominee director towards
the relevant shareholder;
Duty of care is quite onerous and it seems it may be easy to
slip up!
Contravention to result in a fine of INR 1 lakh to INR 5
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& Co
2013
Board Meetings
Attendance of Meetings: To the extent permitted under and in
compliance with applicable Law, any Director may participate in and
vote at a meeting of the Board by means of telephone, video
conferencing or similar communications equipment which allows all
persons participating in the meeting to hear each other and to record
the deliberations. Where any Director participates in a meeting of the
Board by any of the means described in the preceding sentence, the
Company shall ensure that that Director is provided with a copy of all
documents to be referred to during such meeting of the Board before the
meeting of the Board commences.
• Participation by video conference and
other audio visuals as may be prescribed
has been codified and permitted;
• Procedure for participation in a Board
meeting by video conference to be provided
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Impact
• Board Restructuring may
existing investments:
be
required
for
• Independent directors may be required on
private
companies
(CSR)
–
clarification
awaited
• Women Directors may be required on private
companies (share capital threshold)
• Directors’ Liability
• Directors duties in direct conflict with
investor interests
• Increased risk of nominee director liability
(lack of diligence; knowledge attributable
through Board process; non-objection)
• Insider Trading restrictions may extend to
private companies [S 195]
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2013
Reserved Matters
Reserved Matters
Schedule [--] hereto contains a list of indicative affirmative vote items, to be
finalized in the SHA (the “Reserved Matters”).
The Company shall not take any action in respect of any of the Reserved Matters
(whether in a meeting of the Board, any committees or the Shareholders) without the
consent of each Investor Director or each of the Existing Investor’s or New
Investor’s representatives, as the case may be.

Check statutory special
investor holds > 26%

Directors duties are now codified – reserved
matters, if considered at Board level, may result
in conflict with Director’s duties

Reserved matters to be provided for consideration
on shareholder’s level
resolution
items,
where
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2013
Special Resolution Matters
• Matters requiring special resolution •
under the CA2013 expanded:
•
change of registered office
•
alteration of charter documents
•
issue of ESOPs
•
variation of rights attached to a class
of shares
•
preferential allotment of issue of
shares, debentures or convertible
instruments
•
buyback of shares or reduction of share
capital
•
change of auditor
•
re-appointment of independent director
after expiry of term
•
“related party” transactions, provided
that “related party” shall not vote
•
director’s remuneration, if prescribed
in the articles
winding up and appointment of liquidator
• Impact
•
Reserved matter list may be shortened
if the Investor has sufficient
shareholding – to account for a
dilution risk
•
List broadly the same as provided in
CA1956 but applicable to private
companies also
•
Amendment of charter documents should
specifically be made subject to super
majority vote
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2013
Further Funding
• Further Issuances of Capital
• Pre-emptive Rights
• Anti-Dilution Rights
• Conversion
• Penal Ratchets
Pre-emptive Rights; Further
Funding
Pre-Emptive Rights:
In the event the Company proposes to offer Equity Shares, or other securities
convertible into Equity Shares, to any person, the Investors and Promoter shall,
within 30 (Thirty) calendar days after delivery of a notice from the Company
describing such offering, have the right but not the obligation to offer to subscribe
to any such instrument at the price mentioned in such notice in proportion to their
shareholding in the Company to maintain their respective shareholding percentage
in the Share Capital (the “Pre-emptive Right”)
Further Capital Issues:
If the Board determines that the Company requires additional funds, the additional
funds shall be raised in the following order of priority:
(i) loans from banks/financial institutions inside or outside India on a nonrecourse basis on terms acceptable to the Board; or
(ii) subject to the Pre-emptive Right, if the Company is unable to procure nonrecourse loan funds, then equity contribution by the shareholders of the
Company pro-rata to their shareholding in the Company
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2013
Further Issue of Capital
Watch Outs:
•
Preferential allotment
private companies now
•
Rules apply to both issue of shares and any
other securities convertible into shares [R
4.11(2)]
•
Issues with upfront determination of conversion
price
•
In preferential allotment, price of shares to
be determined by the registered valuer | not
applicable in case of preferential allotment by
a listed company [S 62(1)(c), R 4.11]
•
There seems to be a conflict
formula v. upfront “price”
•
Ensure that the identity of the registered
valuer or the parameters to determine the
registered valuer is agreed upfront
process
applicable
with
FEMA
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to
–
2013
Anti-Dilution & Conversion
Anti-Dilution:
If at any time after Closing, the Company issues to any Person (other than pursuant to the
ESOP or bonus issue) any Equity Shares or other instruments that are convertible into Equity
Shares or which confer a right to subscribe to Equity Shares at a later date, at a price per
share that is lower than the Investment Price, then the New Investor shall be entitled to antidilution protection on a [broad based weighted average basis]. In such an event, the Company
shall be bound to, and the Promoter shall be bound to cooperate with the Investor and the
Company such that, the Company forthwith takes all necessary steps to either adjust the
conversion ratio or issue additional equity shares to the Investor.
Conversion:
The CCPS shall compulsorily convert into Equity Shares on the earlier of:
(i)
Immediately prior to the filing of any offer document by the Company with SEBI in
relation to an IPO; or
(ii)
20 years from the Closing Date; or
(iii) Voluntarily, at the sole discretion of the New Investor
The conversion of the CCPS into Equity Shares shall be at a price corresponding to the IRR
Return unless conversion is in relation to an IPO. In the event of an IPO, conversion shall take
place at the lower price of any price band conclusively determined for such IPO.
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2013
Conversion, Anti-Dilution and Penal
Ratchets
 Is a penal
possible?
ratchet
or
other
anti-dilution
protection
 Price of resultant shares to be fixed upfront if CCPS/CCDs
issued at preferential allotment [R 4.11(2)(h)]
 May be structured as a rights issue! ?
 Renunciation [S 62(1)(a)(ii)]:
•
In rights issue, unless the articles provide otherwise,
the shareholder will have the right to renounce the
shares offered to him in favour of any third person –
applicable to private companies also
 Is it enforceable?
 Does it become a backdoor selective bonus issue?
 Renunciation to be clarified in articles?
Promoter’s Waiver: The Promoter agrees and undertakes to waive and renounce his/her
rights and entitlements to participate and subscribe to the Ratchet Securities in favour of the
New Investor and the New Investor shall be solely entitled to participate and fully subscribe to
the Ratchet Securities in accordance with their terms
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2013
EXITS & TRANSFER RESTRICTIONS
• Term Sheet Issues
• IPOs
Transfer Restrictions
Lock-in of Promoter Shares
Except in the event of an IPO, there shall be a lock-in on the Equity Shares
held by the Promoter for a period of 5 (five) years from the closing date
(“Promoter Lock-in”) and the Promoter shall be restricted from transferring
any Equity Shares without the prior written consent of the New Investor and
subject to the Transfer Restrictions enumerated below..
Transfer Restrictions:
In the event that the Promoter transfers any Equity Shares in accordance with
the terms of this Term Sheet and the Transaction Documents, the Promoters
shall provide the New Investor with:
(i) a “Right of First Refusal” to purchase any shares the Promoters may
wish to sell to a third party (after obtaining the New Investor’s consent) at
the price offered to the Promoters by such third party in writing; and
(ii) a corresponding “Tag-along Right” to any such sale permitting the New
Investor to sell its shares to such third party alongside the Promoters at
the same price and upon the same terms and conditions as offered to the
Promoters.
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2013
Exit Rights
Exit Rights:
The Company shall provide an exit to the New Investor, as per the following waterfall:
(i)
QIPO: A Qualified IPO (as identified in the SHA) on or before [●] (the “IPO
Deadline”);
(ii) Buy-back / Put Option: If no Qualified IPO happens within the IPO Deadline, then
the New Investor will have a right to call for the Company and/or the Promoters to
purchase/buy-back the Investor Securities at Fair Market Value. Such purchase/buyback will be completed within 12 months of expiry of the IPO Deadline;
(iii) Stake Sale: Upon expiry of the IPO Deadline, the Company will provide an exit to the
New Investor via a sale to a financial/strategic investor at terms acceptable to the
New Investor; and
(iv) Drag Along Right: In case the Company fails to provide an exit to the New Investor
by all the above means at the end of 12 months after the expiry of the IPO Deadline,
the New Investor shall be permitted to sell its stake to any financial/strategic investor.
The New Investor shall have the right to drag-along the shareholding of the other
shareholders (including the Existing Investors) to such third party financial/strategic
investor at the same price as offered to the New Investor.
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2013
Transfer Restrictions and Exits
Exit Mode
CA2013
Term Sheet Changes
Put/call
Restriction on transfer provisions in
SCRA (for listed and unlisted public
59(4)]
• Improved enforceability
• Drafting should be clear
forward contract
SCRA clarification issued by SEBI clears
enforceability restrictions
Would put/call options still be forward
• 1 year cooling-off period can
transactions where multiple buy-backs
(subject to the overall cap); Exits
will become more difficult
Buy-back
• Applicability of this restriction even
achieved through Court Scheme (which
recognizes and permits buy-back, but
conditions of S 68 to be satisfied) [S
ROFO/ROFR
• Account for cooling-off
utilising buy-back as an
• Combination with put
be thought out to prevent
extended timeline
Contractually enforceable inter-se
Improved enforceability
Fundamentally the same regime as under
See below
Tag/DragIPO
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IPO/Offer for Sale – Issues in
Documentation
When should you convert?


Conversion is mandatory prior to IPO
Conversion should occur upon the actual filing
of a prospectus
What price should you convert at?

Conversion should happen only once a price is
determinate
Conversion should ideally be linked to the lower
end of the price band when conclusively
determined

What if the IPO does not go through?

Provision should be made to revert to
convertible instruments
Mechanics of this require discussion

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TRANSACTION DOCUMENTATION
• Enforceability
• Entrenchment
Transaction Documents
Transaction Documents:
The following documents shall be executed or agreed pursuant to the
Transaction contemplated under this Term Sheet:
a share subscription agreement (the “SSA”) for the subscription
to the Investor Securities to be entered into among the Parties
which will govern the terms on which the New Investor will
subscribe to the Investor Securities in the Company;
(i)
(ii) a shareholders’ agreement (the “SHA”) to be entered into
among the Parties which will govern the inter-se rights of the
Parties;
(iii) an agreed form of the restated articles of association of the
Company (the “Articles”) incorporating the relevant terms of
the SHA;
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Enforceability
Background
•
Articles of Association: The
Articles of Association of the
Company shall be amended and
restated in order to reflect the
provisions of the Transaction
Documents at Closing.
Under
CA1956,
share
transfer
restrictions
in
shareholders’
agreement between shareholders of a
public company challenging (S 111A;
no
safe
harbour
for
transfer
restrictions
inter-se
existing
shareholders)
Key Change
•
CA2013 recognises that arrangements
in
respect
of
transfer
of
securities (even in case of a
‘public
company’)
shall
be
enforceable as a contract [S 58(2),
Proviso]
•
A public subsidiary will be treated
as a public company regardless of
whether it’s articles are in the
nature of a private company [S
2(71), Proviso]
Is this clause
necessary?
Impact
•
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The change finally settles the
position
on
enforceability
of
agreements
providing
for
preemptive
rights
inter-se
shareholders of Copyright
a public
© Khaitancompany
& Co 2013
such as lock-in period, ROFR, ROFO,
Entrenchment
S 5
• Flexibility to specify that certain
provisions of the articles may only
be altered if specified conditions
or procedures more restrictive than
a special resolution are complied
with [S 5(3)]
• For a private company, entrenchment
provisions must be inserted at the
time of formation or by a unanimous
shareholders’ resolution [S 5(4)]
• For a public company, entrenchment
provisions must be inserted at the
time of formation or by a special
resolution [S 5(4)]
• ROC will need to be notified of
entrenchment provisions within 30
days of incorporation or amendment
to articles [R 2.7]
 What
provisions
entrenched?
should
 Unanimous
meetings
in
voting
 Additional
filing,
if
entrenched
be
Closing
post-closing
provisions
are
Watch outs
Protective provisions provided to investors should be
without adequate consent
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2013
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