KEY ISSUES IN DOING M&A
TRANSACTIONS IN INDIA
Shivpriya Nanda
Partner
J Sagar Associates
Advocates & Solicitors
New Delhi Mumbai Bangalore
August 4, 2006
1
Definitions & Backdrop





Merger : Target is usually subsumed and loses
corporate identity
Acquisition: Target or its business is acquired but
Target continues to maintain its legal entity status
Cross border merger of a foreign body corporate in to
an Indian Company permissible - but is rare in
practice
Cross border merger of an Indian company in to
foreign body corporate not permissible
Cross border acquisition – in bound and out bound
permissible
2
Presentation Context & Focus
 Acquisition of an Indian company by a
foreign entity
 Foreign entity merger in to an Indian
company
 Regulatory & Contractual Issues
3
Regulatory Issues : Acquisitions
Foreign Exchange Regulations
FOREIGN DIRECT INVESTMENT POLICY (“FDI
POLICY”) & FEMA
 FDI upto 100% is permitted through automatic route
in all sectors except:
– Activities / items that require an Industrial License (e.g.
Cigarettes, Electronic Aerospace and Defence
Production).
– Where the Foreign Collaborator has an existing financial /
technical collaboration in the same field.
– Acquisition of shares in an existing Indian company in:


financial service sector;
where the Takeovers Code is attracted
4
Regulatory Issues : Acquisitions
Foreign Exchange Regulations
– Proposal falling outside notified sectoral policy / caps (e.g. Asset
Reconstruction Companies 49%, Broadcasting 49%, Defence
Production 26%, Insurance 26%, Refinery 26% in case of PSU,
Print Media (newspapers and periodicals) 26%).
– Prohibited Sectors:




Retail (except single brand product retailing);
Atomic Energy;
Lottery Business;
Gambling and betting.
– Foreign Investment of more than 24% for manufacture of item
reserved for Small Scale Sector.
 All investment proposals not covered by Automatic Route
require approval of Foreign Investment Promotion Board.
5
Regulatory Issues : Acquisitions
Foreign Exchange Regulations
 Pricing Norms
– Minimum pricing norms apply : equal to or greater
than the value of the shares as per CCI guidelines
6
Regulatory Issues : Acquisitions
Indian policy prescriptions and practice
make a hostile bid for a listed entity an
impossibility!!
 FEMA Rules provide that any acquisition which
triggers “Takeover Code” requires prior approval of
FIPB
 Practice requires that FIPB application be supported
by Resolution of the Board of the Target
7
Regulatory White Knight!
“Don’t worry about his reputation as a corporate
raider. Our white knight is FEMA”
8
Regulatory Issues in Acquisitions:
Takeover Code



Listed Indian Companies subject to Takeover Code
Acquirer (and persons acting in concert) acquiring 15% or more
of equity shares or voting rights to make a tender offer for at least
an additional 20% of shares of the Target
Pricing norms for tender offer – highest of
–
–
–
–

contracted price;
average of weekly high and low closing price for last six months;
average of daily high and low closing price over the last two weeks;
and
price at which acquirer may have made any acquisition in the last six
months
Off shore change in control of holding company triggers Takeover
Code of Indian listed entity
9
Regulatory Issues in Acquisitions:
Takeover Code







Off shore merger of holding structure one of the
exceptions to the Takeover Code
Provisions for “creeping” acquisition – 15 to 55% @ not
more than 5% a year
Specific obligations triggering at various levels of
holdings
Comprehensive code provides for competing bids
Strict requirements for public announcement, disclosures
and compliance timelines
Tough penalties for breach of the Code
Private agreement to acquire enforced only after
compliance with applicable provisions of Takeover Code
10
Regulatory Issues in Acquisitions:
Takeover Code
 Pricing
– Pricing of Shares subject to valuation under CCI
Guidelines
11
Regulatory Issues Acquisitions:
Companies Act



Competition Law – amendments pending
But Section 108A to G of the Companies Act
prescribes prior approval requirement if acquisition
– is by a “dominant undertaking”
– will create a dominant undertaking
Relevant market definitions not perfect and
“dominance” precedents under Sections 108 A to G do
not exist
12
Merger
 Companies Act description of common parlance
merger:
– “amalgamation” of two or more companies”
– under a Scheme of “arrangement”
– which provides for undertaking of the “transferor”
(merging company) to be transferred to “transferee”
(the merged company – or the resultant entity)
 Court sanctions scheme of “arrangement” : highly
process driven
 Court would not go in to commercial merits though it
seeks to ensure that the scheme is not detrimental to the
interest of the shareholders and creditors
13
Regulatory Issues in Mergers: FEMA
 Merger of two or more Indian companies:
merged entity shares issued automatically to
non resident shareholders of merging entity
subject to percentage holding, meeting the
criteria set out in approval.
14
Regulatory Issues in Mergers: SEBI &
Stock Exchange




Listing Agreement requires one month prior
submission of scheme with Stock Exchange for
approval – if refused appeal to SAT
Exemption from Takeover Code for acquisition of
shares pursuant to a scheme of arrangement or
reconstruction under any law, Indian or foreign
Disclosure required
Compliance with Delisting Guidelines if public
shareholding in merged entity falls below
requirement of listing agreement – usually 25%
15
Regulatory Issues in Mergers:
Companies Act
 Section 391-394: Complete code on Mergers
 Detailed procedure and forms under the
Company (Court) Rules 1959
 Transnational scheme of arrangements –
only if Indian entity is the merged entity –
not the other way around
 Squeeze out provisions for compulsory
acquisition of dissenting shareholders up to
10%
16
Contractual Issues




Key commercial and contractual issues are about the
same in a merger or acquistion
The intended end commercial result is usually the
same – money or money’s worth (stock) is paid for
acquiring a business
Determination, certainty, accuracy and preservation
of value is at the core of it
Due diligence, reps and warranties and indemnities
and covenants rule the landscape of contractual
issues
17
Due Diligence
 Usual
–
–
–
–
–
–
corporate records
property title check
liabilities
contingent liabilities
pending and potential legal claims etc
Regulatory compliances
18
Lawyer’s Delight :Reps, Warranties &
Indemnities
 Who represents and warrants –more complex question in
case of merger
 Absolute or qualified - match the concerns raised in the
Due Diligence
 Limitation : different levels – e.g., tax liabilities 7 or more
years
 Enforceability of liquidated damages - In India LD
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
19
Non-compete
 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
 Exception not helpful in cases of share acquisition
 E.g., Selling Shareholders cannot be prevented from
undertaking employment in a competing business but a
back ended consulting agreement could work
 Confidentiality obligations are enforceable
20
Some other critical points
… Usually more relevant in an acquisition
 Continuing or transferring employee benefit
plans;
 Notifying parties to contracts;
 Dispute resolution
21
THANKS FOR YOUR ATTENTION
shippi@jsalaw.com
22