Cross- Border
Bharat Vasani
Group General Counsel
Tata Sons
January 13, 2007
Scope of the Presentation

Overview of Cross-Border M & A transactions

Process involved

Deal structuring issues

Due Diligence issues

Legal aspects

FEMA Provisions

Transaction Documents

Emerging Trends

Key Challenges
January 13, 2007
Objectives
Greater Economies
of Scale
Access to
Raw Material
Access to Markets
Diversification
of Business
January 13, 2007
Cross Border Transaction
Imperatives
Business
Environment
Cultural
Issues
Business
Dynamics
Accounting
treatment
Legal & regulatory
framework
Tax regimes &
treaties
Identifying and
delivering synergies
January 13, 2007
Key Tax And
Considerations
2
1
Financial
Entry
Strategy
3
Financing
options
Income flows and
their taxability
4
6
Exit
considerations
Debt
Structuring
Cash repatriation
January 13, 2007
Categories Of Cross Border
Acquisitions

Corporate Partnering

Public to Private

Supporting Management Buy Outs

Leveraged Buy Outs

Strategic Investments

Earn Out Acquisitions

Distress Sale
January 13, 2007
Applicable Laws

India

Companies Act – Section 372A,

FEMA Regulations

Tax

Target jurisdiction

Company Law & Competition law

Exchange Control Regulations

Takeover Regulations

Tax
January 13, 2007
Process

Assemble Team

Limited Due Diligence

Purchaser obtains financing commitment

MoU / LoI

Detailed due diligence

Definitive Purchase Agreement

Purchaser’s firm financing

Seller and Purchaser comply with covenants

CLOSING
January 13, 2007
Structuring Issues

Tax

Financing

Corporate Veil

Regulatory constraints (host & target countries)

Exchange Control Regulations
January 13, 2007
First Steps

Appointment of Advisor
 Investment Banker
 Attorneys (Local and Offshore)
 Public Relations Agents

Identify Due Diligence Areas
 To achieve commercial objectives
 Acquisition
 Strategic Investment

Preliminary Documentation
 Review of Information Memorandum
 Entering into mandate letter with Advisors
 Executive Non-Disclosure Agreement
 Exclusivity Arrangements
January 13, 2007
LoIs / MoUs

Pros
 Binding v/s. Non-binding
 Reduces basic understanding to writing
 It may look different in written form
 From buyers perspective



Cons
Exclusivity may cut-off seller’s negotiations with third party
Provides basis for expense reimbursement
 Leaks
 Duty to disclose

Contents
January 13, 2007
Due Diligence
Methodology:

Physical Data Room

Virtual Data Room

DD list needs to be carefully tailored to meet the
needs of specific transaction and jurisdiction

Specific inputs needed from local lawyers and tax
advisors
January 13, 2007
Due Diligence

Effective Due Diligence Process should
address the following Strategy Assumptions
 Identify operational, legal, financial and other
significant issues
 Assessment of Risks
 Effect of assessment on Valuation (e.g. Fair Price
for the Target Company)
January 13, 2007
Illustrative Due Diligence issues (1)

Onerous obligations/covenants

Payment of ongoing fee/royalty

Restriction on activities

Rights of first refusal/put/call option

LDs/ penal provisions/any liability which flows
through
January 13, 2007
Illustrative Due Diligence issues (2)

Exclusivity provisions

Confidentiality

Assignability / change of control/ consent of the
counter party for transactions

Regulatory Approvals
January 13, 2007
Impact of Due Diligence

Impact on M&A Agreements





Representations, warranties, indemnities, covenants
Conditions precedent, conditions subsequent
Holdback / escrow (mechanism for retention) of
purchase price, bank guarantee, milestones for
payment
Functions as an internal audit for post acquisition
strategy
In cross-border deals - Impact of applicable law to
Transaction (Competition Law issues, Dominant
Undertaking, Takeover Regulations, Insider Trading,
etc.)
January 13, 2007
Results of Due Diligence
 What can the purchaser do?






Require the seller to remedy the problem
Obtain an indemnity/other contractual protection
Restructure deal to exclude asset or liability
Reduce purchase price
Insurance in respect of risk – “price” – the risk
Pull out
 Limitations of liability





Cap on liability
Threshold – “basket”
De-minimis
Others
What should limitations apply to?
 Allocation of Risks
 Representations and
Warranties
 Who gives?
 All shareholders
Institutional
shareholders
 Involvement of
management
 Extent
 Creditworthiness of person giving
warranties – consider guarantee
January 13, 2007
Cross Border Deals - Agreements
Stock Purchase/
Subscription
Agreement
Technology
Collaboration
Agreement
Product
Supply
Agreement
Employment
Agreement
Shareholders’
Agreement
Brand
Licensing
Agreement
Loan/
Security
Agreement
Feeder Stocks
Supply
Agreement
Exclusivity
Arrangement
Code of Ethics
Information
Memorandum
Labour Union
Settlement
January 13, 2007
Typical Regulatory Approvals

Competition Authority

Stock Exchange

Board of Target Company

Lenders

Foreign Investment Authority

Sector Regulators
January 13, 2007
Issues under Companies Act

Section
372A
–
Inter
corporate
loans
&
investment beyond 60% of
paid up capital and free
reserves
or
100%
of
reserves to be approved by
shareholders

Complications
in
International bidding due to
disclosure requirements
January 13, 2007
ODI - Issues under FEMA (1)
Overseas Direct Investment (‘ODI’)

Permissible in:
• overseas Joint Venture (‘JV’); or
• overseas Wholly Owned Subsidiary (‘WoS’)




ODI not permitted in real estate business or banking
business
Conditions for investment under the automatic route
Total permissible financial commitment ≤ 200% of the
net worth
Bona fide business activities
January 13, 2007
ODI- Issues under FEMA (2)

Eligibility norms for Investor:
 not on RBI’s exporters’ caution list / list of defaulters
 not under investigation by investigation / enforcement
agency or regulatory body





Filings in respect of ODI (in Form APR) to be up-todate
All transactions with the JV/WoS to be routed
through 1 AD branch
Form ODA (with details of ODI under automatic route)
to be submitted to the AD
Total Permissible Financial Commitment (post
August 12, 2005)
ECBs – different views
January 13, 2007
ODI- Issues under FEMA (3)




Cash remittance by market purchase
Capitalization of:
 export proceeds, and
 fees, royalties, commissions or other
entitlements due
from foreign entity for
supply of technical know-how, consultancy,
managerial or other services
50% of the value of guarantees issued to or on
behalf of the JV / WoS
Direct and indirect investment in agricultural
operations
January 13, 2007
Financing an Acquisition
Funding

Methods
 Drawal of foreign exchange from AD
 Swap of ADRs/GDRs
 Utilization of proceeds of ECBs / FCCBs
 Balances in EEFC account
 Utilization of foreign currency funds raised
through ADR /
GDR issues

200% net worth ceiling not applicable in case of
funding by:
 Balances in EEFC account
 Utilization of foreign currency funds raised through ADR /
GDR issues
January 13, 2007
Valuation of Shares

Investment more than USD 5 MN:
 By a Category 1 Merchant Banker registered with SEBI; or
 By an Investment Banker / Merchant Banker registered with
the appropriate regulatory authority in the host country

Investment less than USD 5 MN:
 By a Chartered Accountant or a Certified Public Accountant

Where consideration is fully / partly paid by issue of
Indian Party’s shares:
 By a Category 1 Merchant Banker registered SEBI; or
 By an Investment Banker / Merchant Banker registered with
the appropriate regulatory authority in the host country.
January 13, 2007
Post Investment Changes
Step Down Subsidiary
JV / WoS
Post investment changes
/ additional investment in
existing JV / WoS

Step Down
Sub (1)
Step Down
Sub (2)
Step Down
Sub (3)



Parent Co

Post investment changes /
additional investment in
existing JV / WoS
JV/WoS may diversify its
activities
Set-up step down
subsidiaries
Alter shareholding pattern
in the overseas entity
Reportings to be made to
the RBI in Form APR
January 13, 2007
Acquisition in Financial Services
Sector (1)
(Additional) Conditions for Investment in Financial
Services Sector under automatic route
 Net profit earned during last 3 years from financial services
activities
 Registration
with appropriate authority for conducting
financial services activities
 Approval
from concerned regulatory authorities, both in
India and abroad, for venturing into such financial service
activity
 Fulfillment of prudential norms relating to capital adequacy
 Above applicable to JV/ WoS or its step down subsidiary
for making additional investment in the Financial Services
Sector
January 13, 2007
Acquisition
Sector (2)

in
Financial
Services
Recent Development:
 Compliance
with above conditions by
regulated Indian entities engaged in financial
services for investing overseas in any activity
 Trading
in commodities exchanges to be
reckoned as a financial service and require
prior approval of the Forward Markets
Commission
January 13, 2007
Certain other FEMA Issues (1)
Earnest Money Deposit Or Issue A Bid Bond
Guarantee


Remittance of earnest money deposit or issue a bid bond
guarantee permitted for acquisition of a foreign company
through bidding and tender procedure
Subsequent remittances through AD also permitted
Pledge of Shares / Hedging


Indian Party may pledge shares of JV/WoS to AD / financial
institution for credit facility for itself or JV/WoS abroad
Indian Parties with ODI permitted to hedge the exchange risk
arising on such investments
January 13, 2007
Certain other FEMA Issues (2)
Sale of Shares






Listed – through stock exchange
Unlisted – price not less than fair value certified by
CA
No outstanding dues (dividend, technical know-how,
royalty, consultancy etc)
No
write-off
except
in
certain
specified
circumstances
Overseas entity in operation for at least 1 year and
proper filings in Form APR
Indian party not under investigation by CBI / ED /
SEBI / IRDA or other Indian regulatory authorities
January 13, 2007
Certain other FEMA Issues (3)
Annual Performance Reports (APR)

Indian party to submit APR to RBI (in Form APR) in
respect of ODI

Time period: within 60 days of prescribed date for
finalization of the
audited
accounts
of
overseas company

Detailed report containing various disclosures
including details of the “line of activity”, financial
structure and performance of the overseas
company
January 13, 2007
Leveraged Buy- Outs (1)
Borrowing without Recourse
Target Co
Borrowing
Dividend
SPV
Lender
WoS (2)
WoS (1)
Offshor
e
Onshore
Parent Co
January 13, 2007
Leveraged Buy- Outs (2)
Background


Limitation on Indian Parent Co for making overseas investments
upto 200% of its net worth under the “automatic route”
Borrowing without recourse, an option to overcome this limitation
Salient features





Indian Parent Co sets up a wholly owned indirect subsidiary:
Bid Co
Bid Co borrows money from lenders and utilizes that money
to acquire the Target
Loan secured by the dividend stream of the Target
Shares of the Bid Co and the Target are usually pledged in
favour of the lenders
“No recourse” or “financial commitment” on Parent Co
January 13, 2007
Leveraged Buy- Outs (3)
Advantages
 No recourse on Parent Co
 Not counted towards 200% cap
 Parent Co’s balance sheet clean for further
investments
 Parent can raise further money for investment
Disadvantages
 Costly form of borrowing
 Stringent conditions on up streaming of dividends
and “cash sweeps” by Parent Co
 Works best if target is de-listed, otherwise dividend
leakage
January 13, 2007
Certain Grey Areas
Round Tripping
JV / WoS (1)
JV / WoS (2)
Offshor
e
Onshore
Investor Co
Target Co
Condition for outbound investment: Bona fide business activity (offshore)
“Round Tripping”: Money from India is being routed back into India from
another jurisdiction.
Concept not enshrined in any rule or regulation issued by RBI.
Round tripping; if identified – investments could be ordered to be
January 13, 2007
unwound.
Share Purchase Agreement

Key issues
 Reps and Warranties based on due diligence
reports
 Conditions Precedent & Subsequent
 Closing mechanism
 Indemnity from seller
 Statutory approvals – CPs to closing
 Hold back, brand usage and non-compete
 Competition law issues
January 13, 2007
Purpose of Representations

Disclosure

Termination Rights

Indemnification
Disclosure
Termination Rights
Signing
Indemnification
Closing
January 13, 2007
Indemnification Issues (1)

Buyer’s knowledge of Seller’s breach

Protection beyond Representations and Warranties

Joint and several liability

Creditworthiness of the Seller

Offset for tax or insurance benefits

Interest on damages

Separate environmental and tax indemnification
January 13, 2007
Indemnification Issues (2)

Time limitations

Basket

Minimum

Cap

Escrow

Control of litigation

Representation and Warranty Insurance
January 13, 2007
Governing Law & Dispute Resolution

Choice of Law Domestic/Neutral

Mediation
 Informal
 Institutional

Mechanism: Courts v. Arbitration





Domestic/Neutral
Costs
Interim relief
Appeal rights
Enforcement
January 13, 2007
Emerging Trends

Aggressive Indian presence in Global M & A market

High level of sophistication in structuring of deals

Competing bids in high value transactions

Deal Protection Mechanism (Break fees etc.)

Insurance of Reps and Warranties

Virtual Data Rooms

Use of Media and PR agencies

Steep increase in parachute payments

Steep increase in transaction costs
January 13, 2007
Key Challenges
Operational issues post merger / acquisition

Integration of the cultures of the organizations

Realisation of synergies

Alignment of HR policies and practices

Optimum utilization of manpower

Optimum utilization of other infrastructural
resources
January 13, 2007
Any Questions
January 13, 2007
Thank You
bvasani@tata.com
44