chapter - ii mergers process
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Module -II
M&A Process
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Contents
M&A Process Identification of target
Negotiation
closing the deal
due diligence
M&A integration organizational and
human aspects
Managerial challenges of M&A
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Identification of target
M&A Process - steps
Negotiation
closing the deal
due diligence
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Steps in a Merger
There are three major steps in a merger
transaction:
1. Planning,
2. Resolution,
3. Implementation.
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Planning
Planning, which is the most complex part of
the merger process, entails
the analysis,
the action plan, and
the negotiations between the parties involved.
The planning stage may last any length of
time, but once it is complete, the mergerprocess is well on the way.
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More in detail,
the planningstage also includes:
the appointing of advisors who play the role of consultants,
examining the strengths, weaknesses, opportunities, and
threats of the merger; detailing the timetable (deadline), conditions (share
exchange ratio), and ty pe of transaction (merger by
integration or through the formation of a new company);
signing of the letter of intent which starts off the
negotiations; expert report on the consistency of the share exchange
ratio, for all of the companies involved.
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Resolution
The resolution is simply management's approvalfirst, then by the shareholders involved in the mergerplan.
The resolution stage also includes: The Board of Di rectors calling an extraordinary
shareholders meeting whose item on the agenda is themerger proposal;
The extraordinary shareholders meeting being called topass a resolution on the item on the agenda;
any opposition to the merger by creditors and bondholderswithin 60 days of the resolution;
Green light from the Italian Antitrust Authority, thatevaluates the impact of the merger and imposes anyobligations as a prerequisite for approving the merger.
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Implementation
Implementation is the final stage of the
merger process, including enrolment of the
merger deed in the Company Register.
Normally medium-sized/big mergers require
one year from the start-up of negotiations to
the closing of the transaction.
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Implementation
This is because, in addition to the time neededtechnically, there are problems relating to the shareexchange ratio between the merging companieswhich is rarely accepted by the parties withoutdrawn-out negotiations.
During the merger process, share prices will adjustto the share exchange ratio. On the effective date ofthe merger, financial intermediaries will enter the
new shares with the new quantities in the dossiers.The shareholders may trade without constraint thenew shares and benefit from all rights (dividends,voting rights).
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Due diligence
All crucial issues must be identified via due
diligence before mergers and acquisitions
can even be continued.
The key assumptions provided in the
proposal for investment must also be deemed
accurate.
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Due diligence
Due diligence is handled by teams in the midst of businessacquisitions. The teams are typically composed of members withexpertise in mergers and acquisitions, as well as in specific areasof function.
The members of the teams are often employees of thecompanies handling the business acquisitions, unless a certain
expertise cannot presently be found in the companies.
Due diligence teams will get documents from the differentdepartments of the company, using these documents in order toobtain desired information.
With a good due diligence team, company mergers and companyacquisitions will go smoothly and within the boundaries of thelaw.
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Steps in due diligence
Due diligence in mergers and acquisitions
requires four steps.
Step one is Identification, in which
information is gathered and risks are
identified. The risk management team will
review recent operations by the risk
management department and assemble anyand all lost data.
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Steps in due diligence
Step two concerns the law, as all pending
and prior litigation the company may be
undergoing is identified and assessed.
Insurance policies are also reviewed in thisstep, as are the companys environmental
issues. Lastly, all loss run prior to mergers
and acquisitions are analyzed.
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Steps in due diligence
Step three involves the summarization of all the
data thats been collected. The summarized data is
then analyzed and the exposures compared to
existing coverage by insurance. Recommendationswill then be given to the due diligence team.
Step fouroccurs after mergers and acquisitions are
finalized. This step involves visiting new business
locations, consolidation of the companies insuranceprograms, and fixing any administrative issues that
may have arisen during the business acquisitions.
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Types of due diligence
Financial due diligence
Strategic due diligence
Operational due diligence IT due diligence
Human capital due diligence
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Legal frame work In Merger
process
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Merger & DemergerPROCESS
Phase- I
Draft Scheme
Notice to members of Board of both companies
Determine swap ratio based on valuation report
Board approval of both companies
Prior No
Cs from secured creditors and shareholders forexemption from meeting: Reduce Time and Costs
In ICICI Ltd. merger with ICICI Bank, meeting ofpreference shareholders of ICICI Ltd. was dispensedwith since sole preference shareholder furnished anNOC
Phase- II
Draft Application under s. 391(1)
Application to HCs in respective jurisdictions of bothcompanies for sanction / direction to conduct meetings
M
ovingregistered office to one jurisdiction:R
educeTime andCosts
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Merger & DemergerPROCESS
Phase- III
Notice of EGM to members with statement of terms ofmerger, interests of directors and proxy forms: 21 days
Advertisement
Notice in 2 newspapers: 21 days
Affidavit certifying compliance with HCs directions inrespect of notice/ advertisement
Meetings of creditors and/ or shareholders: agreed to by
majority in number representing of value present andvoting
Chairman of meetings to file report within 7 days of meeting
Resolutions and Explanatory Statements to be filed withRoC
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Merger & DemergerPROCESS
Phase- IV (Approval of the Scheme)
HC to be moved within 7 days of Chairmans Report for
second motion petition
10 days notice of hearing of petition in same newspapers
Notice to Central Govt. (Regional Director), Submit reports
Objections raised in 391 proceedings
HC Sanction
Certified copy of HC Order to be filed with RoC within 30
days of order.
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Merger & DemergerISSUES: COMPANIES ACT
391 - 394: Complete Code, Single Window Clearance
Reduction of capital- Position unclear, Predominanceof judicial view: substantial compliance with s. 100- 102required.
Transnational Mergers: 391 - 394 mechanism operatesonly where amalgamated company is Indian. E.g. of
transnational merger concluded under 391 route - Bankof Muscat merging into Centurion Bank by order ofKarnataka HC
Alternative Mechanism: S. 494
Through Liquidation Process
Liquidator transfers assets to foreign company forshares
Process has to be altogether voluntary
Tax benefits are unavailable under this route
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Other Spin-OffsISSUES: COMPANIES ACT
Where spin-offs are outside the 391 mechanism, the
following compliances need to be ensured
293(1)(a) resolution
Voting has to be by postal ballot in a public listed
company
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Mergers and DemergersISSUES: INCOME TAX
Transfer of capital assets by amalgamating companyto amalgamated company is exempt from CapitalGains Tax provided amalgamated company is an
Indian company
Capital Gains Exemption in respect of shares issuedto members of amalgamating/ demerging company-s. 47
Exemption may not be available if members ofamalgamating company receive anything besides sharesin the amalgamated company like debentures or cash-Gujarat HC in Gautam Sarabhaiv. CIT, 173 ITR 216.
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Mergers and DemergersISSUES: INCOME TAX
In case of fraction shares, issue to trustee who
liquidates these and distributes money to shareholders
of amalgamating company.
Carry forward of losses and unabsorbed depreciationprovided the amalgamated company carry on the
business of the amalgamating company for at least 5
years s. 72A
Use of Reverse merger to meet above condition
Spin-off receives tax benefits under Income Tax
Act only if it is a demerger
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Slump Sale
ISSUES: TAXATION
Slump Sale = Transfer of undertaking without
itemizing individual assets and liabilities- s.2(42C)
Income Tax Act
Treated as capital gains
If undertaking is older than 3 years, long term capital
gains rates apply even if individual assets are new
Carry forward of losses and unabsorbed depreciation
unavailable
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Merger
ISSUES: STAMP DUTY Divergences between states: Shopping for beneficial rates
usually pointless
Duty to be imposed on value of shares transferred not onindividual assets transferred: Bom HC in Li Taka AIR 1997
Bom 7
States with Specific entries: Maharashtra, Karnataka,
Rajasthan and Gujarat
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MergerISSUES: STAMP DUTY
States without specific entries: Unclear if duty leviable. Cal HC in Madhu Intra Ltd. v. ROC, 2004 (3) CHN 607 -
394 Order is not an instrument chargeable to duty
Supreme Court in Ruby Sales v. State ofMaharashtra(1994) 1 SCC 531 - specific inclusion of civil court
decrees in Bombay Stamp Act only abundant caution
1937 Notification under Indian Stamp Act, 1899 remitsduty when merger is of a 90% subsidiary: Remissionnot available in states with own legislations eg. Kerala,Karnataka, Maharashtra, Gujarat and Rajasthan
Gujarat and Maharashtra have limits on stamp duty formergers and demergers at Rs.10 crore and Rs. 25
crore.
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MergerISSUES: SEBI
Acquisition of shares pursuant to a scheme ofarrangement or reconstruction under any law, Indianor foreign exempt from SEBI TakeoverCode.
Exemption claimed unsuccessfully by Luxottica in the
acquisition of Ray Ban Sun Optics India
Listing Agreement:
Scheme before the Court/ Tribunal must not violate,override or circumscribe the securities laws or stock
exchange requirements Disclosure required
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MergerISSUES: SEBI
Shares allotted by unlisted transferee company toshareholders of listed transferor company under aHC sanctioned scheme can be listed without anIPO subject to conditions (DIP).
Eg. Dabur Pharmaceuticals
Constitutes Price Sensitive Information in terms ofInsiderTrading Regulations.
Compliance with Delisting Guidelines if publicshareholding below prescribed limit.
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MergersMISCELLANEOUS ISSUES
Foreign Exchange Management Act, 1999
Where the amalgamated company is Indian, nonresident shareholders of the foreignamalgamating company require RBI approval to
receive shares.
Where the amalgamated company is foreign, theissue of its shares to Indian shareholdersrequires RBI approval.
Automatic route available where non residentshave to be issued shares in a merger of Indiancompanies.
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MergersMISCELLANEOUS ISSUES
Human Resources
Workmen entitled to retrenchment benefits
unless retained in employment on same terms.
Adjustments of pay scale needs to be resolved.
Global Trust employees were retained on
same terms in OBC. Pay packages of former
GTB staff could be altered only after 3 years.
OBC management had to contend with GTBscomplex salary structure.
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Mergers & Acquisitions
COMPETITION LAW
Monopolistic and Restrictive Trade Practices Act,1969
Status: Repealing provision in Competition Act,2002 not notified.
No Central Government approval required for amerger or acquisition under the MRTPA
Act attracted only if amalgamated companydiscovered to be monopolistic in its working not atstage of amalgamation- Hindustan Lever, 1995Supp (1) SCC 499
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Mergers & Acquisitions
COMPETITION LAW
Competition Act, 2002 (Partially notified)
Merger or Acquisition = Combination if stipulated
thresholds respecting aggregate asset or turnover
are exceeded
Prior approval of combination is not mandatory
Test Cause or likely to cause an appreciable
adverse effect on competition within the relevant
market
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