chapter 5_legal issues

7/29/2019 Chapter 5_Legal Issues

1/60

Oxford University Press 2011. All rights reserved.

Chapter 5


2/60


Hutch Vodafone

Hindalco- Novelis

Tata -Corus

Holcim -GujaratAmbuja

Increasing number of outbound deals as compared to

inbound investments

High value M&A deals in commodities especially metals

and telecom.

Growth of M& A activity in the commodities sector due to

factors such as economic growth, international commodity

prices, exports, growth of infrastructure, cheap labor etc.

Rationale for major inbound deals such as Holcimsinvestment in Gujarat Ambuja and Ambuja Cements

mostly to expand capacity in India.

In January and February 2007 alone, 102 M&A deals have

taken place with a total value of almost USD 36.8 billion

Changing Indian Scenario


3/60


Provisions of Companies Act, 1956

SEBI (Buyback of Securities) Regulations, 1998

SEBI (Substantial Acquisition of Shares and Takeovers), 1997 Listing Agreement Norms

SEBI (Delisting of Shares)

Corporate Governance Issues Provision of Income Tax Act, 1961

FEMA

Competition Act

Provisions governing M & A:


4/60


Provisions related to mergers and amalgamations containedin Sections 391 to 396A in Chapter V, Part VI of theCompanies Act

Section 390:

Sections deals with Arrangement that includes reorganization of theshare capital of the company

Done either by consolidation of shares of different classes or by thedivision of shares into shares of different classes or both.

Section provides that unsecured creditors who may have filed suits

shall be treated at par with other unsecured creditors.

Companies Act 1956:


5/60


Section 391(1):

Deals with Compromise

Is an arrangement that is carried out at the behest of the Court on anapplication made by the company or any creditor or member or theliquidator where a company is being wound-up

Is generally carried out between the company and its creditors orbetween a company and its members.

Companies Act 1956:


6/60


Section 393 (1):

Section deals with disclosure of terms of arrangement and

compromise Notice calling the meeting of creditors or members should clearly

state the terms of arrangement and compromise and its effects

Also to state any material interest of any of the top official of thecompany

Where notice is given through an advertisement the same should givedetails of the place from where the copies of the statement on theterms of the arrangement and compromise can be obtained

Copies to be provided by the company free of cost.

Companies Act 1956:


7/60


Section 393 (2):

Section states that if the arrangement and compromise is going to

affect the rights of the debenture holders, a statement givinginformation and explanation relating to the trustees of the deed forsecuring debenture capital needs to be given.

If the above provisions are violated the company and every officer of

the company shall be punishable with a fine that may extend up toRs.50000/-

Also any Officer required to give information on self, but fails to do sois punishable with a fine that may extend up to Rs.5000/-.

Companies Act 1956:


8/60


Section 391 (2) to (7):

Sections state that every scheme of arrangement and compromiseshould be approved by of creditors or members present and votingeither in person or by proxy.

Companies Act 1956:


9/60


Section 394: Section states that the Court has powers to sanction compromise or

arrangement scheme proposed in connection with a scheme forreconstruction of the company or amalgamation of two or more companies

The approval of the Court is subject to the condition that the scheme is notprejudicial to the interests of the members or to public.

Sanction of the Court may provide for:

Transfer of whole or part of the property or liabilities of the transferee (target) to the

transferor (acquirer) Allotment or apportionment of the shares, debentures or other like interests amongst the

transferor or transferee

Continuation of suit by or against the target by or against the acquirer

The dissolution, without winding up, of any transferor

Dissent by any person to the scheme of compromise or arrangement and be filed with the

Court within stipulated time and in stipulated manner Matters that are necessary to carry out the scheme in a complete and effective manner

Companies Act 1956:


10/60


Once the scheme is approved, the following changes shalltake:

All the property and liabilities shall stand transferred to the transfereecompany

All the property that had a charge but the order frees the saidproperty from such a charge it should be done

Once the order is passed, the company to file a certified copyof the order with the Registrar of Companies, failing whichevery Officer who is at default is punishable with a fine that

may extend up to Rs.500/-

Companies Act 1956:


11/60


Section 394 A

States that the Court should communicate the details of all

the notices of compromise and arrangement to the CentralGovernment and seek and consider the representationsmade by the Central Government before passing any order.

Court should ensure all material facts pertaining to thecompany and its functioning have been duly disclosed in theapplication before making any order.

Companies Act 1956:


12/60


Section 394 A

Copies of the order to be :

Filed with the Registrar of Companies

Annexed with every copy of memorandum of association issued afterthe copy has been filed with the Registrar.

Companies Act 1956:


13/60


Section 394 A

Default in this regard punishable with fine of up to Rs.100/- for

each copy where default occurs

Once the Court admits the application, a stay is imposed on all

suits or proceedings against the company Where a company that is a going concern , Court needs to

classify creditors or members and ensure the company offers

identical compromise to investors belonging to one class..

Scheme needs to be approved by the requisite majorities and it

becomes binding on all the members of the company whetherconsented to by all or not.

For ascertaining majority the members present at the meeting

are counted and not the total number of members. The Court

may reject the scheme if it feels that the scheme is patently

fraudulent or is intended to cover the misdeeds of the Directors

Companies Act 1956:


14/60


Section 376:

Section states that reconstruction or amalgamation shall be voidwhen it is prohibited under any provision of:

The Memorandum or Articles of Association

Resolution passed in the General Body Meeting or by the

Board of Directors

An agreement between the company and any other person

Companies Act 1956:


15/60


Section 395:

Section deals with acquisition of shares of shareholders

dissenting from the scheme or contract approved by themajority involving the transfer of shares

Companies Act 1956:


16/60


Court can use powers and make provisions in the order on thefollowing matters:

Transfer of the whole or any part of the undertaking, property orliabilities of any target to the acquirer

Allotment or appropriation of any shares, debentures or other likeinterests in that company by the acquirer under the compromise orarrangement

Any legal proceedings pending by or against each other

Dissolution of the acquirers company without winding up

Making provisions for any person who shows dissent to the compromiseor arrangement provided such dissent has been filed within thestipulated time and in the manner prescribed

Any other issues necessary to ensure that the reconstruction oramalgamation is carried out fully and effectively

Powers of the Court with regards tosanctioning the scheme of amalgamation:


17/60


Report of Registrar of Companies and the Official Liquidatorneeds to be considered prior to sanctioning the scheme ofamalgamation or reconstruction

Report should state the affairs of the company are beingconducted in a manner that is prejudicial to the interest ofmembers or the public, in general.

Court can sanction the scheme with retrospective effectprovided the effective date is not too far in the past for canhave adverse implication for the new entity such as non-compliance of various laws



18/60


Where the entire undertaking of the transferor company istransferred to the transferee company without affecting therights of the creditor or members and also without anyreorganization of capital of the transferee company, the

transferee company need not file a separate petition

Approval of shareholders and creditors secured andunsecured need to be obtained in meetings convened under

the directions of the Court

Court to appoint a Chairperson and an alternate Chairpersonfor such meeting



19/60


Once the Court receives a request for the meeting it canissue directions on:

Date, time and place of meetings

Appointment of chairperson for the meetings

Contents of notice and the manner of service of Notice

Determination of the class/classes of members and creditors whose meetings are to

be held

Determination of quorum

Any other matter as the court may deem fit.



20/60


Where the transferee proves before the Court that thecreditors and members have given their consent to the

scheme of amalgamation with their interest not adverselyaffected, the Court can exercise its discretion and grantapproval to the proposed scheme

Voting at Court convened meetings of members or creditorsare to done through poll only.



21/60


Section 391(2) states the resolution approving the scheme ofamalgamation should be passed by majority in numberrepresenting 3/4th in value of the creditors or members

The strength includes members or creditors present inperson or through proxies at the time of meeting

Chairperson of the meeting is required to submit to the

Court a report of proceedings of the meeting stating : The number of persons present at the meeting

The number of persons voting in person and through proxy

The value of shares/indebted amount

The votes cast in favour of the resolution and

The votes cast against the resolution



22/60


SEBI (Buyback of Securities) Regulations, 1998

Section 77: Prohibited a limited company from buying back its own

shares

Basic reason for such a prohibition was a feeling thatallowing companies to buy-back their shares could give riseto companies trafficking in their own shares leading toundesirable practices in the stock market, like insider tradingor other such unhealthy influences on stock prices

Buy back was however possible through compliance with theprovisions of and adherence to the procedure for reductionof share capital as specified under Sections 100 to 104 of the

Companies Act, 1956 that involved confirmation by the Court


23/60


Amendments to Section 77:

Working Group on Companies Act, 1956 constituted by theCentral Government

Recommended insertion of Section 77A and 77B into the

Companies Act facilitating Buy-back of shares

Section 77A of the Act expanded the scope of the companyand bestowed the power to a company to purchase its own

securities subject to the provisions of Section 77A (2) andsection 77B of the Act

SEBI thereafter issued the SEBI (Buy-back of Securities)Regulation 1998 applicable to listed companies

S f b b k


24/60


To increase promoters holding

To increase earnings per share

To improve ROC, RONW and enhance shareholders value

To provide an additional exit route to the shareholders in conditions

where the shares are under-valued or are thinly traded To enhance consolidation of stake in the company

To utilize the surplus cash to the shareholders through buy back

To achieve the objective of having an optimum capital structure

To rationalize the capital structure by writing off capital not

represented by assets

To support the share value in the capital market by reducing thefloating capital

To thwart hostile takeover attempt

To pay surplus cash not required by business

Why do companies go for a Buy back?

Sources for buy-back:


25/60


Free reserves

Share Premium account

Proceeds of any shares or other specified securities

Why do companies go for a Buy back?


26/60


Buy-back of shares authorized under the Articles ofAssociation. If the articles are silent on this aspect thearticles need to be amended as per the procedure laid downin section 31

Pass a special resolution in general meeting of the companyauthorizing the buy-back.

Proposal be approved by the Board of Directors by means of

a Board resolution passed at its meeting.

The overall limit for any buy-back of securities that may beresorted to by a company should not exceed 25% of thecompanys paid-up capital and free reserves.

Pre-requisites of a valid Buy-back:


27/60


Buy-back debt-equity ratio should be within the permissible2:1 range. Central Government is empowered to relax thedebt-equity ratio in respect of a class of companies, but notin respect of any particular company.

The shares intended to be bought back must be fully paid-up

Buyback of listed securities be done strictly in accordancewith the SEBI (Buy-back of Securities) Regulations, 1998

Buyback of unlisted securities to be done in accordance withthe provisions of the Private Limited Company and UnlistedPublic Company (Buy-back of Securities) Rules, 1999



28/60


Section 77A (4) of the Companies Act, 1956 states buy-backis required to be completed within 12 months from:

The date of passing the special resolution or

The date of passing the Board resolution or

The date of declaration of the result of the postal ballot where the resolution is

passed through postal ballot

Notice of the meeting containing the special resolutionrelating to buy-back of shares be accompanied by anexplanatory statement clearly addressing the following

The necessity for buy-back

The class of security intended to be purchased by the buy-back

The amount to be invested under buy-back

The time limit for completion of buy-back



29/60


Declaration of solvency needs to be filed with the Registrarand

Done to guarantee the companys solvency for at least a year

after the completion of buy-back

Unlisted entities need not file this declaration with SEBI

Post buy-back company is required to physically extinguishand destroy the securities within 7 days from the last day onwhich the buy-back process is completed. In case of shares indematerialized form the same should be deleted from therecords of the company



30/60


Company to maintain a register containing the particulars of the

brought back securities stating consideration paid for them, the

date of cancellation, the date of physically extinguishing and

physically destroying securities, etc.

Company cannot make a further issue of securities within a period of

6 months from the date of completion of the buy-back process

although bonus shares can be issued and discharging existing

obligations like conversion of warrants, stock option schemes, sweat

equity or conversion of preference shares or debentures into equityshares permitted

Post buy-back process return to be filed with SEBI and the Registrar

of companies in the prescribed format within a period of 30 days



31/60


Section 77A (5) read with Regulation 4 of SEBI (Buy-back ofSecurities) Regulation, 1998: Existing security-holders on a proportionate basis or

The open market through: book building process in accordance with Regulation 17;

stock exchanges in accordance with Regulation 15; or

In odd lots where the shares of a listed company are smallerthan the marketable lot

Securities issued to employees of the company under stockoption or sweat equity.

Modes of Buy back :


32/60


Section 77 B of the Companies Act: Through a subsidiary company including its own subsidiary

company

Through any investment companies or group of investmentcompanies.

If the company has defaulted in respect of: Repayment of deposit or interest payable thereon or

Redemption of debentures or preference shares or Payment of dividend to any share holder or

Repayment of any term loan or Interest payable thereon to any financial institution or

bank.

Through negotiated deals, spot transactions, private

arrangements and insider dealings.

Prohibited modes of Buy back:


33/60


Section 77 B of the Companies Act: Through a subsidiary company including its own subsidiary

company

Through any investment companies or group of investmentcompanies.

If the company has defaulted in respect of: Repayment of deposit or interest payable thereon or

Redemption of debentures or preference shares or Payment of dividend to any share holder or

Repayment of any term loan or Interest payable thereon to any financial institution or

bank.

Through negotiated deals, spot transactions, private

arrangements and insider dealings.

Other provisions relating to Buy back:


34/60


The offer price should have a floor price. Floor price isdetermined on the basis of the average traded price of 26

weeks preceding the date of public announcement. The floorprice so determined is without any ceiling of maximum price.

If the related securities are infrequently traded, the offerprice shall be determined as per regulation 20(5) of the SEBI

(Substantial Acquisition and Takeover) Regulations.

Entire process needs to be carried out transparently

Other provisions :


35/60


If securities are being delisted, the acquirer is required toallow a further period of 6 months for any of the remainingshareholders, who have not utilized the earlier opportunityof surrendering the securities, to tender securities at the

same price.

Stock exchanges required to monitor the possibility of pricemanipulation and keep a special watch on the securities that

are in the process of getting delisted.

Registrar and Transfer Agent to co-operate with the ClearingCorporation to determine the quality of the genuineness ofphysical securities upfront.

Other provisions :


36/60


Where the quantity eligible for acquiring securities at thefinal price, offered does bring the public shareholding belowthe required level of public holding for continuous listing, thecompany will continue to remain listed.

Delisting of securities does not extinguish the paid up sharecapital

In case of partly paid-up securities, the price determined bythe book building process be applicable to the extent the call

Amount of consideration for the tendered and acceptedsecurities to be settled in cash

Other provisions :


37/60


Low market price

Boost to the share price

Utilizing excess cash

Infuse ESOP

Safeguard from Hostile takeover bid

Advantages of Buyback of Shares


38/60


Flaw in Income tax Act

Flaw in legal provisions

Enhancing promoters holdings

Delisting of companies

No restriction on number of buybacks

Insider trading

Disadvantages of Buyback of Shares

SEBI (S b t ti l A i iti f


39/60


When an acquirer acquires substantial quantity of shares orvoting rights of the Target Company

Acting in concert is a takeover strategy whereby individualsand companies acquire substantial number of shares in thetarget company in a disguised manner and thus avert legalcomplications. Each member acquires enough number of

shares, so that individually each one remains below thethreshold limit but collectively they exceed the thresholdlimit.

SEBI (Substantial Acquisition ofShares and Takeovers), 1997

S b t ti l Q tit f Sh V ti


40/60


Threshold of disclosure to be made by acquirer(s)

5% or more but less than 15% shares or voting rights Threshold of disclosure to be made by acquirer(s)

Trigger point for making an open offer by an acquirer

15% shares or voting rights

Creeping acquisition limit

Consolidation of holding

Substantial Quantity of Shares or VotingRights

P d f S b t ti l


41/60


Public Announcement

Letter of offer

Determining the Offer Price

Duration of the Offer

Discharging the dues of the shareholders

Procedure for SubstantialAcquisition of Shares


42/60


Means admission of securities to the trading privileges/dealings on recognized stock exchanges through a formalagreement.

Listing Agreements needed when:

A Public Issue that may be an Initial Public Offering (IPO) or FurtherPublic Offering (FPO)

Preferential Issues

Issue of Indian Depository Receipts (IDRs)

Amalgamation that implies mergers and acquisitions andreconstruction of companies

Going ahead with Qualified Institutions Placements (QIPs)

Listing Agreement Norms


43/60


To provide liquidity to securities

To mobilize savings for economic development

To protect interest of investors by ensuring full disclosuresby listed entities

To provide a mechanism for effective management of

trading in securities

To provide cost-effective access to capital

Objectives of Listing


44/60


BSE Norms:

Listing Requirements for Companies through initial public offering(IPO) and further public offering (FPO)

Listing requirements for Companies already listed on Other StockExchanges

Requirements for Companies delisted by BSE seeking re-listing

Permission to use the name of BSE in the Company's Prospectus

Submission of Letter of Application

Allotment of Securities Requirement of 1% Security

Payment of Listing Fees

Compliance with the Listing Agreement

Norms of Listing


45/60


Listing in case of IPOs:

Capital requirements

Adherence to legal provisions Submission of Annual Reports

No disciplinary action

Redressal Mechanism of Investor grievance

Distribution of shareholding

Details of Litigation

Track Record of Director(s) of the Company

NSE Norms of Listing


46/60


Listing of Securities of Existing Companies

Paid up Capital

Adherence to legal provisions Documents pertaining to track record

Other Provisions

No Disciplinary action

Redressal mechanism

Shareholding Pattern

Details of Litigation

Track Record of Director(s) of the Company

Change in Control of a Company

NSE Norms of Listing


47/60


Improves ability to raise additional capital

Provides Liquidity

Independent valuation

Improves companys profile

Disclosures

Automated trading

Regular flow of information

Benefits of Listing

SEBI (Delisting of Securities)


48/60


Delisting of shares

Compulsory Delisting

Delisting Exchange

Exchange

Voluntary Delisting

SEBI (Delisting of Securities)

Guidelines, 2003


49/60


Promoters seek voluntary delisting of the company Public shareholding falls below the minimum limit specified

in the listing conditions or listing agreement as a result of

any acquisition of shares of the company or scheme orarrangement Promoters of the companies voluntarily seek to delist the

securities from all or some of the stock exchanges Person in control of management seeks to consolidate his

holdings in a company whereby the public shareholding inthe company falls below the limit specified in the listingconditions or in the listing agreement

Companies are compulsorily delisted by the stock exchanges

Applicability of Voluntary Delisting

Voluntary Delisting of Securities of


50/60


The securities of the company have been listed on any stockexchange for a minimum period of 3 years

The investors have been given an exit opportunity before theshares are de-listed from the stock exchange. The exit pricein such cases needs to be determined in accordance with thebook building process described in clauses 7-10 and 13 and

14 of the guidelines. Again an exit opportunity is not requiredto be given in cases where securities continue to be listed ina stock exchange having nationwide trading terminals.

Voluntary Delisting of Securities of

a Listed Company


51/60


Pass a special resolution at the general The votes cast in favour of the delisting proposal must be at

least twice the votes cast against the proposal

Make an application in the specified format along with acopy of the special resolution to the Stock Exchange Public announcement Comply with the other additional conditions Acquirer must buyback adequate number of shares Acquirer needs to provide the public shareholders an exit

opportunity at a price determined by the book buildingprocess

Procedure for Voluntary Delisting


52/60


Buyback of equity shares initiated by the company or Any preferential allotment made by the company or A period of three years has elapsed since the listing of that

class of equity shares on any recognized stock exchange or Any convertible instruments issued by the company in the

same class of equity shares that are sought to be delisted areoutstanding.

It is not clear whether a company will be required to take

approval from all the stock exchanges having nationwideterminals in case it is listed on more than one such stockexchange.

Delisting is applied for:


53/60


Is about the whole set of legal, cultural, and institutionalarrangements that determine what public corporations cando, who controls them, how that control is exercised, and

how the risks and return from the activities they undertakeare allocated Principles:

Honesty, trust and integrity

Openness

Performance Orientation

Responsibility and accountability

Mutual respect and

Commitment to the organization.

Corporate Governance Issues


54/60


Systems relating to internal controls Procedure to be followed while appointing internal auditors The independence of the companys external auditors and

the quality of their audits

Management of risk associated with the business Financial Statements to be prepared by the entity Procedure for reviewing the compensation of the CEO and

other senior executives

Resources to be made available to directors for carrying outtheir duties effectively The manner and procedure for nominating individuals for

positions on the board Dividend policy to be adopted by the company

Issues Covered:


55/60


Independence of Directors Non-Executive Directors Compensation & Disclosures

Other provisions relating to Board Audit Committee Subsidiary Companies Disclosures

CEO/CFO Certification Compliance Report Non-mandatory requirements

Non-mandatory requirements


56/60


Merger is a process where one company unites with anothercompany and ensures that the following conditions are met:

All properties are transferred to the amalgamated company.

All liabilities are transferred to the amalgamated company.

Shareholders holding at least 3/4th in the value of shares of theamalgamating company become shareholders of the amalgamated

company.

Provision of Income Tax Act, 1961


57/60


Provision of Income Tax Act, 1961

Amortization of expenditure in case of amalgamation ordemerger

Capital gains

Special provision for computing the cost of acquisition ofcertain assets Transfer under Section 47 (vi a) Carry forward and set off of accumulated loss and

unabsorbed depreciation Cost with reference to certain modes of acquisition Deduction of certain expenditure incurred Stamp duty aspects of M&A


58/60


Law states

The percentage of shareholding of persons resident outsideIndia in the transferee or new company does not exceed theprescribed sectoral cap and

The transferor company or the transferee or the newcompany is not engaged in activities that prohibited under

the FDI policy.

Foreign Exchange Management Act, 1999


59/60


Section 3:

The section governs anti-competitive agreements andprohibits agreements that are capable of generatingadverse effect on competition like:

Production

Supply

Distribution

Storage

Acquisition or control of goods or Provision of services

Section 4 Section 6

Competition Act, 2002


60/60

Thank you!