chapter - ii mergers process

8/7/2019 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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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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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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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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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

chapter - ii mergers process

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