presentation on m&a

8/8/2019 Presentation on M&A

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Workshop on

Mergers & AcquisitionsFebruary 17, 2005

presented

by

Mohit SarafPartner

Luthra and LuthraLaw Offices



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Why M&A?

Underlying Principle for

M&A Transactions2 + 2 4

Additional Value of ³Synergy



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Why M&A? Market Intensification:

Horizontal Integration ± Buying a competitor

Acquisition of equity stake in IBP by IOC

AT&T merger into SBC enables the latter toaccess the corporate customer base and exploit

the predictable cash flows typical of thistelephony section

Market Extensions ± New markets for Presentproducts

Maersk ± Pipavav : strategic objective of investing in a container terminal in the westcoast

Bharat Forge¶s acquisition of CDP (Germany)

S&P¶s proposed acquisition of CRISIL



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Why M&A?

Vertical Integration : Internalization of crucial

forward or backward activities

Vertical Forward Integration ± Buying a

customer

Indian Rayon¶s acquisition of Madura

Garments along with brand rights

Vertical Backward Integration ± Buying a

supplier

IBM¶s acquisition of Daksh



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Why M&A?

Diversification: Overcome Barriers to Entry

Product Extension: New product in Presentterritory

P&G acquires Gillette to expand its productoffering in the household sector and smoothout fluctuations in earning

Free-form Diversification: New product & New

territoriesFlight Centre¶s proposed acquisition of

Friends Globe

Indian Rayon¶s acquisition of PSI DataSystems



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Why M&A?

Advantages:

Greater Economic Clout:

Proposed merger of Petroleum PSUs

P&G merger with Gillette expected to

correct balance of power between suppliersand retailers.

Economies of scale and SharingOverheads: Size really does matter

IOC & IBP

Synthesized capabilities

Proposed merger of nationalized banks



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M&A

Different Perspectives

Acquirer ± Majority/ Strategic Partner

± Minority/ Private Equity Investor

Target Company



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M&A

TRANSACTION ISSUES: TARGET Due Diligence ± Full Disclosures

± Linked with Reps & Warranties

± Reps should be negative

± DD in case of Listed Company

± Post Closing Adjustment

Condition Precedents ± Definitive

± Include as Exhibits

Survival of Reps for limited period



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M&ATRANSACTION ISSUES: ACQUIRER

Due Diligence ± Risk Matrix and Value Depletor

± Material Contracts Any subsisting contracts granting similar or superior

rights to other investors

Termination rights of major customers

Approval rights of financiers

± Title to Properties & Assets: esp. where mainbusiness is situated

± Statutory Dues

± Litigation : Contingent Liabilities

± IPR protection

± Tax Compliance (Settlement Commission)



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M&A

TRANSACTION ISSUES: ACQUIRER Mode of Acquisition

± Pure Equity (Existing or New); Equity &Preference; Special Class (Differential voting

rights, dividends or otherwise) ± Leveraged Acquisitions

Corporate Governance

± Related Party Transactions (past & going forward)

Board Representation

- Quorum (Inclusive)

- Fiduciary Responsibility of Board v. Shareholders



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Deadlock Resolution

± Majority/ Strategic Partner

± Lenders

Return on Investment

± Cap on dividends to preference shares

± Liquidation Preference

Lock - in of Promoters

± Enforceability of transferability restrictions



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Non - Compete/ Non - Solicitation

± Payment for Goodwill to exiting partner

Exclusivity

Enforceability against Company

± Company as party to SHA

Exit Options

± Listing (Private Equity)

± Call/ Put Option



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M&ATRANSACTION ISSUES: GENERAL

Effectiveness of SHA and SPA

Indemnity

± Aggregate Liability Cap

± De Minimis

± Threshold

Participative Rights v. Protective Rights

± Strategic Partner : Participative Rights

Control on Board

Sharing Control

± Private Equity : Protective Rights



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M&ATRANSACTION ISSUES: GENERAL

Special Rights

± Tag ± Along Rights: minority partner/ private equity

± Drag - Along Rights: majority partner

± Right to share the upside on revised valuation of

Target eg: on Merger; Listing at higher valuation

± Right of First Refusal

Earn-out Structure

± Favorable Business Projections



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M&A

TRANSACTION ISSUES: GENERAL FCPA

Arbitration v. Litigation: Effective Remedy

± Proper Law of Arbitration

± ICC v. UNICITRAL

± Group Companies Doctrine

± Place of Arbitration

± Cost Effective



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M&AREGULATORY FRAMEWORK

TR ANSACTION STRUCTURE

Companies Act

Income Tax Act

Stamp Acts

Competition Act

TR ANS-BORDER TR ANSACTIONS

Foreign Exchange Management Act

LISTED COMPANIES

SEBI Regulations

Stock Exchange ± Listing Agreement



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M&AOVERVIEW

Mergers Spin Offs Acquisitions

DEMERGER OTHERS

ASSETS

SHARES

CONTROL

SLUMP SALE



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ACQUISITIONS

Acquisition

Shares

Control

Acquisition of Assets

Slump Sale



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AcquisitionsISSUES: COMPANIES ACT

Sections 108A to G: Central Government approval if in excess of threshold prescribed

ambiguity as to µclassification of g oods¶

Section 372A: Compliance by transferee company inacquisition of shares

Section 77A: Buy Back may be used as a defense toa hostile takeover

Used in U.S.: PeopleSoft¶s attempt to thwartOracle



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AcquisitionsISSUES: FEMA

Acquirer - Non-Resident:

No approval required for purchase of shares (includingexisting shares)

From R

From NR

Valuation prescribed in case of R-NR not less than

Ruling Market Price - Listed Target Company

Fair valuation by a CA as per CCI guidelines -

Unlisted Target Company

Press Note 18 replaced by Press Note 1 of 2005

Investment has to comply with FDI policy



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AcquisitionsISSUES: FEMA

Target Company is a Non-Resident Direct investment in JV/ WOS outside India (other

than financial services) requires no approval subject toconditions including i nt er alia

Financial commitment < or = 100% networth

Investment by way of remittance only if valuation

± If > 5 million USD: by Merchant Banker/Investment Banker registered with SEBI/

appropriate authorities ± Other cases: by CA/ CPA

Investment by share swap: valuation by MerchantBanker/ Investment Banker registered with SEBI/

appropriate authorities



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AcquisitionsISSUES: TAKEOVER CODE

Definition of ³Control - Inclusive

Ambiguous:- TATA Sellout in ACC.

Negative control?

S. 25(2) prohibits public offers after 21 days of thepublic announcement of first public offer

In case of indirect acquisition, foreign acquirer hasthree months from completion of transaction to makeopen offer. Therefore, foreign transactions can beconcluded prior to open offer in India.



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AcquisitionsRECENT CHANGES : TAKEOVER CODE

New thresholds of 54% and 74% in Regulation 7

55% shares cannot be allotted by preferentialallotment or market purchase ± consolidation bypublic offer only

Acquisition by public offer under 11(2) can be for onlyso many shares as will keep float above listingrequirements.

Where any acquisition reduces public float below

Listing Agreement requirements, acquisition tocomply with delisting guidelines

Where Code is triggered by a global deal, if the publicoffer will lower float to below the listing requirement,then acquirer has 12 months to raise float either by

fresh issue or by disinvestment.



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AcquisitionsISSUES: MISC

Stamp Duty

No stamp duty if transferred shares are

dematerialized

Industrial Disputes Act (s. 25FF)

Workmen employed by transferor company

entitled to retrenchment benefits unless retained in

employment on same terms.



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Mergers

Mergers

Spin-offs

Demergers



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Mergers

STRUCTURE 1

A = Amalgamating Company: Ceases to Exist

B = Amalgamated Company

B receives all of A¶s assets and liabilities

Shareholders of A receive shares in B and maybe other benefits like debentures, cash

Transfer assets and liabilitiesA B



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MergersSTRUCTURE 2

A, B and C = Amalgamating Companies: Cease to exist

D = Amalgamated Company: may or may not have

existed before Merger

All assets and liabilities of A, B and C transferred to D

Shareholders in A,B and C get shares in D.

A

DB

C



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Spin-OffsSTRUCTURE

YX YTransfer of undertaking Y

Company BCompany A

Consideration is usually shares of Company B but

maybe cash.

Process may or may not be Court sanctioned.

Salora spinning off Panasonic to Matsushita

under s. 391 Scheme. Consideration in cash.

Consideration in cashor issue of shares



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DemergersSTRUCTURE

Demergers are one type of spin-offs: under s. 391

A = Demerging Company

B = Resulting Company: may or may not have existed

earlier

A transfers undertaking to B

B issues shares to shareholders of A

X Y Y

Company BCompany A

Transfers undertaking Y

Shareholders

of

A

Issues shares



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Merger & Demerger PROCESS

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

NoCs from secured creditors and shareholders for exemption from meeting: R educ e T ime and Costs

In ICICI Ltd. merger with ICICI Bank, meeting of preference 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

ovi ng reg ist ered offic e to one j ur isdiction:R

educ eT ime and Costs



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Phase- III

Notice of EGM to members with statement of terms of merger, interests of directors and proxy forms: 21 days

Advertisement

Notice in 2 newspapers: 21 days

Affidavit certifying compliance with HC¶s directions inrespect of notice/ advertisement

Meetings of creditors and/ or shareholders: agreed to by

majority in number representing ¾ 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 Chairman¶s Report for

second motion petition

10 days notice of hearing of petition in same newspapers

Notice to Central Govt. (Regional Director), and OL (if

applicable): Submit reports

Objections raised in 391 proceedings

HC Sanction

Certified copy of HC Order to be filed with RoC within 30days of order.



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Merger & Demerger ISSUES: COMPANIES ACT

s 391 - 394: ³Complete Code´, ³Single 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 of Karnataka HC

Alternative Mechanism: S. 494

Through Liquidation Process

Liquidator transfers assets to foreign company for shares

Process has to be ³altogether 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 of amalgamating company receive anything besides sharesin the amalgamated company like debentures or cash-Gujarat HC in Gautam S ar abhai v. CI T , 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 & DemergersISSUES: SALES TAX

No Sales tax on Amalgamation or demerger.

Where effective date is retrospective, any transfers

between amalgamating company and amalgamatedcompany retrospectively cease to be liable to sales

tax- Mad HC Cast r ol Oil v. S tat e of TN , 114 STC 468

Some Sales Tax enactments contain specificprovisions to tax such transactions eg. S.33C,

Bombay Sales Tax Act. No such provision in Central

Sales Tax Act.



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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 i T aka AIR 1997

Bom 7

States with Specific entries: Maharashtra, Karnataka,

Rajasthan and Gujarat



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Merger ISSUES: STAMP DUTY

States without specific entries: Unclear if duty leviable. Cal HC in M adhu I nt r a Ltd. v. R OC, 2004 (3) CHN 607 -

394 Order is not an instrument chargeable to duty

Supreme Court in R uby S al es v. S tat e of M ahar asht r a(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 for mergers and demergers at Rs.10 crore and Rs. 25

crore.



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Merger ISSUES: SEBI

Acquisition of shares pursuant to a scheme of arrangement or reconstruction under any law, Indianor foreign ± exempt from SEBI Takeover Code.

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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Merger ISSUES: 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 µPrice Sensitive Information¶ in terms of Insider Trading 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 GTB¶s complex

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- H i ndustan Lev er , 1995

Supp (1) SCC 499



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Mergers & Acquisitions

COMPETITION LAW

Competition Act, 2002 (Partially notified)

Merger or Acquisition = ³Combination´ if stipulated

thresholds respecting aggregate asset or turnover

are exceeded

Prior approval of combination is not mandatory

Test ± ³Cause or lik el y to cause an appreciabl e

adv er se eff ect on competition w ithi n the rel evant

mar k et

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