Mergers & Acquisitions

Transcription

1 Mergers & Acquisitions Contributing editor Alan M Klein 2017 Law Business Research 2017

2 Mergers & Acquisitions 2017 Contributing editor Alan M Klein Simpson Thacher & Bartlett LLP Publisher Gideon Roberton gideon.roberton@lbresearch.com Subscriptions Sophie Pallier subscriptions@gettingthedealthrough.com Senior business development managers Alan Lee alan.lee@gettingthedealthrough.com Adam Sargent adam.sargent@gettingthedealthrough.com Dan White dan.white@gettingthedealthrough.com Law Business Research Published by Law Business Research Ltd 87 Lancaster Road London, W11 1QQ, UK Tel: Fax: Law Business Research Ltd 2017 No photocopying without a CLA licence. First published 1999 Eighteenth edition ISSN The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyer client relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. The information provided was verified between March and May Be advised that this is a developing area. Printed and distributed by Encompass Print Solutions Tel:

3 PREFACE Preface Mergers & Acquisitions 2017 Eighteenth edition Getting the Deal Through is delighted to publish the eighteenth edition of Mergers & Acquisitions, which is available in print, as an e-book and online at Getting the Deal Through provides international expert analysis in key areas of law, practice and regulation for corporate counsel, crossborder legal practitioners, and company directors and offcers. Throughout this edition, and following the unique Getting the Deal Through format, the same key questions are answered by leading practitioners in each of the jurisdictions featured. Our coverage this year includes new chapters on Myanmar and the Netherlands, and new pieces on cross-border M&A and franchising in M&A. Getting the Deal Through titles are published annually in print. Please ensure you are referring to the latest edition or to the online version at Every effort has been made to cover all matters of concern to readers. However, specific legal advice should always be sought from experienced local advisers. Getting the Deal Through gratefully acknowledges the efforts of all the contributors to this volume, who were chosen for their recognised expertise. We also extend special thanks to the contributing editor, Alan M Klein of Simpson Thacher & Bartlett LLP, for his continued assistance with this volume. London May

4 INDIA Khaitan & Co India Rabindra Jhunjhunwala and Bharat Anand Khaitan & Co 1 Types of transaction How may businesses combine? Asset acquisitions It is common for companies to acquire or sell entire businesses or undertakings. Alternatively, an acquirer may wish to cherry-pick certain key assets (for example, IP and employees) and leave certain assets (for example, trade debts) behind. Both forms of business combinations (ie, asset transfers or business transfers) are popular in India. Asset acquisitions may be preferred where the acquirer is wary of past liability issues and prefers to acquire segregated assets rather than acquire the target company as a whole. Share acquisitions Often, it is simpler for an acquirer to take over 100 per cent of the share capital of the target company than to seek to acquire key assets or the whole of the target s business undertakings. India s foreign exchange control regime has been considerably liberalised to allow 100 per cent foreign ownership in most sectors of the economy, barring a small negative list where foreign investment is prohibited (for example, betting and gambling, lottery business, atomic energy, etc). In certain sectors, the government has prescribed foreign shareholding caps (for example, banking, insurance sectors, etc) and in some sectors foreign investment is subject to conditions (for example, construction, telecom, single-brand retail trading, etc). Further, share deals may be preferred over asset acquisitions in sectors where key operating licences or assets cannot be transferred easily or in a timely manner (for example, telecom and asset management companies). In case of transactions between a resident seller and a non-resident buyer, deferred consideration and escrows for an 18-month period after the date of the agreement and indemnities with a value of no more than 25 per cent of the full purchase price are permissible without Reserve Bank of India s (RBI) approval. Joint ventures Joint ventures are another popular form of investment for many foreign investors wishing to enter India. Given the recent judicial trends in India, pre-emption rights and share transfer restrictions are enforceable in the case of a private limited company in India. Such pre-emptive rights must, however, be incorporated in the articles of association of the company for such rights to be enforceable against the company. Prior to the Companies Act 2013 (the Act) coming into force, pre-emptive rights and share transfer restrictions in the case of public limited companies were highly debated and there were doubts regarding the enforceability of such terms by courts in India. The Act, however, recognises that provisions regulating the inter se transfer of shares among shareholders as being enforceable. Furthermore, in a complete reversal of its earlier position (since 1969), in October 2013, the Securities Exchange Board of India (SEBI) issued a notification recognising the validity of pre-emption, tag and drag-along rights. SEBI also recognised put and call options, subject to the conditions that the shares in question have been held for a minimum period of one year, the strike price and consideration complies with applicable pricing norms (for share transfers) in India; and) the contract is settled by actual delivery of the underlying securities. Since these rules prescribed by SEBI apply only prospectively, the enforceability of options over the shares of a public limited company entered into prior to October 2013 remains a grey area under Indian law. In July 2014, the RBI rationalised the pricing guidelines for issue and transfer of equity shares, compulsorily convertible preference shares or compulsorily convertible debentures as regards non-residents (including such instruments with in-built options). As per the prevailing exchange control norms, the pricing for the eligible instruments is as follows: in case of listed companies, the pricing as per the SEBI guidelines; and in case of unlisted companies, any internationally recognised pricing methodology. Regardless of whether the instruments are straight equity or convertible, the spirit of the rules (prescribed by the RBI) is that a non-resident investor cannot be provided any assured or fixed rate of return on its investment. Mergers and demergers In India it is possible to either combine two distinct entities into a single entity by way of a merger or to split two distinct undertakings into separate entities by way of a demerger, in either cases through a courtsanctioned scheme. 2 Statutes and regulations What are the main laws and regulations governing business combinations? The following principal laws play an important role in establishing the structure and form of business combinations: Companies Act 2013 Under the Act, the sale of an undertaking by a public company needs shareholder consent (section 180(1)(a) of the Act) by way of a special resolution (75 per cent majority) unless, with reference to the previous financial year, the investment of the company in such undertaking is 20 per cent (or less) of its net worth as per the audited balance sheet of the previous financial year or such undertaking generates less than 20 per cent of the total income of the company. Since June 2015, private companies have been exempt from this requirement. Authorisations under the Act Where an Indian entity is the acquirer it should be noted that under section 179(3)(e) read with sections 179(3)(j) and 186(5) of the Act, the power to invest funds, or acquire a substantial or controlling interest in another company, must be exercised at a meeting of the board through unanimous approval of the directors present at such meeting. No company shall directly or indirectly acquire any securities where the amount of investments exceeds 60 per cent of paid-up share capital and free reserves, or 100 per cent of free reserves and securities premium, whichever is more, unless: the board resolution sanctioning the proposed acquisition is unanimously approved by all directors present at the board meeting; and a special resolution (75 per cent majority) of the shareholders in general meeting is obtained. Indian companies seeking to make acquisitions require prior approval of any public financial institutions to whom loans are outstanding where either: the amount of investments exceeds 60 per cent of paid-up share capital and free reserves, or 100 per cent of free reserves and securities premium; or 128 Getting the Deal Through Mergers & Acquisitions 2017

5 Khaitan & Co INDIA there exists any payment default towards amounts due to such public financial institution by the acquirer. Indian companies in default in repaying deposits are prohibited from making any acquisitions. Schemes of amalgamation Under the newly notified provisions in relation to Compromises, Arrangements and Amalgamations under Indian law (sections 230 to 232 of the Companies Act 2013), it is possible to merge two entities such that all the assets, liabilities and undertakings of the transferor entity are transferred to and vested in the transferee undertaking with the transferor company being dissolved. A scheme of amalgamation must be approved at a duly convened meeting by a majority in number and three-quarters in value of the creditors (or class of creditors) and members (or class of members), present and voting and thereafter sanctioned by the court. Amalgamation would be tax neutral in the hands of an amalgamating company if the conditions prescribed under section 2(1B) of the Income Tax Act 1961 (the Tax Act) are satisfied. Tax losses of an amalgamating company can be carried forward and set off against the profits of the amalgamated company, subject to fulfilment of certain conditions. Please note that unlike the erstwhile companies Act 1956, the new provisions have made certain changes in the procedure involved in the approval of schemes. The National Company Law Tribunal (NCLT) is now vested with the power to sanction schemes of Compromises, Arrangements and Amalgamations, instead of the High Court, and accordingly, all the schemes presently pending before the High Courts, would stand transferred to the respective NCLT bench. Apart from certain procedural changes, the new provisions also provide for fast-track and simplified procedure for mergers and amalgamations of certain class of companies such as holding and wholly owned subsidiary, and small companies, without approval of NCLT. Demerger Where the business of an entity comprises two distinct undertakings, it is possible to split up the entity into two entities. Generally, shareholders of the original entity would be issued shares of the new entity. Where a demerger is completed through a court process and fulfils certain conditions prescribed under the Tax Act, it will not result in capital gains for the seller (section 2(19AA) of the Tax Act) or sales tax liability. In addition, tax losses of a demerged company relatable to the demerged undertaking can be carried forward and offset against the profits of the resulting company, subject to fulfilment of certain conditions. Takeovers SEBI regulates the Indian securities market. In September 2011, SEBI replaced the erstwhile SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the Takeover Code).Under the new Takeover Code, where an acquirer acquires, either directly or indirectly, 25 per cent or more of the shares or voting rights of a listed company, the acquirer is required to make an offer to the public to acquire at least 26 per cent of the voting capital of the company at the minimum offer price. The open-offer obligation is also triggered in the case of change in control of the target company. In addition, if an indirect acquisition exceeds the prescribed threshold of 80 per cent of the net asset value or sales turnover or market capitalisation of the entity of the business being acquired as per the recent audited annual financial statements, such indirect acquisition shall be regarded as a direct acquisition of the target company and will trigger a mandatory open offer obligation in India. Therefore, great care has to be taken while structuring transactions where the offshore target has an Indian listed subsidiary. Listing agreement and SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (Listing Regulations) SEBI issued the Listing Regulations on 2 September 2015, which became effective on 1 December With the coming of the new Listing Regulations, mere contractual obligations (including in respect of disclosures to stock exchanges) under the erstwhile listing agreement have now been embodied in the Listing Regulations and such obligations have statutory basis. The Listing Regulations has also replaced the erstwhile long-form of the listing agreement with a more concise version of the listing agreement, and listed companies need to execute fresh agreement in the new format with the stock exchanges by June The Listing Regulations inter alia specifies continual disclosure obligations for listed companies. Also, sale of a material subsidiary by a listed company which reduces the listed company s shareholding in such subsidiary to less than 50 per cent or listed company ceases to exercise control on such subsidiary requires approval of shareholders of the listed company by way of a special resolution pursuant to the Listing Regulations. Similarly, sale or disposal of assets amounting to 20 per cent of the assets of the material subsidiary on an aggregate basis during a financial year also needs shareholders approval by way of special resolution, except where such divestment is part of a court scheme. The Listing Regulations define a material subsidiary as a subsidiary of a listed company, whose income or net worth exceeds 20 per cent of the consolidated income or net worth respectively, of the listed companies or its subsidiaries in the immediately preceding accounting year. Further, in case of public listed companies, SEBI has prescribed additional compliances for schemes of arrangements for mergers, amalgamations and other restructurings involving listed companies under the Listing Regulations and SEBI circular dated 30 November 2015 (SEBI Circular), being effective from 1 December Among other compliances, schemes of arrangement involving listed companies and promoter or promoter group, inter alia, needs approval of majority of minority shareholders, and such approval of shareholders being obtained by way of e-voting and postal ballot. Competition Act 2002 The relevant provisions of the Competition Act, 2002 (Competition Act) and the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (as amended) came into effect on 1 June Accordingly, acquisitions of shares or voting rights or assets or control or mergers or amalgamations that breach the specified asset or turnover threshold (combination) must be notified to the Competition Commission of India (CCI) and cannot be effective without the prior clearance of the CCI. This is generally the acquirer s responsibility. However, in cases of mergers or amalgamations, the responsibility lies on all the concerned parties to the merger or amalgamation. The thresholds vary, depending upon the nature of the transaction and parties involved, as below: Scenario 1: Combination of standalone acquirer and target (Indian presence only) Combined turnover >60 billion Combined assets >20 billion rupees or rupees Scenario 2: Combination of standalone acquirer and target (worldwide with Indian presence) Combined assets >US$1 billion including Indian presence of 10 billion rupees or Combined turnover >US$3 billion including Indian presence of 30 billion rupees Scenario 3: Combination of group, acquirer and target (Indian presence only) Combined turnover >240 billion Combined assets >80 billion rupees or rupees Scenario 4: Combination of group acquirer and target (worldwide with Indian presence) Combined assets >US$4 billion including Indian presence of 10 billion rupees or Combined turnover >US$12 billion including Indian presence of 30 billion rupees Scenario 5: Acquisition of a target (company A) where the acquirer has existing control over another enterprise in the same or similar business (company B) (Indian presence only) Combined assets >20 billion rupees or Combined turnover >60 billion rupees 129

6 INDIA Khaitan & Co Scenario 6: Acquisition of a target (company A) where the acquirer has existing control over another enterprise in the same or similar business (company B) (worldwide with Indian presence) Combined assets >US$1 billion including Indian presence of 10 billion rupees or Combined turnover >US$ 3 billion including Indian presence of 3 billion rupees The Regulations also provide for certain categories of transactions which need not normally be notified to the CCI. There is also an exemption for transactions involving small targets, namely, targets with assets of less than 3.5 billion rupees in India or turnover of less than 10 billion rupees in India. This exemption is applicable only in case of acquisitions and is available until March The Competition Act prescribes a fine up to 1 per cent of the combined assets or turnover of the combination, whichever is higher, for a failure to notify a transaction to the CCI or for delayed notification to the CCI. In addition to provisions for non-filing of material information, the Competition Act also includes provisions for proceedings against persons and individuals responsible for the conduct of the business and affairs of companies. Certain amendments were introduced to the Regulations recognising certain categories of transactions that are not likely to cause an appreciable adverse effect to competition, including the following: an acquisition of less than 10 per cent equity share capital or voting rights of the target enterprise would be considered to be made solely as an investment provided that (i) the acquirer did not acquire any special rights and would have the ability to exercise only such rights that are exercisable by the ordinary shareholders of the target enterprise to the extent of their respective shareholding; and (ii) the acquirer is not a member of the board of directors of the target enterprise and does not have the right or intention to nominate a director on the board of directors of the target enterprise and does not intend to participate in the affairs or management of the target enterprise. Provided that such an acquisition made solely as an investment does not entitle the acquirer to hold more than 25 per cent or more of the total shares or voting rights in the target enterprise, and is made without any acquisition of control, such an acquisition would not require prior approval of the CCI; and in a situation where an acquirer or its group already holds more than 25 per cent and less than 50 per cent of shares or voting rights in the target enterprise, then the acquirer or its group can acquire additional shares or voting rights without seeking the prior approval of the CCI, provided that the transaction does not result in acquisition of sole or joint control of such target enterprise by the acquirer or its group. 3 Governing law What law typically governs the transaction agreements? Typically, Indian law is preferred as the governing law of transaction agreements where the target is based in India or the assets are based in India. In some cases (for example, project documents or foreign currency-denominated loans), it is possible to negotiate some other governing law. Foreign judgments passed in other jurisdictions are enforceable in India as a decree if such a country is one of the reciprocating territories as notified by the central government under the provisions of the Civil Procedure Code, Filings and fees Which government or stock exchange filings are necessary in connection with a business combination? Are there stamp taxes or other government fees in connection with completing a business combination? Exchange control regulation India has a strict and highly prescriptive exchange control regime that applies to acquisitions with a cross-border element. For example, in the case of a transfer of shares of an Indian company by an Indian resident to a non-resident, shares must not be transferred at a price less than the price determined in accordance with the pricing norms of the RBI, India s central bank. Broadly, this means that the price per share must not be less than the price worked out as per any internationally accepted pricing methodology for valuation of shares on an arm s-length basis, duly certified by a chartered accountant or a SEBI-registered merchant banker in case of unlisted companies, or SEBI guidelines in case of listed public companies. In the case of a share transfer, a report must be filed with an authorised dealer bank in the prescribed form (Form FC-TRS) within 60 days of the receipt of remittance towards sale of shares. An acknowledged copy of Form FC-TRS from the resident party s authorised dealer bank is required to enable registration of the transfer of shares in favour of the acquirer in the books of the company. Recently, the RBI has prescribed mandatory electronic filing of Form FC-TRS and discontinued physical filing as was prescribed earlier. In addition to this, at the time of exit (namely, transfer of shares of an Indian company from non-resident to resident), the pricing norms are required to be complied with. The RBI has liberalised its policy in connection with the transfer of shares from a non-resident to a resident to some extent by clarifying that no prior RBI approval is required in the event the pricing norms are not satisfied in circumstances where the original and the resultant investment complies with the foreign direct investment policy and the pricing of the transaction otherwise adheres to pricing norms prescribed by SEBI (for example, the pricing norms prescribed for delisting, IPO, block deals, takeover, etc), and a chartered accountant certifying compliance with relevant SEBI s pricing guidelines has been obtained. Stock exchange reporting SEBI issued the SEBI (Prohibition of Insider Trading) Regulations 2015 (SEBI Insider Trading Regulations) on 15 January 2015, which came into effect on 15 May 2015 and repealed the erstwhile SEBI (Prohibition of Insider Trading) Regulations The new SEBI Insider Trading Regulations have, inter alia, broadened the definitions of unpublished price sensitive information (UPSI), insider and connected persons, and provides a stricter code for protection of shareholders interests. The new SEBI Insider Trading Regulations prohibit communication of UPSI by an insider, procurement of UPSI by other persons, and trading in securities by an insider in possession of UPSI. In the case of companies whose shares are publicly listed in India, under the SEBI Insider Trading Regulations, information regarding amalgamation, mergers or takeovers is deemed to be UPSI. However, carve-outs have been provided for communication or procurement of UPSI for legitimate purposes or discharge of legal obligations. Further, unlike the earlier regulations, in the interest of M&A deals, SEBI has introduced specific carve-out for communicating or procuring UPSI during diligences in cases: (i) if an open offer is triggered, then such communication of UPSI is permissible where the board is of the informed opinion that the proposed transaction is In the best interest of company; or (ii) if no open offer is triggered, then such communication of UPSI is permissible where the board is of the informed opinion that the proposed transaction is in the best Interest of company and such UPSI is disseminated to be made generally available at least two trading days prior to the proposed transaction being effected in such form as the board of directors may determine so as to rule out any information asymmetry in the market. Further, the new Listing Regulations are more comprehensive in terms of disclosures, and require disclosure of any events or information which in the opinion of board of directors of the listed company is material. Information or events have been classified as: (i) deemed material (such as acquisitions, merger, amalgamations, demergers, other restructurings, etc), for which disclosure needs to be made to the stock exchanges within 24 hours from the occurrence of the event of information; and (ii) disclosure of events for which the board can formulate materiality policy (such as expected default in timely payment of interests, preference dividend or redemption or repayment of debt securities, any change in general character of business of the company, disruption of operation owing to natural calamity, etc). Stamp duty Stamp duty is payable on the instrument for the transfer of physical shares at the rate of 0.25 per cent of the value (or consideration) of the shares transferred. Such stamp duty is exempt if shares to be transferred are held in dematerialised or electronic form. In addition to this, stamp duty is required to be paid on investment agreements, share purchase agreements, asset transfer or business transfer agreement, etc, as per the applicable stamp duty rates under specific local state stamp laws. 130 Getting the Deal Through Mergers & Acquisitions 2017

7 Khaitan & Co INDIA Competition As mentioned under question 2, if the specified thresholds are triggered, a filing will have to be made with the CCI in Form I or Form II. Form I is a simple form and the parties may, at their option make a Form I or Form II filing. The parties may make a Form II filing in two instances: (i) the parties to the combination are engaged in production, supply, distribution, storage, sale or trade of similar or identical or substitutable goods or provision of similar or identical or substitutable services and the combined market share of the parties to the combination after such combination is more than 15 per cent in the relevant market; or (ii) the parties to the combination are engaged at different stages or levels of the production chain in different markets, in respect of production, supply, distribution, storage, sale or trade in goods or provision of services, and their individual or combined market share is more than 25 per cent in the relevant market. In the case of Form I and Form II filing, the CCI must be notified within 30 calendar days of the execution of the agreements relating to acquisitions of shares or voting rights or assets, or board of directors approval for proposed merger or amalgamation. The filing fees to be deposited with the CCI in case of Form I filing is 1.5 million rupees, and for Form II is 5 million rupees. In the case of acquisitions by public financial institutions, foreign Institutional investors, banks or venture capital funds pursuant to any covenant of a loan or investment agreement, the CCI must be notified in Form III within seven days of the acquisition. Form III is a post facto notification. 5 Information to be disclosed What information needs to be made public in a business combination? Does this depend on what type of structure is used? In contrast to public listed companies where the extent of disclosure is relatively high due to dealings taking place on the stock exchange and related reporting obligations (refer to response to question 4), in the case of private company acquisitions, there is no mandatory requirement to make any public disclosures. However, in our experience, details of private deals are often leaked. 6 Disclosure of substantial shareholdings What are the disclosure requirements for owners of large shareholdings in a company? Are the requirements affected if the company is a party to a business combination? Under the Takeover Code, an acquirer must disclose its shareholding if it acquires more than 5 per cent of the shares or voting rights of the listed target company. An acquirer who holds 5 per cent of the shares or voting rights of the listed target company is required to disclose every acquisition or disposal of 2 per cent or more of the shares or voting rights of the listed target company to the company and the stock exchanges where its shares are listed. Such disclosures must be made at each stage of acquisition and are to be made to the company and to the stock exchanges on which the shares of the company are listed. Under the SEBI Insider Trading Regulations, every promoter, employee and director of every company listed on a stock exchange in India is required to disclose to the company the number of such securities acquired or disposed of within two trading days of such transaction if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of 1 million rupees. Further, every company shall notify the particulars of such trading to the stock exchange on which the securities are listed within two trading days of receipt of the disclosure or from becoming aware of such information. 7 Duties of directors and controlling shareholders What duties do the directors or managers of a company owe to the company s shareholders, creditors and other stakeholders in connection with a business combination? Do controlling shareholders have similar duties? Directors duties Directors duties have now been codified under Indian law (section 166 of the Act). The principal duties of directors under Indian law are similar (but not identical) to those under English law. So, under Indian law, a director s relationship with the company is fiduciary in nature. A director must act in good faith in order to promote the objects of the company for the benefit of its members as a whole. A director must act with due and reasonable care, skill and diligence. A director must avoid any actual or potential conflict between his or her own and the company s interests. A director must not achieve or attempt to achieve any undue gain or advantage to himor herself or his or her relatives or partners or associates. However, under the Act, directors duties have been muddled by requiring directors to act not only in the best interest of the company but also its employees, the shareholders, the community and for the protection of the environment. There is no guidance for directors regarding which duties override in case of any actual or potential conflict between duties to different stakeholders. If a company proposes to enter into any arrangement or contract in which the director is directly or indirectly concerned or interested, the director is under a statutory obligation to declare such interest at a meeting of the board (section 184 of the Act). Normally the declaration of an interest must be made at the first such meeting at which the matter is considered and thereafter at the first meeting of the board in every financial year or whenever there is any change in the declarations already made. Under the Act, interested directors cannot constitute or form part of a quorum or vote on matters in which they are interested, except in case of private companies where interested directors may participate in a board meeting after disclosure of his or her interest before the board as permitted by a recent notification in June Please note that the Tax Act contains provisions relating to recovery of the non-recoverable income tax liability of a private limited company from its directors in certain cases. Statutory restrictions on directors Board approval is required for any contract between a company and any related party (which expression includes directors, or certain persons connected with the directors, key managerial personnel or his relative, holding, subsidiary or associate companies, etc) in relation to the sale, purchase or supply of goods or services or for leasing, buying or selling of property of any kind or for underwriting subscription to any securities or derivatives thereof of the company (section 188 of the Act). Moreover, certain transactions with a related party also require the prior approval of the company s shareholders by way of an ordinary resolution (50 per cent majority) (the requirement of a special resolution has been relaxed after Companies (Amendment) Act 2015 effective from 29 May 2015). However, transactions with a related party by the company in the ordinary course of the business and at arm s-length basis will not require the board or shareholders approval. Further, relaxation from this requirement of shareholders approval is also available for transactions between a holding company and its wholly owned subsidiary whose accounts are consolidated with the holding company and placed before the shareholders for approval at a general meeting. Shareholders duties Under Indian law, controlling shareholders are not subject to similar duties as directors. However, as in English law, controlling shareholders are obliged not to deal with the minority in an unfairly prejudicial or oppressive manner (section 241 of the Companies Act 1956). Courts have wide-ranging powers in the case a claim of unfair prejudice is successfully made. 8 Approval and appraisal rights What approval rights do shareholders have over business combinations? Do shareholders have appraisal or similar rights in business combinations? Shareholder approval (75 per cent majority) is necessary where a public company proposes to dispose of a substantial part or the whole of an undertaking. In the case of a merger or demerger, shareholder approval is necessary provided that a majority in number and threequarters in value of the shareholders and creditors approve such transaction. Listed companies need shareholders approval by special resolution in case of disposal of a material subsidiary or sale or disposal of assets of a material subsidiary as mentioned in question 2. Further, approval of majority of minority shareholders is required in certain cases involving schemes of arrangement between a listed company and promoter or promoter group entities

8 INDIA Khaitan & Co It should be noted that listed Indian companies tend to be closely held by an individual or a family. Therefore, deal protection can be achieved by ensuring that the controlling shareholders are committed to the proposed transaction. 9 Hostile transactions What are the special considerations for unsolicited transactions? Historically, unsolicited transactions in the case of publicly listed entities have been scarce in India due to the concentration of controlling interests in a few individuals or families. Most public deals involve a degree of due diligence by the acquirer and fairly robust representations and warranties package backed by the seller. Accordingly, public takeovers closely resemble private M&A transactions, with the exception of the acquirer having to complete an open offer process in accordance with the Takeover Code and make mandatory disclosure under the Takeover Code. The new Takeover Code provides for hostile takeovers of listed Indian companies and has laid down conditions upon satisfaction of which an acquirer can make a voluntary offer to acquire shares of an Indian listed company. These conditions, inter alia, include: a voluntary offer can be made only by a person who holds at least 25 per cent shares or voting rights in a company, but not more than 75 per cent (taking account of the maximum permissible nonpublic shareholding); a voluntary offer can be made only by a person who has not acquired any shares in the target company in the preceding 52 weeks prior to the offer; during the offer period, the acquirer cannot acquire shares other than through the voluntary offer; and once the voluntary offer is completed, the acquirer shall not acquire further shares in the target company for six months after completion of the offer. However, this excludes acquisitions by making a competing offer. 10 Break-up fees frustration of additional bidders Which types of break-up and reverse break-up fees are allowed? What are the limitations on a company s ability to protect deals from third-party bidders? Although much more common in relation to private deals (especially where financial investors are involved or in the case of termination due to non-satisfaction of a condition), deal protection devices such as break fees (payable by the target or promoters to the bidder) and reverse break fees (payable by the bidder to the target or promoters) are extremely rare in connection with public deals India. It is not clear whether SEBI would approve an offer letter involving such payments, especially if these arrangements cast a potential payment obligation on the target company. Under the Act, it is unlawful for any public company to give financial assistance in connection with the acquisition of shares (section 67 of the Act). Further, the consequences of a breach are stringent and liability of the company is subject to a fine of a maximum of 2.5 million rupees, and every officer of the company who is in default is liable to imprisonment for a term which may extend to three years and with fine of a maximum of 2.5 million rupees. We believe making financial assistance an offence with potential criminal liability under the Act (with no whitewash procedure) will give rise to several challenges in the future. 11 Government influence Other than through relevant competition regulations, or in specific industries in which business combinations are regulated, may government agencies influence or restrict the completion of business combinations, including for reasons of national security? Yes. If there is a perceived risk to national security, the government can influence or restrict the completion of a business combination. For instance, under the exchange control policy, foreign investments requiring government approval in defence, railway infrastructure, broadcasting or telecom sectors are scrutinised from a security standpoint. Although there is no formal record, it is reported that the central government had rejected certain investment proposals owing to political or national security reasons in sectors such as telecom. 12 Conditional offers What conditions to a tender offer, exchange offer or other form of business combination are allowed? In a cash acquisition, may the financing be conditional? In the case of a private deal, the parties are free to negotiate the conditions to completion. However, we have rarely seen financing conditions even in the case of private deals. In the case of public transactions that have also triggered a (regulated) mandatory tender offer, the parties have much less flexibility, as the tender offer would necessarily require fund confirmation on the part of the acquiring entity. Further, in case of tender offers SEBI does not allow acquirers to rely on any commercial preconditions other than Indian statutory approvals and other conditions that are not in control of acquirer to withdraw the tender offer. 13 Financing If a buyer needs to obtain financing for a transaction, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer s financing? Pure leverage cross-border deals are not common in India. Where a transaction is debt-financed outside India, normally an offshore security package is put in place by the acquirer as taking security over Indian assets needs prior approval from the RBI. In such a scenario, funds are normally drawn down and available at the time of signing the acquisition documents and making the public announcement in order to satisfy the merchant banker that necessary financing is available. Even in the case of purely domestic deals, financing conditions are rarely sought for, or accepted. 14 Minority squeeze-out May minority stockholders be squeezed out? If so, what steps must be taken and what is the time frame for the process? The Companies Act 2013 provides that the majority shareholders who are the owner of 90 per cent or more of the equity shares of a company shall have the right of offer by notice to the remaining shareholders of the company to compulsorily acquire the shares. The Companies Act 2013 also gives such a right to the minority, to require the offeror to buy them out on the terms of the offer. The offer to be made by the minority shareholders to the majority shareholders for buying the equity shares shall be at a price determined on the basis of valuation undertaken by a registered valuer. In the case of an unlisted company and a private company, the offer price shall be determined after taking into account the following factors: the highest price paid by the acquirer, person or group of persons for acquisition during the last 12 months; or the fair price of shares of the company to be determined by the registered valuer after considering valuation parameters including return on net worth, book value of shares, earning per share, price earning multiple vis-à-vis the industry average, and such other parameters as are customary for valuation of shares of such companies. Further, the Companies Act 2013 requires the company to act as the transfer agent (for receiving and disbursing the price or taking delivery and delivering the shares) between the parties and imposes an obligation on the majority shareholders to deposit the squeeze-out consideration amount in a separate bank account. The separate bank account is required to be operated by the company for at least one year; however, the company is required to disburse the consideration amount to the minority shareholders within a period of 60 days from the date of deposit of the consideration amount by the majority stockholders. In addition to it, the transferee company, may make an offer to the shareholders of another company, in the form of a scheme or a contract to acquire shares of the transferor company. In the event of the holders of nine-tenths of the value of the shares of the transferor company 132 Getting the Deal Through Mergers & Acquisitions 2017

9 Khaitan & Co INDIA accepting the offer of the transferee company within four months from making the offer, the transferee company shall have the right to give a notice to the dissenting shareholders (holders of one-tenth of value of shares) to acquire their shares at any time within two months after the expiry of the said four months. Another possible method of squeeze-out is by way of capital reduction under section 66 of the Companies Act Though section 66 of the Companies Act 2013 does not provide strictly for squeeze-out, the interpretations offered by the Indian courts under section 100 (corresponding provision under the Companies Act 1956) have added a different colour. Squeeze-out through reduction of capital was discussed by the division bench of the Bombay High Court in Sandvik Asia Limited v Bharat Kumari Padamsi ([2009] 92 SCL 272 (Bom)). The High Court held that it will not withhold its sanction to a resolution resulting in a squeeze-out of minority shareholders through reduction of capital if it is established that reduced shareholders are being paid fair value of their shares, the overwhelming majority of the shareholders voted in favour of the resolution and reduction is in complete compliance with the Companies Act and articles of the company. Therefore we can inferfrom this decision that majority shareholders (more than threequarters of the company) can remove minority shareholders by extinguishing the share capital held by the minority shareholders alone if the broad conditions as stated above are satisfied. The Bombay High Court in another case, Elpro International Limited ([2009] 149 Comp Cas 646 (Bom)) held that a scheme of reduction can be made applicable to a select group of shareholders so long as conditions under the Companies Act have been followed. An appeal preferred before the Supreme Court of India against Bombay High Court s Sandvik Asia decision was not admitted by the apex court, meaning effectively that the apex court did not think it fit to interfere with the original decision of the Bombay High Court. Another possible method of squeeze-out for listed companies is delisting the shares from the stock exchange pursuant to SEBI (Delisting of Equity Shares) Regulations 2009 (Delisting Regulations). For this, among other compliances, delisting must be approved by a special resolution of the target company (Delisting Resolution) in a general meeting by a two-thirds majority of shareholders present and voting. It is important to note that the special resolution is to be acted upon only if the votes cast by public shareholders in favour of the proposal amount to at least two times the number of votes cast by public shareholders against it. The pricing of shares for the delisting process is determined by the reverse book-building process with a minimum floor price arrived as per the Takeover Code. For the delisting offer to be successful: the post-offer shareholding of the promoter together with persons acting in concert along with shares accepted through eligible bids at the price arrived as per the Delisting Regulations, reaches 90 per cent of the total shares of that class (excluding shares held by custodians and against which depository receipts are issued); and at least 25 per cent of public shareholders existing on the date of the Delisting Resolution tender in the reverse book building process (however, such a requirement can be relaxed, in the event acquirer and merchant banker to the offer is able to demonstrate that they have contacted all the public shareholders either through registered post or speed post or courier or hand delivery with proof of delivery or other prescribed means). In the event the delisting offer is successful, any remaining public shareholder holding equity shares of the delisted company may tender his or her shares to the promoter up to a period of at least one year from the date of delisting and, in such a case, the promoter is required to accept the shares tendered at the same final price at which the earlier acceptance of shares was made. 15 Cross-border transactions How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? Generally, prior to consummating a share acquisition in India, offshore buyers typically incorporate a holding company in a jurisdiction with a friendly tax treaty with India (for example, Mauritius, Singapore, the Netherlands, etc) in order to secure favourable tax treatment at the time of exit. Needless to say, the holding company should have commercial substance, else it could be regarded as a device for tax avoidance by tax authorities. Also, Indian transfer pricing regulations would apply to international transactions entered into between related enterprises. Apart from tax considerations, India s exchange control regime applies to cross-border deals. Earlier, foreign investors could not acquire listed shares directly on-market unless they were registered as foreign institutional investors with SEBI. However, the RBI has removed this restriction and has clarified that foreign investors including non-resident Indians are eligible to acquire shares on the recognised stock exchanges through a registered broker under an FDI scheme subject to compliance with certain conditions. The Ministry of Finance had announced a new category of investors, qualified foreign investors (QFIs), to directly invest in the Indian equity markets in order to widen the class of investors and attract more foreign funds. Recently, SEBI notified the SEBI (Foreign Portfolio Investors) Regulations, 2014 (FPI Regulations), and with this SEBI has harmonised foreign institutional investors (FIIs), sub-accounts and QFI regimes into a single investor class foreign portfolio investors (FPI) and provided a single window clearance through designated depository participants. The FPI route is a unified market access route for all portfolio investments in India aimed at rationalising and simplifying the process for foreign portfolio investments with a unified access route. 16 Waiting or notification periods Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations? Where an acquisition relates to a sector where foreign investment is restricted and therefore needs prior regulatory approval from the central government, the waiting period for such approvals can range from six to eight weeks. The central government has delegated authority to the Foreign Investment Promotion Board (FIPB) under the aegis of the Ministry of Finance to grant such approvals on its behalf. In practice, delays are not uncommon and the definitive timing to obtain FIPB approval is hard to predict. The central government has proposed to close the FIPB, the government agency responsible for regulating foreign investment and which granted approvals to foreign investment in regulated sectors. Currently, a Group of Officers has been constituted to prepare a roadmap to phase out FIPB. RBI is expected to formulate standard operating procedure for approval of FDI proposals. Going forward, the approval requirements for foreign investment in regulated sectors may be determined by the respective governmental agencies responsible for regulating those sectors. 17 Sector-specific rules Are companies in specific industries subject to additional regulations and statutes? Yes. For example, foreign investment in the insurance sector is restricted to 49 per cent of the share capital of the Indian insurance company. In addition, the Indian insurance company is required to obtain a licence from the Insurance Regulatory and Development Authority and adhere to several reporting, solvency and accounting requirements. Accordingly, in addition to exchange control laws, it is important to evaluate the local industry- specific regulations prior to finalising any investment proposal in India. 18 Tax issues What are the basic tax issues involved in business combinations? Share sales Under Indian tax laws, any gain arising out of transfer of Indian shares is liable to tax in India. Accordingly, it is important to determine whether the gains are long-term or short-term capital gains (depending upon whether the shares are held for: a duration exceeding 12 months or less in case of listed shares; or a duration exceeding 24 months or less in case of unlisted shares). The currently prevailing rates for resident and non-resident corporate sellers are as follows: 133