BCAS. Transferability of Shares (ROFR, TAG & DRAG) Nitin Potdar Partner, M&A J. Sagar Associates advocates & solicitors

Transcription

1 BCAS Transferability of Shares (ROFR, TAG & DRAG) Nitin Potdar Partner, M&A J. Sagar Associates advocates & solicitors Delhi Gurgaon Mumbai Bangalore Hyderabad

2 SHAREHOLDERS RIGHTS PRE-EMPTION (1/4)

3 SHAREHOLDERS RIGHTS PRE-EMPTION (2/4) ROFR Selling shareholder required to first procure price from third party and thereafter, offer the shares to non-selling shareholder at the third party offer price ROFO Selling shareholder required to first offer shares to non-selling shareholder and obtain a price therefrom, and sell to third party only if third party offer is more than the nonselling shareholder s offer TAG You sell, I Sell DRAG I sell, you sell

4 SHAREHOLDERS RIGHTS PRE-EMPTION (3/4) ENFORCEABILITY Private Company Company should be a party to any agreement relating to the allotment of shares, before such an agreement can be enforced. It is not necessary for the Company to be a party in any agreement relating to the transfer of issued shares for such an agreement to be specifically enforced between the Parties to the transfer. Consensual agreements between particular shareholders relating to their specific shares do not impose restriction on transferability of shares. Kerala Kaumudi Pvt. Ltd & Ors. [2004] 9 SCC 204

5 ENFORCEABILITY Public Company S. 111A is not a law dealing with the right of the shareholders to enter into consensual arrangement/ agreement by way of pledge, preemption/. Sale or otherwise. The expression freely transferable in section 111A does not mean that the shareholder cannot enter into consensual arrangement/ agreement with the third party (proposed transferee). Messers Holdings Limited [2010] 98 CLA 325 [Also now recognized in the proposed Companies Bill, 2011]

6 POOLLING AGREEMENTS It is an agreement between two or more shareholders which generally provides that in exercising any voting rights, the shares held by the shareholders shall be voted as provided therein; the shareholders bind one another to vote as they mutually agree. These agreements are enforceable because the right to vote is a proprietary right. The right to vote may be aided and effectuated by contract. A pooling agreement may be utilized in connection with the election of directors and shareholders resolutions where shareholders have right to vote. However, it cannot be used to supersede the statutory right given to the board of directors to manage the company. Rolta India Ltd Company Cases (Vol 100) 19

7 EXIT OPTIONS

8 EXIT OPTIONS Call Option Right but not an obligation to buy an asset at a future date at a predetermined price Put Option Right but not an obligation to sell an asset at a future date at a predetermined price

9 EXIT OPTIONS ENFORCEABILITY - ISSUES SCRA Whether Security? FEMA Whether Quasi Debt?

10 SCRA Whether Security? (1/4) APPLICABILITY Private Company shares cannot be sold in market or, in other words, they cannot be said to be marketable and hence not a security [Dahiben Umedbhai Patel [1983] 85 BomLR 275] Public Company (unlisted or listed) listed shares and also unlisted which are capable of being freely transferable are included in the defn of security. Mysore Fruits Products Limited (2005) 107 Bom LR 955

11 SCRA Whether Security? (2/4) LEGAL FRAMEWORK Definition of Security includes inter alia, shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate Delegated Legislation Notification dated March 1, 2000 issued under S. 16 of SCRA - permits only spot delivery contracts in securities to be transacted outside stock exchanges and states that Derivatives can be transacted only on stock exchanges

12 SCRA Whether Security? (3/4) SEBI PERSPECTIVE Exit Options such as Put/ Call are forward contracts in the nature of Derivatives and not Spot Delivery Contracts

13 SCRA Whether Security? (4/4) CURRENT POSITION Exit Rights by way of Put/ Call Option for all public companies (listed or unlisted) considered to be forward contracts or derivatives and therefore, unenforceable, if transacted outside a recognized stock exchange. SEBI Informal Guidance letter in Vulcan Engineering Ltd

14 FEMA Whether Quasi Debt? (1/5) APPLICABILITY FEMA 20 sets out the FDI Policy FDI Policy applicable to all companies, whether private or public

15 FEMA Whether Quasi Debt? (2/5) RBI PERSPECTIVE Put/ Call Option makes an equity investment subject to fixed return and therefore, gives it a character of quasi debt Since, 2007 (post DLF) investment agreements with put/ call options subjected to compounding

16 FEMA Whether Quasi Debt? (3/5) DIPP PERSPECTIVE Consolidated FDI Policy dated October 1, 2011 Equity instruments issued/transferred to non-residents having in-built options or supported by options sold by third parties would lose their equity character and such instruments would have to comply with the extant ECB guidelines Recession - On October 31, 2011, due to industry outcry, DIPP retracts and rescinds the amendment

17 FEMA Whether Quasi Debt? (4/5) LEGAL FRAMEWORK FDI Policy only permits FDI in Equity and instruments compulsorily converted into Equity (CCPS & CCD)

18 FEMA Whether Quasi Debt? (5/5) CURRENT POSITION Although, DIPP has rescinded the amendment, RBI still maintains the view that FDI structured with Put/ Call Exit Options are quasi debt in character and therefore, in contravention of the FDI Policy

19 VODAFONE - SUPREME COURT Shareholders Agreement Transfer Restrictions including ROFR/ TAG/ DRAG Exit Rights including Put Option & Call Option Voting Rights

20 Thank you! Nitin Potdar Partner, M&A J. Sagar Associates advocates & solicitors Delhi Gurgaon Mumbai Bangalore Hyderabad