M&A IN INDIA LEGAL CHALLENGES Somasekhar Sundaresan Mumbai June 28, 2007 J. Sagar Associates New Delhi Mumbai Bangalore Hyderabad 1
INDIAN M&A ENVIRONMENT Cross-border deals outsize domestic M&A Foreign direct investment is a key M&A driver Entry barriers on FDI are getting more qualitative than quantitative Average deal size steadily rising Greater sophistication in the ecosystem 35 30 25 20 15 10 5 0 2004 (USD Bn) 2005 (USD Bn) 2006 (USD Bn) 2007 (USD Bn) Cross-border Domestic 2
INDIAN M&A ENVIRONMENT Falling exchange controls Means abound Foreign Equity and Debt more accessible Indian multi-nationals abound even locally Greater confidence levels Even domestic companies engage international CEOs 600 400 200 Outbound M&A Deal Size 0 2004 (USD Mn) 2005 (USD Mn) 2006 (USD Mn) 2007 (USD Mn) 3
INDIAN M&A ENVIRONMENT Key Indian laws that impact M&A Exchange controls and foreign investment policy Sectoral regulatory requirements Indian securities laws Indian company law Enforcement of shareholder agreements Taxation Double-taxation avoidance jurisdictions Singapore vs Mauritius Private Equity playing an increasing role Better valuations than strategic players Introduction of professional boards Absence of strategic track record irrelevant 4
TYPES OF M&A TRANSACTIONS Joint Ventures PIPEs Control buy-outs Leveraged buy-outs (for overseas investment) Business Purchases Asset Purchases Friendly / hostile takeovers 5
DEAL STRUCTURES SLUMP SALE Contractual sale of business ASSET PURCHASES COURT-OVERSEEN ARRANGEMENTS Mergers De-mergers Other arrangements SHARE PURCHASES 6
SLUMP SALE Contractual purchase of an undertaking All assets and liabilities comprising the undertaking Fastest course of M&A Requires only a simple majority vote (Section 293) Even for the sale of entire undertaking of the company Undertaking assets and liabilities collectively bundled Undertaking to be valued as a business No individual values to be ascribed to any specific asset or liability Governance Issues Execution risks 7
SLUMP SALE ISSUES CONCERNS Undertaking to be valued as a business No individual values ascribed to any specific asset or liability Identification of related liabilities; Past transactions and third party claims Employees - fresh negotiated terms or as transfer of undertaking preserving not less favourable status Stamp duty on Immovable property and IP Assignment; though Sales Tax saved Distribution of proceeds to shareholders as dividend results in tax leakage Extensive diligence and indemnity provisions significantly similar to a full entity acquisition 8
ASSET PURCHASES Acquirer may cherry pick pre-identified assets Concerns: Stamp duty on immovable property and IP Assignment (5-13%); Sales tax on movable, and IP in some states, (8-12%) Assignment of Contracts Permits and licenses generally to be freshly obtained Carry forward of losses of the target not possible in the hands of the Acquirer Capital Gains for the Seller 9
COURT-OVERSEEN SCHEMES Companies Act has a self-contained code for M&A Sections 391 394 of the Companies Act, 1956 Room for conceptual creativity Subject to taxation implications Cherry-picking is difficult De-merger Entire undertaking spliced out into another Shareholders become shareholders of new company Amalgamation / Merger One company merges into another Shareholders of Transferor Company become shareholders of Transferee Company 10
COURT SCHEMES ISSUES Court order binds the world at large Role of Court perceived as anachronistic Creative structuring has led to discomfort among regulators Court is only a referee Focus is primarily on technical compliance and self-certification Takeover Code is not applicable Preferential allotment guidelines are not applicable Schemes have disgorged shares from investors Other aspects Process driven and time consuming Tax neutral for Shareholders and the companies Tax carry forward of losses possible subject to conditions Immovable property leases transfer not automatic Stamp duty implications Merger of Indian entity into foreign entity not possible Exchange control implications 11
SHARE ACQUISITIONS ISSUES No change in operating legal entity Takeover Regulations apply to listed companies Open Offer to public shareholders Minimum Offer Price Detailed procedural mechanism Criminal consequences Concerns: Extensive diligence, reps, warranties, and indemnities Insider Trading issues for listed companies All explicit and contingent liabilities assumed Leverage on the target company difficult for public companies 12
Don t worry about his reputation as a corporate raider. Our white knights are FIPB and SEBI 13
INBOUND EXCHANGE CONTROLS Cross-border share transfers not fully free Financial services companies RBI controls FIPB clearance in case of existing ventures in same field No freedom yet for free foreign hostile takeovers Pricing restrictions apply to free transfers Inward remittances ought to equal at least CCI valuation Outward remittance to be a fair value Contingent conversions can pose issues Partly-paid shares and earn-out structures can prove difficult Convertible securities must be mandatorily and fully convertible into equity shares 14
OUTBOUND EXCHANGE CONTROLS Overseas entity must be engaged in bona fide business ODI in real estate and banking restricted Overseas financial commitments capped at 300% of networth of Indian company This includes 100% of equity, debt and guarantee contributions for all JVs/WOS abroad Share price as per a valuation conducted by a merchant banker (for more than USD 5 million) or a CA/CPA Acquisition by way of a swap of Indian shares requires FIPB approval Overseas investments by and in financial services companies subject to further restrictions Disinvestment only after one year of incorporation of entity and subject to certain restrictions 15
OTHER ISSUES Competition Law Non-compete arrangements Governing law and Dispute resolution Tribunals to replace Company Courts Sectoral regulatory approvals FIPB and RBI can be a difficult ground Scrutiny of Stock Exchanges over even court-overseen Schemes Listing Agreement issues Minimum Public Shareholding Issues Delisting Guidelines Stamp Duty issues 16
THANK YOU somasekhar@jsalaw.com 17