SEMINAR ON PRIVATE EQUITY KEY TERMS IN SHARE SUBSCRIPTION AGREEMENT The Western India Regional Council of the Institute of Chartered Accountants July 7, 2012 Ms. Anjuli Sivaramakrishnan Partner Kochhar & Co. 1
CONTENTS Brief overview of a PE transaction Life Cycle of a PE investment Key terms of the investment documents 2
OBJECTIVES OF A PE-INVESTMENT Risk free funding; Supporting the growth of the investee company; Providing management and strategic advice; Return on the investment. 3
PE versus DEBT FUNDING PE Investor Lender Participation rights Substantial Minimal Multiple investors Utilization of the funding Difference in the role of the investor/lender Valuation linked to net worth No restriction Partner Rate of interest unrelated to net worth or growth Stipulated and restricted Third party 4
TYPES OF PE FUNDS OFFSHORE Compliance with FDI norms, RBI pricing guidelines etc. No other registrations required DOMESTIC Registration under the SEBI (Alternative Investment Funds) Regulations, 2012 as Category II investor 5
TYPES OF INSTRUMENTS Type of Instrument Equity Convertible Instruments Convertible Debentures Convertible Preference Shares For Offshore funds, the instrument issued has to be compulsorily convertible to equity else ECB (External Commercial Borrowing) norms would become applicable Typically, offshore PE funds opt for compulsory convertible preference shares 6
LIFE CYCLE Proposal by Investee IPO Sale of Shares Buy Back Evaluation by PE investor Exit Legal and Financial due diligence Portfolio Management Closing Term Sheet (Commercials are agreed) Negotiation and preparation of definitive documentation Execution of Documents 7
INVESTMENT DOCUMENTATION Share subscription Agreement Primary Share Purchase Agreement Secondary Shareholders Agreement 8
KEY TERMS OF INVESTMENT DOCUMENTS Key terms and investor rights would depend upon several factors: The purpose of the investment viz-a-viz the investor and investee Extent of Shareholding Sector specific requirements Core business of company Outcome of Due Diligence 9
KEY TERMS OF THE INVESTMENT DOCUMENTS Equity Structure & Subscription / Purchase Clause Conditions Precedent to Closing Conduct of Business & Confidentiality Representations Covenants Investor Rights Closing Exit Options Indemnification & Remedies Legalese 10
EQUITY STRUCTURE AND SUBSCRIPTION / PURCHASE CLAUSE Ascertain the existing equity and control structure based on existing shareholder agreements, if any, and agree upon the structure post the investment, of the investee. Subject to fulfillment of CPs, express undertaking to subscribe / purchase shares at the agreed price Effect increase in authorized share capital, if required IMPORTANCE Minority rights/majority rights/veto rights available through statute or contract NOCs which may be required from other shareholders 11
CONDITIONS PRECEDENT TO CLOSING Appropriate amendments to the MOA / AOA Taking steps to remedy all red / orange / green flag issues Obtaining necessary approvals, if required Taking necessary corporate actions required to effectuate the proposed subscription (i.e. special resolution, NOC etc) 12
CONDUCT OF BUSINESS & CONFIDENTIALITY Reasonable restrictions with respect to business, liabilities etc. Non-Disclosure Obligations with respect to terms and negotiations Public announcements and media management No discussion with third parties 13
REPRESENTATIONS Representations form the basis of the investment & a breach thereof could be an event of default Illustratively, representations made by the investee would include the following: Existence, capacity and authority to contract Issued and outstanding share capital Unencumbered shares Authorizations, permits and compliance with applicable laws Material agreements, financial statements, assets and taxes Anti competitive issues Litigation, arbitration & administrative proceedings Accuracy and completeness of due diligence disclosures No material adverse change 14
COVENANTS Covenants could be both affirmative and negative Illustratively, covenants would be as follows: Undertake business according to law Maintain business licenses and approvals Submission of reports Business plan Intimate regarding change in ownership Milestones to be achieved Intellectual property No default of third party contracts Related party transaction No conflict of interest Non Compete 15
INVESTOR RIGHTS The parties generally negotiate on the following aspects: Right to appoint directors on the Board of Directors, committee of directors Information, visit and audit rights Agreement as to return on investment Affirmative voting rights in board and shareholder meetings: Raising of debts Acquisition or Disposition of assets Transfer of shares Entering into business contracts exceeding an agreed threshold amount Issuance of further shares or debentures or guarantees Business Plan Change in business or objects of the investee company Related party transactions Merger, amalgamation, re-organization ESOP Any action having a material adverse effect on the investor 16
INVESTOR RIGHTS Right of First Refusal Rights of First Offer Tag along/drag along rights Anti-dilution rights Liquidation preference 17
CLOSING Place and Date of Closing Closing Actions (fulfillment of CPs) Escrow Arrangement Allotment / transfer of shares Post closing actions Reconstitution of the Board RBI filings (if required) Public announcement 18
EXIT OPTIONS IPO GDR / ADR Listing Put and Call Option Transfer of shares to third party Buy back 19
INDEMNIFICATION AND REMEDIES Mechanism for breach Remediation Indemnification Events of default Consequences of event of default 20
LEGALESE Governing law & Jurisdiction Dispute Resolution Waiver Assignment Cost and expenses Notices Severability Stamp duty Counterparts Force majeure Change in law Consistency 21
THANK YOU 22