M&A TRANSACTIONS & COURT RESTRUCTURING Shardul Amarchand Mangaldas & Co
TYPES OF M&A TRANSACTIONS Privileged & Confidential 2
TYPES OF M&A TRANSACTION Acquisition of company Strategic/Financial partnership Acquisition of business undertaking Asset Purchase/Sale Restructuring of business to align with the future strategy Business Combination/ Joint Ventures Succession Planning Privileged & Confidential 3
M& A & CORPORATE RESTUCTURING THROUGH COURT SCHEMES Privileged & Confidential 4
M&A & CORPORATE RESTRUCTURING THROUGH COURT SCHEMES Amalgamation Demerger Slump Sale TYPES OF TRANSACTION Slump Exchange Business Combination In bound transaction Out bound transaction Composite scheme covering one or more transactions above Privileged & Confidential 5
DEMERGER Pre-restructuring Structure- Dalmia Cement (Bharat) Limited Listed Company ( DCBL ). Public (43.4%) Promoters (56.6%) DCBL 56.6% (promoters); 43.4% (public) DCBL has WOS in cement sector ( Cem Co. ). 100% DCBL 21.71% 23. 66% Engaged in cement, sugar, refractory, thermal power, wind power. DCBL holds 21.71% in another group company OCL; 23.66% by promoter of DCBL Cem Co. (Cement) Power Sugar OCL Refractory Privileged & Confidential 6
CONTINUED. Post Restructuring Objectives Chief objective to create a singular cement undertaking. To create structure which is not control dilutive. DCBL D e m e r g e r Cement Refractory Thermal Power Demerger Resulting Company 1 DBEL (100% Sub of DCBL). 100% To organize the business undertakings in better fashion. Cement undertaking Thermal Power undertaking Privileged & Confidential 7
FAMILY SETTLEMENT Pre- restructuring Structure Asian Hotels Limited ( AHL ) listed public limited company. Saraf Group Jatia Group Controlled by Gupta Group Runs three hotel undertakings in Delhi, Kolkata, and Mumbai. AHL In the existing structure, each group has their own interests and thus disputes. With objective of minimizing potential conflicts, restructuring Delhi Undertaking Mumbai Undertaking Kolkata Undertaking was to be done. Privileged & Confidential 8
CONTINUED. Change of name of residual and resulting companies (AHL into AHL (North), Chillwinds into AHL (East) and Vardhman into AHL (West)). Exemption from SEBI Takeover regulations as shareholding of promoters in AHL for more than 3 years deemed to be shareholding of promoters in Resulting Companies. Jatia Group Gupta Group AHL Demerger of 2 undertakings Saraf Group Effective date date of receipt of approval from WB Govt. to vesting of leasehold property belonging to WB Govt./ or filing of order with ROC. AHL (North) (Jatia) AHL (East) (Saraf) AHL (West) (Gupta) Cancellation of shareholding of AHL in Resulting Companies. Residual Co. Resulting Companies Privileged & Confidential 9
COMPOSITE SCHEME Under this scheme- a transaction of amalgamation and slump sale has occurred simultaneously. Amalgamation: Amalgamating Company 1, 2 & 3 the wholly owned subsidiaries of NIIT Limited amalgamated with NIIT Limited. Slump Sale: NIIT Limited transferred its school business undertaking to Hole- In The- Wall education limited for a lump sum consideration. Evolve Services Ltd Amalgamating Co. 1 Scantech Evaluation Services Ltd Amalgamating Co. 2 NIIT Limited Hole- In- The -Wall Education Ltd NIIT Online Learning Ltd School Business Undertaking Amalgamating Co. 3 Privileged & Confidential 10
SLUMP SALE Noble Broadcasting Company Limited ( NBC ) was operating an FM radio broadcasting channel in Chennai along with other web TV & magazines. NBC transferred its FM radio business to HT Music and Entertainment Company Limited as a going concern basis through court scheme under section 391-394 of the Companies Act, 1956. Noble Broadcasting Company Limited Transfer of FM Radio business HT Music and Entertainment Company Limited Privileged & Confidential 11
ISSUES UNDER THE SCHEME A lump sum cash consideration was paid as a consideration for the said transfer instead of issue of shares as seen in most schemes. The effective date under the scheme was subject to the approval from broadcasting regulatory authorities such as Ministry of Information & Broadcasting, Ministry of Communication and Information Technology & Standing Advisory Committee on Radio Frequency Allocation. the scheme even after the court sanction was subject to approval of the regulatory authorities, failing which the scheme was considered to be null & void. Whether slump sale allowed under section 391-394 of 1956 Actconsistent view by HC s- In re Health Products Ltd, In re Nirma Ltd, In re United Spirits Ltd- Section 391-394 is code in itself- single window clearance Privileged & Confidential 12
SLUMP EXCHANGE Jaiprakash Associates Limited vested its entire business of Baspa Hydro Electric project Stage- II & Karcham Wangtoo Hydro Electric Project on slump exchange basis to its wholly owned subsidiary. The transferee company issued its equity shares and Non-convertible debentures to the transferor company. Appointed date same as effective date- effective date subject to approvals Jaiprakash Associates Limited Baspa Hydro Electric project Stage- II & Karcham Wangtoo Hydro Electric Project Equity shares & NCDs Himachal Baspa Power Company Limited Privileged & Confidential 13
CONCEPT OF SLUMP EXCHANGE The term slump exchange - not defined in any statue. Bombay High Court in CIT V. Bharat Bijlee Ltd, held sale of undertaking for consideration other than cash is slump exchange & not slump sale. Slump exchange not liable for tax under section 50 of Income Tax Act, 1961. Privileged & Confidential 14
COURT- BASED RESTRUCTURING PROCESS Privileged & Confidential 15
COURT-BASED RESTRUCTURING - PROCEDURE Implemented through a court scheme u/s. 391-394 of the Companies Act 1956 ( 1956 Act ) read along with Rule 67 87 of Company Court Rules. MCA has issued draft Company (Compromises, Arrangements and Amalgamations) Rules, 2016 dated January 28, 2016 for which public comments were invited by 17 February, 2016 ( New Draft Rules ). The New Draft Rules rules along with relevant sections on compromises and arrangement under the Companies Act, 2013 ( 2013 Act ) are currently not in force. Privileged & Confidential 16
DIFFERENCE BETWEEN COMPROMISE AND ARRANGEMENT COMPROMISE Not defined under 1956 Act or 2013 Act. Compromise - Agreement to settle a dispute between parties. Effect - modifying the settled rights of a party, or enabling enforcement of such settled rights. ARRANGEMENT Arrangement includes a reorganization of the share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes or both (Section 390(b), 1956 Act). Inclusive definition. Not merely restricted to reorganization of share capital. Wide scope and includes several transactions. Composite Schemes of Arrangement Various transactions undertaken through one scheme of arrangement. For example, scheme including merger and demerger. Privileged & Confidential 17
COURT-BASED RESTRUCTURING - PROCEDURE Scheme Approved by the Board of the company. Ist Motion: Application by Company to Court for convening a meeting of the Creditors and Shareholders Company to convene meeting as per directions of the Court for obtaining approval from Creditors or class thereof/ Shareholders or class thereof. Scheme to be sanctioned/approved by majority in number representing 3/4 th in value of the creditors or class thereof/ shareholders or class thereof present and voting. IInd Motion: Company to file petition within 7 days after submitting the report. Court Order to be filed within the prescribed timeline. Upon hearing, after receiving the report from RD or OL and hearing the objections, Court shall make an order sanctioning the scheme. Privileged & Confidential 18
CHANGES INTRODUCED UNDER 2013 ACT AND NEW DRAFT RULES Dispensation of meeting Express provision in the New Draft Rules empowering NCLT to dispense with the requirement of holding meetings of creditors and shareholders. No corresponding shareholders meeting. provision in the 2013 Act for dispensation of Section 230(9) of 2013 Act - NCLT may dispense meeting of creditors, if creditors holding 90% value agrees to the scheme by way of an affidavit. Postal Ballot Section 391(2) of the 1956 Act requires the members to be present physically or through proxy for voting The 2013 Act requires a company to provide option of postal ballot. Privileged & Confidential 19
CHANGES INTRODUCED UNDER 2013 ACT AND NEW DRAFT RULES Notice of the court convened meeting ( Notice ) Notice of at least 30 days (currently 21 days) before the date fixed for meeting. Notice to be advertised in newspapers at least 30 days (currently 21 days) and also to be placed on the website. Notice along with requisite documentation to be sent to various authorities as per section 230(5) of 2013 Act. The New Draft Rules further require the notice to be given: In all cases to the Central Government, ROC, Income Tax Authorities and the official liquidator; If applicable to RBI, SEBI, ROC, CCI, stock exchanges, other sectoral regulators. Any representations, to be sent within 30 days from date of receipt of such notice, failing which it is assumed there are no representations. Privileged & Confidential 20
CHANGES TO INTRODUCED UNDER 2013 ACT AND NEW DRAFT RULES Contents of Notice Diclosures in notice of meeting with the explanatory statement made stricter and streamlined. Currently no prescribed details required to be given in the Explanatory statement Now Explanatory statement must disclose / attach Parties involved in such compromise or arrangement; Appointed date, share exchange ratio and other considerations Summary of valuation report including basis of valuation and fairness opinion of management; Details of capital/debt restructuring, if any Rationale for the compromise or arrangement, its benefits as perceived by board, members, creditors and others, Amount due to unsecured creditors. Valuation Report to be annexed to the notices for the meetings. Privileged & Confidential 21
CHANGES TO INTRODUCED UNDER 2013 ACT AND NEW DRAFT RULES Eligibility Threshold for raising objections persons holding not less than 10% of the value of the shareholding; or persons having outstanding debt amounting to not less than 5% of the total outstanding debt. Accounting Treatment: Requirement to provide an auditor's certificate stating that the accounting treatment is in accordance with the accounting standards. Filing of statement certified by a CA/CS with ROC: by the company indicating whether the scheme is being complied in accordance with the orders - until the completion of the scheme. Express provision empowering NCLT to pass any direction or dispense with any procedure prescribed in the New Draft Rules, except otherwise provided in the 2013 Act. Privileged & Confidential 22
MERGER/AMALGAMATION INVOLVING A LISTED COMPANY SEBI, vide its circular dated February 4, 2013 ( Ist Circular ), significantly revised the requirements for listed companies undertaking a scheme of arrangement. Approval of Audit Committee to draft scheme and valuation report. Submission of Complaints Report to stock exchange and SEBI. Attachment of observations of SEBI and stock exchanges and the Complaints Report with the notices. Disclosure of everything on the websites of companies as well as the stock exchanges. Lock in requirements where shares are to be issued by unlisted companies. Subsequent to the Ist Circular, SEBI issued another Circular on May 21, 2013 ( IInd Circular ) providing clarification and modifying certain provisions of Ist Circular. Clarified that Ist Circular will apply to all listed companies undertaking a scheme of arrangement including those for which no exemption from rule 19(2)(b) of SCRR is sought from SEBI. Independent valuation not required if no change in the shareholding pattern of resultant company. Privileged & Confidential 23
MERGER/AMALGAMATION INVOLVING A LISTED COMPANY Public shareholder approval will only be required when, (a) additional shares are allotted to promoter/promoter group; (b) the scheme of arrangement involves listed company and any other entity involving the promoter/promoter group; and (c) the parent listed company has acquired the equity shares of the subsidiary, by paying consideration in cash or kind in the past to any the shareholders (promoter/promoter group) of the subsidiary and thereafter the same subsidiary is merged with the parent listed company under the scheme. On November 30, 2015, SEBI issued a new circular which replicates the provision laid down in the Ist and the IInd Circular with some minor amendments. Requirement to the fairness opinion elaborated. Additional disclosures to be provided pre-sanction and post sanction of scheme by the Court. Privileged & Confidential 24
CROSS BORDER M&A - ANALYSIS Privileged & Confidential 25
CROSS BORDER M&A - ANALYSIS No express provision under Sections 391-394 of the 1956 Act. Types Merger of foreign company into an Indian company Merger of Indian company into a foreign company Currently only merger of foreign company into an Indian company allowed in terms of section 394(4)(b) of the 1956 Act. foreign company defined to mean a company or a body corporate, incorporated outside India, whether having a place of business in India or not. Under the New Draft Rules, limited to foreign companies incorporated in jurisdictions as notified by the Central Government. Condition for merger: sanction of the scheme by NCLT in India. sanction of the scheme by relevant adjudicating authority and regulatory authorities of the notified countries having jurisdiction over the other company. compliance with FEMA and any other applicable laws, including any approval required to effect the merger. Consideration to be paid to the shareholders of the transferor company in cash and/ or depository receipts. Privileged & Confidential 26
DRAFTING OF SCHEME Privileged & Confidential 27
ROLE OF COURT WHILE SANCTIONING THE SCHEME Settled principle laid down in Supreme Court in Miheer H. Mafatlal vs. Mafatlal Industries Limited - Court not rubber stamp and has to apply its judicious mind; Fairness and reasonableness of Scheme ; Court has to ensure that Compliance with statutory provisions have been complied with. Disclosure of relevant material for meetings. Adequate representation of class of creditors/shareholders. Statutory majority was acting bona fide. Not patently unfair or grossly prejudicial to the shareholders Not violative of any provision of law, neither is contrary to public policy Court does not have jurisdiction or expertise to delve into commercial wisdom of members and creditors and company. Privileged & Confidential 28
IMPORTANT PROVISIONS UNDER A SCHEME Introduction of parties to the scheme. MOA to authorize the business to be undertaken. In Re: Pmp Auto Industries Ltd. Rationale for the scheme Drafting of undertaking clause Valuation Hindustan Lever Employee Union v. Hindustan Lever Ltd. Privileged & Confidential 29
IMPORTANT PROVISIONS UNDER A SCHEME Appointed Date Prospective appointed date In Re: Edelweiss Stock Broking Limited, Gujarat HC, while rejecting the observations of RD, approved the scheme of arrangement with prospective appointed date- in the interest of stakeholders & public. In the matter of In Re HCL Hewlett-Packard Ltd, appointed date- for identification and quantification of assets and liabilities of the existing company- the appointed date of resulting company prior to the date of incorporation of the new company is immaterial. Appointed date same as effective date- In Re: Equitas Finance Limited, Equitas Housing finance limited, Equitas Micro Finance Ltd, Equitas Micro Finance Ltd. Privileged & Confidential 30
IMPORTANT PROVISIONS UNDER A SCHEME Third Party Rights General Radio & Appliances Limited V. M.A. Khadaramalgamation results in transfer of tenancy right, exposing amalgamated company for vacating the premises if land lord does not agree to said transfer. Entrustment provisions- conduct of business till the effective date. Residuary Clause. Effective Date can be made subject to regulation. Modification of Scheme Privileged & Confidential 31
STAMP DUTY ISSUES IN M & A TRANSACTIONS Privileged & Confidential 32
INTRODUCTION In terms of Section 3 of the Indian Stamp Act, 1899 ( Central Act ) instruments shall be chargeable with duty of the amount indicated in the Schedule. For the purposes of this presentation we shall be looking into the following definitions under the Central Act: Instruments - Section 2 (14) - "Instrument" includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or record. Conveyance - Section 2 (10) - "Conveyance" includes a conveyance on sale, every instrument, and every decree or final order of any Civil Court, by which property, whether movable or immovable, is transferred to, or vested in or declared to be of any other person, inter vivos and which is not otherwise specifically provided for by Schedule I or ; Concept of property - legally The Indian Stamp (Amendment) Bill, 2014 proposes an amendment to Section 2 (10) to include, inter alia: (d) every order made by the High Court under section 394 of the Companies Act, 1956 in respect of the amalgamation or reconstruction of companies: Provided that on or after the constitution of the National Company Law Tribunal under section 10FB of the said Companies Act, the reference to High Court under this clause shall be construed as reference to such Tribunal; and Privileged & Confidential 33
STAMP DUTY ON AN ORDER OF THE COURT UNDER SECTION 394 OF 1956 ACT ( ORDER ) The Central Act is silent on the stamp duty payable on such Orders. However, there are diverging views on the issue amongst the States in the form of the following: Some states have specifically amended the state laws levying stamp duty to include Orders. Decisions of various High Courts - where no modification has been made by the States to the definition of conveyance or the relevant entry for conveyance in the Schedule. A number of High Courts as well as the State specific amendments/modification are silent on the issue. Privileged & Confidential 34
STATES WITH SPECIFIC ENTRY PERTAINING TO ORDER Some states (such as Maharashtra, Gujarat, Karnataka, Rajasthan, Andhra Pradesh, Madhya Pradesh ) have amended their respective state laws levying stamp duty, to include an Order within the ambit of the term Conveyance. In such states the prescribed duty shall be applicable. Maharashtra Bombay Stamp Act, 1958 Definition of Conveyance Section 2 (g) Prior to Amendment (g) "conveyance" includes a conveyance on sale and every instrument by which property, whether moveable or immovable, is transferred inter vivos and which is not otherwise specifically provided for by Schedule I. (l) instrument includes every document by which any right or liability is, or purports to be created, transferred, limited, extended, extinguished, or recorded but does not include bill of exchange, promissory note, bill of lading, letter of credit, policy of insurance, transfer of share, debenture, proxy and receipt. After Amendment in 1985 and 1993 (as referred to in Hindustan Lever Ltd. Case) (g) conveyance includes, - (i) a conveyance on sale, (ii) every instrument, (iii) every decree or final order of any civil court, (iv) every order made by the High Court under section 394 of the Companies Act, in respect of amalgamation or reconstruction of companies..; by which property, whether movable or immovable, or any estate or interest in any property is transferred to, or vested in, any person, inter vivos, and which is not otherwise specifically provided for by Schedule I. Hindustan Lever Ltd. v. State of Maharashtra an order of the Court sanctioning scheme of amalgamation u/section 394 read with s. 391 of Companies Act, 1956 would fall within the definition of instrument and conveyance It is exigible to stamp duty (amendment in the law was clarificatory and only by way of abundant caution) Privileged & Confidential 35
DUTY CHARGEABLE IN MAHARASHTRA Entry If relating to the order of the High Court in respect of the amalgamation or reconstruction of companies under section 394 of the 1956 Act or under the order of the Reserve Bank of India under section 44A of the Banking Regulation Act, 1949 Rate 10 per cent of the aggregate of the market value of the shares issued or allotted in exchange or otherwise and the amount of consideration paid for such amalgamation: Provided that, the amount of duty, chargeable under this clause shall not exceed, - (i) an amount equal to 5 per cent of the true market value of the immovable property located within the State of Maharashtra of the transferor company ; or (ii) an amount equal to 0.7 per cent of the aggregate of the market value of the shares issued or allotted in exchange or otherwise and the amount of consideration paid for such amalgamation, whichever is higher: Provided further that, in case of reconstruction of demerger the duty chargeable shall not exceed, - (i) an amount equal to 5 per cent of the true market value of the immovable property located within the State of Maharashtra transferred by the Demerging Company to the Resulting Company; or (ii) an amount equal to 0.7 per centum of the aggregate of the market value of the shares issued or allotted to the Resulting Company and the amount of consideration paid for such demerger, whichever is higher. Privileged & Confidential 36
DUTY CHARGEABLE IN MAHARASHTRA (Contd...) Explanation:- III- (i) For the purposes of clause (da) the market value of shares,-- (a) in relation to the transferee company, whose shares are listed and quoted for trading on a stock exchange, means the market value of shares as on the appointed day mentioned in the Scheme of Amalgamation or when appointed day is not so fixed, the date of order of the High Court; and (b) in relation to the transferee company, whose shares are not listed/or listed but not quoted for trading on a stock exchange, means the market value of the shares issued or allotted with Reference to the market value of the shares of the transferor company or as determined by the Collector after giving the Transferee company an opportunity of being heard. (ii) For the purposes of clause (da), the number of shares issued or allotted in exchange or otherwise shall mean, the number of shares of the transferor company accounted as per exchange ratio as on appointed date. Vide notification M.G.G. Ext. No. 124, Part IV-B dated May 6, 2002, the State Government of Maharashtra has reduced the maximum chargeable duty under Article 25(da) to Rupees Twenty Five Crores only. Privileged & Confidential 37
STATES WHICH ARE GUIDED BY THE DECISIONS OF THE COURT Some states (such as Delhi, and Uttar Pradesh) have adopted the provisions of Central Act with modifications and amendments but have not specifically included such Orders neither under the definition of conveyance nor provided for them in the charging entry of the Schedule. The Courts in these States have opined on the same. Delhi - Delhi Towers Ltd. v. G.N.C.T. of Delhi relied on the Apex Court in Hindustan Lever - Order is an instrument which has the impact of transferring of all assets and liabilities including the property of the transferor company to the transferee company - therefore be exigible to stamp duty under the Indian Stamp Act, 1899. In the above States Issue of computation of stamp duty: Value of shares being issued? Value of assets and liabilities being transferred? Any other consideration being exchanged? Privileged & Confidential 38
STATES WHICH ARE SILENT ON THE ISSUE Some states such as Haryana, Punjab and Bihar have adopted the provisions of Central Act with modifications and amendments. However, they have not included such Orders within these amendments neither under the definition of conveyance nor provided for them in the charging entry of the Schedule. Further, their respective High Courts have also not taken a view on the same. In such states, state notifications or memos are the guidelines for stamping of Orders. However, in Haryana, a recent memo was issued by the Haryana Government to the stamp authorities in the State directing them to impose a stamp duty of 5% on instruments of mergers/amalgamations upon directions/order of the High Court evidencing transfer of property in terms of Article 23 (a) of Schedule I-A of the Indian Stamp Act, 1899. Privileged & Confidential 39
OTHER ISSUES PERTAINING TO STAMPING OF ORDERS Transactions involving registered offices/properties located in multiple States Section 19 A of the modified/amended Central Act as adopted in several states or Section 19 of the State specific stamp legislations -payment of the difference in stamp duty in case documents executed in one State and taken to another State relating to any property situate or to any in matter or thing done or to be done in that State. Chief Controlling Revenue Authority v. Reliance Industries Limited For the purposes of stamp duty, whether the Order of the Court is regarded as the instrument or the scheme? If a reduction in stamp duty is permitted in case of stamp duty already paid in another state? Privileged & Confidential 40
EXCHANGE CONTROL Privileged & Confidential 41
WHEN ARE THE FOREIGN EXCHANGE REGULATIONS TRIGGERED? Resident - Acquires foreign security of a foreign entity Non-resident Acquires security of Indian entity. Privileged & Confidential 42
FOREIGN DIRECT INVESTMENT THROUGH A COURT APPROVED SCHEME The transferee company / new company may issue shares to the shareholders of the transferor company resident outside India, subject to the following conditions: The percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the sectoral cap. The transferor company or the transferee or the new company is not engaged in activities, which are prohibited in terms of FDI policy. Reporting Details of shares held by persons resident outside India before and after acquisition within 30 days. Approval not be required for investment in sectors permitting foreign investment under the Automatic route. (FDI Policy) Implies Government approval required for investment in sectors permitting foreign investment under Government approval route. Privileged & Confidential 43
FOREIGN DIRECT INVESTMENT THROUGH A COURT APPROVED SCHEME (CONTD.) Issuance of non-convertible/redeemable preference shares or debentures to non-resident shareholders is permitted by way of distribution as bonus from its general reserves subject to the following: the original acquisition of shares / convertible debentures of the Indian company by non-resident shareholders entitling them to hold nonconvertible redeemable preference shares or debentures is in accordance with these Regulations and the conditions specified in the relevant Schedule; in accordance with the provisions of the Companies Act, as applicable and the terms and conditions, if any, stipulated in the scheme approved by the Court in India have been complied with; no-objection from the Income Tax Authorities. Privileged & Confidential 44
THANK YOU Inder Mohan Singh Partner Shardul Amarchand Mangaldas & Co. Shardul Amarchand Mangaldas & Co Advocates & Solicitors Amarchand Towers, 216 Okhla Industrial Estate, Phase III, New Delhi - 110 020, India T +91 11 41590700, 40606060 ext. 4387 F: +91 11 2692 4900 Ahmedabad Bengaluru Gurgaon Kolkata Mumbai New Delhi Email: inder.mohan@amsshardul.com Mobile No.: +91-9818927535