Presentation 06-8-13

LEGAL ASPECTS OF MERGERS &
ACQUISITIONS
NEW DELHI | MUMBAI | BANGALORE

August 9, 2013
Sameen Vyas
Partner
Luthra & Luthra Law Offices
www.luthra.com
OVERVIEW
Modes of Acquisition
o
Stock Deal Vs Asset/Business Deal
Transaction Process Stock Deal

o
Due Diligence
Definitive Documentation
Key Approvals
www.luthra.com

2
MODES OF ACQUISITION
Acquisition of securities of an existing target company (Target
Company)
o Primary investment - by way of subscription to fresh securities
(shares, debentures, preference shares, warrants etc.) of the Target
o Secondary investment - by way of acquisition of equity/ preference
shares from existing shareholders of the Target
Acquisition of an entire business/ undertaking as a going concern on a
slump sale basis
o Contractual slump sale
o Court approved scheme (Section 391- 394 of the Companies Act)
Application to jurisdiction High Court to convene shareholders
and creditors meetings
www.luthra.com

3
MODES OF ACQUISITION contd
Scheme has to be approved by 3/4th majority of shareholders and

creditors present and voting- and thereafter by High Court
In case Target is listed entity, scheme can be acted upon only if the
votes cast by the public shareholders approving the scheme is twice
the number of votes cast by public shareholders against it
In case Target is a listed entity, scheme has to be submitted (for
approval) to stock exchange, one month prior to submission with High
Court
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o Court Approved Slump sale: Indicative Types Of Structures
Structure 1: Demerger
Acquirer acquires shares of Target Subsidiary

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Structure 2: Hive-off
Acquirer acquires shares of Target Subsidiary

o Structure 3: Slump sale directly to Acquirer
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MODES OF ACQUISITIONcontd
Acquisition of certain select assets / liabilities of the Target
Mergers and amalgamations under Section 391 - 394 of the Companies

Act
Formation of a fresh joint venture and incorporation of a joint venture

company
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7
KEY DIFFERENCES BETWEEN A STOCK DEAL

AND AN ASSET/ BUSINESS DEAL
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KEY DIFFERENCES BETWEEN A STOCK DEAL

AND AN ASSET/ BUSINESS DEAL ...contd
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TRANSACTION PROCESS: STOCK DEAL

AN OVERVIEW
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10
DUE DILIGENCE: KEY ASPECTS
Structure and design the due diligence exercise depending on the:

o
o
o
o
Business of the Target

Nature of the transaction
Determination of materiality from a commercial perspective
Listed Companies
Purpose of a due diligence exercise:

o
o
o
o
o
Risk Matrix
Identification of potential value depletors
Determination of conditions precedent
Critical for evaluation of representations and warranties
Identification of items for specific indemnities
www.luthra.com

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DUE DILIGENCE: KEY ASPECTS ...contd
Key Areas to be covered in a legal due diligence exercise
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www.luthra.com

13
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15
TRANSACTIONAL ISSUES: LEGAL

DOCUMENTATION
Confidentiality /non-disclosure agreements

o
o
Information Memorandum
o
Covers financial, technical, legal and other information disclosed to Acquirer

Duration of confidentiality obligations
Overview of operations, financials and prospects of the Target
Term Sheet
o
o
Broad contours of parties understanding

Binding or non-binding (with some binding provisions such as confidentiality,
governing law, non-solicitation )
Acquisition Agreement
Shareholders Agreement
www.luthra.com

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DEFINITIVE DOCUMENTATION:
ACQUISITION AGREEMENT
Key terms
o
Conditions Precedent
Purchase Price & Adjustments
Covenants between signing and closing
Closing
Representations & Warranties
Indemnification
Limitation of Liability
Non-compete & Non-solicitation
Confidentiality
www.luthra.com

17
DEFINITIVE DOCUMENTATION :
ACQUISITION AGREEMENT contd
Conditions precedent
o
From Acquirers perspective, conditions precedent represent

walk-out right if all the conditions precedent are not satisfied
by a specified date i.e Long Stop Date
From Target / Sellers perspective, conditions precedent should

be as precise (and objective) as possible
Some common examples:
Statutory approvals such as Competition Act, FDI policy

related
Consents from counterparties (in case of contracts having
change-in-control provisions)
www.luthra.com

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No breach of representations, warranties, covenants and

undertakings of Sellers
No event having material adverse effect having occurred
No-objection certificate under Section 281, Income Tax Act,
1961
Tax withholding certificate (especially if Seller is a nonresident entity)
Conduct of a satisfactory due diligence by Acquirer
www.luthra.com

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ACQUISITION AGREEMENTcontd
Covenants of Target / Sellers between signing and closing

o
o
o
o
o
o
o
Carry on business in the ordinary course, and in accordance

with applicable law
Not incur any material indebtedness
Not issue or allot securities of the Target, or grant to any
person, the right or option to acquire the same
Not sell, transfer or create encumbrances over the assets of
the Target
Not enter into, terminate or amend any material contract
including with key employees
Not declare any dividends
Not amend the charter documents of the Target
www.luthra.com

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Purchase Price Adjustments : Key issues

o
Post-closing purchase price adjustments may pose certain

challenges:
If Acquirer is a non-resident entity:
any upward revisions to purchase price post closing

may be seen as deferred payment of considerationand would require prior RBI approval
Form FC-TRS
has to be filed within 60 days of receipt of
consideration;
and transfer of shares can be recorded by the Target
only after the same has been certified by AD-Bank
If Target is a listed entity and open offer is triggered

www.luthra.com

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Representations and warranties

o
o
o
Walk-out right prior to Closing- and indemnification right post

Closing
Repetition as of effective date / closing date
Some common examples:
Title to shares, and no prior encumbrances thereon

Requisite corporate power and authority and consents to
carry on business
Due authorization to execute, deliver and perform
Target has good and marketable title to assets
www.luthra.com

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Financial Statements
Have been prepared in accordance with Indian GAAP;

Same fairly and accurately represent position of Target
All licenses required for business have been duly procured

and the same are valid;
Compliance with applicable law
Foreign Corrupt Practices Act, 1977 / Prevention of
Corruption Act, 1988
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Representations and warranties

o
o
Knowledge qualifiers
Disclosure Schedule
Updation of disclosure schedule between signing and

closing
All information disclosed during due diligence constitutes
disclosure?
Survival Period for representations and warranties
Title
Tax
Environmental
Others
www.luthra.com

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Indemnity
o
o
General indemnity for breach of representations / warranties /

covenants
Specific indemnities on account of particular items such as noncompliances, tax issues such as withholding, pending proceedings
against Seller
Limitation of Liability
o
o
o
Aggregate cap on liability

De-minimus threshold
Time limitation on claims
www.luthra.com

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SHAREHOLDERS AGREEMENT
Key Terms
o
Management & Quorum Rights- at Board and Shareholders

meetings
Funding Commitment and Business Plan
Information rights
Liquidation preference
Transfer of Shares & Restrictions thereon
Future Funding and anti-dilution
Deadlock and mechanisms for exit
Events of default & exit on account of the same
Non-compete
Confidentiality
www.luthra.com

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SHAREHOLDERS AGREEMENT...contd
Management rights
o
Board representation (including at committee level)

Concept of control under FDI policy- right to appoint
majority directors
o
o
Quorum in Board and Shareholders meetings

Affirmative vote items
Concept of control FDI Policy, Take Over Code
Right to appoint / nominate key management personnel
Deadlock resolution mechanisms
Information rights
Minimum shareholding thresholds linked rights
o
o
o
o
www.luthra.com

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SHAREHOLDERS AGREEMENT ...contd
Restrictions on transfer of shares

o
o
Lock- ins and Escrow Mechanism

Right of first refusal / right of first offer
Restrictions on sale to competitor
o
o
o
Call / put options

Tag- along rights (usually minority / private equity)
Drag along rights (usually majority partners)
Restrictions on sale to competitor
Validity on restrictions on transfer of shares in case of a public company

o
Different High Courts have taken different views
www.luthra.com

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SHAREHOLDERS AGREEMENT contd
Future funding and anti-dilution rights

o
Funding Commitment linked to business plan
Default/ Deadlock Exit

o
Valuation
o
Pricing regulations stipulated under FDI policy
Exit mechanisms (particularly for private equity investors)

o
Put Option
Concerns from an FDI perspective
Enforceability in case of public companies: Securities Contracts

(Regulation) Act, 1956
o
Buy-back by Target
o
IPO
o
Sale to another financial /strategic investor
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SHAREHOLDERS AGREEMENT ...contd
Non-compete and non-solicitation obligations during and post

termination of agreement
o
o
Enforceability of non-compete/non-solicit obligations under Indian

law; Section 27 of the Indian Contract Act, 1872
Enforceable only when linked to sale of goodwill- and when such
restriction appears reasonable (in time and scope) to the Court
having regard to the nature of business.
Dispute resolution mechanisms

o
o
o
Litigation vis--vis arbitration

Choosing the seat of arbitration and the governing law thereof
In case seat of arbitration is outside India, parties to arbitration
cannot approach Indian courts for interim relief etc
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KEY APPROVALS /REQUIREMENTS
Companies Act, 1956
Competition Act, 2002
Take Over Code / Listing Agreement
Foreign Direct Investment Policy
Sector specific regulations
www.luthra.com

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KEY APPROVALS /REQUIREMENTS:

COMPETITION ACT, 2002
Applicable to combinations defined as:

acquisition of shares, voting rights, assets and control
over an enterprise
acquisition of control over an enterprise when the
acquirer already has direct or indirect control over
another enterprise engaged in production, distribution or
trading of a similar/substitutable good/services
mergers and amalgamations
where certain thresholds are met
Thresholds linked to value of assets or turnover of:
Individual parties to the acquisition or the group

in India or globally
www.luthra.com

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COMPETITION ACT, 2002
Importantly, transactions where the Target entity has either:

assets of not more than INR 2.5 billion in India; or
turnover of not more than INR 7.5 billion in India
have been exempt till March 2016
o
o
India is a suspensory jurisdiction

o
no notifiable transaction can be consummated without obtaining

the prior approval of the Competition Commission of India
(CCI)
Certain transactions have been exempted from the
requirement of giving notice
www.luthra.com

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COMPETITION ACT, 2002 ...contd
Any person who proposes to enter into a combination is required

to give notice of the same to the CCI within 30 days of:
o
approval of proposal relating to the merger/amalgamation, by

the board of directors of the entities involved in the
merger/amalgamation
execution of any agreement or other document for acquisition
of shares, voting rights, assets or control
No notifiable transaction can be consummated until the expiry of 210

days from the date on which notice has been given to the CCI,
or the CCI has passed orders, whichever is earlier
CCI examines whether combination causes or is likely to cause

appreciable adverse effect on competition
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KEY APPROVALS/REQUIREMENTS:
TAKE OVER CODE
Applicable to direct and indirect acquisition of shares/ voting rights

in, or control over the Target
o
Concept negative control
Mandatory open offer to public shareholders triggered upon:

o
o
Initial Threshold: Acquisition of 25% or more voting rights in the

target
Creeping Acquisition: For any person holding (individually and with
persons acting in concert) between 25%-75% of the share capital,
acquisition of more than 5% shares in any financial year
Direct or indirect acquisition of control
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TAKE OVER CODE
Minimum Offer Size: 26%
Public Announcement to be made on:

o
the date of agreeing to acquire shares or voting rights in or control over
the target company.
Offer Price
o
Highest of:
Negotiated price per share under the agreement which attracted

the requirement to make open offer- which will also include any
control premium/non-compete fee etc. agreed to be paid to
the promoter
Volume weighted average price paid or payable by acquirer

for acquisitions during 52 weeks preceding date of public
announcement
Highest price paid or payable by acquirer for acquisitions

during 26 weeks preceding date of public announcement
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TAKE OVER CODE
o
o
o
If shares are frequently traded, volume weighted average

market price of such shares for a period of 60 days
immediately preceding the date of public announcement
If shares are not frequently traded, price determined by acquirer
and manager to offer
Where acquirer has any outstanding convertible securities,
the conversion price of such securities also taken into
consideration
Withdrawal from open offer allowed in limited circumstances
Voluntary Offer:
o
person holding between 25-75% of the shares/voting rights can make a

voluntary offer for acquiring atleast 10% additional shares/voting right
subject to certain condition
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KEY APPROVALS/ REQUIREMENTS: FOREIGN

DIRECT INVESTMENT POLICY
Highly liberalized policy
FDI permitted in almost all sectors other than:

o
o
o
o
o
lottery business
gambling and betting
chit funds
nidhi companies
manufacturing of cigarettes, cigars
etc, or of tobacco and tobacco
substitutes
o trading in transferrable
development rights
o real estate business or
construction of farm houses
o atomic energy, and
o railway transport
Prior governmental approval required for very few sectors such as:
o Defence
o Single brand retail
o Multi-brand retail
o Aviation
o Pharmaceuticals (Brownfield)
o Print media
www.luthra.com

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KEY APPROVALS/ REQUIREMENTS: FOREIGN

DIRECT INVESTMENT POLICYcontd
Only equity shares, fully and compulsorily convertible debentures or

fully and compulsorily convertible preference shares can be issued by
Indian companies
o
o
Dividends (net of taxes) are freely repatriable

Price/conversion formula of convertible capital instruments to be
determined upfront at the time of issuance of instruments
o
o
Price at time of conversion of the instrument cannot be less

than fair value (DCF value for unlisted companies, and SEBI
(ICDR) valuation for listed companies) of the instruments at the
time of issuance
Rate of return / interest on CCPS/CCD capped under the FDI

policy.
All other instruments such as optionally convertible preference
shares etc. treated as external commercial borrowing
www.luthra.com

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KEY APPROVALS/REQUIREMENTS: FOREIGN

DIRECT INVESTMENT POLICY ...contd
Pricing Guidelines :Computation of fair value (Fair Value) on the basis of :
Unlisted companies: Discounted Free Cash Flow Method

Listed Companies: SEBI guidelines
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40
THANK YOU
9th Floor & 103, Ashoka Estate,

Barakhamba Road, New Delhi-110001
Tel: 91-11-41215100 Fax: 91-11-23723909 e-mail: svyas@luthra.com
www.luthra.com

41

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LEGAL ASPECTS OF MERGERS &

NEW DELHI | MUMBAI | BANGALORE

Stock Deal Vs Asset/Business Deal

Transaction Process Stock Deal

Luthra & Luthra Law Offices

Luthra & Luthra Law Offices

MODES OF ACQUISITION contd

Scheme has to be approved by 3/4th majority of shareholders and

Luthra & Luthra Law Offices

MODES OF ACQUISITION contd

Acquirer acquires shares of Target Subsidiary

Luthra & Luthra Law Offices

MODES OF ACQUISITION contd

Acquirer acquires shares of Target Subsidiary

Luthra & Luthra Law Offices

Acquisition of certain select assets / liabilities of the Target

Mergers and amalgamations under Section 391 - 394 of the Companies

Formation of a fresh joint venture and incorporation of a joint venture

Luthra & Luthra Law Offices

KEY DIFFERENCES BETWEEN A STOCK DEAL

Luthra & Luthra Law Offices

KEY DIFFERENCES BETWEEN A STOCK DEAL

Luthra & Luthra Law Offices

TRANSACTION PROCESS: STOCK DEAL

Luthra & Luthra Law Offices

DUE DILIGENCE: KEY ASPECTS

Structure and design the due diligence exercise depending on the:

Business of the Target

Purpose of a due diligence exercise:

Luthra & Luthra Law Offices

DUE DILIGENCE: KEY ASPECTS ...contd

Key Areas to be covered in a legal due diligence exercise

Luthra & Luthra Law Offices

DUE DILIGENCE: KEY ASPECTS ...contd

Luthra & Luthra Law Offices

DUE DILIGENCE: KEY ASPECTS ...contd

Luthra & Luthra Law Offices

DUE DILIGENCE: KEY ASPECTS ...contd

Luthra & Luthra Law Offices

TRANSACTIONAL ISSUES: LEGAL

Confidentiality /non-disclosure agreements

Covers financial, technical, legal and other information disclosed to Acquirer

Overview of operations, financials and prospects of the Target

Broad contours of parties understanding

Luthra & Luthra Law Offices

Purchase Price & Adjustments

Covenants between signing and closing

Representations & Warranties

Non-compete & Non-solicitation

Luthra & Luthra Law Offices

From Acquirers perspective, conditions precedent represent

From Target / Sellers perspective, conditions precedent should

Some common examples:

Statutory approvals such as Competition Act, FDI policy

Luthra & Luthra Law Offices

No breach of representations, warranties, covenants and

Luthra & Luthra Law Offices

Covenants of Target / Sellers between signing and closing

Carry on business in the ordinary course, and in accordance

Luthra & Luthra Law Offices

Purchase Price Adjustments : Key issues

Post-closing purchase price adjustments may pose certain

If Acquirer is a non-resident entity:

any upward revisions to purchase price post closing