1 KEY ISSUES IN DOING M&A TRANSACTIONS IN INDIA Shivpriya Nanda Partner J Sagar Associates Advocates & Solicitors New Delhi Mumbai Bangalore August 4, 2006

2 Definitions & Backdrop  Merger : Target is usually subsumed and loses corporate identity  Acquisition: Target or its business is acquired but Target continues to maintain its legal entity status  Cross border merger of a foreign body corporate in to an Indian Company permissible - but is rare in practice  Cross border merger of an Indian company in to foreign body corporate not permissible  Cross border acquisition – in bound and out bound permissible

3 Presentation Context & Focus  Acquisition of an Indian company by a foreign entity  Foreign entity merger in to an Indian company  Regulatory & Contractual Issues

4 Regulatory Issues : Acquisitions Foreign Exchange Regulations FOREIGN DIRECT INVESTMENT POLICY (“FDI POLICY”) & FEMA  FDI upto 100% is permitted through automatic route in all sectors except: –Activities / items that require an Industrial License (e.g. Cigarettes, Electronic Aerospace and Defence Production). –Where the Foreign Collaborator has an existing financial / technical collaboration in the same field. –Acquisition of shares in an existing Indian company in:  financial service sector;  where the Takeovers Code is attracted

5 Regulatory Issues : Acquisitions Foreign Exchange Regulations –Proposal falling outside notified sectoral policy / caps (e.g. Asset Reconstruction Companies 49%, Broadcasting 49%, Defence Production 26%, Insurance 26%, Refinery 26% in case of PSU, Print Media (newspapers and periodicals) 26%). –Prohibited Sectors:  Retail (except single brand product retailing);  Atomic Energy;  Lottery Business;  Gambling and betting. –Foreign Investment of more than 24% for manufacture of item reserved for Small Scale Sector.  All investment proposals not covered by Automatic Route require approval of Foreign Investment Promotion Board.

6 Regulatory Issues : Acquisitions Foreign Exchange Regulations  Pricing Norms –Minimum pricing norms apply : equal to or greater than the value of the shares as per CCI guidelines

7 Regulatory Issues : Acquisitions Indian policy prescriptions and practice make a hostile bid for a listed entity an impossibility!!  FEMA Rules provide that any acquisition which triggers “Takeover Code” requires prior approval of FIPB  Practice requires that FIPB application be supported by Resolution of the Board of the Target

8 Regulatory White Knight ! “Don’t worry about his reputation as a corporate raider. Our white knight is FEMA”

9 Regulatory Issues in Acquisitions: Takeover Code  Listed Indian Companies subject to Takeover Code  Acquirer (and persons acting in concert) acquiring 15% or more of equity shares or voting rights to make a tender offer for at least an additional 20% of shares of the Target  Pricing norms for tender offer – highest of –contracted price; –average of weekly high and low closing price for last six months; –average of daily high and low closing price over the last two weeks; and –price at which acquirer may have made any acquisition in the last six months  Off shore change in control of holding company triggers Takeover Code of Indian listed entity

10 Regulatory Issues in Acquisitions: Takeover Code  Off shore merger of holding structure one of the exceptions to the Takeover Code  Provisions for “creeping” acquisition – 15 to not more than 5% a year  Specific obligations triggering at various levels of holdings  Comprehensive code provides for competing bids  Strict requirements for public announcement, disclosures and compliance timelines  Tough penalties for breach of the Code  Private agreement to acquire enforced only after compliance with applicable provisions of Takeover Code

11 Regulatory Issues in Acquisitions: Takeover Code  Pricing –Pricing of Shares subject to valuation under CCI Guidelines

12 Regulatory Issues Acquisitions: Companies Act  Competition Law – amendments pending  But Section 108A to G of the Companies Act prescribes prior approval requirement if acquisition –is by a “dominant undertaking” –will create a dominant undertaking  Relevant market definitions not perfect and “dominance” precedents under Sections 108 A to G do not exist

13 Merger  Companies Act description of common parlance merger: –“amalgamation” of two or more companies” –under a Scheme of “arrangement” –which provides for undertaking of the “transferor” (merging company) to be transferred to “transferee” (the merged company – or the resultant entity)  Court sanctions scheme of “arrangement” : highly process driven  Court would not go in to commercial merits though it seeks to ensure that the scheme is not detrimental to the interest of the shareholders and creditors

14 Regulatory Issues in Mergers: FEMA  Merger of two or more Indian companies: merged entity shares issued automatically to non resident shareholders of merging entity subject to percentage holding, meeting the criteria set out in approval.

15 Regulatory Issues in Mergers: SEBI & Stock Exchange  Listing Agreement requires one month prior submission of scheme with Stock Exchange for approval – if refused appeal to SAT  Exemption from Takeover Code for acquisition of shares pursuant to a scheme of arrangement or reconstruction under any law, Indian or foreign  Disclosure required  Compliance with Delisting Guidelines if public shareholding in merged entity falls below requirement of listing agreement – usually 25%

16 Regulatory Issues in Mergers: Companies Act  Section : Complete code on Mergers  Detailed procedure and forms under the Company (Court) Rules 1959  Transnational scheme of arrangements – only if Indian entity is the merged entity – not the other way around  Squeeze out provisions for compulsory acquisition of dissenting shareholders up to 10%

17 Contractual Issues  Key commercial and contractual issues are about the same in a merger or acquistion  The intended end commercial result is usually the same – money or money’s worth (stock) is paid for acquiring a business  Determination, certainty, accuracy and preservation of value is at the core of it  Due diligence, reps and warranties and indemnities and covenants rule the landscape of contractual issues

18 Due Diligence  Usual –corporate records –property title check –liabilities –contingent liabilities –pending and potential legal claims etc –Regulatory compliances

19 Lawyer’s Delight :Reps, Warranties & Indemnities  Who represents and warrants –more complex question in case of merger  Absolute or qualified - match the concerns raised in the Due Diligence  Limitation : different levels – e.g., tax liabilities 7 or more years  Enforceability of liquidated damages - In India LD becomes a cap - penal damages will not be enforced.  Threshold for invoking indemnity claims- individual and aggregate thresholds  Cap on indemnity liability  Use of Escrow by acquirer to recover indemnity claims

20 Non-compete  Usual to insert a non-compete but enforcement specific or otherwise a big question mark – though Indian law different from usual common law rule of “reasonable restriction” acceptability  Section 27 of Contract Act renders “void” a non-compete restrictions except in case of “sale of a business” with goodwill and that too with specific limitations on duration, scope and geographic extent  Exception not helpful in cases of share acquisition  E.g., Selling Shareholders cannot be prevented from undertaking employment in a competing business but a back ended consulting agreement could work  Confidentiality obligations are enforceable

21 Some other critical points … Usually more relevant in an acquisition  Continuing or transferring employee benefit plans;  Notifying parties to contracts;  Dispute resolution

22 THANKS FOR YOUR ATTENTION