Microsoft PowerPoint - Business Restructuring.pptxIndirect TaxIndirect TaxIndirect TaxIndirect Tax
Companies ActCompanies ActCompanies ActCompanies Act
Direct Tax Direct Tax Direct Tax Direct Tax
Laws affecting Laws affecting Laws affecting Laws affecting M&AM&AM&AM&A
Accounting Standards / Accounting Standards / Accounting Standards / Accounting Standards / GAAPGAAPGAAPGAAP
FDI & Exchange FDI & Exchange FDI & Exchange FDI & Exchange ControlControlControlControl
Competition ActCompetition ActCompetition ActCompetition Act Stamp Duty Stamp Duty Stamp Duty Stamp Duty
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SEBI Circulars* & Listing Agreement SEBI Circulars* & Listing Agreement
SEBI (SAST) Regulations, 2011
SEBI (SAST) Regulations, 2011
Regulations, 2009
Regulations, 2009
impacting mergers & demergers?
same?
India? (Incl. Summary of Discussion paper on review of delisting
regulations)
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In recent times, SEBI has widened its scope to ensure increased degree of transparency, disclosure and to protect interest of minority shareholders
Some key amendments/ proposals introduced include– SEBI Circulars dealing with Scheme of Arrangements
Amendments in Clause 35B and Clause 49 (Corporate Governance norms) Amendments in Clause 35B and Clause 49 (Corporate Governance norms)
Review of Clause 36 to ensure adequate and timely disclosure
Proposal to enhance scope of listing and disclosure norms
Discussion paper on Review of Delisting Regulations
Refer a case in the ensuing slide where SEBI intervened in the interest of minority shareholders
Accordingly, compliance with SEBI regulations is critical to success of an M & A transaction
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Step 1 – A Co to acquire 24% stake in H Co. for cash - Rs 35bn (No shareholder approval required)
HM
40.83 %
0.29%
Outside
India
Step 2 – H Co. to merge with A Co. (Approval required).
HM
(Unlisted)
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2
(Unlisted)
Refer ensuing slides for key issues and SEBI Regulations…… 5
Key issues
A Co required to obtain shareholder’s approval (majority of minority) only for merger transaction and not for acquisition of 24% stake in H Co.
However, pursuant to step 1cash of Rs 35 bn transferred from A Co.
Consequently, as cash has already left A Co, shareholders have no option but to vote FOR the merger resolution
In case minority shareholders vote against the resolution – A Co. would have transferred all its cash
SEBI Impact
SEBI has observed that ‘the agreement and the draft Scheme of Arrangement are interdependent transactions and not independent transactions
Approval of minority shareholders to be complied with separately for Step 1
Accordingly, both parts of the deal are contingent on each other and that the purchase of 24 percent of H Co. for Rs 35 bn cannot be acted upon unless the scheme is approved and that minority shareholders will get to vote on both parts of the transaction and in both votes, the majority of the minority will prevail.
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Regulatory Scenario prior to SEBI Circular – o SE approval from limited perspective
o No mechanism for SEBI approval/ comments
o No requirement for approval from public shareholders
o Minimal disclosure requirements
In light of the increased M&A Activity, SEBI sought In light of the increased M&A Activity, SEBI sought to widen its scope to ensure increased degree of transparency, disclosure and to protect interest of minority shareholders
In light of above, SEBI Circulars were introduced in February, 2013 and based on public comments modified in May 2013.
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Approval from SEBI Approval from SEBI Approval from SEBI Approval from SEBI in addition to noin addition to noin addition to noin addition to no----objection from SEsobjection from SEsobjection from SEsobjection from SEs
Approval required from majority of minority shareholders via postal ballot Approval required from majority of minority shareholders via postal ballot Approval required from majority of minority shareholders via postal ballot Approval required from majority of minority shareholders via postal ballot and eand eand eand e----voting voting voting voting
Requirement of Audit Committee approval on Scheme and Valuation reportRequirement of Audit Committee approval on Scheme and Valuation reportRequirement of Audit Committee approval on Scheme and Valuation reportRequirement of Audit Committee approval on Scheme and Valuation report in in in in addition to Board Approvaladdition to Board Approvaladdition to Board Approvaladdition to Board Approval
Requirement Requirement Requirement Requirement of filing complaints report introducedof filing complaints report introducedof filing complaints report introducedof filing complaints report introduced
Timelines & process introduced for obtaining SEBI commentsTimelines & process introduced for obtaining SEBI commentsTimelines & process introduced for obtaining SEBI commentsTimelines & process introduced for obtaining SEBI comments
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Scheme
Process for obtaining approvalProcess for obtaining approval
Filing application and documents with SE and uploading on Company website
Filing application and documents with SE and uploading on Company website
Stock Exchange to forward documents to SEBIStock Exchange to forward documents to SEBI
Pre and post amalgamation
for Compliance with Accounting
for Compliance with Accounting
Practicing CA)
File Complaints report with SE (within 7 days from expiry of 21 days from date of filing application)
File Complaints report with SE (within 7 days from expiry of 21 days from date of filing application)
SE to forward its No objection to SEBI and SEBI to send its comments on the documents
SE to forward its No objection to SEBI and SEBI to send its comments on the documents
SE to provide their observation letter after comments from SEBI
SE to provide their observation letter after comments from SEBI
Uploading the observation letter on Company’s website
Uploading the observation letter on Company’s website
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No-objection certificate denied
As per listing agreement, prior approval (no-objection) of SEs required before filing scheme with the HC
There have been recent cases where approval has been denieddenied
General reasons for denying approval include – o Bypassing IPO & Takeover regulations o Change in control without providing exit opportunity o Swap ratio skewed in favor of unlisted company
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Initially as per Feb circular, companies required approval of minority in 2:1 through postal ballot & e-voting
Amendments introduced in May Circular –
Additional shares allotted to promoters*
or
requiredrequiredrequiredrequired
Circular –
Conditions for applicability introduced
In case not applicable, Company to furnish undertaking certified by auditor and approved by the Board
* Includes promoter group, related parties of promoter / promoter group, associates / subsidiaries of promoter / promoter group
Scheme involves listed company and any other entity involving
promoters*
Listed company has purchased shares of subsidiary intended to be merged with itself, from
promoters* in past
or
or
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In case majority of minority shareholders vote against the resolution, the concerned M&A activity shall cease
Recent cases where majority of minority shareholders have not granted approval –shareholders have not granted approval –
Scheme of Amalgamation between SEPR Refractories India Ltd, Saint- Gobain Crystals & Detectors India Ltd and Saint Gobain Sekurit India Ltd with Grindwell Norton Ltd & their respective shareholders & creditors
Public Votes against the resolution – 70.69%
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Analysis of Applicability of Clause 5.16
Under the scheme, no shares are proposed to be allotted to Promoter / Promoter Group* of UCL;
The scheme does not involve any (Unlisted)
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Demerger of Cement business of JCCL to UCL
Issue of shares by UCL as consideration to shareholders of JCCL (i.e. JAL)
NoteNoteNoteNote – JAL does not belong to the Promoter/ Promoter Group* of UCL
* Includes promoter group, related parties of promoter / promoter group, associates / subsidiaries of promoter / promoter group
The scheme does not involve any other entity involving the Promoter / Promoter Group* of UCL; and
The scheme does not contemplate any of the UCL's subsidiary companies being merged into it.
Therefore, Clause 5.16 is not applicable
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Substantial AcquisitionSubstantial AcquisitionSubstantial AcquisitionSubstantial Acquisition Creeping AcquisitionCreeping AcquisitionCreeping AcquisitionCreeping Acquisition
Any direct and indirect acquisition of shares or change in control in an Indian Any direct and indirect acquisition of shares or change in control in an Indian Any direct and indirect acquisition of shares or change in control in an Indian Any direct and indirect acquisition of shares or change in control in an Indian Listed company beyond the prescribed threshold will trigger an Open OfferListed company beyond the prescribed threshold will trigger an Open OfferListed company beyond the prescribed threshold will trigger an Open OfferListed company beyond the prescribed threshold will trigger an Open Offer
Change in controlChange in controlChange in controlChange in control
Open Offer Open Offer Open Offer Open Offer Triggered onTriggered onTriggered onTriggered on (Min. Size (Min. Size (Min. Size (Min. Size ---- 26% of 26% of 26% of 26% of total shares of target)total shares of target)total shares of target)total shares of target)
HoldingsHoldingsHoldingsHoldings
•25 % to 75% - Creeping Acquisition beyond 5%
•> 75% - Only method of Consolidation of Holdings is Voluntary Delisting Offer
•Acquisition of 25% or more - Open offer triggered
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Inter se promoter transfer
Condition for transfer between entities other than holding/ subsidiaries - 3 year holding pursuant to filings as per listing agreement
Cap on transfer price applicable for all inter-se transfer
Acquisition pursuant to SchemeAcquisition pursuant to SchemeAcquisition pursuant to SchemeAcquisition pursuant to Scheme
Direct Direct Direct Direct –––– Involving target companyInvolving target companyInvolving target companyInvolving target company
Indirect Indirect Indirect Indirect –––– Without involving target companyWithout involving target companyWithout involving target companyWithout involving target company
Exempt subject to conditionsExempt subject to conditionsExempt subject to conditionsExempt subject to conditions Exempt subject to conditionsExempt subject to conditionsExempt subject to conditionsExempt subject to conditions
Acquisition by way of succession, inheritance or transmission
Increase in voting rights pursuant to Buyback
Increase in shareholding attracting Regulation 3(1)/ 3(2)* – Provided shareholding exceeding threshold is reduced within 90 days from date of increase in voting rights
Rights Issue
Upto entitlement
Beyond entitlement
* Subject to additional conditions to claim exemption for buyback triggering open offer
Refer ensuing slides for detailed discussion on exemption for acquisition pursuant to Scheme……
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Any acquisition under scheme of arrangement pursuant to an order of a court or a competent authority involvinginvolvinginvolvinginvolving the Target Company is exempt
Any acquisition under scheme of arrangement/ reconstruction pursuant to an order of a court or a competent authority not not not not pursuant to an order of a court or a competent authority not not not not directly involvingdirectly involvingdirectly involvingdirectly involving the Target Company as a transferor/ transferee exempt provided:
Cash and cash equivalents constitute less than 25% of the consideration paid; and
Post implementation, persons directly or indirectly holding at least 33% voting rights in the combined entity are same as the persons who held the entire voting rights before implementation of the scheme
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Facts
Merger of A Ltd into B Ltd
Issue of shares by B Ltd to share holders of A Ltd
Shareholders of A Ltd
Shareholders of B Ltd
Post merger shareholding
Question
A Ltd B Ltd
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Increase attracting open offer trigger under Regulation 3(1) i.e. >25%
Exempt if shareholder subsequently reduces his shareholding to less than 25% within 90 days from date of increase in voting rights
Increase attracting creeping acquisition limit [Regulation 3(2)]
Regulation 10(4)(c )
Exempt if :
Buyback >10% shares – Such shareholder has not voted in favor of resolution for Buy back pursuant to regulations of Companies Act
Buyback up to 10% - Such shareholder in capacity as director has not voted in favor of Board resolution
No acquisition of Control
Further, if aforesaid conditions are not met, shareholder has option to reduce the increase to less than creeping acquisition limit (i.e. 5%) within 90 days from date of increase in voting rights
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Promoters shareholding to reach at least 90% for success of delisting
Key Approvals required Board of directors Stock exchange Special resolution of shareholders (promoters can participate) 2/3rd of the participating public shareholder required to approve (promoters cannot
participate)
Pricing Floor price (base price) – determined upfront based on prescribed mechanism Discovered Price – Arrived through RBB Process Exit price – Final price paid by promoters (cannot be lower than Discovered Price)
Typically, exit price is at significant premium compared to floor price
RBB process Denotes price at which maximum shares are tendered
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Delisting offer 1 in 2004Delisting offer 1 in 2004Delisting offer 1 in 2004Delisting offer 1 in 2004
Unsuccessful Unsuccessful Unsuccessful Unsuccessful ---- discovered discovered discovered discovered
price of Rs 3000 (as against price of Rs 3000 (as against price of Rs 3000 (as against price of Rs 3000 (as against
floor price of Rs 825) not floor price of Rs 825) not floor price of Rs 825) not floor price of Rs 825) not
acceptable to promoters acceptable to promoters acceptable to promoters acceptable to promoters
Delisting offer 2 in 2010Delisting offer 2 in 2010Delisting offer 2 in 2010Delisting offer 2 in 2010
Unsuccessful Unsuccessful Unsuccessful Unsuccessful –––– Proposal not Proposal not Proposal not Proposal not
approved by 2/3approved by 2/3approved by 2/3approved by 2/3rdrdrdrd of of of of
participating participating participating participating public public public public
shareholdersshareholdersshareholdersshareholders
May 2013 May 2013 May 2013 May 2013 ----Offer for sale of Offer for sale of Offer for sale of Offer for sale of
14.99% stake 14.99% stake 14.99% stake 14.99% stake
(To comply with minimum (To comply with minimum (To comply with minimum (To comply with minimum
shareholding requirement)shareholding requirement)shareholding requirement)shareholding requirement)
Delisting offer 3 in 2014Delisting offer 3 in 2014Delisting offer 3 in 2014Delisting offer 3 in 2014 24 June 201424 June 201424 June 201424 June 2014
~94% of total shares offered ~94% of total shares offered ~94% of total shares offered ~94% of total shares offered
subscribed by 6 FIIssubscribed by 6 FIIssubscribed by 6 FIIssubscribed by 6 FIIs
15 March 2014 15 March 2014 15 March 2014 15 March 2014 –––– Board Board Board Board
approvalapprovalapprovalapproval
20 June 14 20 June 14 20 June 14 20 June 14 –––– Public Public Public Public
shareholder’s approvalshareholder’s approvalshareholder’s approvalshareholder’s approval
24 June 201424 June 201424 June 201424 June 2014
SEBI issues order for close SEBI issues order for close SEBI issues order for close SEBI issues order for close
monitoring of delisting monitoring of delisting monitoring of delisting monitoring of delisting
processprocessprocessprocess
SEBI order is in connection to a possibility that deliberate attempts are made by the promoters to get shares of AstraZeneca delisted at ease pursuant to the OFS carried out in 2013 wherein approx. 94% of total shares offered had been subscribed by 6 FIIs where the end subscribers
prima facie belonged to the same group.
• Directions of Order - BSE and NSE to closely monitor the delisting process and grant approval only post being satisfied that the same is fair and transparent & promptly report any irregularities, if any
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Option 1 - Modification of RBB process
Exit price : highest price at which promoter touches the threshold limit (ie 90%) – Bid of each shareholder counts
Additional condition for success of delisting – acquire shares from specified no of public shareholders and/or acquire specified number of shares which are held but not traded for more than a year
Option 2 – Fixed Price Mechanism
Option 3 – Counter offer
Step 1 – Similar to current RBB process to arrive at Discovered Price
Step 2 – If discovered price not acceptable to promoter, it may make counter offer to public shareholder instead of rejecting discovered price
Step 3 – Public shareholders to be given choice to either accept or reject the Counter offer
Lack of retail participation – to put restriction on trading during last few days before closure of RBB process
Time consuming process
To do away with requirement of shareholder’s approval (as same would be evident during RBB process)
To do away with requirement of stock exchange approval (SEs to be mandated to maintain compliance status with listing agreement for the companies)
* SEBI has issued a discussion paper on Review of Delisting regulations dated May 9, 2014 24
“This Presentation provides certain general information existing as at the time of production. Accordingly, this presentation should neither be regarded as comprehensive nor sufficient for the purposes of decision- making. We do not undertake any legal liability for any of the contents in this presentation. The information provided is not, nor is it intended to be an advice on any matter and should not be relied on as such. Professional advice should be sought before taking action on any of the Professional advice should be sought before taking action on any of the information contained in it. Without prior permission, this document may not be quoted in whole or in part or otherwise referred to in any documents.”
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SE Stock Exchange
FDI Foreign Direct Investment
SAST Substantial Acquisition of Shares & Take over codeSAST Substantial Acquisition of Shares & Take over code
WOS Wholly owned subsidiary
RBB Reverse Book Building
INR/ Rs Indian Rupees
FII Foreign Institutional Investors
SHP Shareholding pattern