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Mergers & Acquisitions in 44 jurisdictions worldwide 2005
M ergers &
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MERGERS & ACQUISITIONS 2005 ISSN 1476-8127
M&A 05 covers 27/5/05 4:53 pm Page 1
1 Form What form do business combinations take?
Under the Companies Act 1956 (Companies Act), a company can be set up either as a private company or a public company. A pri- vate company restricts the number of shareholders and the trans- ferability of its shares, as well as prohibiting public share subscription and restricting the acceptance of deposits. A public company does not necessarily mean that the company is listed on a stock exchange, although it can subsequently be listed on one or more stock exchanges in accordance with the guidelines pre- scribed by the Securities and Exchange Board of India (SEBI) and the provisions of the relevant listing agreement executed with the respective stock exchanges. In addition, businesses could be set up as partnerships or proprietary concerns, although these are typically used for small businesses since the liability of the founders is not limited.
Businesses are usually acquired by the purchase of shares of the target, or, alternatively, the acquisition of the assets of the tar- get. Acquirers look at gaining control over the target company in a variety of ways such as board control, veto rights at the share- holder level, etc.
The merger or amalgamation of two or more companies into one entity, or the demerger of a business division into a new com- pany, requires the approval of the relevant high courts. Courts grant approvals after considering the scheme (setting out the terms and conditions) submitted by the relevant high courts. Two par- ties may also enter into a joint venture subsequent to which a joint venture company may be set up.
2 Statutes and regulations What are the relevant regulations and statutes governing business combinations?
Corporate laws Companies in India are registered and regulated under the pro- visions of the Companies Act. The Companies Act provides for the fundamental statutory framework for the purchase and sale of corporate entities. Its provisions govern formation, conduct- ing of business, mergers, amalgamations and demergers and the winding up of companies. The Indian Contract Act 1872 (Con- tract Act) governs and supports the transactions and under- standing of the parties in respect of the various business transactions. In addition there are a number of separate legisla- tions that deal with different commercial transactions, such as the transfer of property, the sale of goods, partnerships etc.
Securities laws The securities market is regulated by SEBI established under the Securities and Exchange Board of India Act 1992 (SEBI Act) and
the guidelines, rules and regulations made by SEBI. In relation to acquisitions, SEBI has prescribed the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 1997 (SEBI Takeover Code) which regulates the acquisition of shares and takeovers of listed companies. Further- more, companies that are listed on the stock exchanges also have to comply with the requirements of the listing agreements with the respective stock exchanges.
Competition law The Monopolies and Restrictive Trade Practices Act 1969 (MRTP Act) seeks to ensure that there is no concentration of economic power to the common detriment and provides for the prohibition of monopolistic and restrictive trade practices. The MRTP is sought to be replaced by the Competition Act 2002, which pro- poses to promote and sustain competition in the markets and to protect the interest of the consumers. This Act is expected to come into force shortly. One of the major changes to be brought in by this legislation will be the pre-merger notification procedure in cases where the merged entity crosses certain thresholds in rela- tion to turnover and market share.
Exchange controls For cross-border business combinations and transactions, the implications under the Foreign Exchange Management Act 1999 (FEMA) and the regulations issued thereunder by the Reserve Bank of India (RBI) will have to be considered.
Additional issues Apart from the above, the purchase of shares or assets is not sub- ject to any specific legislation. The legal issues that may arise will vary depending on the manner in which the transaction is struc- tured. Tax considerations may be crucial to the transaction par- ticularly in the context of a slump sale or ‘cherry picking’ of the assets. The Indian Income Tax Act 1961 (ITA) will serve as an important guide in such cases. Employee-related issues might also require some prior approvals or notifications under the Indian labour laws and need to be kept in mind while structuring a busi- ness combination
3 Legal documentation What type of contracts or other legal documentation are entered into by parties
to a business combination?
The legal documentation that is required depends on the specific type of business combination that is being contemplated. In the case of private companies, the sale of shares or assets is normally effected under a share purchase agreement or an asset purchase agreement. Such agreements are usually preceded by a letter of
117A GLOBAL COMPETITION REVIEW Special Report getting the deal through – MERGERS & ACQUISITIONS 2005
India Ruetveij Pandya and Vikram Shroff
Nishith Desai Associates
India 27/5/05 12:17 pm Page 117
intent or a memorandum of understanding that incorporates the understanding between the parties and is not binding except with respect to the confidentiality and non-disclosure requirements; such documents do not typically create any legal obligation on the parties to enter into definitive agreements. An asset purchase agreement may result in the formal conveyance of some assets (real property etc), novation agreements in relation to the liabil- ities that are to be assumed and deeds of assignment for intellec- tual property. Customer contracts can generally be assigned or transferred with the consent of the third party. Under certain cir- cumstances, the approval of the shareholders will also be required.
In order to merge two or more companies into a single com- pany, or to demerge a business or assets of the business into a sep- arate company, the approval of the high courts is required. It is possible that the parties would enter into a merger agreement, although, in addition, a scheme setting out the terms and condi- tions of the merger would need to be submitted to the courts and an order approving the merger would need to be obtained. Share- holder approval will also be required.
The other related agreements that may be executed are shareholders’ and share subscription agreements, option agree- ments, voting agreements, employment agreements and licence agreements.
In the case of listed companies, the public offer requirements are triggered if the acquirer acquires 15 per cent or more of the shares or voting rights in a company. In such cases public announcements with the terms and conditions of the offer need to be made. In addition, various disclosures need to be made to the shareholders of the company along with the letter of offer to the existing shareholders.
4 Filings and fees What governmental or stock exchange filings are required to be made in
connection with a business combination? Are there stamp taxes or other
governmental fees in connection with completing a business combination?
Any changes in the shareholding of a company are recorded with the registrar of companies (RoC) through the annual returns that are to be filed with the RoC. In the case of mergers, amalgama- tions or demergers, the order passed by the high court, approv- ing the scheme of arrangement or compromise as proposed by the company, must