Legal & Regulatory aspects.pptx

7/27/2019 Legal & Regulatory aspects.pptx

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LEGAL & REGULATORYASPECTS OF M & A


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INTRODUCTION TO MERGERS & ACQUISITIO

A merger happens when two firms agree to go forward as a singlecompany rather than remain separately owned and operated.

When one company takes over another and completely establishethe new owner, the purchase is called an "acquisition".


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KEY TERMS IN M&A

Merger

Horizontal Merger (eg- Lipton India & Brooke Bond)

Vertical Merger (eg- Reliance & Flag telecom group)

Conglomerate Merger (eg- L&T and Voltas Ltd.)

Acquisition (PVR acquiring Cinemax)

Reverse Merger (eg- Godrej soaps Ltd & Gujrat Godrej Innovative Ltd)

Joint Venture (eg- Sony Erickson)

Strategic Alliance (eg- Siemens & Huwaie Technologies)


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MOTIVES & DRIVE FORCES OF M

Market opportunities

Risk reduction

External opportunities

Economies of scale

Cross selling

Corporate synergy

Taxes Geographical or other diversification


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RELEVANT PROVISIONS RELATEDM&A


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SEC 391 0F THE COMPANIES AC

Gives the Tribunal the power to sanction a compromise or arrange

between a company and its creditors/ members subject to certain

This section talks about

Scheme of compromise between a company and its creditors or any claor

Scheme of arrangement between a company and its members or any c

them.

All material facts relating to the company, should be disclosed to tCourt/Tribunal before an order is passed sanctioning a scheme.


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Gives power to the Court to implement a compromise or arrangem

It further empowers the Court to order winding up of the companythe scheme cannot be satisfactorily implemented with or withoutmodifications


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Contains provisions regarding information to be furnished and the

furnishing the information in relation to a scheme of compromise arrangement.

This section further requires every director, managing director, mand debenture trustee to provide to the company all details as manecessary for the purpose of the said section.

It also stipulates a penalty provision if the requirements of the senot complied with.


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Section 394 -Provisions for facilitating reconstand amalgamation of companies

Where an order provides for the transfer of any property, then thaand liabilities shall be transferred to the liabilities of the transfere

Documents

Section 394(4)(b) of the Companies Act, 1956 defines-

Transferee company to include any company within the meaning

Transferor company to include anybody corporate, whether a comunder this act or not.

Foreign company can be a transferor company but cant be a transcompany


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Section 395 - Power and duty to acquire the shshareholders dissenting from the scheme

Dissenting shareholder - any shareholder who has failed to transfer his sharetransferee company in accordance with the scheme.

Notice of Dissenting shareholderTransferor company

Transferee company

Duration - 6 months from the offer Minimum Share requirement 9/10th of the total value of shares that are to transfer

Same term to all shareholders

Maximum time for the transferee company to give notice to all respective sh

1 months


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Section 396 -Power of the central government to provide for an amalgamation of companies in the national

Rights of members shouldnt change . Any member whose rights are affected c

Company law board

Copy of proposed order to be send to both company.

Either company can appeal for a modification of the draft

Government within 2 months of receiving this appeal may decide on such m

After the order is finalized , it should be laid to both Houses of Parliament


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SEBI Provision

Guidelines on Mergers and Acquisitions

Disclosure - acquirer should disclose its holdings at every stage when it exceeds 5%

15% of the total holdingsTrigger point - Can hold above 15% but to the extent of 20% only if he makes pub

announcement to acquire shares through public offerMerchant banker - acquirer needs to appoint category 1 merchant bankerPublic announcement- acquirer should make announcement within 4 working days

Number of sharesMinimum offer price

Object of acquisition

Date by which the letter will be posted

Opening and closing date of the offer


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Offer price - Shall not be less than the highest of: Negotiated price Average price paid by acquirer Preferential offer price if made in last 12month The avg of the weekly high and low for the 26months

Obligation of acquirer - letter of offer should reach the shareholders within 45 day

announcementShareholders should get the payment within 30 days from date of closureObligation to board - cannot dispose or issue capital etc unless approval is given from

body of shareholders

Competitive bids - Bids should be made within 21 days of public announcement

Provision of Escrow - company should deposit at least 25% of the consideration payab

100cr and 10% if exceeding 100cr


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Impact of FEMA on M&A

The relevant regulations under FEMA from an M&A perspective a

Foreign Exchange Management Regulations, 2000 (FDI Regulation

Foreign Exchange Management Regulations, 2004 (Foreign Securi

Regulations)


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Foreign Exchange Management Regulations, 20Regulations)

Regulate the investments made by any persons resident outside

It regulates the all of acquisitions and investments in India by foreentities.

The investment allowed is regulated by FIPB & RBI

In FDI cap is decided on the sector in which investment is made.


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Foreign Exchange Management Regulations, 2004 (Foreign Security Re

Outbound investments by residents in India are regulated by the FSecurity Regulations.

The regulation is important from the perspective of raising moneFCEB .

Directs the way in which the issued funds are to be used.

FIPB and RBI guide the entire process of raising funds.


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Indian stamp duty act

Power of Parliament in respect of stamp duty

- rates prescribed by parliament in respect of various assets

- different states different rates

Instruments chargeable to stamp duty

- document by which any right or liability

- Any instrument mentioned in Schedule I to Indian Stamp Act

- if an instrument is not listed in the schedule, no stamp duty is p Duty payable when several instruments

- In case of sale, mortgage or settlement, if there are several instrfor one transaction, stamp duty is payable only on one instrument.


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Powers to reduce stamp duty

Mode of payment of stamp duty

-The payment of stamp duty can be made by adhesive stamps or stamps.

Adjudication as to stamp duty payable

- Adjudication means determining the duty payable

What is meant by duly stamped

- Instrument cannot be accepted as evidence if not duly stamped


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DIFFERENT STRATEGIES

POISON PILL

Series of possible strategies designed to defend a hostile takeover.

Example : Offering discounted shares to current shareholders in order to dilutestake the acquirer may hold and increase the cost of an acquisition.

People pill : The threatened resignation of the whole management team in the successful takeover.

Suicide pill : A term for any high-risk poison pill strategy that may discourage acquirer but also place the takeover target under severe financial pressure.

Example Ruias led Indian conglomerate, Essar Group, has received a boost tproposed acquisition of US steel firm, Esmark, with the target company adopteto protected itself against any hostile takeover.


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Staggered Board

Staggered Board

Get representation on the targeted companys board inorder to taover target company.

Attaining representation and voting power on the board of directo

Influence the other board members to accept the bid or influence shareholders to take a more positive stance towards the takeover

60 per cent of the U.S corporations and almost one-half of the Sta

Poors 500 firms list have adopted a staggered board.


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Golden Parachutes

Aims to stagger and make hostile takeovers more expensive by dwhat is usually a lump-sum payment to the board of directors of t

company.

Primary function in a hostile takeover is to align incentives betweeshareholders and the executives of the target company as there gare concerns about executives who face a hostile takeover while rlosing their jobs, oppose the bid even when it increases the valueshareholders.

Example - Pearce & Robinson, (2004).


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White Knight -

Require and involve a third party. The targeted firm seeks for a friendly firm which can acquire a maj

in the company.

Can be chosen for several reasons such as; friendly intentions, beliefit, belief of better synergies, belief of not dismissing employees or good relationships.

Example A good example of this is the acquisition of Bear Stearnsknight JPMorgan Chase in 2008. At the time of the acquisition, Beamarket cap had declined by 92% on concerns of its vulnerability to credit crisis at that time, making it extremely vulnerable to hostile tand even insolvency.


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Greenmail -

If the bidders interests are short-termed profit rather than long-tecorporate control then an effective and simple defense measure c

use a so called greenmail, also known as targeted repurchase or akiss.

Involves repurchasing a block of shares which is held by a singleshareholder or other shareholders at a premium over the stock prfor an agreement called a standstill agreement.

In this standstill agreement it is stated that the bidder will no longto buy more shares for a period of time, often longer than five yea

It is effective for short termed profit seekers and not for long term