scope overview of cross-border m & a transactions process involved deal structuring issues due...
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SCOPEOverview of Cross-Border M & A transactions
Process involvedDeal structuring issues
Due Diligence issuesLegal aspects
FEMA ProvisionsTransaction Documents
Emerging TrendsKey Challenges
Cross Border Transaction
• Cross Border Transaction services means services related to transaction which involve two or more countries. In India there are two Acts which primarily seems to show concern when a person (Indian Resident or foreign Resident) undertakes cross border transactions that is:
•• Foreign Exchange Management Act, 1999 and• Income Tax Act, 1961
Definitions
• Capital: Equity share, fully , compulsorily or mandatory convertible preference shares, debentures,
• Capital account transaction: Transaction which alters assets or liabilities.
• Control: Right to appoint majority of directors, or control of management or policy decisions
• FDI: Investment by Non-Resident which alters capital
• Joint Venture: Indian Company in which a foreign company makes investment
• OCB: Overseas Corporate Bodies• QFI: Qualified Foreign Investors• VCF: Venture Capital Funds
Who Can Invest In India
• Non Resident subjct to FDI policy expect in prohibited sector.
• NRI resident in Nepal and Bhutan• OCB: Overseas Corporate Bodies• FII: Registered
Where to Invest
• Companies• Partnership Firm• VCF• Trust : Prohibited• LLP• No other entities
Prohibited Sectors
• Lottery• Gambling and betting• Chit Funds• Nidhi Companies• Trading in TDR• Real Estate• Other prohibited
Permitted
• Agriculture including floriculture, horticulture, seed development, agro services- 100%
• Tea: 100% • Mining: 100%• Petroleum and Natural Gas: 100%• Defense: 49%• Aviation : 100%• Courier: 100%
Sectors
• Construction: 100% Automatic• Telecom: 100% Automatic• Trading : 100% Automatic• Single Brand retail: 100% Automatic upto 49%• Multi Brand Retail: 51% Government• Railways: 100% Automatic• Banking 74% Automatic• NBFC: 100% Automatic• Pharma: 100% Automatic
OBJECTIVES
Greater Economies of Scale
Access to Markets
Access to Raw Material
Diversification of Business
IMPARATIVES
Cultural Issues
Legal & regulatory framework
Identifying and delivering synergies
Tax regimes & treaties
Business Dynamics
Business Environment
Accounting treatment
TAX AND FINANCE ISSUES
Exit considerations
Cash repatriation
Debt Structuring
Income flows and their taxability
Entry Strategy
Financing options
1
2
3
4
5
6
CATEGORIES
• Corporate Partnering• Public to Private• Supporting Management Buy Outs• Leveraged Buy Outs• Strategic Investments• Earn Out Acquisitions• Distress Sale
APPLICABLE LAWS India Companies Act – Section 372A, FEMA Regulations Tax
Target jurisdiction Company Law & Competition law Exchange Control Regulations Takeover Regulations Tax
PROCESS
• Assemble Team• Limited Due Diligence• Purchaser obtains financing commitment• MoU / LoI• Detailed due diligence• Definitive Purchase Agreement• Purchaser’s firm financing• Seller and Purchaser comply with covenants• CLOSING
STRUCTURE ISSUE
• Tax• Financing• Corporate Veil• Regulatory constraints (host & target
countries)• Exchange Control Regulations
FIRST STEP
Appointment of Advisor Investment Banker Attorneys (Local and Offshore) Public Relations Agents
Identify Due Diligence Areas To achieve commercial objectives Acquisition Strategic Investment
Preliminary Documentation Review of Information Memorandum Entering into mandate letter with Advisors Executive Non-Disclosure Agreement Exclusivity Arrangements
LOI or MOU• Pros
– Binding v/s. Non-binding– Reduces basic understanding to writing– It may look different in written form– From buyers perspective
• Exclusivity may cut-off seller’s negotiations with third party• Provides basis for expense reimbursement
• Cons– Leaks– Duty to disclose
• Contents
Due Diligence
• Physical Data Room• Virtual Data Room• DD list needs to be carefully tailored to meet
the needs of specific transaction and jurisdiction
• Specific inputs needed from local lawyers and tax advisors
Due Diligence
• Effective Due Diligence Process should address the following-
– Strategy Assumptions– Identify operational, legal, financial and other significant
issues– Assessment of Risks– Effect of assessment on Valuation (e.g. Fair Price for the
Target Company)
Illustrative Due Diligence issues (1)
• Onerous obligations/covenants• Payment of ongoing fee/royalty• Restriction on activities• Rights of first refusal/put/call option• LDs/ penal provisions/any liability which
flows through
• Exclusivity provisions• Confidentiality• Assignability / change of control/ consent of
the counter party for transactions• Regulatory Approvals
Impact of DD
• Impact on M&A Agreements – Representations, warranties, indemnities, covenants– Conditions precedent, conditions subsequent
• Holdback / escrow (mechanism for retention) of purchase price, bank guarantee, milestones for payment
• Functions as an internal audit for post acquisition strategy
• In cross-border deals - Impact of applicable law to Transaction (Competition Law issues, Dominant Undertaking, Takeover Regulations, Insider Trading, etc.)
Results of Due Diligence
What can the purchaser do? Require the seller to remedy the problem Obtain an indemnity/other contractual protection Restructure deal to exclude asset or liability Reduce purchase price Insurance in respect of risk – “price” – the risk Pull out
Limitations of liability Cap on liability Threshold – “basket” De-minimis Others What should limitations apply to?
Creditworthiness of person giving warranties – consider guarantee
Allocation of Risks Representations and
Warranties
Who gives?
All shareholders Institutional shareholders
Involvement of management
Extent
Cross Border Deals - Agreements
Shareholders’ Agreement
Technology Collaboration
Agreement
Product Supply
Agreement
Stock Purchase/Subscription Agreement
Exclusivity Arrangement
Information Memorandum
Brand Licensing
Agreement
Code of Ethics Labour Union Settlement
Loan/Security
Agreement
EmploymentAgreement
Feeder Stocks Supply
Agreement
Regulatory Approval
• Competition Authority• Stock Exchange• Board of Target Company• Lenders• Foreign Investment Authority• Sector Regulators
Companies Act, 1956
• Section 372A – Inter corporate loans & investment beyond 60% of paid up capital and free reserves or 100% of reserves to be approved by shareholders
• Complications in International bidding due to disclosure requirements
FEMAOverseas Direct Investment (‘ODI’)• Permissible in:
• overseas Joint Venture (‘JV’); or• overseas Wholly Owned Subsidiary (‘WoS’)
• ODI not permitted in real estate business or banking business
• Conditions for investment under the automatic route
• Total permissible financial commitment ≤ 200% of the net worth
• Bona fide business activities
• Eligibility norms for Investor:• not on RBI’s exporters’ caution list / list of defaulters• not under investigation by investigation / enforcement agency or
regulatory body
• Filings in respect of ODI (in Form APR) to be up-to-date
• All transactions with the JV/WoS to be routed through 1 AD branch
• Form ODA (with details of ODI under automatic route) to be submitted to the AD
• Total Permissible Financial Commitment (post August 12, 2005)
• ECBs – different views
• Cash remittance by market purchase• Capitalization of:
• export proceeds, and• fees, royalties, commissions or other entitlements due
from foreign entity for supply of technical know-how, consultancy, managerial or other services
• 50% of the value of guarantees issued to or on behalf of the JV / WoS
• Direct and indirect investment in agricultural operations
Financing an AcquisitionFunding• Methods
• Drawal of foreign exchange from AD• Swap of ADRs/GDRs• Utilization of proceeds of ECBs / FCCBs• Balances in EEFC account
• Utilization of foreign currency funds raised through ADR / GDR issues
• 200% net worth ceiling not applicable in case of funding by:
• Balances in EEFC account• Utilization of foreign currency funds raised through ADR / GDR
issues
Post Investment Changes
Parent Co
Step Down Sub (3)
Step Down Sub (2)
JV / WoS
Step Down Sub (1)
Step Down Subsidiary Post investment changes / additional investment in existing JV / WoS
Post investment changes / additional investment in existing JV / WoS
JV/WoS may diversify its activities
Set-up step down subsidiaries
Alter shareholding pattern in the overseas entity
Reportings to be made to the RBI in Form APR
Share Purchase Agreement
• Key issues – Reps and Warranties based on due diligence reports– Conditions Precedent & Subsequent– Closing mechanism– Indemnity from seller – Statutory approvals – CPs to closing – Hold back, brand usage and non-compete– Competition law issues
Governing Law and Dispute Resolution
Choice of Law - Domestic/Neutral Mediation
Informal Institutional
Mechanism: Courts v. Arbitration Domestic/Neutral Costs Interim relief Appeal rights Enforcement
QUESTIONS
• Thanks•
Rajvendra SarswatAdvocate
Rajasthan High Court+91-98290-98210sarswat.r@gmail.com
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