january 13, 2007 cross- border bharat vasani group general counsel tata sons
TRANSCRIPT
January 13, 2007
Cross- Border
Bharat VasaniGroup General Counsel
Tata Sons
January 13, 2007
Scope of the PresentationScope of the Presentation
Overview of Cross-Border M & A transactions Process involved Deal structuring issues Due Diligence issues Legal aspects FEMA Provisions Transaction Documents Emerging Trends Key Challenges
January 13, 2007
Greater Economies of Scale
Access to Markets
Access to Raw Material
Diversification of Business
ObjectivesObjectives
January 13, 2007
Cross Border Transaction Cross Border Transaction ImperativesImperatives
Cultural Issues
Legal & regulatory framework
Identifying and delivering synergies
Tax regimes & treaties
Business Dynamics
Business Environment
Accounting treatment
January 13, 2007
Key Tax And Financial Key Tax And Financial ConsiderationsConsiderations
Exit considerations
Cash repatriation
Debt Structuring
Income flows and their taxability
Entry Strategy
Financing options
1
2
3
4
5
6
January 13, 2007
Categories Of Cross Border Categories Of Cross Border AcquisitionsAcquisitions
Corporate Partnering Public to Private Supporting Management Buy Outs Leveraged Buy Outs Strategic Investments Earn Out Acquisitions Distress Sale
January 13, 2007
Applicable LawsApplicable Laws
India Companies Act – Section 372A, FEMA Regulations Tax
Target jurisdiction Company Law & Competition law Exchange Control Regulations Takeover Regulations Tax
January 13, 2007
ProcessProcess
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
January 13, 2007
Structuring IssuesStructuring Issues
Tax Financing Corporate Veil Regulatory constraints (host & target countries) Exchange Control Regulations
January 13, 2007
First StepsFirst Steps
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
January 13, 2007
LoIs / MoUsLoIs / MoUs
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
January 13, 2007
Due DiligenceDue 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
Methodology:
January 13, 2007
Due DiligenceDue Diligence
Effective Due Diligence Process should address the following-
Strategy Assumptions Identify operational, legal, financial and other
significant issuesAssessment of RisksEffect of assessment on Valuation (e.g. Fair Price
for the Target Company)
January 13, 2007
Illustrative Due Diligence issues (1)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
January 13, 2007
Illustrative Due Diligence issues (2)Illustrative Due Diligence issues (2)
Exclusivity provisions Confidentiality Assignability / change of control/ consent of the
counter party for transactions Regulatory Approvals
January 13, 2007
Impact of Due DiligenceImpact of Due Diligence
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.)
January 13, 2007
Results of Due DiligenceResults 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
January 13, 2007
Cross Border Deals - AgreementsCross 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
January 13, 2007
Typical Regulatory ApprovalsTypical Regulatory Approvals
Competition Authority Stock Exchange Board of Target Company Lenders Foreign Investment Authority Sector Regulators
January 13, 2007
Issues under Companies ActIssues under Companies Act
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
January 13, 2007
ODI - Issues under FEMA (1)ODI - Issues under FEMA (1)
Overseas 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
January 13, 2007
ODI- Issues under FEMA (2)ODI- Issues under FEMA (2)
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
January 13, 2007
ODI- Issues under FEMA (3)ODI- Issues under FEMA (3)
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
January 13, 2007
Financing an AcquisitionFinancing an Acquisition
Funding 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
January 13, 2007
Valuation of SharesValuation of Shares
Investment more than USD 5 MN: By a Category 1 Merchant Banker registered with SEBI; or
By an Investment Banker / Merchant Banker registered with the appropriate regulatory authority in the host country
Investment less than USD 5 MN: By a Chartered Accountant or a Certified Public Accountant
Where consideration is fully / partly paid by issue of Indian Party’s shares:
By a Category 1 Merchant Banker registered SEBI; or
By an Investment Banker / Merchant Banker registered with the appropriate regulatory authority in the host country.
January 13, 2007
Post Investment ChangesPost 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
January 13, 2007
Acquisition in Financial Services Acquisition in Financial Services Sector (1)Sector (1)
Net profit earned during last 3 years from financial services activities
Registration with appropriate authority for conducting financial services activities
Approval from concerned regulatory authorities, both in India and abroad, for venturing into such financial service activity
Fulfillment of prudential norms relating to capital adequacy Above applicable to JV/ WoS or its step down subsidiary
for making additional investment in the Financial Services Sector
(Additional) Conditions for Investment in Financial Services Sector under automatic route
January 13, 2007
Acquisition in Financial Services Acquisition in Financial Services Sector (2)Sector (2)
Recent Development:Compliance with above conditions by
regulated Indian entities engaged in financial services for investing overseas in any activity
Trading in commodities exchanges to be reckoned as a financial service and require prior approval of the Forward Markets Commission
January 13, 2007
Certain other FEMA Issues (1)Certain other FEMA Issues (1)
Earnest Money Deposit Or Issue A Bid Bond Guarantee
Remittance of earnest money deposit or issue a bid bond guarantee permitted for acquisition of a foreign company through bidding and tender procedure
Subsequent remittances through AD also permitted
Pledge of Shares / Hedging Indian Party may pledge shares of JV/WoS to AD / financial
institution for credit facility for itself or JV/WoS abroad Indian Parties with ODI permitted to hedge the exchange risk
arising on such investments
January 13, 2007
Certain other FEMA Issues (2)Certain other FEMA Issues (2)
Sale of Shares Listed – through stock exchange Unlisted – price not less than fair value certified by
CA No outstanding dues (dividend, technical know-how,
royalty, consultancy etc) No write-off except in certain specified
circumstances Overseas entity in operation for at least 1 year and
proper filings in Form APR Indian party not under investigation by CBI / ED /
SEBI / IRDA or other Indian regulatory authorities
January 13, 2007
Certain other FEMA Issues (3)Certain other FEMA Issues (3)
Annual Performance Reports (APR) Indian party to submit APR to RBI (in Form APR) in
respect of ODI Time period: within 60 days of prescribed date for
finalization of the audited accounts of overseas company
Detailed report containing various disclosures including details of the “line of activity”, financial structure and performance of the overseas company
January 13, 2007
Leveraged Buy- Outs (1)Leveraged Buy- Outs (1)
Borrowing without RecourseBorrowing without Recourse
Parent Co
Onshore
SPV
OffshoreWoS (1)
WoS (2)
Target Co
Lender
BorrowingDividend
January 13, 2007
Leveraged Buy- Outs (2)Leveraged Buy- Outs (2)
Background Limitation on Indian Parent Co for making overseas investments
upto 200% of its net worth under the “automatic route” Borrowing without recourse, an option to overcome this limitation
Salient features Indian Parent Co sets up a wholly owned indirect subsidiary:
Bid Co Bid Co borrows money from lenders and utilizes that money
to acquire the Target Loan secured by the dividend stream of the Target Shares of the Bid Co and the Target are usually pledged in
favour of the lenders “No recourse” or “financial commitment” on Parent Co
January 13, 2007
Leveraged Buy- Outs (3)Leveraged Buy- Outs (3)
Advantages No recourse on Parent Co Not counted towards 200% cap Parent Co’s balance sheet clean for further
investments Parent can raise further money for investment
Disadvantages Costly form of borrowing Stringent conditions on up streaming of dividends
and “cash sweeps” by Parent Co Works best if target is de-listed, otherwise dividend
leakage
January 13, 2007
Certain Grey AreasCertain Grey Areas
Round Tripping
Investor Co
JV / WoS (1)
Target Co
JV / WoS (2)
Offshore
Onshore
Condition for outbound investment: Bona fide business activity (offshore)“Round Tripping”: Money from India is being routed back into India from another jurisdiction.Concept not enshrined in any rule or regulation issued by RBI. Round tripping; if identified – investments could be ordered to be unwound.
January 13, 2007
Share Purchase AgreementShare 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
January 13, 2007
Purpose of RepresentationsPurpose of Representations
Disclosure Termination Rights Indemnification
Disclosure Termination RightsIndemnification
Signing Closing
January 13, 2007
Indemnification Issues (1)Indemnification Issues (1)
Buyer’s knowledge of Seller’s breach Protection beyond Representations and Warranties Joint and several liability Creditworthiness of the Seller Offset for tax or insurance benefits Interest on damages Separate environmental and tax indemnification
January 13, 2007
Indemnification Issues (2)Indemnification Issues (2)
Time limitations Basket Minimum Cap Escrow Control of litigation Representation and Warranty Insurance
January 13, 2007
Governing Law & Dispute ResolutionGoverning Law & Dispute Resolution
Choice of Law - Domestic/Neutral
Mediation Informal
Institutional
Mechanism: Courts v. Arbitration Domestic/Neutral Costs Interim relief Appeal rights Enforcement
January 13, 2007
Emerging TrendsEmerging Trends
Aggressive Indian presence in Global M & A market High level of sophistication in structuring of deals Competing bids in high value transactions Deal Protection Mechanism (Break fees etc.) Insurance of Reps and Warranties Virtual Data Rooms Use of Media and PR agencies Steep increase in parachute payments Steep increase in transaction costs
January 13, 2007
Operational issues post merger / acquisition Integration of the cultures of the organizations Realisation of synergies Alignment of HR policies and practices Optimum utilization of manpower Optimum utilization of other infrastructural
resources
Key ChallengesKey Challenges
January 13, 2007
Any QuestionsAny Questions
