m&a 4th - legislation.pdf

8/10/2019 M&A 4th - Legislation.pdf

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LEGISLATION FORMEGER AND

ACQUISITION

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Legislation Dealing Mergers in a

Particular Sector.

Section 48 of the Banking

Companies Ordinance, 1962

282L of Companies Ordinance,

1984

Section 67 to 71 of the Insurance

Ordinance, 2000 and

application to High Court

For Banking Companies.

For N.B.F.Cs

For Insurance Companies.


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Legislation on Foreign Investment.

Board of Investment and Foreign Exchange

Regulation contain certain exceptions and

restrictions for non-residents for which general or

special permission is required.*


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Section 2 (1A) of the Income Tax Ordinance,

2001

Amalgamation means the merger of one or more

1. banking companies or

2. non-banking financial institutions, or

3. insurance companies, or

4. companies owning and managing industrial undertakings or

5. companies engaged in providing services and not being a trading company or

companies.

In such manner that

The assets of the amalgamating company or companies immediately before the

amalgamation become the assets of the amalgamated company by virtue of theamalgamation, otherwise than by purchase of such assets by the amalgamated

company or as a result of distribution of such assets to the amalgamated

company after the winding up of the amalgamating company or companies; and


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Section 2 (1A) of the Income Tax Ordinance,

2001

The liabilities of the amalgamating company or companies immediately before

the amalgamation become the liabilities of the amalgamated company by virtue

of the amalgamation

Requisite criterionOne company must be a public company or

A company incorporated under Companies Ordinance,1984 or under any

other law for the time being in force,


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Merger/Amalgamation.

From

Members/Shareholders

Point of View

From the Point of View of

Company to beMerged/Amalgamating.

From the Point of View of

Amalgamated

Company.


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From the Point of View of Company to be

Merged/Amalgamated.

S 97 & 97A - No gain or loss is taxable

subject to certain conditions.

Amalgamating companies are resident

and belong to wholly owned group.

In case of Section 97 the condition of

both companies to be resident shall not

apply in light of clause 62 of Part IV of

2nd Schedule.

Gain of amalgamating companies are

taxable if the above criteria is not

fulfilled under the Income Tax

Ordinance, 2001

Taxability of gain on transfer of assets and

liabilities?


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From Amalgamated Company Point of View.

S 76 - Relating to cost of purchase.

S 98C, concerning succession.

The tax value of assets in the hands of

amalgamating company (immediatelybefore amalgamation) shall be taken

as the tax value for amalgamated

company

Tax value of assets / liabilities acquired?


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From the Amalgamated Companys Point of View.

S 20(3) - Only expenditures incurred

under following heads are tax

deductible

Legal Advisory Services

Financial Advisory Services

Administrative expensesPlanning and Implementation of

amalgamation

What is the treatment of merger related

expenses?

What about carry forward and set-off

of losses sustained by the

amalgamating company ?

S. 57A - In the year of amalgamation only

assessed loss of the amalgamating

companies for the tax year is availablefor the set off. The facility to set off

accumulated losses of amalgamating

companies has been taken away from

July 01, 2007.


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Acquiree Point of View.

Transfer of assets and liabilities have tax implications

depending on the basis of nature of asset.

Consideration may be taken at higher of the actual selling

price or Fair Market Value [S. 77]

Slump sale principle Applicability ? [S. 77]

Consideration under restrictive covenant whether capital

or revenue?


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PAYING FORACQUISITION


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Factors influencing choice among

financing methods

a. Risk and Valuation Considerations Preferred Payment Methoda. Risk and Valuation Considerations Preferred Payment Method

Higher valuation risk to bidder

Target a highly cyclical business

Bidder keen to exploit its high current

share valuationBidder already leveraged

bidder prefers shares(Target-cash)

share offer

Share offer

Share offer to reduce financial risk

b. Maximize Tax Benefits Preferred Payment Method

high capital gain tax to targetBidder can use accumulated tax losses

and investment credits of targets

Bidder can step up target assets value for

depreciation allowance

Exploit additional debt capacity of target

And tax advantage of debt

Target prefers sharesShare offer

Cash

Loan stock or leveraged cash finance


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Share Exchange-Walk-away

options and Top up right

M&A agreements may provide for termination for

either party to walk away from deal when price has

fallen (target)or risen (bidder) unacceptably high.

Walk-away option may be exercised with collarsand exercised when the bidder stock price goes

outside the range.

To off-set target walk-away rights, the bidder mayask for top up rights which allow to increase the

exchange ratio.


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Conversion value Rights

CVRs are commitment by the acquirer to pay

additional cash or securities if the share prices of

the combined company does not exceed a specified

level e.g. a year after the acquisition is completed.

CVRs are part of the acquisition currency and are

traded in open market enabling the shareholder totarget to cash out earlier.


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Leveraged cash Financing-

characteristics

High gearing may sometimes leads to default and

decline

Target assets may be used to finance the acquisition

Related interest payment is tax deductible.


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Financing with Convertibles

Straight preferred or loan stock with an option of

conversion to ordinary shares.

Valuing a convertible is rather complex.

D f d id ti Fi i


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Deferred consideration Financing-

An Earn-out

Both bidders and shareholder of target facevaluation risk in negotiation.

One way of mitigating this risk is to make

consideration contingent upon future performanceof the company under their own management.

Value of such company normally depends uponhuman creativity and the flair of one or two

individual e.g. advertising company An earn-out is the way of retaining the vendors

talent.


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D f d id ti Fi i


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Deferred consideration Financing-

An Earn-out

Advantages Disadvantages

a. For Acquirer

Vendors talent retained

Valuation risk reduced

Buy not and pay later reducesimmediate need for cash

Provide hedge against warranty and

indemnity claims

Conflict of motive between vendor and

buyer

Vendor given autonomy and buyersintegration plan delayed

Vendor after becoming rich may lack

motivation

Management succession after earn-out

may cause problems

b. For Vendor Increases personal wealth

Career opportunities may be brighter

Buyer can fund future growth of

business.

Loss of control

Pressure for short term results

Culture shock of working in a large

bureaucratic company

T A t f A i iti


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Tax Aspects of Acquisition

financing

Objectives:

Structuring acquisition to maximize the tax relie

Enhancing bid price to benefit target shareholders and

success of acquisition


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Bidd fi i l t t d


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Bidders financial strategy and

acquisition financing

Maintaining reasonable gearing

Credit rating

Ensuring adequacy of lines of credit from banks

Tax impact on cost of capital

Timing of security issue

Earning dilution is share exchange

Boot strapping-applying bidder higher P/E ratio totarget is known as boot strapping. It assumes thatearning growth of target after acquisition match withthat of the bidder. If not, boot strapping will be a shortlived delusion.

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