Cross Border Mergers & Acquisitions

CROSS BORDER MERGERS & ACQUISITIONS The Legal Landscape

Madhurendra Nath Jha

Introduction Merger - A Merger may be defined as the combination of two or more independent business corporations into a single enterprise, usually involving the absorption of one or more firms by a dominant firm. Mergers may be broadly classified as Horizontal, Vertical or Conglomerate Acquisition may be defined as an act of one enterprise of acquiring, directly or indirectly of shares, voting rights, assets or control over the management, of another enterprise . © Paras Kuhad & Associates, Advocates

M&A Band Wagon • Frenzied Activity in the field of M&A in recent years • In 2007 out of Total 348 Cross Border Deals: Outbound: 240 ($32.37 billion) Inbound: 108 ($15.61 billion) © Paras Kuhad & Associates, Advocates

Increase in M& A 700 600 500 400

No. of Deals Amount (USD million)

300 200 100 0

2006

2007

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India Inc. Goes Global  Tata Steel acquired UK based Corus for $ 8 billion.  Suzlon Energy Ltd acquired German firm Repower Systems AG for $ 1.7 billion.  United Spirits bought Scotch whisky distiller Whyte & Mackay for US$ 1.11 billion  Hindalco acquired Novelis for $ 6 billion © Paras Kuhad & Associates, Advocates

India goes global  TATA Chemical acquires US based Soda Ash Maker General Industrial Products for $ 1 billion  Indian shipping company Great Offshore acquires UK based Sea Dragon for US$ 1.4 billion  Essar Energy acquires 50% stake in Kenya Petroleum refineries ltd.  Banswara Syntex to acquire France firm Carreman Michel Thierry for around US$ 125 million

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Graphical representation of Indian outbound deals since 2000. Source: IBEF

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Inbound Transactions  Sistema, Russian Joint Stock Company’s acquisition of 74% stake in Shyam Telelink – Telecommunications  French banking major BNP Paribas’s acquisition of 45% stake in financial services firm Sundaram Home Finance for $45.81 million  Standard Chartered Bank bought 49% stake for $34.19 million in UTI Securities and Interpublic Group hiked its stake in Lintas India to 100% for $100 million © Paras Kuhad & Associates, Advocates

 Fursa Mauritius’s acquisition of 42.63% equity in Gayatri Starchkem  UBS Global Management’s Acquisition of Standard Chartered Asset Management Company for $ 117.78 Million  EMC Corporations Acquisition of Valyd Software Pvt. Ltd.  Orkla’s Acquisition of MTR foods for $ 100 Million

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Destination India • Liberal FDI Policy Framework • FDI allowed in most sectors • Entry Routes for Investment in India – Approval – Automatic

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FDI and Portfolio Flows to India

Source: RBI

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Entry Strategies for Foreign Investors •

As a Foreign Company through: – – –

•

Liaison office/Representative office Project Office Branch Office foreign company through:

As an Indian company through: – –

a Joint Venture Wholly Owned Subsidiary

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Joint Ventures As An Entry Strategy • JV’S regulated by Policies and Laws governing FDI • Two Tier Approval Mechanism for JV’S: - Automatic Approval Route - FIPB Approval Route • If the Foreign Partner has entered into JV in the same field before then NOC of the previous JV partner and approval of the Government also required

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India-entry • ‘Same Field’ may be defined as the 4 digit National Industrial Classification (NIC) Code Illustration: If the foreign investor has collaboration for the manufacture of tarpaulin Code 268.3, he can invest in the manufacture of rubberized cloth Code 268.2 as there is no restriction to enter into JV’s in allied fields. The restriction shall apply to any item whose code NIC code is 268.2.

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India entry • A ‘Conflict of Interest’ clause advisable in the JV/Collaboration agreement in case one of the Partners to the JV wants to set up another JV or wholly owned subsidiary in the same field

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India entry-JV •

The Following are exempted from the restriction of entering into JV in the same field: 1) Information Technology sector 2) Investments made by multinational financial institutions 3) mining sector for the same area/mineral

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Other inbound • Prior government approval not required in certain cases: - Investment to be made by venture capital funds is registered with SEBI - Existing JV investment is less than 3% - Existing venture is defunct or sick

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Remittances • -

Determination of sale Price of Shares Listed Company Unlisted Company/Shares Thinly Traded on the Stock Exchange • Remittance of Sale Proceeds: i. NOC from Income Tax Authority required ii. If the security has not been sold on a recognized stock exchange then prior approval of the RBI in form TS 1 has been obtained © Paras Kuhad & Associates, Advocates

Sectors Attracting Highest FDI Equity Flows Computer Software& Hardware Construction Activities

3000 2500

AutomobileIndustry

2000

Housing& Real Estate

1500

Power

1000

Drugs and Pharmaceuticals Mettalurgic Industries

500

All Figures in US$(Million)

0

2004-05

2005-06

2006-07

2007-08

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Indian Overseas Investment • Favourable Policy framework - Overseas Investment Limit – 400% of Net Worth - Overseas portfolio investment - 50 per cent of Net Worth • Permissible Funding: – Drawal of foreign exchange from an AD; – Capitalization of exports; – Swap of shares;

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Funding Permissible Funding Cont. – Utilisation of proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs); – in exchange of ADRs/GDRs – Balances held in EEFC account of the Indian party; – Utilisation of proceeds of foreign currency funds raised through ADR / GDR issues.

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India’s Direct Investment Abroad Source: RBI

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Data on Overseas Direct Investments S.no.

Country

Outflow 2006-2007 (In US$ Million)

1.

US

313.379

2

Canada

397.772

3

China

4

Netherlands

5

Czech Republic

26.008

6

Italy

7.104

7

Germany

8

France

0.693

9

Portugal

0

10

Poland

0.454

11

Hungary

0

3.176 1005.518

22.858

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Overseas Direct Investment – Sector wise Breakup S.no.

Sector

Outflow 2006-2007 (In US$ Million)

1.

Manufacturing

2402.760

2.

Financial Services

3.

Non-Financial Services 2249.960

4

Trading

390.811

5

Others

985.587

5.754

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Regulatory Framework • Applicable Indian Laws - Companies Act - Competition Act - Income Tax Act - Indian Stamp Act - SEBI Takeover Code - FEMA © Paras Kuhad & Associates, Advocates

Companies Act, 1956 • Merger is a scheme of arrangement • Scheme of arrangement has to be presented before the High Court for sanction • Relevant Sections 391-394 • Limited Scope in Cross Border M&A’s because Transferee company has to be a company incorporated in India

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Competition Law, 2002 • Salient Features: – Anti-competitive agreements; – Prohibition of abuse of dominant position – Regulation of Combinations including mergers – Unfair Trade Practices

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India : Merger Law • Monopolies and Restrictive Trade Practices Act, 1969 – Inadequate – Obsolete

• Still Prevailing

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New Merger Law Competition Act, 2002 • Combination The Indian law uses the word combinations to cover acquisition of control, shares, voting rights and assets, and mergers and amalgamations • Relevant Sections: 5-6 & 29-32

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Areas of Concern • Applicable threshold Limits Based on: – Value of Assets – Turnover

• Notice Requirement – Mandatory – Within 30 days of • Approval of proposal by BOD • Execution of agreement/ document

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Competition proposals • Mandatory waiting Period for Approval – 210 Days

• Extra Territorial Jurisdiction of CCI – CCI has power to inquire about combinations taking place outside India

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Intent of National Security Legislations

– Right to Intervene in case of perceived threat to National Security – Discretionary powers to prevent certain foreign companies from doing business in the country

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Foreign Investments & National Security Legislations • United States- Foreign Investment & National Security Act, 2007 (Exon-Florio Provision) • China- Anti Monopoly Law • European Union- Members are free to regulate International Mergers (Articles 81-85 EC Treaty regulates Competition) © Paras Kuhad & Associates, Advocates

security • United Kingdom- Enterprises Act 2002 • India- National Security Exception Bill yet to be passed by the Parliament

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THANK YOU Should you have any questions on issues reported here or on other areas of law, you may contact Paras Kuhad and Associates at the following coordinates: Mr. M.N. JHA Paras Kuhad and Associates, Advocates A-238, Lower Ground Floor, Defence Colony, New Delhi- 110 024, India Tel: +91 (0) 11 46562525, 46562727 Fax: +91 (0) 11 46562000

Mob: +91/0-9811319922 Email :

[email protected], [email protected]

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Disclaimer The contents of this document are intended for informational purposes only and are not in the nature of a legal opinion or advice. They may not encompass all possible regulations and circumstances applicable to the subject matter and readers are encouraged to seek legal counsel prior to acting upon any of the information provided herein. This Note is the exclusive copyright of Paras Kuhad and Associates, Advocates and may not be circulated, reproduced or otherwise used by the intended recipient without the prior permission of its originator. © Paras Kuhad and Associates, Advocates 2008

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