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