Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • Changi Airport Group
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • BCC Partners
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek International Pte. Ltd.
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • Kazakhstan Potash Corporation Limited
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V. (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • TMI Associates (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Jurie Advokat AB (Sweden)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Rolf Watter
  • Bär & Karrer AG (Zürich)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Monthly Archives: September 2013

AUSTRALIAN UPDATE: Deal Landscape, Deal Structures and Foreign Bidders in Australian Public M&A in 2013

Highlights

  • The Australian public M&A market has seen a significant drop in activity over the 12 months to 30 June 2013.
  • After a number of years where the energy and resources sectors were the primary drivers of public M&A activity in Australia, in FY 2013, most activity was in the utilities, industrials, financial services and agriculture sectors.
  • Overall, success rates for transactions dropped to 63% in FY2013, down from 81% in FY2012.
  • Success rates were notably higher for transactions announced with the support of the target board, and where the bidder offered an initial premium of more than 40%.
  • Levels of inbound cross-border public M&A activity continued to decrease with 42% of bidders in FY2013 being based offshore, down from 46% in FY2012 and 51% in FY 2011.

Main Article:

Deal landscape

Australian public merger and acquisition activity dropped in the 12 months to 30 June 2013 (FY2013), with just 59 deals announced and $11.6 billion committed by bidders, down from 83 deals and $63 billion in the previous 12 months (FY2012). This can be contrasted with the subdued but relatively steady volumes of M&A activity globally over the same period.

Unlike previous years, energy and resources deals did not drive public M&A activity in FY2013, accounting for significantly less than half of total deal value. Consolidation in the gold sector replaced coal sector consolidation as the source of deal activity in the resources sector, but with much lower transaction volumes. Although public M&A activity in the resources sector was limited, a large number of resources projects were put up for sale as stand-alone assets by private auction process, reflecting an increased focus by energy and resources companies on their core businesses and assets.

The industrial and utilities, financial services (including insurance, REITs and diversified financials) and agriculture sectors accounted for significant deal flow in FY2013 ($7.1 billion of announced transactions).

Consistent with the general decline in M&A activity, the number of private equity deals declined in FY2013, with only 8 transactions announced (of which only 3 had completed successfully as yet). However, FY2013 did see private equity acquirers entering into the previously untouched energy and resources sector.

After 3 years of steadily increasing success rates, in FY2013, success rates dropped to 63% (down from 81% in FY2012).

The correlation between initial target board approval (at the time of announcement) and transaction success rates was starker in FY2013 than in previous years, with 86% of transactions which were announced with target board approval being successful compared with a success rate of 31% for transactions which were announced without target board approval. The use of public ‘bear hug’ tactics to force target board approval dropped, with none of the bids which were announced in FY2013 as being conditional on target board approval being successful as yet.

Success rates in ‘hostile’ and friendly deals

First image

Also, in contrast to previous years, there was a clear correlation between the size of the initial premium offered and deal success rates, with all transactions involving a premium of more than 40% being successful.

Success rates of deals based on share premium offered

Second Picture

Another significant contributor to success was the presence of lock-up arrangements (involving pre-bid commitments by significant shareholders in the target to support the bid), with 87% of deals with lock-up arrangements being successful in FY2013.

Foreign bidders

Bidders headquartered overseas accounted for 42% of total M&A activity in FY2013, down from 46% in FY2012 and 51% in FY2011, reflecting a continuing decrease in inbound cross-border M&A. Nevertheless, of the announced transactions exceeding $1 billion in FY2013, all of them were launched by foreign acquirers.

Asia-based bidders continued to account for a significant proportion of all foreign bidders. However, the number of bids originating from China reduced in line with overall deal activity, dropping from 10 in FY2012 to 6 in FY2013, of which only one has succeeded so far, 2 are ongoing and 3 have failed.

Origin of bidders

3 picture

Deal structure

The number of scrip-based transactions increased in FY2013, mirroring the trend seen in 2009, with alternative uses of cash (reinvestment in existing assets or return to shareholders) taking priority. Of the cash bids, 76% were funded entirely using the bidder’s cash reserves, with external debt funding being the primary source of cash consideration in only 20% of bids.

The proportion of transactions by foreign acquirers that were scrip-only increased in FY2013 (36%, up from 15% in FY2012). However, in contrast to previous years, in just under half of these bids, the bidder offered scrip to target shareholders that would be listed only on a foreign exchange without any listing on the ASX. This suggests an increasing willingness by Australian investors to rely on overseas exchanges to provide liquidity.

Levels of conditionality in public M&A transactions remained consistent with previous years, with 95% of transactions in FY2013 being made subject to conditions. However, there was a significant decrease in use by bidders of minimum acceptance conditions (conditions requiring minimum levels of acceptance from target shareholders for the transaction to proceed) in FY2013, with only 71% of off-market bids having a minimum acceptance condition in FY2013, compared with an average of 88% for the previous 4 years.

Also, among foreign bids, conditions requiring overseas regulatory approval for the bid to proceed were rarer. This may reflect the experience in FY2012 where a number of relatively high-profile transactions involving overseas regulatory approval conditions were the subject of lengthy delays while relevant overseas regulatory authorities conducted their review processes, and in some cases were unable to be consummated.

Deal protection mechanisms, including no-shop/no talk provisions, break fees, lock-ups (eg, commitments by shareholders to accept a bid) and toe-holds (eg, acquisitions of pre-bid shareholdings) continued to play an important role in negotiated transactions. In particular, FY2013 saw a return to the use of lock-ups by bidders, and a strong correlation between use of lock-ups and deal success.

Forms of deal protection in negotiated transactions

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The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

Global Update – Cross-Border Schemes of Arrangement and Forum Shopping

Editors’ Note: This paper was authored by Jennifer Payne, who is Professor of Corporate Finance Law at the University of Oxford.

Executive Summary:  A number of recent high profile cases have allowed non-English companies to make use of the English scheme jurisdiction to restructure their debts.  These decisions have proved controversial in some quarters, with concerns being raised that allowing these schemes of arrangement to proceed facilitates forum shopping. The purpose of my paper, Cross-Border Schemes of Arrangement and Forum Shopping, is to consider this use of English schemes of arrangement by non-English companies, and particularly by companies registered in other EU Member States. This paper also assesses the concerns raised regarding forum shopping in this context and rejects these concerns.

Main Article:

The English scheme of arrangement has existed for over a century as a flexible tool for reorganising a company’s capital structure. Schemes of arrangement can be used in a wide variety of ways. In theory a scheme of arrangement can be a compromise or arrangement between a company and its creditors or members about anything which they can properly agree amongst themselves. It is common to see both member-focused schemes and creditor-focused schemes. In practice the most common schemes are those which seek to transfer control of a company, as an alternative to a takeover offer, and those which restructure the debts of a financially distressed company with a view to rescuing the company or its business.

In recent years schemes of arrangement have proved popular as a restructuring tool not only for English companies but also for non-English companies. A number of recent high profile cases have allowed non-English companies to make use of the English scheme jurisdiction to restructure their debts, including Re Rodenstock GmbH [2011] EWHC 1104 (Ch), Primacom Holdings GmbH [2012] EWHC 164 (Ch), Re NEF Telecom Co BV [2012] EWHC 2944 (Comm), Re Cortefiel SA [2012] EWHC 2998 (Ch) and Re Seat Pagine Gialle SpA [2012] EWHC 3686 (Ch). Typically, these cases involve financially distressed companies registered in another EU Member State making use of an English scheme of arrangement without moving either their seat or Centre of Main Interest (COMI). In general, the main connection to England is the senior lenders’ choice of English law and English jurisdiction as governing their lending relationship with the company.

These decisions have proved controversial in some quarters, with concerns being raised that allowing these schemes of arrangement to proceed facilitates forum shopping. The idea of forum shopping often carries negative connotations, and is associated with debtors seeking legal regimes that will favour the debtor at the expense of the creditors. The purpose of my paper, Cross-Border Schemes of Arrangement and Forum Shopping, is to consider the use of English schemes of arrangement by non-English companies, and particularly by companies registered in other EU Member States. This paper also assesses the concerns raised regarding forum shopping in this context. The paper rejects these concerns.

In particular, this paper asserts that forum shopping is not always problematic. In some instances the debtor may be driven by a desire to utilise a form of proceeding in a particular jurisdiction with a view to maximising returns to creditors. For example, if a financially distressed company has no domestic option which would allow it to restructure and to carry dissenting creditors with it, to deny access to a scheme of arrangement may result in insolvency for the company. Such an outcome is likely to be worse for creditors than a successful debt restructuring. To demand that the company forego this option, and go into liquidation, would be of little or no benefit to the creditors or other stakeholders of the company. Modern businesses typically have most value as going concerns. Since liquidation unnecessarily destroys a large amount of that value, rehabilitative restructurings are almost always preferable for companies and their creditors. Schemes of arrangement may therefore offer a valuable pre-insolvency solution that can transcend international borders.

The full version of the paper is available for download here.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

PANAMANIAN UPDATE – Regulating Corporate Spin-offs in Panama

Editors’ Note: Carlos G. Cordero G. is a senior partner at Alemán, Cordero, Galindo & Lee and a member of XBMA’s Legal Roundtable. Alemán, Cordero, Galindo & Lee is one of Panama’s leading law firms in the offshore area as well as in representing large corporations doing business in Panama. Mr. Cordero concentrates on Commercial Law, Banking and Administrative Law, with specialization in mergers and acquisitions, government contracts and commercial arbitration.

Executive Summary:  From a commercial perspective, spin-offs can represent incredible opportunities for unlocking shareholder value.  As with any major undertaking, spin-offs require a tremendous amount of planning, and investors and management alike should rightfully strive to achieve predictable outcomes.  Fortunately, the Panamanian legislature has shed some additional light on this subject by recently enacting a long overdue law that specifically regulates corporate spin-offs.

MAIN ARTICLE

From a commercial perspective, spin-offs can represent incredible opportunities for unlocking shareholder value.  Whether it’s by decoupling a high value/growth asset from the trappings of its larger conglomerate or by devising more tax efficient means of distributing value to shareholders, spin-offs offer a whole host of potential benefits.  However, spin-offs (as is the case with any major undertaking) may be plagued by certain commercial, administrative and legal challenges, and as such, companies undergoing spin-offs must carefully “manage” the marketplace’s expectations, lest they inadvertently send a mixed or negative message.  Some onlookers might interpret a spin-off as tossing out the trash, in order for the winners to keep the cash.  Others might view it more favorably if they believe in the operational benefits of having “focused” companies instead of unwieldy conglomerates.  In any event, corporate spin-offs require a tremendous amount of planning, and investors and management alike should rightfully strive to achieve a predictable outcome.

In Panama, the law has historically been silent on the issue of corporate spin-offs.    The lack of proper regulation has led to corporate spin-offs being perceived as ambiguous and unpredictable affairs in Panama. The unregulated environment and the unpredictability surrounding corporate spin-offs made corporations wary of taking any such actions.  Fortunately, the Panamanian legislature recently enacted a long overdue law that specifically regulates corporate spin-offs.  Since the enactment of Law 85 of November 22, 2012, Panamanian corporations have finally been able to engage in corporate spin-offs within a regulated and more predictable framework.

Law 85 added several new provisions to the Panamanian Commercial Code, regulating various types/forms of corporate spin-offs. This law starts off by stating that: “A company engaged in commerce of any kind or nature can be split by dividing all or part of its assets and transferring them to one or more new or existing companies, called beneficiaries, which should have the same shareholders or partners as the company being divided or which have said company as their sole partner or shareholder.”

Essentially, the above provision allows for the following types/forms of spin-offs:

 

1)         A complete spin-off, whereby the original company to distribute its assets in full to the beneficiary company or companies and is thereby dissolved in the process; or

 

2)         A partial spin-off, whereby the dividing company remains intact following the split with part of its assets being allotted to one or more beneficiary companies.

It is important to note that in both cases, existing companies or companies to be incorporated pursuant to the spin-off can be used as beneficiary companies for the corporate spin-off process; provided that the beneficiary companies retain the same ownership structure (ie, same partners and shareholders) as the pre-spinoff company, or for the beneficiary companies to be wholly owned subsidiaries of the surviving post-spinoff company.

From a mechanical/procedural perspective, this law clearly lays out the ground rules for completing a spin-off.  For example, the members or shareholders of a company are required to approve a spin-off; conversely, the board of directors does not have the authority to unilaterally authorize a spin-off without member/shareholder oversight and approval.  Moreover, a company wishing to initiate a spin-off process must provide the Panamanian National Revenue Authority (ANIP) with at least 30-days’ notice prior to registering the spin-off at the Public Registry.  After the notification period has expired, the minutes of a meeting of the shareholders/partners adopting the resolution that authorizes a spin-off (or a written certification of the Secretary of said meeting) must be protocolized and registered at the Public Registry for the spin-off to be effective. The law goes on to list a series of other issues that may be dealt with at the above referenced shareholders/partners meeting, which include the following:

a.         Total or partial transfer of assets, individually or in block.

b.         The limitation of liability regime of the company being divided and of each of the beneficiary companies.

c.         Transfer of liabilities of the company being divided.

d.         Transfer of shares or related interests to the beneficiary companies.

e.         The amount of shares or related interests corresponding to each partner or shareholder of the company being divided, in accordance with the proportion of their stake therein.

f.         The approval of the Articles of Incorporation of the beneficiary companies.

This law takes a strong stance towards protecting minority interests and creditors’ rights (viz-a-viz the controlling stakeholders of a company contemplating a spin-off).  For example, by requiring a shareholders/members meeting, minority stakeholders are given the tools to overturn any corporate action taken that falls short of strict compliance with the law (e.g., meetings held without providing all shareholders/partners with due notice).  Furthermore, by requiring the same ownership structure amongst the various beneficiary companies, minority stakeholders are protected from potentially unscrupulous controlling shareholders/partners attempting to syphon off quality assets, while leaving minority stakeholders holding the proverbial bag.   In addition to building in fundamentally sound corporate governance protections, this law introduces an element of paternalism by requiring companies to provide the Panamanian National Revenue Authority (ANIP) with prior notice of forthcoming spin-offs.

With respect to the protection of creditors, this law specifies that any and all liabilities associated with a given asset shall flow directly into the recipient beneficiary company (e.g., mortgaged property).   However, creditors are afforded additional protections in the event they oppose the spin-off.  For example, a certification issued by the Public Registry in connection with the spin-offs is required to be published (ie, made available to the public) for three days.  Any creditor may challenge a spin-off within thirty (30) days of the final publication of the above referenced certification.  Furthermore, creditors that either were unable to avail themselves of this thirty (30) day window or opted not to use it may still sue the other beneficiary companies involved in the spin-off.  Such beneficiary companies would be treated as jointly and severally liable in the event the spin-off was found to be prejudicial to the suing creditor.

From a tax perspective, this law creates a conundrum that in many instances might make spin-offs an unattractive alternative for certain corporations.  On its face, spin-offs are treated as tax neutral events (ie, not treated as transfers for tax purposes); provided that, assets are transferred at book value.   However, this law imposes joint and several liability on the beneficiary companies for any and all of the dividing company’s tax liabilities at the time of the spin-off and into the future.  If the courts opt to interpret this new provision literally, spun-off companies may need to account for this contingent liability in their books, subject to applicable statutes of limitation.  Since this law does not clarify whether this joint and several liability applies for spin-offs where the dividing company does not survive (ie, joint and several liability as between the beneficiary companies), practitioners may opt to advise their clients to pursue this type/form of spin-off until the courts and/or the legislature clarifies this issue.

The views expressed herein are solely those of the author and have not been endorsed, confirmed or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

 

INDIAN UPDATE – INDIA’S NEW COMPANY LAW – KEY CHANGES IN THE REGIME

Editors’ Note: Cyril Shroff is the Managing Partner and head of the Corporate group of Amarchand & Mangaldas & Suresh A. Shroff & Co.  Mr. Shroff is also a member of XBMA’s Legal Roundtable and one of the deans of the Indian corporate bar and a leading authority on Indian M&A, with extensive experience handling many of the largest and most complex domestic and cross-border M&A, takeover, banking and project finance transactions in India.  This article was co-authored by Mr. Shroff and Ms. Vandana Sekhri (Partner) of the Mumbai office of Amarchand & Mangaldas & Suresh A. Shroff & Co.

Executive Summary:  The Companies Act, 2013 has been highly anticipated and will bring sweeping changes to the extant company law regime. This article covers a general overview of some of the key changes brought about by the 2013 Act.  Topics covered include:

  • New and changed key concepts of control, a promoter, a subsidiary company, associate and related party.  Introduces a new form of corporate entity—a One Person Company.
  • Introduces the concept of fraud in relation to affairs of a company.
  • Creates a National Company Law Tribunal as well as a National Company Law Appellate Tribunal and vests it with the jurisdiction of High Courts and other judicial authorities.
  • Imposes certain restrictions and liabilities on companies, promoters and the management with regard to funds raised from the public.
  • Withdrawal of exemptions to private companies, holding and subsidiary companies from effecting inter-corporate transactions.
  • Excessive regulation of private companies similar to public companies.
  • Prohibits forward dealings and insider trading by directors and KMPs of unlisted companies.
  • Prohibits companies from making investments through more than 2 layers of investment companies i.e. companies whose principal business is acquisition of securities.
  • Significant changes in the corporate governance sphere, particularly in relation to provisions applicable to listed companies, directors’ duties and liabilities, independent directors, corporate social responsibility and board and shareholder meetings.
  • Changes to the auditors regime.
  • Empowered the central government to establish Special Courts for the speedy trial of offences.
  • Changes in the court restructuring process.

Full text of India’s New Company Law – Key Changes In The Regime

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

INDIAN UPDATE – COMPANIES ACT, 2013 – IMPACTING M&A DEALS

Editors’ Note: Cyril Shroff is the Managing Partner and head of the Corporate group of Amarchand & Mangaldas & Suresh A. Shroff & Co. Mr. Shroff is also a member of XBMA’s Legal Roundtable and one of the deans of the Indian corporate bar and a leading authority on Indian M&A, with extensive experience handling many of the largest and most complex domestic and cross-border M&A, takeover, banking and project finance transactions in India. This article was co-authored by Mr. Shroff and Ms. Vandana Sekhri (Partner) of the Mumbai office of Amarchand & Mangaldas & Suresh A. Shroff & Co.

Executive summary:

The Companies Act, 2013 (“2013 Act”) was expected to simplify life for corporate India, strengthen corporate governance norms and make India an attractive and safe investment destination. Introduced with the objective of consolidating and amending the existing law applicable to companies, the 2013 Act contains 470 clauses as opposed to nearly 700 sections under the Companies Act, 1956 (“1956 Act”). The central government has been empowered to make rules under many provisions of the 2013 Act. While many of the rule making powers are procedural, certain substantive provisions have been delegated, which could have far reaching implications for corporate India. Various provisions of the 2013 Act have marked a considerable departure from the extant positions under the 1956 Act.

This article seeks to examine certain key changes with regard to shareholder rights and structuring restrictions proposed under the 2013 Act, which could impact conventional deal making methods.

Posted In: India, M&A (General), Legal Regime, Regulatory Matters

Main Article:

Veto Rights and ‘Control’

The introduction of the concept of ‘control’ in the 2013 Act[1] has implications for investors in Indian companies. Under the 2013 Act, ‘control’ is understood to include the right to: (i) appoint a majority of directors; or (ii) control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholding agreements or voting agreements, or in any other manner. The definition is similar to the definition of ‘control’ under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011[2] (“Takeover Code”). The definition of ‘control’ and the jurisprudence surrounding the same under the Takeover Code has been developed with the objective of protecting minority shareholders and providing an exit to them in the event of change in its control. The definition of ‘control’ is linked closely with the definition of ‘promoter’. The 2013 Act provides that a person having control over the affairs of the company would be regarded as its ‘promoter’.

Given the similarity in the definition of ‘control’ under the Takeover Code and the 2013 Act and its linkage to the definition of ‘promoter’ it is likely that the jurisprudence of control under the Takeover Code would be applied under the 2013 Act, as well. But, the scope of the term ‘control’ under the Takeover Code itself is not clear. While the Securities Appellate Tribunal (“SAT”) had held that affirmative voting rights granted to investors would not amount to ‘control’,[3] the Supreme Court has left the question open in the Subhkam decision[4] by ruling that the SAT’s order would not have any precedent value. The Securities Exchange Board of India (“SEBI”) has not laid down any test to determine with reasonable certainty the point at which a person acquires control. With the new definition of ‘control’ under the 2013 Act, the prevailing uncertainty around what constitutes ‘control’ would impact deal making with respect to unlisted companies as well.

The uncertainty around the interpretation of control would impact negotiation of shareholder agreements. Affirmative vote rights in favour of investors under a shareholders agreement are meant to be an effective tool for safeguarding investment or the interest of the investors. These rights are negotiated and decided in the shareholders agreement, which are subsequently incorporated into the articles of association of a target company. Accordingly, an investor or shareholder who has secured for itself certain rights which enable a degree of control over ‘management or policy decisions’, whether by way of board representation or veto rights, may be regarded as having ‘control’ of the company and therefore be classified as a ‘promoter’. Investors would need to carefully consider the obligations and liabilities associated with the position of a promoter under the 2013 Act when negotiating rights and powers in a company under the shareholders agreement.

Transfer Restrictions

Apart from veto rights, shareholder agreements also provide for certain exit rights and restrictions on transferability of shares of the company. Such rights typically vary based on the nature of the investment or the acquisition structure and range from pre-emption rights to call and put options. While transfer restrictions are enforceable in case of private companies, their enforceability in relation to shares of a public company has not been established conclusively. The 2013 Act[5] prescribes that the shares of a public company would be freely transferable but has introduced a carve-out for any contract or arrangement between two or more persons in respect of transfer of securities, which would be enforceable as a contract. This exception could be an attempt to codify the principle laid down in the decision of the Bombay High Court in the Messer Holdings case,[6] wherein it was held that an agreement between shareholders restricting the transfer of shares in a public company is not in violation of the law mandating free transferability of shares of a public company. However, the provision could have been drafted with more clarity to achieve the desired objective.

Under the 2013 Act, unless a company is not a party to the agreement containing transfer restrictions, the same would not be binding on the company and it would be free to register any transfer of shares in contravention of such restrictions. But the clause in the 2013 Act does not support the view that a public company can be bound by contract to restrict the transfer of its shares. In the absence of such a contract being enforceable against the company, an aggrieved party would only have a right to claim damages for breach of contract against the defaulting seller in cases of sale in breach of transfer restrictions. A remedy of specific performance or injunction may be available against the seller only if such sale has not been completed.

Entrenchment

Another new development in the 2013 Act is the recognition of entrenchment provisions in the articles of association of a company. The purpose of shareholder agreements is to secure certain rights for shareholders which have not otherwise been made available to them under law. For example, an investor holding 20% shares in a company may want a say in an alteration of the investee’s articles which affect its rights in the company. As the law only mandates a special resolution (3/4th majority of shareholders present and voting) for any alteration to the articles to be approved, the consent of the investor may not be required. In such a situation, the shareholders agreement may mandate an affirmative vote of all shareholders for any such alteration to be approved. While inclusion of such rights has been the norm in most shareholders agreements, the same has been granted legal sanctity under the 2013 Act[7]. Under the 2013 Act, articles of a company may contain provisions for entrenchment such that certain specified provisions of the articles may be altered only upon the satisfaction of conditions or procedures that may be more restrictive than those applicable in the case of a special resolution.

There has been some debate on the validity of affirmative rights in favour of minority shareholders, for a company to perform certain actions. The rationale behind the debate being that such affirmative rights place a higher threshold on the company than what is statutorily prescribed under law for exercising such actions. The Punjab and Haryana High Court[8] has, in the past, ruled that a company is not prohibited from providing a higher quorum for board meetings in its articles than that prescribed under the 1956 Act. The underlying principle which may be inferred from this decision is that it is permissible for a company to adopt a higher threshold of compliance than that required under law. However, the Company Law Board’s decision in the Jindal Vijaynagar[9] case invalidated the affirmative rights of a minority shareholder from preventing a change in the location of the registered office of a company. The new provision for entrenchment does not expressly grant recognition to affirmative rights in the hands of minority shareholders in situations where the statute provides for voting thresholds. But, it at least grants legal sanction to affirmative rights on amendment of the articles of the company.

Apart from the issue of shareholder rights and their enforceability, the 2013 Act also affects, amongst other things, the manner in which investments are held or made.

Layering 

A significant development under the 2013 Act is the restriction introduced on a company from making investments through more than two layers of investment companies (i.e. companies whose principal business is the acquisition of shares, debentures and other securities).[10] There is no guidance within the 2013 Act on determination of the principal business of a company. This phrase has also been the subject of debate under the non-banking financial companies’ legal regime, governed by the Reserve Bank of India. In the absence of any statutory clarity in this regard, deal structures would need to be looked into carefully to ensure compliance with this restriction.

Private Companies: Fund Raising

As mentioned at the outset, the 2013 Act seeks to protect interests of minority shareholders and this has resulted in curbing the flexibilities available to private companies under the 1956 Act. Various provisions have been introduced across the statute, which effectively nullify the advantages of incorporating a private company over a public company. Of these, those associated with fund raising activities are of particular relevance to investment transactions.

The process of a ‘rights issue’ under the 1956 Act[11] has been made mandatory for even private companies, with certain additional requirements. A special resolution would be required for any preferential allotment of shares with the pricing being determined by a registered valuer.[12] In addition to the above, cumbersome requirements (including issuance of a private placement offer letter and filings with the registrar of companies) usually required to be followed by public companies, will have to be adhered to by private companies even in case of standalone placements which constitute an ‘offer’ or ‘invitation to offer’. However, given that most private companies are closely held, except for the added paperwork and factoring of such processes in transaction timelines, it should be possible to work around the regulatory framework to ensure uninterrupted operations.

Classes of Shares – Private Companies

Another significant change under the 2013 Act is its position on shares with differential rights. The 1956 Act permitted a private company to issue shares of various classes, each of which could have different rights in terms of dividend, voting or any other special rights. While public companies were required to meet the stipulated conditions for issuing such shares, private companies had been exempted from the same.[13] The 2013 Act provides that private companies would also have to comply with the rules, to be framed by the government in this regard, in order to be able to issue shares with differential class rights. Otherwise, the voting rights of each shareholder in a poll would have to be proportionate to such shareholder’s share in the paid up capital of company.[14] While the government is yet to release the rules for issuing shares with differential rights, subjecting private companies to any onerous rules in this regard will hamper investment structuring.

Insider Trading Restriction on Shares of Private Companies

Another feature of the 2013 Act is the applicability of insider trading restrictions on shares of a private or public unlisted company. The 2013 Act mandates that no director or key managerial personnel[15] of a company shall engage in insider trading; which is described to include, among other things, subscribing or selling to shares by such persons or providing any price sensitive information to any person. This restriction will impact deal structuring since almost every deal in the unlisted company space would involve sharing of information by directors or key managerial personnel or subscription or sale of shares by promoters who are normally in an executive capacity within the company.

Grandfathering

While some of the changes described above are onerous and make deal structuring a challenge, the absence of clear grandfathering provisions in the 2013 Act is a cause for concern especially when assessed in light of the restrictions on creation of classes of shares or layers of investments. As the 2013 Act[16] merely grandfathers acts validly done under the 1956 Act which are not inconsistent with the 2013 Act, there is no clarity on whether the ‘inconsistent’ provisions would have prospective or retrospective applicability. This is relevant to determine whether existing structures and transactions consummated pursuant to the extant law would have be wound up or restructured for aligning them with the provisions of the 2013 Act. Apart from the operational inconvenience in unwinding existing structures, the cost implications for such unwinding could be significant.

Concluding Remarks

The government has been advocating that the 2013 Act is a positive step towards greater accountability and transparency for corporate India. But, in order to achieve accountability and transparency, the legislature may have restricted the ability of corporate India in structuring deals. While we hope that the rules that are to be prescribed by the government dispel some of the uncertainty created by the 2013 Act, certain provisions clearly need to be revisited by the legislature.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

 


[1] Clause 2(27) of the 2013 Act

[2] Regulation 2(e) of the SEBI (Substantial Acquisition of Shares and Takeover Regulations), 2011

[3] Subhkam Ventures (I) Pvt.. Ltd. v. The Securities and Exchange Board of India, Appeal No. 8 of 2009, decided on 15.01.2009

[4] The Securities and Exchange Board of India v. Subhkam Ventures (I) Pvt. Ltd., Civil Appeal No. 3371 of 2010, decided on 16.11.2010

[5] Clause 58(2) of the 2013 Act

[6] Messer Holdings Ltd. v. Shyam Madanmohan Ruia & Ors. [2010] 159 Comp Cas 29 (Bom)

[7] Clause 5(3) of the 2013 Act

[8] Amrit Kaur Puri v. Kapurthala Flour, Oil and General Mills Co. P. Ltd. and Ors., [1984] 56 CompCas 194 (P&H)

[9] In Re: Jindal Vijayanagar Steel Limited , a Company registered under the Companies Act, 1956, [2006] 129 CompCas 952 (CLB)

[10] Clause 186(1) of the 2013 Act

[11] Section 81 of the 1956 Act

[12] Clause 62(1)(c) of the 2013 Act

[13] Section 86 read with Section 90 of the 1956 Act

[14] Clause 43 of the 2013 Act

[15] Clause 2(51) of the 2013 Act defines ‘key managerial personnel’ to mean the chief executive officer, managing director, manager, company secretary, whole-time directors, chief financial officer and such other officers as may be prescribed

[16] Clause 465 of the 2013 Act

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

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