The low oil price and limited capacity for oil and gas producers to further reduce operating costs is presenting challenges for producers of all shapes and sizes. In 2015 we expect that a number of producers will conduct strategic reviews which may lead to the sale of ‘non-core’ assets.
Traditional solutions of raising capital or debt may not be available on acceptable terms for many producers due to the uncertainty about the timing and extent of the oil price recovery. The option of warehousing a marginal project until economics improve may not be available either because such a project is now ‘non-core’ or because the producer must comply with minimum work obligations.
If strategic reviews trigger M&A activity in 2015 in the oil and gas sector, one challenge will be matching price expectations of producers with prospective investors. This is because of the inherent uncertainty around the recovery of the oil price. In this scenario, some junior producers may encounter difficulties and enter the M&A market as a distressed vendor.
This article considers some tensions between the positions of vendor and purchaser in an M&A transaction where the vendor is in financial distress.
Diligence is crucial in a distressed sale process
Effective due diligence typically provides the framework for the risk/pricing profile in an M&A transaction. In a distressed vendor environment, the purchaser’s ability to conduct effective due diligence may be impacted by a number of factors including:
- shortened deal timeframes sought by vendors as a means of limiting the further deterioration of the asset and to obtain certainty, or
- imperfect information being available due to the transaction being forced upon the vendor (rather than planned as part of an orderly sales process).
A risk to purchasers in these circumstances is ensuring that all key issues are considered and priced into the deal.
Prospective purchasers also need to be wary of the risk of using their bargaining position to obtain a deal which might later be challenged by a liquidator as an uncommercial transaction.
Warranties and indemnities
Where the vendor is in formal insolvency, the insolvency practitioner vendor administering the sale process will be concerned to limit personal liability and will usually resist giving any meaningful warranties or indemnities.
Where possible in a distressed vendor transaction, the purchaser should insist on warranties that provide comfort:
- that the insolvency practitioner has been validly appointed and has the power and authority to enter into, and give effect to, the transaction,
- that no consents or registrations are required to give effect to the transaction, other than as set out in the transaction documents, and
- as to title to the assets and that the assets are unencumbered.
The practical value of any warranties and indemnities given by a distressed vendor or insolvency practitioner to a purchaser may be severely limited in any event. This is because a distressed vendor may not have the financial resources to honour a warranty or indemnity claim. Where such a claim is honoured, there is a risk that a liquidator appointed later may challenge the payments as ‘unfair preferences’. Any warranty or indemnity claims given by an insolvency practitioner as agent for a distressed or insolvent company will be unsecured debts of the company and may form part of the broader unsecured creditors’ pool in liquidation.
Possible options to enhance warranty and indemnity protection for the purchaser include:
- obtaining security or a guarantee from a third party whose credit worthiness is not in doubt,
- structuring the transaction so that there is a hold back as to part of the purchase price (provided that the purchaser does not have notice of, or suspicion, that the vendor was insolvent), or
- obtaining buy-side warranty and indemnity insurance against insurable warranties.
Purchase price adjustments following completion
Post-completion purchase price adjustments may also be at risk where a distressed vendor does not have the financial resources to honour its obligation or, if it does, the amount paid may be later challenged as an ‘unfair preference’. The solutions listed above may be of assistance to protect the purchaser. It is also noted that a drafting solution may be to ensure that it is more likely that the purchaser will be required to pay the adjustment payment (e.g. in respect of a working capital adjustment, to make a conservative estimate of target working capital).
Negotiating a sale and purchase agreement where a vendor is distressed or in formal insolvency is unlikely to be an orderly process. For prospective purchasers, due diligence is critical before making an assessment of whether to proceed with a deal due to the limited legal protection typically on offer in these circumstances.
Executive summary: This article briefly examines a few key changes made to the process for court based restructurings introduced by the Companies Act, 2013.
The Companies Act, 2013 (“2013 Act”), having been approved by the Lok Sabha in 2012, was approved by the Rajya Sabha on August 8, 2013 and now only awaits Presidential assent and notification in order to become law. Once notified, the 2013 Act will replace the more than 50 year old Companies Act, 1956 (“1956 Act”) in an effort to modernize and streamline the legal and regulatory framework in which Indian companies operate.
Whilst the 2013 Act introduces a number of far-reaching changes over the current legal regime, notably in the detailed treatment of corporate action and its regulation, and is characterized by the degree to which specific prescriptions or prohibitions in respect of such action have been set out whilst at the same time delegating a large number of matters (a common criticism is too many) for executive rule making, the focus of this article is to briefly examine the changes made to the process for court based restructurings and comment on the key aspects in relation to the same.
Brief Overview of the Court Based Restructuring Process
Court based restructurings, referred to as “compromises” or “arrangements” between a company and its members or class or members, or a company and its creditors or class of creditors, are dealt with in Chapter XV of the 2013 Act (Clauses 230-240) and set out a framework that will replace the erstwhile framework under Sections 391-394 of the 1956 Act.
A brief overview of the key steps of the court based restructuring process is set out below:
- The first step is the making of an application to the Tribunal for sanctioning the compromise or arrangement. The application may be made by the company concerned or its members or creditors or class or members or creditors. In the event of a company being wound up, the application is required to be made by the liquidator.
- On receipt of the application, the Tribunal may order a meeting of the company’s various classes or members or creditors as it deems fit. The Tribunal may dispense with a meeting of the creditors or class or creditors where such creditors (or class of creditors), holding at least 90% in value of the debt, give their confirmation to the proposed compromise or arrangement through an affidavit.
- Appropriate details of the proposed compromise and arrangement are required to be given to the classes of members and creditors in order to enable them to take an informed decision. A copy of the valuation report in respect of the proposed transaction (if any), together with a statement disclosing the effects of the compromise or arrangement on the key managerial personnel and directors of the company is required to be shared with the members and creditors as part of the notice for the meetings.
- A copy of such notice is also required to be sent to the Central Government, the income-tax authorities, the Reserve Bank of India (“RBI”), the Securities and Exchange Board of India (“SEBI”) and the stock exchanges (for listed companies), the Registrar of Companies, the Official Liquidator and the Competition Commission of India (“CCI”) and such other sectoral regulators and authorities as are likely to be affected by the compromise or arrangement, requiring them to make representations (if any) on the proposed compromise or arrangement within a period of 30 days from the date of receipt of such notice.
- Where a majority of the persons representing three-fourths in value of the creditors or class or creditors, or members or class of members, agree to a compromise or arrangement, the Tribunal may sanction such compromise or arrangement, which order then binds the company and its creditors and members.
A Few Key Changes and Their Implications
A few of the important changes introduced by the 2013 Act are highlighted below;
(i) Enhanced Regulatory Scrutiny and Multiplicity of Regulators – As set out above, the 2013 Act now requires that companies forward the notice of the compromise or arrangement to a plethora of regulatory bodies including such other sectoral regulators or authorities which are, “likely to be affected by the compromise or arrangement”, together with such other documents as may be prescribed. It is currently unclear who these other sectoral regulators and authorities would be – whilst it can be expected that this will become established through market practice in the course of time for companies engaged in diverse businesses, a degree of uncertainty nevertheless remains at least at the initial stages.
The other question that arises is one of potential regulatory overlap. Under the Competition Act, 2002, the CCI is already empowered to rule on combinations within a period of 210 days of being notified of a proposed combination. Similarly, the SEBI is authorized to regulate, and has issued for this purpose, circulars dealing with court based restructurings of listed companies. It is currently unclear what happens if the CCI or the SEBI make or omit to make representations within the prescribed timeline of 30 days under the 2013 Act and what impact any such representation/omission will have on their independent statutory powers under separate legislation. Furthermore, it has always been understood that court approval for a restructuring does not do away with specific regulatory approvals that may be required for a proposed compromise or arrangement under different laws.
Accordingly, it is debatable whether it was necessary to require companies to notify specific regulators as part of the restructuring process through express legislation and whether such inclusion will result in regulatory overlap and confusion. Perhaps this is also something where market practice will evolve with the passage of time.
In any event, the requirement for dissemination of the scheme to such a variety of regulators can be expected to result in an enhanced level of regulatory and government scrutiny (particularly in the case of listed companies or schemes involving related party transactions) thereby necessitating a higher degree of foresight and care in undertaking and implementing a transaction and better transaction management.
(ii) Prohibition of Treasury Stock – Companies are no longer permitted to hold treasury stock as a result of the compromise or arrangement either in their own name, in the name of a trust or on behalf of any subsidiary or associate company, and any such shares are required to be either cancelled or extinguished. Accordingly, a holding company will not be able to issue and hold shares in itself arising out of a merger of its subsidiary into such holding company.
Historically, companies have found treasury stock to be a useful tool for liquidity and as a source of easy finance. Such stock has also indirectly served to cement the control of the “promoter” or controlling shareholder. Minority investors have however frowned upon this.
It is unclear what happens to companies which already own such stock. The grandfathering provisions of the 2013 Act provide that any action taken under the erstwhile act will be valid so long as it is not inconsistent with the 2013 Act. However, as the 2013 Act contains an express bar on companies holding such stock there are two views possible – the first that companies already holding such stock will be required to cancel or extinguish such shares (which will have a bearing on the shareholding pattern and balance sheet of such companies) and the second, that historical holdings will be exempt.
(iii) Restructuring with Foreign Companies permitted – Whilst the 2013 Act continues to permit arrangements between a company and its members and/or creditors (or a class of members and/or creditors) as before, Indian companies and foreign companies in jurisdictions notified by the Central Government have now been permitted, pursuant to Clause 234 of the 2013 Act, to enter into amalgamations with each other subject to such rules and conditions as may be prescribed by the Central Government and the RBI in this behalf.
Under the 1956 Act, it was not possible for an Indian company to merge with, or demerge an undertaking into, a foreign company, although a foreign company (in any jurisdiction and not just a notified jurisdiction) could merge/demerge into an Indian company. Inbound mergers were possible but not outbound mergers.
The change set out in the 2013 Act is a significant step forward in providing companies greater flexibility in restructuring their operations. However, the key will lie in the manner in which this is implemented and the countries which are notified as being eligible jurisdictions for inbound and outbound mergers. Suitable changes in the Foreign Exchange Management Act, 1999 & Rules (FEMA) will also be needed. Also the Income Tax law will need to be amended to extend the exempt nature of such transaction to such reverse cross border mergers as well
(iv) Threshold for Raising Objections – Unlike the 1956 Act, the 2013 Act now prescribes a threshold for objecting in court to the proposed scheme of compromise or arrangement. Only persons holding not less than 10% of the shareholding or having outstanding debt amounting to not less than 5% of the total outstanding debt as per the company’s latest audited financial statement may object to the scheme.
It has been market experience in India that small investors acquire a small stake (sometimes just one share) in a large number of companies only with a view to objecting to schemes and hold transactions to ransom (usually there is a delay of a few months in the implementation of the transaction whilst the court considers their objections). The introduction of a threshold therefore will reduce frivolous objections/harassment by such professional troublemakers and is a welcome step. Sadly the message coming from SEBI, under recent pronouncements (4th February) are at variance with the 2013 Act and seem to empower minority shareholders.
(v) Simplified Merger Process for Certain Categories of Companies – Further to Clause 233 of the 2013 Act, (a) two or more small companies i.e. companies which are not public companies, have a paid up capital not exceeding INR 5,000,000/- (Rs. 5 million) and a turnover (as part their last profit and loss statement) not exceeding Rs. 20,000,000/- (Rs. 20 million) (or such higher amount as may be prescribed); (b) holding companies and their wholly owned subsidiaries; and (c) such other class of companies as may be prescribed; can now each enter into schemes of merger/amalgamation pursuant to a separate and simplified procedure and subject to satisfaction of certain conditions which are as follows: (a) giving of notice of the proposed scheme and seeking objections/suggestions to the same from the concerned Registrar of Companies and the Official Liquidator; (b) consideration of such objections/suggestions and approval of the scheme by the members holding at least 90% of the total number of shares, (c) filing of a declaration of solvency in the prescribed form with the Registrar; and (d) the scheme being approved by a majority representing nine-tenths in value of the creditors of the respective companies. If the Registrar and Official Liquidator do not have any objection to the scheme once approved, and if the Central Government is not of the view that the scheme is against public interest or the interests of the creditors, the Central Government is required to register the scheme which has the effect of consummating the merger/amalgamation.
(vi) Restructurings Involving Listed and Unlisted Companies – The 2013 Act provides that in case of a merger of a listed company into an unlisted company, if the shareholders of the listed transferor company decide to opt out of the transferee company, provision is required to be made for the payment of the value of their shares and other benefits in accordance with a pre-determined price formula or after a valuation is undertaken, and the Tribunal is empowered to make such arrangements, provided that the price is not less than the minimum price specified by the SEBI pursuant to regulations framed by it. It is only when the Rules are out that clarity will emerge, but this seems like a light touch back door delisting possibility.
The 2013 Act nuances the current legislative framework for court based restructurings set out in the 1956 Act by providing greater transactional flexibility (by permitting outbound mergers), shunning a one-size fits all approach (by creating a simplified regime for certain categories of companies) and removing common process bottlenecks (by introducing a high threshold for objections). However, certain process changes introduced by the 2013 Act (such as the requirement to notify a whole host of regulators) would also create uncertainty/confusion, in the initial stages of the implementation of the 2013 Act.
The 2013 Act as it stands now is a mixed blessing and a lot hinges on the rules that are notified and the manner in which the legislation is implemented going forward. It is to be hoped that both will be facilitative of such transactions going forward.
 This article deals with the provisions of Chapter XV of the 2013 Act which relate to court based restructurings. It does not deal with certain other provisions in the Chapter which do not relate to court based restructurings such as those pertaining to purchase of minority shareholding.
 Although the jury is out on this and much will depend on the list of countries actually notified as eligible countries.
Executive Summary: From time to time all businesses experience unforeseen legal issues and disputes which may quickly escalate into a crisis if not dealt with properly and in good time. This article suggests eight points to consider when developing a strategy to deal with a potential crisis, and may be particularly useful for foreign investors in Russian joint ventures and other corporate transactions.
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- On 19 March 2012 the King ratified a new act modifying the Belgian Companies’ Code with respect to the procedure for the liquidation of Belgian companies. The Act comes into force on 17 May 2012.
- The purpose of the Act is twofold: on the one hand, a series of procedural amendments for company liquidations which resolve certain difficulties and practical problems and, on the other hand, the introduction of a procedure for winding-up (dissolution) and liquidation of companies in one and the same notarial deed.
In Belgium there are two ways of terminating a company: bankruptcy or winding-up. Under Belgian law, any company which (i) is in an on-going situation where it is unable to meet its debts (cessation of payments) and (ii) has lost the trust of its creditors (creditworthiness) is in a state of bankruptcy. Both conditions must be met.
The winding-up of a company can occur by a voluntary decision of an extra-ordinary general meeting (EGM), by a court decision upon a petition for judicial dissolution, or automatically by law (e.g. upon the expiry of a company’s term).
The liquidation of a company is the next step after a company’s winding-up. It implies that a liquidator (or several liquidators) sell the company’s assets, repay the debts and allocate any positive balance among the shareholders in compliance with the objectives prescribed by law or the company’s articles of association.
To give a complete picture, it should be noted that a company can be wound-up without being put into liquidation, as a result of certain reorganisation procedures under the Belgian Companies’ Code (the “BCC”), i.e. mergers and demergers. Such reorganisation procedures, however, fall outside the scope of the Act and, consequently, outside the scope of this contribution.
On 19 March 2012 a new act was ratified by the King modifying the BCC as regards the liquidation procedure for Belgian companies (the “Act”). The Act was recently published in the Belgian State Gazette on 7 May 2012 and is due to come into force on the tenth day after its publication, i.e. on 17 May 2012.
Since the ‘Act of 2 June 2006’, intended to improve the liquidation procedure, certain provisions in the law were not clear or feasible or were subject to misinterpretation. The first goal of the Act, therefore, has been to amend such provisions and to clarify the law on certain points. The Act also puts an end to differences of interpretation among legal scholars. We will not go into further detail on this as it does not materially affects the procedure.
The second goal of the Act has been to introduce a simplified liquidation procedure. As opposed to the incorporation of a company in Belgium, the standard procedure for winding-up and liquidation of a company is a relatively cumbersome and time consuming (and therefore costly) procedure. The reason for this is that the ‘Act of 2 June 2006’ placed the liquidation procedure under judicial control, i.e. at two moments in the procedure, a court decision must be obtained: the first, to have a liquidator appointment or approved and the second, to secure the court’s consent to the proposed distribution scheme.
This standard procedure was in reaction to previous abuses by some liquidators and exclusively benefited the company’s creditors. This is also the reason why such procedure should remain the standard procedure for most companies. For some companies, however, e.g. non-active or dormant companies, small or medium sized companies which are to be terminated due to the retirement or passing of the sole shareholder, etc. this lengthy procedure seems a bit disproportionate.
The Act, therefore, introduces the possibility of winding-up and liquidating a company in one and the same notarial deed subject to certain strict conditions but without the need for court intervention (the “Simplified Liquidation”). This practice already existed before the Act and was based on a circular letter of the Minister of Justice dated 14 November 2006. Because there was no legal basis for this practice in the BCC, a majority of notaries refused to follow this procedure. Some notaries did follow it, however, and this created a considerable degree of legal uncertainty. After six years, the legislator finally responded by implementing the Act.
Based on the Act, Simplified Liquidation is now possible, provided that the following cumulative conditions are fulfilled:
- No liquidator is appointed;
- Based on a recent statement of assets and liabilities, the company has no liabilities at all at the time the company is wound-up;
- All shareholders are present or represented at the EGM at which the resolution for winding-up is adopted;
- The EGM unanimously approves the winding-up and immediate closing of the liquidation of the company;
- The remaining assets are allocated to the shareholders.
Pursuant to this procedure the company is wound-up and, assuming the company has no liabilities, there is no need for any further liquidation procedure, and thus no obligation to appoint a liquidator. Immediately following the decision to wind-up the company, the ‘liquidation’ of the company is closed. The remaining assets of the company will be distributed to the shareholders.
The second condition, however, is a somewhat problematic condition for two reasons. First, the legislator refers to ‘liabilities’ instead of ‘debts’. However, accounting entries such as ‘share capital’ and ‘reserves’ are also recorded on the liability side of financial statements. Supposedly, the legislator means ‘no debts’ instead of ‘no liabilities’. Secondly, liabilities which are not recorded in financial statements (e.g. deferred tax liabilities, pending litigation claims, future guarantee obligations, etc.) seem not to be included in the condition’s scope. The legislator does not specify how such future liabilities have to be treated.
One possible solution is an explicit statement in the notarial deed to the effect that not only the assets but also the future liabilities, if any, are distributed to the shareholders. As the legislator remains silent on this point, we assume that notarial practice will adopt this as a protection mechanism for future creditors.
Another potential problem could be the organisation by the directors of a so-called factual liquidation to anticipate and avoid the rather complicated and lengthy (standard) liquidation procedure and prepare the company to comply with the conditions for a Simplified Liquidation. The directors could be tempted to sell the assets and repay the debts before the winding-up, i.e. without complying with the standard BCC procedure. However, as directors are required at all times to act in the company’s best interest, in accordance with its corporate objects and in continuity, this could trigger directors’ liability as being contrary to the law.
It should be noted, however, that there is an important difference between directors’ liability and liquidators’ liability. Liquidators, unlike directors, are liable towards third parties and shareholders for the performance of their duties and for any shortcoming in their management.
The Simplified Procedure is a positive development which is in keeping with the tendency towards simplification and clarification of Belgian corporate law. However, it is likely that the time and cost savings of the Simplified Procedure will encourage many to arrange company liquidations to take advantage of those benefits and, in particular, avoid court supervision designed to safeguard the interests of creditors. It is to be hoped that the conditions of the Simplified Procedure will be properly applied and that abuse will not erode the protection of creditors interests nor make the standard procedure redundant.
The attached slides summarize trends in cross-border M&A and strategic investment activity throughout the first quarter of 2011.
- Global M&A volume for Q1 2011 was US$671.8 billion, up 29.5% as compared to Q1 2010.
- Cross-border transactions have rebounded substantially from 2009: 38% of Q1 2011 global M&A was cross-border — up slightly from 37% in 2010 and up significantly from the low of 26.8% in 2009.
- Canada and Australia’s shares of global M&A each more than double their respective shares of world GDP, perhaps reflecting the large number of deals involving natural resources.
- Distressed deals have exceeded US$75 billion per annum since 2009.
- Energy M&A remains the most active among cross-border transactions – reflecting the ongoing pressure to acquire natural resources to fuel emerging economies and the churn created by political instability in the Middle East and by the widespread adoption of technological improvements in the natural gas industry – with Materials and Financials cross-border M&A in the second tier.