expert guide - mergers & acquisitions

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Expert GuideM e r g e r s & A c q u i s i t i o n s

AMAA IMAP Deloitte Skadden Merrill Datasite and more...

May 2012

The Americas6 - 9 Middle Market: Mid-Year M&A Outlook

10 - 13 Failed PRC Reverse Mergers: Strategies to Maximize Stakeholder Recoveries

14 - 17 M&A In Mexico

18 - 21 Brazil’s New Antitrust Law: A Paradigm Shift In National Competition Policy

22 - 23 Changes in the Law & Their Effect on Transactions in El Salvador

24 Snapshot - North America

25 Snapshot - South America

Chief Executive OfficerOsmaan Mahmood

Publisher and Editor in ChiefJake Powers

Managing DirectorAndrew Walsh

Art DirectorAdeel Lone

DesignerBen Rogers

Senior WriterJames Drakeford

Staff WritersMark JohnsonEhan Kateb

Contributing organizationsAlliance of Merger & Acquisition Advisors (AMAA) ¦ Skadden ¦ Lilla Huck Otranto Camargo Advoga-dos ¦ Vázquez Aldana, Hernández Gómez & Aso-ciados ¦ Arias & Muñoz¦ Merrill DataSite ¦ Astrea ¦ Sayenko Kharenko ¦ Institue of Mergers & Ac-quisitions Professionals (IMAP) ¦ GUR Law Firm ¦ Deloitte ¦ Anderson Mori & Tomotsune ¦ Anderson Mori & Tomotsune ¦ AZB Partners ¦ Khaitan & Co ¦ G. Elias & Co ¦ Marketing ManagerSylvia Estrada

Production Manager Sunil Kumar

Account ManagersIbrahim ZulfqarNorman LeeSarah KentSteve Bevan

Accounts AssistantJenny Hunter

Editorial [email protected]

Advertising [email protected]

General [email protected]

Europe

26 - 27 Preparing For M&A In An Unpredictable Market

28 - 31 M&A In Belgium: Tips And Tricks

32 - 33 New requirements for M&A transactions in Ukrainian financial services market

34 - 35 Globalisation of M&A Activity

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36 - 39 Effect Of Changes In The Turkish Competition Legislation On M&A Transactions

40 Snapshot - Europe

41 Snapshot - EuropeAsia

42 - 45 Riding The Dragon – Chinese M&A Overview

46 - 47 Recent Developments Regarding Possible Amendments to the Companies Act of Japan

48 - 51 Mergers and Acquisitions activity in India- glass half full or half empty.

52 - 55 Changes In The Law & Their Effect On Transactions

56 Snapshot - Asia

57 Snapshot - Australaisa

Africa58 - 61 Topical Legal Practice Developments

62 Snapshot - Africa

63 Snapshot - Middle East

Expert Directory

64 - 65 The Americas

66 - 67 Europe

68 - 69 Asia 70 Africa

















4 - Expert Guide : Mergers & Acquisitions

Introduction: Mergers & AcquisitionsBy Jake Powers

lobal merger and acquisition (M&A) activity got off to a slow start in the first quarter however deal makers are hope-ful that recent stability in stock markets and an improving economy bode well

for deals in the coming months. Globally, the first quarter saw about $545.2 billion of announced deals, the slowest start to a year since the first quarter of 2003.

This follows the global market uncertainty that plagued 2011, resulting in an uneven level of mergers and acquisitions activity. The energy sec-tor accounted for a large portion of the total deal value; highlighted when Duke Energy Corpora-tion (NYSE:DUK) bid $25.53 billion for Progress Energy, Inc. (NYSE: PGN) in a merger that creat-ed the largest utility company in the United States. While one of the biggest deals over the past twelve months saw Express Scripts, Inc. (Nasdaq:ESRX) purchase Medco Health Solutions Inc. (NYSE: MHS) for $34.3 billion in a takeover that would create the largest U.S. pharmacy benefits manager.

It’s not all doom and gloom, Brazilian M&A activi-ty appears to have gone from strength-to-strength, largely led by the Brazilian government’s selling off of three airports in a $14.27 billion deal. Overall M&A deals were up by 177% in the first quarter over the same period in 2011. The growing econo-my and the increasing interest from private equity investors seem to have been a significant factor in the upturn, but more importantly the state of the global economy has led to many dealmakers feel-ing more confident about doing business in emerg-ing markets, like Brazil, rather than in the US and Europe. With the impending World Cup in 2014 and the preparations for the Olympics in 2016; ex-pect to see the infrastructure industry enjoy great benefits for future M&A processions.

Other developing countries such as China, India, Malaysia, Russia and South Africa continue to defy the odds by using M&A as their main globalisation strategy and generating more value from takeovers than their counterparts from developed nations. Unlike Western companies that use M&A primar-ily to promote efficiency or instant growth, emerg-ing giants acquire companies with a clear long-term vision allowing patience for the takeover to pay off. These takeovers are frequently used in order to obtain technologies, competencies and knowledge essential for their strategy rather than as a cost lowering measure.

In recent years China’s voracious shopping spree for western brands and infrastructure has focussed considerably on UK targets as it seeks to develop and expand its rapidly growing economy. In early May 2012, Bright Food, a state-owned company closed a deal for a 60% share in the breakfast ce-real maker Weetabix in a deal worth £1.2 billion. Gieves & Hawkes, famous Saville Row tailor, was also sold to Trinity, an upmarket Chinese mens-wear company, for an initial £32 million, rising to a maximum of £60 million, subject to the future growth of the business in China. While in January, China’s sovereign wealth fund paid an estimated £600-700 million for an 8.6% share in Thames Wa-ter, Britain’s biggest water company.

The Nigerian merger control regulator, the Securi-ties and Exchange Commission (SEC) has lowered the threshold for the size of transactions subject to prior merger notification and review to the equiv-alent of £1 million, and now insists on reviewing acquisitions of as little as 30% of the shares issued by a company once the £1 million threshold is passed. This will likely result in a significant delay in proceedings as the SEC is burdened with a large amount of paperwork relating to a number of rela-tively small deals which it should not be concerned with.

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Expert Guide : Mergers & Acquisitions - 5

An interesting regulatory shift in Australia looks set to impact through an increase in prospective M&A activities in the financial planning sector. The Future of Financial Advice (FOFA) reforms concerns the fee structure and will force industry players to move away from a commission structure to a fee for service model. Larger financial plan-ning groups are looking at acquiring smaller firms whose owners have accelerated their exit plans in the face of significant changes to their industry.

In Turkey we have seen legislative reforms prohib-iting certain M&A transactions that pose a poten-tial threat of monopolising a market for goods or services within part or whole of Turkey.

The Communiqué aims to change the M&A control regime in Turkey from bottom to top with signifi-cant amendments. The amendments in the Law and effectiveness of the Communiqué has not only had a positive effect on the Turkish system concern-ing the undertakings but also played an important role in the European Union candidateship period. In the year 2011-12, India had attracted foreign direct investment totalling $50 billion and are ex-pected to continue to flourish throughout 2012.

However, the decision to amend laws relating to taxation of overseas acquisitions of domestic assets has drawn harsh criticism from foreign investors already downhearted by the country’s unpredict-able regulation. The move could severely impede cross-border M&A activity and have been warned that the move could damage the overall investment sentiment in Asia’s third-largest economy.

In these challenging economic times, two things are increasingly important to M&A players: inno-vation and deal certainty. Companies searching for ways to return value to their shareholders are having to look outside the box as traditional M&A strategies are increasingly unavailable. Spinoff transactions have found favour as an innovative way to unlock value for shareholders. Recently announced examples include Abbott Laborato-ries’ spin-off of its research-based pharmaceuticals business, Kraft Foods’ spin-off of its North Ameri-can grocery unit, and the split of each of Tyco In-ternational and ITT into three companies, substan-tially completing the disassembling of two of the remaining major conglomerates. Spin-off transac-tions provide each separate business with greater focus on its own growth prospects and strategies, and better align management’s interests with the applicable business and were done in record num-bers during 2011. We believe that this trend will continue throughout 2012.

Middle Market: Mid-Year M&A Outlook By Michael R. Nall, CPA , CM&AA

hile the larger publicly traded com-panies dwindle in number because of regulatory and other costs, the influence of the Middle Market private business sector is stagger-

ing sheer dimensions. Virtually ignored by aca-demia and the media, the vitally important sector is one of the most important drivers of America’s economy and yet, it flies largely under the radar. It accounts for a third of private sector GDP and jobs, and has been growing, in the face of the past four difficult years of “the great recession”. If the U.S. Middle Market were a country, its GDP would rank it as the fourth-largest economy in the world, just behind Japan’s. Clearly then, there is a need to better understand this important market sector and provide it with the level of support, attention, and advocacy it merits.*

* From GE Capital 2011 National Middle Market Summit, The Market that Moves America Insights, Perspectives, and Opportunities from Middle Market Companies GE Capital and The Ohio State University’s Fisher College of Business —

Any beginning economics class teaches that in the free market, prices are determined by sup-ply and demand. Based on completed transac-tion activity as we approach mid-year, there is an extremely large imbalance in the M&A mar-ket, with demand for companies clearly out-stripping supply creating a big “seller’s market.” With cash exceeding $2 trillion, strategic corpo-rate buyers as well as private equity investors are strongly motivated to make acquisitions. Public companies need to “buy” growth by making acqui-sitions. Private equity funds must buy (and sell) companies to generate a meaningful return to the institutional investors and remain in business.

In addition, historically low interest rates also make acquisitions relatively more attractive in-vestments for all potential buyers. Even though

private equity funds are actively selling to take ad-vantage of these favorable market dynamics, many private business owners have remained largely on the sidelines in early 2012. Part of the reason may be companies continue to struggle to earn suf-ficient profitably following “the great recession”. Alternatively, some owners feel compelled to wait after calculating likely “post-transaction” invest-ment returns.

However, meaningful Information about these middle market private companies can be incred-ibly hard to locate. They are not regulated by the federal government and thus, in most cases, are not required to regularly file with the Securities and Exchange Commission. The mergers and acquisitions marketplace for these companies is somewhat chaotic, highly fragmented, and often fails to capture any substantial efficiency in scale, particularly in the lower end of the middle mar-ket with private companies valued at less than $150,000,000. Role of Middle Market M&A Advisor in the economy

M&A Advisors provide essential liquidity to small and private businesses of America. Large business-es have the option of going public to seek growth capital and get liquidity to their entrepreneurial efforts. However, access to public market capital and liquidity options are not available to small and mid-size companies.

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Also, entrepreneurs by nature are creative and free-spirited. Not all are motivated to go public or want to face the scrutiny of external oversight. They rely upon the services of intermediaries for capital ac-cess and liquidity. The M&A Advisor facilitates that liquidity by creating a market for each trans-action and managing the actual exchange process. Often without significant regard for the very spe-cial personal financial planning needs of the pri-vate company owner, this market has been served by numerous advisors and intermediaries ranging broadly from accountants and management con-sultants to investment bankers to small business brokers. Unfortunately, some of these various market participants are less than fully qualified or reputable. Investment bankers tend to concentrate on the larger deals only and may take on a middle-market business client only as an accommodation or “fill in” activity. For reasons of economics, they primarily focus on servicing publicly traded com-panies and financing engagements, rather than the “full service” business and personal financial advisory needs of small to mid-sized private busi-ness clients. Because of these current market re-alities, often many business owners lack access to a knowledgeable and trustworthy M&A advisor. Over 90% of all business enterprises in North America and the majority of businesses interna-tionally are family-owned.

At this time of sluggish economic growth, the highly fragmented marketplace for all types of financial advisory and transaction services of-fers enormous potential for significant econom-ic growth and profitability. With the growing numbers of small businesses, revolutionary new technology, and a rapidly changing global com-petitive environment, the middle market is now in the midst of an extraordinary transformation.

In the late 1990’s, responding to void of this over-looked marketplace, the Alliance of Merger & Ac-quisition Advisors, (AM&AA) a Chicago based, international professional trade association was formed to share information, education, trusted relationships and extensive “behind the scenes” support for highly qualified business profession-als seeking to better position themselves to serve the many transactional advisory needs of small to midsized, private companies.

The mergers and acquisitions marketplace for these companies is

somewhat chaotic, highly fragmented, and often fails to

capture any substantial efficiency in scale, particularly in the lower

end of the middle market with private companies valued at less

than $150,000,000.

The “Certified Merger & Acquisition Advisor” (CM&AA) credential is a “first-of-its-kind” train-ing and certification program for the middle mar-ket attracting and M&A investment and advisory professionals of all types.

In today’s economic environment the lines be-tween formerly distinct disciplines are fading, and experienced technical experts require new advisory skills to better understand and collabo-rate with other experts essential to the completion of successful M&A and other corporate financial transactions. As the first recognised standard of professional competence for these types of M&A transactional advisory services, the CM&AA des-ignation complements and extends the value of all other existing credentials and academic de-grees, such as JD, MBA, or CPA.


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M&A advisors have an unprecedented opportu-nity in the middle market with the generational transfer of wealth and capital being deployed by private equity and corporate investors. Because of the need for much better decision-making infor-mation in this Middle Market, to help others learn what is necessary about the marketplace, lead-ing certified members of AM&AA have recently published: Middle Market M&A: Handbook for Investment Banking and Business Consulting a must-read for investment bankers, M&A inter-mediaries and specialists, CPAs and accountants, valuation experts, deal and transaction attorneys, wealth managers and investors, corporate devel-opment leaders, consultants and advisors, CEOs, and CFOs.

With strong year-to-date results in the public mar-kets, improving credit markets, low interest rates, the second half of the year looks more encouraging. Considering ageing private equity fund portfolio companies, improving financial performance, and likely increasing tax rates, we anticipate a mid-year acceleration of middle market M&A deal flow in 2012. Michael Nall is the founder of the Alliance of Merger & Acquisition Advisors® (www.amaaonline.org). The AM&AA is the leading association and credential-ing body for 800 + middle market M&A professionals in 20 countries, providing connections, best practices, and education.


An experienced corporate financial advisor with a proven track record as a transaction advisor for privately held companies, Mr. Nall is a published author and recognised speaker on the valuation, growth, and sale of middle market companies.

With the benefit of over 25 years of experience in the industry, he leads the AM&AA development and launch of a ‘first of its kind’ professional train-ing and credential designation for the independent corporate financial advisory community: ‘Certified Merger & Acquisition Advisor’ (CM&AA).

A licensed and retired CPA, having sold his business over 25 years ago, Mr. Nall holds a Bachelor of Science degree in Business Administration and Accounting, graduating with honors from Eastern Illinois University.

Michael Nall can be contacted by calling +1 312 856 9590 or alternatively by emailing [email protected].

Reverse Mergers Boom and Bust

The past two years have seen the boom and bust of so-called “Chinese reverse merger” transactions. In a typical reverse merger transaction, a company operating in the People’s Republic of China merges into a defunct (or nearly defunct) company that is listed on a public exchange in the US or else-where in order to more quickly access capital mar-kets that would otherwise present a lengthy or un-wieldy process. By merging into an existing listed entity, the Chinese operating companies avoided lengthy delays, and heightened scrutiny, associ-ated with raising capital through initial public of-ferings. Unfortunately, a number of these compa-nies have failed, resulting in billions of dollars in losses to creditors and investors, and prompting governmental investigations, regulatory rule revi-sions, and creditor and shareholder lawsuits. In-deed, one fourth of all securities actions filed in the United States in the first half of 2011 involved Chinese reverse merger companies.(1) Since then, many of these companies have gone private to cash out the original investors and shield them from regulations applicable to public companies. The Aftermath

In 2011, the SEC began suspending trading of se-curities in certain of these companies created via reverse mergers and issued investor advice and new rules amid allegations of fraud and misman-agement at the companies. Though news reports have devoted much attention to the downfall of these companies and the resulting shareholder losses, there has been little discussion of the op-tions available to preserve and maximize the value of the underlying operating assets after the debt or equity security prices have plunged. This is no easy matter: the Chinese operating subsidiaries are usually indirectly owned by the publicly listed holding company, typically controlled by a board of directors comprised of at least some indepen-dent directors, and may be unwilling to


Failed PRC Reverse Mergers: Strategies to Maximize Stakeholder Recoveries By John K. Lyons and Frances Kao

cooperate with their ultimate parent. In the worst cases, the management of the operating entities in China may be complicit in actual fraud. Due to differences in the manner in which corporations are regulated and corporate governance is viewed in China, it may be dif-ficult to force action at the Chinese sub-sidiary level. Gaining Control

When a prod-uct of a reverse merger goes south, both share-holders and investigators may demand to see what assets are still available to the defunct parent cor-poration. This is often a multi-step process, in-volving several foreign legal systems.

First, if financial discrepancies appear, immediate steps should be taken to form a special committee of independent directors to investigate and safeguard assets from depletion through a special resolution of the board of directors. The special committee should be empowered to take all action necessary to investigate financial discrepancies and preserve assets of the estate including, if warranted, com-mencing chapter 11 or similar proceedings to safe-guard assets and insure transparency of the process. If the special committee is obstructed from fulfill-ing its duties by management, other board mem-bers, or a controlling shareholder that may be en-gaged in wrongdoing, the special committee can then use its mandate to assume formal control of the company through institution of bankruptcy or insolvency proceedings. An insolvency proceed-ing authorized by the special committee as part of its directive to protect assets, accompanied with a request that the court recognize the special com-mittee as the controlling entity in the proceeding,


By John K. Lyons and Frances Kao

can effectively permit the special committee to fulfill its mandate under the auspices of a trans-parent court-supervised process that is open to all stakeholders, including creditors and inves-tors. In addition, a bankruptcy court or similar tribunal can use its equitable power to enjoin a controlling shareholder from interfering with the conduct of the insolvency proceeding by ap-pointing new directors or firing existing ones. The case of ShengdaTech, Inc. is illustrative. ShengdaTech was formed through a reverse merg-er of a British Virgin Islands company that owned five PRC subsidiaries into a US holding company that was listed on NASDAQ. An ongoing internal investigation spearheaded by a special committee of independent board members led to evidence highly suggestive of fraud.

Faced with these developments, in early Au-gust, the Chinese controlling shareholder im-plicated in the wrongdoing sought to add di-rectors to the full board to obtain a majority of votes and, presumably, dissolve the special com-mittee before it could complete its investigation. The resolution creating the Special Committee conferred broad power upon the Special Com-mittee to complete the internal investigation and safeguard assets. To fulfill its duties, the Special Committee filed a chapter 11 petition in the Unit-ed States Bankruptcy Court in Reno, Nevada on behalf of the company to safeguard assets and to enjoin the previous owner from obstructing in the special committee’s performance of its mandate.

The bankruptcy court agreed and issued an injunc-tion to prevent the controlling shareholder from altering the composition of the board or otherwise interfering in the management of the company.

Reaching Down the Chain

Once control of the listed company is secured, the special committee can take steps to secured con-trol of intermediate companies in the corporate family that actually own the PRC operating com-panies under the auspices of the insolvent estate.

For example, many PRC operating companies are owned by companies in the British Virgin Islands or the Cayman Islands, which then become inter-mediate subsidiaries following the reverse merger transaction with the listed company.

When a product of a reverse merger goes south, both

shareholders and investigators may demand to see what assets are still available to the defunct

parent corporation. This is often a multi-step process, involving several foreign legal systems.

The first step is thus to replace the management of the intermediate subsidiary in accordance with the corporate law of the host country. It is important to anticipate roadblocks in this process as often-times, the registered agents of the intermediate subsidiaries are operating under written instruc-tions from the PRC controlling shareholder who is often also an officer or director of the interme-diate subsidiary. Accordingly, if the registered agent refuses to recognize a duly passed resolu-tion, litigation may be necessary at this stage for the registered agent to recognize the resolution and to alter the company registry accordingly.

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Though replacing board members at the interme-diate level may pose difficulties, it is in fact rela-tively simple compared to gaining control effective control of the PRC operating entities.

Chinese corporate law still relies heavily on for-malities that have been replaced in Western law by principles of agency law.

In particular, Chinese companies are required to have both a legal representative and a company seal – or “chop.” The legal representative must sign official corporate registration documents in order for many corporate actions may be effective.

Problems thus arise when the legal representative is complicit in fraud or mismanagement or is oth-erwise uncooperative due to cultural differences or local relationships. Until a legal representative is replaced by the special committee’s designee, the special committee will be powerless to exercise ef-fective control over the PRC operating companies.

The process to replace a legal representative can be costly and involve time consuming litigation. Complaints filed in Chinese civil courts must meet rigorous procedural requirements, must be filed in the province where the assets are located, and may even be rejected by courts outright as not suffi-ciently stating a case. Careful oversight and coordi-nation with local PRC counsel is absolutely critical to achieve a successful and expeditious outcome.


(1) The Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research, Securities Class Action Filings—2011 Mid-Year Assessment 1 (2011).

Takeaways

Creditors, investors and independent directors of “reverse merger” companies must exercise a heightened degree of care in insuring that accurate financial reporting and operational control are in place. In addition to standard auditing controls and procedures, it is critical that independent PRC legal representatives be chosen to insure that the PRC operating companies will adhere to the direc-tion of the operating company’s ultimate legal own-ers if the original owner is legitimately displaced. If financial discrepancies arise, immediate action to appoint a special committee led by independent di-rectors should be taken.

Once appointed, a special committee must move swiftly to complete its investigation and, if warrant-ed, take decisive steps to safeguard assets, including the commencement of a bankruptcy or insolvency proceeding. The process of ultimately wresting control of PRC operating assets from a wrongdoer is a highly complicated process that must be swiftly navigated with great care and cultural sensitivity in order to maximize recoveries to stakeholders.


John Lyons represents corporations in complex busi-ness reorganizations, acquisi-tions and divestitures, typical-ly in distressed situations, and also has represented clients in connection with asset recovery proceedings.

For example, Mr. Lyonsrepresented the special com-mittee of the board of directors of ShengdaTech, Inc. in its Chapter 11 case to complete the committee’s in-vestigation of ShengdaTech and to safeguard assets. His other representations include the official commit-tee of unsecured creditors in the American Airlines Chapter 11 cases, Delphi Corporation, Verasun Energy, Einstein/Noah Bagel Corp., Exodus Communications, Interstate Bakeries Corporation, Montgomery Ward and US Airways.

Mr. Lyons has been consistently recognized as a lead-ing lawyer in Chambers USA and the Leading Law-yers Network. In addition, he was named by Turn-arounds & Workouts as one of the nation’s top dozen “Outstanding Young Bankruptcy Lawyers.”

Mr. Lyons can be contacted on +1 312 407 0860 or by email at [email protected].

Frances Kao has an inter-national dispute resolution practice in which she repre-sents public and private com-panies, as well as their offi-cers, directors and employees, in commercial litigation, arbitration, and both inter-nal and civil and criminal government investigations before the DOJ, the SEC, the FTC, state attorneys general and local district attorneys.

Ms. Kao’s representative clients include BP China, China National Offshore Oil Company, China Petro-leum and Chemical Corp. (Sinopec), China Sunergy Limited, JA Solar Limited, KFC Corporation, KUF-PEC (China) Inc., Merrill Lynch Capital Services, Inc. and The Sports Authority, Inc. She also served as chief investigator for the special committee of the board of directors of ShengdaTech, Inc.

She is a native Mandarin speaker and was selected as a leading lawyer in Chambers Asia 2012 for dispute resolution.

Ms. Kao can be contacted at + 852 3740 4827 or by email at [email protected].

M&A In Mexico

conomic Highlights

It is crucial for economies to create a friendly environment for investment. Mexico has been very active at doing so in

the last 18 years. This year the growth of Mexico´s economy is over 4% in the first quarter, higher than most advisors projected. Mexico´s unemployment rate is 4.86%, much lower than USA and most Eu-ropean Countries with a positive balance of trade over $560 million. Banamex (Mexican Subsid-iary of Citibank) reported in April 2012 that the exports from the manufacturing sector increased by 9.1% indicating that Mexico´s country risk and interest rates remain very low under international standards. Mexico´s telecommunications sector increased by 11.9% during the first quarter of 2012. According to El Financiero, the M&A transac-tions in Mexico could reach US $15 billion in 2012. Reuters published Mexico could become “another Brick in the wall” (2011 Latin America Summit Report). With a population of 110 mil-lion and a middle class rapidly growing, Mexico has become a strong potential market. The eco-nomic crisis in Europe and the volatile markets make Mexico even more attractive for invest-ment. During 2012 we will also see Mexican investors buy businesses in other parts of the world. To confirm these forecasts, this week BBVA announced they will divest their pension funds management company (Afore) in Mexico. Mexico´s M&A transactions seem to be leveled if we compare 2010-2012 (first quarter) and it is expected by the Ministry of Finance to remain ac-tive in the manufacturing sector, financial services and mining sectors. We have seen a Mexican Bank acquire the private banking arm of American Ex-press in Mexico; Sabadell from Spain sold its 20% participation in the Mexican Bank Banco del Bajio. Other sectors as healthcare, food and beverages, telecommunications and IT are becoming active; the Mexican government has offered significant

incentives in the Automotive sector as well. The level and capabilities of Mexican Engineers has allowed the automotive, aerospace, telecommu-nications and IT/ industries to be very competi-tive worldwide. The level of the talent and the ef-fort and efficiency of Mexican employees raise the competitive advantages of our country.

Despite the good economic performance and the current comparative and competitive advantages offered my Mexico, some reforms are vital to trig-ger what could be one of the most actives markets in the world. In the event the so called “stalled reforms” in Mexico are finally passed by congress (energy, tax, labour law, telecommunications, se-curity) the competitiveness of Mexico could get even stronger as it will be much more attractive than other developing economies.

To invest in Mexico there are only six procedures needed (see doing business report by World Bank) as it is needed in the USA; therefore according to such report it is easier to invest in Mexico than to invest in Brazil, India or China. You only need nine days to open a business in Mexico, while in Brazil you need 119 days. Additionally the work-force costs are lower in Mexico than in Brazil, In-dia or China and much lower than USA, Germany or Korea.

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By Fernando Hernandez Gomez

Mexico´s corporate tax rate is significantly lower than Brazil or China and Mexico has 44 Free Trade Agreements in place being one of the most open economies.

Some Legal References

There are some relevant issues to consider when-ever an M&A transaction is taking place in Mex-ico, especially when transferring participations of Mexican subsidiaries.

Attention shall be given to foreign investment framework regulation, tax implications, corpo-rate structures, local agreements and corporate resolutions, concentration, as well as to foreign in-vestment and labour law implications. Directors and Officers liabilities shall also be considered. Foreign Investment Regulation in Mexico

Although generally a foreign investor may partici-pate with up to a 100% in a Mexican investment vehicle, certain sensitive activities, including but not limited to national ground passenger and car-go transportation, radio transmission and televi-sion services, are reserved only for Mexican per-sons or companies.

Other sensitive activities have the possibility of limited participation, with percentages lower than those required in order to obtain majority of participation. Finally, certain other activities or amounts of participation require authorisation by Mexican authorities in order for the investor to obtain a majority of participation thereto.

All other activities require that the foreign inves-tor sign a waiver to invoke the protection of their country, and accept to be given the treatment of a Mexican national.

Limited or non-voting shares (neutral investment) may apply when participating in some restricted sectors.

Allocation of Price of the Global Transaction & Tax Implications

According to article 190 of the Income Tax Act (ITA), foreign residents are subject to a 25% in-come tax withholding over the total price of the shares. Therefore the way the global price of a transaction is allocated is very important.

When the shares of a Mexican subsidiary are trans-ferred, some tax implications should be consid-ered. When the allocated price of the shares of the Mexican subsidiary is above the fiscal cost and the amount of the price allocated, the tax opinion of the auditor would result into a tax loss and there-fore no income tax would be incurred by either.

Legal Structures Should seller and purchaser be related parties, the difference between the purchase price and the fair value will be very obvious to the SAT, since the registered accountant must disclose the transac-tion is been effected between related parties in the tax opinion, and shall determine if both the pur-chase price and the “market price” of the shares is according to (i) book value; (ii) cash-flow value; or (iii) present value. Now, if buyer and seller are not related parties, then the registered CPA will not have the obligation to comment on the fair-ness of the value of the Shares in his opinion. This does not mean that the purchaser will no longer have the tax contingency when the allocated price is below the tax cost of the shares but only that as a result of the transactions the SAT will not have an objective element to figure out the fair value of the Shares.



Although very similar to the traditional Corpo-ration regarding its internal organisation struc-ture, this version of the commercial corporation is intended to provide shareholders with better re-sources to act within the company, including the possibility to name a member of the board and summoning shareholders meetings with a lower percentage of share control than those provided for the traditional corporation. The special pro-visions for this particular kind of corporation are found in the Securities Market Law. This corpora-tion has become widely used among newer large companies, and a number of them have chosen to transform their traditional corporation to an S.A.P.I. given its advantages with respect to mi-nority rights. Investment Promotion Corpora-tions must be managed by a board of managers. Antitrust Regulation

The main purpose of the Mexican antitrust law (Federal Law on Economic Competition “FLEC”) is to protect the free competition process and the free access to the market by preventing monopo-list practices, as well as any by preventing restric-tions to the Market economic efficiency.

Concentrations, including but not limited to any merger, acquisition of control, or any other action by means of which companies, associations, shares, equity participation, trusts, or assets in general, are accumulated are considered monopoly practices. Therefore certain M&A transactions may be pre-vented from closing without the prior approval of the federal antitrust Commission: (i) a transaction for a value of more than $79.6 Million US; or (ii) the accumulation of 35% of the assets or stock cap-ital of an entity which annual sales or total assets are worth more than $79.6 Million US; or (iii) the accumulation of assets with a value of more than $37 Million US in a transaction in which the accu-mulated value of two or more entities participating in the transaction or the annual sales have a value of more than $212 Million US.

Vázquez Aldana, Hernández Gómez & Asociados (VAHG) operates in Mexico City and Guadalajara, Mexico, being the largest Mexican member firm in Consulegis, EEIG; servicing clients across the Mexican Territory. VAHG has consolidated more than 50 years of legal practice. VAHG is formed as a result of the prestige, experience, reputation, business approach, high ethical values and profes-sional standards, responsiveness, accountability and trust of its Partners.

VAGH is now recognised as a leading legal firm in M&A, Contract Law, Banking and Securities Law, Real Estate Law as well as corporate transactions in general, including Notary Public and Commer-cial Notary Public services, within its geographic area in Mexico.

As a result of its non-stop search for high added value, VAHG is proud of having the trust of world-wide known Mexican and multinational com-panies as a result of the adoption of its business model.

VAGH represents an invaluable sum of prestige and reputation with strengths and capabilities to conduct international transactions, operat-ing under the highest standards of services and quality, together with a singular personal ap-proach, developing a unique strategic competi-tive factor and high appreciation of its clients. In VAHG we value each of our members, the human and professional capabilities of our team allows us to be able to know each and every one of our clients. We develop long term relationships with our clients as a result of our quality and personal treatment. In VAHG, we know we could not achieve our goals without our client’s’ trust and we think believe that in having partners and associates with extensive experience, ethical values, continuous updating


and attitude of service and teamwork skills we can offer unique added value to our customers.

VAHG is capable of covering full services includ-ing corporate law, mergers & acquisitions; bank-ing and securities law, project finance, public at-testing, as well as real estate, and infrastructure, joint ventures, commercial law and contracts, foreign investment, intellectual property law, due diligence, Notary Public law, and Public Com-mercial Notary Public law, civil and commer-cial litigation, tax and administrative litigation, labor litigation and consulting among others. Fernando Hernandez Gomez graduated with honors in 1994 Education: Universidad Panameri-cana Campus Guadalajara (Class of, 1994), Masters in Business Administration (MEDEX, Instituto Pana-mericano de Alta Dirección de Empresas, 2005).

Graduate in Economic and Corporate Law in 1996, Contract Law in 1997 and Tax Law in 1999 by Uni-versidad Panamericana. Commercial Notary Pub-lic in 2001. Expert Translator of English - Spanish and vice versa by the Supreme Court of the State of Jalisco, Vice Chairman of Consulegis, EEIG, Secre-tary of the Board of Directors of several Corpora-tions.

Member of the International Union of Lawyers, member of the National Association of Corporate Counsels, A.C. Guest speaker for the international section of the Bar of New York and the International Union of Lawyers.

Fernando can be contacted via email at [email protected] or alternatively by phone on +52 33 381 717 31.


Brazil’s New Antitrust Law: A Paradigm Shift In National Competition Policy

n 29 May, 2012, after a long-lasting legislative process, Brazil’s New An-titrust Law (Law no. 12,529/11) will finally enter into force, resulting in a paradigm shift in the country’s compe-

tition policy. Such legal reform, on the one hand, has led to intense and interesting debates within the business community, and, on the other hand, will likely pose relevant challenges to policymak-ers, firms and legal experts. Although the New Antitrust Law has introduced significant reforms in various important aspects of Brazilian competition policy – such as institu-tional matters and anticompetitive practices –, the new merger review framework has unquestionably drawn most of the attention in the marketplace. In particular, one of the most discussed issues arising in connection with the enactment of the New Antitrust Law concerns the shift from a post-merger review system to a pre-merger review sys-tem. Under the Antitrust Law currently in force in Brazil (Law no. 8,884/94), mergers can be, and usually are, consummated before the Adminis-trative Council for Economic Defence (CADE) – antitrust authority in charge of merger reviews – issues its opinion. Nevertheless, after the New Antitrust Law enters into force, the consumma-tion of mergers meeting the thresholds set forth in law will be contingent upon previous approval by CADE. That is to say, such deals shall be sus-pended until CADE issues a final decision about the transaction. Allegedly, the pre-merger review system was ad-opted as a regulatory response to two main prob-lems identified throughout Brazilian antitrust ex-perience. Firstly, the post-merger review system created incentives to the parties involved in merg-ers to extend as much as possible the period of an-titrust review. In general terms, the longer the re-view took, the better it is for the parties who would be free to engage in their activities without any

sort of restrictions. Secondly, the post-merger review system implemented in Brazil compro-mised the imposition of post-merger remedies by CADE, which would only occur after the consummation of transactions, increasing the costs of having the deal undone or restricted. Under this perspective, the implementation of the pre-merger review system may be interpreted as an attempt to align interests as well as to give in-centives to the parties involved in merger transac-tions to cooperate and to accelerate the antitrust review processes. Such reform also can be seen as an attempt to facilitate the imposition of post-merger remedies by CADE.

An additional important reform introduced by the New Antitrust Law concerns thresholds for triggering mandatory merger filings with CADE, which have also been significantly changed. In the first place, the market share test – which con-cerned the analysis of whether market shares re-sulting from the merger exceeded 20% of a par-ticular relevant market – was excluded from the New Antitrust Law. Moreover, the new legislation innovates by fore-seeing a secondary objective threshold. That is to say, contrary to the previous Antitrust Law, the revenue threshold test set forth in the New

OBy Fabio Weinberg Crocco & Luís Gustavo Haddad


Antitrust Law requires not only that one of the parties involved in the deal has reached in Brazil group-wide revenues of at least BRL 400 million (approx. GBP 125 million), but also that another party to the deal has reached in Brazil group-wide revenues of at least BRL 30 million (approx. GBP 9.5 million). Hence, under the new law the rev-enues of more than one party involved in the deal are considered for the purposes of determining mandatory filings. Notwithstanding the establishment of new objec-tive criteria for determining mandatory submis-sion of mergers, the New Antitrust Law also autho-rises CADE to review on an ex post basis, within one year of the consummation of the deal, merg-ers falling below the aforementioned threshold. Such new thresholds, and in particular the aboli-tion of the market share test, were intended to en-sure legal certainty, since in various transactions it was difficult to access in specific circumstances whether parties exceeded 20% of a particular rel-evant market. On the other hand, the new mon-etary secondary threshold was aimed at reducing the amount of mergers submitted to CADE that had no significant impact in competition (e.g. cas-es in which a large company acquired very small businesses). It is worth noting that in case transactions subject to mandatory filing are consummated before filed with CADE, they will be regarded as null and void, and the parties involved in the deal may be subject to fines ranging from BRL 60,000 (approx. GBP 19,000) to BRL 60 million (approx. GBP 19 mil-lion). Another regulatory innovation, which is a direct consequence of the new pre-merger review system, concerns the timing of review by CADE. Such is-sue has gained importance since the longer the an-titrust review proceeding takes, the later deals will be consummated.

As per the New Antitrust Law, a final decision by CADE must be reached within 240 days of the fil-ing. Tough, in more complex transactions, the re-ferred deadline may be extended for up to 60 or 90 days upon request of the parties involved in the deal or of CADE’s Tribunal, respectively. Hence, as per the new legislation the maximum review period is of 330 calendar days from the date of filing.

It is interesting to note that President Dilma Rous-seff has vetoed a provision that stated that mergers would be automatically approved in case CADE failed to comply with the referred maximum re-view period.Considering the above, both public and private sectors will probably face significant challenges in connection with the New Antitrust Law. From the public perspective, CADE will have to quickly adapt its structure and personnel, with-in a short period of time, to a radically different institutional design as well as to an entirely new merger review system. Firms and legal experts will have to adapt their practices to the new institutional arrangement as well as to different rules governing merger review and anticompetitive practices. While drafting transaction documents, parties will have to care-fully consider the recent reforms. In particular, parties will have to draw special attention to clauses governing, among other matters: conduct of busi-ness throughout the merger review; adjustment of price and conditions; as well as consequences of the imposition of antitrust remedies by CADE.

The New Antitrust Law seems to be inaugurating a new era in Brazil’s competition policy. Interesting-ly, this occurs at important times, when the Brazil-ian economy is facing a positive momentum and foreign investment inflows have been consistently rising. As a consequence, it is important that pub-lic and private players quickly adapt to the new regulation promoting the consolidation of Brazil as solid and reliable jurisdiction in what regards antitrust law and enforcement.


Fabio Weinberg Crocco is a partner at Lilla, Huck, Otranto, Camargo Advoga-dos. He earned his Bachelor’s Degree in Law from São Paulo Law School of Funda-ção Getulio Vargas (EDESP-FGV). He has attended the Trade Policy Training Pro-gram at the Brazilian Em-bassy in Washington D.C. He will read the University of Oxford’s Magister Juris program beginning September 2012. He is a member of the Brazilian Bar Association (OAB). Fabio also speaks three languages: Portuguese, Eng-lish and Italian.

Luís Gustavo Haddad is a partner at Lilla, Huck, Otranto, Camargo Advoga-dos. He graduated in Law from the Universidade de São Paulo (USP) and holds a Master Degree in Civil Law from the same university. He is a member of the Brazilian Bar Association (OAB). His practice is focused on con-tracts and corporate law. Luís also speaks two lan-guages: Portuguese and English.

Luís can be contacted by calling +55 (11) 3038 1008, or alternatively by email at [email protected]

n El Salvador, in the decade between 1992 and 2001, positive reforms that created excellent conditions for foreign investment were pro-moted, such as a crisis-free dollarisation, the homogenisation of tariff norms and pension

privatisation, to mention a few.

The Investments Law of 1999 created the Oficina Nacional de Inversiones or National Investment Office (“ONI”) as the governmental agency in charge of promoting the local and foreign invest-ments in El Salvador.

Pursuant to the Investments Law, capital contribu-tions for the incorporation of new companies in El Salvador as well as the capital to acquire interests in Salvadoran companies are deemed as foreign investments, among others that are established in such law.

The Investments Law also provides protection for foreign investors and their investments by provid-ing the same treatment as the one provided to lo-cal investors. This law guarantees the return of capital such as the profits and dividend payments.

However, even though the ONI represents a gen-eral framework for foreign investment, recently, from a tax perspective, the dividend distribution became an event subject to income tax in El Salva-dor by means of the tax reform that became effec-tive on January 1, 2012. According to this tax re-form, dividend payment is subject to a 5% income tax or 25% if the stockholder receiving payment is incorporated or domiciled in a jurisdiction that is considered to be a tax haven or a low tax country.

The impacts of said reform have hit both organisa-tional structures as well as the legal analysis that potential investors might make upon considering El Salvador as a jurisdiction where to conduct their businesses and establish their operations.

IBy Ana Mercedes López

Changes in the Law & Their Effect on Transactions in El Salvador


It is very important that prior to closing any ac-quisition of shares or interests in an existing Salva-doran company or establishing a Salvadoran sub-sidiary, the corporate chart of the target company is analysed in order to anticipate the tax impact as a consequence of any payment distribution. With respect to a more specific business activity, another change in the law that has impacted trans-actions in El Salvador has been the amendment to the Free Zones Law along with the effectiveness of the International Services Law. Upon the ef-fectiveness of the International Services Law, the operations related to the transfer of goods are car-ried out under the Free Zone Law within the free zone facilities authorised by the Ministry of Econ-omy; on the other hand, the operations related to services such as call centers, BPO and others, are now subject to the International Services Law and must be rendered in services park duly authorised by the Ministry of Economy.

Another change in the regulation that has taken place recently in El Salvador is with respect with the energy sector which affects investors and transactions related to such industry. For more than 10 years, the energy market in El Salvador operated under a system of prices declared by the market participants that injected energy into the system such as energy generators. Under this system what basically happened was that the mar-ket participant sent the offers to the market op-erator in terms of blocks of energy and its price. The market operator then determined the mar-ket price and the offers that were accepted. In this type of market the generators specified the amount of power that they were willing to sell or produce at a determined price (price of injection). On the other part, effective from August 1, 2011, the energy system and market in El Salvador now operates under a system based on production costs.

This new system aims for a more competitive mar-ket and more stable prices of energy because under the system based on production costs, the remu-neration for the generators is not only based on the energy but also in the reliability that they provide to the electric system, i.e. for energy and for capac-ity. Therefore this system has a double retribution: one for capacity and other for energy.

Now, the market participants (generating units) must supply all the information of its production costs and the necessary technical information to elaborate the dispatch. Generators are not remu-nerated only for the energy but also for the firm capacity that they bring; that is why it has been said that the generators recover their investment and obtain a margin of profit through two ways: incomes for energy and for capacity.

The results expected from the market based on costs, are greater transparency in the performance of the market which reduces the risks perceived by new generators, and to produce economic efficien-cy at the producers’ and consumers’ level.

Ana Mercedes Lopez has participated in Project Fi-nancing deals surpassing US$ 200 million, for avia-tion and electry compa-nies, among others.

She graduated from the Universidad Dr. Jose Ma-tias Delgado (1997) with a degree in law practice and is authorised as a Practicing Attorney and Notary Public by the Supreme Court of El Salvador.

She has a Masters Degree in Entrepreneurial Law from Universidad Navarra, Spain (1999) as well as a Diploma in Family Education from the European Institute of Education (2008). Ana is also a member of the Center of Judicial Studies of El Salvador and of the Banking Association of El Salvador.

Ana speaks English and Spanish and can be contacted via email at [email protected]



Snapshot: Deal Focus

Buyer: Google Inc.Seller/Target: Motorola MobilityValue: £7.9 BillionAfter announcing the largest wireless-equipment deal in at least a decade back in August 2011, the acquisition of Motorola Mobility has finally gone through. Google won approval from Chinese regulators provided they ensure that Android software versions are free and open over the next five years. The deal gives Google a trove of 17,000 patents to protect Android devices and elevates their position as a competitor to the other handset makers that use the Android devices. In addition to Motorola Mobility phones, the software is used in handsets made by companies such as Samsung and HTC.

North AmericaGoogle Acquires Motorola Mobility


Buyer: Airports Company South Africa / InveparSeller/Target: InfraeroValue: £9.2 BillionAirports Company South Africa (ACSA), together with Brazilian joint venture partner Invepar, won a $9.2 billion concession to overhaul and operate the busiest and most valuable of three Brazilian airports, Gua-rulhos, in Sao Paulo. The partnership own 51% of the Guarulhos In-ternational Airport concession, with Brazilian State aerospace operator Infraero owning the remaining 49%. ACSA will provide airport man-agement through a technical service agreement with the concession for twenty years, and in addition to the investment return on capital con-tributions, ACSA would be paid airport management fees. Some of the immediate tasks include preparing detailed operational plans for the 2013 FIFA Confederations Cup, the Pope’s visit for World Youth Day in 2013, the 2014 FIFA World Cup and the 2016 Olympic Games, all to be held in Brazil.

South AmericaConsortium Win Brazil Airport Deal

Preparing For M&A In An Unpredictable Market

t was the case, around five years ago, that analysts, bankers, lawyers and dealmakers were able to somewhat predict the financial markets and any potential growth or risks to growth on the horizon, even up to two or

three years in advance. Then, in 2007, the global financial crisis hit, Lehman Brothers folded and suddenly all bets were off.

Now experts find it hard to predict what is going to happen from month to month, let alone from quar-ter to quarter and forget about year on year. Rat-ings get downgraded, commodity prices fluctuate, regulation is introduced and elections take place (not even in your country) and it’s all change, again! Due to globalisation and the opening-up of new markets, no company can isolate itself from the impact of these market forces. Organisations are intertwined and interconnected inevitably, some-times they might be connected through convolut-ed routes, but even if it’s just through the hardware they have to buy to keep their IT systems running, or the fuel they have to put in their company cars, they are connected to the global markets, and its ups and downs.

Because no company is an island, the only thing that can be predicted currently is more change and the way to deal with that change is to be pre-pared. This means preparing for opportunities and for any eventualities in the best way possible. Any organisation looking to sell an asset, to raise capital, or to make an acquisition in this vola-tile economic environment has to be prepared to move at lightening-speed. This isn’t just be-cause it’s important for the health and wealth of their business to close deals quickly and efficiently anymore. Now speed is of the essence because markets will change, the ground will shift and the opportunity may be lost forever as a result. Who, for example, can predict the impact that the crisis in Greece will have on the Euro, what affect the new French President will have on the

European economy, or what event may unfold from “left field” to influence the markets next? When a company is ready to sell an asset they must be ready to go to market there and then, able to promote and present their investment opportunity with all the information to hand that will be nec-essary for buyers to complete due diligence and make a decision. Once potential buyers are en-gaged in a sale process, the final decision can be a long time coming (especially in this risk-adverse, cautious investment environment), but at least in-terest will have been secured, connections made and relationships built, which will definitely assist in the successful outcome of a transaction.

Because no company is an island, the

only thing that can be predicted currently is more change and the way

to deal with that change is to be prepared. This means preparing for

opportunities and for any eventualities in the best way possible.

One way of ensuring market-readiness is to have a pre-prepared and pre-populated virtual data room (VDR) that’s accessible to an unlimited buying audience, from anywhere in the world. A VDR can enable firms to instantly react to the ups and downs of the global economy and to capitalise on the windows of opportunity this opens – but be-cause these windows may be small, it’s vital not to miss out.

The need for agility; to be nimble and react to op-portunities is particularly important in the sale of distressed assets. An established VDR can facili-tate a sale process, or support in raising capital, fast. Merrill DataSite recently worked with a busi-ness in this situation; a high yield bond was be-ing raised and information assembled from three different locations, the advisors of the company in question were able to prepare their prospectus and publish it through their VDR within hours.

IBy Merlin Piscitelli


“ “

However, if this process had taken longer or begun three weeks later the transaction wouldn’t have been able to get underway, because of the subse-quent changes in European market conditions. The unpredictability inherent in the global econ-omy, as it stands, isn’t always a bad thing for the M&A market either. For those with the will and the money to buy, there is a wealth of options available and the key is targeting the right ones. This means that the need for speed isn’t pertinent to the M&A sell-side only, increasingly VDR projects are being established by buy-side teams who are willing to pay for the cost of the VDR setup within a target organisation, just to ensure they have the time and opportunity to perform thorough due diligence.

Now that it is so difficult to forecast what is go-ing to unfold across the world’s economies from one month to the next, even for the most seasoned of experts, all that dealmakers, investors, advisors and companies can do is prepare to weather the storm. There are risks and there will be exposure on all sides when it comes to putting M&A trans-actions together, raising funds, selling an asset or even just operating in such an interconnected but unpredictable global market. But, where there are risks, there are also opportunities and the secret is to be prepared, ready to seize that opportunity when it does arise, before it ebbs away again, potentially forever.


Merlin Piscitelli, Director, Merrill DataSite, International. Merlin started his career in 1997 with an executive search firm in Los Angeles after graduating from Florida State University. From 2003 to 2006, he worked as a Business devel-opment professional for Infotrieve Inc., an informa-tion management services company in New York. He spearheaded the sales operations of an internal business unit at Infotrieve and grew the business by over 160percent.

Merlin joined Merrill DataSite in 2006 to help lead the International sales effort operating from Lon-don, the European headquarters. Since then, the In-ternational DataSite business has grown at a robust rate. Merlin has personally facilitated virtual data rooms to execute more than 1,700 online due dili-gence projects. He has also developed a wide client base in the U.K., Russia, the CIS Region, Spain, In-dia, South Africa and the Nordic region.

Merlin can be contacted at +44 (0)207 422 6266 or by email at [email protected]


M&A In Belgium: Tips And Tricks

lthough 2011 started very promising in terms of M&A activity in Belgium, the market slowed down in the second half of the year. The main reason for this downturn was the general lack of con-

fidence on the investors’ side in Europe, for which Belgium is unfortunately not immune. In addition thereto, the uncertain political situation in Belgium during most of 2011 and the problems faced by Dexia, one of the country’s leading banks, no doubt have contributed to the uncertainty in the market. Nevertheless, M&A activity may be expected to increase again in the course of 2012. Macroeco-nomic parameters are relatively strong, unlike oth-er European countries, Belgium’s GDP is expected to grow this year by 0.9% and Belgium still has many assets when it comes to attracting foreign investment.

Belgium has a lot of healthy and well-managed family-owned businesses that are middle market, in particular in the consumer market industries (food, beverages, and consumer products). These companies tend to maintain strong balance sheets and are more and more opening up to private eq-uity investments. As a result, foreign private eq-uity companies and investment funds will still find interesting middle market assets in Belgium. Belgium’s exceptional strategic location at the heart of Europe and its proximity to numer-ous important European cities are also an es-sential asset for foreign investors. Belgium hosts an impressive number of international institutions and centres of decision-making. In addition, Belgium is a centre of knowledge where top tier universities have played a major role in the development of, amongst others, the biotech and pharmaceutical industries. The Belgian work-force is highly skilled, very productive and mul-tilingual, and the Belgian public authorities are seeking to reduce labour costs through business-friendly measures.

Incorporating a company in Belgium is relatively easy and does not require more than a couple of days.

Finally, Belgium offers modern and efficient busi-ness infrastructures, well-developed transport and logistics, and a high quality of life in general. However, despite the many advantages Belgium has to offer, the current M&A climate is still not the same as it was before the 2008 crisis.

Incorporating a company in Belgium is relatively easy and does not require more than a

couple of days.

Banks are still somewhat reluctant to provide funds to finance takeovers that are not for the most part funded by the acquirer’s own equity. In order to deal with this lack of available debt, advisers are challenged to find innovative funding structures in order to allow their clients to raise the required capital. Moreover, negotiation processes tend to take more time than before since buyers request more stringent information covenants, substantive se-curity packages and tight financial covenants. As a consequence, more deals get canceled before closing. Legal and financial advisers should there-fore always try to speed up the preparation, sign-ing and closing of the transaction, because the lon-ger an acquisition process takes the more chance there is that the deal will collapse.

At the same time, they should assist their clients in focusing the due diligence investigation on the key issues.

ABy Steven De Schrijver, Philippe Van den Broecke & Frédéric Verspreeuwen

“ “


Employment law is strictly regulated in Belgium and is therefore one of the important issues which require specialised advice before as well as after the closing of a deal.

The pre-closing concerns mainly relate to the possible information and consultation obliga-tions and to the retention of key employees. The post-closing issues relate to the so-called col-lective employment conditions and include the integration of works councils and other bodies of employee representation, the shift to a differ-ent joint industrial committee (which can result in the change of employment conditions, includ-ing wages, vacation periods, etc.) and the applica-tion and impact of different collective bargaining agreements at company level. Regarding compen-sations and benefits, a takeover often requires the development of a strategy to streamline salaries and fringe benefits in view of the integration of the acquired business into the group.

Below we have outlined some tips that may be use-ful when acquiring a Belgian company:

-Be careful with the letter of intent (LOI). Under Belgian law, there is a binding agreement as soon as there is consent between the parties regarding the object and the price of the sale. Hence, it is important to indicate in the LOI which provisions are binding and which are not. The LOI can be used to negotiate a few important deal points. -Pay a lot of attention to your due diligence. De-fine the scope carefully, implement a realistic but strict timetable and make sure to carry out due diligence on the business culture of the target in order to examine organisational health, leadership talent and managerial abilities.

-Educate the seller. Convince your counterpart to hire a good lawyer, to start preparing the data room as soon as possible, to answer all questions and to start timely with the preparation of the disclosures. -Start timely with the preparation of the tax struc-ture of the transaction (e.g., share deal v. asset deal). It makes no sense to prepare the acquisition documents if the tax structure is not yet in place.

However, if this process had taken longer or begun three weeks later the transaction wouldn’t have been able to get underway, be-cause of the subsequent changes in European market conditions. The unpredictability inherent in the global economy, as it stands, isn’t always a bad thing for the M&A market either. For those with the will and the money to buy, there is a wealth of options available and the key is targeting the right ones. This means that the need for speed isn’t pertinent to the M&A sell-side only, increas-ingly VDR projects are being established by buy-side teams who are willing to pay for the cost of the VDR setup within a target organisation, just to ensure they have the time and opportunity to perform thorough due diligence.

Now that it is so difficult to forecast what is go-ing to unfold across the world’s economies from one month to the next, even for the most seasoned of experts, all that dealmakers, investors, advisors and companies can do is prepare to weather the storm. There are risks and there will be exposure on all sides when it comes to putting M&A trans-actions together, raising funds, selling an asset or even just operating in such an interconnected but unpredictable global market. But, where there are


Steven De Schrijver is a partner in the Brussels of-fice of Astrea. He has 20 years of experience advising Belgian and multinational companies on mergers and acquisitions, joint ventures, corporate restructurings, acquisition financing, pri-vate equity and venture capital, debt structuring and secured loans. He has been involved in several national and cross-border transactions mostly in technology-oriented sectors.

Steven is also recognised as one of the leading com-mercial IT lawyers in Belgium specialising in new technologies (such as data protection, e-commerce, software licensing, technology transfer, IT-outsourc-ing, cloud computing, etc.).

Steven holds a law degree from the University of Ant-werp (magna cum laude, 1992) and an LLM Degree from University of Virginia School of Law (1993). He received the ILO Client Choice Award 2012 in the General Corporate Category for Belgium.

He is fluent in Dutch, French and English and has good notions of German and Spanish.

Steven can be contacted via email at [email protected] or alternatively by calling +32 3 287 11 11 / Mob. +32 475 388 955.

Astrea is an independent law firm in based in Antwerp and Brussels with over 40 attorneys (10 of whom are partners). Established in 2006, the Firm has experienced continued growth and advises a growing list of domestic and international clients in all major areas of business law (including corporate/M&A, finance, employment, commercial, IP, ICT, real estate, transport & logistics, administrative, environmental, litigation and tax). Working closely with some of the finest law firms around the world, Astrea’s partners advise on complex, cross-border and domestic transactions and legal matters.

Astrea’s corporate department consists of 16 attor-neys (3 of whom are partners), who all have exten-sive experience in multi-jurisdictional M&A trans-actions, private equity, corporate restructuring and corporate litigation.

Our attorneys are multilingual and combine specific legal expertise with relevant industry knowledge and a pragmatic and solution-oriented approach.

In this article the authors give some practical tips and information on how to make M&A transactions succeed in Belgium.

-Make sure that you get the management of the target on board. Specify roles for the top execu-tives that will remain with the target. Put the right executive compensation system and incentives in place.

-Be careful with earn-outs. The sellers will usu-ally wish to maintain some form of legal status, control, or power of veto, in view of ensuring the ‘earn-out’ is successful for them. This may cause anxiety for the buyer as far as formulating long-term planning and integration. Make sure that all details are clearly outlined as far as both parties’ interests are concerned before finalisation.

-Design the post-closing integration as carefully as the takeover itself. Apply the guiding principles that were important to the success of the acquir-ing company to the acquired business but do not change things too quickly. Nevertheless, get the transition over as quickly as possible.


Philippe Van den Broecke is a partner in the Ant-werp office of Astrea. He has 20 years of experience in corporate law, and more in particular in the field of M&A, corporate restructur-ing, private equity and ven-ture capital, debt structur-ing and corporate litigation.

Philippe holds a law degree from the Vrije Universit-eit Brussel (1993) and is member of the Bar of Brus-sels since October 1993.

He is fluent in Dutch, French and English.

Philippe can be contacted via email at [email protected] or alternatively by calling +32 3 287 11 11 / Mob. +32 475 388 955.

Frédéric Verspreeuwen is a partner in the Antwerp office of Astrea. He advises domestic and internation-al clients on national and international acquisitions and restructurings general corporate law, financial law and bankruptcy mat-ters.

Frédéric holds a law degree from the Antwerp Uni-versity (2000) as well as a Master after Master in Company Law from the University of Ghent (2001) and the University of Brussels (2003). He is fluent in Dutch, French, English and German.Frederic can be contacted via email [email protected] or alternatively by calling +32 3 287 11 12 / Mob. +32 478 240 710.


New requirements for M&A transactions in Ukrainian financial services market

n 9 January 2012, the Law on Amendments to Certain Laws on the Regulation of Financial Services Markets entered into force introducing the requirement to obtain

a special regulatory approval for the acquisition of shares or other interest in financial institutions.

The new regulatory approval requirement covers both non-banking financial institutions (e.g., companies providing financial services) and professional participants of stock market (e.g., se-curities traders, custodians, asset management companies, depository or stock exchanges).

Transactions requiring approval include:

-acquisition of a significant shareholding - direct and/or indirect, independent or joint holding of 10% or more of the authorised share capital or voting rights stemming from the purchased shares of a legal entity, or the ability to exercise decisive influence on a legal entity’s activities, or

-increase of a significant shareholding so that the investor will directly or indirectly, independently or jointly own 10%, 25%, 50% or 75% of the financial institution’s authorised share capital or the voting rights under the acquired shares, and/or ir-respective of formal ownership will have the ability to exert decisive influence on the management or activities of the financial institution.

The new disclosure regime requires the inves-tor (acquirer) to notify either the National Com-mission On State Regulation of Financial Services Market (in case when the target is a non-bank-ing financial institution) or the National Secu-rities and Stock Market Commission (in case when target is a professional participant of stock market) one month prior to the acquisition of such interest and to file thereto the set of docu-ments evidencing financial state, business repu-tation and ownership structure of such investor. The exact list of documents to be filed will be de-fined by each regulator separately in 2012.

Approval from the relevant regulators must be obtained prior to completion of the transaction. Those investors who fail to obtain the written ap-proval from named regulators are prohibited from voting at shareholder meetings, and will be banned from participating in the management of the finan-cial institutions. Any decision of the shareholder meeting, if held with the participation of investors who failed to obtain the approval, shall be void. In addition, any of the regulators may appoint an au-thorised person, who will vote at the shareholders meetings of a financial institution in which a signif-icant shareholding was acquired or increased with-out the written approval required under new rules.

This requirement is similar to the regulatory ap-proval and disclosure regime applicable to banks. However, unlike in the banking sector where tacit (silent) consent was recently introduced, potential investors in the financial institutions will have to wait for a written consent of the relevant regulator. For the avoidance of doubt, the new disclosure re-gime for financial institutions does not replace the requirement to seek a separate approval from the Antimonopoly Committee of Ukraine, where ap-plicable under Ukrainian competition laws.

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Vladimir Sayenko is a partner at Kyiv based Sayenko Kharenko. He has over 17 years of experience, admit-ted in Ukraine and in the State of New York (USA). He specializes in M&A, corporate, competition and securities law. Vladimir advises extensively in the fi-nancial, energy, oil & gas, real estate and media sec-tors and litigates numerous investment, corporate and property disputes in Ukrainian courts and interna-tional arbitration tribunals.

Mr. Sayenko is repeatedly ranked as one of Ukraine’s leading lawyers. Most recently he has been named No. 1 Antitrust, Corporate and M&A lawyer for Ukraine by Ukrainian Law Firms 2011 research and recom-mended as one of the top lawyers for Ukraine by The Legal 500, Chambers Global, PLC Which Lawyer?, IFLR 1000, Who’s Who Legal. CIS, Best Lawyer Inter-national. Mr. Sayenko can be contacted on +380 44 499 6000 or by email at [email protected].

By Vladimir Sayenko


By Vladimir Sayenko


The global economy has changed dra-matically over the past 10 years, partic-ularly as the financial crisis slows down Western economies and emerging mar-kets power on with double digit growth.

This dramatic realignment in economic power has had a significant impact on merger and acquisition (M&A) activity and presents significant opportuni-ties both domestically and abroad.

In the UK, which is Europe’s most open economy, overseas buyers now dominate the market. UK businesses present an ideal stepping-stone into the European Union; they are hungry for investment, offer strong technological advantages and respected brands – and a weakened pound offers the ability to transact at levels attractive to both buyer and seller. Between 2010 and 2011, our dealmakers at Clear-water saw cross border deals, ranging from Europe and the United States to India, increase from 63 per cent to 80 per cent of trade sales – a startling statis-tic and indicative of the market changes.

For a UK business, which is operating in a reces-sionary environment and with restricted access to bank funding, the external investment is wel-come. It is important to remember that while our economy remains flat, there are many areas of the world in growth. An overseas buyer will bring with them the opportunity to access the high growth international markets and therefore avoid having to rely on the sluggish domestic economy. China – A Leading Driver of Cross-border M&A

Out of the BRIC nations, which are rapidly climbing up global GDP rankings, China presents the most obvious opportunity as the world’s second largest economy. Boasting an economic growth rate of 9.2 per cent in 2011, Chinese businesses are expanding their reach across the globe and are keen to acquire quality assets.

A recent IMAP summit in Beijing highlighted the demand for access to the Chinese market, but also the need to facilitate investment from the Far East into the UK economy. As a result, we have launched a dedicated China team to ensure that, as a firm, we can offer a personalised service to cor-porates, business owners and entrepreneurs mov-ing investing in both directions.

Chinese investors are also extremely keen on the European mid-market and many Chinese firms have huge trading surpluses that they want to invest overseas. As a result, there is cer-tainly a feeling that the M&A space between China and Europe will become a more active.

In the UK, which is Europe’s most open economy, overseas

buyers now dominate the market. UK businesses present an ideal stepping-stone into the

European Union Consolidation Drivers

The key driver behind Chinese interest, and this is also the case for Indian corporates, is the desire to cash in on UK expertise and share of the supply chain. The expertise and contracts held by UK firms are much sought after. The knowledge capital and con-nections can catalyse their business in their own domestic markets and provide a competitive edge.

However, it is the cost benefits provided by acquir-ing smaller firms in the supply chain, particularly in industries such as automotive and aerospace, that is driving the bulk of M&A activity.

TGlobalisation of M&A Activity

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By Mike Reeves

By Mike Reeves


The target firms are well-priced and, with less com-petition from European buyers, provide greater control on cost for corporates from the emerging markets. India and China are gradually becom-ing more sophisticated when it comes to M&A and there is evidence to suggest the perfect storm is forming for them to significantly increase their investment in Europe and the UK.

Another important factor is the impending shift towards a ‘near shore/far shore’ model where Asian groups use their domestic assets for less ur-gent production schedules and those in the West, which typically have more expertise and experi-ence, to adhere to strict customer supply chains. We have had discussions with acquisitive investors from China who are targeting this area. It is not a case of if they arrive in the West, but when they do.

M&A is a fantastic barometer of the economy, highlighting the sectors and geographic regions that represent the most potential for growth. It is vital that businesses are receptive to the chang-ing economic landscape and M&A transac-tions that are taking place, to ensure that they are ahead of the curve and do not miss the op-portunities that a changing world will present. Mike Reeves is joint manag-ing partner at Clearwater Corporate Finance, which is the UK member firm of IMAP, the leading global M&A advisory firm.

Mike, one of Clearwater’s founding partners, has been involved in mid-market cor-porate finance and restruc-turing work for over 25 years. After leading the MBO of Clearwater, he has grown the business into one of the leading corporate finance boutiques in the UK. Mike was recently appointed to IMAP’s board of directors as well as Chairman to IMAP’s Interna-tional advisory board.

As part of the leading global M&A partnership IMAP, Clearwater is represented in more than 40 countries worldwide by more than 400 experienced transaction advisers. Despite the recent challenges in the global economy, IMAP has continued to ex-pand and is now ranked third globally for mid-mar-ket deal volumes up to $500 million, by Thomson Reuters.

Mike can be contacted on +44 (0)845 058 0342 or by email at [email protected]

urrent Status Law No. 4054 on the Protection of Competition (the “Law”) is the pri-mary legislation in Turkey aiming

to prevent agreements, decisions and practices that prevent, distort or restrict competition in markets for goods and services, and the abuse of dominance by the undertakings dominant in the market. It also ensures the protection of compe-tition by performing the necessary regulations and supervisions to this end. The Law prohibits certain M&A transactions that pose a potential threat of significantly lessening competition in a market for goods or services within part or whole of Turkey from the point of creating or strength-ening a dominant position. Accordingly, the Law requires particular types of M&A transactions to be notified to the Competition Board (the “Board”) and permission to be obtained from the Board in order to attribute legal validity to such M&A transactions. Although M&A transactions in all aspects are not regulated under a specific law in Turkey, the gen-eral principles governing M&A transactions are set forth under several legislations including the Law. The procedure and principles with respect to the notification of M&A transactions which need the authorisation of the Board in order to gain legal validity are provided under Commu-niqué No: 2010/4 Concerning the Mergers and Acquisitions Calling for the Authorization of the Board (the “Communiqué”). Timeline Control of M&A transactions is an important instrument of competition policy in Turkey as it is the case throughout the world. It all started with the issuance of the first communiqué by the Board, Communiqué No: 1997/1, clarifying the M&A transactions, which are subject to notifica-tion and authorisation.

Furthermore, the said communiqué envisaged a threshold system based on market shares and turnover. Nevertheless, there was not much le-gal certainty for practitioners or for undertakings. Additionally, during the period that has passed, major problems are encountered in terms of de-termining market shares or calculating turnovers.

Moreover, several important changes are made to the Law and the development of the Turkish econ-omy necessitated the issuance of the Communiqué with the turnover-based notification threshold, in a way to ensure legal certainty. The Communiqué & Amendments The Communiqué aims to change the M&A con-trol regime in Turkey from bottom to top with sig-nificant amendments. In accordance with Article 5 of the Communiqué, the transactions requiring the Board’s authorisation are deemed to have oc-curred provided there is a permanent change in control subsequent to the completion of the envis-aged transaction. The Communiqué provides for the following ad-ditional thresholds for the obligation to apply for the permission of the Board in order to complete the relevant transaction and become legally valid: (a) Total turnover of the parties to the transaction in Turkey exceed TL 100,000,000; and turnovers of at least two of the parties to the transaction in Turkey each exceed TL 30,000,000, or; (b) Global turnover of one of the parties to the transaction exceed TL 500,000,000; and Turkey turnover of at least one of the other parties to the transaction exceed TL 5,000,000.

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Effect Of Changes In The Turkish Competition Legislation On M&A Transactions By Isenbike Bilgili & Caka Kul

It should be emphasised that the thresholds shall cover the turnover of the undertakings from any and all activities. Save for the joint ventures, authorisa-tion of the Board shall not be required for transac-tions where there is not any affected market, even if the thresholds listed above are exceeded. If the thresholds based on turnover are met in respect of the relevant transaction, and if there is an affected market, a notification to the Board has to be made. However if there is no horizontal overlap and no vertical integration, the transaction is not notifi-able. In merger transactions, the affected market shall be understood by considering the activities of all undertakings while in acquisitions; the activi-ties of the company subject to the transaction shall be evaluated to understand the affected market. A joint venture shall be deemed as forming a new company or changing the control of an existing joint venture, in other words forming an economic unit subject to joint control as a result of the trans-action. Therefore transactions, which do not lead to joint control, shall not be considered as joint venture in respect of application of the Commu-niqué. On the other hand, if a transaction does not re-quire notification to the Board, then, the parties to such transaction may still be obliged to ap-ply to the Board in order to obtain exemption or negative clearance - as the case may be - as long as there exists a provision in the definitive agree-ments relating to the transaction, which restricts or may restrict competition in contrary to the Law. Furthermore, Communiqué governs that the con-ditional transactions and closely related transac-tions realised over a short period of time by way of expedited exchange of securities are treated as sin-gle transaction. Two or more transactions carried out between the same persons or parties within a period of two years, shall also be considered as a single transaction for the calculation of turnovers.

It should be underlined that the notified transac-tions began to be published on the Competition Authority’s website upon effectiveness of the Com-muniqué. Thus, once notified, the transaction can no longer be a confidential matter. Another change is the Board’s approval decision’s coverage. The decisions are also deemed to cover those restraints which are directly related and nec-essary to the implementation of the M&A trans-action leaving the transaction parties determine whether the restraints introduced by the M&A ex-ceed this framework. Communiqué also aims to recognise and discuss the efficiencies of the M&A transactions only to the extent that the transactions serve consumer welfare maximisation objectives. Additionally, the Communiqué aims to facilitate the transactions by allowing the parties provide commitments to rem-edy substantive competition law issues.

Lastly, the notification form has been evolved in a way which simplifies the notification process. If any one of the parties to the transaction shall acquire full control of an undertaking to which it already has joint control or if the aggregate market share of the parties to the transaction with respect to hori-zontal transactions is less than 20% and in case of vertical transactions, the market share of one of the parties is less than 25% in an affected market with respect to Turkey and the relevant geographi-cal market, a shorter notification form is used. The new notification form also no longer requires the executed copies of the agreement subject to the M&A transaction and allows the parties to file the relevant agreement before its execution. Further Amendments & Conclusion It has been possible to appeal against the Board’s decisions before the Council of State in 60 days


By Isenbike Bilgili & Caka Kul


from the notification date of the related parties. However such appeal no longer ceases the imple-mentation of decisions, follow-up and collection of administrative fines. Moreover, the amount of fine to be imposed in case M&A transactions that are subject to authorisation are realised without Board’s approval is increased to an important ex-tent. With the reforms strengthening economic funda-mentals, Turkey ushered in an era of strong growth. The amendments in the Law and effectiveness of the Communiqué not only had a positive effect on the Turkish system concerning the undertakings but also played an important role in the European Union candidateship period.

Tevfik Adnan Gür is the founding and managing partner of Gür Law Firm. He established “Gür Law Firm” in 1984. GÜR in-corporates experience, ex-pertise and a rigorous level of professionalism and pro-vides legal service to both international and domestic clients with a well organ-ised and specialised legal team and seven major de-partments divided as Corporate, Energy, Banking & Finance, Litigation & Dispute Resolution, Ship-ping, Debt Recovery and Intellectual Property. GÜR has an office in Moscow and is also in collaboration with other law firms in other countries, allowing to coordinate the clients’ legal needs concerning their business transactions all over the world.

Tevfik can be contacted on +90 212 325 9020 or by email at [email protected].

Isenbike Bilgili is a partner at Gür Law Firm. Isenbike can be contacted on +90 212 325 9020 or by email at [email protected].

Caka Kul is a partner at Gür Law Firm. Caka can be contacted on +90 212 325 9020 or by email at [email protected].



Buyer: Milk LinkSeller/Target: Arla FoodsValue: £2 BillionBristol based co-operative Milk Link are set to merge with one of Eu-rope’s largest dairy firms. The UK’s largest producer of cheddar cheese, have asked their members to back a merger with Arla Foods that will pool nearly a quarter of UK milk production. The planned combina-tion with Leeds based co-operative Arla, which is home to dairy brands Cravendale, Lurpak and Anchor will create the largest player in the UK dairy market, processing more than three billion litres of milk a year with a combined turnover in excess of £2 billion. The proposed merger has been backed by the Milk Link board but still requires the approval of its members on June 26, as well as Arla’s board of representatives and various regulatory bodies.

EuropeMilk Link & Arla Plan £2 Billion Merger


Buyer: Global TransSeller/Target: MetalloinvesttransValue: $540 MillionGlobaltrans Investment PLC has acquired 100% of LLC Metalloinvest-trans (MIT), the captive freight rail transportation operator of Metal-loinvest, a leading global iron ore and HBI producer based in Russia on a cash and debt free basis. The transaction between the independent private freight rail group and the large natural resources company will enable Globaltrans to increase its total fleet to about 60 thousand units by mid-2012, thus further enhancing its position as a leading indepen-dent freight rail group in Russia. As part of the transaction, Globaltrans will provide rail freight transportation and logistics services to Metallo-invest, handling 100% of all its rail transportation cargo volumes in year one based on agreed pricing terms and 60% in the following two years based on a “rights of first refusal” principle.

EuropeGlobal Trans To Acquire Metalloinvesttrans For $540 Million

By Eric Leung

hinese M&A activity remained broad-ly steady over 2011 with deal volumes and values holding up over the year despite wider market downturns. In-deed, over the latter six months, when

the Eurozone crisis was in full swing, Chinese M&A transactions remained in line with H1 met-rics in terms of volume, and actually rose in terms of cumulative deal values.

Nonetheless, while overall deal flow remained stable over the two halves of 2011, this was only due to a subtle shift in terms of deal types com-ing to market. Perhaps unsurprisingly, in-bound acquisitions over H2 2011 dropped off in terms of intensity, with volumes falling some 15% compared to the previous six month pe-riod. Meanwhile, domestic and outbound activ-ity made up for this decline, with domestic and outbound deal volumes rising by around 10%. However, it would have taken a minor miracle for markets to remain resilient over the first quarter of 2012 as the associated effect of the Eurozone crisis (as well as the requisite time-lag) hit home. As a result, deal flow over the first three months of 2012 dropped off sharply compared to the same period the year prior. Just 189 transactions, worth a total US$36.5bn came to market over the quarter, down from the 277 deals, worth US$41.1bn, that were announced over Q1 2011. And it was within the inbound space that the majority of this slowdown took place, with inbound M&A inflows by value dropping a massive 83.1% in Q1 2012 compared to the same period the year before. Meanwhile, volumes fell by more than half. In stark contrast to this however, both domestic consolidation and outbound M&A activity by value rose over the two periods in question.

Inbound M&A Activity

Over 2011, inbound activity became more re-strained, primarily because of the onset of the Eurozone crisis, with M&A markets witnessing a fall in the number of announced inbound M&A deals, according to mergermarket, an independent provider of M&A data and analysis. Compared to the first half of 2011, H2 inbound M&A vol-umes dropped by more than 20%, reinforcing the perception that prospective acquirers of Chinese assets were beginning to prioritise the upkeep of their own houses, as opposed to buying into others towards the latter half of the year.

However, while the volume of inbound transac-tions declined over the latter half of 2011, the total amount spent rose by 75%, chiefly due to the No-vember 2011 acquisition of an implied 3.05% stake in China Construction Bank by Singaporean sov-ereign wealth fund Temasek, among other inves-tors, in a deal which was worth a total of US$6.6bn. The deal heavily skewed the overall valuation fig-ures and perhaps a truer figure emerges when this particular transaction is discounted from the over-all metrics – in which case, second-half inbound valuations rose by a much more modest – but still not inconsequential – 19%.


Riding The Dragon – Chinese M&A Overview

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Nonetheless, preliminary figures for the first quar-ter of 2012 perhaps indicate that inbound deal-making is at its inflection point, at least in terms of volumes, with 31 transactions having been an-nounced over Q1 2012 – the same number that came to market in the previous quarter. Although it would seem that foreign corporates are begin-ning to re-engage with the China marketplace once again, they are only doing so cautiously – only US$1.1bn was spent by overseas buyers on Chinese companies over the quarter, down signifi-cantly from a figure of US$11bn in Q4 2011.

Reading the tea-leaves from one particular angle, inbound M&A activity into China could gradually pick up over 2012, with deal flow primarily driven by cash-rich US corporates and first-tier private equity firms hoping to move beyond the difficult downturn caused by the Global Financial Crisis and instead look towards the future for profitable opportunities in China. Their European counter-parts will also look to emulate them but to a lesser extent - wider macroeconomic fundamentals indi-cate that the US is now on the road to a recovery of sorts, while parts of the Eurozone are still mired in debt.

Indeed, such a story is evident when looking at Q1 2012 metrics, which show that inbound investments from the US into China increased by 13 percentage points in terms of volume compared to the previ-ous quarter – this rise being coupled with a cor-responding decline in the proportion of inbound acquisitions emanating from Europe. Indeed, over the same two periods, European M&A volumes dropped 16 percentage points to account for just 29% of the total figure for inbound investment. Nonetheless, the converse could also play out, with another picture emerging if one were to take the view that a recovery in the US would result in US corporates and private equity firms taking an increasingly bullish view on the US economy – and keeping their investments at home as a re-sult. With US manufacturing orders up in March, and with consumer spending having recent hit a

seven-month high, could it be first-tier European corporations and private equity firms who end up driving the bulk of Chinese inbound M&A activity over 2012? Either way, inbound activity is likely to increase over the next twelve months. Domestic Activity

Meanwhile, domestic M&A plays in China con-tinue to be driven by the strategy outlined in the government’s 12th Five Year Plan (2011-2015) published in March 2011. The plan broadly aims to create a more “inclusive” growth model whilst maintaining strong GDP growth. The focus is to build a more equitable society by smoothing out income disparities at both the individual and col-lective levels, as well as improving access to jobs, education and healthcare, among other social ser-vices and public goods.

In terms of the implications for domestic M&A ac-tivity, the most recent five-year-plan will broadly encourage (among other goals), the upgrading and modernisation of industry, and thus the continu-ation of domestic consolidation in key industries such as the mining, light manufacturing, automo-tive, industrials, and processing industries to name a few. Particular focus will be placed on those industries that are labour and/or resource inten-sive, highly polluting or plagued by over capacity. And it was this process of technical upgrading that continued to drive the bulk of Chinese domestic M&A activity, with some 617 local deals, worth US$118.1bn, coming to market over 2011. Fur-thermore, such flows were equally-spread over the two halves of the year, with H2 domestic takeovers by value (US$62.8bn) actually exceeding invest-ments over H1 (US$55.5bn). However, as financial markets held their breath over Q1 2012, acquisitive domestic bidders seemingly lost their nerve with just 126 domestic deals coming to market over the quarter – the lowest number since Q1 2006.


Nevertheless, given the global economy’s fragile recovery since then, a growing number of industry insiders now believe that domestic M&A activity will rebound over the remainder of the year, with this resurgence being dominated by manufactur-ing sector tie-ups. Indeed, over 2011, such deals comprised around one-quarter (24%) of all do-mestic deals by volume and 21% of domestic M&A activity by value. Consumer Business transactions are also likely to proliferate, as many fragmented sectors, such as the Food & Beverage space, con-tinue to see consolidation occurring. Deals such as Guangxi Royal Dairy’s acquisition of a 55% stake in Dalilaisier Dairy, the Chinese manufacturer of yogurt-and milk-based products, for US$15.1m in mid-2011, are a recent case in point.

Furthermore, domestic activity could also increas-ingly shift inland over 2012, with industry play-ers reportedly showing strong interest in growing their national market share by acquiring in regions such as Sichuan, Yunnan and Tibet, chiefly due to the greater comparative market potential of these areas. At the same time, powerful government in-centives to shift investment away from developed coastal regions and towards such inland provinces, will also act as a significant draw for potential ac-quirers.

In summary, while the emergence of further deal-making opportunities in these sectors is certainly not a new trend, it is important nonetheless. Do-mestic consolidation plays that are now taking place, or are likely to come to market in the near-future, are set to be the ones that result in the cre-ation of tomorrow’s market leaders and national brands, and ultimately re-shape the future of Cor-porate China.


Outbound Activity

The Greater China outbound story is no longer a new one. Over 2011, Chinese outbound acquir-ers undertook 183 deals, worth US$64bn – a large jump from the 148 overseas acquisitions, worth a total of US$56.2bn, that were announced over the previous year. As a result, over the wider 2007-2011 period, outbound deal flow rose steadily in terms of both volumes and values, growing by an average of more than 10% per year in terms of vol-umes, and increasing by an average of more than one-fifth by values per annum over the same time-frame.

However, the slowdown that befell China’s in-bound and domestic M&A markets over Q1 2012 also impacted the outbound market, with deal flow slowing to just 32 deals, worth US$10.4bn over the quarter (down from a total of 41 deals in Q1 2011). Although, the pace of decline was the slowest of the three market types, with y-o-y volume declines of just 22%, with deal values actually appreciating over the two periods in question.

Interestingly, the Chinese outbound M&A story continues to be one that is very much focused on Energy & Resources transactions. Over the 2007-2009 period, close to one-third of all outbound deals were of foreign Energy & Resources assets by volume – a proportion which fell slightly over the subsequent two years. Having said that, in-vestments by value of such assets located abroad jumped from making up 62% of total outbound M&A by value over the 2005-2007 timeframe, to accounting for more than two-thirds of the overall figure.


Yet while Chinese bidders continue to focus on acquiring overseas Energy-related targets, they are also increasingly focusing their intent when it comes to where they are buying. Over the 2007-2009 period, 38.5% of all Chinese outbound ac-quisitions by volume were of Western European & North American targets. Yet over the subsequent twenty four months, this proportion rose to just under 45% of all deals – although this shift con-ceals an apparent swing in preference from North American assets towards purchases within West-ern Europe over the latter period.

Looking forward over 2012, expect to see some groundbreaking shifts in terms of bidder focus as Chinese bidders increasingly move up the value chain. From a sector perspective, infrastructure-related plays could become more commonplace. Such a move could take two forms – the first being the more familiar, traditional project-based infra-structure investment as part of a wider resource-extraction deal. The second type are those pure infrastructure bids – often defensive plays to con-trol large foreign assets overseas in order to ensure steady cash-flow generation. For instance, in one of the very largest outbound transactions of 2011, Cheung Kong Infrastructure Holdings (CKI), an investment vehicle owned by Hong Kong tycoon Li Ka-shing, made a successful bid for the UK’s Northumbrian Water, for a total consideration of US$7.9bn.

Outbound buys in the Consumer Business & Transportation sectors will also continue to see steady growth over 2012. In 2011, for instance, deals in these sectors accounted for more than 22% of outbound transactions by volume, and this is unlikely to start falling off anytime soon. These acquirers are not simply looking to buy abroad to access international markets, nor simply to intro-duce a reputable brand home.

In fact, they have a much more holistic strategy in mind, particularly in the tourism and leisure spac-es. Chinese tourism is increasingly becoming a carefully choreographed, door-to-door experience – with companies from airlines to cruise operators to theme park developers looking to control each dollar (or Yuan) flowing from a Chinese tourist’s wallet. That’s why tie-ups between seemingly un-related entities in this space will be making head-lines in 2012.

A final trend in outbound M&A in 2012 could be a rising prevalence of intra-Asia deals, especially as the RMB becomes an increasingly predominant currency throughout the region as a result of loos-ening cross-border capital controls. Buys in Asia reduce exposure to flagging markets elsewhere, and provide the cultural and linguistic comfort of markets and people closer to home. Financial ser-vices, mining, and agribusiness plays are expected to lead outbound deal-making across the region over the next 12 months.

Eric Leung is the M&A Transaction Services Leader for Deloitte China Over the last 20 years, he has been sup-porting major corporate and private equity clients in their M&A due diligence. In ad-dition to his extensive experi-ence in transactions in China, he also supported many of the major Chinese companies in their overseas acquisitions.

Eric Leung can be contacted by calling +852 2852 1600.


he Ministry of Justice of Japan an-nounced a proposed amendment to the Companies Act (the “Proposed Amend-ment”) on December 7, 2011 and invit-ed public submissions. If the Proposed

Amendment is implemented, it will be the first large amendment of the Companies Act since its renewal in 2005.

The main purpose of the Proposed Amendment is to reform (i) the corporate governance system and (ii) the regulation of the relationship between a parent company and its subsidiaries. Therefore, the Proposed Amendment includes many impor-tant topics, such as outside directors, third party allocations of shares upon the change of a control-ling shareholder, lawsuits brought against the di-rectors of a company by shareholders of its parent company on the company’s behalf, and statutory cash out. Some of these topics are outlined below. Outside Directors

Under the current Companies Act, it is at each company’s discretion whether to have an out-side director. In order to enhance the corporate governance of certain companies, the Proposed Amendment suggests that companies above a certain size (e.g. the company’s capital stock is not less than JPY 500,000,000 or its debt is not less than JPY 20,000,000,000), listed companies or certain other categories of companies have at least one outside director. The Ministry of Jus-tice has also proposed, as an alternative, that the current Companies Act be kept unchanged. In addition, the Proposed Amendment proposes stricter requirements for an outside director. Put simply, the current definition of an outside direc-tor under the Companies Act is a director who is not, and at no stage was, an executive director or employee of the company or one of its subsidiar-ies. The Proposed Amendment suggests excluding the following persons, amongst others, from the definition of an outside director:

(i) directors and employees of the parent com-pany of the relevant company and (ii) cer-tain relatives of the relevant company’s direc-tors and employees. The Ministry of Justice has also proposed, as an alternative, that the current Companies Act be kept unchanged.

Third Party Allocations of Shares

Under the current Companies Act, a resolution of shareholders is not required to issue shares sim-ply because the number of issued shares is large enough to result in a change of the controlling shareholder. (Please note, however, that the rules of certain stock exchanges may require such a res-olution.) The Proposed Amendment proposes that a resolution of shareholders be required whenever a company intends to conduct a share issue, by way of third party allocation, which will result in a change of the controlling shareholder. This gives the existing shareholders control of such a share issue, rather than just the company’s management. The Ministry of Justice also suggests, as an alterna-tive, that the current Companies Act be kept un-changed.

Lawsuits Against Company Directors Brought by a Parent Company’s Shareholders on Behalf of the Company

Under the current Companies Act, the sharehold-ers of a parent company are not entitled to

Recent Developments Regarding Possible Amendments to the Companies Act of Japan

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By Yuichiro Nukada

directly bring a derivative lawsuit against a sub-sidiary’s directors on behalf of the subsidiary. In order to secure the rights of the parent company’s shareholders, the Proposed Amendment proposes giving shareholders of a parent company, under certain conditions, the right to file a derivative lawsuit against a wholly-owned subsidiary’s di-rectors on behalf of the subsidiary. The Minis-try of Justice also suggests, as an alternative, that the current Companies Act be kept unchanged. Cash Out

Under the current Companies Act, “cash out” (squeezing minority shareholders out by giving monetary consideration) can be made by (i) reor-ganisation procedures, such as exchanging shares for monetary consideration, or (ii) using class shares subject to a class-wide call. In practice, both methods incur procedural costs and time. Therefore, in order to reduce such costs and save time, the Proposed Amendment proposes that a special controlling shareholder (who has not less than 90% of all the voting rights of the company) should have the right to call other shareholders to sell their shares to the special controlling share-holder.

Overview

The Proposed Amendment is only an interim proposal from the Ministry of Justice. The issues raised by the Proposed Amendment, including the topics described above, are still under consid-eration—not only regarding the details but also whether to adopt them at all. The working group of the Ministry of Justice will further develop the Proposed Amendment in light of the public sub-missions it received prior to the close of submis-sions, which was at the end of January, 2012. It is therefore important to carefully monitor the working group’s progress.

Anderson Mori & Tomotsune is one of the largest full service law firms in Japan with over 50 years of experience ad-vising international clients. Through specialized teams of Japanese and foreign at-torneys equipped to meet the needs of international real estate investors, Anderson Mori & Tomotsune is proud to offer a full-range of real estate advice, including deal structuring advice, legal due diligence, con-tract negotiation and closings, to sellers, purchasers, trustees, asset managers, financiers and arrangers.

Yuichiro Nukada, a partner at Anderson Mori & Tomotsune, practices in the fields of M&A (takeover bids, share acquisitions, business transfers, statu-tory corporate reorganizations, JVs, general corpo-rate), general corporate matters, real estate (J-REIT, TMK), financing, international transactions, sport (professional football clubs) and entertainment. In addition to his professional experience at AM&T, he worked for the Financial Services Agency of Japan where he was in charge of maintaining laws and regulations for modernising the Companies Act, the Securitization Law (TMK Law), the REIT Law and other financial areas. He was also engaged in the preparation, revision and formulation of the Fi-nancial Instruments and Exchange Act (June 2004 - June 2005). He has also worked for Slaughter and May in London as a foreign visiting associate (Sep-tember 2006 - March 2007).

Yuichiro can be contacted on +81 3 6888 1110 or by email at [email protected].

Mergers and Acquisitions activity in India- glass half full or half empty.

012 will be the year of mergers and acquisitions”- according to an an-nual survey carried out by global consulting firm, Grant Thornton.

The survey, conducted in the last quarter of 2011 among top private equity players and corporations indicates optimism for both inward and outward M&A activity by Indian corporations. The actual FDI figures for the financial year ending March 2012, seems to confirm this - India had attracted foreign direct investment totalling USD 50 billion, with the January to March 2012 quarter alone see-ing deals worth USD 18 million being closed.

And yet these figures and the supposed buoyancy is dampened by numerous factors, including ret-rospective tax amendments that could severely impede cross-border M& A activity, a policy pa-ralysis and the inhibition to take bold reformist measures, uncertainty at the centre as also various states including the credibility of the entire po-litical class which is being marred by corruption scandals.

It is difficult to say whether the glass is half full or half empty for M&A in India. But it is certainly clear that several initiatives ranging from small clarifications to some big ticket reforms could give a huge fillip to M&A activity and in turn galvanise the real economy.

The much-discussed retrospective amendments to the Income Tax Act are yet to be passed, but the proposed amendments have now received some measure of certainty, with the Finance Minister clarifying that the amendments do not override the provisions of Double Taxation Avoidance Agreements (DTAA) which India has with 82 countries, and would impact those cases where the transaction has been routed through low tax or no tax countries with whom India does not have a DTAA. Further, a reprieve has been received on the dreaded implementation of GAAR, which has been deferred by one year.

There are several other areas of law and regulation, critical to mergers and acquisitions which are cry-ing out for reform.

One such area is the ambiguity surrounding the enforceability of put and calls options, with differ-ent regulators taking divergent views. Put and call options in shareholders agreements afford parties the opportunity of an exit at a certain price upon the occurrence of certain triggers events. Such contractually agreed transfer should be permitted so long as they are not speculative, subject to com-pliance with exchange control stipulated pricing guidelines where either the transferor or transferee are non-India. However, a cloud of doubt exists over such options from an exchange control as well as securities regulation perspective in India.

The Reserve Bank of India (“RBI”) and the Depart-ment of Industrial Policy and Promotion (“DIPP”) have been taking a view that equity invested with such contractual options should be treated as debt and accordingly regulated far more stringently as external commercial borrowings. On October 1, 2011, DIPP came out with a clarification that eq-uity instruments issued to non-residents and hav-ing in-built options or supported by options sold by third parties would lose their equity character and would be treated as debt, which it retracted from subsequently. Soon thereafter, the RBI has once again taken a disapproving view on put/call options in certain instances. Some finality was ex-pected in Consolidated FDI Policy released by the DIPP on April 1, but it was unfortunately silent on this point.

“2


By Vineetha MG & Richa Roy

This could mean that the RBI could continue to view put and call options with suspicion on a case by case basis as they had been in the past, despite there being not formal codification on this issue. In the context of securities regulation, the issue of put and call option came up in the Cairn Vedanta deal where SEBI directed the parties to that pre-emption rights and the put/call option be removed from the share purchase agreement between the parties. SEBI’s view was that such arrangement violated a notification dated March 2000 as it was not in conformity with the requirements of spot delivery contract or a derivative contract under Section 18A of the Securities Contract Regulation Act, 1956 (“SCRA”).

SEBI’s view on put/call option arrangements was further substantiated in an interpretative letter dated May 23, 2011 issued to Vulcan Engineering Limited (“VEL”) that a put/call option would not qualify as a legal and valid derivative contract in terms of Section 18A of the SCRA, as it is exclu-sively entered between two parties and is not a con-tract traded on stock exchanges and settled on the clearing house of the recognised stock exchange. In this backdrop, the Bombay High Court in MCX Stock Exchange Limited v SEBI held that, buy-back arrangements are not “forward contracts”, since such contracts merely confer an option on the promisee to cause the purchase of the shares held by the promisee and the actual contract for purchase and sale of shares does not fructify until the option is exercised. The court further held that upon the exercise of the option by the promisee, the contract (in the present case) would be fulfilled by spot delivery and therefore be exempt from the purview of the restrictions under the SCRA.

Therefore, the courts seem to be taking a view that put options should be enforceable so long as the actual transfer when the option is exercise is completed on a spot delivery basis. On appeal the Supreme Court did not go into the merits and disposed of the appeal by directing SEBI to make appropriate changes to the regulations without being bound by the observations or comments of the Bombay High Court. One will need to wait and see the legislative outcome on this issue. The recent corruption scandals have impacted M&A transactions as well, in cross-border deals, owing to the vigorous enforcement of the Foreign Corrupt Practices Act, 1977 by the US Depart-ment of Justice in the recent years and the enact-ment by the UK of the Bribery Act, 2010 report-edly the strictest anti-bribery legislation till date. The Foreign Corrupt Practices Act, 1977 (“FCPA”) could potentially extend to a US investor’s investee company in India and could expose the investor’s management in the US to penal sanctions if an In-dian investee company has been involved in brib-ing or unduly influencing a public official.

The UK has enacted the Bribery Act, 2010 (“Brib-ery Act”) which came into effect in July 2011, which has significant extra territorial reach as well. The Bribery Act criminalises the act of giv-ing bribes to foreign public officials and private bribery in offshore jurisdictions which may be un-connected to the investor’s UK business. Accord-ingly, foreign investors and JV partners insist on covenants, representations, on-going compliances such as the adoption of codes of conduct, annual certifications and audits. Also, India Inc, which has been aggressively expanding abroad, has be-come mindful of the repercussions for their Indian global operations once they establish a connection with companies in the UK or the US.


By Vineetha MG & Richa Roy

India recently ratified the UN Convention against Corruption (“UNCAC”) and accordingly, is now obliged to take a range of measures against cor-ruption, several of which may impact M&A trans-actions as well. The signatories to the UNCAC are bound to take measures to prevent corruption involving the private sector. Recent press articles have indicated that the Union Home Ministry is working on adding a chapter in the Indian Penal Code (“IPC”) to check corruption in the private sector which could potentially apply to transac-tions between two private entities as well, similar to the Bribery Act.

Outbound M&A activity is also expected to be on the upswing this year, since several Indian cor-porate houses are looking to use cash reserves to acquire appropriately valued businesses abroad. Apart from access to markets and potential for increased revenues, such acquisitions could result in the transfer of technology and skills for the In-dian purchaser. Some clarity from RBI on holding and operating structures set up by Indian parties and the manner and extent to which Indian par-ties may provide financial support to their over-seas entities would go a long way in helping Indian companies in their overseas direct investment.

While it is clear that an Indian party’s exposure to its overseas subsidiaries and joint venture compa-nies cannot exceed 400 per cent of its net worth (a prudent figure), it is unclear as to the levels of subsidiaries to which financial support can be ex-tended. For instance, while an Indian party may extend a guarantee or other financial support to a step down operating company, it is unclear wheth-er the intermediate company must be subsidiary or a joint venture, a holding company or an op-erating company. There have been mixed signals from the RBI as to whether an Indian party can extend financial support to step down companies only if they are holding companies, or if they are operating companies.

We understand that the regulator has concerns of opaqueness, and round tripping while the Min-istry of Finance would like to provide recipro-cal treatment with regard to preventing complex structures to avoid tax. RBI could consider codi-fying the manner in which overseas investments may be held through various levels of subsidiaries and joint ventures, with adequate safeguards as to disclosure. Raghuram Rajan, the former chief economic advi-sor to the Prime Minister, in a recent speech said that one of the short term actions that the govern-ment should take is to “be kinder to foreign inves-tors… avoid the tremendous uncertainty created by catch-all measures …we should focus instead on clearly delineating specific actions we want to prevent.” We believe the same applies equally to India Inc looking at expanding abroad. If the gov-ernment and regulators set down some bright line tests, lay down some certainty regarding some is-sues fundamental to M&A activity, it could go a long way in reinvigorating the economy.

In terms of Section 18A of the SCRA, contracts in derivatives are legal and valid if such con-tracts are (i) traded on a recognized stock ex-change; (ii) settled on the clearing house of the recognized stock exchange, in accordance with the rules and bye-laws of such stock exchange. Vineetha M.G. is partner in AZB & Partners. The focal areas of her practice are project and corporate finance, venture capital and private equity invest-ments.

Ms. Vineetha has extensive experience in the infra-structure space, specifically the power, oil and gas, telecom, roads, airports, railway, and port sectors. She has advised and represented the entire spectrum of participants in these sectors. Ms. Vineetha is also widely experienced in setting up and advising on-shore and offshore venture capital and private eq-uity funds which invest in several sectors, including infrastructure..


In this domain, she has also advised major private equi-ty funds and their investors in relation to investments in India, in both listed and unlisted companies, as well as exits from investments. Ms. Vineetha took her B.A.LLB (Hons.) from the National Law School of In-dia University, Bangalore, in 1998 and began her career at ICICI Bank Limited, Mumbai, in the same year. Since 2002 she has been with AZB & Partners and became a partner with the firm in April 2006. Legal 500 (Asia-Pacific), in their 2008-09 edition, named her among the “leading individuals” in the country in the practice area of ‘Banking and Fi-nance’. The International Financial Law Review, in its publication ‘IFLR 1000: The Guide to the World’s Leading Financial Law Firms’ published in the year 2009, named Ms. Vineetha among clients’ favourite lawyers to work with who also acknowledged her for being attuned to client requirements, and for her timely delivery and great accessibility. Ms Vineetha has contributed articles on several issues in various publications and has been a panelist / speaker at several conferences and seminars.

Vineetha can be contacted via email at: [email protected]

Richa Roy is a Senior Asso-ciate with AZB & Partners. Her focal practice areas are banking and financial ser-vices, private equity and venture capital funds and foreign inward investment law.

She has advised on the struc-turing and setting up of sev-eral funds and feeder structures investing in capital markets, real estate, private equity and other as-set classes in India and drafted and negotiated key documentation in this regard, including subsequent investment by such funds. She has advised on sev-eral diverse bank regulatory and securities law is-sues including relating to the offer of a large Indian bank’s private wealth management products in 50 countries across the world and helped set up a com-pliance program in this regard.

Richa took her B.A.LLB (Hons.) from the National Law School of India University, Bangalore, in 2005 and began her career at ICICI Bank Limited, Mum-bai, in the same year. Since 2008 she has been with AZB & Partners.

Richa can be contacted via email at: [email protected]


onsidering the growing Indian econ-omy and market dynamics, one can appreciate the several policy and le-gal changes which have been, and will be, witnessed in the near future.

Some of the important recent changes in law and their effect on transactions are covered below. FDI in Single Brand Retail Trading and the Pharmaceutical Sector

Recently, the government allowed 100% foreign direct investment (FDI) in single brand retail trading subject to prior government approval and certain conditions. One such condition, which is meant to promote local industry, requires Indian companies where the proposed FDI exceeds 51% to mandatorily source at least 30% of the value of products sold from Indian “small industries/village and cottage industries, artisans and craftsmen”. ‘Small industries’ have been defined as industries with a total investment in plant and machinery not exceeding USD 1 million.

No guidance has been provided on how “value of products sold” will be calculated to meet the sourc-ing condition. It is unclear whether sub-compo-nents like cost of packaging material and fiscal du-ties / taxes will be included in the value. It is also unclear whether the sourcing requirement applies to each product sold or to the aggregate value of all the products proposed to be sold. These ambi-guities have resulted in lack of investor interest in single brand retail which has tremendous potential given the market for high luxury brands in India.

Another area of ambiguity is brownfield invest-ment by foreign investors in the pharmaceutical sector, which was recently made subject to prior government approval. The Foreign Investment Promotion Board was the approving authority till 31 March 2012 after which the Government proposed to issue guidelines for the Competition

Commission of India to approve such investments. In the absence of such guidelines, all approvals for such projects have been stalled due to lack of clar-ity on the approving authority.

Put Options

Typically, in private equity deals, an investor would have pre-defined exit rights including a “put op-tion” pursuant to which the investor could cause the promoters to purchase the investor’s shares for a fixed return. The enforceability of such “put op-tions” has been controversial.

Even though put options involving non-resident investors are not expressly prohibited, their use is frowned upon by the exchange control regulator, the Reserve Bank of India (RBI) and the capital markets regulator, the Securities and Exchange Board of India (SEBI).

RBI considers such put options as debt rather than equity since the investor is guaranteed a return. Further, RBI considers such put options as deriva-tive transactions which are not permissible under the Indian securities and foreign exchange laws. Newspaper reports suggest that RBI has issued letters to various parties taking a stand that such put options are violative of the foreign exchange laws and should be deleted from agreements. In recent informal guidance, SEBI has also ques-tioned the enforceability of put options as they would amount to forward contracts and would also not constitute valid derivatives, and directed their removal from agreements. Interestingly, the Bombay High Court in the recent case of MCX-SX, held that put options are not forward contracts since they are completed on a spot basis once the option is exercised. However, the MCX-SX case did not consider the issue of whether such a put option is a valid derivative leading to continued ambiguity.

CBy Bhavik Narsana & Ronak Ajmera

Changes In The Law & Their Effect On Transactions


Given the importance of put options in exit mecha-nisms for private equity investors, there is a press-ing need for immediate clarity on this issue from the Government.

Stamp Duty on Amalgamation, Merger & De-merger

Only a handful of states in India have included a specific entry in their stamp acts for court orders approving an amalgamation/merger/demerger scheme under sections 391-394 of the Companies Act, 1956. Most of the states which have not includ-ed a specific entry either stamp such court orders as ‘conveyance’ or do not stamp it at all.

In 2004, in the case of Hindustan Lever, the Su-preme Court held that an amalgamation scheme sanctioned by the court is an ‘instrument’ and ac-cordingly liable to stamp duty under the entry for ‘conveyance’. However, in practice, various stamp authorities take the view, based on strict interpre-tation, that the foregoing decision does not have any legal bearing on amalgamation of companies in those states where the relevant stamp act does not have any specific entry for such court orders. In 2010, in the case of Delhi Towers, the Delhi High Court and in 2011, the Calcutta High Court has re-iterated the position in the Hindustan Lever judg-ment. The Tamil Nadu government has proposed to amend their stamp act for levy of stamp duty on transfer of properties pursuant to such court orders.

In such a situation, for states whose stamp acts do not have a specific entry for such court orders, it is important for parties to ascertain the position taken by local authorities on this issue since such position could differ from the judicial position in this regard. Clash Between SEBI Takeover Code and FDI Pol-icy

There are certain sectors where the FDI limit is 49% or 26% (e.g. 49% in petroleum refining, 26% in

defence, etc). It could become difficult for a non-resident to acquire 26% or more in Indian compa-nies engaged in such sectors where the securities of such Indian company are also listed on Indian bourses. This is because when a non-resident ac-quires 25% or more shares, the acquirer is required to make a mandatory offer to the public to acquire a further 26% shares under the new SEBI Take-over Code (effective from October 2011). This would take the non-resident’s shareholding to 51% thereby resulting in breach of the FDI policy and would, therefore, need a separate exemption from the government and/or from SEBI.

Such a situation would make it difficult for Indian listed companies engaged in such sectors to raise money from non-residents. It would be helpful if the government could clarify the position. Press reports suggest that the government is working on certain guidelines to avoid such a clash between FDI Policy and SEBI Takeover Code.

Retrospective Tax on Offshore Acquisitions In-volving Indian Assets

The Government has recently promulgated an ex-tremely controversial retrospective amendment to Indian tax laws pursuant to which offshore acquisi-tions involving Indian assets could be subject to tax in India. This amendment seeks to nullify the im-pact of the Supreme Court ruling in the celebrated Vodafone case. There has been considerable out-cry from foreign Governments and trade organisa-tions following this amendment since it could lead to tax on past transactions and impact future acqui-sitions. This amendment is expected to have a sig-nificant impact on the investment climate in India. Concluding Remarks

The government has been responsive, to a certain extent, to the demands and requests of the indus-try, professionals and investors. A recent example



of this is the alteration and postponement of ap-plicability of the general anti avoidance rules for one year. Having said that, there are certain ar-eas wherein positive legislation/policies framed by the government have not produced the de-sired results. There also remain certain grey areas where the industry awaits corrective action and/or clarifications on the part of the government. Bhavik Narsana is an ad-vocate and solicitor and is a Partner in the corporate team at the Mumbai of-fice of Khaitan & Co. He focuses on domestic and cross border mergers and acquisitions, and private equity transactions, advis-ing regularly on all legal and regulatory aspects of such transactions and foreign investments (both inbound and outbound). He joined the firm in 2006. He has advised several multinational and domestic clients on noteworthy cross-border and domestic M&A transactions, private equity investments and other corporate commercial matters.

Ronak Ajmera in an Asso-ciate in the corporate team at the Mumbai office of Khaitan & Co. He started his career with the firm in 2009 and has since been in-volved in various mergers and acquisitions, corporate restructuring exercises, capital market transac-tions and tax litigation and other matters involving ex-change control laws, inbound and outbound struc-turing and securities laws.

Bhavik and Ronak can be contacted at the Mumbai office by emailing [email protected] or alternatively by calling +91 22 6636 5000.



Buyer: Bright FoodSeller/Target: Lion CapitalValue: £1.2 BillionChinese state-backed firm Bright Foods has agreed to buy 60% share of the Weetabix Food Company, while current private equity owner Lion Capital will retain a 40% stake. The move looks to take advantage of China’s “growing appetite” for healthy foods and to drive Weetabix’s growth across Asia. Northampton-based Weetabix was founded in 1932 and was family owned until 2004 when it was bought by a Texan private equity firm. The cereal giant, which also owns Alpen and Ready Brek, is the UK’s second biggest cereal manufacturer, exports to more than 80 countries and generates annual revenues of £100 million.

AsiaChina’s Bright Food Buys Weetabix


Buyer: SabMillerSeller/Target: Foster’s Group LtdValue: £6.5 Billion

SabMiller has acquired all of the shares in Foster’s in a deal worth £6.5 billion. According to the conditions set for the approval, the world’s sec-ond-largest brewer by volume agreed to keep Foster’s located in Austra-lia under its ownership, and not to relocate Foster’s existing brewing fa-cilities offshore that produce beer for Australian domestic consumption. The UK based company who also produce Grolsch and Coors Light, has agreed to continue investing in Foster’s iconic Australian brand portfo-lio consisting of Victoria Bitter, Carlton Draught, Corona, Crown Lager, Carlton Mild, Carlton Dry and Pure Blonde brand beers.

AustralasiaSabMiller Purchase Iconic Australian Beer


Topical Legal Practice Developments

erhaps, the most topical developments in Nigerian merger legal practice have been in the threshold for merger control and in litigation seeking to restrain mergers from going forward. The Nigerian merg-

er control regulator, the Securities and Exchange Commission (“SEC”), has lowered the threshold for the size of transactions subject to prior merger notification and review to the equivalent of £1mm, and now insists on reviewing acquisitions of as lit-tle as 30% of the shares issued by a company once the £1mm threshold is passed. This means that the SEC will get burdened with a large number of relatively small deals which ideally it should not be concerned with.

There have been in the past several years a number of attempts by aggrieved minority shareholders to restrain in the courts companies going through statutory mergers approval procedures. These at-tempts, usually based on allegations of procedural impropriety and non-disclosure to courts before which schemes of merger have been filed, have largely been unsuccessful. The implication of the courts’ decisions in this area appears to be that the merger wishes of the majorities of shareholders who may have voted for mergers will be respect-ed although monetary compensation for the dis-sentients may well be available. However, the last word has not yet been heard on many of the dis-putes as there are several pending appeals and as yet very few appellate decisions.

Opportunities for Dealmakers

Opportunities for dealmakers have increased in some respects and been diminished in others. Opportunities have increased to the extent that mergers have now become increasingly common outside the two traditional areas of global multina-tional industrial companies and financial institu-tions. There are far more mergers of companies in, for example, the Nigerian-controlled food prod-ucts and oil and gas sectors than there were fifteen years ago.

To the extent that many of the parties to mergers today are Nigerian-controlled and use Nigerian fi-nanciers, the opportunities for foreign dealmakers are perhaps not as great as they could have been.

However, as the larger Nigerian businesses expand into markets outside Nigeria, they will need more foreign dealmakers for their activities in those markets than they currently do.

Interesting Trends

Fifteen years ago most mergers concluded in Ni-geria involved a single global multinational indus-trial parent combining its Nigerian subsidiaries. The mergers of Unilever and Nestle entities readily come to mind here. Such mergers were motivated in large part by the aims of achieving improved economies of scale, in effect amending the share-holding percentage of a multinational in one of its subsidiaries where its majority shareholding may have become marginal, and enjoying organisation-al efficiencies.

Because the mergers of that era were mergers of related companies, the emphasis in the legal work involved was on the regulatory elements of ac-tually concluding a merger rather than on “due diligence” and contractual negotiations and docu-mentation. Lawyers have had to do deeper work on “due diligence” and contractual negotiations, and therefore have developed better skills, in the more recent spate of merger deals in the financial services sector.

These deals have been driven primarily by bank and other financial sector-regulatory changes calling for financial institutions to increase their capital. To comply with these regulations, several smaller banks have had to merge with larger banks with the deals to be completed within tight dead-lines.

PBy Prof. Gbolahan Elias & Mena Eremutha


Future Outlook

Today, there are many mergers that involve neither global multinationals nor financial institutions. Mergers driven by the aim of growing business lo-cally have become common, perhaps most notably in the consumer (especially food) products and oil and gas sectors. As these mergers have grown in size and number, the level of sophisticated legal work to support them has also grown. The indica-tions are that the level of merger activity in these sectors will continue to grow.

It remains to be seen how far recent regulatory changes in the local shipping (“cabotage”) and oil and gas (“local content”) regimes will increase the level of mergers and acquisitions activities in those sectors. New rules in the sectors give locally-owned businesses preferences, and sometimes ex-clusive entitlement, to certain areas of business in the sectors. It had been thought that, to seize the improved opportunities, we would see the more successful local players merging with each other and buying out the weaker foreign-controlled players.

There has been some merger activity in this respect but not much. Major foreign players have in many instances sought and obtained exemptions from the cabotage and local content regimes on the ba-sis that the locally-controlled alternatives to their customers lacked capacity. Several local players have simply sought and got larger debt financing or sold non-controlling equity stakes to raise mon-ey to pursue the new opportunities. There is now every possibility that the new rules will not lead to significantly greater merger activity in these sec-tors.

Some of the fiscal aspects of merger law will need to be made clearer in the years ahead. The law is favourable to the extent that there is no capital gains tax on either (a) transfers of shares or (b) transfers of assets in exchange for shares where the company transferring the goods gets dissolved as part of the merger process. However, for now there is still a great deal of regulatory discretion on the tax law relating to the commencement and cessation of businesses on mergers, and much of the impact of VAT and state (as distinct from Fed-eral) land transfer tax law is as yet untested in the courts. Law suits and law reform in these areas is to be expected in the years ahead.


Prof. Gbolahan Elias was called to the Nigerian Bar in 1981 and the New York Bar in 1990. He is a Senior Ad-vocate of Nigeria (Nigerian QC equivalent) and one of the three equity partners in G. Elias & Co., a leading Ni-gerian business law firm with a bias for corporate and fi-nancial work.

He was an associate at Cravath, Swaine and Moore, the leading New York corporate law for, from late 1989 to mid-1993. “Exim” banks both in Nigeria, Africa and beyond feature frequently in his practice in Lagos.

He studied law at Oxford University and has that Uni-versity’s BA MA BCL and D. Phil degrees, both the BA and BCL with first-class honours. Over the years he has served on several Nigerian committees to reform the law on trusts, pensions, petroleum and shipping. Mena Eremutha is an associate at G. Elias & Co. She studied law at Igbinedion University Okada, Edo State and was called to the Nigerian Bar in 2009. She has participated in several merger trans-actions that the firm has advised on.

Gbolahan Elias & Mena Eremutha can be contacted at [email protected] or alternatively by calling +2341 280 6970 1.



Buyer: Eurasian Natural ResourcesSeller/Target: First Quantum Minerals Ltd.Value: $1.25 BillionEurasian Natural Resources have acquired Kolwezi Investments and its subsidiary Congo Mineral, Frontier SPRL, Compagnie Miniere de Sakania SPRL, Roan Prospecting & Mining SPRL from First Quantum Minerals in Africa’s largest deal in the first quarter of 2012. They are all located in the Katanga Province of the Democratic Republic of Congo. The acquisition will enable ENRC to consolidate and develop copper and cobalt licences within the African copperbelt. Eurasian paid $750 million cash with a further $500 million plus interest to come from a three-year promissory note.

AfricaFirst Quantum Sells Congo Mines For $1.25 Billion


Buyer: Abraaj CapitalSeller/Target: Aureos CapitalValue: £540 Million

Middle East’s largest private equity firm has expanded its geographical footprint with its acquisition of Aureos Capital. The UK based firm has an operational presence in over 20 countries, $1.3 billion in funds under management, provides expansion and buy-out capital to small and me-dium-sized businesses across Asia, Africa and Latin America and have over 250 deals completed in the SME segment in the last two decades. Abraaj declined to give financial details for the acquisition but said the combined company will manage $7.5 billion in assets across 30 emerg-ing countries.

Middle EastDubai’s Abraaj Capital buys UK’s Aureos Capital

USAAMAA Michael Nall +1 312 856 [email protected]

Expert Directory -The Americas

MexicoVázquez Aldana, Hernández Gómez & AsociadosFernando Hernandez +52 33 381 717 [email protected]

USASkaddenJohn Lyons+1 312 407 [email protected]

Frances Kao+ 852 3740 [email protected]

Expert Directory -The Americas

BrazilLilla Huck Otranto Camargo Luís Gustavo Haddad+55 (11) 3038 [email protected]

El SalvadorArias & Muñoz Ana Mercedes [email protected]

Europe

UKMerrill DataSite Merlin Piscitelli+44 (0)207 422 [email protected]

UK / TurkeyIMAPMike Reeves +44 (0)845 058 [email protected]

BelgiumAstrea Steven De Schrijver+32 3 287 11 [email protected]

Philippe Van den Broecke +32 3 287 11 [email protected]

Frédéric Verspreeuwen+32 3 287 11 [email protected] www.astrealaw.be

UkraineSayenko Kharenko Vladimir Sayenko+380 44 499 6000 [email protected]

TurkeyGUR Law FirmTevfik Adnan Gür+90 212 325 [email protected]

Isenbike Bilgili+90 212 325 [email protected]

Caka Kul +90 212 325 [email protected] www.gurlaw.com

Asia China / Hong KongDeloitte Eric Leung+852 2852 1600www.deloitte.com

IndiaAZB Partners Vineetha [email protected]

Richa [email protected]

IndiaKhaitan & Co Bhavik Narsana / Ronak Ajmera+91 22 6636 [email protected]

JapanAnderson Mori & Tomotsune Yuichiro Nukada+81 3 6888 [email protected]

Africa

NigeriaG. Elias & CoGbolahan Elias+2341 280 6970 [email protected]

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expert guide - mergers & acquisitions

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