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JAYANT THAKUR

CHARTERED ACCOUNTANT

WIRC 2ND SEPTEMBER 2009

MERGERS, TAKEOVERS AND ACQUISITIONS – A CORPORATE

LAWS REFRESHER



Brief Introduction

Jayant Thakur, WIRC, 2nd Sept, 2009

Mergers, acquisitions and restructuring Scope

Mainly acquisition/sale transactions

Important issues

Current developments

Occasional transactions Involvement of Chartered Accountants even less

No reason why

Complicated



Outline of presentation


Nature of transactions – important distinctions andimplications

10 important considerations

Companies Bill 2009 – Important changes



Important forms of restructuring


Mergers New Company

Absorption

DemergersTakeovers

Sale/divestitures/Acquisitions



Important considerations


Company law

Documentations MOU, Agreements, Schemes, notices, resolutions, filings

ValuationTax Respective companies

shareholders

SEBI laws

Stamp duty



Important considerations


Accounting

Financial Structuring

Indirect taxes

General contract law



Important 10 considerations


Regular role of Chartered Accountants inrestructuring

Actual transactions quite complex

However, like 80/20 principle, 10 considerationsdominate every transaction



Chartered Accountant’s role


Expertise of Chartered Accountant and suitability forrestructuring

Preferences given to lawyers/merchant bankers

Areas/laws importantSpecial updation/study needed



Why and when Takeovers?


Simplest in Company law, etc.

Fastest

Most laws inapplicable

Even documentation may not be requiredLeast stamp duty

Lower or no tax

Separation of undertakingsLeast approvals



Why and when sale/acquisition?


Simpler than mergers/demergersFast but eventual completion over periodNo court process

Some documentationCombination of undertakingsTransfer of liabilitiesStamp duty

Less tax efficient Capital gains Transfer of losses



Why and when merger/demerger?


Most complex Numerous approvals and clearances

Takes most time also

Fixing of dateMost tax effective Realisation of profits

Capital gains/carried forward losses

Single window approvalsSimultaneous financial restructuring



Advance preparations


Form of restructuring

Valuation

External/internal approvals

Important shareholder groups SEBI/stock exchanges

Insider Trading



Clearing of accounting/financial mess


Bloated capital

Reserves

Losses

Valuation of assetsClasses of capital

Dissenting shareholders



Preliminary documents


Usually advisable

Long process before, during and after restructuring

Important areas

Valuation Hidden liabilities

Due diligence

Costs and damages



Obtain preliminary approvals


Lenders/creditors

Major shareholders

External authorities



Avoid single/dominant purpose avoidance of laws


Tax

Stamp duty

SEBI laws



Permitted benefits


Some case law driven concessions Authorised capital Whether separate procedure required

Whether authorised capital can be combined

Whether ROC fees can be netted

Elpro International Ltd. 2008 (086) SCL 0047 –BOM

El Forge Ltd. (2005) 64 SCL 529 (Mad.)

Dissenting decision in Areva T&D India Ltd. 5th July 2007

Reduction of capital – separate procedure?

Accounting/reserves

Buying out shareholders.



Provide for unexpected hurdles/delays


Hurdles/Costs/delays

Creditors

Shareholder suits

Authorities



Valuation – Supreme Court in Sultania

G. L. Sultania v. SEBI (2007) 76 SCL 473 (SC)

Context of open offer

Original purchase value Rs. 267, purchase Rs. 40,

revised to Rs. 67 Alternate valuations Rs. 408/590.

Reliance on Dr. Renuka Datla v. Solvay Pharmaceuticals B. V. (2004) 1 SCC 149 – court willintervene only if patent mistake going to root.

Miheer H. Mafatlal v. Mafatlal Industries Ltd. (1997)1 SCC 519 valuation best left to experts.





“These decisions clearly lay down the principle that valuation of shares is not only a question of fact, butalso raised technical and complex issues which may be appropriately left to the wisdom of the experts,having regard to the many imponderables whichenter the process of valuation of shares. If the valueradopts the method of valuation prescribed, or in the

absence of any prescribed method, adopts any recognised method of valuation, his valuation cannotbe assailed….





…unless it is shown that the valuation was made ona fundamentally erroneous basis, or that a patentmistake had been committed, or the valuer adopted ademonstrably wrong approach or a fundamentalerror going to the root of the matter. Where a methodof valuation is prescribed the valuation must be madeby adopting scrupulously the method prescribed,

taking into account all relevant factors which may beenumerated as relevant for arriving at the valuation”.





The Court also held that it could not go into theintricacies of valuation since these were “really matters within the realm of the experts to determineand the Court may not be justified in delving intothese matters, which must be left to the wisdom,expertise and experience of a qualified valuer”.




Companies Bill 2009 – important changes


Amendments of 2002

Tribunal

Role of Chartered Accountants

Missing link removedReduction of capital Present controversy

Express clarification





Buyback of shares Present controversy and history

Court decisions

SEBI/stock exchanges

Express clarification

Abatement of BIFR Schemes Overriding powers?

Controversy today of conflict of powers of BIFR and CourtTransfer of employees





Merger of listed with unlisted companies Delisting

Purchase of shares of dissenting shareholders

Conflict/overlap with SEBI laws

Authorised share capital

Absorption/division/formation of new company





Small companies mergers What is small company?

Holding/wos

Only mergers/demergers Avoidance of Tribunal approval

ROC/OL’s objections





Registered Valuers

Mandatory for valuations under Act

Registration

Chartered Accountants Their partners

CS/Cost Accountant

Company/body corporateLimit on fees





3 yearly review





Cross border mergers Foreign Company/Indian Company

Indian Company/Foreign Company



New Scheme for sick companies

Tribunal to oversee

New criteria for sick companies Networth based criteria dropped

Broad procedure

Concept of Interim Administrator

Concept of Company Administrator May be Chartered Accountant

No overriding powers over other laws




New Scheme for sick companies

No powers to stay proceedings/litigation However, stay over winding up, recovery of money,

enforcement of security, etc. may be granted.

Approval of Scheme by 1/4th unsecured and 3/4th secured creditors




Jayant Thakur WIRC 2nd Sept 2009

THANK YOU!QUESTIONS/COMMENTS ?

jayant thakur

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