Mergers & Acquisitions

[By Ajith N Kale & Rupa Veena S] The authors are students of School of law, CHRIST (Deemed to be University), Bangalore.   Introduction The common law rule of the majority, as laid down in the case of Foss v. Harbottle, has been widely followed in India. It empowers the majority shareholders to make decisions related to the management of affairs of the company which is not interfered with by courts generally. However, minority shareholders always have the right to approach the National Company Law Tribunal (“NCLT”),and courts in case of fraud, mismanagement, oppression or breach of charter documents by the majority shareholders. As per the freeze-out or squeeze-out provisions under the Companies Act, 2013 (“Act”) the majority shareholders can acquire the shares held by minority shareholders and, thereby, squeeze them out of the company, and resultantly can hold the entire shareholding in a company. In light of the same, this article focuses on the legal status of freeze-out mergers in India and further makes a comparative analysis with the laws of South Korea, the United Kingdom (UK), and Australia. Legal status of freeze-out mergers in India In early 2020, section 230 of the Act was amended to include sub-sections (11) and (12)(“2020 Amendment”). Moreover, Companies (Compromises, Arrangements, and Amalgamations) Amendment Rules, 2020 (“CAARules”) and the National Company Law Tribunal (Amendment) Rules, 2020(“NCLT Rules”) were also notified, which were collectively known as the “Takeover Notification” as the amendments primarily were in relation to the takeover of minority shareholding by the majority. Firstly, as per section 230(11) of the Act, any compromise or arrangement includes a takeover offer. Secondly, Rule 3(5) of the CAA Rules enables majority shareholders holding at least 75% of the equity shares carrying voting rights (including depository receipts with voting rights) to file an application with the NCLT to acquire the remaining minority shares subject to a fair price. Thirdly, NCLT Rules deal with procedures related to acquiring minority shares. If the NCLT approves the application, the majority shareholders can forcibly acquire the minority shares by creating an obligation on minority shareholders to sell their shares. Section 235 of the Act allows the compulsory acquisition of shares held by dissenting shareholders if such an acquisition by a scheme or contract is approved by 90% of the shareholders within two months of notice to such dissenting shareholders unless NCLT has ordered otherwise on an application made by the dissenting shareholders. Another option available for the acquirer to acquire the minority shares is stated under section 236. The said section allows majority shareholders holding at least 90% of the equity shares to acquire minority shares by virtue of an amalgamation, share exchange, conversion of securities or for any other reason by notifying the company about the same. However, the bare reading of the section does not expressly obligate the minority shareholders to sell their shares. Moreover, section 236(9) states that in the event of failure of acquisition of all of minority shares by the majority shareholders, the residual minority shareholders will still be regulated under the relevant provisions of the Act. While also ensuring the right of acquisition to the majority shareholders, the amendments provide effective safeguards for the minority shareholders. As per section 230(12) of the Act, aggrieved minority shareholders of unlisted companies can approach the NCLT in case of grievances related to takeover offer. Additionally, the majority shareholders must compulsorily deposit at least 50% of the consideration of the takeover offer in a separate bank account. In the case of S. Gopakumar Nair v. OBO Bettermann India Private Limited, the National Company Law Appellate Tribunal (“NCLAT”)held that the 90% majority shareholders can acquire the minority shares only if any of the events stated in section 236(1) that is “amalgamation, share exchange, conversion of securities or for any other reason” has taken place. As per the rule of ejusdem generis, NCLAT held that “for any other reason” includes only events that are like amalgamation, share exchange, or conversion of securities. It also differentiated between section 235 and section 236 by stating that on one hand section 235 provides for the acquisition of shares from dissenting shareholders, on the other, section 236 allows the acquisition of shares from assenting shareholders only if any of the events mentioned in section 236(1) are triggered. Arguably, Indian laws have tried to strike a balance between rights of the majority and the interests of the minority shareholders, however, to determine whether they are as per the global standards, laws of other nations may be compared. Comparative jurisdictions South Korea Article 360-24 of the Korean Commercial Act, 2018 guarantees a majority shareholder holding at least 95% of the shares to buy out the shares held by minority shareholders. The minority shareholders must sell their shares within two months from the date of request. However, even after negotiation, if the minority shareholders are unsatisfied with the sale price, they can approach the court to determine a fair and reasonable sale price. This section can be compared to section 235 of the Act, wherein majority shareholders holding 90% of shares can acquire the shares held by dissenting shareholders within four months. Further, under Article 360-25, the minority shareholders have the right to sell their shares to the majority shareholder, and the court shall determine the sale price if the parties do not come to a consensus through negotiation. This is similar to section 236, wherein minority shareholders can sell their shares to the majority shareholder. However, while Korean law allows the minority shareholders to approach the court only to determine the reasonable sale price, Indian law empowers the minority shareholders to approach the NCLT in case of any grievances they face in relation to such an acquisition, in addition to making the submission of valuation report of the shares to NCLT mandatory. This indicates that the Indian laws emphasize more on minority shareholders’ protection than the Korean law. Furthermore, section 230 allows shareholders holding 75% of shares to acquire minority shares as opposed to the

[By Aastha Bhandari] The author is a student at the OP Jindal Global University. Introduction The conundrum between the two significant concepts of Appointed Date (“AD”) vis-a-vis the Effective Date (“ED”) within a scheme of amalgamation/merger or demerger filed before the National Company Law Tribunal (“NCLT”) has been a contested subject-matter. It was left obscure, with contrasting judgments from the NCLT, up until the Ministry of Corporate Affairs (“MCA”) released its clarificatory circular on the matter in 2019. (“the Circular”) The two concepts form a substantial part of any scheme on account of the fact that section 232(6) of the Indian Companies Act of 2013 (“CA”) makes it mandatory for every scheme to “clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date.” Put simply, the ED refers to the date when the scheme receives the sanction of approval from the NCLT and AD refers to the date when the parties record the financial values of all the assets, liabilities and other parameters that are to be transferred from the transferor company to the transferee company, as a part of the scheme. As such, the scheme is deemed to be effective on the AD.  In line with this, it is the aim of this article to map the impact and influence of the Circular on the decisions of the NCLT on the validity of an AD vis-à-vis the ED. In particular, this article will focus on the MCA’s clarification regarding the validity of an AD, being a calendar date, which is set at a date that precedes the date of filing of the Scheme before the NCLT beyond one year. Understanding the Background and Content of Clarifications Contained in MCA’s Circular The following clarification that is relevant to the scope of this article is reproduced below: When AD Precedes Date of Application of Filing the Scheme before NCLT: In its Circular, the MCA issued a significant clarification stating that where the AD is chosen as a specific calendar date, it may precede the date of filing of the application for the scheme of merger/amalgamation in NCLT. However, if the AD is significantly ante-dated beyond a year from the date of filing, the justification for the same would have to be specifically brought out in the scheme and it should not be against the public interest. Decoding the Impact of the Circular on Decisions of the NCLT vis-à-vis sanctioning Schemes In Avanthi Warehousing Services Private Limited v. Awaze Logistics Private Limited (2022), the Regional Director of the MCA (“RD”) made an observation to the effect that the Petitioner Companies had defined the AD in such a manner that it was approximately two years old from the date of filing of the Company Application (“CA”) for the scheme and thereby, the RD recommended a revision of the AD from 1.04.2020 to 1.04.2021. In line with the Circular, the Petitioner Companies justified the AD of this particular scheme by arguing that it had been approved by all the relevant stakeholders including the shareholders, secured creditors, and unsecured creditors. Further, the employees had also taken 1.04.2020 as the AD on record. Therefore, the Petitioners prayed for an acceptance of their AD by further relying on the Suo-moto order of the Supreme Court of India (“SC order”) dated 2021 on cognizance of the extension of limitation on account of the Covid-19 pandemic. In this case, the NCLT sanctioned the scheme on the grounds that it was not opposed to: i) public interest and ii) interests of the relevant stakeholders. In Re: Murli Industries Limited (2022), the RD objected to the AD set by the parties to the scheme on the ground that it was non-compliant with the Circular as it outdated the year of the filing of the CA by more than a year. However, this represents a case wherein the Petitioner’s justification relied on the fact that the AD was not outdated and well within the one-year time period permitted by the Circular. This was because the scheme was approved by the Board of Directors on 23.03.2021 shortly after which the CA was filed on 28.03.2021. This response was accepted by both the RD as well as the NCLT, the final implication being that the time taken to undertake the scheme was elongated sizably. This represents one of the numerous cases in which the RD has objected to the scheme on the grounds of the scheme being outdated for over a year when the same is not factually correct. This trend has especially seen an increase during the Covid-19 pandemic. In Vaiduriya Hotels Private Limited v. Ratnaa Lakshmi Hotels Private Limited (2022), the RD objected to the scheme on the ground that the AD was “non-acceptable” as it was ante-dated beyond a year from the date of filing of CA, thereby not being compliant with section 232(6) of the CA. In reply, the Petitioners argued that the date of filing was well within one year from the AD, with the AD being 1.03.2019 and the date of filing being 20.02.2020. It was only due to the peculiar and inevitable circumstances of the pandemic lockdown that all applications were numbered and listed for the first hearing on 14.20.2020. Therefore, the period from 15.3.2020 to 28.02.2022 shall stand excluded on account of the SC order. Further, in the matter of Subhas Impex Private Limited and Others (2022), the RD objected to a particular AD in this case by stating that it lacked any relevance to the scheme because the AD had been set as 1.04.2019 however simultaneously the Petitioner Companies had submitted their financial statements to the NCLT up to the financial year ended 31.03.2021. In line with this, the RD found that the Petitioners had not adequately justified the setting of their AD through the production of relevant documents. The Petitioners justified the AD on two large grounds: i) that they had filed

[By Nandini Shenai] The author is a student at the NMIMS School of Law, Mumbai. Countries around the world are imposing strict restrictions and social distancing norms as the Covid-19 outbreak worsens and the number of positive reports and casualties continues to rise. The catastrophe has transformed into a financial downturn plummeting the financial sector into an unprecedented recession, as the wheels of economic development come to a stop. The economic standstill in India comes as a consequence of the same. Changes in the market landscape, valuation problems, and a shortage of financial backing as a result of banks’ restricted lending and corresponding reallocation of excess funds are some of the primary factors of strategic planning. With regard to current negotiations, corporations must choose between bringing deals to a halt or accelerating the process. M&A transactions already in the planning phase or on the verge of being implemented would most probably be postponed until the economic downturn passes. Potential buyers are more likely to drop out of market bid systems. Multinational companies and Private Equity funds are expected to save capital in this volatile environment and move their focus to ventures that are domestic to their respective countries, which could have an impact on cross-border trade. Interpreting mergers and acquisitions in light of the existing conditions and circumstances would provide clarification when facing complexities.  Companies are resorting to a variety of unconventional corporate strategies, including emerging innovation technology acquisitions, risk mitigation, divestiture of secondary resources, collaborations with competitors, funding beyond venture capitals, diversified alliances with experts, and strategic associations with governments, in addition to rigid M&A. These incredibly turbulent times have given rise to a rare set of possibilities.   While some of the M&A transactions were due to companies restarting deals that had been placed on hold given the financial slump caused by the various national lockdowns, a large majority of it also demonstrated companies’ endeavors to undergo transformations and succeed in the post-pandemic setting. Transactions in the COVID Era: Various schemes and tax relaxations that were put forth by the Central Government in the 2020 budget including the inflow of cash that comes from sovereign wealth funds and the implementation of eased policies by the SEBI and the MCA have proved to act as a boost needed for M&A transactions in the times of the pandemic. Highlighted below are certain factors that may change the way M&A deals have traditionally been followed in India: Scope for investment: M&A deals completed during this span of time will need to account for the constraints imposed by the current situation and the strategy to decision-making will have to be rectified to meet the current challenges. Nevertheless, the downturn can provide some prospects for investors, who can take advantage of lower stock prices in the immediate future to gain a greater profit on investments once normalcy returns. Due Diligence:  A focused emphasis would be provided on clauses of contracts like indemnity clause, termination clause, risk of insolvency, ability to repay debts, medical insurance and benefits for employees, and regulatory compliance. Due to the evolution of the virtual corporate world in times of the pandemic, a stricter data protection and data privacy regime would be followed by companies. Pertaining to cross-country data transfers, stronger enforcement of international data protection rules like the GDPR needs to be done. Digitization of Regulatory Practices: Although the SEBI and the RBI have allowed stakeholders to file petitions digitally, the CCI allowed them to submit a tandem of applications digitally in March 2020, as well as pre-filing consulting via virtual conferencing in connection to, among other things, combinations that are in the ambit of the green channel path. Regulatory Interference: Opening up the possibility of delays in receiving clearance from statutory bodies, shareholders may opt for systems that do not have many regulatory configurations. As a result, a share purchase could be preferable to a downturn transaction under a corporate transfer arrangement. Indemnity: Potential buyers will need to determine the risks posed by the financial meltdown caused by Covid-19 to pursue detailed indemnity. Not only will the owners use information and subjectivity qualifiers to properly establish these indemnities, but they will also consider revealing any clear details pertinent to the Covid-19 situation in the form of a documented declaration.  Strategies for Corporate Recovery: The role of M&A will be reshaped in a post-Covid-19 setting as companies struggle to hold their standing in the market, accelerate the recovery process, and brace themselves to survive through a mix of offensive and defensive M&A strategies. Owing to the current pandemic, companies are resorting to either of the two processes of corporate revival. Defensive M&A: Defensive M&A strategies are the ones that are used to safeguard the functioning of the company. These strategies basically cater to hostile takeovers and are used to salvage the value of companies and safeguard markets to maintain competitive parity. To save capital from loss-making segments and maintain a stable primary sector, financially troubled businesses need to take drastic measures, such as the sale of assets that are distressed. The sale of distressed assets in crisis situations necessitates the quickest possible process to increase profits. Some defensive strategies that are could be followed by companies are mentioned below: Divestments: Due to the current economic strain, secondary assets that are and widely desirable after and do are not usually set for sale can be divested. In this type of situation, those who sell such assets must be fully cognizant that the number of prospective purchasers will be limited, and they must be mindful of how to handle asset fire-sales. Investor Activism: At the time of downturns, vigorously seeking value creation initiatives is critical to long-term success, as is knowing what investor activists or competitive bidders would seek. This may include rethinking shareholder returns, capital allocation, and trade finance, among other things. End-to-End M&A: Companies can aggressively reduce expenses and open up cash flow by taking pivotal steps to consolidate recent acquisitions. Private equity firms, institutional investors, distressed venture capitalists, and large corporations with solid investment portfolios are all in a hurry to act quickly and pursue potentially “predatory” M&A approaches.      

[By Aniket Singh and Pranav Mihir Kandada] The authors are students at NALSAR University of Law, Hyderabad. Introduction In M&A transactions, a “break fee” agreement is an arrangement between the target company and the potential acquirer. In this arrangement, the target company promises to pay a certain fee to the potential acquirer in case the offer from the acquirer does not go through for any given reason. Such agreements are often looked upon favorably as beneficial deal-protection devices.  However, the quantum of the break fee is regulated in several jurisdictions through varying approaches. This article seeks to explain the concerns associated with break fee arrangements and examine how various jurisdictions regulate it. Uses and Concerns For target companies and stockholders, a break fee arrangement can induce competition between the bidders. By assuring potential acquirers that they will be compensated for various costs undertaken prior to effectuating a transaction (identification and assessment of the target, fees for due diligence, etc.), a break fee would encourage bidders to spend on such assessments and make better bids. As potential acquirers are now assured of compensation for their efforts, more of them can enter the fray thereby increasing competition and providing better options to the shareholders. In this manner, break fees facilitate M&A transactions. However, break fees are deal protection devices that invariably function by preferring one bidder over the other. Although a break fee’s impact on the net asset base of the company is negligible, it could potentially wipe out the annual revenue of the target. This would make the target less attractive to subsequent bidders. Hence, a high break fee could serve to reduce competition. Further, a high break fee amount could constrain shareholder choices. Shareholders are coerced when they are forced to vote for transactions backed by the management. A vote would be structurally coercive when the directors “have created a situation where a vote may be said to be in avoidance of a detriment created by the structure of the transaction … rather than a free choice to accept or reject the proposition voted on.” When a high break fee amount assured by the management is disclosed to the shareholders, the shareholders get to know the exact cost to be borne if the merger does not go through. Voting against such a proposition becomes unviable and costly for the shareholder. Thus, a higher break fee empowers the company’s management to influence voting. Despite this influence, it is contentious whether a break fee arrangement is structurally coercive. In Brazen v. Bell Atlantic Corp., the Delaware Supreme Court stated that mere knowledge that voting against the merger would result in activation of the fee does not by itself constitute shareholder coercion. Further, the arrangement would not be coercive, as the shareholders would only vote against the merger in favour of a better price from another bidder. In the Indian context, however, this reasoning may not be applicable given the minority shareholders who would remain in the company with diminished value due to activation of the break fee. How US Deals With Break Fees A characteristic feature of the shareholding in US is its dispersed nature. Due to this feature, the board and management act as agents for the shareholders and are empowered to take various decisions, which determine the outcome of an offer. They have to make these decisions in light of the interest of the company and owe duties of care and loyalty to the shareholders. The Delaware jurisdiction has especially favoured the exercise of such powers by the management. Further regulation has also been developed in such a manner. The various standards of review in the US should not be readily applied in other jurisdictions because the nature shareholding in many jurisdictions is concentrated and not dispersed (e.g., the jurisdictions of India, Japan, Korea, Singapore, and China). These jurisdictions have adopted the rule of Board Neutrality, which finds its origin in the UK. The Board Neutrality Rule makes the shareholders and not the management of the primary decision-makers regarding an offer. The management has little to no leeway to enter into deal protection devices once an offer is made. Only with prior approval of the shareholders, can the management undertake any such act. A judgment rule, which is predicated on management’s freedom and power to take decisions without shareholder approval, would hardly make sense in these jurisdictions. How the UK and Most Asian Countries deal with Break Fee The UK in furtherance of its board neutrality rule provides for a de minimis limit to deal with break fees. A de minimis limit is the standard percentage value of transaction value against which all break fees are adjudged (1% in the case of UK). Apart from the UK, de minimis limits are now an accepted standard in jurisdictions of Australia, Hong Kong, etc. However, de minimis limits have multiple issues. Firstly, they favor rigidity and certainty over flexibility. Even though certainty leads to a more predictable market, flexibility allows managers to structure the fee to custom-fit the specific conditions their companies face.  Secondly, given the dual nature of break fees as inductive as well as anti-competitive, the quantitative standard of a de minimis limit would not be ideal to distinguish and adjudge the permissibility of such arrangement. These concerns have been raised in multiple jurisdictions. The Australian Business Community has argued that a target might have to go beyond a de minimis limit considering the various specific circumstances an enterprise might face. The reason for not using a de minimis limit in the US was held to be along the same lines. The Delaware Chancery Court in In re IXC Communications, Inc. Shareholders Litigation held that a break fee arrangement must be judged by evaluation of the entire agreement and the terms of negotiation that brought it about. Regulation in Asia Importing de minimis limits to Asia would be contrary to the purpose for which they were introduced in the UK.  The de minimis limit is part of the larger