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Cross- Border

Cross- Border

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Cross- Border

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  1. Cross- Border Bharat Vasani Group General Counsel Tata Sons

  2. Scope of the Presentation • Overview of Cross-Border M & A transactions • Process involved • Deal structuring issues • Due Diligence issues • Legal aspects • FEMA Provisions • Transaction Documents • Emerging Trends • Key Challenges

  3. Objectives Greater Economies of Scale Accessto Markets Access to Raw Material Diversification of Business

  4. Cross Border Transaction Imperatives Business Environment Cultural Issues Business Dynamics Accounting treatment Legal & regulatory framework Tax regimes & treaties Identifying and delivering synergies

  5. Key Tax And Financial Considerations 2 Entry Strategy 1 3 Financing options Income flows and their taxability 4 6 Exit considerations Debt Structuring 5 Cash repatriation

  6. Categories Of Cross Border Acquisitions • Corporate Partnering • Public to Private • Supporting Management Buy Outs • Leveraged Buy Outs • Strategic Investments • Earn Out Acquisitions • Distress Sale

  7. Applicable Laws • India • Companies Act – Section 372A, • FEMA Regulations • Tax • Target jurisdiction • Company Law & Competition law • Exchange Control Regulations • Takeover Regulations • Tax

  8. Process • Assemble Team • Limited Due Diligence • Purchaser obtains financing commitment • MoU / LoI • Detailed due diligence • Definitive Purchase Agreement • Purchaser’s firm financing • Seller and Purchaser comply with covenants • CLOSING

  9. Structuring Issues • Tax • Financing • Corporate Veil • Regulatory constraints (host & target countries) • Exchange Control Regulations

  10. First Steps • Appointment of Advisor • Investment Banker • Attorneys (Local and Offshore) • Public Relations Agents • Identify Due Diligence Areas • To achieve commercial objectives • Acquisition • Strategic Investment • Preliminary Documentation • Review of Information Memorandum • Entering into mandate letter with Advisors • Executive Non-Disclosure Agreement • Exclusivity Arrangements

  11. LoIs / MoUs • Pros • Binding v/s. Non-binding • Reduces basic understanding to writing • It may look different in written form • From buyers perspective • Exclusivity may cut-off seller’s negotiations with third party • Provides basis for expense reimbursement • Cons • Leaks • Duty to disclose • Contents

  12. Due Diligence Methodology: • Physical Data Room • Virtual Data Room • DD list needs to be carefully tailored to meet the needs of specific transaction and jurisdiction • Specific inputs needed from local lawyers and tax advisors

  13. Due Diligence • Effective Due Diligence Process should address the following- • Strategy Assumptions • Identify operational, legal, financial and other significant issues • Assessment of Risks • Effect of assessment on Valuation (e.g. Fair Price for the Target Company)

  14. Illustrative Due Diligence issues (1) • Onerous obligations/covenants • Payment of ongoing fee/royalty • Restriction on activities • Rights of first refusal/put/call option • LDs/ penal provisions/any liability which flows through

  15. Illustrative Due Diligence issues (2) • Exclusivity provisions • Confidentiality • Assignability / change of control/ consent of the counter party for transactions • Regulatory Approvals

  16. Impact of Due Diligence • Impact on M&A Agreements • Representations, warranties, indemnities, covenants • Conditions precedent, conditions subsequent • Holdback / escrow (mechanism for retention) of purchase price, bank guarantee, milestones for payment • Functions as an internal audit for post acquisition strategy • In cross-border deals - Impact of applicable law to Transaction (Competition Law issues, Dominant Undertaking, Takeover Regulations, Insider Trading, etc.)

  17. Results of Due Diligence • What can the purchaser do? • Require the seller to remedy the problem • Obtain an indemnity/other contractual protection • Restructure deal to exclude asset or liability • Reduce purchase price • Insurance in respect of risk – “price” – the risk • Pull out • Limitations of liability • Cap on liability • Threshold – “basket” • De-minimis • Others • What should limitations apply to? • Creditworthiness of person giving warranties – consider guarantee • Allocation of Risks • Representations and Warranties • Who gives? • All shareholders Institutional shareholders • Involvement of management • Extent

  18. Cross Border Deals - Agreements Stock Purchase/ Subscription Agreement Shareholders’ Agreement Technology Collaboration Agreement Brand Licensing Agreement Loan/ Security Agreement Product Supply Agreement Feeder Stocks Supply Agreement Information Memorandum Employment Agreement Exclusivity Arrangement Code of Ethics Labour Union Settlement

  19. Typical Regulatory Approvals • Competition Authority • Stock Exchange • Board of Target Company • Lenders • Foreign Investment Authority • Sector Regulators

  20. Issues under Companies Act • Section 372A – Inter corporate loans & investment beyond 60% of paid up capital and free reserves or 100% of reserves to be approved by shareholders • Complications in International bidding due to disclosure requirements

  21. ODI - Issues under FEMA (1) Overseas Direct Investment (‘ODI’) • Permissible in: • overseas Joint Venture (‘JV’); or • overseas Wholly Owned Subsidiary (‘WoS’) • ODI not permitted in real estate business or banking business • Conditions for investment under the automatic route • Total permissible financial commitment ≤ 200% of the net worth • Bona fide business activities

  22. ODI- Issues under FEMA (2) • Eligibility norms for Investor: • not on RBI’s exporters’ caution list / list of defaulters • not under investigation by investigation / enforcement agency or regulatory body • Filings in respect of ODI (in Form APR) to be up-to-date • All transactions with the JV/WoS to be routed through 1 AD branch • Form ODA (with details of ODI under automatic route) to be submitted to the AD • Total Permissible Financial Commitment (post August 12, 2005) • ECBs – different views

  23. ODI- Issues under FEMA (3) • Cash remittance by market purchase • Capitalization of: • export proceeds, and • fees, royalties, commissions or other entitlements due from foreign entity for supply of technical know-how, consultancy, managerial or other services • 50% of the value of guarantees issued to or on behalf of the JV / WoS • Direct and indirect investment in agricultural operations

  24. Financing an Acquisition Funding • Methods • Drawal of foreign exchange from AD • Swap of ADRs/GDRs • Utilization of proceeds of ECBs / FCCBs • Balances in EEFC account • Utilization of foreign currency funds raised through ADR / GDR issues • 200% net worth ceiling not applicable in case of funding by: • Balances in EEFC account • Utilization of foreign currency funds raised through ADR / GDR issues

  25. Valuation of Shares • Investment more than USD 5 MN: • By a Category 1 Merchant Banker registered with SEBI; or • By an Investment Banker / Merchant Banker registered with the appropriate regulatory authority in the host country • Investment less than USD 5 MN: • By a Chartered Accountant or a Certified Public Accountant • Where consideration is fully / partly paid by issue of Indian Party’s shares: • By a Category 1 Merchant Banker registered SEBI; or • By an Investment Banker / Merchant Banker registered with the appropriate regulatory authority in the host country.

  26. Post Investment Changes Post investment changes / additional investment in existing JV / WoS Step Down Subsidiary JV / WoS • Post investment changes / additional investment in existing JV / WoS • JV/WoS may diversify its activities • Set-up step down subsidiaries • Alter shareholding pattern in the overseas entity • Reportings to be made to the RBI in Form APR Step Down Sub (1) Step Down Sub (2) Step Down Sub (3) ParentCo

  27. Acquisition in Financial Services Sector (1) (Additional) Conditions for Investment in Financial Services Sector under automatic route • Net profit earned during last 3 years from financial services activities • Registration with appropriate authority for conducting financial services activities • Approval from concerned regulatory authorities, both in India and abroad, for venturing into such financial service activity • Fulfillment of prudential norms relating to capital adequacy • Above applicable to JV/ WoS or its step down subsidiary for making additional investment in the Financial Services Sector

  28. Acquisition in Financial Services Sector (2) • Recent Development: • Compliance with above conditions by regulated Indian entities engaged in financial services for investing overseas in any activity • Trading in commodities exchanges to be reckoned as a financial service and require prior approval of the Forward Markets Commission

  29. Certain other FEMA Issues (1) Earnest Money Deposit Or Issue A Bid Bond Guarantee • Remittance of earnest money deposit or issue a bid bond guarantee permitted for acquisition of a foreign company through bidding and tender procedure • Subsequent remittances through AD also permitted Pledge of Shares / Hedging • Indian Party may pledge shares of JV/WoS to AD / financial institution for credit facility for itself or JV/WoS abroad • Indian Parties with ODI permitted to hedge the exchange risk arising on such investments

  30. Certain other FEMA Issues (2) Sale of Shares • Listed – through stock exchange • Unlisted – price not less than fair value certified by CA • No outstanding dues (dividend, technical know-how, royalty, consultancy etc) • No write-off except in certain specified circumstances • Overseas entity in operation for at least 1 year and proper filings in Form APR • Indian party not under investigation by CBI / ED / SEBI / IRDA or other Indian regulatory authorities

  31. Certain other FEMA Issues (3) Annual Performance Reports (APR) • Indian party to submit APR to RBI (in Form APR) in respect of ODI • Time period: within 60 days of prescribed date for finalization of the audited accounts of overseas company • Detailed report containing various disclosures including details of the “line of activity”, financial structure and performance of the overseas company

  32. Leveraged Buy- Outs (1) Target Co Borrowing Dividend SPV Lender WoS (2) WoS (1) • Offshore • Onshore Parent Co Borrowing without Recourse

  33. Leveraged Buy- Outs (2) Background • Limitation on Indian Parent Co for making overseas investments upto 200% of its net worth under the “automatic route” • Borrowing without recourse, an option to overcome this limitation Salient features • Indian Parent Co sets up a wholly owned indirect subsidiary: Bid Co • Bid Co borrows money from lenders and utilizes that money to acquire the Target • Loan secured by the dividend stream of the Target • Shares of the Bid Co and the Target are usually pledged in favour of the lenders • “No recourse” or “financial commitment” on Parent Co

  34. Leveraged Buy- Outs (3) Advantages • No recourse on Parent Co • Not counted towards 200% cap • Parent Co’s balance sheet clean for further investments • Parent can raise further money for investment Disadvantages • Costly form of borrowing • Stringent conditions on up streaming of dividends and “cash sweeps” by Parent Co • Works best if target is de-listed, otherwise dividend leakage

  35. Certain Grey Areas Round Tripping JV / WoS (1) JV / WoS (2) • Offshore • Onshore Investor Co TargetCo Condition for outbound investment: Bona fide business activity (offshore)“Round Tripping”: Money from India is being routed back into India from another jurisdiction.Concept not enshrined in any rule or regulation issued by RBI. Round tripping; if identified – investments could be ordered to be unwound.

  36. Share Purchase Agreement • Key issues • Reps and Warranties based on due diligence reports • Conditions Precedent & Subsequent • Closing mechanism • Indemnity from seller • Statutory approvals – CPs to closing • Hold back, brand usage and non-compete • Competition law issues

  37. Purpose of Representations • Disclosure • Termination Rights • Indemnification Disclosure Termination Rights Indemnification Signing Closing

  38. Indemnification Issues (1) • Buyer’s knowledge of Seller’s breach • Protection beyond Representations and Warranties • Joint and several liability • Creditworthiness of the Seller • Offset for tax or insurance benefits • Interest on damages • Separate environmental and tax indemnification

  39. Indemnification Issues (2) • Time limitations • Basket • Minimum • Cap • Escrow • Control of litigation • Representation and Warranty Insurance

  40. Governing Law & Dispute Resolution • Choice of Law - Domestic/Neutral • Mediation • Informal • Institutional • Mechanism: Courts v. Arbitration • Domestic/Neutral • Costs • Interim relief • Appeal rights • Enforcement

  41. Emerging Trends Aggressive Indian presence in Global M & A market High level of sophistication in structuring of deals Competing bids in high value transactions Deal Protection Mechanism (Break fees etc.) Insurance of Reps and Warranties Virtual Data Rooms Use of Media and PR agencies Steep increase in parachute payments Steep increase in transaction costs

  42. Key Challenges Operational issues post merger / acquisition • Integration of the cultures of the organizations • Realisation of synergies • Alignment of HR policies and practices • Optimum utilization of manpower • Optimum utilization of other infrastructural resources

  43. Any Questions

  44. Thank You bvasani@tata.com