Companies in business have this intent of expanding their operations by entering into different businesses in the market and also expanding its network by acquiring new business with has less expertise or having fewer resources in the market and needs capital for expanding its operations. Merger and Acquisition transactions come under the law of commercial transaction in which companies are merged together or acquirer by other company in competition to get a larger market share in the economy. Also a Demerger process, which is an opposition of Mergers, where a new Company is created out of disinvestment from its parent Company. Each party benefits in its own way in an M&A transaction and reap different benefits in that process. In Mergers a company is absorbed (merging company) by another, while the latter retains its own name and identity, and acquires the assets and liabilities of the merging company (merged company). After the merger, the merging company ceases to exist as a separate entity. To perform the activity of Mergers in India laws and regulations has been assigned for the smooth transaction in acquiring or control of a company and ownership of the Business for the parties in a transaction. The formation of Joint Venture, Subsidiary and Holding Company has to follow the procedure of Merger or Amalgamation to have its existence. The Article discusses the prime legal applications and regulations that suffice M&A proactive in India.
The Parties And Its Kinds In An M&A
In an M&A transaction, the parties involve in the transaction are either Body Corporate or Individual firms. The Body Corporates are Companies which are registered under The Companies Act, 2013 or The Companies Act, 1956 and also the Limited Liability Partnership Firms which are registered as per The Limited Liability Partnership Act, 2008, these Body Corporates are either act as the Acquirer or the Target Company in a transaction. The Companies by going into the mergers & acquisition deal has the motive of expansion in the market and reap the benefits of expertise in the market. The Companies Act, 2013 has a Chapter 15 on Compromise, Arrangement & Amalgamation which gives a procedure of Mergers & Amalgamation of the Companies and also with the foreign Companies, the undertaking of a merger by a scheme of arrangement and in relation to purchasing from the existing shareholders and transfer of shares thereof.
Similarly, Private Equity (PE) Firms and Venture Capital (VC) Funds which are specialized in the Investment and acquisition of the Companies and Firms, these firms are registered under The SEBI (Venture Capital Funds) Regulations, 1996 for a VC fund and for a PE fund SEBI(ALTERNATIVE INVESTMENT FUNDS) REGULATIONS, 2012 . PE & VC firms are specialized Investment funds which invest in newly incorporated companies known as ‘startups’ or new ventures. In a PE & VC business model, it collects capital from the masses and then invests into new Ventures according to the risk embodied in the business.
Regulators are the checkpoints in M&A Transactions. Several regulators are developed for an effective deal-making process that suits the Investors and the Investees. Several of the rules have been formulated by the SEBI through its regulations in case of the companies which are listed in a stock market. The SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 2011 (also known as ‘Takeover Code’) and the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 guides in the procedure of the deals in M&A in the Listed Companies. The Takeover Code has the procedure for the acquisition of the other entity and has set proper guidelines on disclosures in safeguarding the interest of the Shareholders of the Merging Entity. The Listed Obligations and Disclosure requirements are a set of norms for the listed company the timely production of control of the company, the voting rights and the appointment of new directors and the financial records of the company.
The RBI also acts as a regulator in case of Foreign Acquisition of a company which has been later discussed in this article.
The Competition Commission is the last regulator in an M&A deal where the motive of the Commission is to see that there is no absorption of business only to one company and a healthy Competition exists in the market. In an M&A transaction, the Competition Commission has to ensure that the Merged or Acquiring Company does not create a monopoly of one entity in the economy and can call off such deal for ensuring it not happens.
How Consideration Are Formulated In An M&A Deal?
The Government of India with its Regulators has framed certain rules and regulations governing the consideration part of an M&A. In an M&A deal the exchange of capital or the acquisition by instruments are done namely through Equity Shares or Preferential shares or Debentures or Convertible Security Instruments (either Compulsory or Optional) which are used as a part of the consideration in an M&A deal. The following are the rules and regulations which the companies in a transaction can the issue:
Companies (Share Capital and Debentures) Rules, 2014 lays downs the rules and regulation for listed and unlisted companies for the issuance of shares and debentures of the company. Similarly, for Listed Companies SEBI (ISSUE OF CAPITAL AND DISCLOSURE REQUIREMENTS) REGULATIONS is in place for the issuance of capital shares. Both the rules have the same purpose for the issuance of Equity shares, Preferential Shares, Debentures & Convertible Instruments for the company. In the Acquisition of the company, it is generally the equity type of instruments which are transacted between the parties Companies.
A Company in an M&A deal can also transact with a Foreign Company, for this, Foreign Investment Rules are triggered which are laid down by the Department of Industrial Promotion and Policy (DIPP) and by the RBI through its Rules and Regulations as per the Foreign Exchange Management Act, these laws determine the methods of raising funds either by an External Commercial Borrowings (ECB) or by Foreign Direct Investment (FDI) into a company. The FDI policy determines the routes of foreign Investment in different sectors in the economy. The sectoral caps fix Foreign Investments which can be accepted to an extent, the Government in this instance determines the FDI inflow for a sector either as an automatic route or Government Approval Routes or a Prohibited Route. To know more about the approval routes in FDI check here.
The RBI, ECB Regulations, determines the extent of Foreign Borrowing by a Company Registered in India, though, the regulations do not give rise to ownership or voting rights of the Company but it can have an influence over the Company to a certain extent.
How Parties Makes the Deal?
An M&A deal can be executed by Instruments such as Business Transfer Agreement, Share Purchase Agreement, Share Holding Agreement as per the law placed in compliance with Contract Act, The Companies Act, the Security Contracts Act or the SEBI rules & regulations.
The Business Transfer Agreement (BTA) is the method by which direct sale of the assets or liabilities of the company are done, whether it is land, building machinery or any other asset of the company. In another kind of BTA, a business can also be transferred in a slump sale manner where the whole undertaking is transferred in a going concern to the acquiring party with all its Assets and Liabilities attached. A BTA is an instrument which is duly Registered and Stamped for its proper Execution.
Another method is through a Share Purchase Agreement (SPA) or Share Subscription Agreement (SSA), the Equity or Preferential shares of the acquiring company are transferred between the Parties in the Transaction. It is the most common method of acquisition of a Company. Equity shares can also be in the form of Convertible Instruments (either in the form of Equity or Debt) which can be converted by the holding party into Equity Shares of the Company. The Agreement for its execution is properly stamped and if in case of a listed company has to be disclosed according to the SEBI Regulations (Takeover Code). The Company in this has to comply with rules and regulations for the takeover of the company and disclosures related to the acquisition of shares of the acquiring company in the public domain. The Stamps applicable to execute the instrument of transfer or acquisition of shares will be according to the concerned state both the parties having its Registered Office herewith.
The transfer of assets through a BTA or by Share Purchase will attract Income tax and will be taxed accordingly with the provisions as per the Income Tax Act.
What Are The Dispute Resolution Options?
Disputes generally arise between the transacting parties also in the case of M&A dealing. The Parties can safeguard their interest through Representations or Warranty clause in the agreement after the execution of the M&A deal. If a party aggrieved by any finding that may violate any undertaking by a party it will trigger the Representation or Warranty clause, then the aggrieved party may demand to Indemnify upon the finding from the other party. To proper resolve, these disputes Parties have an Arbitration clause in the Instrument of the M&A deal or can also file an Application for the damages before the National Company Law Tribunal.
Though Arbitration has become a preferred choice of dispute resolution among the parties, which is less time consuming and can have better experts dealing with the kind of disputes between the parties. Companies can also resolve disputes through the National Company Law Tribunal (NCLT) for resolution. The NCLT is a special court in matters related to Companies. As per the Companies Act, the NCLT has to power to enforce a scheme of compromise or arrangements.
An M&A deal can have a greater extent for the betterment of the economy in a huge way. The capital inflow and the dynamics of the business in the economy can develop Infrastructure, development and the better labor market in the economy. The law and its Implementation shall suit the interest of the parties in the deal-making process and must bring smooth transaction between the parties in negotiations it shall benefit in those aspects that the whole process of Acquiring or the Merging does not bring any damages to a party in a transaction. The Regulations and its legal aspects of it must be adherent to the companies functioning and its motives in the Indian Market. The law and the government shall also ensure that hostile takeover of the companies does not harm the individual shareholder of the company for which a proper disclosure mechanism in effect for the companies. The law related to the M&A has a huge influence on the commercial business transaction and can set a standard in the globalization of the market economy.