Corporate M&A 2019

Last Updated June 10, 2019

India

Law and Practice

Authors



Platinum Partners has established itself, in a short span of just under 11 years, as a high-impact firm that is able to undertake marquee transactions for a roster of blue-chip clients. Several of the firm's lawyers have spent time with international law firms. The firm brings to its matters the right mix of international experience and standards along with local knowledge and expertise, and is particularly strong in its ability to manage transactions for clients by implementing a hands-on, partner-driven approach. Areas of expertise within M&A include public and private M&A, acquisition and disposal of businesses and business assets, joint ventures, private equity and venture capital transactions, India entry strategies, securities laws and delistings, and merger control. The firm has seven partners and 37 associates.

According to data compiled by Thomson Reuters, the value of announced M&A deals involving Indian companies more than doubled to reach a record value of USD129.4 billion in 2018. The number of announced deals also grew 17.2% from a year ago. While domestic deals continued to dominate the Indian M&A landscape, the total foreign direct investment also recorded an increase of 77% over the previous year.

The following top trends were observed in India in 2017/2018 in relation to M&A activity:

  • according to a Price Waterhouse Cooper report, consolidation was the key driver for deal activity in 2017/2018. Corporates were keen to improve their size, scalability and operating models through consolidation. Reliance Industries pursued acquisitions of Den and Hathway to inorganically grow its broadband business. Also, with technological advancements, companies are increasingly pursuing acquisitions in the technology space to boost their operational efficiency;
  • e-commerce players continued to witness significant M&A activity primarily to raise funds to meet the growing demand and gain an edge over their competitors. Marquee foreign companies and institutional investors largely remained keen on the potential of the Indian e-commerce market resulting in an overall inflow of several billions of dollars in such companies. The biggest M&A deal of the year, where Walmart Inc. acquired Flipkart from SoftBank and Naspers Ltd, for USD16 billion, was in the e-commerce sector;
  • overseas pension funds and sovereign wealth funds continued to remain active in the renewable energy and infrastructure sectors. Private equity-backed M&A also witnessed a noticeably high growth in 2018;
  • the Insolvency and Bankruptcy Code 2016 (Insolvency Code) has also been a game changer in Indian M&A, as the Insolvency Code had put a number of defaulting borrowers for sale in industries spanning from steel to power and infrastructure. The more than USD5 billion purchase of bankrupt Bhushan Steel by Tata Steel was this year’s second-biggest deal between two Indian companies. The Insolvency Code also contributed in country’s recent jump on the World Bank’s ‘Ease of Doing Business’ rankings; and
  • outbound acquisitions by Indian companies also saw a resounding growth and reached an eight-year high in 2018. The outbound acquisitions focused primarily on the materials sector followed by acquisitions in the technology sector.

Materials, financial services, retail, energy and power and healthcare were among the top five sectors drawing significant attention in 2018. One of the primary drivers for deal activity across sectors, according to PWC, was technological disruption: “Relevance has become a key element for the survival of any business, and this has made technology expertise a requirement to achieve a competitive advantage in the current market.”

The number of high-value deals also increased across sectors in 2018. Other than the leading Walmart-Flipkart deal in the e-commerce space, multi-billion dollar deals were seen in multiple sectors including industrial products (Tata Steel: Bhushan Steel), telecom (Indus Towers: Bharti Infratel), chemicals (Arysta: UPL), energy (ONGC-HPCL), and consumer products (HUL–GSK).

Share purchases are the most commonly used means for acquiring a company in India. If the target business is housed in an entity that has other businesses or if the buyer does not wish to takeover historic liabilities residing in the target entity, the acquisition can be done by way of a business sale (as a going concern) or an itemised asset sale, respectively. If timelines permit, mergers can also be a method of acquiring a company. However, the process of a merger in India is generally protracted, as it is a tribunal driven process. The choice of technique/legal means finally depends on tax considerations and efficiency in concluding a deal. As most Indian companies have a controlling shareholder, non-negotiated transactions involving a tender offer to the public are rare in India.

There is no central regulator for M&A activity in India. However, a number of regulators may have a role to play in M&A, depending on the nature of the transaction. The Competition Commission of India, which is the Indian antitrust regulator, has jurisdiction over mergers and acquisitions that meet certain assets or turnover thresholds. With the Government recently dismantling the Foreign Investment Promotion Board, an approval of the relevant Administrative Ministry/Department is now required in case of foreign investment beyond a certain limit in certain sectors. The Reserve Bank of India (RBI), India’s central bank, regulates many aspects (including procedural aspects) of foreign investment transactions. Finally, the Securities and Exchange Board of India (SEBI), India’s securities regulator, regulates M&A transactions involving listed Indian entities.

Foreign investment into India is regulated by the Foreign Exchange Management Act 1999 and the foreign direct investment (FDI) policy notified by the Government of India. A number of avenues have been provided for foreign investment such as the FDI route (typically long-term strategic equity investments) and foreign portfolio investments (typically smaller liquid investments by financial investors in stock markets). There are also foreign venture capital investments (primarily investments in unlisted companies in certain sectors), investments in investment vehicles such as alternative investment funds, real estate investment trusts, infrastructure investment trusts and other investment funds, plus investments in certain debt instruments (debentures) and depository receipts.

Among these possibilities, the FDI route is typically the preferred one for M&A transactions.  Broadly speaking, under the FDI route, foreign investment is permitted either under the ‘approval’ route (ie, those for which the foreign investor will be required to obtain the prior approval of the relevant Administrative Ministry/Department), or under the ‘automatic’ route, for which no prior approval is required.

FDI is not permitted in a few sectors, such as gambling, real estate and tobacco. There are certain sectors where FDI is permitted subject to overall FDI caps and/or prior approval of the relevant Administrative Ministry/Department. Currently, very few sectors are subject to sectoral caps and/or approval requirements. These sectors include defence, insurance, multi-brand retail trading and brownfield pharmaceuticals. There may be additional approval requirements if the proposed investor is from neighbouring countries of Pakistan and Bangladesh. In the case of all other sectors (ie, other than those falling in the categories mentioned above) and investments from all other jurisdictions, FDI up to 100% is permitted under the automatic route.

There are other regulatory restrictions that are aimed at achieving the objective of procuring FDI as a long-term strategic risk investment. For example, foreign investors are not allowed to claim assured returns from the Indian company or Indian shareholders on their equity investment. Foreign investors are also not allowed to invest at a valuation less than the fair market value or exit at a price that is above the fair market value (in case of cross-border transfers).

India has a mandatory and suspensory merger control regime in place. The Competition Commission of India must be notified of any acquisition of shares, voting rights, assets of any enterprise or acquisition of control over the management or assets of any enterprise, or a merger or amalgamation of enterprises that meets certain assets or turnover thresholds and is not subject to any exemption. The notification needed to be filed within 30 days of:

  • the execution of binding transaction documents in case of an acquisition; or
  • the final approval of the board of directors, in case of a merger or amalgamation.

This mandatory time limit, however, has been removed, but the requirement to seek approval of the Competition Commission of India as a condition precedent to closing continues.

India has a complex framework of central and local labour law regulations that govern employment conditions in India. The statutory framework, in the context of M&A activity, comprises a federal law for resolving industrial disputes and state specific legislations governing commercial establishments. This framework is largely designed to protect blue-collar workmen rather than sophisticated white-collar employees, which is typically a very narrow group of employees. For blue-collar workmen, termination of employment, closure of undertakings and sale/transfer of undertakings are generally difficult to implement due to various statutory requirements that are often difficult to fulfil. Yet, white-collar employees are mostly governed by the terms of their employment agreement.

There is no general national security review of all acquisitions in India. Reviews are prompted based on the sector in which investment is made or based on the country from where investment is made. In case of foreign investment in certain sensitive sectors such as telecom, defence, aviation, pharmaceuticals and media, a national security review is undertaken as part of the approval process. Similarly, all FDI from Pakistan and Bangladesh require prior government approval and any FDI from Pakistan in certain sensitive sectors is completely banned. The government may undertake a national security review as part of this approval process as well.

In relation to the Indian merger control regime, the financial thresholds (value of assets and turnover) triggering a merger filing before the Competition Commission of India were enhanced by 100% in March 2016 and the de-minimis exemption thresholds were also increased. The Government recently expanded the scope of the de-minimis exemption by extending the benefit of the exemption to mergers and amalgamations. Previously, the de-minimis exemption only applied to an ‘acquisition’ of shares, voting rights, assets or control but not to mergers or amalgamations. It has now been extended to all forms of transactions, ie, acquisitions, mergers and amalgamations, where the value of the assets being acquired, taken control of, merged or amalgamated is not more than INR3.5 billion in India or consolidated turnover is not more than INR10 billion in India. Further, it has been clarified that for the purposes of assessing the de-minimis and/or jurisdictional thresholds, in cases of transactions involving an asset or business transfer, only the value of the assets and turnover of the target assets or business being transferred shall be relevant and not the entire assets and turnover of the selling entity.

A comprehensive Goods and Services Tax, replacing various central and state levies, was implemented recently and is likely to have a favourable impact on M&A activities in India in the logistics and warehousing industry, as well as sectors that have a long value chain with operations in multiple states in India, eg, pharmaceuticals, consumer durables and automobiles, etc.

The Insolvency Code is likely to be a significant development from an M&A perspective and has been hailed as a ‘game changer’ reform for distressed companies. The Code provides a comprehensive framework for acquisition of distressed assets and opens opportunities for distressed assets buyers. It ensures improved debt recovery timelines, a maximisation of asset value, a clear waterfall of distribution in case of liquidation and a time-bound settlement of matters regarding insolvency and bankruptcy of corporates. The success of this legislation would, however, depend on the development of the institutional framework and the competency of the insolvency professionals.

The Indian Government also introduced amendments to the existing arbitration law with a view to implementing a time-bound process for conducting arbitrations. Earlier, due to the lack of clarity in legislation, judicial case laws had created ambiguity on whether Indian courts can interfere in cases of international commercial arbitration. The revised legislation now makes it clear that in cases of international commercial arbitration, parties may contract out of the provisions, which give Indian courts the ability to interfere with an offshore arbitration process.

The decision of the Delhi High Court in the widely publicised Tata-Docomo matter, to allow the enforcement of the arbitral award by the London Court of International Arbitration arising out of a fixed-price put option clause will boost investor confidence and is a welcome step for the enforcement of foreign arbitral awards in India, despite the RBI opposing its enforcement on regulatory grounds. While the decision is not an approval of the fixed-price put option clauses, given that a major part of the Court’s reasoning was based on how the clause had been worded in the shareholders’ agreement and on the fact that the award was in the nature of damages, the decision is a step towards ensuring enforcement of contracts entered into by Indian entities with international counterparties, and curbing local protectionism of arbitral awards.

There have not been many significant changes to the takeover law in India in either 2017 or 2018. The key changes were to harmonise the Insolvency Code with the law governing takeovers. Accordingly, exemptions were provided under the SEBI (Acquisition of Shares & Takeovers) Regulations 2011 (Takeover Regulations) from the requirement of making an open offer and the limit on non-public shareholding, where the acquisition is pursuant to a resolution plan under the Insolvency Code. Further, in line with the recently enacted Fugitive Economic Offenders Act 2018, the Takeover Regulations have introduced a prohibition on persons declared as fugitive economic offenders, from making a public announcement for an open offer or make a competing offer for acquiring shares or entering into a transaction for acquiring shares/voting rights/control of a listed company.

There do not appear to be proposals to amend the Takeover Regulations.

Most Indian companies, even if they are public, do not have a dispersed shareholding. Most Indian companies are promoter-driven and have a controlling shareholder, making a non-negotiated takeover extremely challenging. Therefore, building a stake in a company with the intent of a takeover, with limited certainty on success of attempted acquisition, is generally not seen. That said, in a few situations when the shareholding structure of a company would permit a non-negotiated takeover, it is customary for a bidder to build a stake in the target prior to launching an offer. The stakebuilding exercise is usually carried out by acquiring blocks of shares on the market, though under the Indian foreign exchange regulations, FDI investors cannot acquire shares from the market unless they already have a controlling stake in a listed entity.

In India, all companies are required to file an annual return in which the shareholding pattern of the company must be provided in the prescribed form. In relation to listed companies in India, SEBI provides certain other requirements with respect to shareholding disclosure.

The company must disclose names of the shareholders holding 1% or more shares of a listed company. Names of persons acting in concert shall be disclosed separately. Further, any person (along with persons acting in concert) who acquires any shares or voting rights of a listed company that together with the existing shares or voting rights held by them results in its aggregate holding of shares or voting rights to 5% or more of the shares of the company must disclose the aggregate shareholding and voting rights within two working days of the receipt of the shares or acquisition of shares/voting rights to the target company and to the stock exchange.

Also, any person (along with persons acting in concert) holding 5% or more shares or voting rights in a listed company shall disclose every acquisition or disposal of shares representing 2% or more of the shares or voting rights within two working days of the receipt of allotment of shares or acquisition or disposal of shares/voting rights, as the case may be, to the target company and to the stock exchange. Every person (together with persons acting in concert) holding shares or voting rights aggregating to 25% or more of the shares or voting rights in a listed company shall, within seven working days of the end of the financial year, disclose their aggregate shareholding and voting rights as of 31 March in that company to the target company and the stock exchanges.  The promoters of every listed company must, together with persons acting in concert, within seven working days of the end of the financial year, disclose their aggregate shareholding and voting rights as of 31 March in that company to the company and the stock exchanges.

Additionally, under the Insider Trading Regulations, insiders (such as promoters, directors, key managerial personnel and their immediate relatives) are also required to make certain disclosures in relation to their holding of shares of the company in a prescribed form. They are also required to make disclosures at the time of acquiring or selling such shares. The listed company, in turn, is required to disclose such information to the stock exchanges.

Companies do not have the ability to introduce higher or lower reporting thresholds. With the merger control regime being in effect, potential gun jumping issues could be a hurdle to stakebuilding.

Dealings in derivatives are allowed in India. Dealings in futures and options contracts are usually standardised and are allowed to be traded through self-regulated organisations such as the stock exchanges (for example Bombay Stock Exchange or the National Stock Exchange). The supervisory body of such self-regulated organisations is SEBI.

The early warning mechanism under the Take Over Regulations does not cover derivatives in securities yet.

There is no specific provision in the Indian competition law dealing with derivatives. In the absence of anything specific, the general principle would apply which in essence says that a filing will have to be made at the time of entering into an agreement, which conveys a definitive agreement or a decision to acquire shares/assets.

Disclosures are generally limited to the factual details of the acquisition. It is only where a tender offer is made (ie, in cases where an acquirer seeks to purchase 25% or more of the share capital or seeks to obtain control) does the acquirer need to make qualitative information known.

A listed target is required to disclose any material price sensitive information. Whilst some kind of information is per se deemed to be material (eg, signing of definitive agreements), materiality of information prior to that stage is determined based on certain guiding principles. Generally, listed companies only disclose any transaction at a relatively advanced stage, ie, at the stage of definitive agreements being entered into or if firm offers are received.

As mentioned above, while the legal requirement is to disclose any price sensitive information, in practice, target companies usually take a liberal view and disclose transactions only at a relatively late stage.

It is typical for the buyer to conduct an exhaustive due diligence exercise on the target and its business in case of a negotiated business combination. The diligence usually covers legal, regulatory, financial, tax, operational and environmental issues. The due diligence has in fact become more rigorous recently as a number of acquirers burnt their hands due to due diligence shortcomings (eg, telecom sector and coal sector acquisitions). Under the earlier regulations for insider trading, there was an ambiguity on consequences of disclosure of unpublished price sensitive information in a due diligence. However, the new regulations have allowed such disclosures subject to certain guidelines.

Exclusivity is commonly demanded and agreed as part of a term sheet or memorandum of understanding entered into between the parties. In India, given the limited utility of stakebuilding, standstill provisions are less relevant.

Tender offer terms and conditions are prescribed under the Takeover Regulations. The transaction agreements may also contain certain matters relating to tender offers, including the obligation to comply with the aforesaid regulations, the minimum level of acceptance required to proceed with the transaction, the circumstances in which an open offer can be withdrawn and a provision relating to the course of conduct to be adopted by the parties once the actual results of a tender offer are known.

Timelines for acquiring/selling a business in India vary depending on various factors, including whether the target is listed or unlisted, whether a tribunal approved process is adopted or not and whether there is a requirement to obtain any regulatory and other third-party consents.

Where the acquisition involves an unlisted target that is not subject to any significant regulatory or third-party approvals, the process for acquiring/selling a business can be completed within a matter of a few weeks. If, however, the target is listed and the acquisition results in a mandatory tender offer or if any significant regulatory or third-party approval is required as a condition precedent to closing, closing could take four-six months from the time of signing. If the acquisition involves a tribunal-approved merger or demerger, the process can again take six-nine months, depending on whether the transaction involves a listed company and the nature and number of regulatory and third-party consents involved.

The mandatory tender offer threshold in India is the acquisition of 25% or more of the voting rights in a listed company or the acquisition of control over a listed company. The annual thresholds for creeping acquisitions beyond the above threshold that would trigger a mandatory offer are in excess of 5% of voting rights.

Although share swaps are permitted subject to certain conditions, cash is the most common form of consideration used in deals involving Indian target companies.

A takeover offer is often subject to a minimum acceptance condition. In addition, a takeover offer can be withdrawn in very limited circumstances. These are:

  • failure to obtain any statutory approval required for the open offer or for making the acquisition which triggers the offer;
  • any contractual condition precedent not having been met for reasons beyond the reasonable control of the acquirer.

In both cases, such approvals/conditions should be expressly mentioned in the offer document.  Also, in the latter case, while in theory the requirement is broadly worded so as to include any condition, in practice SEBI has typically given it a narrow interpretation and has restricted it to any condition precedent that needs to be mandatorily satisfied in order for the acquisition to be completed or the offer to proceed.

A shareholding in excess of 25% allows a shareholder to block special resolutions, while a shareholding in excess of 50% enables a shareholder to cause ordinary resolutions to be passed and to appoint a majority of the directors on the board. Hence, minimum acceptance conditions, if imposed, can work off these shareholding thresholds. It must be borne in mind that SEBI requires a minimum public shareholding of 25% for listed companies, therefore, unless the idea is to delist the company following the tender offer (which also comes with its own set of challenges), an acquirer of a public company may not be able to hold more than a 75% shareholding.

While a condition of obtaining financing could be possible (though not normal) in case of negotiated transactions, acquirers must have in place firm financing arrangements before making a tender offer for listed companies. Moreover, since acquisition financing is restricted in India, a financing condition would not be normal.

Deal security measures such as break-up fees, match rights, ‘force the vote’ provisions or non-solicitation provisions are not commonly seen in India.

Where the target company is unlisted and the bidder does not seek 100% ownership, he or she will seek additional governance rights under the shareholders’ agreement by having mandatory representation on the board of directors and veto rights over certain strategic matters. Where the target company is listed, special rights for the bidder may not be available in the company’s articles of association, but it is possible that bidder may have separate voting agreements with other shareholders.

Shareholders can vote by proxy, provided the necessary requirements, ie, of depositing the duly signed proxy form with the company within the requisite time, are complied with. However, a proxy does not count towards a quorum and a proxy cannot vote on a show of hands. As a result, it is common for corporate shareholders to appoint an authorised representative to attend, and vote at, shareholder meetings on their behalf. An authorised representative is counted towards quorum and is also entitled to vote on a show of hands.

Squeeze-outs are generally not very common in listed companies in India and short-form mergers may not be useful, as a short-form merger process is allowed only with respect to wholly owned subsidiaries. Companies could, however, use a selective reduction of capital as a method to squeeze out minority shareholders. This process requires approval from the National Company Law Tribunal (NCLT) and a review by SEBI. The NCLT and SEBI are essentially likely to examine whether the majority of the minority shareholders have approved the reduction of capital and whether the price offered is fair.

Other options to squeeze out the minority may be possible only if the company is delisted and the acquirer’s ownership reaches 90% of the share capital. Delisting is governed by the delisting regulations laid down by SEBI (except in case the delisting is pursuant to a resolution plan under the Insolvency Code). In 2015, SEBI amended the rules relating to delisting, which has made it more difficult for companies to delist by providing increased protection to the minority shareholders. Earlier, the price that would have to be paid to the shareholders in a delisting offer would be determined by the price at which the maximum number of shares was offered by the shareholders. The amendment, however, states that the price shall be the highest price at which the shares, resulting in the promoter’s shareholding reaching 90%, are offered.

SEBI again amended the delisting regulations in 2016 to provide that equity shares of certain small companies may be delisted from all stock exchanges without following the prescribed procedure if, inter alia, the number of equity shares of such companies that traded on each recognised stock exchange during the preceding twelve calendar months is less than 10% of the total equity shares of these companies. This may make it simpler for small companies with very low traded volumes to delist themselves without going through an elaborate delisting process.

In November 2018 there was another amendment to the delisting regulations that provides an acquirer the flexibility to make a counter-offer once the price of the shares is determined in accordance with the reverse book building process under the delisting regulations if such price is not acceptable to the acquirer.

It is rare to obtain commitments to tender or vote from principal shareholders, since these may result in the shareholders being considered to be acting as concert parties with the acquirer. If, however, it is the principal shareholder that is selling shares in the transaction, then an unconditional voting undertaking can be obtained.

In the case of a bid for a listed entity, an acquirer is required to make a public announcement when it enters into an agreement to acquire control or acquire shares in excess of the prescribed threshold. In the case of preferential allotments, such an announcement is to be made when the board authorises the allotment. In the case of indirect acquisitions, the trigger is the entering into of agreements and/or making announcements with respect to the primary acquisition. The public announcement should also be sent to the stock exchange where the company is listed (and the stock exchange will further disseminate the announcement), plus the target company.

In the case of a bid for an unlisted entity, there generally would be no requirement to make a bid public. However, if a listed entity is a shareholder of the unlisted business, the disclosures of the listed entity will be governed by the guidelines discussed above with respect to disclosure of unpublished price sensitive information.

The basis for disclosures on a share issue, or related to share issue, in a business combination depends on factors such as:

  • whether the business combination involves a listed entity or not;
  • whether the business combination results from a tribunal approved merger or by way of an issuance of shares to the acquirer; or
  • whether anti-trust notification is required or not for the business combination.

If other regulatory approval requirements are triggered as a result of the business combination, additional disclosure requirements may arise and will have to be looked at separately.

Starting with disclosure requirements only when a listed entity is involved, disclosures would be triggered primarily by four sets of regulations. The Takeover Regulations, the regulations governing open offers to public shareholders in case of a takeover (including by way of a share issue), require disclosure with respect to the underlying transaction, eg, the name and identity of parties, the nature of a transaction, and its consideration. Under the regulations governing the issue of shares by listed entities, if the business combination is proposed by way of an acquisition through a share issue, amongst other things, the disclosures related to the objects of the issue, the participants in the issue, pre- and post-issue shareholding patterns and details of beneficiaries of issue would be required to be made to the shareholders.

A separate set of regulations governing mergers of listed companies require disclosure to SEBI and the stock exchanges of the draft merger scheme, along with a valuation report, fairness opinion, shareholding patterns and financial statements of unlisted companies (if involved).

Finally, under the regulations governing conditions for listing, if a company proposes to issue shares as part of a business combination, it may need to make a disclosure to the stock exchanges when the board considers or approves such an issue or when any agreement for the issue is entered into, under the general requirement of disclosing price-sensitive information.

In addition to the above, disclosure requirements could be triggered under general corporate law, which apply to both listed and unlisted entities. Also, there would be a distinction between a combination resulting from a simple issue of shares to the acquirer and a tribunal-approved merger, resulting in the issue of shares to existing shareholders, due to the different methodology adopted for the business combination. The disclosures where it is an acquisition by way of a share issue would be pursuant to the notice to shareholders that requires significant disclosures as to the proposed issue, including the objects of the issue, the identity of the acquirer, the price and the basis for arriving at the price, whether the proposed issue will result in any change in control, whether any of the directors is interested in the resolution, the shareholding pattern as a result of the issue and the proposed date of allotment. On the other hand, disclosures in cases of a business combination by way of a merger would entail disclosure of, amongst other things, the proposed terms of the scheme of merger, a report of directors stating the effect of the merger on various stakeholders, a valuation report and supplementary financial statements, if required.

If a business combination by way of an issue of shares triggers the requirement to make a merger filing, then the parties to the combination will also be required to disclose, inter alia, information on the structure of the proposed combination, financials, corporate structure and shareholding details of the parties, information on the parties’ businesses, market-related information (including sales, market shares, competitors, customers and suppliers of the parties) to the Competition Commission of India.

Bidders are required to disclose brief audited financial statements for the preceding three years in a format prescribed by SEBI, which can be presented in generally accepted accounting principles (GAAP). The bidders’ audited annual reports must also be submitted for inspection.

In the case of tender offers, bidders have to disclose the terms of the transaction documents and make the agreements that triggered the tender offer available for inspection. Elsewhere, the target company will need to disclose any price-sensitive information, including material terms of agreements entered into by it that could be price sensitive.

If a business combination triggers the requirement of making a merger filing with the Competition Commission, the acquirer will have to share a copy of the transaction documents with the Commission as part of the filing (although for disclosure to the public, the confidential terms may be redacted).

Directors’ duties in a business combination are not listed specifically, except in the regulations relating to a tender offer for a listed company. The general principles of directors’ duties would therefore apply even in case of a business combination. Indian law recognises the three duties of directors generally seen in common law countries: 

  • a duty of good faith;
  • a duty of care; and
  • a duty of loyalty.

Accordingly, the duty of directors is to act in good faith and for the benefit of the shareholders as a whole and in the best interests of the company, its shareholders, its employees and the community – the duty of good faith; a director is required to exercise his or her duties with due and reasonable care, skill and diligence exercising independent judgment – the duty of care; and a director should avoid any situation where his interests might conflict with that of the company and should not achieve any undue gain or advantage – the duty of loyalty). Also, during a tender offer for shares of a listed company, directors are required to:

  • conduct business in the ordinary course consistent with past practice; and
  • not undertake specified material transactions such as alienate material assets, effect borrowings, issue or buy-back shares and enter/amend material contracts.

With respect to the beneficiaries of directors’ duties, the current position under Indian law is rather ambiguous. Until the enactment of Companies Act 2013, directors’ duties were not codified and courts generally followed English law to hold that directors owe duties to the company and the shareholders as a whole. However, directors’ duties were codified in the 2013 Act and with the intent to be more socially responsible, the Act mandates the directors to consider best interests of other stakeholders such as the employees, the community and the environment, along with that of the company and the shareholders. In light of this, legislative or judicial clarity is awaited with respect to the priority among the various stakeholders.

In case of unlisted target entities, it is not common for boards of directors of Indian companies to establish special or ad hoc committees in business combinations. If some of the directors have a conflict of interest, they are required to recuse themselves from the proceedings in the case of a public company. Where it is a tender offer for shares of listed companies, however, the board of directors is required to constitute a committee of independent directors to provide ‘reasoned recommendations’ on an offer received by the shareholders of the target.

The approach typically adopted by courts in India is to defer to the judgment of the board of directors in takeover situations unless the board has not followed due processes or the directors have not acted with proper skill and care.

It is typical for the board of directors to obtain independent legal advice in relation to a business combination. It is also fairly common for a board of directors to seek independent third-party valuation reports identifying the fair value of the shares/assets proposed to be acquired or sold. In the context of a listed target, fairness opinions are also generally obtained regarding the proposed consideration to be paid or received. Merchant bankers oversee the entire public process offer.

While conflicts of interest of directors have been the subject of judicial scrutiny in India, there has been no significant analysis of conflicts of interest of managers, shareholders or advisers.

While there is no bar on making a hostile tender offer in India, they are not commonly seen. In practice, there are several means available to companies and their promoters to make hostile takeover difficult/expensive to complete.

Further, hostile takeovers in India are not common due to cultural and political issues. There have been instances in the past where corporates attempted hostile takeovers but eventually had to drop their plans due to political opposition. As a result, there have only been a handful of successful hostile takeovers in India.

Indian law provides for a very limited role for directors of listed companies in a hostile tender offer scenario. Besides the general obligation to conduct business of the company in the ordinary course consistent with past practice, there are restrictions on directors’ ability to undertake material transactions while the tender offer is made. For instance, the directors (independent of shareholders’ consent) cannot alienate material assets, effect material borrowings, or issue or buy back voting securities or amend material agreements. This limits the directors’ ability to effect defensive measures such as a poison pill.

Since most listed companies in India are managed by promoters who have influential shareholding positions, counter-offers are frequently used as a defence against tender offers. Other defensive measures include introduction of white knights, measures to increase the market price (ie announcements of potential dividends and buy backs after the open offer), solicitation of larger shareholder groups and challenging the validity of the offer.

As mentioned above, directors are restricted from taking material actions during the period of a tender offer. At a more general level, directors are required to act in the interests of the company and its shareholders and directors would be restricted from supporting the existing management if the same is against the interests of the shareholders of the target. However, there is very limited judicial precedent in India where these issues have been considered.

The ability of the board of directors to reject a hostile takeover bid is very limited, since the Takeover Regulations do not contain any specific provision allowing the board to do so. In case there is an unsolicited bid, the board of directors is required to constitute a committee of independent directors to provide recommendations on the offer to the shareholders. In any event, the fiduciary duties of the board of directors would require the board to find the best possible deal for the shareholders.

Litigation in connection with M&A deals is not common in India.

Although not common in India, one is more likely to see a dispute post-closing when investors seek to enforce their contractual rights to exit.

Shareholder activism in India is not as common as it is in some Western countries. However, there is a growing trend of shareholder activism and it is becoming an increasingly important force in relation to corporate governance in India. Recently, there has been a spurt in the growth of proxy advisory firms in India. These are independent firms that assist retail shareholders (and in some cases even institutional investors) with corporate governance research and voting advisory services.

Some of the popular instances of shareholder activism are:

  • Raymond, where the proposal to sell one of its prime properties to its Chairman and some of his relatives at a heavily discounted price failed to pass as a majority of the institutional investors voted against the proposal;
  • Infosys, where the company acknowledged that ‘actions of activist shareholders may adversely affect our ability to execute our strategic priorities, and could impact the trading value of our securities’ in light of the past shareholder activism; and
  • Fortis Healthcare, where the investors voted on removal of a director (an ally of the promoters), as lower bids for takeover were accepted when higher bids were available – resulting in reopening of the bidding process.

As can be seen from the examples above, the focus of activists in India may take different forms and pertain to a wide range of corporate decisions such as pricing of products, related party transactions, corporate restructuring, appointment/removal and remuneration of executives, etc.

While shareholder activism is growing in India, it is mostly reactive in nature. Therefore, it is not very common for activists to encourage companies to enter into M&A transactions, spin-offs or major divestitures.

Activists generally do not seek to interfere with the completion of announced transactions in India. However, as mentioned in the case of Fortis Healthcare previously, things seem to be changing and shareholder activism is playing a role in M&A transactions. There have also been instances in the past where minority shareholders have sought relief from courts with respect to the buy-back price announced by a company.

Related party transactions have also of late been subjected to increased scrutiny, particularly in cases where the majority shareholders are being perceived as transferring value out of the company.

Platinum Partners

2nd Floor Block E
The MIRA, Plot 1 & 2
Mathura Road Ishwar Nagar
New Delhi 110 065

+91 11 4260 3045

+91 11 4260 3049

karam.dauletsingh@platinumpartners.co.in N/A

Law and Practice

Authors



Platinum Partners has established itself, in a short span of just under 11 years, as a high-impact firm that is able to undertake marquee transactions for a roster of blue-chip clients. Several of the firm's lawyers have spent time with international law firms. The firm brings to its matters the right mix of international experience and standards along with local knowledge and expertise, and is particularly strong in its ability to manage transactions for clients by implementing a hands-on, partner-driven approach. Areas of expertise within M&A include public and private M&A, acquisition and disposal of businesses and business assets, joint ventures, private equity and venture capital transactions, India entry strategies, securities laws and delistings, and merger control. The firm has seven partners and 37 associates.

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