Description
Legal Aspects of Corporate Restructuring
Legal Aspects of Corporate Restructuring
Presentation context & focus
?
To understand the forms of M&A and Restructuring, including slump-sale, share sale, asset sale, through Scheme u/s. 391, demerger etc.
To identify key challenges in some of these processes.
?
2
Management Objectives Every one today wants to be a market leader or sustain its position, produce better quality, sell larger quantity, but with
? less
cost, ? less people, ? in less time and ? without any competition!
3
Why Restructuring?
1. 2. 3. 4. 5.
Consolidation or focus on corecompetencies. Global acquisition or sale, resulting in change in India Family separation Restructuring to defend a potential takeover Only carried out as Tax planning exercise
4
Forms of Restructuring
1. Slump Sale of Business Undertaking. 2. Asset Purchase (Plant/ Building/ Brands etc).
3. Share Purchase (Secondary/ Primary).
4. Court Schemes including (Merger or Amalgamation/ Demergers/ Capital Restructuring including reduction/ buy-back).
5
Parties involved
?
?
COMPANY
?
?
? ? ? ?
Owners Management Shareholders Creditors Statutory Bodies Advisors Other Side External Parties
6
Challenges (unforeseen….)
Internal
? ? ?
External
? ? ?
Owners
Other Side Statutory Bodies External Advisors Unknown factors
Shareholders
Creditors
?
?
Internal Advisors
7
Internal issues
1. Owners
?
? ?
Family related Personality driven Inability to run or grow business
2. Management
? ?
No Effective management Personality driven
8
Internal issues – contd..
3. Shareholders
?
? ? ?
Block shareholders Institutional/ PE Investors Strategic (Foreign Collaborators) Small Shareholders
4. Creditors
? ? ?
Secured Unsecured Family / Group Creditors
9
Internal issues – contd..
5. Internal Advisors
? ? ? ?
Investment Bankers Law firms Auditors Other Consultants
10
External Issues – contd..
1. Other Side
?
? ?
Very aggressive Lack of Clarity Change of Assumptions
2. Statutory Bodies (copy book style)
? ? ? ? ?
RBI/ Authorised Dealers FIPB SEBI/ Stock Exchanges RoC/ Liquidator Industry Specific
11
External issues – contd..
3. External
?
? ? ? ? ? ? ? ?
PIL (Public interest litigation) & PIL (Private Interest litigation - Competition) Political Intervention Media/ Press Finding Local advisors Lack of Public Information Cultural issues Poor processes Aggressive timelines
12
Slump Sale – Issues
Legal Concerns ? Extensive diligence and indemnity provisions – significantly similar to a full entity acquisition. ? Documentation – (reps & indemnity heavily negotiated) ? Difficulty in getting regulatory approvals/ license/ consents transferred. ? Assignment of third party contracts (vendors/ key customers) ? Tenancy/ leases may require consent
13
Slump sale contd..
?
?
?
?
?
Consents from Shareholders (compulsorily through postal ballot). Consent from Creditors (secured & unsecured. depending upon the agreements and need). Employees – to preserve not “less favourable” status. Stamp duty on Immovable property and IP Assignment; though Sales Tax saved. Could get challenged before any Court including industrial/ labour and the scrutiny could go well beyond in all directions!
14
Asset Purchases - Issues
?
Acquirer may “cherry pick” pre-identified assets Legal Concerns:
?
?
? ? ?
Stamp duty on immovable property and IP Assignment (5 - 13%); Sales tax on movable, and IP in some states, (8 - 12%) Target Employees – to be hired by Acquirer Assignment of Contracts/ tenancy may require consent. Statutory approvals/Permits and licenses – generally to be freshly obtained.
15
Asset Purchase contd…
?
?
?
Carry forward of losses of the target not possible in the hands of the Acquirer. Capital Gains for the Seller and inefficient for Seller Shareholders. Tax Holiday denied to undertakings formed by splitting or reconstruction or acquisition of used Plant & Equipment.
16
Share Acquisitions - Issues
Legal Concerns:
?
?
? ?
?
Extensive diligence and indemnity provisions – significantly similar to a full entity acquisition. Documentation – (reps & indemnity heavily negotiated). Insider Trading issues. FIPB/ RBI approval in case of non-automatic industry. Structuring of investment vehicles.
17
Contd..
Takeover Regulations apply to listed companies (certain issues unresolved and provisions ambiguous). SEBI DIP guidelines – allotment to be made within 15 days and other provisions. FIPB permission required if Press Note 18 is applicable (New issue of holding cum operating company) RBI Approval in certain cases.
18
?
?
?
?
Court Schemes u/s 391- Issues
? ?
?
?
? ?
Extensive due-diligence. Time consuming process, starting from Stock Exchange notice of one month – (SE heading towards scrutiny of commercial terms). Process gets delayed because of Court vacations. Valuation questioned – New requirement of „fairness opinion? from independent Merchant Bankers. Role of Court perceived as anachronistic. Third party contracts/ immovable property leases transfer not automatic.
19
Issues contd..
?
?
? ? ?
Creative structuring has led to discomfort among regulators, since Court is only a referee and its focus is primarily on technical compliance and self-certification. Stamp duty on order of amalgamation virtually in all states. Objections from Regional Director/ Liquidator. Objections from minority shareholders. Public Interest Litigation.
20
Common challenges!
?
?
?
? ?
To expect Companies to 100% transparent during the due-diligence – still a distant dream! Documentation - Representation & warranties – lawyers delight! To expect Regulators to give clarity – hope against hope! Managing Advisors – increasing challenge! Indian Promoters – all MBAs!
21
THANK YOU Nitin Potdar [email protected]
22
doc_130380863.pptx
Legal Aspects of Corporate Restructuring
Legal Aspects of Corporate Restructuring
Presentation context & focus
?
To understand the forms of M&A and Restructuring, including slump-sale, share sale, asset sale, through Scheme u/s. 391, demerger etc.
To identify key challenges in some of these processes.
?
2
Management Objectives Every one today wants to be a market leader or sustain its position, produce better quality, sell larger quantity, but with
? less
cost, ? less people, ? in less time and ? without any competition!
3
Why Restructuring?
1. 2. 3. 4. 5.
Consolidation or focus on corecompetencies. Global acquisition or sale, resulting in change in India Family separation Restructuring to defend a potential takeover Only carried out as Tax planning exercise
4
Forms of Restructuring
1. Slump Sale of Business Undertaking. 2. Asset Purchase (Plant/ Building/ Brands etc).
3. Share Purchase (Secondary/ Primary).
4. Court Schemes including (Merger or Amalgamation/ Demergers/ Capital Restructuring including reduction/ buy-back).
5
Parties involved
?
?
COMPANY
?
?
? ? ? ?
Owners Management Shareholders Creditors Statutory Bodies Advisors Other Side External Parties
6
Challenges (unforeseen….)
Internal
? ? ?
External
? ? ?
Owners
Other Side Statutory Bodies External Advisors Unknown factors
Shareholders
Creditors
?
?
Internal Advisors
7
Internal issues
1. Owners
?
? ?
Family related Personality driven Inability to run or grow business
2. Management
? ?
No Effective management Personality driven
8
Internal issues – contd..
3. Shareholders
?
? ? ?
Block shareholders Institutional/ PE Investors Strategic (Foreign Collaborators) Small Shareholders
4. Creditors
? ? ?
Secured Unsecured Family / Group Creditors
9
Internal issues – contd..
5. Internal Advisors
? ? ? ?
Investment Bankers Law firms Auditors Other Consultants
10
External Issues – contd..
1. Other Side
?
? ?
Very aggressive Lack of Clarity Change of Assumptions
2. Statutory Bodies (copy book style)
? ? ? ? ?
RBI/ Authorised Dealers FIPB SEBI/ Stock Exchanges RoC/ Liquidator Industry Specific
11
External issues – contd..
3. External
?
? ? ? ? ? ? ? ?
PIL (Public interest litigation) & PIL (Private Interest litigation - Competition) Political Intervention Media/ Press Finding Local advisors Lack of Public Information Cultural issues Poor processes Aggressive timelines
12
Slump Sale – Issues
Legal Concerns ? Extensive diligence and indemnity provisions – significantly similar to a full entity acquisition. ? Documentation – (reps & indemnity heavily negotiated) ? Difficulty in getting regulatory approvals/ license/ consents transferred. ? Assignment of third party contracts (vendors/ key customers) ? Tenancy/ leases may require consent
13
Slump sale contd..
?
?
?
?
?
Consents from Shareholders (compulsorily through postal ballot). Consent from Creditors (secured & unsecured. depending upon the agreements and need). Employees – to preserve not “less favourable” status. Stamp duty on Immovable property and IP Assignment; though Sales Tax saved. Could get challenged before any Court including industrial/ labour and the scrutiny could go well beyond in all directions!
14
Asset Purchases - Issues
?
Acquirer may “cherry pick” pre-identified assets Legal Concerns:
?
?
? ? ?
Stamp duty on immovable property and IP Assignment (5 - 13%); Sales tax on movable, and IP in some states, (8 - 12%) Target Employees – to be hired by Acquirer Assignment of Contracts/ tenancy may require consent. Statutory approvals/Permits and licenses – generally to be freshly obtained.
15
Asset Purchase contd…
?
?
?
Carry forward of losses of the target not possible in the hands of the Acquirer. Capital Gains for the Seller and inefficient for Seller Shareholders. Tax Holiday denied to undertakings formed by splitting or reconstruction or acquisition of used Plant & Equipment.
16
Share Acquisitions - Issues
Legal Concerns:
?
?
? ?
?
Extensive diligence and indemnity provisions – significantly similar to a full entity acquisition. Documentation – (reps & indemnity heavily negotiated). Insider Trading issues. FIPB/ RBI approval in case of non-automatic industry. Structuring of investment vehicles.
17
Contd..
Takeover Regulations apply to listed companies (certain issues unresolved and provisions ambiguous). SEBI DIP guidelines – allotment to be made within 15 days and other provisions. FIPB permission required if Press Note 18 is applicable (New issue of holding cum operating company) RBI Approval in certain cases.
18
?
?
?
?
Court Schemes u/s 391- Issues
? ?
?
?
? ?
Extensive due-diligence. Time consuming process, starting from Stock Exchange notice of one month – (SE heading towards scrutiny of commercial terms). Process gets delayed because of Court vacations. Valuation questioned – New requirement of „fairness opinion? from independent Merchant Bankers. Role of Court perceived as anachronistic. Third party contracts/ immovable property leases transfer not automatic.
19
Issues contd..
?
?
? ? ?
Creative structuring has led to discomfort among regulators, since Court is only a referee and its focus is primarily on technical compliance and self-certification. Stamp duty on order of amalgamation virtually in all states. Objections from Regional Director/ Liquidator. Objections from minority shareholders. Public Interest Litigation.
20
Common challenges!
?
?
?
? ?
To expect Companies to 100% transparent during the due-diligence – still a distant dream! Documentation - Representation & warranties – lawyers delight! To expect Regulators to give clarity – hope against hope! Managing Advisors – increasing challenge! Indian Promoters – all MBAs!
21
THANK YOU Nitin Potdar [email protected]
22
doc_130380863.pptx