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Download e-book The Market for Corporate Control in Japan: M&As, Hostile Takeovers and Regulatory Framework

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This is because domestic banks are not allowed to lend for the acquisition of shares and under the current laws an Indian company is not allowed to provide any financial assistance including security for the acquisition of its shares. However, in such structures creation of security in favour of the lender at times proves to be an insurmountable challenge given the Indian extant exchange control laws do not automatically an approval is required permit a creation of security over the assets or shares of the Indian company in favour of a non-resident.

This could act as a catalyst for other legal changes that will then act as enablers for leveraged buyouts. In , the seeds of leveraged buyouts may perhaps be sown. With the revival of the primary market, Indian companies may also explore raising capital through public offerings to finance deals.

Japan - The Shareholder Rights and Activism Review - Edition 3 - TLR - The Law Reviews

In , several companies were able to raise capital due to the buoyant economic sentiment. Indian companies may also consider tapping the overseas market through American depository receipts ADRs or Global depository receipts GDRs for financing deals. In , stocks were increasingly used as deal currency, one of the most notable being the Sun-Ranbaxy merger.

Having said that, share prices of most listed companies in India have accelerated in the last 6- 8 months and given the bullish market sentiment one would expect the stock prices to rise further in India has not witnessed classic hostile bids in the form and manner seen in other developed economies such as US and the UK. Additionally, some Indian listed companies may even have camouflage shareholding i.

What legislation governs M&A activity in Japan?

In recent years and in , hostile bids in India were seen more in nature of competing bids. This is not to say that hostile takeovers are not possible in the near future. The dilution in aggregate promoter shareholding in some significant listed companies and the improvement in the quality of disclosures coupled with increase in shareholder activism makes a hostile takeover theoretically possible. The Indian market for corporate control is likely to unfold in the manner the Japanese hostile takeover landscape did in the ss.

Japan had a similar share ownership structure whereby shares of publicly traded firm were held by connected shareholders referred to as keiretsu. However, in s the share ownership structure of publicly traded firms in Japan changed significantly wherein the holdings of Japanese financial institutions considered more aligned to keiretsu reduced and the ownership of foreign institutional investors increased.

This change in the corporate ownership structure coupled with the rise in corporate governance standards and increased shareholder activism created a robust market for corporate control. Some of these ingredients are already taking shape in India. While hostile bids are possible, the Indian regulations prohibit conventional defenses such as the "poison pill".

However, "white knight" has been successfully used as a takeover defense in India. The other takeover defense that may possibly work in India is a "poison put". Poison Put are covenants in debt documents which states that if there is a change in control then the debt will be immediately bought back "put" part at a premium "Poison" part and therefore such covenants could potentially be used as takeover defenses in India. In light of the recent trends, the parties should at a fairly early stage examine the anti-trust implication of the transaction including the need and timing of the filing and actions that can be undertaken prior to obtaining CCI's approval to avoid gun jumping.

If the parties foresee an anti-trust implication, then the parties must allocate the anti-trust risk by either a negotiating a general hell and high water clause which requires the buyer to undertake all measures including divestures to comply with anti-trust requirement or b agreeing to a set of divestures as a condition precedent in order to mitigate any anti-trust concern.

Further, deal documents including board resolutions should be carefully drafted to ensure that transactions are accurately characterized and composite or inter connected transactions are not consummated prior to CCI's approval. In competitive bids, parties and the target company's board must examine the anti-trust implications and the certainty of consummation of the transaction before recommending a deal to the shareholders.

While share acquisitions resulting in a change of control rarely results in any significant employee related issues except some post-integration changes, other forms of corporate restructuring such as merger, spin-offs raise a number of employee related issues which parties should address at the earliest. India has strong trade unions and in the past these unions have had profound impact on deal structures.

The concern is more acute in the case of spin-offs as it results in the transfer of employees from one company to another company. It is important for the parties while deciding on a deal structure to calibrate the employment related risks.

General Overview

Even in global corporate restructurings, if the entities have employees in India then these risks have to be assessed. With the positive change in the economic climate and spate of regulatory changes in the pipeline, India is poised for a new era of deal activity. Significant economic and regulatory factors that will influence deal activity are as follows It is to be noted that all the provisions of the new Companies Act, are not in force but can be expected to come in force in However, it is to be noted that amendments need to be made to the Companies Act, to make leveraged buyout transactions possible.

In India, a business transfer as a going concern is commonly referred to as "slump sale". It is to be noted that for spin-offs there are other local taxes such as value added tax and stamp duty that needs to be considered.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Last Updated: 19 January Nishith Desai Associates. Your LinkedIn Connections at Firm. Dear Friends , marked a remarkable change in how the Indian economy was viewed internationally when the largest democracy in the world gave itself a new and stable government.

Due Diligence In recent years, acquirers especially foreign acquirers have lost significant value by entering into transactions without conducting adequate due diligence on target companies and the controlling shareholders also referred to as promoters in the Indian context. Given, the tax concerns in India, tax indemnity has also occupied a central theme in the negotiations.

Sellers and targets are more reluctant to provide a full indemnity cover for an open ended duration. In some instances, acquirers have held back a certain portion of the consideration in escrow as cover for the indemnity obligations of the seller. MAC- In recent years due to increased global uncertainty and volatility, the material adverse change MAC clause has emerged as the single most important covenant in deal documents. T he MAC clause serves as an import ant function in risk allocation.

Acquirers have used MAC clauses to either not close a deal or re-negotiate a lower consideration.


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Whilst, MAC clauses have not been tested in India courts, the Indian takeover code tacitly recognizes such arrangements as it allows an acquirer to withdraw an open offer if the underlying transaction which triggered the open offer falls through. Termination Fees - Termination fees i. Similarly, in some deals, reverse termination fees are also being negotiated. Earn-Outs - Indian businesses are still reliant on the founding families also promoters. Further, foreign acquirers may not always have the local knowledge or experti se that is required to run a busi ness in India.

In order to bridge these gaps and other valuation concerns, parties are increasingly negotiating earn-out covenants in deal documents. While earn outs help keep the promoter on board and therefore the new acquirer benefits from the knowledge of the existing management, it has largely been used in domestic deals since an acquisition of shares by a foreign acquirer from a resident seller for a deferred consideration requires prior RBI approval which approval is not granted very often.

Shareholder Activism In , India witnessed an increase in shareholder activism. Sectors and Industries In , several sectors are likely to see increased deal activity.

What impact have recent legislative changes had on the nature and amount of M&A activity?

Role of the Board of Directors Perhaps, the most important theme in will be- ' The role and liability of Boards '. Thus, far the Government has lived up to its pledge and the following actions are illustrative of that-: The Government has decided not to appeal the decision of the Bombay High Court in the Shell and Vodafone transfer pricing cases wherein the Bombay High Court had ruled against the Government.

One of instructions requires officers to carefully and judiciously examine cases before scrutinizing them or appealing before the higher courts. Take Private Transactions As discussed earlier, the current takeover and delisting regulations do not permit the acquirer to take the company private pursuant to an open offer. Deal Financing 1. Leveraged Buyouts In India, private equity investors have largely provided growth capital thus far and leveraged buyouts in the classic sense have been absent. Private Equity and Public Offerings With the revival of the primary market, Indian companies may also explore raising capital through public offerings to finance deals.

Stock as Deal Currency In , stocks were increasingly used as deal currency, one of the most notable being the Sun-Ranbaxy merger.


  • General Overview.
  • CONTENT DEVELOPMENT;
  • What impact have recent legislative changes had on the nature and amount of M&A activity?.

Hostile Bids India has not witnessed classic hostile bids in the form and manner seen in other developed economies such as US and the UK. Anti-Trust Assessment In light of the recent trends, the parties should at a fairly early stage examine the anti-trust implication of the transaction including the need and timing of the filing and actions that can be undertaken prior to obtaining CCI's approval to avoid gun jumping.

Human Resource Considerations While share acquisitions resulting in a change of control rarely results in any significant employee related issues except some post-integration changes, other forms of corporate restructuring such as merger, spin-offs raise a number of employee related issues which parties should address at the earliest.

Significant economic and regulatory factors that will influence deal activity are as follows-: Government's ability to undertake and implement more structural economic reforms such as the GST; Government's ability to rationalize the Companies Act, and thereafter implement the law in totality including setting up the specialized tribunals for corporate dispute resolution as proposed i.

SEBI's ability to enact clear regulations for take private transactions and delisting; In so far as the stakeholders are concerned, the following are the key tak eaways-: Boards -: Under the current landscape, the Board will play a more central role in deal making and in protecting the interests of all the stakeholders and therefore will have to make considered decisions.

Footnotes 1. Supra Note 6. The provisions are not in force as on this date. Do you have a Question or Comment? Interested in the next Webinar on this Topic? Click here to register your Interest. Email Firm. View Website. Events from this Firm. More from this Firm. More from this Author. News About this Firm. The amendments have been made effective immediately and are introduced with an aim to boost the economy.

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