Merger&Acquisition

Although the finance ministry has been in favour of consolidation, there have been repeated statements that such mergers would be voluntary and the initiatives should come from the banks which desire to consolidate. The flip side of this is that the banks would have to first convince their unions to accept any merger .

In India, a JV is generally understood as a technical and financial collaboration between two existing companies. Typically, in a JV, one foreign company comes together with an Indian company to form a third one, either a private or public limited one, and hold agreed portions of its share capital. An acquisition , on the other hand, is a complete takeover of a company, either through a purchase of shares, assets or the entire business.

As JVs and acquisitions differ greatly in their utility, one of the most important decisions for any company is whether or not a JV will be best suited to achieve its corporate goals, as opposed to an acquisition or simple organic growth. A company that needs international technology which has not been implemented in India can consider creating a JV with a foreign company that has such technology. On the other hand, an acquisi tion may be better for a company that seeks to gain market share or an exclusive distribution channel. Structurally, a JV offers significant contractual support in respect of coordination and co-operation with a partner and, at the same time, alleviates the integration challenges presented by an acquisi tion. Instances when a JV is preferred to an acquisition are:

Ð'* When the assets are difficult to separate.Assuming that a company manufactures two different products from one factory, if an acquirer were to buy out such a company, it will be saddled with assets that it does not need. Therefore, if a JV is arranged, the required assets can be structured to flow into the JV company without the other undesired assets.

Ð'* When a full acquisition will increase management costs. In a corporate acquisition , the acquirer acquires an existing corps of employees having their own routine and culture. Integrating such employees can prove difficult.

Ð'* When valuation is difficult. A JV is an effective and easy solution when the valuation of a target company is difficult.

Ð'* When legal or regulatory constraints make an acquisition difficult. Generally, JVs have lesser regulatory constraints and are easier to put in place.

Assuming that a JV is the preferred mode of alliance, one issue that must be dealt with at the contracting stage is control and management of the JV company. The shareholders' agreement can prescribe the number of directors on the board, the quorum for board meetings and general meetings, the mode of day-to-day management of the company, the procedure to be followed on the bankruptcy of a JV partner, etc. To prevent a deadlock, the chairman of the board of directors can be given a casting vote.

Protecting confidential information is very important in JVs. To protect sensitive business information from being divulged to others, confidentiality and non-disclosure agreements must be entered into prior to commencing negotiations. Relevant clauses should also be incorporated in the shareholders' agreement. Indian courts enforce such agreements and grant injunctions on adequate proof of breach or proposed breach.

In many instances, companies route their investments into an Indian JV company through an offshore tax jurisdiction. India has double taxation avoidance agreements (DTAA) with many countries. Many foreign companies route their investments through Mauritius because under the India-Mauritius DTAA, a Mauritius resident does not pay any capital gains tax on a transfer of shares of an Indian company. Cyprus is another offshore destination gaining popularity. On the flip side, a JV is also susceptible to various other hazards such as misappropriation of knowledge, hold-up by the JV partner, etc., which may make an acquisition more attractive.

STRUCTURING an acquisition so as to optimise tax and operational benefits is extremely important. For example, amalgamating two companies by following the procedure under the Companies Act, 1956, can save capital gains tax that may otherwise be applicable on an asset or share acquisi tion deal. However, the court procedure can be long drawn and requires compliance of a number of procedural formalities.

Likewise, although a share purchase transaction can be completed fairly quickly, it requires a much higher level of due diligence on the company because, effectively, the buyer of the shares becomes the owner of the company and inherits all its liabilities also. As such, no compromise should be made on due diligence, and it is imperative to require the seller to resolve all company compliance matters before closing. An asset purchase transaction attracts capital gains tax and VAT on the assets, and is usually the easiest to close.

An acquisition of a listed company can trigger the Securities Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the Takeover Regulations), as amended from time to time. If this occurs, the takeover regulations have to be followed and an open offer has to be made to at least 20% of a target company's existing shareholders. In a buoyant stock market, it can, sometimes, be difficult to successfully close an open offer.

Further, in cross-border acquisitions , it is important to comply with the government's foreign investment regulations. Various industry sectors in India such as telecommunication, banking , insurance, aviation, defence, etc., are restricted to foreign investment, and compliance of sectoral caps and sector-specific guidelines is imperative. The Vodafone-Hutchison deal is a classic example of the importance of complying with foreign investment regulations and obtaining the requisite government approvals at the very beginning. Otherwise, the foreign investor runs a high risk of post-closing scrutiny.

On the anvil is a competition law, similar to the Hart-Scott-Rodino Act in the US and EU competition legislation. Once notified, most mega

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