Mergers and Acquisitions in India: Legal Guide & Compliance Checklist

Introduction – Legal Documentation for Mergers and Acquisitions

Mergers and Acquisitions (M&A) are an important component of business growth where businesses aim to grow further by getting market share, diversifying the product range, and improving the operational parameters. M&A in India requires a deep understanding of legalities and a very robust skill to handle voluminous paperwork. Documenting M&A transactions is a complex process, this article assists in offering a checklist for legal documentation required for M&A transactions in India encompassing all the requisite agreements, regulatory filing, compliances, and best practices. In this article, we will explore in detail about Legal Documentation necessary for Mergers and Acquisitions.

Understanding Mergers and Acquisitions in India

Mergers and Acquisitions (M&As) are the merger of two or more companies into one business entity. While mergers are typically the absorption of one company into another, acquisitions occur when one company buys another. Familiarity with the M&A regulatory framework and the crucial stages will enable a business to expedite the M&A process.

Types of Mergers and Acquisitions in India & Their Strategic Benefits

1. Horizontal Mergers: Combination of companies operating in the same industry, often aiming to eliminate competition or gain market share.
2. Vertical Mergers: Involves the merger of companies on different levels of the supply chain to improve their operational efficiency and minimize costs.
3. Conglomerate Mergers: Mergers involving companies in unrelated lines of business to spread business risk.
4. Acquisitions: The purchase of a company, to take control over its operations.

Regulatory Authorities Governing M&A in India: SEBI, RBI & More

• Securities and Exchange Board of India (SEBI): Regulates listed company M&A, ensuring transparency and protection of investor interest.
• Competition Commission of India (CCI): The CCI reviews M&A deals to prevent unfair competition and anti-competitive practices, guarding against monopolistic markets.
• Reserve Bank of India (RBI): Regulates cross-border M&A transactions & compliance with foreign exchange regulations.
• National Company Law Tribunal (NCLT): Sanction schemes of mergers and amalgamations under the Companies Act, 2013.
• Ministry of Corporate Affairs (MCA): Corporate filing and statutory compliance are managed by the MCA.

Key Preliminary Agreements in Mergers and Acquisitions in India

M&A deals often begin with preliminary agreements. Such documents express the intent of the parties and also help with confidentiality at the negotiation stage. Well-drafted preliminary agreements can help avoid disputes and provide clear expectations.

Non-Disclosure Agreement (NDA) in M&A

It is signed when sensitive information related to the M&A process is disclosed to an outside party. When there is no NDA, there is a possibility of erroneous disclosure of confidential or proprietary information.

Key Clauses in an NDA:

• What is confidential information: Clearly state what is considered confidential information.
• Permitted Disclosures: Identifies through whom information may be disclosed and under what conditions.
• Term of Confidentiality: Specifies the length of time that the confidentiality obligation lasts.
• Consequences of Breach: Lists possible remedies if confidentiality is breached.

Memorandum of Understanding (MoU) or Letter of Intent (LoI)

These are preliminary agreements that set out the general framework and approach of the parties, ahead of the legal due diligence and documentation. Though they are non-binding, they frame the transaction.

Common Clauses in MoU/LoI:

• The intent of the Parties: Set forth the preliminary understanding and intent to proceed with the transaction.
• Summary of Proposed Transaction Structure: Essentials of the proposed transaction structure.
• Confidentiality Obligations: Repeat the confidentiality obligations.
• Exclusivity Period: Provides an exclusive window of opportunity for the other party to negotiate.

Legal Due Diligence in M&A: Checklist for Indian Transactions

The Impact of Corporate M&A on Legal Due Diligence: Company and Legal Considerations proper due diligence helps identify the potential risks and liabilities.

Types of Due Diligence in M&A: Financial, Legal & Operational Review

1. Financial Due Diligence: A comprehensive examination of financial statements, accounting records, and financial projections, aimed at evaluating the target company’s financial condition.
2. Legal Due Diligence: Contractual, litigation, regulatory, and ownership rights.
3. Operational Due Diligence: Evaluate the target company’s operations, such as supply chains, facilities, and any key operational risks.
4. Tax Due Diligence: evaluates tax filings, unpaid tax liabilities, and compliance with tax legislation.

Essential Legal Documents for M&A Due Diligence in India

• Incorporation Documents and By-Laws: To confirm the legal existence and double-check that the target company is authorized to conduct its required business deal.
• Contracts: Includes customer, supplier, and employee agreements to measure the obligations and liabilities.
• Litigation Records: Examines past and ongoing litigation to find potential risks.
• Intellectual Property (IP) Ownership: Verifies ownership and protection of key IP assets.
• Records for Regulatory Equivalence: Ensures compliance with market-specific regulations and licenses.

Key Legal Documents Required for Mergers and Acquisitions in India

Accurate legal documentation and execution are the cornerstone of a successful M&A transaction. These documents guarantee that the deal will comply with legal and regulatory requirements, and ensure transparency and smooth execution.

1. SPA: Share Purchase Agreement

The buying party executes the Share Purchase Agreement (SPA) when they purchase shares of the target company. They then receive ownership and control.

Essential Clauses in an SPA:

• Purchase Price Clause: States the amount to be paid and the method of payment.
• Representations and Warranties: Statements made by each party about the accuracy of the information.
• Indemnity Clause: Outlines compensation for any losses incurred due to breaches.
• Closing Conditions: Requirements that must be met to finalize the transaction.

2. Asset Purchase Agreement (APA)

When assets, rather than shares, are purchased, an APA is used. This is a common deal structure where sellers want to carve out certain liabilities.

Key Clauses in an APA:

• Assets to Be Transferred: Description of the assets being acquired.
• Assumption of Liabilities: Details which liabilities the buyer will take on.
• Price Allocation: Allocation of the purchase price among different asset categories.
• Transition Services Agreement: Ensures continuity of business operations in the post-transaction period.

3. Merger/Amalgamation Agreement

This agreement defines the conditions under which two or more companies combine to form a single company. This is important for clarity on the merger terms.

Legal Requirements:

• Subject to the Board of Directors’ Approval.
• Approval by shareholders through a special resolution
• Filing of the merger scheme with the NCLT
• Governed under Section 230-232 of the Companies Act, 2013

4. Scheme of Arrangement

A company and its shareholders or creditors approve a scheme of arrangement, which a court also often uses for complex restructuring.

Approval Process:

• Submission to NCLT
• Shareholder’s and creditors approvals
• Sanction by NCLT

5. Employment Transfer Agreement

An employment transfer agreement helps ensure that employee rights are protected when an M&A transaction includes employee transfer. This is particularly crucial in asset acquisitions.

Key Provisions:

• Integration of Service: Ensures employees will keep their service tenure.
• ContinuationP of Benefits: Assures the continuation of employee benefits.
• Non-Solicitation Clauses: Prevents the seller from poaching key employees.

6. Intellectual Property Assignment Agreement

A separate agreement is entered into for the transfer of the intellectual property when it is a key asset in the deal. This ensures that the buyer acquires complete ownership and control of the IP assets.

Key Considerations:

• Identification of IP Assets: It specifies the IP assets being transferred.
• Representations about IP Ownership: Seller confirms clear title to the IP assets.
• Indemnities for IP Infringement Claims: Protects against potential IP-related disputes.

M&A Compliance and Regulatory Filings in India: A Step-by-Step Guide

This is where regulatory requirements play the most important role in ensuring compliance, as investors face complicated FDI investments, and failing to comply can lead to serious legal issues after they complete the deal.

Regulatory Body Approvals

1. Competition Commission of India (CCI): If the size of the merger exceeds certain prescribed thresholds, a party would be required to file for approval from the CCI.
2. Reserve Bank of India (RBI): A company must comply with the regulations under the Foreign Exchange Management Act, for cross-border transactions, as applicable, and accordingly must approach the Reserve Bank of India (RBI) for cross-border payment if made in foreign exchange.
3. Securities and Exchange Board of India (SEBI): Ensure transparency and compliance with takeover regulations for listed companies.

Compliance Under the Companies Act, 2013

• Filing of Board Resolutions: With the Registrar of Companies (RoC) to get the M&A approved.
• Filing of Scheme of Arrangement: With the NCLT for approval.
• Form MGT-14: Filing of a special resolution passed by the company.
• Issuing New Shares: In the scenario of mergers with share exchanges.

Tax Implications and Stamp Duty in Indian M&A Deals

Important Tax Implications in M&A Transactions

• Capital Gains Tax (CGT): Payable when you transfer your shares/assets, depending on how long you’ve held them.
• Goods and Services Tax (GST): Unless exempt, applicable on the transfer of movable assets.
• Income Tax: Impact on re-organization, goodwill, and transfer pricing.

Stamp Duty

No one can argue that the buyer must pay stamp duty on the transfer of shares and immovable property. The rates depend on the state and the transfer of assets.

Rates of Stamp Duty:

• Transfer of Shares: 0.015% of share value.
• Transfer of Immovable Property: As per state laws, can range from 5%-10%.

Key Issues for the M&A Transaction Legal Document Drafting

• Poor Due Diligence: Failure to identify potential liabilities can result in post-deal disagreements.
• Ambiguous Clauses: Vaguely constructed clauses can lead to misinterpretations and litigation.
• Regulatory Approvals: Important approvals from regulatory authorities may cause delays.
• Valuation Mismatch: If there is a valuation mismatch between the parties, the transaction may not close.
• Cultural and Integration Issues: Integration issues post-merger (especially cross-border), can impact business operations.

Guiding Principles for Drafting M&A Legal Documents

• Clarity and Precision: Make sure that you are not using any ambiguous language.
• Broad Representations and Warranties: Cover all bases and require full disclosure.
• Dispute Resolution Mechanisms to Be Included: Define how to resolve disputes through arbitration or court jurisdiction.
• Regular Legal Updates: Keep up to date with upcoming legal changes and ensure compliance.
• Get Help from Experienced Legal Counsel: Involve lawyers knowledgeable in M&A to draft and review documents.

Learn more by visiting Corrida Legal’s article on Legal Compliance for E-Commerce entities in India.

FAQs on Legal Documentation for Mergers and Acquisitions in India

Q1. What are the primary legal documents required for an M&A transaction?

The key legal documents consist of a Share Purchase Agreement (SPA), Asset Purchase Agreement (APA), Merger / Amalgamation Agreement, Scheme of Arrangement,  Non-Disclosure Agreement (NDA), Memorandum of Understanding (MoU), Employment Transfer Agreement, and Intellectual Property Assignment Agreement.

Q2. What significance does legal due diligence hold in M&A?

Legal due diligence is essential to uncover potential legal risks, confirm regulatory compliance, and validate the target company’s assets, contracts, and liabilities. While this may enable informed decision-making and help mitigate risks post-deal.

Q3. What are the tax implications of M&A in India?

The main tax implications would be capital gains tax on share or asset transfer, GST on transfer of moveable assets, and income tax on restructuring. Tax liability can be minimized through proper tax planning.

Q4. What is the role of NCLT in mergers and amalgamations?

Just as any scheme of arrangement needs the approval of NCLT to make sure it does not go against the Companies Act, 2013, it also ratifies mergers and amalgamations when shareholders, creditors, and regulatory bodies have approved.

Conclusion

Mergers and acquisitions often anchor in sound legal documentation. Whether it be preliminary agreements such as non-disclosure agreements (NDAs) or complex final agreements such as share purchase agreements (SPAs) and asset purchase agreements (APAs), parties must draft these documents carefully to ensure legal compliance and mitigate risks for all involved. Diving into the deep end of the pool with a touted M&A deal requires careful planning and assessment of various risks, regulatory implications, and compliance issues. In the long run, understanding the technicalities of M&A documentation in India is a must regardless of whether you are a corporate executive /legal professional. It is always advisable to seek the help of experienced corporate lawyers to get customized legal advice and to draft M&A documents appropriately.

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