Business Law In India

The Global Reality : Transnational Mergers & Acquisitions & The Law In India
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III. Legal Regime In The US
 
Law in the U.S. is equally accommodating for the host as well as acquirer. The relevant statutes with respect to acquisition of companies in the U.S. have been given in their respective securities regulations. They are: Securities Act of 1933 and the Securities Exchange Act of 1934 including the rules and regulations promulgated by the Securities and Exchange Commissions under both the abovementioned laws.28 The security laws in the U.S. generally requires registration of any offer of securities to the residents. But there are certain exemptions available as well which are the highlight of the Regulation concerning cross border mergers in the U.S. The registration process is compulsory for public companies in the U.S. but there are certain exemptions for non public companies when securities are offered by way of private placement. These exemptions are provided under Regulation D.29 These are the exemptions when the U.S. companies are targets but there are provisions which govern the conduct of companies which are listed on the Exchange. There are two primary requirements under the regulations and they are: a company covered by the Exchange Act may be duty bound to disclose the existence of acquisition negotiations and these apply equally to a non U.S. company whose securities are publicly traded in the U.S. Secondly, Insider Trading, is strictly prohibited under the Exchange Act and is made punishable by imprisonment as well as heavy penalties. The Sec has recently adopted regulations which provide that where a company is having its assets in the U.S and it’s a foreign company, going for an acquisition of another foreign company, then the Act does not apply to that company and all exemptions are provided.30 However certain conditions need to be followed by the company going in for a merger of foreign company whose assets are based in the U.S.31 With regard to competition issues, more properly termed as antitrust issues, the Clayton Act is the primary U.S. statute governing the substantive competition issues arising out of mergers and acquisitions. In addition to the Act aforementioned there is the popular Sherman Act which prohibits unreasonable restraint of trade, attempts to monopolize and monopolization. The Hart-Scott-Rodino Antitrust Improvements Act of 1976  is the statute governing the procedural aspects of the government’s right to review of mergers and acquisitions. The HSR Act also ensures that no merger or acquisition results in restraint of  competition or creation of monopoly.32 Further there are certain regulated industries like telecom, energy, banking, transportation which must comply with special business combination legislation with spewcial reference to those industries.   
The legal regime in the U.S. provides for tax treatment of cross border mergers in a structured form. This means that nothing special is done and only certain categories have been created for the tax treatment to be given to such mergers. These are: Asset Acquisition, Stock Acquisition, Merger or Consolidation and Triangular Merger or Subsidiary Merger.33 The Internal Revenue Code of the U.S. is the primary legislation influencing tax considerations in cases of cross border merger in the form that it affects tax free reorganizations. Section 351 and 358 of the IRC provides for certain tax free reorganizations. The most commonly used forms are forward merger, forward triangular merger and stock swap. In cross border transactions where a U.S. company is being acquired by a non-U.S. company it has to comply with requirements in Section 367 of the IRC which states that the U.S. shareholders of the target should not be in receipt of more than 50% of the total voting power and the total value of the stock of the acquirer.34 The law provides for further exemption in the form of Section 338 Election. It’s a procedure byb which the acquirer while acquiring the stock of the target, can be treated as a single taxable transaction. However this is subject to the acquirer taking at least 80% of the stock of the target company. Thus it comes easy on the target in the manner that the whole transaction even if carried out in different stages is  termed as a solitary one thus lessening the burden of payment of tax on the target on the incomes which he makes by selling away his business. This provision is useful when the target has Net Operating Losses and gains on deemed sale of assets is likely to be offset by the losses. Therefore what should India do? Not much with respect to taxes, it seems as there are already enough laws in place to handle situations of cross border mergers & acquisitions.
What can be done to further the process of cross border mergers is that specific and clearly earmarked exemptions should be provided to the persons investing in an Indian company by way of merger or acquisition. Taxation law in India is governed by the Income Tax Act, 1961 and the law specifically recognizes three major types of restructuring activities. They are: merger or amalgamation, slump sale and demerger or spin off. The Indian law recognizes the sale or purchase of business by way of the word ‘transfer’.35 Section 2(1B) of the Act defines amalgamation and provides that a merger should be pursuant to a scheme of amalgamation.36 The scheme should provide for the inclusion of all the assets and liabilities of the amalgamating company, there is no prescribed time limit for the whole transaction and 75% of shareholders in the amalgamating company should be given shareholding in the amalgamated company as well. In a cross border merger in India where an Indian company is being acquired, there is an exemption in the form of non payment of capital gains tax to the Indian authorities for assets located within the country.37 The definition of amalgamation as given under the Indian Income Tax Act, 1961 implies that an Indian company cannot amalgamate into a foreign company without attracting capital gains tax.  
 
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