| The Global Reality : Transnational Mergers & Acquisitions & The Law In India |
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1. For more on the topic of existing Indian law on mergers and acquisitions, Please See, MERGERS et al by S Ramanujam, 2nd edn., (2006), Wadhwa Nagpur at pp. 3, 14, 41, 47, 56, 97, 101, 119 & 123. |
2. This is borne out by the fact that Jindal Steel & Power Ltd. Has recently won a contract to mine Bolivia’s huge El Mutun iron ore deposit, and the rival bidders in for the mines were all companies from third world including Mittal Steel, China’s Shangdong Luneng Hengyuan Trading Group, Brazil’s EBX Group and a joint venture of two Argentinean companies. Source: EAST INDIA COMPANY IN REVERSE by Swaminathan S Anklesaria Aiyar as appeared in THE ECONOMIC TIMES, NEW DELHI EDN. Dated 7th Jun 2006. |
3. For more on the topic of Indian IT companies going for acquisitions abroad, Please See, PUTTING IT IN A SHOPPING BAG [NETWORKED] by PP Thimmaya as appeared in The ECONOMIC TIMES, NEW DELHI EDN. Dated 8th Jun 2006. |
4. This applies equally for the targets as well as acquirers. |
5. The law relating to merger activity occurring within the country is given in Sections 391-396, Companies Act, 1956. For more on the topic, See Dr.K.R. Chandratare’s CORPORATE RESTRUCTURING, Chapter-I, COMPROMISES, ARRANGEMENTS & AMALGAMATIONS at pp.41. |
6. For example, there are provisions in the Indian law under Section 81 A of the Companies Act, 1956. |
7. Fears of adverse competition may be allayed by formulating proper policy with respect to the competition regime which is to prevail in any country. In India, the Competition Act, 2002 in Section 6 provides for regulation of combinations in the Indian market. But it is hereby proposed in the paper to have a stricter regime in the form of a competition policy which would facilitate the analysis of the concept on a functional level. Examples could be drawn from other countries where such competition policies exist or have been instrumental in driving business sale and purchases. FOR MORE on the topic, See COMPETITION POLICY & THE COMPETITIVE PROCESS: EUROPE IN THE 1990s by Alan Hughes [At the UNIVERSITY OF CAMBRIDGE, Small Business Research Center Department of Applied Economics] as given in TAKEOVERS by Andy Cosh & Alan Hughes, Vol.III at pp.217. Also See, THE IMPACT OF MERGER: A SURVEY OF EMPIRICAL EVIDENCE FOR THE U.K. by Alan Hughes as given in J.Fariburn & J.A. Kay (eds.) of MERGER & MERGER POLICY, Oxford University Press (1989) & SMALL FIRMS MERGER ACTIVITY & COMPETITION POLICY by Alan Hughes as given in Barber J. Metcalfe and Porteous, M. (eds.) of BARRIERS TO GROWTH OF SMALL FIRMS, Routledge, London (1989). |
8. The regulation of cross border mergers and acquisitions has been mooted in the report of the panel under Dr.J.J. Irani which advocated for strong measures to ensure a law in place for cross border mergers and acquisitions. Also See, CHANGING LANDSCAPE OF INDIAN M&As by Rajiv Memani as appeared in THE ECONOMIC TIMES, NEW DELHI ed. For an international perspective on the topic, Please See A GUIDE TO TAKEOVERS: THEORY, EVIDENCE & REGULATION by Roberta Romano [as taken from the Yale Journal on Regulation: Vol.9: 119, 1992] & given in TAKEOVERS by Andy Cosh & Alan Hughes, Vol.III at pp. 267. The abovementioned article provides a nontechnical analysis and synthesis of the scholarship on takeovers and their regulation and seeks to ease the informational problem for legislators and policymakers. |
9. This issue has to be viewed in light of the fact that the constitution of a new board of directors should not result in reduction of shareholder’s rights. Therefore a conciliatory structure of Board of Directors is required in order to avoid any anti takeover protection approach on part of the target company. |
10. For a detailed discussion on the topic related to acculturation, Please See ACCULTURATION IN MERGERS & ACQUISITIONS by Afsaneh Nahavandi & Ali R. Malekzadeh [Arizona State University West Campus] as given in TAKEOVERS by Andy Cosh & Alan Hughes, Vol.III, Ashgate, at pp. 79. |
11. This may be achieved through a strategic or coordinating committee or through a fully common or partly common board of directors. This is necessary as whenever an Indian company enters into a joint venture with a technologically superior company, it may have to compromise on certain aspects which may not be in the best interests of the JV in the long run. |
12. All the aspects being mentioned at this stage in the paper have been discussed briefly at a later stage in the paper. |
13. This makes it aptly clear that at any stage, cross border mergers remains far more complicated & difficult to implement than their domestic counterparts in relation to investor skepticism of issues specific to cross border M&As. |
14. Antitrust issues may not be too much of a problem for a country like India but with an emphasis on a stricter competition regime and a Competition Act, 2002 already in place, there is an effort to move towards a legal regime that accommodates antitrust issues like those prevalent in the U.S. For a detailed look on the aspect of the impact of the antitrust policy on the mergers in the U.S., Please See, DID ANTITRUST POLICY CAUSE THE GREAT MERGER WAVE? by George Bittlingmayer [Washington University] as given in TAKEOVERS by Andy Cosh & Alan Hughes, Vol.I, Ashgate, at pp. 85. |
15. For more on the topic, Please See, INTERNATIONAL MERGERS & ACQUISITIONS, JOINT VENTURES & BEYOND by Ben Daniel & Rosenblum (1998) at pp. 3-25. For more on the topic with respect to impact of globalization on the developing countries, See UNCTAD Annual Report 1999. |
16. This could be aptly demonstrated by two recent incidents in the Indian aviation sector & the global steel sector. The merger of Sahara India (an airline company formerly owned by SAHARA INDIA PARIWAR) into Jet Airways (another private sector airline company) brings out the aspect of economic necessity. [For a detailed analysis of the merger, Please See, A MARRIAGE, BUT CONDITIONS APPLY by Pradeep S. Mehta in THE ECONOMIC TIMES, NEW DELHI edn. On the other hand we have Mittal Steel aggressively vouching for Arcelor, the second biggest steel maker of the world. However doubts have been raised over as to whether India needs to be concerned about the problem which Mittal Steel faces. For a discussion on the issue, Please See, IS ARCELOR AN INDIAN PROBLEM [POLITALK] by Narendar Pani in THE ECONOMIC TIMES, NEW DELHI ed. |
17. This generally happens in the U.S. where such benefits are provided under GAAP. As to how this is done, Please See, THE LAW & FINANCE OF CORPORATE ACQUISITIONS by Gilson & Black at pp. 510. Accounting Treatment with respect to domestic mergers & acquisitions in India is governed by the Accounting Standard –14. For more on the Accounting Standard –14, Please See, CORPORATE RESTRUCTURING by Dr.K.R. Chandratare, CHAPTER- I, COMPROMISES, ARRANGEMENTS & AMALGAMATIONS at pp. 223. |
18. For a detailed look at the role of investment bankers throughout the country, Please See, DEALS OF THE YEAR [SPECIAL REPORT] as appeared in BUSINESS INDIA dtd. Dec.19, 2005- January 1, 2006 on the business being done by investment banks throughout the country. Also See, INDIA INC RULES DEAL ST’ 05 by George Smith Alexander as appeared in THE ECONOMIC TIMES, NEW DELHI ed.; M&A DISPARITIES OFFER RISK FREE OPPORTUNITIES FOR INVESTORS [newsprint] as appeared in THE ECONOMIC TIMES, NEW DELHI ed.; YEAR OF DEALS by Gargi Banerjee as appeared in BUSINESSWORLD dtd. 17 October 2005 at pp. 34; MERGERMANIA 2005 by Brian Carvalho as appeared in BUSINES TODAY dtd. February 27, 2005 at pp. 68; THE GLOBAL INDIAN TAKEOVER by Swaminathan S Anklesaria Aiyar as appeared in THE TIMES OF INDIA, NEW DELHI ed.; VALUE OF M&A DEALS ON THE RISE [newsprint] as appeared in THE ECONOMIC TIMES, NEW DELHI ed. |
19. For more on the topic, Please See, United Nations Conference on Trade & Development (UNCTAD) WORLD INVESTMENT REPORT 1998 at pp. 202-204. |
20. For a detailed overview of the topic, Please See, MERGERS & ACQUISITIONS YEARBOK 1997 OF INTERNATIONAL FINANCIAL LAW REVIEW by M.M. Hickman & B.R. Miller (Euromoney Publications, London, 1997) at pp. 15-18. |
21. This law embodied the Sino-Foreign Equity Joint Venture law of 1979 as amended in 1990, the Sino-Foreign Contractual Joint Venture law of 1988 and Foreign Wholly Owned Enterprise law of 1986. |
22. In this regard, the ‘China Strategic Phenomenon’ holds importance as it provided a new way to liquidate state assets by channelizing international capital into China, which will lead to China’s utilization of foreign investment to a new level. |
23. Chapter 7 of the law deals with mergers and acquisitions and Chapter 7 entitled Company Merger and Division includes only 7 short articles. |
24. An analogy could be drawn with Section 394A of the Companies Act, 1956 whereby after meeting of the shareholders and other interested parties and approval of the scheme of amalgamation, a notice should be sent to the respective state government by the court or the parties concerned. The purpose behind such a function of the provision is to bring to light those facts that may have escaped the attention of the courts or may have not been presented before the courts. |
25. The legal conditions enumerated in the first regulation related to establishment of a company which includes a minimum of 25% of foreign registered capital and certain other conditions as enumerated in the articles. The second Regulation related to introduction of holding or umbrella company into China. This has mandated heavy investment by the foreign company in China. The investment should be no less that U.S. $400 million and over U.S. $10 million paid in capital in China with more than three approved projects or to have more than U.S. $30 million paid in capital in more than 10 investment enterprises in China. The minimum registered capital of such a company must be U.S. $30 million and its final approval has to be made by the MOFTEC. [WITH RESEPCT TO ENTRY OF FOREIGN INVESTORS IN CHINA, ARTICLE 6 of the abovementioned law holds importance as it provides for A FOREIGN INVESTENT HOLDING COMPANY to directly invest or jointly invest with other foreign investors through M&As into domestic enterprises in China to turn them into foreign investment joint ventures or subsidiaries by injecting 25% foreign capital |
26. For more on the interim provisions, See Article 3 of the Interim Provision abovementioned. |
27. Rules and regulations relating to foreign investment in the country need to be strengthened and codified so that a straight formula is available in determining the investment limits and at the same time allowing foreign enterprises to enter freely in the market. This holds true for various sectors of the industry. |
28. Recently Regulation M-A was enacted by the SEC under the Exchange Act in an attempt to bring together and harmonize in one Regulation the existing Exchange Act. |
29. Please See, Rule 504, 505 & 506 of Regulation D at www.cfss.com for more details. Also See, SECURITIES REGULATION, CASEES & MATERIALS by Cox, Hillman & Langevoort, Aspen Law Business (2001) at pp. 430, 530, 532 & 536; SECUTRITITES REGULATION by Louiss Loss & Joel Seligman, Aspen Law & Business, 3rd ed. (2000); SECURITIES REGULATION CASES & MATERIALS by Jennings, University Casebook Series (1998); SECURITIES REGULATION, CASES & MATERIALS by David L. Ratner & Thomas Lev, 5th ed. (1996) – Chapter 13, Takeovers & Tender Offers at pp.758. |
30. Such incentives can increase the inflow of foreign investment within the country. |
| 31. Supra note 27. |
32. Both the Federal Trade Commission and the U.S. Department of Justice has powers to challenge any merger or acquisition. |
33. For more details on the tax structure and the treatment given to mergers, Please See, M&A FROM PLANNING TO INTEGRATION (EXECUTIVE MBA SERIES) by Robert J. Borghese & Paul F. Borghese, Tata Mc Graw Hill Edn. (2004) at pp. 83 [Chapter 9- Step 6: Selecting the appropriate Legal & Tax Structures for the Transaction] |
| 34. Please See, Section 367, Internal Revenue Code. |
35. The word ‘transfer’ has been defined in Section 2(47), Income Tax Act, 1961. |
36. For a specimen of the scheme of amalgamation under Indian law, Please See, CORPORATE RESTRUCTURING by Dr.K.R. Chandratare, at pp. 241. |
37. This is in stark comparison to what the Indian law provides. It includes within the ambit of the word ‘transfer’, the transfer of shares as well. This is in reference to what happens between the amalgamating and the amalgamated company in relation to their shareholders. Please See, Commissioner of Income Tax v Mrs. Grace Collins & Anr., [2001] 248 ITR 323 (SC). |
38. However the mergers that qualify for investigation are again subject to the law of the European Community. Please note that article 21(2) of the European Community Regulation on the Control of Concentrations between undertakings (Regulation 4064/89). The effect of this provision is in essence that large mergers with a European dimension are for the European competition authorities to investigate and report on. Member states are precluded from applying national legislation on competition to such mergers. The E.C. have clear powers to block or clear large cross border mergers. There are only three exceptions where such supervision is disallowed and the national legislation may apply which are: (i) where under Art. 9, the EC decides to refer the merger to the English authorities on the grounds that it will impede competition; (ii) where under Art.21(3), the U.K. authorities seek to protect legitimate interests such as plurality of the media, public security and prudential rules, that would not be taken into account by the E.C. & (iii) where the merger relates to military activities and the U.K. takes measures under Art. 223(1)(b) of the EC treaty to prevent the parties notifying the merger to the European Commission. [SOURCE: WEINBERG & BLANK ON TAKEOVERS & MERGERS, VOL. I, Sweet & Maxwell Publications, London at pp. 3119- PART 3- MERGER LEGISLATION IN THE U.K., Section 13] |
39. Please See, WEINBERG & BLANK ON TAKEOVERS & MERGERS, VOL. I, Sweet & Maxwell Publications, at p. 3119. |
| 40. See Section 64(4)(a), Fair Trading Act, 1973. |
| 41. See Section 64(4)(b), Fair Trading Act, 1973. |
| 42. See Section 81(1)-(3), Fair Trading Act, 1973. |
| 43. See Section 92(1), Fair Trading Act, 1973. |
44. These classifications for domestic mergers are made on the basis of assets, profits, turnover, consideration to market capitalization, gross capital. For a detailed view of the topic, Please See, WEINBERG & BLANK ON TAKEOVERS & MERGERS, VOL. I, Sweet & Maxwell Publications, London at pp. 5008. |
45. These rules are also known as the Yellow Book. London Stock Exchange is designated pursuant to the Financial Services Act, 1986 as the “competent authority” for the purpose of admitting securities to the official list. |
46. The City Code is a set of general principles and rules governing the conduct of takeovers and mergers of UK companies. It is issued and administered by the Takeover Panel. The Panel is an independent body made up of representatives from UK financial institutions and professional associations which supervises the conduct of takeovers and mergers to ensure fair and equal treatment for shareholders. Key members of the Panel are currently appointed by the Bank of England. The Panel also has the support of other major City of London institutions (such as the London Investment Banking Association) as well as the major City of London financial institutions and professional associations. The Panel’s day-to-day business is carried out by an Executive comprising full-time employees and second from the investment banking community, accountancy firms, law firms and from the civil service. It is headed by a Director General who is usually a director of an investment bank seconded for generally a two year period. [FOR MORE ON THE INTRODUCTION TO THE CITY CODE ON MERGERS & ACQUISITIONS, Please See, WEINBERG & BLANK ON TAKEOVERS & MERGERS, VOL. I & II, Sweet & Maxwell Publications, London] |
47. The Takeover Directive is about to change the status of the Panel on Takeovers & Mergers by giving it a statutory basis. The non statutory basis of the Panel is about to change as a result of European Parliament and Council Directive 2004/25/EC of 21 Apr 2004 on Takeover Bids. The Takeover Directive in Article 21(1) provides for the implementation of the Directive by individual EU member states within two years. For more on the statutory regulations and the law prevalent in U.K. with respect to takeover activity, Please See, BUTTERWORTHS TAKEOVERS: LAW AND PRACTICE by Gary Eaborn, 1st ed., Lexis Nexis, Butterworths. |
48. For a critical response to the 13th Company Law directive, Please See, TAKEOVERS & MERGERS by Weinberg & Blank- 4.ASPECTS OF THE TAKEOVER PROCESS at pp.4006- pt.4-1003 [W & Blank R.19: Feb. 1999], Sweet & Maxwell. |
49. Code, Introduction, s.3 states that the General Principles are “essentially a statement of good standards of commercial behaviour”. ………….. The jurisdiction of the Code is limited to the U.K., the Channel Islands and the Isle of Man. |
50. For a better understanding of the point, Please See, judgments of the court delivered in R v Panel on Takeovers & Mergers; Ex parte Datafin plc., [1987] Q.B. 815. Also See, R v Spens, [1991] B.C.C. 140, CA, where the court of appeal in concluding that the proper interpretation of the Code was in the context of a criminal trial, a matter for the judge and not for the jury. [The purpose of the Code was interpreted in the case of Re Chez Nico (Restaurants) Ltd., [1991] B.C.C. 736, Ch D, Sir Nicolas Browne Wilkinson said: “… the Code does not have the force of law. But in considering for the purposes of s.430C whether the Court should exercise its discretion, in my judgment the Code is a factor of great importance.”[Therefore it could be seen that in interpreting the provisions of the Companies Act in the U.K., the Code holds tremendous significance] |
51. This has been stated in the case of R v Panel on Takeovers & Mergers,; Ex Parte Datafin plc., [1987] Q.B. 815. |
52. Where this is done, the panel will take care to refer the details of the matter to the Department of Trade and Industry, the Stock Exchange, the Securitites and Investments Board or the relevant self regulating organization. FOR MORE ON SANCIONS FOR BREACH OF THE CODE, Please See, TAKEOVERS & MERGERS by Weinberg & Blank- 4.ASPECTS OF THE TAKEOVER PROCESS at pp. 4018 titled (5) NATURE OF THE SANCTIONS FOR BREACH OF THE CODE 4-1029. |
53. An example in the form of multinational stock exchange could be seen in Europe, where the Euro removes other obstacles to cross border trading, the establishment of a system that would allow U.S. firms to list in Europe and participate in the major European indices, a widening of investment mandates and the speed of pan-European indices. The same holds true for India as well, which could be seen with the creation of the proposed SAFTA (South Asian Free Trade Agreement) which would greatly facilitate cross border mergers & acquisitions especially takeovers by Indian firms in their neighbourhood. For more on the issue, Please See, SHARING A CURRENCY by Anupam Goswami as appeared in BUSINESS INDIA dtd. Jan. 29, 2006 at pp. 40. |
| 54. Please See, from section 32 of the Income Tax, 1961 onwards. |
55. This entails a study of the existing laws prevalent in the market with respect to mergers and amalgamations in the target as well as acquirer country. |
56. Reference being made to the Competition Commission of India, which is dysfunctional at present. |
57. Reference may be made here to the procedure prescribed under Section 391 onwards of the Companies Act, 1956 of India. |
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