Module -II

M&A Process
Contents
 M&A Process –
 Identification of target –
 Negotiation –
 closing the deal –
 due diligence –
 M&A integration – organizational and
human aspects –
 Managerial challenges of M&A
M&A Process - steps

Identification of target

Negotiation

closing the deal

due diligence
Steps in a Merger

 There are three major steps in a merger

transaction:
1. Planning,
2. Resolution,
3. Implementation.
Planning

 Planning, which is the most complex part of

the merger process, entails
 the analysis,
 the action plan, and
 the negotiations between the parties involved.
 The planning stage may last any length of
time, but once it is complete, the merger
process is well on the way.
More in detail,
 the planning stage also includes:
 the appointing of advisors who play the role of consultants,
examining the strengths, weaknesses, opportunities, and
threats of the merger;
 detailing the timetable (deadline), conditions (share
exchange ratio), and type of transaction (merger by
integration or through the formation of a new company);
 signing of the letter of intent which starts off the
negotiations;
 expert report on the consistency of the share exchange
ratio, for all of the companies involved.
Resolution
 The resolution is simply management's approval
first, then by the shareholders involved in the
merger plan.
 The resolution stage also includes:
 The Board of Directors calling an extraordinary
shareholders’ meeting whose item on the agenda is the
merger proposal;
 The extraordinary shareholders’ meeting being called to
pass a resolution on the item on the agenda;
 any opposition to the merger by creditors and bondholders
within 60 days of the resolution;
 Green light from the Italian Antitrust Authority, that
evaluates the impact of the merger and imposes any
obligations as a prerequisite for approving the merger.
Implementation

 Implementation is the final stage of the

merger process, including enrolment of the
merger deed in the Company Register.
 Normally medium-sized/big mergers require
one year from the start-up of negotiations to
the closing of the transaction.
Implementation
 This is because, in addition to the time needed
technically, there are problems relating to the share
exchange ratio between the merging companies
which is rarely accepted by the parties without
drawn-out negotiations.
 During the merger process, share prices will adjust
to the share exchange ratio. On the effective date of
the merger, financial intermediaries will enter the
new shares with the new quantities in the dossiers.
The shareholders may trade without constraint the
new shares and benefit from all rights (dividends,
voting rights).
Due diligence

 Due diligence is important as it determines

whether or not the information disclosed
regarding corporate mergers and corporate
acquisitions is accurate and correct, so as to
avoid any troubles with future business,
international or otherwise.
Due diligence

 All crucial issues must be identified via due

diligence before mergers and acquisitions
can even be continued.
 The key assumptions provided in the
proposal for investment must also be deemed
accurate.
Due diligence
 Due diligence is handled by teams in the midst of business
acquisitions. The teams are typically composed of members with
expertise in mergers and acquisitions, as well as in specific
areas of function.
 The members of the teams are often employees of the
companies handling the business acquisitions, unless a certain
expertise cannot presently be found in the companies.
 Due diligence teams will get documents from the different
departments of the company, using these documents in order to
obtain desired information.
 With a good due diligence team, company mergers and company
acquisitions will go smoothly and within the boundaries of the
law.
Areas of due diligence
 Members of the teams often have expertise in the
following areas:
 Accounting,
 Tax,
 Risk Management,
 Human Resources,
 Legal,
 Environmental,
 Information Technology,
 Operations, and Sales.
 It is necessary to conduct due diligence in all these
areas so that the mergers and acquisitions can
proceed without a hitch.
Steps in due diligence

 Due diligence in mergers and acquisitions

requires four steps.
 Step one is Identification, in which
information is gathered and risks are
identified. The risk management team will
review recent operations by the risk
management department and assemble any
and all lost data.
Steps in due diligence

 Step two concerns the law, as all pending

and prior litigation the company may be
undergoing is identified and assessed.
Insurance policies are also reviewed in this
step, as are the company’s environmental
issues. Lastly, all loss run prior to mergers
and acquisitions are analyzed.
Steps in due diligence
 Step three involves the summarization of all the
data that’s been collected. The summarized data is
then analyzed and the exposures compared to
existing coverage by insurance. Recommendations
will then be given to the due diligence team.
 Step four occurs after mergers and acquisitions are
finalized. This step involves visiting new business
locations, consolidation of the companies’ insurance
programs, and fixing any administrative issues that
may have arisen during the business acquisitions.
Types of due diligence

 Financial due diligence

 Strategic due diligence
 Operational due diligence
 IT due diligence
 Human capital due diligence
Legal frame work In Merger
process
 Merger & Demerger
Phase- I
PROCESS
 Draft Scheme
 Notice to members of Board of both companies
 Determine swap ratio based on valuation report
 Board approval of both companies
 Prior NoCs from secured creditors and shareholders for exemption
from meeting: Reduce Time and Costs
 In ICICI Ltd. merger with ICICI Bank, meeting of preference
shareholders of ICICI Ltd. was dispensed with since sole
preference shareholder furnished an NOC
Phase- II
 Draft Application under s. 391(1)
 Application to HCs in respective jurisdictions of both companies for
sanction / direction to conduct meetings
– Moving registered office to one jurisdiction: Reduce Time and
Costs
 Merger & Demerger
PROCESS

Phase- III
 Notice of EGM to members with statement of terms of
merger, interests of directors and proxy forms: 21 days
 Advertisement
 Notice in 2 newspapers: 21 days
 Affidavit certifying compliance with HC’s directions in
respect of notice/ advertisement
 Meetings of creditors and/ or shareholders: agreed to by
majority in number representing ¾ of value present and
voting
 Chairman of meetings to file report within 7 days of meeting
 Resolutions and Explanatory Statements to be filed with
RoC
 Merger & Demerger
PROCESS
Phase- IV (Approval of the Scheme)
 HC to be moved within 7 days of Chairman’s Report for
second motion petition
 10 days notice of hearing of petition in same newspapers
 Notice to Central Govt. (Regional Director), Submit reports
 Objections raised in 391 proceedings
 HC Sanction
 Certified copy of HC Order to be filed with RoC within 30
days of order.
 Merger & Demerger
ISSUES: COMPANIES ACT
 391 - 394: “Complete Code”, “Single Window Clearance”
• Reduction of capital- Position unclear, Predominance of
judicial view: substantial compliance with s. 100- 102 required.
 Transnational Mergers: 391 - 394 mechanism operates only
where amalgamated company is Indian. E.g. of transnational
merger concluded under 391 route - Bank of Muscat merging into
Centurion Bank by order of Karnataka HC
 Alternative Mechanism: S. 494
• Through Liquidation Process
• Liquidator transfers assets to foreign company for shares
• Process has to be “altogether voluntary”
• Tax benefits are unavailable under this route
 Other Spin-Offs
ISSUES: COMPANIES ACT

 Where spin-offs are outside the 391 mechanism, the

following compliances need to be ensured
• 293(1)(a) resolution
• Voting has to be by postal ballot in a public listed
company
 Mergers and Demergers
ISSUES: INCOME TAX
 Transfer of capital assets by amalgamating company to
amalgamated company is exempt from Capital Gains Tax
provided amalgamated company is an Indian company

 Capital Gains Exemption in respect of shares issued to

members of amalgamating/ demerging company- s. 47

 Exemption may not be available if members of amalgamating

company receive anything besides shares in the amalgamated
company like debentures or cash- Gujarat HC in Gautam
Sarabhai v. CIT, 173 ITR 216.
 Mergers and Demergers
ISSUES: INCOME TAX
 In case of fraction shares, issue to trustee who
liquidates these and distributes money to shareholders
of amalgamating company.

 Carry forward of losses and unabsorbed depreciation

provided the amalgamated company carry on the
business of the amalgamating company for at least 5
years – s. 72A
• Use of Reverse merger to meet above condition

 Spin-off receives tax benefits under Income Tax Act

only if it is a demerger
 Slump Sale
ISSUES: TAXATION
 Slump Sale = Transfer of undertaking without
itemizing individual assets and liabilities- s.2(42C)
Income Tax Act

 Treated as capital gains

 If undertaking is older than 3 years, long term capital

gains rates apply even if individual assets are new

 Carry forward of losses and unabsorbed depreciation

unavailable
 Merger & Demergers
ISSUES: SALES TAX
 No Sales tax on Amalgamation or demerger.

 Where effective date is retrospective, any transfers

between amalgamating company and amalgamated
company retrospectively cease to be liable to sales
tax- Mad HC Castrol Oil v. State of TN, 114 STC 468

 Some Sales Tax enactments contain specific

provisions to tax such transactions eg. S.33C,
Bombay Sales Tax Act. No such provision in Central
Sales Tax Act.
 Merger
ISSUES: STAMP DUTY
 Divergences between states: Shopping for beneficial rates
usually pointless

 Duty to be imposed on value of shares transferred not on

individual assets transferred: Bom HC in Li Taka AIR 1997
Bom 7

 States with Specific entries: Maharashtra, Karnataka,

Rajasthan and Gujarat
 Merger
ISSUES: STAMP DUTY
 States without specific entries: Unclear if duty leviable.
• Cal HC in Madhu Intra Ltd. v. ROC, 2004 (3) CHN 607 -
394 Order is not an instrument chargeable to duty
• Supreme Court in Ruby Sales v. State of Maharashtra
(1994) 1 SCC 531 - specific inclusion of civil court
decrees in Bombay Stamp Act only abundant caution

 1937 Notification under Indian Stamp Act, 1899 remits

duty when merger is of a 90% subsidiary: Remission
not available in states with own legislations eg. Kerala,
Karnataka, Maharashtra, Gujarat and Rajasthan

 Gujarat and Maharashtra have limits on stamp duty for

mergers and demergers at Rs.10 crore and Rs. 25
crore.
 Merger
ISSUES: SEBI
 Acquisition of shares pursuant to a scheme of
arrangement or reconstruction under any law, Indian
or foreign – exempt from SEBI Takeover Code.
 Exemption claimed unsuccessfully by Luxottica in the
acquisition of Ray Ban Sun Optics India

 Listing Agreement:
• Scheme before the Court/ Tribunal must not violate,
override or circumscribe the securities laws or stock
exchange requirements
• Disclosure required
 Merger
ISSUES: SEBI
 Shares allotted by unlisted transferee company to
shareholders of listed transferor company under a
HC sanctioned scheme – can be listed without an
IPO subject to conditions (DIP).
 Eg. Dabur Pharmaceuticals

 Constitutes ‘Price Sensitive Information’ in terms of

Insider Trading Regulations.

 Compliance with Delisting Guidelines if public

shareholding below prescribed limit.
 Mergers
MISCELLANEOUS ISSUES
 Foreign Exchange Management Act, 1999
• Where the amalgamated company is Indian, non
resident shareholders of the foreign amalgamating
company require RBI approval to receive shares.

• Where the amalgamated company is foreign, the

issue of its shares to Indian shareholders requires
RBI approval.

• Automatic route available where non residents have

to be issued shares in a merger of Indian companies.
 Mergers
MISCELLANEOUS ISSUES
 Human Resources
• Workmen entitled to retrenchment benefits
unless retained in employment on same terms.
• Adjustments of pay scale needs to be resolved.
 Global Trust employees were retained on
same terms in OBC. Pay packages of former
GTB staff could be altered only after 3 years.
OBC management had to contend with GTB’s
complex salary structure.
 Mergers & Acquisitions
COMPETITION LAW
 Monopolistic and Restrictive Trade Practices Act, 1969
• Status: Repealing provision in Competition Act, 2002
not notified.

• No Central Government approval required for a merger

or acquisition under the MRTPA

• Act attracted only if amalgamated company discovered

to be monopolistic in its working not at stage of
amalgamation- Hindustan Lever, 1995 Supp (1) SCC
499
 Mergers & Acquisitions
COMPETITION LAW
 Competition Act, 2002 (Partially notified)
• Merger or Acquisition = “Combination” if stipulated
thresholds respecting aggregate asset or turnover
are exceeded

• Prior approval of combination is not mandatory

• Test – “Cause or likely to cause an appreciable

adverse effect on competition within the relevant
market”