Highly leveraged takeover deal backed by KKR to acquire Yageo rejected by Investment Commission, Taiwan

Asia is living in exciting times.  Ministry of Economic Affairs’ Investment Commission (IC) rejected private equity (PE) fund Orion Investment Co (Orion) US$ 1.6 billion buyout of Yageo Corp (Yageo).  The reasons for rejection given by IC are:

• lack of transparency in deciding acquisition price;
• minority stakeholders’ interests could be at risk because of a lack of transparency in the stake-buying prospectus;
• the debt ratio of the new company (as per the prospectus, after the takeover, Orion planned to delist Yageo from the Taiwan Stock Exchange (TWE) and thereafter merge with it), would surge, given that Orion had borrowed money to buy the shares (this being highly leveraged debt borrowing to the extent of NT$28 billion).

Structure of the proposed deal

Just like many other PE funded deals, in the present deal (Yageo deal), Orion in which Mr. Chen Tie-min holds 54.36% and KKR owns the remaining 45.64%, was planning to take Yageo (a manufacturer of passive components used in electronics) private from the TWE after the acquisition.  Orion was planning to spin off Yageo’s deferent component divisions after delisting and take these divisions to public in the future.

Structure of the Yageo deal is described below in a diagram.

The financing of Yageo deal is a bit-complex and  in stricto sensu, it’s a classic leverage buy-out (LBO) deal- and that’s what was opposed by the IC.  The Yageo deal was financed by- (a) own funds of the offeror; (b) shareholder loans; and (c) loans from local (loans from local Taiwan Banks and foreign banks in Taiwan upto NT$28 billion) and foreign financial institutions (UBS AG and Nomura International were roped in for loans upto US$ 957,745,000). 

Transaction Agreement for financing the Yageo deal

As per the transaction agreement (Transaction Agreement) dated 5 April, 2011 between (a) Mr. Chen Tie-min (Chairman and GM of the Target), HCHEL, SHDL, STHE, HTHL, HTL, Mr. Yoshiro Kubota and TMPC Holdings Limited (Founder Shareholders); (b) CHIL Parent (a holding company established by KKR) (CHIL Parent); and (c) AIHL (a JV between Founder Shareholders (through TMPC Holdings Limited) and CHIL Parent):

(a) On First Closing

• Founder Shareholders to invest US$ 35,566,000 in TMPC Holdings Limited (TMPC HL), and cause TMPC HL to acquire loans from offshore financial institutions in an amount of approx US$ 218,064,000 (Founder Bridge).  TMPC HL to further invest the borrowed money and other cash (equivalent to US$ 253,630,000) in shares issued by AIHL.
• CHIL Parent shall make it investment in AHIL by (i) 145,961,000 P-Notes issued by Citigroup Markets Global Holdings (P-Note Issuer) issued by Yageo; and (ii) all shares of CIHL held by CIHL Parent (CIHL holds 227,700,000 offshore convertible bonds issued by Yageo).
• AHIL, to further take loan (debt financing) from offshore financial institutions through bridge loan agreements to fund the sale of shares in the tender offer.

(b) On Second Closing

After the tendered shares reach minimum shares requirement, prior to the closing of tender offer:

• Further investment by CIHL Parent and TMPC HL and other relevant payments by CHIL Parent.

      (c) On Third Closing

Prior to the record date of merger between Yageo and Orion:

• Further investment by CIHL Parent and TMPC HL and other relevant payments by CHIL Parent.

The Offeror shall further seek debt financing from domestic financial institutions.  Subject to availability and credit limit of such debt financing from domestic financial institutions, Alphard Investments Netherlands, may borrow funds from offshore financial institutions and provide such funds to the Offeror in the form of shareholder loan so as to pay a part of purchase price of the tender offer.

After, due consideration the IC took the view that the Yageo deal is a highly leveraged transaction where load to pay the debt would fall on Yageo after the merger between Yageo and Orion and if any default happens Yageo could not be saved (it must be noted Yageo is one of the leading passive manufacturer of passive electronic component in Taiwan, and perhaps, Taiwanese authority do not want a debt default like situation in Taiwan); and another reason could be that Taiwanese authority wants to protect the shareholders particularly the minority shareholders-who would be forced out of the company pursuant to merger between Yageo and Orion.

Scenario in Indian takeover deals

In a takeover deal involving Indian listed company, provisions of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Takeover Code) would be applicable.  Under regulation 16 (xiv) of the Takeover Code: (Contents of the Public Announcements) disclosure to the effect that firm arrangement for financial resources required to implement the offer is already in place, including details regarding the sources of the funds whether domestic, i.e., from banks, financial institutions or otherwise or foreign, i.e., from Non-Resident Indians or otherwise.

Indian regulations are more of disclosure oriented regulations, however in practise the SEBI, may ask for details from the acquirer about the funding sources and if found highly leveraged- I am not sure what and how would SEBI react to this.  As a market practise, in the public announcements made by the acquirer a standard clause is put, which is worded like:

The Acquirers and the PAC propose to finance the Offer through internal accruals, equity infusion and bank borrowings

Further as a market practice, the acquirer takes a certificate from the chartered accountants stating that the acquirers are financially fit to acquire the target company.  In my opinion, SEBI might take the view as taken by IC in the Yageo deal and the LBO structured buyouts might not work in India, given the current market situation and regulatory regime in India.  Additionally, the acquisition financing is not allowed/ permissible under the Indian laws (Indian regulations impose restrictions on the ability of banks in India in relation to acquisition financing, prohibiting them from lending to a borrower, irrespective of whether the borrower is located offshore or onshore).

If suppose, Yageo structured like deal as above comes to SEBI (but removing the aspects of debt financing), SEBI might not take block the deal, as in numerous occasions SEBI has cleared the deals (where the public announcement) states (for e.g., acquisition of Patni Computers by iGate):

The Acquirers and the PAC reserve the right to streamline/restructure the operations, assets, liabilities and/or businesses of the Target Company through arrangement/reconstruction, restructuring, merger (including but not limited to merger with itself or any of its subsidiaries), demerger/delisting of the Shares of the Target Company from the Stock Exchanges and/or sale of assets or undertakings, at a later date. Such decisions will be taken by the boards of Directors of Acquirers and the PAC and/or the Board of the Target Company in accordance with procedures set out by applicable law, and pursuant to business requirements and in line with opportunities or changes in the economic scenario, from time to time. The Acquirers and the PAC will evaluate and consider such proposals from time to time in accordance with the business requirements, if appropriate.

Unsecured loans advanced could be adjusted against allotment of shares in the rights issue

In a recent order dated 6 June, 2011 (SRM Energy Limited v. SEBI, Appeal No. 34 of 2011) (SRM Case), the  Securities Appellate Tribunal (SAT) set aside the Securities and Exchange Board of India (SEBI) order and allowed an appeal with a verdict that the unsecured loans can be adjusted against the allotment of shares in the rights issue.

In the SRM case’s scheme of things:

·         SEPL (a promoter of SRM Energy Limited) as on 31 December, 2010 had lent Rs. 4160.89 lacs of unsecured loan to SRM Energy Limited. 

·         On 13 August, 2010, shareholders of SRM Energy Limited passed a unanimous resolution through postal ballot approving the rights issue.  SEPL, was holding 71.19 % shares of SRM Energy Limited on the date of the right sissue, its entitlement in that issue worked out to 4,19,25,000 shares amounting to Rs. 4192.50 lacs.

·         SEPL by its letter dated 13 August, 2010 authorised SRM Energy Limited to adjust the unsecured loans provided to it towards its entitlement in the proposed rights issue (this was done based on the oral understanding between the parties).

·         SEBI objected to this arrangement and ordered that condition so section 81(3) of the Companies Act, 1956 (the Companies Act) should be strictly met.

Interpretation of section 81 of the Companies Act

SAT ordered that:  A bare reading of section 81 (1) makes it clear that when it is proposed to increase the subscribed capital of a company by allotment of further shares, the normal rule referred to therein needs to be followed.  The normal rule is that further shares must be offered to the existing body of shareholders of the company in the same proportion in which they already hold shares of the company.  The underlying object of this normal rule is to maintain the balance of voting rights and control in the company.  It is for this reason that section 81(1) mandatorily requires that further shares shall be offered to the existing shareholders in the same proportion to the capital paid up on these on the date of offer.  Section 81(1A), carves out an exception to the aforesaid normal rule and enables the company to offer further shares to a chosen few who may or may not be its shareholders.  When offer is made to this select group of persons, the section requires, as a condition precedent, that the general body of the shareholders must pass a special resolution in a general meeting authorizing and permitting the said allotment.  A special resolution is one which is passed by a majority of three fourth shareholders.  The underlying objective of this requirement is that the shareholders who are going to waive their right and entitlement to such further shares must agree to do so and if three fourth of them agree, that decision would bind the entire body of the shareholders.  It is pertinent to note that when the normal rule as aforesaid is resorted to, there is no requirement for the shareholders to pass any resolution, special or otherwise, because none of them is going to be deprived of the further allotment.  It is only when the company decides to deprive them of the further allotment that a resolution from them is required.

The opening words of section 81(3) makes it clear that cases which fall under this provision shall not be governed by section 81(1) and section 81(1A).  A reading of this provision makes it clear that it carves out yet another category/ exception for a preferential allotment to which section 81(1) and section 81(1A) shall not apply.  Section 81(3) would apply where a company has raised loans or issued debentures and these loans/ debentures have a stipulation attached thereto that the lender will be entitled to exercise an option to convert these loans/debentures into shares or subscribe to the shares of the company.  The proviso then imposes further restriction requiring the terms of the loan to be approved by the Central Government before the raising of the loan or such terms have to be in conformity with the rules made by the Central Government in that behalf and if the loan has been obtained from a person other than the government or a specified institution a special resolution approving the same has to be passed by the company in a general meeting before the loan is raised.

SAT’s decision

“The unsecured loans were payable on demand and SEPL could have demanded from the appellant the immediate return of those loans and then paid the money back to it towards the price of the shares allotted to SEPL in the rights issue.  It did not go through this ritual and instead, requested the appellant to adjust the amount of unsecured loans towards the price of shares allotted to it.  In other words, SEPL requested and made payment to the appellant by adjustment in the books of accounts.  Payment by adjustment in the books of account is a well-recognized mode by all accounting standards and we find no fault with this mode being adopted…In the strict sense of terms, it is not a conversion of a loan into equity.”

Takeaways for Capital Markets lawyers

·         There is no requirement to pass a special resolution for further issue of shares under section 81(1) of the Companies Act.

·         While drafting a rights issue offer document, in ‘objects of the issue’ section, following may be inserted-

Our Company intends to utilize the proceeds of the Issue towards repayment/adjustment of the unsecured loan forwarded to us by [name of the lender].

·         If a company has taken any loan, following may be inserted in the rights issue letter of offer:

Out of the total Rights entitlement of [●] Equity Shares amounting to Rs. [●], our promoter company/lender’s name [●], has, till [●], extended [●]as interest free unsecured loan (depends on the terms of issuance of loan) which has been utilized for [●]and meeting a part of the issue expenses. This amount will be fully adjusted against their entitlement/ additional subscription in the proposed Right issue.

I would like to put a caveat here; this order of SAT is appealed by SEBI in the Supreme Court and the above holds good only, if not reversed by the Supreme Court.

Applicability of the Combination Regulations to Joint-ventures

Section 5 and 6 of the Competition Act, 2002 (the Act), defines and regulate combinations, it provides various thresholds, crossing which an enterprise or a person entering into a combination shall report of the Competition Commission of India (the Commission) in the prescribed forms/notification.

Under section 6(1) of the Act, “No person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void.”  The word “or” in section 6(1) shall be read as disjunctive; so any person (i.e., any legal entity-that could be LLP, company, individual, association of persons, partnership etc) or any enterprise (as referred to in section 2(h) of the Act), if they enter into a combination referred to in section 5- they need to notify the Commission about it.

In light of the above, all joint ventures (JV), in whatever form, which take place in India or outside India with an effect in India, clearly fall within the ambit of the Act. The question would therefore be whether such joint ventures constitute combination in a manner contemplated in the Act.

Joint-ventures under various jurisdictions

JV is not defined under the Act or the Companies Act, 1956.  However, for the limited purposes of foreign direct investment, Consolidated FDI policy (circular 1 of 2011), at paragraph 2.1.23 defines JV as ‘Joint Venture’ (JV) means an Indian entity incorporated in accordance with the laws and regulations in India in whose capital a non-resident entity makes an investment. 

Further, honourable Supreme Court of India, in the case of Fakir Chand Gulati v. Uppal Agencies Pvt. Ltd, (2008)10SCC345, while referring the case of New Horizons Ltd v. Union of India (1995)1SCC478 has held:

“The expression "joint venture" is more frequently used in the United States. It connotes a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit or an association of persons or companies jointly undertaking some commercial enterprise wherein all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement, to share both in profit and losses. [Black's Law Dictionary; Sixth Edition, p. 839]. According to Words and Phrases, Permanent Edition, a joint venture is an association of two or more persons to carry out a single business enterprise for profit [P.117, Vol. 23].

The following definition of 'joint venture' occurring in American Jurisprudence [2nd Edition, Vol.46 pages 19, 22 and 23] is relevant:

A joint venture is frequently defined as an association of two or more persons formed to carry out a single business enterprise for profit. More specifically, it is in association of persons with intent, by way of contract, express or implied, to engage in and carry out a single business venture for joint profit, for which purpose such persons combine their property, money, effects, skill, and knowledge, without creating a partnership, a corporation or other business entity, pursuant to an agreement that there shall be a community of interest among the parties as to the purpose of the undertaking, and that each joint venturer must stand in the relation of principal, as well as agent, as to each of the other coventurers within the general scope of the enterprise.

Joint ventures are, in general, governed by the same rules as partnerships. The relations of the parties to a joint venture and the nature of their association are so similar and closely akin to a partnership that their rights, duties, and liabilities are generally tested by rules which are closely analogous to and substantially the same, if not exactly the same as those which govern partnerships. Since the legal consequences of a joint venture are equivalent to those of a partnership, the courts freely apply partnership law to joint ventures when appropriate. In fact, it has been said that the trend in the law has been to blur the distinctions between a partnership and a joint venture, very little law being found applicable to one that does not apply to the other. Thus, the liability for torts of parties to a joint venture agreement is governed by the law applicable to partnerships.

A joint venture is to be distinguished from a relationship of independent contractor, the latter being one who, exercising an independent employment, contracts to do work according to his own methods and without being subject to the control of his employer except as to the result of the work, while a joint venture is a special combination of two or more persons where, in some specific venture, a profit is jointly sought without any actual partnership or corporate designation.

To the same effect is the definition in Corpus Juris Secundum (Vol. 48A pages 314-315):

"Joint venture," a term used interchangeably and synonymous with 'joint adventure', or coventure, has been defined as a special combination of two or more persons wherein some specific venture for profit is jointly sought without any actual partnership or corporate designation, or as an association of two or more persons to carry out a single business enterprise for profit or a special combination of persons undertaking jointly some specific adventure for profit, for which purpose they combine their property, money, effects, skill, and knowledge.... Among the acts or conduct which are indicative of a joint venture, no single one of which is controlling in determining whether a joint venture exists, are: (1) joint ownership and control of property; (2) sharing of expenses, profits and losses, and having and exercising some voice in determining division of net earnings; (3) community of control over, and active participation in, management and direction of business enterprise; (4) intention of parties, express or implied; and (5) fixing of salaries by joint agreement.

Black's Law Dictionary (7th Edition, page 843) defines `joint venture' thus:

Joint Venture: A business undertaking by two or more persons engaged in a single defined project. The necessary elements are : (1) an express or implied agreement; (2) a common purpose that the group intends to carry out; (3) shared profits and losses; and (4) each member's equal voice in controlling the project.”

Further, in Inter-City Tire and Auto Center, Inc. v. Uniroyal, Inc (701 F. Supp. 1120, 1989-2 Trade Cases P 68, 839), the following were outlined as the basic element of a joint venture under the New Jersey or New York law:

•         an agreement between the parties manifesting some intent to be associated as joint  ventures;
•         each party contribute money, property, effort, knowledge or some other asset to a common undertaking;
•         a joint property interest in the subject matter of the joint venture;
•         a right of mutual control or management of the enterprise; and
•        an agreement to share in the profits or losses of the venture.

Under the European competition law, a joint venture has been defined as an undertaking which is jointly controlled by two or more other undertakings (Commission Notice (98/C 66/01) p.101 para. 3 of the Introduction). A distinction has been drawn between “concentrative” joint ventures and “cooperative” joint ventures. Concentrative joint ventures are described as those that bring about a lasting change in the structure of the undertakings concerned, while cooperative joint ventures are conceived for specific purpose, for instance, research and development, marketing, distribution, networking, and production.

Application of combination provisions to JV

While JVs are seen as enhancing efficiencies, depending on how they are structured, they may create a fertile ground for collusion between competitors and eliminate or lessen competition in the market. A JV that results in a combination may not only result in lessening or elimination of competition but more importantly, may result in elimination of an effective competitor and therefore reduction in the number of market players.

For including a JV into the purview of the Act and the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combinations Regulations), it would be helpful to consider, how a JV is structured.  There could possibly be two situations:

•          Where two or more firms jointly form a new entity; and
•          Where two or more firms acquire joint control over an existing firm or business thereof.

Where two or more firms jointly form a new entity

Under this head, there could be following structures:

•     Where two or more persons/ entities combine to form a new enterprise- under which, the parties to the JV holds certain percentage in the new enterprise, none of the parties holds any shareholding in the other enterprise.
•     Where the parties to the JV transfer assets or interests into the newly created entity. For e.g., Company A and Company B, who are competitors in manufacturing and distribution of certain products, decide to create a JV company, and transfer their respective distribution businesses into the said venture. In that case the assets that are transferred by the creating companies will constitute an acquisition by the joint venture, which is a separate entity, of control over the business, or a part thereof, of the creating companies.
•      Where, a special purpose vehicle company is created, which then acquires certain divisions or businesses of the said creating companies. The creating companies therefore cease to operate their independent businesses in respect of the transferred divisions and operate them through the newly created entity. This technically and factually results in the creating companies merging their divisions or businesses into one operation.

If we analyze, the first situation above- this would typically not fall under the definition of combination under section 5 of the Act.  Whereas, in the next two situations, if the threshold is crossed, then a possible case made be made out of bringing the JV into the purview of combination under section of the Act.


Of course,by virtue of MCA notifications (dated 4 March, 2011 and 27 May, 2011) as discussed in my earlier blog-since, there would be no turnover for a new JV entity (although there can be asset more than Rs. 250 crore), the parties to JV would not be required to file any notification for next five years. 

Where two or more firms acquire an existing firm or business thereof

Under this head, there could be following structures:

•     Where two or more companies acquire an existing entity or any part of the business thereof-this would constitute merger under the provisions of the Act and consequently, if the threshold are met, such combination may be treated as combination under section 5 of the Act.  This recently happed in the recent acquisition of Camlin Limited (Camlin) by Kokuyo S&T Co. (Kokuyo) of Japan, where under a JV agreement was signed between Camlin and Kokuyo, under which 14,044,850 shares of Camlin was acquired by Kokuyo. 
•     In certain instances, the transaction may involve the issue of shares by the acquiring companies in consideration for the acquisition. Therefore, depending on the amount of shares issued, the share issue may result in a further notifiable combination. That may be the case if, for instance, the acquiring companies issue shares that confer control over their businesses or a part thereof to the seller.  An example of this is where Company A and Company B jointly acquire control over Company C in order to use it as a vehicle for a joint venture through a sale agreement. Instead of cash, the two companies each issue 50% shares to Company C in their respective businesses. Therefore, the shares issued may result in Company C acquiring control over the businesses of Company A and B respectively. This subsequent issue of shares by Company A and B may therefore constitute notifiable mergers if they meet the threshold. Therefore, one transaction may result in multiple mergers that may require notification. 

Conclusion

From a transactional point of view, there could be various structures possible, above mentioned structures were only indicative of what might be construed as combination by the regulatory authority i.e, the Commission in India.  A transactional lawyer, while structuring a JV may take note of above observations, so as to help the enterprises (parties to JV) to surpass the provisions of filing a notification to the Commission without violating the provisions of the Act and Combination Regulations.

Combination under Competition Laws in India

Mergers and Acquisitions (M&As) in India has just became a bit-more complex with the passing of Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations)-but then aren’t all legislations necessary evils?, anyways that’s not the topic of discussion of this post.

Laws relating to M&As in India

Lawyers dealing with M&As in India now need to diversify themselves; first, they need to acquaint themselves with various basic terminologies involved under various legislations pertaining to M&As in India, for instance (see the table below) and second, they need to apply these laws correctly.

S.No	Legislation dealing with M&A	Terminology	Provision	Interpretation	Approving authority under Indian laws
1.	Companies Act, 1956 (Companies Act)	Arrangement	Section 390	Courts in India have give word ‘arrangement’ a very wide interpretation and it includes every kind of restructuring and reorganization scheme.	High Courts
2.	SEBI (Substantial Acquisition of Shares and Takeovers), 1997 (Takeover Code)	Acquisitions and Takeovers [Terms acquisitions and Takeovers are not defined under the Takeover code, but none the less are commonly used word as a market practice]	Regulation 2(b)- defines acquirer; 2(o) defines target company.	Under Takeover code, acquisitions and takeover refers to acquisition of shares and/ or voting rights or control of the targets company (i.e., the listed company which is being acquired).	SEBI
3.	Competition Act, 2002 (the Act)	Combination	Section 5	The acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises. [This also takes into account various thresholds provided under the Competition Act, for a transaction to be termed as Combination]	CCI

‘Combination’ under Competition Act

Combination is defined under section 5 of the Competition Act, 2002 as the acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises.  Here the word ‘or’ is disjunctive and should not be read as ‘and’.  The Act here, it appears envisages only three situations- (i) acquisitions, (ii) mergers and (iii) amalgamations and is silent on other schemes of reorganizations and restructuring.  The legislatures in their wisdom have defined the word ‘acquisition’ (section 2(a)) in the Act but have forgotten to define ‘mergers’ and ‘amalgamations’.  For our guidance, they have left section 2(z), which refers us to Companies Act, but Companies Act has also not defined ‘mergers’ and ‘amalgamations’.

So, to interpret the scope of word, ‘mergers’ and ‘amalgamations’:

(a) we need to refer the definition of ‘arrangement’ under the Companies Act; or

(b) we dive more deep into the wordings of mergers and amalgamations under the Act-

(i) under section 5(c), merger is referred as the enterprise remaining after merger, the literal interpretation would mean-

Situation 1: Company A + Company B = Company A; or

Situation 2: Company A + Company B = Company B.

If that is the case- then, in my opinion in Situation 1, Company A is the acquiring entity and Company B is the acquired entity and in Situation 2, Company A is the acquired entity and Company B is the acquiring entity.

(ii) further, under section 5(c), the reference to ‘amalgamation’ is worded as the enterprise created as a result to amalgamation.  There is only one situation under ‘amalgamation’ literally, which is Company A + Company B = Company C.  There is a ‘creation’ of an enterprise as a result of combination under amalgamation.

In my opinion, the CCI and courts for the purposes of competition law cases, should consider the scope of word ‘mergers’ and ‘amalgamations’ as mentioned under the Competition Act, 2002 and not the Companies Act.

Further, ‘Combination’ under the Act, is only for big ticket transaction i.e. only those combinations, which crosses certain minimum threshold (see table below) are considered as combination under the Act and liable to be reviewed by the CCI.

Status	Geographical Coverage	Threshold
No Group	India	Assets:	Rs.1500 crores
		Turnover:	Rs.4500 crores
	India and Worldwide	Assets:	US$ 750 million (including at least in India Rs. 750 crores)
		Turnover:	US$ 2250 million (including at least in India  Rs. 2250 crores)
Group	India	Assets:	Rs.6000 crores
		Turnover:	Rs.18000 crores
	India and Worldwide	Assets:	US$ 3 billion (including at least in India Rs 750 crores).
		Turnover:	US$ 9 billion (including at least in India Rs.2250 crores).

MCA Notification S.O. 482 (E), dated 4 March, 2011 and Corrigendum dated 27 May, 2011 (MCA Circular)

Under section 54(a) of the Act, Ministry of Corporate Affairs, in its wisdom notified (under MCA Notification S.O. 482 (E), dated 4 March, 2011, which was amended by Corrigendum dated 27 May, 2011) : “the central government, in public interest, hereby, exempts an enterprise, whose control, shares, voting rights or assets are being acquired has [either] assets of the value of not more than Rs. 250 crores [in India] and turnover of not more than Rs. 750 crores [in India] from the provisions of section 5 of the said Act for a period of five years”

I am not sure what public interest does this MCA Circular serve, but nevertheless, this MCA Circular has created a lot of ripples in the competition lawyer fraternity- because of its bad legislative drafting.

Under the MCA Circular:

(i)         the exemption is available for the period of five from 4 March, 2011 (i.e., upto 3 March, 2016);

(ii)        the exemption (exemption in terms of notification under section 6(2) of the Act) is available to parties to the combination, where the assets of the target company (the acquired company) is less than Rs. 250 crores or the turnover of the target company (the acquired company) is less than Rs. 750 crores. 

If either of the above mentioned condition is fulfilled, then, the parties to the combination need not file notice to the CCI.

(iii)       the exemption is given only in terms of- when control, shares, voting rights or assets are being acquired.  That implies, the ‘amalgamation’ transactions are not covered under the MCA Circular, since there is no acquisition of control, shares, voting rights or assets under amalgamation, but a takeover, acquisition and merger transactions are covered and are exempted under MCA Circular, if the condition mentioned in (ii) above is satisfied.