Two-track transaction structure: case of acquisition of Immucor, Inc., by TPG Partners VI, L.P.

This note discusses in brief the two-track transaction structure (TTT Structure) generally employed in the United States for acquisitions of the corporations and for this purpose have considered the case of acquisition of Immucor, Inc., a Georgia corporation (Immucor or Target) by TPG Partners VI, L.P., a Delaware Limited Partnership (TPG Partners) as a base model.  Further, the note also discusses in brief the salient features of the merger agreement signed between Immucor and TPG Partners.

Transaction Structure

Under the terms of the merger agreement (Merger Agreement) signed on 2 July, 2011, between Immucor, IVD Holdings Inc., a Delaware Corporation (IVD Holdings or Parent), which is controlled by TPG Partners and IVD Acquisition Corporation, a Georgia corporation (Purchaser or Merger Sub) (Parent, Merger Sub, Immucor are collectively referred as Parties, and Parent, Merger Sub are collectively referred as Acquirers)) pursuant to consummation of tender offer (Tender Offer) in accordance with procedure laid under the Securities Exchange Act, 1934 (SEA), Merger Sub would acquire the share of Immucor from the shareholders tendering their shares under the Tender Offer at a purchase price of $27 per share and thereafter upon satisfaction or waiver of certain conditions, Merger Sub will be merged with and into Immucor (Merger), with Immucor continuing as the surviving corporation in the merger and a wholly owned indirect subsidiary of Parent.  

TTT Structure under the Merger Agreement

Under the terms of Merger Agreement, the Parties agreed to complete the Merger whether or not the Tender Offer is complete.  If the Tender Offer is not completed, the Parties agreed that the Merger could only be completed after the receipt of shareholder approval of the Merger Agreement at the special meeting.  Under a typical TTT Structure acquisition/ merger, the Tender Offer under SEA and the Merger under the State’s corporation law (here it is Georgia Business Corporation Code) are independent of each other and often runs parallel to each other.  The Target, parallely solicits proxies for the special meeting to obtain shareholder approval of the Merger Agreement to be able to consummate the Merger regardless of the outcome of the Tender Offer.  However, if the Tender Offer bid is successful and the Acquirer acquires more than 90% of the outstanding shares (95% shares in some States) or in certain qualified situation exercises Top-Up Option, discussed below and reach 90% shareholding level and therefore resultantly is in a position of effect short-form merger, then there is no requirement of special meeting of the shareholders to effect Merger.

The TTT Structure for the Tender Offer enables the Target’s shareholders to receive the cash price pursuant to the Tender Offer in a relatively short time-frame (and reduce the uncertainty during the pendency of the transaction), followed by the cash-out Merger in which the Target’s shareholders that do not tender in the Tender Offer will receive the same cash price as is paid in the Tender Offer.  In addition TTT structure permits the use of a one-step Merger, under certain circumstances, in the event the Tender Offer is unable to be effected in a timely manner.

Salient features of the merger agreement signed between the Parties

The Merger Agreement signed between the Parties had several boiler plate provisions typical to a merger agreement.  Among other things, some of the important provisions are discussed below:         

• Top-Up Option: Pursuant to the Merger Agreement, Immucor granted to Purchaser an irrevocable option to purchase at the Offer Price an aggregate number of Shares equal to the lowest number of Shares that, when added to the number of Shares owned by Parent, Purchaser and their affiliates at the time of such exercise (after giving effect to the Offer Closing), will constitute one Share more than 90% of the outstanding Shares on a fully-diluted basis.

• Equity Financing: In connection with the Merger Agreement, Parent received an equity commitment letter from the TPG Fund, dated 2 July, 2011,pursuant to which the TPG Partners has committed to purchase equity securities of Parent, at or prior to the Merger Closing, with an aggregate purchase price of up to $691 million, for the purpose of funding a portion of the aggregate offer price and/or the aggregate per share merger consideration, as applicable, required to be paid pursuant to the Merger Agreement and the transactions contemplated thereby, as well as related fees and expenses.

• Debt Financing : Purchaser received a debt commitment letter, from Citigroup Global Markets Inc., which, JPMorgan Chase Bank, N.A., and J.P. Morgan Securities LLC, to provide $1.1 billion in Debt Financing, consisting of a $600 million senior secured term loan facility, a $400 million senior unsecured bridge facility and a $100 million senior secured revolving facility.

• Limited Guaranty: In connection with the Merger Agreement, the TPG Partners executed and delivered to the Target a limited guaranty (Guaranty), dated 2 July, 2011.  Pursuant to the Guaranty, the TPG Partners has irrevocably and unconditionally guaranteed the due and punctual payment by Parent to the Target of $90.0 million, when required to be paid under the terms of the Merger Agreement.

Acquisition of Motorola Mobility Holdings, Inc. by Google Inc.

This note provides a brief overview of  the ongoing merger deal- acquisition  of shares (Merger Deal) of Motorola Mobility Holdings, Inc. (Motorola or the Target) by Google, Inc. (Google or the Buyer or Acquirer) through its wholly owned subsidiary (WoS), RB98 Inc. (RB98) and discusses in brief, (a) the structure of the deal, (b) time lines involved in structuring and negotiating the merger agreement (Merger Agreement), (c) procedure involved under Delaware General Corporation Law (DGCL), Securities Act, 1934 (Exchange Act) and Hart–Scott–Rodino Antitrust Improvements Act, 1976 (HSR Act) for Merger Deal to go through, (d) business strategy behind the Merger Deal, and (e) the salient feature of the Merger Agreement signed between RB98, Motorola and Google (collectively referred as Parties) dated 15 August, 2011.

Structure of the Merger Deal

For the purpose of facilitating Google’s acquisition of Motorola, Google formed/ incorporated RB98 in the state of Delaware under DGCL (it must be noted that Google and Motorola both are incorporated under the laws of state of Delaware under DGCL).  Under the terms of the Merger Agreement (Terms of Agreement), upon consummation of proposed merger, RB98 will merge with and into Motorola and as a result of the merger, the separate corporate existence of RB98 will cease and Motorola would be the surviving corporation in the merger and will continue as a WoS of Google. Further under the Terms of Agreement, if the merger is completed, by virtue of the merger, each share of the Motorola common stock issued and outstanding immediately prior to the effective time of the merger will be cancelled and converted into the right to receive $40 per equity in cash (without interest and less any applicable tax withholdings).

Following the completion of merger, among other things:

•  Current shareholders of Motorola would cease to have direct or indirect ownership interest in Motorola;
• Motorola common stock will be de-listed from the New York Stock Exchange (NYSE) and deregistered under the securities laws and as a result Motorola will become a privately held corporation; and
• Each share of common stock of RB98 will constitute the only outstanding shares of capital stock of the surviving corporation i.e., Motorola.
  

Time lines involved in structuring and negotiating the Merger Agreement

As per the preliminary special proxy statement (Proxy Statement) filed with the U.S. Securities and Exchange Commission (SEC) pursuant to the section 14(a) of the Exchange Act on 13 September, 2011, the Parties of the Merger Deal expects the merger to be completed by the end of 2011 or early 2012.  As regards timelines, the exact dates cannot be predicted as the closing of Merger Deal is dependent upon hosts of factor including absence of any order issued by courts against the transaction, affirmative votes of the majority shareholders of Motorola, Anti-trust approvals (national and international) etc., however, based on the Proxy Statement and the Merger Agreement (assuming all the closing requirements are fully met) following may be the timeline involved in the Merger Deal [from start (approaching of Google) to finish (consummation of all the legal requirements under the applicable laws)]:-

Procedure involved under DGCL, HSR Act and Exchange Act for the Merger Deal to go through

• Under section 251 of the DGCL, for a corporation to be acquired in a merger, the transaction first must be approved by the board and thereafter approved by the stock holders.  In a publically traded corporation, there typically will be a time lag on no less than 30-60 days from the date of the board action until the date of the stock holder vote.  In the present Merger Deal, after considering the proposed Terms of the Merger Agreement, the board unanimously on 14-15 August, 2011 determined that the transaction contemplated under the Merger Agreement are advisable and fair to, and in the best interest of the shareholders of Motorola.

• Further, those shareholders who do not vote in favor of the Merger Agreement and the merger will have the right to seek appraisal (under section 262 of the DGCL) of the fair value of their shares of Motorola common stock as determined by the Delaware Court of Chancery if the merger is completed, but only if they submit a written demand for such an appraisal prior to the vote on the Merger Agreement and the merger and comply with the other DGCL procedures.

• Under the provisions of the HSR Act and the rules and regulations promulgated thereunder by the Federal Trade Commission (FTC), the merger may not be completed until notification and report forms have been filed with the Antitrust Division of the United States Department of Justice (Antitrust Division) and the FTC by each of Motorola and Google, and the applicable waiting period has expired or been terminated.  Under the Terms of the Merger Agreement, Motorola and Google filed their respective notification and report forms with the Antitrust Division and the FTC under the HSR Act on 29 August, 2011.  The waiting period under the HSR Act, therefore, will expire at 11:59 p.m., New York City time, on 28 September, 2011 unless earlier terminated or extended by a request for additional information and documentary material, which we refer to herein as a “second request.”
• If within the 30-day waiting period the Antitrust Division or the FTC were to issue a second request (which in the present Merger Deal was made on 28 September, 2011), the waiting period under the HSR Act would be extended until 30 days following the date on which both Google and Motorola certify substantial compliance with the second request, unless the Antitrust Division or the FTC terminates the additional waiting period before its expiration.  Google, RB98 and Motorola have agreed to use reasonable best efforts to certify compliance with any “second request” within four months after its receipt and to produce documents as required on a rolling basis. If the Antitrust Division or the FTC believes the merger would violate the U.S. federal antitrust laws by substantially lessening competition in any line of commerce affecting U.S. consumers, it has the authority to challenge the transaction by seeking a federal court order to enjoin the merger. U.S. state attorneys general or private parties could also bring legal action.  Further, Google and Motorola plan to submit filings in other jurisdictions as necessary in due course. On 29 August, 2011, Motorola and Google agreed that, in addition to those in the United States and European Commission, pre-closing antitrust clearances in Canada, China, Israel, Russia, Taiwan and Turkey are required and applicable to the merger. Foreign antitrust authorities in these or other jurisdictions may take action under the antitrust laws of their jurisdictions, which could include seeking to enjoin the completion of the merger.

•  With respect to antitrust clearances, each of Motorola, Google and RB98 has agreed to:  

• use its reasonable best efforts to obtain termination or expiration of any waiting periods under the HSR Act, clearance under the EC Merger Regulation and such other approvals, consents and clearances as may be necessary, proper or advisable to effectuate the merger under the antitrust laws and to remove any court or regulatory orders under the antitrust laws impeding the ability to consummate the merger by the outside date; and

• use reasonable best efforts to certify compliance with any “second request” for additional information or documentary material from the Department of Justice or the FTC pursuant to the HSR Act within four months after receipt of such second request and to produce documents as required on a rolling basis.

• Google will have the unilateral right to determine whether or not the parties will litigate with any governmental entities to oppose any enforcement action or remove any court or regulatory orders impeding the ability to consummate the merger. Google will also control and lead all communications and strategy relating to the antitrust laws and litigation matters relating to the antitrust laws, subject to good faith consultations with Motorola and the inclusion of Motorola at meetings with governmental entities with respect to any discussion related to the merger under the antitrust laws.

• Securities laws in US are based on disclosure for regulating the public listed companies, if any material information comes up the board is required to promptly disclose it to the stock exchanges.  Pursuant to this, (a) under section 14(a) of the Exchange Act, Motorola filed Proxy Statement in the specified format with the SEC; (b) Motorola is obligated to file current report in Form 8-K as prescribed under the Exchange Rate

Business strategy behind the Merger Deal

Apart from the text-book explanations of the Merger Deal, in my view the main driving forces behind the present Merger Deal are:

• Mr. Carl C. Icahn (through its various US and Cayman Island based funds) have 11.39% equity shares in the Target and he wanted liquidate his shareholdings; and

•  Dr. Sanjay Jha, CEO of the Target, has about 1.84% equity shares of the Target and he also wanted to liquidate his shareholdings and perhaps, Google happens to be the only Acquirer who have agreed on the ‘Golden Parachute’ clause under the Merger Deal and additionally, Dr. Jha along with other officers of the Target would be beneficiary of cash severance payment, bonus payment, LRIP replacements, perquisites etc.

In my view, the shareholders of the Target may bring derivative suits or class action suits against the directors and officers of the Target for approving the Merger Agreement, as these directors and officers have failed in their fiduciary duties and instead to running the company steadily, they have chosen to sell the Target to an outside raider.

As per the Proxy Statement filed with the SEC, among other things, board of Motorola has cited following reasons for approving the proposed merger:

•  Terms of the Agreement are more favorable to Motorola Stockholders, like per share consideration payable (which is in full cash);
• There is a risk that Motorola’s performance may not meet market expectations, which could adversely impact Motorola’s trading range/ internal forecasts;
• If Google does not use its reasonable best efforts to complete the deal, it would be liable for $2.5 billion termination fee;
• Motorola may face certain risks related to (i) intellectual property litigation and claims; and (ii) intellectual property infringement claims; and
• Opinion of Qatalyst Partners LP and Centerview Partners LLC was tilted towards approval of the Merger Deal.

Salient feature of the Merger Agreement signed between the Parties

The Merger Agreement and plan of merger was signed among the Parties on 15 August, 2011.  Among other things, some of the important features of the Merger Agreement are as follows:

Conversion of shares clause: Typically, in a merger agreement such as the present Merger Deal, at effective time (generally a time after all closing conditions are met), all the outstanding shares of some par value (it could be any number) shall no longer be outstanding and shall cease to exist, and each holder of such shares shall cease to have any rights with respect to shares, except the right to receive the merger consideration (which is $40 in the present case).

Requisite stockholder approval clause: In terms of section 251, DGCL, the stockholders of Motorola are required to adopt the Merger Agreement and approve the merger by affirmative vote of the holders of not less than a majority of the outstanding shares in favor of the merger.

No Solicitation; Company Recommendation clause: Motorola shall and shall cause each of its subsidiaries to, and shall instruct each of its and their respective directors, officers, employees, financial advisors, legal counsels, auditors, accountant or other agents to, immediately cease any solicitation, knowing encouragement, discussions or negotiations with any persons that may be ongoing with respect to any acquisition proposal and immediately instruct any person (including that person’s representatives) that has confidential information about Motorola that was furnished by or on behalf of Motorola in connection with any actual or potential acquisition proposal to return or destroy all such information. In addition, Motorola has agreed that neither it nor its subsidiaries will, nor will they authorize or knowingly permit their representatives to, directly or indirectly:

• solicit, initiate, propose or induce the making, submission or announcement of, or knowingly encourage or assist, an acquisition proposal;
• furnish to any person any non-public information relating to Motorola or its subsidiaries in connection with any acquisition proposal;
• furnish to any person any non-public information relating to Motorola or its subsidiaries in response to any other proposal or inquiry for a potential transaction that on its face is one of the specified transactions;
• afford to any person access to the business, properties, assets, books, records or other non-public information, or to any personnel of Motorola Mobility or any of its subsidiaries in connection with any acquisition proposal;
• afford to any person access to the business, properties, assets, books, records or other non-public information, or to any personnel of Motorola or any of its subsidiaries in response to any other proposal or inquiry for a potential transaction;
• enter into, participate, engage in or continue or renew discussions or negotiations with any person with respect to any acquisition proposal; or
• enter into, or authorize Motorola or any of its subsidiaries to enter into, any letter of intent, agreement or understanding of any kind providing for, or deliberately intended to facilitate an acquisition transaction.

However, until Motorola stockholder approval has been obtained, if the Motorola Board of Directors receives an acquisition proposal that it determines in good faith (after consultation with its financial advisor and outside legal counsel) either constitutes a superior proposal or could reasonably be expected to result in a superior proposal (and at the time of taking the following action, the acquisition proposal continues to constitute or remains reasonably expected to result in a superior proposal), the Motorola Board of Directors may:

• participate or engage in discussions or negotiations with the person that has made the bona fide unsolicited written acquisition proposal (which must not have resulted from a knowing breach of the non-solicitation provisions of the merger agreement);
• furnish to the person that has made the bona fide unsolicited written acquisition proposal (which must not have resulted from a knowing breach of the non-solicitation provisions of the merger agreement) any non-public information relating to Motorola or any of its subsidiaries, pursuant to a confidentiality agreement that contains provisions restricting disclosure and use that are no less favorable in the aggregate to Motorola than those in the confidentiality agreement entered into between Motorola and Google; and/or
• afford to the person that has made the bona fide unsolicited written acquisition proposal (which must not have resulted from a knowing breach of the non-solicitation provisions of the merger agreement) access to the business, properties, assets, books, records or other non-public information, or to the personnel, of Motorola or any of its subsidiaries, pursuant to a confidentiality agreement that contains provisions restricting disclosure and use that are no less favorable in the aggregate to Motorola than those in the confidentiality agreement entered into between Motorola and Google.

Reasonable Best Efforts clause: This is a standard clause, under which the parties to the merger agreement shows their willingness and uprightness to complete the transaction and perform their reasonable best effort to fulfill the requirements as contemplated under the merger agreement for e.g., anti-trust clearances, consents, approvals, registrations, furnishing of information etc.  In the Merger Agreement signed between the Parties, there is a standard reasonable best efforts clause.

Termination Fees clause: This is a relief clause, and one of party is compensated for the wrong committed by the other party.  In the instant Merger Agreement, Motorola has agreed to pay $375 million to Google under some conditions and Google has agreed to pay Motorola a fee of 4 2.5 billion if some of the specified conditions/ events occurs.  Further, if Google fails to make reasonable best efforts to effectuate merger under antitrust laws, it is liable upto the tune of $3.5 billion.

Golden Parachute Compensation (GPC) clause: GPC means compensation that may be paid or become payable to its named executive officers in connection with the merger and the agreements and understandings pursuant to which such compensation may be paid or become payable.   Under the Merger Agreement, the executive officers of Motorola will receive GPC (in the form of severance amount, Bonuses, LRIP Replacements, Equity, Perquisites, Tax Reimbursement) 

Further, following completion of the merger, Motorola Mobility common stock will be delisted from the NYSE and deregistered under the Exchange Act. As a result, Motorola Mobility will be a privately held corporation, and there will be no public market for shares of Motorola Mobility common stock.

Drafting Exclusivity Agreement in an acquisition transaction

Typically in an acquisition transaction, at the inception of the deal (which in practice happen before or during the same time of signing the term sheet), the parties to the acquisition (both buyers and sellers) (Parties) insists on signing an exclusivity agreement (Exclusivity Agreement).  The reasons for signing Exclusivity Agreement are:

•  the buyer wants to buy some time (some specified dated for e.g. from 1^st September, 2011 to 30 September, 2011) from the seller by undertaking a preliminary due-diligence over the target company (Target) to evaluate its interest in the Target;

• while undertaking such preliminary due-diligence, the buyer may dig some price sensitive information, which the seller would not like its opponents or markets to know.

Salient provisions in an Exclusivity Agreement

As a matter of practice, Exclusivity Agreement is not drafted in a form of standard contract/ deed, but as a letter which is at the end signed by both the Parties.  Among other things, some of the salient provisions of an Exclusivity Agreement are as follows:

• the buyer takes a promise from the seller that, the buyer and its affiliates will not during the exclusivity period solicit or enter into any acquisition proposal with other potential buyer;
• terms exclusivity fees paid to the sellers are mentioned;
• signing of exclusivity agreement under any circumstance should not construed as share purchase agreement;
• the exclusivity agreement should be kept confidential unless required by law; and
• the exclusivity agreement is not binding upon the Parties.

Exclusivity Agreement under Indian context

Generally, an Exclusivity Agreement is signed at the signing of term-sheet/ starting of negotiation and as regards the exclusivity period the practice varies.  It could be just prior to making the public announcement (in case of listed company) or could be a week/ month duration. 

But while, undertaking the preliminary due-diligence, the buyer may (and in practice almost every transaction) come across some price sensitive information- as generally while conducting due-diligence, the buyer have full excess to the accounts/documents etc of the Target.  Often, the ever eager seller is happy to disclose the secret information of the Target to the buyer.  At present there is no ‘chinese-wall’ policy etc prescribed under the law for knowing-what information may be disclosed to the buyer and what should not be disclosed.  This may give rise to possible case of insider trading, but this may be defended by inserting a ‘chinese-wall’ clause in the Exclusivity Agreement or any other such document, additional insider trading charges are very difficult to prove in the court of law.

Enforceability of Exclusivity Agreement

Exclusivity Agreement is not a binding document, once the exclusivity period ends none of the parties have any claim over the other, but during the exclusivity period if any breach is committed then that breach may be rectified under the contract laws.  In a recent transaction (acquisition of Wachovia by Wells Fargo), Citigroup Inc. had entered into an Exclusivity Agreement with Wachovia to acquire certain number of its shares, however during the Exclusivity Agreement period, Wachovia was tacitly negotiating with Wells Fargo and in the end Wells Fargo acquired Wachovia, much to the embarrassment of Citigroup.  Citigroup had no alternative but to file a law-suit for damages for $ 6 billion- it did that only to be compensated by Wells Fargo to the amount of $100 million.  So, in practice it can be reasonable concluded that an Exclusivity Agreement is difficult to enforce; only claim which a party has is under the provisions of breach of contract clause.  As a transactional lawyer, (depending on who is being represented), it is required to insert a clear and precise language for the breach of terms of Exclusivity Agreement and if possible (depending upon the negotiation), a right to first refusal clause as to the purchase of shares (if you are acting for buyer) may be inserted in the Exclusivity Agreement.

SEBI Board on proposed new Takeover Regulations based on recommendation of TRAC

Securities and Exchange Board of India (SEBI or Board) finally met on 28 July, 2011 and took major decisions on the takeover regulations, which may impact takeover activities in times to come in India.

In this post, I would deal briefly with the decisions of SEBI on Takeover regulations.  Most of the recommendations of the Takeover Regulations Advisory Committee (TRAC) are accepted by the Board.  As per the press release PR No. 119/2011 dated 28 July, 2011, the Board took note of and decided the following:

(a)   Initial trigger threshold increased to 25% from existing 15%.

Takeaways of transactional lawyer

This is a welcome move for the industry.  Listed Indian corporates may tap-in more funds from strategic investors like Private Equity firms, foreign institutional investor, foreign venture capital investors, and of course Indian investors etc. without there being any need for open offer to acquire further 20% (now 26%) shares of the company.  SEBI in its wisdom increased the triggering limit to 25%- this I believe has to do with the changing times in emerging markets coupled with the prevalent view that strategic investors having no potential or willingness to further acquire equity in the company as they are not interested in control or day to day affairs of the company.  In times to come, I view a lot of investment happening in the listed companies where new shares would be issued to the strategic investors (in form of qualified institutional placement, rights issues, preferential allotment of shares etc).

(b)   There shall be no separate provision for non-compete fees and all shareholders shall be given exit at the same price.

Takeaways of transactional lawyer

Indian promoters exiting the business would hate this.  This decision is in-effect would null the verdicts of the Securities Appellate Tribunal (SAT) in the cases of E-Lands Fashion China Holdings v. SEBI (SAT 2011) and Tata Tea Limited v. SEBI (SAT 2008).  Recently, SEBI was also very slow on giving approvals to the takeover offers in cases where a non-compete fee clause was existing in a share purchase agreement (SPA) which was triggering the open offer.  Transactional lawyers drafting the SPAs should take note of the above and delete the non-compete fee clause and if not, they may be prepared with their litigation counter-parts to challenge this policy move before the court of law, but I believe Indian courts do not give any opinion where Government’s policy is involved.

(c)    In cases of competitive offers, the successful bidder can acquire shares of other bidders after the offer period without attracting open offer obligations.

Takeaways of transactional lawyer

This would certainly ease the takeover process, however it is not clear how this policy move would apply as in is there any time period or is it left open ended after the offer period has passed.  Under the present takeover code, the successful bidder can buy the shares of other bidders-there is no limitation on this.  Under the TRAC recommendation, within twenty-one business days from expiry of the offer period, any competing acquirer would be free to negotiate and acquire the shares tendered to the other competing acquirer, at the same price that was offered by him to the public. I hope this would be clarified when SEBI comes out with draft new takeover regulations for public comments.

(d)   Voluntary offers have been introduce subject to certain conditions.

(e)    A recommendation on the offer by the Board of Target Company has been made mandatory.

Takeaways of transactional lawyer

This move shows the graduation of maturity level in the Indian capital markets.  This is in line with the practices followed in US and the EU.  We might see the emergence of white knights and other takeover market practices prevalent in the US or the EU.

(f)     Existing definition of control shall be retained as it is.

Takeaways of transactional lawyer

Verdict of SAT is very clear on this.  Transactional lawyers should read and apply the holding in cased of Subhkam Ventures (I) Pvt. Ltd v. SEBI (SAT, 2010).

(g)   The minimum offer size shall be increased from the exiting 20% of the total issued capital to 26% of the total issued capital.

Takeaways of transactional lawyer

This is in line with initial triggering event at 25%, so under the proposed takeover regulations, pursuant to successful open offer and assuming that the existing shareholders tenders the shares upto 26%, this will lead to acquisition of 51%, therefore making the target company a subsidiary of the acquirer fulfilling the requirements of section 4 of the Companies Act, 1956 (Companies Act).  Under the Companies Act, any equity holding greater than 25% gives a right to block a ‘special resolution’, however this is a type of indirect control or negative control, with 51% equity shareholdings the acquirer would exercise the majority stake in the target company.  This is also in line with the definition of ‘control’ under section 5 of the Competition Act, 2002.

(h)   The Board did not accept the recommendation of TRAC to provide for delisting pursuant to an offer and proportionate acceptance.

Certainly, in times to come there is going be a lot of in-bound acquisition deals and these changes in takeover regulations may in short run as well as long run propel the acquisition activities of listed companies in India.

Outbound acquisition by Indian firms: Case of acquisition of Peguform Group by Samvardhana Motherson Group

Indian corporates are on buying spree-more specifically outbound acquisitions.  Recently, on 13 July, 2011 board of directors of Motherson Sumi Systems Limited (MSSL) approved the acquisition of 80% shareholding in Pegasus group, Germany (Pegasus) from Cross Industries AG, Austria (Cross Industries). 

MSSL is a JV between Samvardhana Motherson Group (SMG) and Sumitomo Wiring Systems, Japan and is listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).  MSSL specializes as manufacturer of automotive rearview mirrors, automotive wiring harness, plastic components and modules to the automotive sector, HVAC systems, automotive and industrial applications and other diverse support systems related to automotive accessories sector,

Pegasus Group, is owned by Cross Industries and specializes in manufacture, supply and distribution of high quality interior and exterior products for the automotive and related industries.

Transaction Structure

The outbound transaction (as proposed) was outlined in the press report submitted with the Bombay Stock Exchange.  The proposed transaction structure is as follows:

Under the present structure, MSSL, through a special purpose vehicle (SPV) along with Samvardhana Motherson Finance Limited (SMFL) would acquire 80% shareholding/ stake in Peguform Group, Germany from Cross Industries.  Cross Industries would continue to hold 20% in Peguform Group.  This would also include acquisition of 50% shareholding of Wethje Carbon Composite (Wethje) which is a part of Cross Industries.

SPV would be structured in a form of 51:49 JV between MSSL and SMFL.

Legal provisions concerning outbound acquisition in India

The relevant Indian law provisions pertaining to outbound acquisitions are:

• Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (notification no. FEMA 120/RB-2004 dated July 7, 2004) (FEMA 120) seeks to regulate acquisition and transfer of a foreign security by a person resident in India i.e. investment by Indian entities in overseas joint ventures (OJV) and wholly owned subsidiaries (WOS) as also investment by a person resident in India in shares and securities issued outside India.  Overseas investments can be made under two routes (i) automatic route and (ii) approval route.
• The criteria for investment under automatic route are as under:
• The Indian Party can invest up to 400 per vent of its net worth (as per the last audited Balance Sheet) (50 % of net worth in case of listed Indian companies) in JV / WOS for any lawful activity permitted by the host country. The ceiling of 400% of net worth will not be applicable where the investment is made out of balances held in the EEFC account of the Indian party or out of funds raised through ADRs/GDRs.
• The Indian Party is not on the Reserve Bank of India’s (RBI) exporters' caution list / list of defaulters to the banking system published/ circulated by the Credit Information Bureau of India Ltd. (CIBIL)/RBI or  any other credit information company as approved by RBI or under investigation by the Directorate of Enforcement or any investigative agency or regulatory authority.
• The Indian Party routes all the transactions relating to the investment in a JV/WOS through only one branch of an authorised dealer to be designated by the Indian Party
• Investment in an overseas OJV / WOS may be funded out of one or more of the following sources:
• drawal of foreign exchange from an AD bank in India
• capitalisation of exports
• swap of shares
• proceeds of External Commercial Borrowings (ECBs) / Foreign Currency  Convertible Bonds (FCCBs)
• in exchange of ADRs/GDRs issued in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued thereunder from time to time by the Government of India
• balances held in EEFC account of the Indian party
• proceeds of foreign currency funds raised through ADR / GDR issues.
• In case of partial / full acquisition of an existing foreign company, where the investment is more than USD 5 million, valuation of the shares of the company shall be made by a Category I Merchant Banker registered with SEBI/ other foreign regulatory authority.
• In case of acquisition by way of share swap-prior approval from Foreign Investment Promotion Board is required.
• Prescribed form under FEMA 120 should be filed with the Reserve Bank of India within prescribed time (30 days from date of transaction, presently) for the purpose of reporting and legal compliance.
• More information on direct foreign investments by Indian firms is available at http://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=2126.
• In addition to above under section 6 of the Competition Act, 2002 (Competition Act), (if requirements under section 5 of the Competition Act are met) 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.  Further, the parties to the combination would have to approach the Competition Commission of India (the Commission or the CCI) under section 6(2) of the Competition Act and take prior approval from the Commission before executing the transaction. If the approval is not given, the parties to the combination shall not enter the transaction or work upon it.
• For investing in target company, in excess of 60% of the net worth of the company or 100% of its free reserves, the company under the Companies Act, 1956 would require approval from the shareholders of the company.

Outbound acquisition in practice

• In practice the vast majority of the transactions have been structured as friendly, plain vanilla, all-cash acquisitions of the target company, with few using company shares as consideration.
• Indian firms have been able to use ADRs and GDRs to ease access to foreign capital markets and to facilitate M&A activities in foreign markets.
• Indian firms have been able to raise acquisition financing abroad, they have faced difficultly in raising acquisition financing in India as Indian regulations restrict the ability of Indian banks to provide acquisition financing.
• The typical structure for the Indian acquirer to set up an SPV by providing some equity financing, and then to raise large amounts in the SPV through senior debt and mezzanine financing for which the target company‘s assets will be provided as security.
• RBI approval for financing of outbound investment by way of pledging of shares is rarely given in practice.
• Combination provisions under Competition Act has just started operation (from 1 June, 2011), so it would be pretty early to comment on CCIs practice, but as per the Competition Act and Combination Regulations, it appears that CCI would not take more than 30 days (210 days in case a show cause communication is issued) to clear a transaction which have no appreciable adverse effect on the competition in India.

Present deal- acquisition of Peguform Group by SMG

• The present deal (Peguform Acquisition Deal) appears to be a plain deal where the outbound investment would be following a plain vanilla through Mauritius route under automatic route. 
• With debt to equity ration of 0.8 of MSSL, the promoters of SPV (MSSL and MSFL) would face less-problem in raising finances for the acquisition.
• If the thresholds are met under section 5 of the Competition Act, Peguform Acquisition Deal would require prior approval from the CCI and a notification under section 6 of the Competition Act and Combination Regulations is required in this deal.
• If the Peguform Acquisition Deal happens to be a ‘no-all cash’ deal, then perhaps, in all likelihood, MSSL and MSFL would enter into a receivable agreement/ guarantee/ financing  agreement with a lender-preferably an Indian bank having branches outside India or having some association with foreign bank- which would in turn provide loan to Mauritius/ Cyprus/ BVI based SPV.
• MSSL and MSFL (through SPV) may enter into share-pledge agreement (not involving any Indian asset), put-option agreement with Financial Institution/ Bank in order to get financing.

Irregular IPOs: Lessons from Vaswani Industries IPO

Market players in the Indian equity capital markets have been exposed by the Securities and Exchange Board of India (SEBI) of following a cartelized approach with respect to subscription and allotment of securities in an initial public offering (IPO) in a recent order dated 11 July, 2011 in the matter of issuance of shares by Vaswani Industries Limited (Vaswani Industries).

Various complaints were filed before the SEBI regarding deliberate huge withdrawals/ rejections after the closure of the Vaswani Industries IPO.  The issue was subscribed to the extent of 4.16 times and after the withdrawals/ rejections the issue subscription dropped to 1.28 times. During the investigation, SEBI found that there was collusion amongst the BRLM/ syndicate-sub syndicate members to the issue in artificially raising the demand of Vaswani Industries shares during the bidding period.

Contentions of Vaswani Industries and the BRLM/sole syndicate member

In brief, the contentions were (Vaswani Industries):

·         Company should not be penalized for unlawful acts of others;

·         In terms of section 71 of the Companies Act, 1956 (Companies Act), an allotment made by a company to an applicant could be voidable at the instance of the applicant only under two circumstances i.e. (i) an allotment made without ensuring the minimum subscription under section 69 of the Companies Act and (ii) an allotment is made without issue of prospectus under section 70 of the Companies Act.

In brief, the contentions were (BRLM/sole syndicate member (SSM)):

·         SSM is under no obligation to underwrite the Company’s IPO post-allotment;

·         If option of withdrawal of shares is ordered then requirements of regulation 26 (4) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 may not be satisfies;

·         SEBI has no power under section 73 of the Companies Act to declare the allotment null and void.

SEBI order

This order is not as impeccable as any other order passed by Dr. K.M. Abraham, Whole Time Member, SEBI.  The order appears to be a compromise between the SEBI and the Company under which, the Company would be allowed to list and trade and at the same time the Company give a withdrawal option to all the investors who have been allotted shares (in retail and non-institutional category) for such number of shares by which allotment ratio was impacted.

Takeaways for transactional lawyers

·         During the refund/withdrawals process, separate escrow demat account for crediting the shares that are offered to be put in place.

·         In case the is under-written, then the underwriters under the agreement may purchase or arrange purchases post-IPO of such number of shares so as to ensure that the subscription does not fall below the minimum level of subscription.

·         In case the issue is not under-written/ there is non-compliance of above the entire subscription money to be refunded to the investors and all shares so allotted shall be cancelled.

·         Section 71 of the Companies Act shall not be literally applied and the irregularly allotted shares shall be cancelled and the money refunded in the interest of the securities market.