Mergers and acquisitions (M&A) can be a complex and long drawn process. However, exercise of due caution, proper planning and execution with the help of relevant experts can aid in reducing time and effort for all stakeholders. It is imperative to approach all deals appropriately and identify various generic and deal-specific issues upfront, to be able to devise a plan to mitigate foreseeable issues to the extent possible.
One of the most important steps in an M&A transaction is determining its optimal structure. Some commonly adopted transaction structures include share purchase, asset purchase (including the cherry-picking of assets and liabilities and slump sales) and schemes of arrangement. The choice of structure depends on various factors such as the nature of the businesses, nature of assets and liabilities, stamp duty, tax implications, regulatory consents and approvals, contractual consents, statutory compliance (including sector-specific requirements under foreign direct investment policy) and cash flows. Moreover, the role of judicial forums in schemes of arrangement, time and other resources are also important factors to be considered. Each transaction structure has its own advantages and disadvantages and there is no straightjacket formula that can be applied to all.
Purchase price payment and related details including statutory payment timelines, exchange rate fluctuations, milestones, holdbacks, working capital adjustments, closing adjustments, deduction of tax from the consideration payable, prior conditions, and the payment of expenses including stamp duty and professional fees need to be analysed and carefully dealt with. Uncertainty surrounding the purchase price payment may greatly impact commercial considerations and , consequently, the closing of the transaction. Wherever necessary, escrow structures should be adopted to safeguard the seller’s interests against risks such as those concerning payments, contract uncertainties, statutory requirements etc.
Representations and warranties (R&W) are of the utmost importance, and may be made as of a particular date or as of multiple dates, with or without room for amending or supplementing it in case of occurrence of any material changes. R&Ws may be broad or specific depending on the transaction. “Material” and “knowledge” qualifiers are normally used where the seller or its promoters may not have complete information on day-to-day affairs. R&Ws could be dealt with in various buckets, such as “fundamental”, “business”, “operations”, “title” and “tax”, and specific consequences for making inaccurate statements or misrepresentations may also be set out in the definitive agreements. It is better for the party making the R&Ws to make proper disclosure through exceptions to those R&Ws so that other parties involved are not entitled to make subsequent claims on such R&Ws. Some parties insist that, unless specific disclosures are made against each R&W, a generic disclosure will not qualify the R&Ws and previous knowledge, whether gained through diligence or otherwise, will not limit a party’s right to rely on any R&W in the transaction documents.
While indemnification is generally provided for breach of covenants and for any misrepresentation or inaccuracy of R&Ws, its extent and applicability vary from transaction to transaction. Concepts such as limitation periods, indemnity caps, per claim thresholds, de minimis baskets, basket deductibles and third-party claims have gained critical relevance as they aid in balancing commercial positions.
Facilitating and managing business between execution and closing date(s) is also a key concern that needs to be addressed such that business continuity is not adversely impacted. Generally, parties agree that matters in the ordinary course of business may be undertaken with due consent and anything beyond ordinary course of business or beyond certain agreed thresholds will require express consent. Further, legal advice should be sought to prevent premature actions or actions that may have serious implications under legislation such as the Competition Act, 2002 and the Income Tax Act, 1961.
Where any M&A transaction results in acquiring less than a 100% stake, separate agreements should be executed for dealing with the relationship between various shareholders interse and between them and the company. Relevant provisions should also be incorporated in a company’s constitution documents to avoid inconsistency between the understanding of the parties reflected in the definitive agreements and the constitution documents.
Lastly, standard, miscellaneous, or general provisions such as term, termination, notices, expenses, severability, succession and assignment, governing law, dispute resolution and specific performance should be precisely drafted as they are critical to any arrangement and may prove to be a point of conflict if not negotiated and drafted with prudence.
M&A transactions are usually complex, and it is critical to engage the best team of experts for valuations, legal advice, integrations and sector-specific inputs. Only a solution-oriented approach based on in-depth knowledge and expertise can successfully close a transaction.
Arvind Sharma is a partner in the general corporate practice at Shardul Amarchand Mangaldas & Co in New Delhi
216 Okhla Industrial Estate, Phase III
New Delhi – 110 020.
Executive Chairman: Shardul Shroff
Tel: +91 11 4159 0700
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