Mergers and acquisitions have
come out as the very strong tools for business growth and strategic
consolidation across the globe, and India is no exception. Functioning in a
dynamic and competitive marketplace, M&A transactions enable the expansion
of firms' footholds, facilitate their acquisition of new access to
technologies, better streamline operations, and enhance the markets. Whether
you are a start-up that is looking for acquisition of a complementary business
or a large business planning to merge as strategic moves in pursuit of market
share, smooth execution calls for an absolutely necessary legal framework.
These aspects make legal spectrum
governing M&A multifaceted and depends upon the corporate law, competition
law, tax law, and employment law. No matter how big or small, every M&A
deal goes through regulatory clearances, complicated contracts, due diligence
procedures, and integration issues post transaction. Lacking in legal
understanding or strategy, even the best deals can turn sour and get costly in
terms of disputes or regulatory fines or operational disruption.
M&A imply, for business
managers, a threshold of critical juncture in transactions since they represent
much opportunity and great risk. Beyond dollars and cents and their corresponding
market valuations, it entails a very technical legal process that requires one
to be expert and foresighted. Every phase-from planning through to due
diligence, negotiation, closure, and post-merger integration-deals with legal
challenges that have continuing implications for the business.
That deals with nuances of due
diligence to be applied legally, negotiating contracts, employee rights,
transfer of intellectual property, tax implications of all such things while
ensuring an M&A deal success. Further for large transactions, the approval
and oversight process by the regulatory bodies like the Competition Commission
of India (CCI), the Securities and Exchange Board of India (SEBI), and the
Reserve Bank of India (RBI) is critical so that these are in keeping with
antitrust laws as well as other sector-specific regulations.
In the following blog post, we
shall detail a number of the major legal issues an enterprise needs to be aware
of in contemplating an M&A deal. It would be best exemplified by drawing on
instances of successful M&As in India, like those executed by Vodafone Idea
and others, to illustrate how companies can navigate the complexities of legal
compliance and secure their interests.
Whether you're starting out with
your first entrepreneurial foray, or you're a seasoned businessman and
strategist who's been eyeing some very high-value mergers, this guide will be
your indispensable legal knowledge- making-informed decisions, reducing risk,
and maximizing the value of your M&A transactions.
Mergers and Acquisitions (M&As) Introduction
By way of explanation, mergers
and acquisitions are involving the consolidation of two or more companies.
Although nowadays people use both terms pretty much inter changeably, they mean
something slightly different:
Merger: Merger refers to
the mergers wherein the merging two firms or companies unite to create a single firm. In
such a merger, the original firms lose their existence and culminate in a new company or firm.
Acquisition: Acquisition is where one firm or company buys out another completely or partially by buying the assets or equity of the acquired firm or company. The acquiring firm or company remains in control, while the acquired firm or company might stay on as a subsidiary or becomes fully absorbed into the acquiring firm or company.
Merger and acquisition come with
very complex and lengthy legal procedures, and business owners need to be clear
mind set whether they are coming from the acquisition or the merger journey.
Due Constancy is the Backbone of Successful Merger and Acquisition (M&A)
Due constancy alludes to the
broad examination or audit or verify by buyer and target firms into the target
company's monetary, lawful, and operational standing before any merger and
acquisition can be closed. That way the buyer will understand just how risky and
what are the possibilities.
Financial Due Diligence:
The seller must unveil or highlight his financial records, whether in terms of
profits, liabilities, tax history, revenue streams, etc.
Legal Due Diligence:
Review of contracts on a legal basis; IP issues; lawsuit; and compliance status
with laws.
This would mean operational due
diligence over the business model, supply chain, and human resource make-up of
the target business.
For instance,
Flipkart deal was the huge deal of around $16 billion by Walmart in the year 2018. Before acquisition, it has done all due diligence regarding Flipkart's
financial health and Indian regulatory compliance. Due diligence analysis
includes the entire aspects of customer base analysis, legal contracts, and
operational risks being associated with Flipkart in determining whether Walmart
should go for acquisition in order to come into the market of e-commerce in
India.
Key Legal Tools Applied in M&A
The legal form of an M&A is
contained in just a few very basic documents:
Letter of Intent is that
non-binding paper which basically consists of summarizing general terms of a
deal.
A Purchase Agreement is
that lawfully official contract that concludes the deal whereby terms and
conditions of the transaction, cost, warranties, etc. are finalized.
Non-Disclosure Agreement
(NDA): This ensures that delicate information disclosed amid negotiation is
kept confidential.
Shareholders' Agreement:
It decides the rights and obligation of the shareholders after purchasing in a
stock deal transaction.
Example: The
purchase agreement by Microsoft in 2016 for around $26.2 billion bought LinkedIn; here, it stipulated the terms of the acquisition to be adopted
between LinkedIn and Microsoft; although LinkedIn didn't lose its brand and
independence, it became a part of the group. There were also non-compete
clauses under which no key executive of LinkedIn would compete against it at
times.
Approvals and Compliance in Regulations
Many M&A transactions require
regulatory approval, especially those involving giant companies or cross-border
deals. It is enacted mainly as a result of avoiding monopolies so that there
would be free market.
Antitrust Laws: The
respective firms have to follow antitrust policies to not indulge in
monopolistic practices. In India, CCI indeed bears enormous responsibilities
while sanctioning the major merger and acquisition processes.
Foreign Direct Investment
Regulations: The M&A of a foreign company or firm requires an approval
under FDI rules and regulations.
For instance, in
2018, Vodafone India and Idea Cellular was merged to form Vodafone Idea as the biggest
telecom operator in the country. In the name of the merger, permission from CCI,
Department of Telecommunications (DoT), National Company Law Tribunal (NCLT)
and SEBI have been taken. Since the regulatory approvals were taken place, the
merger didn't lead to an unfair monopoly of the telecommunication sector.
Workers' Rights and Contractual Obligations
Indeed, M&A transactions have
a lot of influence on workers. Thus, the legal process should consider
employment contracts, pensions, benefits, and union agreements.
Employment Contracts: The
employment contracts of employees of the company compulsorily either extend or
modify them. Severance packages, retention bonuses, and non-compete agreements
are some of the best-enchanted options in this category.
Collective Bargaining: The
new owner usually gets more responsibility in collective bargaining agreements
even at unionized firms.
Severance and Retention:
Companies typically provide severance package to employees separated or
retention packages to those retained once they acquire it.
For instance, when
Tata Motors acquired Jaguar Land Rover from Ford in 2008, it inherited
agreements with employees and pension liabilities. British workforce unions
were also pretty strong, so they already had the collective bargaining
agreements instituted, so Tata had to honour those. So that was an added
complexity in acquiring.
Tax Implication of M&A
Any M&A deal has the element
of taxation as one of the most sensitive parts. The tax implications regarding
the transaction, in terms of the structured deal, must therefore be clear to
both the buyers and the sellers.
Capital Gains Tax: Those
sellers will be charged capital gains tax on their shares or assets on selling
them off.
Stamp Duty: Stamp duty is
collected on all purchases involving transfer of immovable property or shares.
The amount paid varies by state or nation.
Tax Structuring: Buyers
are often looking to structure deals to pay as few liabilities in taxes as
possible. Different tax consequences for share sales and asset sales; very
important to determine which of those structures is the most tax-efficient.
For instance, the
tax incidence was highly significant in the Walmart deal to acquire Flipkart,
since the deal imposed its tax incidence upon the shareholders of Flipkart.
Most the major stakeholders faced capital gains taxes majorly because the
company was a foreign-owned company, Flipkart. Tax liabilities needed to be
considered in structuring the acquisition deal for Walmart.
Example:
Acquisition by Adani Group of controlling stake of MIAL, Mumbai International
Airport Limited. Of great importance, tax structuring should be done carefully
considering possible liabilities incurred since this acquisition is based on
high-value asset acquisition. Significant share and assets transfer will
require navigating capital gains and stamp duty law for Adani Group.
Post-Merger Integration and Intellectual Property
It will later involve combining
the operations of two companies after signing the deal. The integration, in
this context, entails technology and supply chains as well as intellectual
property. In this regard, the effective transfer of trademarks, patents, and
other IP assets becomes imperative.
All Intellectual Property Rights
are formalized. In some cases, trademarks registrations, patents, and records
of copyright must be updated.
Operational Integration:
The integration process of supply chains, finance systems, and IT architecture
brings forward legal and logistical constraints.
For example, it
purchased Android Inc. in 2005, when this still remained a completely unknown
small time company. It is how Google acquired those precious intellectual
properties with the mobile operating system Android. Following the legal
formalities to transfer and protect all those patents and trademarks propelled
Android to its global success.
For instance, example of post-merger integration relates to Network18 Media
& Investments acquired by Reliance Industries back in 2014 with massive
intellectual property. Network18 was a holding company for some of the most
vital trademarks and media properties etc., which had to be transferred to
Reliance after acquisition.
Legal Conflicts and Risk Management
Sometimes, legal disputes may
arise in M&A deals as a result of due diligence revealing previously
undisclosed liabilities or that one party defaulted in a term of an agreement.
This encompasses questioning the valuation over the Target Company, rights to
intellectual property, or unexpected financial liabilities.
Risk Management: Contracts
are supposed to be indemnity clauses between both parties, protecting each
other from risks that may occur unexpectedly. This is possible through
representation and warranty insurance.
In the specific process under
the terms of agreement, there should clearly define the process of dispute
resolution, saying whether arbitration or litigation.
Example: The deal
between Xerox and Fujifilm faced lawsuits between the two companies.
Shareholders of Xerox rejected the merger terms for they justified that it was
undervalued. Eventually, the deal was annulled. That way, this presents the
merits of the clear definition of the contracts that respect the rights of shareholders
in huge transactions of M&A.
Consult with Lawyer Early
Mergers and acquisitions are a
complicated legal issue because the complexity varies by industry,
jurisdiction, and deal size. Any professional early advice will prevent costly
mistakes in the transaction process itself and ensure the transaction is
structured to operate efficiently.
Besides, there should be
experience on a legal team on M&A work to seek advice on that matter
regarding their needs according to your business need. The right legal counsel
will be very significant in helping you through navigating the tricky terrain
of M&A easily and successively whether it is for a small business or a
large enterprise.
Conclusion
Mergers and acquisitions open
doors for the business owner but involve tremendous legal complexity at the
same time. Every move-from due diligence to regulatory clearances, from
structuring deals to managing tax liabilities-is planned legally in every detail.
Study of examples and having engaged experienced legal counsel on board hold
the key to the perfect renegotiation of the M&A landscape.
Be it acquisition of a competitor
or merging with another firm or company to increase your market, the laws surrounding such
an event are very treasured in terms of the deal's success and smoothness.
