Mergers, Acquisition And Joint Ventures

Mergers, Acquisitions and Joint Ventures    Mohit Saraf  Partner, Luthra and Luthra Why M&A    Underlying principles for M&A transactions 2+2 > 4 Additional Value of “Synergy”- Merger  of Bharti’s subsidiaries- Cellular and Infotel with itself  Why M&A? q Buying competitor- UB Acquisition of SWCL HORIZONTAL INTEGRATION: a  q    MARKET EXTENSION- New Markets Existing Service   – Bharti’s foray into Rajasthan and Chennai New Services Existing Markets- Bharti   purchase of Comsat (VSAT and Broadband services) Why M&A? Vertical Integration- Internalizing crucial forward or backward activities Forwar For ward d Integra Integratio tion: n: Buy Buying ing a cust custome omer  r  Back ckwa ward rd In Inte teg gra rati tion on:: Buy uyin ing g a Su Supp ppli lieerReliance buying out FLAG q Diversification- Agriculture with Rothschild (Field Fresh), Airports with DLF and CHAMPS q Restructuring q   Transaction Issues q Legal Due Diligence Ø Acquirer/ Private Equity Ø Seller  q Two types of transactions documents Ø Subscription Agreement Ø Shareholders Agreement  Transaction Issues (…contd.) Subscription Agreements Right to subscribe based on reliance upon various reps and warranties q Prominent elements Title w.r.t. transferred shares Standing of Company Adverse judicial orders Related party transactions Due authorization and valid execution of agreement q Ø Ø Ø Ø Ø Ø  Transaction Issues (…contd.) Subscription Agreements Ø Ø Ø Ø Ø Ø Ø Ø Full Disclosure of liabilities Status of proprietary assets like IP, real estate Material contracts and obligations Financial statements must reveal true and fair   picture Labour dues Environmental compliances Disclosures in listed companies- Insider Trading Regulations Transaction Issues (…contd.) Subscription Agreements q Ø Ø • • Closing Related Issues Conditions precedent to closing- govt. approvals, shareholders approvals Indemnity Aggregate Liability  De minimus Threshold q Post Closing Adjustments q Reps and Warranties survival vs. Claims survival q Termination • Transaction Issues (…contd.) Shareholders Agreement q Effectiveness of SHA q Management Control Board Control Shareholders Meeting control quorum requirements affirmative list Ø Ø Ø Ø  Transaction Issues (…contd.) Shareholders Agreement Transferability Restrictions Public companies vs. Private Right of first Refusal Tag Along rights Drag along rights Put and call options Transfer restrictions fall at IPO q Liquidation Preference q Ø Ø Ø Ø Ø Ø Transaction Issues (…contd.) Shareholders Agreement q Non- Compete provisions on promoter  q Termination- if minority holding falls below threshold  Transaction Issues (…contd.) Due Diligence Report q Approvals and Permissions q Material Agreements q Indebtedness and Lender restrictions q Insurance q Litigation q Human resources and IP Case Studies Reliance Infocom- FLAG q q q FLAG – bankrupt but sound asset base FLAG merged with private limited subsidiary of Reliance Infocom Pivotal’s competing bid- Reliance’s strategyVoting agreement with Harbert and Triage. Case Studies Bharti- Rothschild q q Ø Ø Ø q q 50-50 JV to exploit inadequate exploitation of  agricultural sector  Diversification exercise prompted by favorable tax and duty regimes  by availability of surplus funds HR to spare from wide scale outsourcing of own activities. Confined to back-end of food retailing because of  FDI limitations.
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Mergers, Acquisitions and Joint

Ventures

 Mohit Saraf
 Partner,
 Luthra and Luthra
Why M&A

 Underlying principles for M&A
transactions
 2+2 > 4
 Additional Value of “Synergy”- Merger
of Bharti’s subsidiaries- Cellular and Infotel
with itself
Why M&A?

q HORIZONTAL INTEGRATION: Buying a
competitor- UB Acquisition of SWCL

q MARKET EXTENSION-
 New Markets Existing Service – Bharti’s
foray into Rajasthan and Chennai
 New Services Existing Markets- Bharti
purchase of Comsat (VSAT and Broadband
services)

Why M&A?

q Vertical Integration- Internalizing crucial forward
or backward activities
 Forward Integration: Buying a customer
 Backward Integration: Buying a Supplier-
Reliance buying out FLAG
q Diversification- Agriculture with Rothschild (Field
Fresh), Airports with DLF and CHAMPS
q Restructuring
Transaction Issues

q Legal Due Diligence
Ø Acquirer/ Private Equity

Ø Seller

q Two types of transactions documents
Ø Subscription Agreement

Ø Shareholders Agreement


Transaction Issues (…contd.)
Subscription Agreements
q Right to subscribe based on reliance upon various
reps and warranties
q Prominent elements
Ø Title w.r.t. transferred shares

Ø Standing of Company

Ø Adverse judicial orders

Ø Related party transactions

Ø Due authorization and valid execution of agreement

Ø


Transaction Issues (…contd.)
Subscription Agreements
Ø Full Disclosure of liabilities
Ø Status of proprietary assets like IP, real estate
Ø Material contracts and obligations
Ø Financial statements must reveal true and fair
picture
Ø Labour dues
Ø Environmental compliances
Ø Disclosures in listed companies- Insider Trading
Regulations
Ø


Transaction Issues (…contd.)
Subscription Agreements
q Closing Related Issues
Ø Conditions precedent to closing- govt. approvals,

shareholders approvals
Ø Indemnity

• Aggregate Liability

• De minimus

• Threshold

q Post Closing Adjustments
q Reps and Warranties survival vs. Claims survival
q Termination
Transaction Issues (…contd.)
Shareholders Agreement
q Effectiveness of SHA
q Management Control
Ø Board Control

Ø Shareholders Meeting control

Ø quorum requirements

Ø affirmative list


Transaction Issues (…contd.)
Shareholders Agreement
q Transferability Restrictions
Ø Public companies vs. Private

Ø Right of first Refusal

Ø Tag Along rights

Ø Drag along rights

Ø Put and call options

Ø Transfer restrictions fall at IPO

q Liquidation Preference
Transaction Issues (…contd.)
Shareholders Agreement
q Non- Compete provisions on promoter
q Termination- if minority holding falls below
threshold

Transaction Issues (…contd.)
Due Diligence Report
q Approvals and Permissions
q Material Agreements
q Indebtedness and Lender restrictions
q Insurance
q Litigation
q Human resources and IP
Case Studies
Reliance Infocom- FLAG
q FLAG – bankrupt but sound asset base
q FLAG merged with private limited
subsidiary of Reliance Infocom
q Pivotal’s competing bid- Reliance’s strategy-
Voting agreement with Harbert and Triage.
Case Studies
Bharti- Rothschild
q 50-50 JV to exploit inadequate exploitation of
agricultural sector
q Diversification exercise prompted by
Ø favorable tax and duty regimes
Ø by availability of surplus funds
Ø HR to spare from wide scale outsourcing of own activities.
q Confined to back-end of food retailing because of
FDI limitations.
q