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Companies Act, 2013 Industry’s perspective on M&A Provisions

Companies Act, 2013 Industry’s perspective on M&A Provisions. 22 February 2014. Equity shares with DVRs - Commonly used instrument for PE/ VC funding Used for various commercial reasons – typically to separate economic interest and voting rights

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Companies Act, 2013 Industry’s perspective on M&A Provisions

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  1. Companies Act, 2013Industry’s perspective on M&A Provisions 22 February 2014

  2. Equity shares with DVRs - Commonly used instrument for PE/ VC funding • Used for various commercial reasons – typically to separate economic interest and voting rights • New provisions applicable to private companies also – Draft rules provide: • 3 year dividend (≥10%) track record • 25% limit on issuance • No default in annual filings for 5 years • Impact on future capital structuring for investments in private companies • Grandfathering provisions for past? Funding - Differential equity instruments Not Notified

  3. Convertible Preference Shares popular for PE/ VC funding • Allows for conversion to equity in future, based on agreed valuation parameters • Pro-rata voting rights to accrue, where dividends are not paid for 2 years – Applicable to private companies as well • Impact on commercial arrangement regarding voting rights • Challenges in issuing 0% Preference Shares • Waive voting rights? • Change instrument to Convertible Debentures? • Grandfathering provisions for past? Funding - Voting rights for preference shares Not Notified

  4. Prohibition on insider trading • Extended to unlisted companies • How to quantify impact? • Definition of ‘Securities’ referenced to SCRA – “Marketable securities” • Applicable to Private Companies? • SEBI Insider Trading Regulations – Cooling off period, disclosures, trading window, model code of conduct • Prohibition on forward dealings • No director or KMP to enter into a forward contract for delivery of shares or debentures • Standard provisions in M&A deals - Permitted by RBI and SEBI • Impact assessment required Dealing in shares by KMPs and other personnel Notified

  5. New merger tools Not Notified + Fast track mergers • Simplified procedure - Internal restructuring more time and cost efficient • Clarity required on certain concepts + Cross border mergers • Fund raising opportunities, Efficient cash repatriation, un-winding of holding companies etc • Awaiting alignment of other regulations

  6. Imperative for schemes to receive concerned regulators’ buy-in • Clarity required on regulators, who would receive scheme – Less discretion • Intimation to all the authorities may increase time, cost and effort Merger – Procedural aspects • Threshold prescribed for objections (10% shareholding or 5% debt) - Avoids frivolous litigation and reduces unnecessary delays • Dispensation from creditor meetings – Welcome step; Different positions adopted by different state courts/ judges • Dispensation from shareholder meetings - Thresholds? Not Notified - Intimation to multiple regulators prior to shareholders’ meeting + Objections to scheme Migration from High Court to NCLT – Any grandfathering provisions?

  7. Basic requirement in M&A deals • Entrenchment provisions introduced for Articles • Transfer restrictions inter-se shareholders enforceable in a public company • Correlation of sickness with inability to pay debts – favourable for stakeholders • Earlier “erosion of net worth” criteria subjected to accounting vagaries - Not an appropriate measure; Now removed • Classification as sick company and reference to BIFR • Discomforting for bankers and investors Investment perspectives Not Notified + Recognition to contractual shareholder rights + Revival and rehabilitation of sick companies

  8. Thank you!

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