This article is written by Brijesh Devi, pursuing a Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho. The article has been edited by Tanmaya Sharma (Associate, LawSikho) and Smriti Katiyar (Associate, LawSikho).
Although the terms “mergers” and “acquisitions” are sometimes used interchangeably, their meanings are distinct. An acquisition is when one firm buys another outright. A merger is the coming together of two businesses to form a new legal entity under a single corporate name. By examining comparable companies in the industry and employing measures, a company can be valued objectively. Mergers and acquisitions (M&A) is a broad phrase that describes the merging of two companies. It provides an option to expand organically for buyers seeking to achieve strategic goals; it provides an opportunity for sellers to cash out or partake in the risk and reward of a newly created organization. Cross-border mergers and acquisitions (M&A) have risen in popularity as a means of quickly gaining access to new markets and customers, and global trends indicate that deal volume will continue to rise. Hence it is necessary to know the foreign regulations before entering into an M&A transaction with the company of the concerned nation. This article compares the German legal framework for M&A with that of India.
Comparison between German M&A Laws with India
Legal and regulatory issues frequently have a significant impact on cross-border M&A, thus it is important to look into the legal nitty-gritty of such transactions. To have an overview of the regulatory aspect of the foreign company (target/acquirer) it is always advisable to compare the laws relating to the M&A of both countries. Below is a comparison of German and Indian M&A laws.
Different adjudicating authorities
If the applicable turnover thresholds of the participating entities are exceeded (i.e., the total turnover of all participating entities is more than €500 million worldwide; one participating entity’s turnover in Germany is more than €50 million, and another participating entity’s turnover in Germany is more than €17.5 million), a merger control proceeding with the Federal Cartel Office is required. The transaction cannot be completed until the statutory waiting period (usually one month) has expired or the German Federal Cartel Office has issued an explicit clearance notification. The necessity for merger control clearance applies to all industries. The European Commission will be in charge of merger control if the participating businesses’ turnovers surpass the higher EU thresholds. Foreign direct and indirect investments in particular industries that exceed a threshold of 10% of the target’s shares or voting rights are subject to mandatory foreign investment control by the Federal Ministry of Economic Affairs and Energy. The following industries are impacted: military equipment; information technology security; essential infrastructure, such as energy, water, gas, and telecommunications; and health. Transactions in such industries must be completed when a two-month waiting period has passed or the ministry has issued an explicit clearance notification. The legislative rules for foreign investments have recently been tightened (as of May 2021), and the list of industries covered has been increased. Local governments may have anticipatory rights if they invest in real estate enterprises.
In India, if specific assets or turnover levels established in the Competition Act, 2002 are met, the acquisition of shares/voting rights/assets/control of an entity will also require prior clearance from the Competition Commission of India (CCI). The Ministry of Corporate Affairs of the Indian government issued a notification on March 27, 2017, indicating that a combination will not require previous notification to and clearance from the CCI if the assets being acquired or combined are valued at less than INR 3.5 billion in India; or the turnover is less than INR 1 billion in India. Other regulatory approvals in India are based on the following factors:
- the target’s industry of operations;
- the nature of the purchase in an acquisition;
- whether the buyer is a foreign national; and
- whether the target is on the list or not
For example, a non-resident may purchase up to 74 percent of the shares of a brownfield pharmaceutical firm using the automatic method (i.e., without obtaining government approval); but, acquisitions greater than 74 percent require government approval. The Indian insurance regulator must approve any investment in the insurance business that exceeds 5% (issuance or transfer). The Reserve Bank of India (RBI) must approve the purchase of a banking company in India. Schemes of arrangement are approved by the National Company Law Tribunal (NCLT) and, in the case of public listed companies on the stock exchanges, the Securities and Exchange Board of India must approve offer documents relating to transactions that trigger an obligatory tender offer (SEBI).
The Federal Cartel Office is in charge of ensuring that merger control requirements are followed. The Federal Cartel Office has the authority to levy hefty fines (up to 10% of the infringing party’s turnover) and to mandate the demerger of already-completed deals. The Federal Cartel Office has the authority to undertake formal investigations, which may include formal interrogation, dawn raids, and document seizures. The European Commission will keep an eye on transactions that are subject to EU merger control laws. Similar to the Federal Cartel Office, the European Commission has similar powers. Compliance with foreign investment controls is monitored by the Ministry of Economic Affairs and Energy. The Federal Financial Supervisory Authority (BaFin) is in charge of overseeing transactions involving publicly traded companies’ shares, ensuring that rules such as Insider trading regulations; ad hoc publication requirements; public takeover regulations BaFin has broad investigative authority and can work with local prosecutors to Investigate firms, question witnesses, confiscate records, and launch official investigations that could result in fines for infringing businesses and criminal charges for those implicated. BaFin is also in charge of ensuring that some private equity and venture capital firms are properly organized and follow all applicable legal requirements.
SEBI, the RBI, the NCLT, and the CCI are the key regulators of M&A activities in India. SEBI is India’s securities law regulator, and it requires compliance with SEBI laws for certain types of transactions involving publicly traded companies (eg, mandatory tender offers, buybacks, delisting). The Reserve Bank of India (RBI) is India’s central bank, and it oversees foreign investment into the country. Foreign investments into India must adhere to the RBI’s mandated pricing criteria, and in some cases, RBI permission may be required. Schemes of arrangement are regulated by the NCLT, while India’s competition regulator is the CCI. Furthermore, sectoral regulators may have the authority to control specific sorts of businesses. For example, The Insurance Regulatory and Development Authority of India oversees insurance investments and must authorize share acquisitions over a particular threshold; foreign investments in the brownfield pharma sector over a specific threshold require prior clearance from the Department of Pharmaceuticals. Certain types of aviation investments require clearance from the Ministry of Civil Aviation ahead of time.
The German tax system is complicated and constantly changing. In most cases, the seller is responsible for paying taxes on the gains realized as a result of the business transfer. On May 6, 1996, Germany and India signed a double taxation treaty to avoid double taxation on income and capital. Acquisition of shares, in particular, requires notarization before a German notary public to be valid in Germany. The obligation must be notarized if the purchase agreement includes a transfer of the real estate, shares, or the title to the shares. As a result, more charges may be incurred. In Germany the following items are subject to the real estate transfer tax during M&A transactions:
- Real Estates sale and transfers,
- as well as the sale and transfer of more than 95 per cent of the shares of a firm that owns real estate directly or indirectly.
The buyer is usually responsible for the real estate transfer tax. The real estate tax rate is computed as a percentage of the real estate’s purchase price or allocation, and it varies based on the federal state in which the property is located (anywhere between 3.5 per cent and 7.5 %).
Stamp duty is the most prevalent type of transfer tax. For the conveyancing of immovable property, transfer charges may be required in specific instances. Instruments performed in India are subject to stamp duty at statutorily fixed rates under the central and most state stamp laws. Instruments executed outside India and received in India that relate to any property located in India, or any matter or activity is done or to be done in India, are also subject to stamp duty. The stamp duty charged on instruments differs from state to state since different stamp laws have been implemented. Certain types of stamp duty, on the other hand, are applied universally across India. Stamp duty on a share transfer, for example, is computed at 0.015 percent of the value of the shares being transferred and is paid by the seller if the shares are exchanged off-exchange. The stamp duty is paid by the buyer if the shares are exchanged on an exchange. In most states, the NCLT order is subject to stamp duty in the event of a merger, amalgamation, or demerger. Stamp duty, especially if it is determined on an ad valorem basis or is not capped, can be a large transaction expense.
The laws of each company’s country are bound to differ & it is essential to consider both country’s laws before structuring & entering the deal. The most important condition for cross-border M&A to take place is that regulatory inspection of ownership patterns and holding structures be conducted. Overall, cross-border mergers and acquisitions can help companies and improve their stock price, but as we’ve seen, there are several aspects to consider to avoid any problems. Thorough and planned preparation and commitment of time and other resources are the most crucial aspects that separate successful M&A transactions from those that fail.
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