lawyer’s work with respect to the Takeover Code in M&A transactions

This article is written by Krishnendra Joshi, a student of Dream Job BootCamp, a programme run by Lawsikho, with inputs from Abhyuday Agarwal, COO, iPleaders.

2018 is being cited as a blockbuster year in terms of M&A activity in India. Deals amounting to more than 104.5 billion took place during the year. (see here). Industry experts have further estimated that deals will cross the 100 billion mark in 2019. Seeing such astronomical figures, law students, young lawyers are bound to get fascinated.

Being an M&A lawyer is definitely cool – you get cited in newspapers, LegallyIndia and get recognized in global legal practice magazines.  

An M&A lawyer is expected to possess industry awareness along with legal acumen, an ability to negotiate persuasively with the parties and excellent drafting skills.

However, nobody is a born M&A lawyer. The skills to be successful are acquired and fine-tuned over time.

Before you can get down to acquiring those skills, let us inquire into the question, what is the work that M&A lawyers do?

Structuring the deal

There are a number of options available in choosing a vehicle to give effect to the takeover, such as whether to acquire a target company directly or indirectly through a subsidiary incorporated in a tax haven like Mauritius or Cayman Islands, or whether to acquire shares of the target, specific assets or the entire business of the target company is a structuring decision. These structuring decisions are guided by tax planning, corporate and other regulatory considerations. The method to be used for financing the acquisition is also important from a structuring perspective. Which structure to use for an M&A transaction, how to draft the necessary agreements for each structure is dealt with in great detail in the Lawsikho Diploma in M&A, Institutional Finance and Investment Laws.

Drafting, modifying and negotiation of transaction documents

  1. Shareholders Agreements
  2. Share Purchase Agreements
  3. Share Subscription Agreements
  4. Third party consent letters

This is explained in detail below.

  • Drafting each of these documents is not taught in LLB or CS course, but are very difficult to learn. You need an exposure to:
    • commercial intent of an investor (expressed through certain technical clauses in each contract or document),
    • connected legal framework, which typically involves multiple laws and those who are new to this work find it confusing and difficult initially and
    • certain aspects of contract drafting.

Irrespective of whether you are a lawyer, a working professional who has acquired a law or CS degree or a student, these aspects are not taught in mainstream courses or diplomas in universities or in certificate programs. However, acquiring these skills immediately enhances employability and value creation in your existing career, if you deal with such aspects. That is the reason the Lawsikho Diploma in M&A, Institutional Finance and Investment Laws was specifically designed to teach these aspects.    

Securing necessary regulatory approvals for the transaction

Prepare documentation for and apply for necessary approvals from CCI/ SEBI/ sectoral regulator/ regulator notified under Consolidated FDI Policy (for any sectors under approval route)

Working on Draft Letter of Offer and Detailed Public Statement (DPS) (in case of listed companies)

An M&A lawyer runs the acquisition deal. He works in as per a tight activity schedule. First of all, A Draft Letter of Offer detailing Terms & Conditions of the offer is prepared after a detailed public statement is issued by the acquirer in consultation with the Merchant Banker and a lawyer. One of the unique features of the takeover code is the determination of the best possible offer price to safeguard against arbitrary price discovery. Lawyers advise on the relevant criteria to facilitate the offer price and size of the issue.

The lawyer verifies that the draft letter of offer is prepared in line with the letter of intent. The level of deviation determines the scope for negotiation. He has to ensure that it is not misleading and has all the material disclosures so that it invites a minimum level of scrutiny from SEBI. Lawyers also advise the acquirer on depositing the purchase consideration for the transaction in an Escrow A/C maintained with a scheduled bank as per the requirement of reg 17 of SEBI (SAST, 2011). Likewise, a lawyer is expected to prepare well reasoned legal opinions and clarifications with regard to procedural and substantive provisions of the SEBI (SAST) for the client. The queries can range from advising clients on the events that trigger the requirement of a mandatory open offer to guiding on them on the exemptions available to disclosures mandated under the regulations.

An M&A lawyer needs to be well-conversant with the Takeover Code and should also be able to draft various acquisition-related documents such as the letter of offer and detailed public statement.

To start with, you can get a sense of these documents as they are available online for free on the SEBI website. We teach how to extract and draft such documents in detail in the Lawsikho Diploma in M&A, Institutional Finance and Investment Laws, which also covers PE and VC transactions, see here.

Advisory Work

There is a lot of advisory work before, during and after an M&A transaction, all of which is billed by law firms. This can relate to the Takeover Code, FDI Policy, provisions of the Companies Act, licenses, approvals or some other aspects. It can also be triggered if the company is trying to undertake a specific corporate action.

An example of advisory work is the question whether the Takeover Code is triggered in a given situation when promoter shareholding increases after the company has undertaken a buyback of its shares from the open market. An M&A lawyer is often flooded with such questions requiring him to advise the client with the correct interpretation of the Takeover Code.

Advisory work may be followed by some regulatory work, such as working on an exemption application before the Takeover Panel of SEBI.

Which are the key laws and regulations you need to develop expertise in to perform such work proficiently?

The most important laws are SEBI and RBI regulations, FDI Policy and Companies Act. A lawyer’s role becomes significant especially in situations where other corporate and security laws are applicable in conjunction with the Takeover Code. For example, in cross-border transactions, compliances with FEMA regulations and FDI policy is also applicable. In such cases, the regulatory oversight also increases as RBI also comes into the picture along with SEBI. The nature of the transaction-enabling acquisition, of a target company, is bound to bring in some legal and business issues. For example, Is there a safeguard prohibiting the acquirer company to alienate its assets through its directors once the takeover offer is accepted by the target company? Can a director of the acquiring company become a director of the target company before and after completion of the takeover? In such cases, the lawyer performs the advisory functions of guiding the client about its obligations, structuring the deal and the sequence of actions and performing various compliances under the law.

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Which are the documents that are required to be drafted?

Shareholders agreements

There is a lot of brainstorming required to draft the clauses of a shareholders agreement. These are not simple contracts and require knowledge of technical concepts which are specific to the venture capital, private equity and the M&A industry.

For example:

  • How will you ensure that the rights attached to ownership of existing shareholders are not diluted when new securities are to be issued in an acquisition?
  • Can you differentiate between cases where a ROFR clause is required and cases where  inserting a shotgun clause would suffice?
  • What rights will you insert in a contract to enable a minority shareholder (investor) to compel a majority shareholder to sell?

Share purchase agreements

A share purchase agreement is involved when existing shares of the target company are purchased by the acquiring company from an existing shareholder. The document only governs the aspect of purchase, consideration and representations and warranties in connection with a particular transaction.

Share swaps are less common in comparison to the cash purchase of shares. When the purchase is in the nature of share swaps, a clause stipulating the share exchange ratio is a specific requirement with regard to this agreement. A lawyer must pay due regard that the share exchange ratio and that the mode of payment is defined unambiguously. Appropriate valuation certificates may be required to be obtained under provisions of Consolidated FDI Policy or SEBI Takeover Code, as applicable. A few examples of practical considerations while drafting an SSA can be as follows:

  • Structuring a transaction keeping stamp duty (being a state subject) implications in mind.
  • Dealing with any asset or shares as the case may be, that is required to be transferred separately.
  • Any asset cover insurance policies available.
  • Reviewing any disclosure requirements or vendor protection clauses with regard to obtaining relevant representations & Warranties.
  • Should a purchaser opt for an acquisition of assets in cases where specific warranties cannot be obtained?
  • Ongoing litigations of the seller company has an impact on negotiating the purchase consideration too.

Share subscription agreement

It must be made clear that an SSA is different from a term sheet. Lawyers help in advising and negotiating an SSA after a thorough due diligence of the target company. Many startup enthusiasts belonging to engineering and finance backgrounds don’t know the difference between a term sheet and SSA. In such a scenario a lawyer’s role becomes important to guide and ensure that an SSA is not merely a copy-paste job lifted from a term sheet. A lawyer’s role is draft an SSA keeping objectivity and clarity in mind. A vague description of issued share capital or ambiguity in detailing the representation and warranty clauses can make the enforcement of rights and obligations between the parties not only difficult but at the mercy of the court. Hence a lawyer’s role is to iron out the loose ends striking a balance between the interests of both the parties.

Lawsikho’s Diploma in M&A, Institutional Finance and Investment Laws contains drafting exercises where you have an opportunity to draft each of the above agreements based on a mock situation, and obtain feedback from faculty. See the sample drafting exercise to draft a shareholders agreement here. You can find a sample exercise and an evaluated solution here.    

Other agreements

The scope of drafting work also includes drafting and negotiating employment contracts post the completion of the takeover. Besides these, amending the incorporation documents pursuant to changes affected by the takeover also requires legal help. The stamp duty is levied at different rates in different states, so documents are drafted and vetted accordingly.

Notices and Third Party Consent letters

Many target companies are subject to agreements with third parties. Examples include leases, loan agreements, customer contracts, assignment contracts, distributorship agreement and more. When contractual restrictions cannot be avoided through negotiation and deal structuring, the parties must obtain written consents from third parties who have rights that would be triggered by a deal. However, counterparties may leverage their power of giving consent to extract additional value from the requesting party, which can impede the transaction itself or add to costs.

Liasoning and communication between different stakeholders

Lawyers involved in the takeover process also coordinate with other stakeholders and regulatory authorities to make statutory submissions, disclosures,  finalize documents, seek representations and to obtain necessary permissions. For example, if an Indian entity is planning a takeover on the lines of TATA-JAGUAR deal, it will involve coordinating with a number of regulatory authorities like RBI, SEBI, MCA, CBDT, along with regulatory authorities of the foreign country too.

How can you start building your skill sets to perform such work?

You must begin with the end in mind. For example, when you prepare for an entrance test, you always start with past years’ question papers. Similarly, if you want to become an M&A lawyer, you need to begin by knowing about each kind of work performed by M&A lawyers. You must then work backwards on learning how to perform each kind of work, step by step. This is easier said than done.  

You can use the following strategies:

  • Ask your seniors – This, however, will be limited by the senior’s own experience and the time available with them to teach you. Every senior is not an expert teacher. Further, to extracting the best from a teacher often involves asking the right questions – which puts the responsibility back on you. As someone said, knowing the questions you need to ask is critical to get the job done. This is also the hard task.
  • Guest lectures or a credit course in your university
  • Ask your faculty – if they have not practised themselves (which is most likely the case, they will refer you to a course or ask you to pursue an internship).
  • Save your time reinventing the wheel pursue a course from a trusted provider, read more about Lawsikho’s Diploma in M&A, Institutional Finance and Investment Laws. The reason we emphasize on this strategy is simple:
    • You can’t save guest lectures on your phone and access them at your convenience. There is an over-reliance on note-taking. You will never be able to revisit in original form anything that you have missed while taking notes. In real life, you learn on the go and can revisit and understand study materials and videos much better upon subsequent readings.
    • Subject matter expertise plus teaching experience is superior to subject matter expertise alone. There is a reason parents send children to school even though they may know the subject matter well – they are not experts to teach.
    • In a guest lecture the pool of industry experts available is limited; Lawsikho’s online courses have a huge panel of experts who constantly contributing their insights to the courses. The panel is expanding over time and leads to an expansion of the scope and horizons of the courses. This is an unmistakable advantage, possible only through the use of online technology.   
    • There is a reason guest lectures are called ‘guest lectures’ – you get a sneak peek of the real deal, but you do not always have time to go into a comprehensive deep dive of all the concepts involved. At best, you may look deeply into a handful of concepts.  

                  

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