This article is written by Nimish Dhagarra, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho. The article has been edited by Aditi Deshmukh (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).
The M&A space has been growing for the past decade and has been a trending sector to practice law in India, attracting investment from investors all around the world. In present times the process as well as procedure for merger and acquisition has become so flexible and dynamic in nature that it requires a great deal of attention to detail when entering into such transactions from deciding potential collaborators to agreeing the terms and conditions to due diligence to signing the final contracts. Due to the rise in such transactions, the Indian corporate sector has been on the edge of its seat as who knows which big monster companies might merge or acquire other dominant players in the market. But at the end of the day these deals provide a huge boost to all the stakeholder in the market from companies to its board of directors, employees, investors, suppliers, government and at last we consumers in the society.
M&A in India
The merger and acquisition landscape in India is mostly regulated by the Companies Act, 2013. Acquisition in India can be done through two ways, either;
1. The entire business is transferred by way of merger/amalgamation or share buyout,
2. Acquisition through an asset sale, slump sale or demerger.
Depending upon the business strategy of the company, such transactions are either executed through a scheme of arrangement between two companies resulting in merger/amalgamation under Companies Act, 2013, if it is share buy out then through a share purchase agreement or if it slump sale or asset sale then it is executed through what is known as a Business Transfer Agreement which is a document used for acquiring a part of business or undertaking or division or unit of a company and lays down the consideration and undertaking itself.
But when it comes to merger and acquisition through auction, here the flexible and dynamic nature of merger and acquisition space really comes into play since parties have a little bit of extra freedom to auction their business to the higher bidder. This article will highlight the basic procedure of M&A auction transactions followed in India.
What is an auction?
According to Collins Dictionary of Law, if refers to; “a (normally public) sale of property usually conducted by competitive bidding where the item auctioned is sold to the person who makes the highest bid. It is conducted by an auctioneer, who is deemed to be the agent of the seller until the hammer falls and he announces the completion of the sale in favour of the highest bidder. Many auctions now take place on the Internet whereby the auctioneer provides the site upon which the goods are advertised”.
The famous auction theory’s main aim is to utilize economics to design optimal bidding procedures and revenue-enhancing auctions. Now when it comes to business, you as an owner can offer to either auction the entire or part of the business or as an undertaking or as an asset or as a unit or division, depending upon your preference, the value of your company in the market and how competitors value the addition of your company to them. It is important to note that though an auction is time-consuming as well as an expensive process due to many compliances and formalities which are required in a typical sale, an auction can gain the selling company a very high selling price for their business and it leads to the seller having more options/alternative with them which places the seller in a better position to fetch a good price for their business meaning the seller can now select, evaluate and customize the deal according to their preferences.
That is why in most cases, sale through the medium of auction concludes in the favour of the seller at an advantageous position. The aim is simple, to get the highest bidder to pay you the value for your company in terms favourable to you, based on your preference. The basic intention of an auction is easy to understand but the real implementation of the process is quite complex which makes it difficult for sellers to get the potential buyers they expected, that’s why in-house counsel, lawyers, M&A consultants or law firms are hired to make the process a smooth transaction by negotiation, drafting, advising, helping in due diligence, selecting the best buyers etc you name it, that why these intermediaries bridge the gap between the buyers and seller though there is no compulsion on seller company to engage such help, they have full discretion to organize the auction themselves too.
The general perspective of the auction in India
Now in India in recent times e-auction platforms are preferred as a medium for companies to sell their business. These e-auction platforms conduct auctions for sale for the seller companies. Now it is up to the seller to choose a platform regulated by government or private companies based on their preference. The e-auction platform has brought a diverse change in the way we do auctions as it has made the process versatile at the same time safe by providing secured networks conducting auctions on a daily basis. The e-auction platform, especially during the pandemic has helped businesses in continuing their business activity. Now depending on the valuation of your business in the market, you may opt to do a private auction or a public auction.
The public auction also known as the open auction is an auction in which the bidding is open to any or all the eligible buyers and the auction is done in the open with the seller setting the basic price and buyers bidding above the base price. Most sellers go for private auction as in the case of M&A transaction, the seller would like to have what is called a controlled bidding procedure in which the seller calls a few limited numbers of buyers to the preliminary stage for bidding and as we go through the stages, the number reduces and at the end the seller is left with his best potential buyer. It is important for sellers to have a large pool of potential buyers in order to get the price they are looking for so that they can explore the various options before them. Private auctions as the name suggests, are conducted away from the public eye in confidentiality to prevent leak of information or partiality in selecting the buyers and the process is conducted in a fair manner, following the principle of natural justice and the general practices of auction. It is always in the best interest of all the parties to avoid dispute.
It is important to know that in India there is no specific law governing the auction of businesses, the general practice of auction is followed where the seller has freedom and discretion to exercise in the process of selecting the buyers according to them. As mentioned above the main aim of the auction is to fetch a price greater than that in the market so it is important for the seller to provide the base price which exceeds the expectation of the stakeholders in the company and is approved by the board of directors and as the seller is conducting the auction, they get to choose the terms and condition of the sale which the bidders must agree to beforehand.
The procedure of auction
1. Identification of potential buyers
The seller, after engaging with an M&A consultant, should first publish its intent to sell its business. After scanning the market and receiving interest from buyers, the seller should make a list of potential buyers which they think is qualified as per their expectation. After the list is finalized, the seller through his legal representatives will invite the potential buyers to the preliminary stage for bidding disclosing general information about the target company including the base price of the business. In parallel to this, the legal help engaged by the seller will prepare the necessary legal documents, information, reports and private data room for further stages.
2. Disclosure of standard information/presentation
- After all the potential buyers have been assembled in the private room (which can be an online auction or physical private place of the meeting), the legal representatives of the seller will ask the potential buyers to sign a confidentiality agreement to keep the information that will be disclosed by them secured. After signing the agreement, the seller’s management will provide an information memorandum or in certain cases a vendor due diligence to all the buyers disclosing a detailed description of the sellers business. After going through the information memorandum, the buyers will submit their non-binding bids which should include the details, structure and condition of the deal proposed by them.
- It is important to note that during these stages the seller should remain anonymous and should act through its legal representatives only who will be conducting these procedures on behalf of them. It is also important that the seller should refrain from engaging in any communication with the outside world about their business, the auction or financial aspect of their business etc.
- The information memorandum is a document that aims to contain reasonably sufficient information about the target to elicit meaningful bids from potential buyers, such as; a description of the target’s business, industry and history; the principal assets; historical financial information and future projections; information about management and employees; and depending on the sensitivity of the transaction, information about key customers and contracts.
3. Evaluation of non-binding bids
- Now, this is the second stage in which the seller, after much deliberation with its M&A consultant/legal representatives, will evaluate the bids of potential buyers and break down the bids to a few selected buyers towards which the sellers feel indicative. Now, these remaining potential buyers after notifying will be given access to the data room prepared by the seller through special access rights which will have all business of the seller from its incorporation to its present transaction and dealings.
- After this, the potential buyers are free to conduct their own due diligence and now the buyers have the floor to ask any question to the seller regarding business. In this stage, the buyers can engage with the seller directly and both the management can engage in discussion, meetings etc.
4. Assessment of offers
- This is the third stage in the auction process in which the seller uploads the “seller and purchase agreement” on the data room. Now the potential buyers are given time to submit their binding offers with the proposed amendment that they want in the seller/purchase agreement. The offer submitted by the buyers should include a detailed report of how they have reached the specific offer price submitted by them, the structure of the offer and factors taken into consideration such as liabilities, evaluation of the business, market demand-supply etc.
- After going through the binding offer submitted by the few potential buyers with the proposed amendments, the seller evaluates the offers and selects the ones that they feel is more feasible and suitable for their business.
5. Negotiation and finalizing of the deal
- This is the final stage in which the seller and potential buyer engage in negotiation over the proposed offer and the seller provides buyers access to a confidential agreement that was not disclosed in the previous stages. After going through the negotiations the seller finally selects one potential buyer that they think has offered the best-constructed price for their business.
- The potential buyer who has been selected will now be given exclusive negotiation rights for a limited time period. Now going back and forth in this period the buyer and seller will reach the final terms and conditions of the contract.
- At last, the buyers and seller will sign the fully negotiated contract and the auction procedure is finally complete meaning the business will now be transferred to the buyers upon his payment of the consideration to the seller.
General auction process and timeline
|Preparing of for Sale||Define Strategy|
-Do we want to sell?
-To whom? (Identify potential buyers)
-For how much? (Create a valuation framework)
-What kind of process do we want to run? (Define the process and timetable)
-Produce marketing material
-Prepare non-disclosure agreement (NDA)
|Round 1||-Contact buyers: Exchange NDAs and distribute the CIM|
-Receive initial bids: Non-binding indications of interest used to narrow the buyers’ list
|Round 2||-Hold meetings with interested buyers, conduct Q&A and answer follow-ups|
-Set up a data room and facilitate due diligence for interested acquirers
-Draft definitive agreement
-Receive final bids/letters of intent (LOI)
|Negotiation||-Negotiate with buyers submitting bids|
-Circulate draft of the definitive agreement
-Enter into an exclusivity agreement with one bidder
-Continue to facilitate due diligence-Present finalized deal terms and fairness opinion to seller’s board, get board approval-Sign a definitive agreement
Certain points that need to be kept in mind while auctioning your business
- One of the drawbacks of auctioning in India is that there is no specific legislation to regulate the auction of businesses in India, the general practice of auction and contract law are followed.
- There are always high chances of a dispute arising as the buyers who did not get contracts may sue the sellers in the court for impartiality in the process etc.
- There is also the fear of hostile takeovers as when a company publishes its intention for auction, there will be bidders looking to take over the seller’s business rather than engaging in a friendly competitive bidding fight. In India, hostile takeovers are regulated by SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. In such scenarios, the targeted company can enter into a standstill agreement to restrict and delay the action of the bidders. A standstill agreement can help the targeted company prevent hostile takeovers by providing time to the company to assess its situation.
- As multiple parties are involved, there are high risks of leakage of confidential information at every stage. Although the confidentiality agreement is signed beforehand, once information is leaked, it is hard to track the source of leakage.
To summarize, the auction process starts with the distribution of information- memorandum to bidders; a first-round indicative bid by the bidders; due diligence/review of a draft sale/purchase agreement by bidders; a further round of bidding by a limited number of bidders with their comments on the draft sale/purchase agreement-negotiations between the seller and preferred bidders. Auction is a process that involves multiple parties, to have a smooth process there is a need to have a mechanism at hand to regulate the rights and liabilities of the parties. In totality, the M&A auction process has its advantages and disadvantages. The practitioners in the corporate field have mixed feelings about the acquisition from such means. If a company opts for engaging in acquisition through auction process either as a seller or bidder, it is highly advised to engage M&A consultants and your financial advisors as early as possible in the process to get the desired deal.
- auction. (n.d.) Collins Dictionary of Law. (2006). Retrieved August 8, 2021, from https://legal-dictionary.thefreedictionary.com/auction
- Mark Davies and Trinh Chubbock, Kings and Spalding, The Auction Process: Advantages and Disadvantages and the Key Steps, EMPEA Legal & Regulatory Bulletin | WINTER 2017, Pg 12-15, https://www.globalprivatecapital.org/app/uploads/2017/10/The-Auction-Process.pdf
- Sautter, Christina M., “Auction Theory And Standstills: Dealing With Friends And Foes In A Sale Of Corporate Control” (2013). Journal Articles. 26. https://digitalcommons.law.lsu.edu/faculty_scholarship/26
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