This article is written by Pulkit Mohnot, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.

Introduction

M&A is the most prospective field in the matters of corporate restructuring. The most efficient method to increase an entity’s business operations is to merge with another entity working in the same or another business. Many organizations seek to develop their entities through restructuring. According to Thomson one bank SDC, no deals that have taken place from 1980-2010 are 4.5 lakhs. During these periods, takeovers recorded by Caribbean firms were worth US dollar 195 billion. The number of such takeovers surged drastically during these periods. M&A has helped Caribbean firms to compete in global markets and locally increase their stronghold.

History of M&A : Caribbean perspective

The story of M&A began in 1993 in T&T, where a merger of 3 banks took place to form First Citizens Bank. Concerning developed countries, M&A activity in T&T was very passive. The leading cause of liberalization was the debt crisis of the 1980s, which paved for this activity. It was precisely contrary to the government’s plan of nationalization during the 1970s. There was the insistence by premier lending agencies worldwide to liberalize their economy to expedite their growth and productivity. Specifically for T&T, there were 75 M&A taking place between the period the 1980s and 2009, out of which foreign firms undertook 52% of takeovers. The majority of acquirers were either from Europe or the American continent. The sectors targeted by foreign entities were telecom, manufacturing, petrochemical, and banking.

What is FTA?

The FTA, also known as the Fair Trading Act, establishes a framework for efficient implementation of competition policy in T&T and addresses issues like thwarting the use of monopoly and controlling 40% of the market mergers and agreements with anti-competitive objects. This act applies to all of the fields except telecommunication, banking, and securities industry. In addition, there are specific activities such as forming cartels, price-fixing, resale price maintenance, and bid-rigging, which are prohibited.

What is a merger in regards to FTA?

As per Section 13(1) of the FTA, defines a merger is a combination of two or more entities, like or alike. Therefore, it can be either through JV, amalgamation, or combination.

Laws governing M&A in Trinidad and Tobago

We know that M&A transactions can be complicated; the legislature imposes some more complexity through the Fair trading act, which is given in chapter 81:13 of the laws of T&T. Recent proclamation of FTA in early February 2020, has come as a welcome for the previously unregulated industry. The primary purpose of the FTA is to act as a watchdog for entities that combine and tend to bring anti-competitive practices in the industry. This type of regulatory legislation solved the age-long problem when the players used to abuse their power through mergers and acquisitions that were anti-competitive to the industry. Entities have to take the approval of the T&T FTA commission before entering into a transaction. 

Merger control

Recently, the Commission has released specific Draft merger guidelines on its internet website, demonstrating the required regulatory approval steps. It clarifies the restriction imposed under Section 14 of the FTA. Section 14 of the FTA talks about the conditions for entering into the merger agreement to satisfy certain conditions. They have to take permission from the FTA commission where their assets should not go past the US dollars 50 million. One such party should conduct business in T&T. During January 2021, and the Commission published a press release to construe the provisions of the guidelines and comment on any controversial issue. Also, the Commission would provide help and cooperation concerning complying with any provision of the FTA. The two provisions mentioned above can create a level of vagueness that is clarified through the guidelines, e.g., the conditions for which asset test is to be measured and what it means to carry on the business in T&T according to the FTA? These guidelines also talk about which both parties must submit essential documents for the proposed transaction. For example, item 3 (16) of the guidelines talks about the need for parties to confirm that the parties intend to run or carry their business in Trinidad and Tobago. It must also fulfil the conditions mentioned under Section—14 (1)(b)(2) of the Commission.

The FTA speaks for conditions where the transaction does not constitute a merger as per the guidelines of the FTA. For example, the phrase mentioned that tends to bring some change in influence regarding the policy of the enterprise in a transaction does not come under the definition of the merger.

Penal sanctions by FTA

There is a specific provision of FTA, which contains penal sections. There should be strict construe of penal sections. Also, a person must be given punishment lest there is a gross violation of the law. They tend to observe transactions, and the vision of parliament is evident that it vigilantes that transactions tend to create anti-competitive impact. Such transactions should be analyzed and approved by the FTA before closing the transaction. There are restructuring ways that do not come into the definition of the merger, such as reorganization within an organization, transferring shares from one party to another, i.e., to subsidiaries to the holding company. These are some transactions that look like mergers at their face, but as per the FTA, these are not mergers.

T&T fair trading commission

TTFC is an independent body that was established after the FTA act,2006. T&T was the third country that established such a statutory body. The primary functions of TTFC are as follows; Guiding the company concerning compliance with laws, advocating competition as free and fair, thwarting anti-competitive conduct.

TTFC has many powers which makes it possible to start its function:

• Starting the investigation; 
• Witness examination; 
• Examination of documents with regards to the investigation.

Present competitive index

T&T ranks 79 according to the global competitive Index,2019. Their ranking has increased as compared to previous years. It can be made possible due to the Commission’s proper functioning and developing business incubators.

Case of Trinidad and Tobago in the Caribbean

Rambarran and Elbourne (2006), these people studied the situation of M&A in Caribbean countries. They found out the main issues were an increase in market and monopoly power, no proper regulation regarding acquisition, and takeover regarding cross-border. There was a clear consensus that M&A helps build competitive preference, but there is a problem when it comes to the stage of post-merger integration. A chunk of activity is concentrated in the banking and financial sectors, three merged banks, and a Canadian Bank. It was regarded as having a positive impact on the financial system as there was a more substantial entity, but if we go to the other side, state control on the bank issues many transparency issues. However, still, M&A activity is at the dormant stage in the Caribbean Island as there are many family-controlled businesses that generally do not prefer merger and take it as the last option. Also, there is a limitation in financing instruments; M&A transaction sources are from merchant banks and investment banks, which often use project finance, equipment housing, and syndicated loans. Also, in 1984, the venture capital industry was established, but the growth rate is still low.

Recent M&A transaction

ANSA merchant bank limited subsidiary of ANSA Mcal acquired Bank of Baroda(Trinidad and Tobago). The central bank approved this agreement through a sale agreement. It includes three retail branches in San Fernando, Chaguanas, and Port of Spain. The cost of the transaction was between 175-200 crore. Bob Started its operation around 2007. The intention of BOB here is to rationalize its international operation. BOB signed the share purchase agreement for the sale of the business of BOB with approval from the Central bank.

The Trinidad-based company Trinity Exploration and production acquired moonsie oil company which is a private based Trinidad operator. The deal considers the US $3.5 billion, which is paid consideration from the company’s existing capital. It will help in adding more reserves as well as increasing production. Also, it will Enable Trinity to expand its new 3D seismic sequence stratigraphic interpretation approach.

Conclusion

Undertaking an acquisition without a proper strategy is always going to be a disastrous process. The history of the transaction in M&A has suggested a kind of a chart to achieve success, including management of top and middle, staff skills, physical resources, and operation. Companies now need to be careful in regulating their debt obligation and moving earlier to pave the way for negotiation with creditors to not be in an unfavourable position later. Also, the recipe for most of the failed mergers in history is poor execution and integration planning. Closing must not be the success measure; integration should be. A successful M&A transaction is dependent on many factors; picking the right team to manage, conducting a readiness assessment, carrying out DD through leverage technology, planning for post-merger processes. In future T&T, M&A activity would be swelling up. The new wave of M&A in T&T should be consolidating the financial regulation, competencies. Also, the government must bring such reforms, which would help in strengthening the financial market.

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