What is Acquisition?
In Indian Law, the term ‘’acquisition’’ is not defined in the Companies Act 2013 or the Income Tax Act 1961. But the term “Takeover” of a company is no different from an “Acquisition” of a company, which as per the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, means – “directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control over, a target company”.
In layman’s terms, when a business purchases another business, hoping that the synergy can make them more profitable, and is a corporate transaction in which one company takes partial or complete control of, or purchases, another existing company.
Evolution of the concept of Acquisition:
During ancient times, the importance of acquisition for strategic alliances of one kingdom was observed, for trading and acquiring the rule over golden companies. During the Pre-liberalization period, the deep-rooted history of alliances can be traced from the matrimonial alliances from the reign of Chandragupta Maurya to the Rajputs of Mewar & The East India Co. erstwhile acquisition to invade India. After Independence friendly takeovers were more reported due to the prevalence of the MRTP Act 1969. The process of globalization initiated in 1990, resulted in the improvement in corporate governance. This also directed the way for adopting different growth strategies for expanding domestic firms.
Case study of Acquisition: Etihad & Jet Airways (Aviation Merger)
In the year 2013, Etihad, a company incorporated in the United Arab Emirates (UAE), a national airline of UAE, proposed to acquire 24% in Jet Airways, a listed company incorporated in India. Jet Airways is primarily engaged in the business of providing low-cost and full-service scheduled air passenger transport services to/from India along with cargo, maintenance, repair & overhaul services and ground handling services. The proposal got approved by the Security Exchange Board of India (SEBI), the Foreign Investment Promotion Board (FIPB), FEMA, and the Cabinet Committee of Economic Affairs (CCEA).
Analysis of the Order: This case has been first approved by CCI, (basing its conclusion drawn by details given provided by the parties) wherein it examined the combination arrangement between two airlines. CCI decision has primarily been based upon the observation that there has been sufficient competition in the relevant market and therefore it is not likely that there would be AAEC in those markets.
In the order, the CCI considered the question of whether Etihad had acquired “joint control” over Jet pursuant to the Jet-Etihad Transaction in order to determine the applicability of the exemption from notification requirements. In relation to this matter, the CCI stated in its order that “Etihad ‘acquisition of twenty-four (24) percent equity stake and the right to nominate two (2) directors, out of the six (6) shareholder directors, including the Vice-Chairman, in the Board of Directors of Jet, is considered as significant in terms of Etihad’s ability to participate in the managerial affairs of Jet. The effect of these agreements including the governance structure envisaged in the CCA establishes Etihad’s joint control over Jet, more particularly over the assets and operations of Jet’’.
The majority ruling takes a coherent approach while following the steps in analyzing AAEC and approving the said combination under section 31(1) of the Act. It puts the onus on parties for providing the information and reserves the right to further look into the same if some new material is put on record. Though the minority ruling orders an investigation into the case, it seems less convincing given that the majority reserved the right with itself for future investigation, and said that some information will only be available post-merger. Having said that, post its decision, CCI has imposed Rs. 1 crore penalty under Section 43 of the Competition Act, on Etihad for consummating parts of the deal without getting its approval.
HOSTILE ACQUISITION:
In this form happens when the board members of the company are either unaware of the acquisition taking place or they reject this offer but the bidder still carries on with the process forcefully.
Case Analysis: L&T Group and Mindtree Ltd
FORMAT OF SUCH ACQUISITION ON THE TARGET
The Mindtree hostile takeover started in the debt crises of another entity, Cafe Coffee Day Enterprises Ltd. (“CCD”). Founded in 2000 by 10 co-founders from Wipro, Cambridge Technology Partners Inc., and Lucent Technologies, Mindtree was first invested in by the Late V.G. Siddhartha.
In the next decade, on the back of sound financials, steady growth, and a high-touch business a large number of foreign and domestic institutional investors like Singapore-based Nalanda Capital, UTI Mutual Fund and Franklin Templeton invested into Mindtree. In 2007 Mindtree went public and since 2011, the shareholding of the promoters has been 13.32%. However, not until the Late Siddhartha had to sell his 20.4% stake in Mindtree to finance his debt in CCD, did the prospect of a takeover arise for the company.
For L&T, who entered into a Share purchase agreement with Siddhartha, Mindtree has been an addition to their IT services portfolio (Infotech Ltd. and L&T Technology Services Ltd.). This has offered L&T a golden opportunity to shed its ‘construction company’ tag and look for opportunities with Infosys and Tata Consultancy Services. Furthermore, the calling came for L & T when it was exploring alternative options to generate value for its shareholders after SEBI rejected its plan for INR 9,000-crore buyback in 2019. The clearance from the Income-tax Department, under section 281 B of the Income Tax 1961 for the transfer of charge of 22,20,000 and 52,70,000 equity shares of Mindtree Limited by Coffee Café Enterprise Limited and VG Siddhartha held by them respectively. Subsequent SPA entered into with L&T.
With an intention to acquire control of Mindtree, the public announcement was issued by Axis Capital Limited and Citigroup Global Markets India Private Limited on 18th March 2019 pursuant to Regulation 3(1) and Regulation 4 read with Regulation 13(1) and Regulation 15(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. L&T therefore made an Open Offer for INR 980 per share to acquire 5,13,25,371 equity shares of the Target Company aggregating to 31% of the voting share capital of Mindtree.
Along with retail investors, most foreign and domestic institutional investors of Mindtree have sold their stake to L&T and after attaining SEBI and the Competition Commission of India approval, L&T now holds a majority stake upwards of 60% in Mindtree.
BAILOUT ACQUISITION: In this form of acquisition, a profit-making company takes over a struggling company. This is usually done with the motive to pay out less taxes by combining the profits with losses of the sick company thus it is a bailout method from the taxes on the profit margins.
Case Analysis: Yes Bank and State Bank of India, started in 2004, is one of the new-generation private banks that were allowed to start banking operations by the Reserve Bank of India in the post-liberalization era. The crisis at YES Bank started when the huge NPA issue at YES Bank became public. For the quarter ended December 2019, Yes Bank reported a loss of Rs 18,564 crore compared to a profit of Rs 1001 crore in the same quarter in 2018. In one of the biggest rescue operations of a private sector commercial bank in the country, the government and the Reserve Bank of India (RBI) have acted promptly to bring in SBI as an ‘investor’ for YES Bank. As the collapse of a bank means the loss of trust of depositors in the financial system. The RBI gave a long rope but despite that the bank needed anywhere between Rs 10,000 to Rs 12,000 crore to meet the regulatory requirement and grow the bank.
FORMAT OF SUCH ACQUISITION ON THE TARGET
As per the scheme, the investor bank invests to an extent that post infusion it holds 49 percent in the bank. The investor bank will have two nominee directors on the restructured board. The RBI will also appoint a director to the board. The Article of Association has also been changed by taking away the rights of the Indian partners. This relates to the rights of Indian partners to recommend the appointment of three directors, and chairman, and CEO. The RBI scheme also says the instruments qualifying as additional tier-1 capital, issued by YES Bank under the Basel III framework, also stand written down permanently, with effect from the appointed date.
LEVERAGED BUYOUTS:
The acquisition of another company using borrowed money to meet the cost of acquisition. Often, the assets of the target company are used as collateral for the loans besides the assets of the acquiring company. The purpose behind this is to allow companies to make large acquisitions without having to commit a handsome amount of money.
The Leveraged Buy-out Deal of Tata & Tetley
The case ‘The Leveraged Buyout Deal of Tata & Tetley’ this deal which was the biggest ever cross-border acquisition, was also the first-ever successful leveraged buy-out by any Indian company.
In a landmark deal, heralding a new chapter in Indian corporate history, Tata Tea acquired the UK heavyweight brand Tetley for a staggering 271 million pounds. Apart from the size of the deal, what made it particularly special was the fact that it was the first ever leveraged buy-out (LBO) by any Indian company. This method of financing had never been successfully attempted before by any Indian company. Tetley’s price tag of 271 million pounds (US $450 m) was more than four times the net worth of Tata tea which stood at US $ 114 m. This mechanism allowed the acquirer (Tata Tea) to minimize its cash outlay in making the purchase. In an LBO, the acquiring company could float a Special Purpose vehicle (SPV), a 100% subsidiary of the acquirer with a minimum equity capital.
The purchase of Tetley was funded by a combination of equity, subscribed by Tata Tea, junior loan stock subscribed by institutional investors, and senior debt facilities arranged and underwritten by Rabobank International.
FORMAT OF SUCH ACQUISITION ON THE TARGET
Tata Tea created a Special Purpose Vehicle (SPV)-christened Tata Tea (Great Britain) to acquire all the properties of Tetley. The SPV was capitalized at 70 million pounds, of which Tata Tea contributed 60 million pounds; this included 45 million pounds raised through a GDR issue. The US subsidiary of the company, Tata Tea Inc. had contributed the balance of 10 million pounds.
ACQUISITION AGREEMENTS
While there are many types of acquisition transactions, a deal will generally involve one of two main types of acquisition agreements – and Business Transfer Agreement and Asset Purchase Agreement.
BUSINESS TRANSFER AGREEMENT
What is a Business Transfer Agreement?
A Business Transfer Agreement (“BTA”) is an agreement structured to give effect to a comprehensive sale of assets and liabilities of one entity to another entity. It is in the form of a purchase and transfer of ownership agreement wherein details regarding the sale of the business and its assets are captured.
It outlines the type of transfer, type of sale, terms of sale, and details of the transferrable. The BTA, inter-alia, lists down the assets, liabilities, capital, contracts, customer lists, leases, employee insurance, new employment rights, inventory, tax issues, copyrights, and patents. In common parlance, the transaction envisaged in a BTA is also referred to as a slump sale.
In order to give effect to such transaction, the parties typically enter into a BTA, which records the following terms and conditions :-
Assets and liabilities of the business undertaking to be transferred are listed in the schedule to the BTA; Lump sum consideration for the sale is specified (usually sale price is based on a business valuation report);
The BTA specifies the date prior to which all necessary approvals, permissions, and documents to consummate the transaction are to be obtained (usually referred to as the ‘Closing Date’);
Requisite representations and warranties providing a guarantee of good standing by the respective parties is often included, particularly, the selling entity with respect to the legal status and financial health of the business undertaking as on the Closing Date;
The fact that upon obtaining all requisite documents and approvals, the transfer of business shall take place on the Closing Date is also captured.
ASSET PURCHASE AGREEMENT
An Asset Purchase Agreement (APA) is an agreement between a buyer and a seller that finalizes terms and conditions related to the purchase and sale of a company’s assets. In an APA transaction, it is not necessary for the buyer to purchase all of the assets of the company but it is common for a buyer to exclude certain assets in an APA.
Provisions of an APA may include payment of purchase price, monthly installments, liens and encumbrances on the assets, condition precedent for the closing, etc. In an APA, the buyer must select specific assets and avoid redundant assets. These assets are itemized in a schedule to the APA.
The assets transferred in an asset purchase agreement include Plant and machinery, Goodwill, Stock, Premises, etc.
An asset purchase agreement is a must for ensuring that the party gets the highest value from the sale or purchase of assets. Asset purchase agreements have distinct advantages and disadvantages compared to using an equity (or stock) purchase agreement or a merger agreement. In an equity or merger acquisition, the purchaser is guaranteed to receive all of the target’s assets without exception, but also automatically assumes all of the target’s liabilities. An asset purchase agreement, alternatively, allows not only for a transaction in which only some of the assets are transferred (which is sometimes desired) but also allows the parties to negotiate which liabilities of the target are expressly assumed by the purchaser, and allows the purchaser to leave behind those liabilities it does not wish to accept (or does not know about). A disadvantage of an asset purchase agreement is that it can often result in a greater number of change issues. For example, contracts held by a target, and acquired by a purchaser, will often require the consent of the counterparty in the context of an asset deal, whereas it is less common that such consent will be needed in connection with an equity sale or merger agreement.
CONCLUSION
The practice of acquisition has emerged massively in the past two decades such transactions have the potential to benefit consumers through increased investment as they relieve capital constraints and/or lower the cost of expanding the network. Acquisitions like bailouts do benefit the acquiring party but also aid the acquired party from sinking. Further, with the ongoing legislative reforms, judicial precedents and performed with the leave of the NCLT which revolves around ‘’public interest’’ and ‘’economic interest’’ such a practice can’t be termed as harmful.
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