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International Commercial Arbitration: An Overview

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Introduction

Overburdened legal systems and complex and specialised disputes require the mechanism of Alternative Dispute Resolution (“ADR”). Arbitration is one such mechanism in ADR. For this, India enacted the Arbitration and Conciliation Act, 1996 (“Act”) that strengthens the arbitration procedure and process in India.

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As per section 2 (1) (a) of the Act, “arbitration” means any arbitration whether or not administered by a permanent arbitral institution. In simple words, arbitration means a private procedure where parties submit their disputes to a single arbitrator or number of arbitrators through a mutual agreement between them. This route does not involve taking the matter to the court.

International Commercial Arbitration (“ICA”) is a form of alternative dispute resolution that has gained popularity in recent years as a means of resolving international commercial disputes. Unlike traditional litigation, which involves court proceedings, ICA is a private process in which a neutral third party, known as an arbitrator, facilitates the resolution of a dispute between the parties. ICA offers many advantages over traditional litigation. In this blog post, we will explore the basics of ICA, its advantages and challenges, and its increasing importance in resolving international commercial disputes.

The Fundamentals of ICA

Section 2 (1) (f) of the Act defines international commercial arbitration as an arbitration relating to disputes arising out of a legal relationship which must be considered commercial where at least one of them is a resident/national/body corporate residing or incorporated in a foreign nation; association or body of individuals having central control and management in a country outside India. Thus, under Indian law, an arbitration with its seat in India, involving a foreign party is regarded as an ICA. 

ICA involves a neutral third party, known as an arbitrator, who is appointed by the parties to the dispute. The arbitrator is responsible for facilitating the resolution of the dispute between the parties by hearing evidence and arguments from both sides and issuing a binding decision, known as an arbitral award.

ICA can be initiated either by agreement between the parties or by a clause in a contract that requires disputes to be resolved through arbitration. The parties can choose the rules governing the arbitration, the location of the arbitration, the language of the arbitration, and the qualifications and experience of the arbitrator.

ICA offers many advantages over traditional litigation, including speed, cost-effectiveness, flexibility, and confidentiality.

 

Benefits of International Commercial Arbitration

1. Speed: 

One of the main benefits of ICA is that it is often faster than traditional litigation. Court proceedings can take a long time to resolve, which can be a significant drain on resources. In contrast, ICA typically takes only a few months to complete. This is because the parties involved can set their own timeline for the arbitration, and there are fewer procedural requirements than in court proceedings.

2. Cost-Effectiveness: 

ICA can be more cost-effective than traditional litigation. Court proceedings can be expensive, with high legal fees and court costs. In contrast, ICA typically involves lower fees and costs, since there are fewer procedural requirements and the parties can choose an arbitrator who charges reasonable rates.

3. Flexibility & Neutrality: 

ICA offers parties more flexibility and neutrality in terms of the dispute resolution process. For example, parties can choose the rules governing the arbitration, such as the International Chamber of Commerce (ICC) Rules, the UNCITRAL Rules, or the rules of a particular arbitration institution. They can also choose the location and language of the arbitration, as well as the qualifications and experience of the arbitrator.

4. Confidentiality: 

ICA is a private process, which means that the parties can keep their dispute and any settlement agreement confidential. This can be important for protecting their business interests and reputation. This is also supported by Article 30 of the London Court of International Arbitration.

5. Enforceability: 

ICA awards are generally enforceable in most countries around the world, thanks to the New York Convention of 1958, which has been ratified by more than 150 countries. This means that the parties can rely on the arbitral award to resolve their dispute without having to go through lengthy and expensive court proceedings.

Challenges of International Commercial Arbitration

Despite the many advantages of ICA, there are some challenges associated with this form of dispute resolution.

  • Enforcement of Awards

One of the biggest challenges of ICA is the enforcement of arbitral awards. Although the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards provides a mechanism for the recognition and enforcement of arbitral awards in many countries but still some countries that do not enforce foreign arbitral awards or may impose additional procedural or substantive requirements. The difficulty of enforcing arbitral awards can make ICA less attractive to parties, particularly those in countries with weaker legal systems.

  • Choice of Arbitrators

The selection of arbitrators is a key aspect of ICA, and parties may have different preferences as to the qualifications, nationality, and expertise of the arbitrator(s). In some cases, parties may have difficulty agreeing on an arbitrator, which can delay the proceedings and increase costs. In other cases, parties may be concerned about the potential bias of the arbitrator, particularly if one of the parties is from a country with a different legal and cultural background.

  • Lack of Precedent

Unlike court judgments, arbitral awards are not binding precedents, and arbitrators are not required to follow previous decisions. This lack of precedent can create uncertainty and inconsistency in the interpretation and application of the law, particularly in areas where there is limited guidance from national courts or international conventions.

  • Confidentiality

While confidentiality is often cited as a benefit of ICA, it can also create challenges. Confidentiality can limit the ability of parties to obtain information and evidence, which can affect the quality of the decision-making process. Moreover, the confidentiality of the proceedings can make it difficult for third parties, such as regulators or the public, to monitor and evaluate the effectiveness and fairness of the arbitration process. 

  • Costs

While ICA is generally considered to be more cost-effective than litigation, it can still be expensive, particularly if the dispute involves complex legal or technical issues or requires extensive discovery or expert testimony. The cost of ICA can also be affected by the location and qualifications of the arbitrator, the complexity of the dispute, and the length of the proceedings.

How International Commercial Arbitration Works?

The process of ICA typically begins with the parties involved agreeing to submit their dispute to arbitration. This can be done through a clause in a contract or through a separate agreement. Once the parties have agreed to arbitration, they will usually select an arbitrator or a panel of arbitrators to hear the case.

The arbitrator(s) will then hold a hearing where both parties can present evidence and arguments in support of their position. The arbitrator(s) will then issue an award, which is binding on both parties. This award may include damages or other remedies, depending on the nature of the dispute.

Role of Courts in International Commercial Arbitration

Involvement of court in the Arbitration can be in the following ways: 

  • Enforcement of the arbitral award: 

If a party fails to comply with the award voluntarily, the other party may seek to have the award recognized and enforced by a court. The procedure for recognition and enforcement of an arbitral award varies by country, but it generally involves filing an application with the court and providing evidence of the award and the circumstances of the case.

  • Setting aside of the arbitral award: 

In some cases, a party may challenge the validity or legality of the award, such as if there was a serious procedural irregularity or if the award is contrary to public policy. The procedure for setting aside an arbitral award also varies by country, but it generally involves filing a petition with the court and providing evidence to support the challenge.

Overall, while ICA is designed to avoid court involvement, courts may still play a role in certain aspects of the process.

Latest Developments  in International Commercial Arbitration in 2023

One recent development in international commercial arbitration is the increasing use of technology and online platforms to conduct hearings and manage cases. The COVID-19 pandemic has accelerated this trend, as parties and arbitrators have had to adapt to remote work and social distancing requirements. This has led to the development of new tools and platforms to facilitate virtual hearings and case management.

Another development is the increasing importance of diversity and inclusion in arbitrator appointments. Many institutions and organisations have launched initiatives to promote greater diversity among arbitrators, including gender, ethnic, and geographic diversity. This is seen as a way to enhance the legitimacy and effectiveness of the arbitration process.

Latest International Trends in Commercial Arbitration in 2023

  • Arbitration Emerging from the Russia Ukraine conflict: The legal and financial repercussions of the conflict have had a substantial impact on enterprises across a variety of industries globally, and more arbitrations involving Russia under investment treaties and commercial agreements are anticipated. Strategic and innovative preparation will be essential to increasing the likelihood that enforcement will be successful.
  • The construction arbitration problem and the global supply chain issue: Major global projects will continue to experience challenges as a result of significant supply chain disruption. The rise in legal disputes is anticipated involving the application of important contractual terms, such as those relating to price increases, currency fluctuations, and nominated supplier agreements, as well as claims by parties of frustration, force majeure, and/or change in circumstances.
  • As a result of the market turbulence, LNG disputes are growing as buyers and sellers attempt to navigate the severe market fluctuations and supply issues facing the industry, as well as the effects of sanctions and other political issues. An increase in petrol pricing disputes and other contractual disputes is expected as a result of the wider energy market volatility.
  • Cybersecurity and data protection issues are becoming increasingly significant in international arbitration.
  • International arbitration in the field of life sciences: The number of disputes involving the life sciences that are referred to arbitration is increasing. This is partly due to the expansion of the life sciences industry as a whole, and partly because the industry has realised that many of the features of international arbitration are suitable for resolving sectoral disputes.

Conclusion

Global convergence and harmonisation in international commercial arbitration are particularly evident in the area of judicial control of a foreign arbitral award. In most countries, the possibility to bring before a court an action for annulment of an arbitral award rendered abroad is excluded.

Arbitration trend and practice in India is changing with India’s growth in order to be able to attract foreign investment.  It is clear that there still are some ambiguities in Indian arbitration law, which require judicial explanation and practically which need some major changes to solve the cross border issues through the arbitration. In conclusion, international commercial arbitration offers an efficient and effective means of resolving disputes in the global economy. While it presents some challenges, recent developments such as the use of technology, diversity initiatives, and expedited procedures demonstrate that the arbitration process is evolving and adapting to meet the needs of parties and practitioners.  

References:

“Advantages and Disadvantages of International Commercial Arbitration” by Lexology – https://www.lexology.com/library/detail.aspx?g=312747c9-9f0c-4e8a-b674-c24edf7be1c9

“Enforcement of International Arbitral Awards: A Review of Key Issues and Recent Developments” by the International Bar Association (IBA) – https://www.ibanet.org/Article/NewDetail.aspx?ArticleUid=DDC0DCA8-287B-476C-A816-AD03ACB4D204

“The Pros and Cons of International Commercial Arbitration” by LexisNexis – https://www.lexisnexis.com/community/insights/newsletters/document-strategy-newsletter/2015/the-pros-and-cons-of-international-commercial-arbitration.aspx

“International Commercial Arbitration: An Overview” by the International Chamber of Commerce (ICC) – https://iccwbo.org/dispute-resolution-services/arbitration/international-commercial-arbitration/

https://www.lexology.com/library/detail.aspx?g=98901e69-aade-461d-9cb6-086a86715069

Women’s Reservation Bill, 2023: All you need to Know!

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The Parliament of India has recently passed the historic women’s reservation bill unanimously. The Constitution (One Hundred and Twenty-Eighth Amendment) Bill 2023 or the Nari Shakti Vandan Adhiniyam aims to increase women’s participation in the political sphere.

The Women’s Reservation Bill is the first legislation to be cleared by both Houses in the new Parliament building. The voting proceedings were presided over by Chairman Jagdeep Dhankhar.

After decades of discussion on low representation of women in the Parliament which is just about 15%, this led to the introduction of this bill in Parliament.

This is not the first time that a bill seeking reservation of seats for women in Parliament has been introduced; previous attempts were made in the years 1996,1998, 1999, and 2010. However, these bills never saw the light of the day.

Let’s look at the highlights of the new Bill:

  1. The Constitution (One Hundred and Twenty-Eighth Amendment) Bill 2023 seeks to reserve one-third of all seats for women in the Lok Sabha and the state legislative assemblies. The allocation of reserved seats would be determined by such authority as decided by Parliament.
  2. Out of 33%, one-third shall be reserved for women from scheduled castes and scheduled tribes in the Lok Sabha and the state legislative assemblies.
  3. Seat for women would also be reserved in the legislative assembly of Delhi:
  4. -One third of the seats reserved for scheduled castes in Delhi’s legislative assembly would be reserved for women.
    -One third of seats filled by direct elections in Delhi’s legislative assembly would be reserved for women.
  5. Rotation of seats for women in Lok Sabha, legislative assembly of states and Delhi will take place after each subsequent delimitation exercise as Parliament by law decides.
  6. Reservation of seats for women would cease to exist 15 years after the commencement of this amendment act.

The key thing to note here is that the reservation of seats will be implemented after delimitation is undertaken after taking into account relevant figures as per the new Census of India after commencement of the amendment act.

Conclusion:

India already has the reservation of women in municipalities and panchayat provided by Article 243D and Article 243T in the constitution. The passing of this new Women’s Reservation bill marks a solid step in strengthening the role of women in the political arena. However, the implementation of the bill is said to not take place until the completion of the census and redrawing of electoral constituencies or delimitation exercise is completed. Nevertheless, the bill may prove to be a right step in the long run.

Advantages of an LLP structure over a Private Limited Company

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This blog post is written by Mr. Gagan Kelhanka, a law graduate from at KC Law College and worked as in-house counsel at Xoxoday. He pursued Companies Act, 2013 & SEBI Law Course from Bettering Results (BR). 

OVERVIEW 

One of the most commonly and reasonably expected dilemmas of any new budding entrepreneur intending to start up a business venture in India is often the choice of form of entity structure that best suits their individual needs. Due to the plethora of alternatives available under the Indian legal regime, it can unsurprisingly be a daunting and thoughtfully challenging task, but equally important nonetheless. This particular decision has a significant impact on the profitability and sustainability of a business, in terms of different material aspects such as liability, control, cost, risk, etc. Therefore, it is absolutely vital that this decision be made diligently after taking all relevant considerations into account. 

This article is intended to provide the readers with some clarity on two of the most popular business structures found in the country for more than a decade now, i.e., Limited Liability Partnerships (“LLP”) and Private Limited Companies (“PLC”), and why the former is usually a better option than the latter. 

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WHAT ARE THESE STRUCTURES? 

LLPs 

A LLP is a relatively new and unique form of business entity structure that combines the flexibility of a traditional partnership firm and the core benefits of a PLC, thus making it an attractive and popular choice among willing entrepreneurs for a considerable period of time now. Its inception dates back to 2008 with the passing of the Limited Liability Partnership Act (“LLP Act”) which was brought into force by the legislature to be the governing statute for LLPs. A LLP firm is registered by the Ministry of Corporate Affairs (“MCA”) as per the provisions of LLP Act. 

The basic features of a LLP are as following: 

➢ A minimum of two partners are required for the formation of a LLP. There is no such limit for the maximum number of partners. 

➢ There is no minimum amount of capital requirement for the creation of a LLP. This implies partners enjoy the flexibility of determining how much capital they are willing to infuse in the business and also that they can contribute in terms other than money such as manpower, fixed assets, technical knowhow, goodwill, etc. 

➢ As the name suggests, the liability of the partners in a LLP is limited to the extent of their contributions to the firm, which means that they are not liable beyond that in the event of losses or repayment of debts and their personal assets or property are safe from attachment in such a case. 

➢ Unlike a traditional partnership, the partners in a LLP enjoy immunity from any responsibility in relation to acts done by their fellow partners. They can be held accountable only for their own individual conduct.

➢ There is no distinction between the ownership and management in the LLP structure. This is to say that partners are owners themselves who manage the affairs of the business. An LLP also has designated partners who are responsible for managing its affairs; there may be sleeping partners as well. 

➢ The functioning of LLPs is governed as per the LLP Agreement, which needs to be filed with the MCA within 30 days of their incorporation. 

➢ The name of a LLP should contain ‘LLP’ mandatorily. 

➢ It is a suitable form of structure for small-to-medium sized businesses which do not require significant funding from external sources. 

 

PLCs 

A PLC is a form of business entity that is privately formed and held by its members/promoters that come together in furtherance of shared commercial aspirations. It varies from a public limited company as it is not permitted to invite subscription to its securities by the general public. Registration of a PLC is carried out by the Registrar of Companies (“RoC”), the statutory authority acting for the MCA, as per the provisions of the Companies Act, 2013 (“CA 2013”) along with ‘Companies (Incorporation) Rules, 2014’. 

The basic features of a PLC are as following: 

➢ A minimum of two members are requisite in order to incorporate a PLC who need to subscribe to the Memorandum of Association (“MoA”) to be filed with the Registrar of Companies. The membership can be extended to a maximum cap of 200 members. 

➢ Similar to the membership needs, at least two directors are required for the formation of a PLC whereas the maximum threshold is 15. Directors are vested with managerial powers who are responsible for the day-to-day affairs and functioning of the company. 

➢ There is no amount fixed as the minimum capital requirement for the registration of a PLC. 

➢ The liability of members in a PLC is limited to the extent of their shareholding if the company is limited by shares or to the extent of the guarantee provided by them if the company is limited by guarantee. 

➢ The internal management of a PLC is conducted as per its Articles of Association (“AoA”), which serves as the constitutional document of the company and lays the groundwork for material procedures and policies to be in place. AoA needs to be filed with the MoA and any other required documents at the time of incorporation. 

➢ The name of a PLC should contain ‘Private Limited’ mandatorily. 

➢ This form of business entity structure is ideal for ventures that are intended to operate on a relatively larger scale, expecting a sizable turnover and have a requirement of significant funding from external routes such as private equity, venture capital, angel investors, etc.

BENEFITS OF LLP STRUCTURE OVER PLC 

  1. Registration and Management – It is considerably easier and cheaper to start as well as run a LLP business as compared to its PLC counterpart, as the mandatory requirements and costs involved are significantly lesser in quantum in case of a LLP. This makes choosing a LLP entity over a PLC one highly advantageous for the willing entrepreneurs, as they are able to save precious money at the nascent stages of their venture which can be utilised for key growth objectives in the future. In addition, they do not need to worry too much about the hassles of constant regulatory compliances, preserving valuable time and energy that can be invested in more essentially integral aspects driving business growth and expansion.
  2. Control – Another important merit of a LLP over a PLC is the control factor. Within a PLC setup, there is a much greater need of heavy funding from external sources such as private equity & venture capital firms, angel investors, etc., and control is often diluted to the hands of these resultantly mighty stakeholders, as they seek sizable chunks of shareholding in the company to protect their interests. This can end up with them having an influential say in the decision making process of the business, thus making life hard and unfair for the laborious founders who, in most cases, put in years of hard work, struggle as well as planning in order to convert an idea into a worthy profit making business venture. This misfortune is entirely impossible altogether in a LLP, where the founders are the very people who manage the complete functioning and decision making of the business, as partners in the firm. They are in full and sole control.
  3. Taxation – The taxation structure applicable in the case of a LLP is also simpler and more economic as compared to a PLC, resulting in further savings. PLCs need to first and foremost pay tax on its income at the rate of 25%, its obligations increase by another 7% as surcharge once the income exceeds INR 1 Crore and then 12% once it exceeds INR 10 Crores added to other taxes such as a Dividend Distribution Tax, Education Cess, Wealth Tax and a Minimum Alternate Tax (“MAT”), upon fulfilment of requisite criteria. Whereas a LLP is treated at par with a traditional partnership firm when it comes to the taxation aspect and majorly is required to pay only a fixed amount of 30% out of its taxable income, with the benefit of deductions in the form of remuneration, salary, bonus, commission or interest payable to its partners. It may be subject to a MAT which is lesser than normal obligations and is only applicable in the alternate scenario and a surcharge of 12% if the taxable income inclusive of capital gains exceeds INR 1 Crore, which is not very common.
  4. Compliances – LLPs enjoy greater leeway when it comes to statutory compliances than PLCs. For instance, a LLP is only required to get their accounts audited if its annual turnover exceeds INR 40 Lakhs or its capital contribution exceeds INR 25 Lakhs in any financial year, whereas a PLC needs to get the statutory audit done irrespective of its turnover. PLCs are also mandated to hold at least four board meetings and a general meeting of members every financial year, whereas no such obligations are imposed on partners of a LLP.

CONCLUSIVE REMARKS 

Although no structure out of the two is a “one-size fits all” and the choice of any one depends entirely upon the needs of any particular case, a LLP is certainly likelier to be considered as the wiser alternative as it combines the benefits of a traditional partnership firm and a PLC in such a manner that is most ideal for the majority of entrepreneurs, as it facilitates preservation of invaluable time, money, energy and resources that can be pivotal to the long-term survival and growth of any business. In consideration of all relevant factors, the author strongly opines in favour of LLP and advocates for its election over a PLC structure to any willing entrepreneur intending to start a small-to-medium sized business with minimum regulatory burdens, considerable saving of material resources and maximum growth within a relatively shorter span of time.

Equity issuance and various equity instruments

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This blog post is written by Ms. Ritu Sajnani, Senior Legal Counsel, Coinswitch, Ex-AZB & Partners and Cyril Amarchand Mangaldas.

Securities and their Issuance – Equity

Companies registered under the Companies Act, 2013 (“CA 2013”) have the choice to periodically meet their capital requirements by issuing a variety of instruments to their investors. “Securities” is the technical name for financial instruments that businesses offer to investors. Although the issuance of securities signifies an investor’s interest in the company, they are primarily a collection of rights and obligations that become due and payable to the investor either at the time of the issuance of the securities, upon the occurrence of certain events or the winding up of the company. 

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The capital table of the corporation may or may not change when the securities are offered to investors. The capital table is a structure that shows how much money has been invested in a company overall, broken down into the percentage of shares that each shareholder owns.

Investment into companies is generally in the form of an equity investment or debt investment. Equity instruments provide the investor with direct upside from the operations of the investee company, along with substantial control rights. On the other hand, debt investments provide investors downside protection, guaranteed returns and security against the sums advanced.

Let us give a brief background about Equity instruments.

I. Preference Shares:

The meaning of preference shares can be understood from the explanation in Section 43 of the CA 2013. A preference share is issued concerning the issued share capital of the issuer company limited by shares which carry or would carry a preferential right for payment of dividends and in the case of winding up of a company or repayment of capital.   

Prerequisites for issue 

The governing rules on the issuance of preference shares are the Companies (Share Capital and Debentures) Rules, 2014 (“Share Capital and Debenture Rules”).  A company may issue preference shares if it meets certain preconditions, as below:

  1. Issuance of preference shares must be authorised by the Articles of Association (“AoA”) and Memorandum of Association (“MoA”) of the issuer company. If the AoA and MoA do not authorise the issue of preference shares, the issuer company must amend both constitutive documents.
  2. Issuance of preference shares must be authorised by passing a special resolution in the general meeting of the issuer company. 
  1. The issuer company at the time of such issue of preference shares shall not have subsisting default in:a) Redemption of preference shares; or
    b) Payment of any dividend due on any preference shares. 
  1. A statement containing material facts concerning the special business to be transacted at the general meeting shall be annexed to the notice for such meeting.  According to the issuance of preferences shares, the statement that is annexed to the notice as mentioned above must set out the complete material facts concerned with the said issue as included below:a) size of the issue and number of preference shares to be issued and nominal value of each share;
    b) nature of such shares i.e. cumulative or non – cumulative, participating or non – participating, convertible or non – convertible;
    c) objectives of the issue;
    d) manner of issue of shares;
    e) price at which such shares are proposed to be issued;
    f) basis on which the price has been arrived at;
    g) terms of issue, including terms and rate of dividend on each share, etc.
    h) terms of redemption, including the tenure of redemption, redemption of shares at a premium and if the preference shares are convertible, the terms of conversion;
    i) manner and modes of redemption;
    j) current shareholding pattern of the issuer company; and
    k) expected dilution in equity share capital upon conversion of preference shares. 

(A) Issuance of preference shares for listed companies

This is guided by SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and SEBI (Issue and Listing of Non-convertible Redeemable Preference Shares) Regulations, 2013. 

(B) Process of issuance of preference shares

Section 62(1)(c) of the Companies Act read with Rule 13 of the Share Capital and Debenture Rules provides for the issue of preference shares.

II. Equity Shares:

Section 43 of the CA 2013 lays down the scope and criteria governing the issuance of equity shares which is typical with voting rights or with differential rights as to dividend, voting or otherwise following such rules as may be prescribed. Equity share capital is issued in different ways as elucidated below:

a) Rights Issue

The issuance of equity shares through rights issues has been provided under Section 62(1)(a) of the CA 2013. This entails that people who are already equity shareholders in the issuer company are offered to purchase additional shares in proportion to their paid-up capital. 

b) Private Placement

The issuance of shares through private placement has been envisaged under section 42 of the CA 2013. The applicable rule for the private placement of shares is Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 (“Prospectus and Allotment Rules”). Offer of shares can be made to a select group of persons by a company not exceeding 200 (two hundred) persons. 

c) Bonus Issue of Shares 

Bonus shares have been specified under Section 63 of the CA 2013. Bonus Shares are shares given to the existing shareholders in proportion to the number of shares they hold. They are additional shares given to the current shareholders. It is the further issue of shares by a company to its existing shareholders without any receipt of any consideration. Rule 14 of the Share Capital and Debenture Rules provides relevant information on the issuance of bonus shares. 

III. Mutual Funds:

A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities such as stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.

Mutual Funds in India are governed by the SEBI (Mutual Funds) Regulations, 1996.

IV. Exchange Traded Funds:

An exchange-traded fund (“ETF”) is a collection of securities-such as stocks-that tracks an underlying index. The best-known example is the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index. ETFs can contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. An ETF is a marketable security, meaning, it has an associated price that allows it to be easily bought and sold.

ETFs are regulated under SEBI (Mutual Funds) Regulations, 1996. However, specific diversification norms for index funds and ETFs were circulated in January 2019.

V. Compulsory Convertible Debentures:

These are “deferred equity instruments” since after the maturity period has passed, they must be converted into equity shares. Due to their conversion from a debt (debenture) to an equity share, they are hybrid instruments and have features of both.

A corporation may issue Compulsory Convertible Debentures under Section 71(1) of the CA 2013. The Hon’ble Supreme Court stated that given the nature of these securities, “any instrument which is compulsorily convertible into shares is eventually recognised as equity and not as a loan or debt.”  On the other hand, under the RBI Guidelines, they are not treated as the Company’s share capital but rather as equity for all financial statements and records.

VI. Compulsory Convertible Preference Shares

They are the most popular option and most favoured by investors for two primary reasons.

  • Preference shareholders receive the dividend first, and the set dividend amount provides them with more advantage
  • In the event of a liquidation, the preferred shareholders have first claim to the venture’s assets under the waterfall process (Section 53 of the Insolvency and Bankruptcy Code, 2016).

Additionally, preference shares are converted to equity shares if the business is successful, enhancing the opportunity for capital development and profit retention for investors. The primary benefit of these shares is their conversion, which is based on the company’s success.

Mergers and Acquisitions in India

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This blog post is written by Mr. Badarinath CH, 4th year law student at Karnataka State Law University. 

Introduction:

“When the wind of change blows, some build walls while the others build windmills” is the statement which is suitable for India as it has become a hub for rampant economic growth while the developed are still trying to cope up with the Pandemic. There has been a lot of growth in the economic activities and one of the most prominent and trending is Mergers and Acquisitions as the Country saw nearly 70% increase in the M&A activities this year and reached an all-time high of $171 billion.

Mergers and acquisitions (“M&A”) are one of the most effective ways to accelerate the execution of high-growth business plans. Companies in all industries such as telecommunications, pharmaceuticals, automotive, food and beverage are growing at lightning speed, especially due to M&A strategies. M&A refers to transactions between two companies that combine in different ways. Although the terms “merger” and “acquisition” are used interchangeably, they have different legal meanings.

Mergers & It’s Types:

Mergers are like marriages in corporate law where there is an integration of two or more enterprises joining forces to create a new organization by entering into a legal agreement. Merger has become a tool to expand one’s operation. The various objectives of a merger are to increase the long-term profitability of the merging entity, increase market share, reduce operating costs, expand to new locations, and connect everyday items.

Mergers are of the following types:

  • Horizontal Mergers

Horizontal mergers occur when two merging companies manufacture similar products in the same industry. A horizontal merger occurs when two companies competing in the same market merge or merge. This type of merger can have a very large impact on the market or no impact at all.

  • Vertical Mergers

A vertical merger occurs when two companies, each involved in a different stage of production of the same commodity, join forces. Vertical mergers can be anti-competitive because they make it difficult for competitors to access key product components or distribution channels. Such mergers have a significant impact on other manufacturers and distributors in the same sector.

  • Congeneric Mergers

Congeneric Merger occurs when two merged companies operate in the same general industry but do not have a mutual buyer or supplier relationship. This is a merger of two companies with no related products or markets. In other words, there is no common business relationship. The reason for such mergers is usually to spread risk.

  • Conglomerate Merger

It is a merger between two companies in independent industries. The main reasons for Conglomerate mergers are to increase the value of outstanding shares by leveraging financial resources, increasing debt capacity, increasing leverage and his earnings per share, and lowering average cost of capital. Mergers with independent companies also help companies enter different businesses without incurring the high start-up costs normally associated with a new company.

The Concept of Acquisition

An acquisition usually refers to a large trading company buying a smaller company. Acquisition, in its broader sense, refers to the acquisition of corporate property by one company by purchasing another company directly. It is the acquisition by a company of control of the share capital of another existing company. Acquisitions come in two basic forms-

  1. Stock Purchase: here, the acquirer pays the shareholders of the target company cash and/or shares in exchange for shares in the target company. Here, the target company’s shareholders receive the reward, not the target company.
  2. Asset Purchase: In an asset purchase, the acquirer purchases the target’s asset and pays the target directly.

Merits of Mergers & Acquisition

  • Access to Talent

Industries such as engineering, construction, software development and programming face labour shortages. Therefore, it is difficult for companies to find new skilled and talented employees to fill vacancies. This is a huge advantage for mergers and acquisitions as it introduces new talent to the company that may not otherwise be accessible.

  • Improved Economy of Scale

New large companies or companies that acquire another company generally have a greater need for materials and consumables. Also, if a company has high requirements, it means that the company has high purchasing power. High purchasing power enables companies to negotiate large orders, and when companies can negotiate large orders, it leads to cost efficiency. can be enlarged.

  • More Financial Resources

When two companies merge or when one company acquires another company, the two companies combine their financial resources, especially since the marketing budget is larger, so the company needs more financial resources. Thus, making it easier to reach its customers.

  • Reduce Competition

Mergers and Acquisitions reduce competition. This has a negative impact on customers. However, from a business perspective, reducing competition can be a huge benefit. Less competition means less pressure to lower prices and compete. This allows the enterprises to charge higher prices and benefit from higher profit margins.

  • Tax Benefits

Mergers and acquisitions have several tax Benefits. First of all, companies with cash on hand may try to consolidate rather than pay dividends. Dividends are taxable but increases in shareholder value is not. Even if shareholders sell their shares at a higher price, they will still have to pay capital gains, which are usually at a lower rate than income tax.

Demerits of Mergers & Acquisition

  • Employee Distress

Mergers and acquisitions are tough on employees. This is because the new company will try to take advantage of synergies, which tends to lead to massive layoffs. This can cause stress as employees fear that their work will be jeopardized. At the same time, there are many unknowns that can cause stress.

  • Financial Burden

One of the main drawbacks of mergers and acquisitions is that they often generate large amounts of debt. Acquiring companies usually have to borrow heavily to invest.

Alternatively, a company that acquires or merges may have a large amount of debt. Second, the merged company may incur significant debt as a result of the transaction.

  • Clash of Cultures

When two companies merge and acquire, so do their corporate cultures. For example, a company may be very strict and disciplined and require workers to work overtime. However, other companies are very flexible and allow employees to work the hours they choose.

Additionally, there may be different employee benefits that vary from company to company.

  • Time & Cost Consuming

Mergers and acquisitions involve a significant amount of legal and accounting work that can cost companies millions of dollars. Any failure to complete the merger or acquisition could result in significant losses. At the same time, even if it does pass, it’s a huge premium to the real price.

Recent M&A Deals in India:

  1. Acquisition of NDTV by Adani Group: Adani Group’s media arm, led by Gautam Adani, has acquired a 29.18% stake in New Delhi Television Ltd (NDTV). The Ports-to- Energy conglomerate acquired a stake in NDTV by buying the company backed by TV channel founders Radhika Roy and Prannoy Roy. NDTV made a public offer to acquire an additional 26% stake from public shareholders. The conglomerate acquired the media house indirectly and through Vishvapradhan Commercial Pvt Ltd (VCPL), a wholly owned subsidiary of AMG Media Network Ltd (AMNL), owned by Adani Enterprises Ltd (AEL). NDTV promoters, who tried to resist the offer, eventually resigned from the board, ergo paving for the most talked corporate takeover of the media company.

  2. Merger creating a Financial Behemoth: The Merger between HDFC Ltd and HDFC Bank which is billed as the largest merger in the Indian Corporate History at over $40 Billion. Mortgage lender Housing Development Finance Corporation merged with its subsidiary HDFC Bank to create a financial giant. The Board of Directors of HDFC Bank has approved the merger of HDFC Investments and HDFC Holdings with HDFC and the merger of HDFC into his HDFC Bank.
  3. Air India’s return to its Home: The National airline, formerly acquired by the Tata Group upon nationalization, officially became Tata’s in January this year after acquiring the debt-ridden airline last October after winning a bid of Rs 18,000, up Rs 2.9 billion handed over to the group from bids of other conglomerates. Since then, Tata Sons Air India merged with his Vistara and Air Asia and has become a significant player in the Indian aviation industry.

Statutes Regulating M&A

There are certain Promulgations that regulate the Mergers and Acquisition deals such as Section 230-240 of the Companies, Act 2013. Further the Competition Act, 2002 where it regulates the Mergers & Acquisitions by mandating the entities to not cross the threshold limit which is decided by the turnover and the asset of the entities. The duties regarding payment of stamp duties are regulated under The Indian Stamp Act, 1899 and regarding Cross-border merger which involves the Merger or Acquisition between Indian and foreign Companies, the Foreign Exchange Management Act, 1999 despite these statutes the Central Bank of India i.e., RBI, SEBI and CCI are other bodies that are watchdog of these transactions.

Conclusion:

The M&A has become an emerging sector in the modern Corporate Market, which is expected to become the catalyst for India’s market growth. Even though these deals have its own hindrance as abovementioned, a good M&A can boost the economy of an industry as well as the market in ways it never can. It is evident that the M & A market is booming but still there are instances where there has been involvement of hostile takeover which is trending in the recent times due to many takeovers both in India and Oversees, thus there is need of protecting the target companies from such hostile takeovers.

Top M&A Deals of 2022

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This blog is written by Aishwarya Deshpande, LLM Student at Jindal Global Law School. She was a participant of our Mergers & Acquisitions Course.

TOP MERGER DEALS OF 2022

  • L&T AND MINDTREE –

NCLT gave its permission for the merger of IT services companies L&T Infotech and Mindtree. The National Company Law Tribunal’s (NCLT) Mumbai and Bengaluru Benches both accepted the scheme of amalgamation and arrangement between the two entities in two different rulings. In May 2022, the two businesses announced their intention to unite. LTIMindtree will be the name of the combined company. According to the market value of the combined firm, India will now have the fifth-largest IT service provider. The corporation has started conducting business as a single unit from November 14, 2022.

73 shares of LTI would be issued to each Mindtree shareholder out of every 100 Mindtree shares as part of the transaction. L&T, the amalgamated entity’s parent business, will own 68.73% of it. November 24, 2022 has been set as the Record Date for identifying Mindtree stockholders who are entitled to receive equity shares of LTI under the programme. The merged company employs 90,000 people and has a clientele of over 700.

  • BHARTI INFRATEL MERGES WITH INDUS TOWERS-

On November 19, 2022, one of the largest mergers in India’s telecom sector was formally concluded. The largest telecom infrastructure company in our nation was created with the merger of Bharti Infratel Ltd. and Indus Towers. Bharti Airtel will own a total of 36.73% of the shares in Indus Towers Limited (together with Nettle). In accordance with the agreement, Vodafone Idea chose to sell all of its shares in Indus Towers. As a result, it has now been paid Rs 3,760 crore for all of its Indus Towers shares.

The Vodafone Group Plc received 75.78 crore equity shares worth Rs 10 each from the board of Bharti Infratel. This equates to a 28.12% ownership interest in the combined company. 8.75 crore shares, priced at Rs. 10, have been allocated to Providence. Indus Towers Ltd. is therefore owned by Providence (or PF Asia Holding Investments [Mauritius] Ltd.) to the tune of 3.25%. With more than 1,63,000 towers spread out over 22 telecom service zones, it has a pan-Indian tower reach. Additionally, according to Bharti Infratel, the consolidation of the two tower firms would result in annual cost savings of close to Rs 560 crore. On Friday, shares of the merged companies rose significantly (November 20). The price of Bharti Infratel’s shares increased by 17.8% to close at Rs.219.05 The share price of Vodafone Idea saw a rise of 8.65% and closed at Rs 10.05 on the NSE.

  • MX TAKATAK MERGER WITH MOJ

The announcement of the strategic combination of Moj and MX Taka Tak to create the largest short video platform for Indians was made by MX Media, the parent company of MX TakaTak, and ShareChat, the parent of Moj. ShareChat will now oversee the two platforms.

The combined platform will have 250 billion monthly video views, 100 million artists, and over 300 million monthly active users (MAU). ShareChat will add MX Media and its stockholders as strategic shareholders. Ankush Sachdeva, CEO and co-founder of ShareChat and Moj, said, “We at ShareChat are establishing India’s largest content ecosystem, which has been on an unparalleled growth trajectory.

  • PROLOGIS MERGER WITH DUKE REALTY

Two of the largest logistics real estate companies in the world are now combined thanks to the June merger of Prologis and Duke Realty. With debt included, the acquisition had a value of $26 billion and was funded by Prologis’ equity. It solidified Prologis as the biggest developer of logistics real estate in the world.

The new company, whose name has not yet been selected, will have an astounding portfolio of logistical real estate once the deal is finalized. This includes 153 million square feet of real estate spread over 18 US regions, 11 million square feet of construction currently under way, representing an investment of more than $1.5 billion, and 1,228 acres of land that is both owned and optioned.

  • ORANGE MERGER WITH GRUPO MÁSMÓVIL

A new market leader for mobile phones has emerged in Spain as a result of the merger between Orange and Grupo MásMóvil. The synergies from the acquisition are expected to total €450 million annually after a four-year post-integration period, and each of the companies will have equal governance powers in the new entity (likely to be called Orange).

Although neither of the two merging partners would confirm it, it seems like a push for size that would help the new business expand into nearby countries like Spain and France. The new entity may leverage the combined financial strength of the two businesses to make crucial investments in 5G and fibre before that can happen.

ACQUISITIONS OF 2022

  • ZOMATO ACQUIRES BLINKIT

Zomato has completed the acquisition of rapid commerce provider Blinkit (previously Grofers) and its warehousing and related services business, according to a filing on August 11, 2022. “The Company has finished buying all of the shareholders’ shares in BCPL. As a result, BCPL became an immediate wholly owned subsidiary of the Company, effective August 10, 2022 “said Zomato. The three most recent fiscal years saw Blinkit’s annual turnover of Rs 263 crore in FY22, Rs 200 crore in FY21, and Rs 165 crore in FY20.

In accordance with the terms of the agreement, SoftBank, the largest shareholder in Blinkit, would receive 28.71 crore Zomato shares, followed by Tiger Global with 12.34 crores, BCCL with 1.5 crore, and South Korean investor DAOL with 3.66 crore. Sequoia will receive 4.51 crore additional shares in Zomato, increasing its ownership in the company from 1.33 crore to 5.84 crore shares.

  • PHONEPE ACQUIRES WEALTHDESK AND OPENQ

Walmart Owned PhonePe announced in May 2022 that it would acquire WealthDesk, an Indian wealth management fund, for $50 million, and OpenQ, a smart beta wealth management

platform, for $25 million. The deals, which totalled $75 million, were made in order to diversify PhonePe’s payment options. With its involvement in a $40 million investment round into Smallcase last August, PhonePe now has a presence in the investing and wealth management industry, where its main rival Amazon is only marginally active.

  • SHIPROCKET ACQUIRED PICKRR

Pickrr is an e-commerce SaaS platform for D2C brands and SME e-tailers. Shiprocket, a tech- enabled shipment and fulfilment company, has signed a contract to acquire a majority investment in Pickrr. The deal’s estimated $200 million value is made up of cash, shares, and earn-outs. The consolidation also gives a solitary entry point for other enablers and suppliers to serve the community of digital retailers, which is constantly expanding.

  • RELIANCE RETAIL ACQUIRES STAKE IN ONLINE LINGERIE RETAILER CLOVIA

According to a statement released by the business on March 20, Reliance Retail Ventures (RRV) has purchased an 89% ownership in online lingerie retailer Clovia in a deal worth Rs 950 crore that combines initial investment and secondary share sales. According to Reliance Retail Ventures’ statement, the Clovia founding team and management will hold the remaining equity in the company. Following the acquisitions of Zivame and Amante, Clovia is the third online lingerie retailer by RRV. After leading a $240 million investment round in Dunzo and acquiring a 25% share in the Bengaluru company, the agreement was announced.

  • LENSKART ACQUIRED OWNDAYS

The two companies announced that India’s Lenskart is purchasing the bulk of Owndays’ shares in Japan, forming one of Asia’s largest online eyeglass sellers. The companies would not disclose the deal’s financial details, but a source with knowledge of the situation said the merger values the 32- year-old enterprise Owndays.

According to those with knowledge of the situation, the development occurs just as Lenskart, which is supported by SoftBank and Premji Invest, is closing a fresh round of fundraising at a valuation of over $4.5 billion. Shuji Tanaka and Take Umiyama, co-founders of Owndays, will remain stockholders and head the management group at the Japanese company.

Deal Cycle of an M&A Transaction

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This blog is written by Taniya Shah, LLM Student at Jindal Global Law School. She was a participant of our Mergers & Acquisitions Course.

WHAT ARE MERGERS AND ACQUISITIONS (M&A)?

Tracing back to history, most Mergers and Acquisitions have taken place as a result of Economic Factors such as GDP growth, interest rates, and monetary policies, which are crucial in determining how M&A between businesses or organizations are structured. Initially, the mergers took place so that the businesses could enjoy their monopoly in the market. Roadways, Electricity, Railways, etc., are some of the first lines of business wherein mergers and acquisitions used to take place.

In the words of Simon Sinek, “Mergers are like marriages. They are the bringing together of two individuals. If you wouldn’t marry someone for the ‘operational efficiencies’ they offer in the running of a household, then why would you combine two companies with unique cultures and identities for that reason?”. Thus, the expression “mergers and acquisitions” refers to the merging of businesses or their key financial assets through business-to-business financial transactions. A business can completely buy out and absorb another business, combine with it to form a new business, take over some or all of its key assets, make a tender offer for its stock, or launch a hostile takeover.

Although the phrases mergers and acquisitions are frequently used synonymously, they really denote significantly different concepts. An acquisition is a takeover in which one business buys another and positions itself as the new owner. For instance, Walmart acquired Flipkart with the intention to enter the Indian Market making it the largest e-commerce deal. On the other hand, a merger is the coming together of two businesses that are roughly the same size in order to continue ahead as one new organization rather than continuing to be owned and run independently. For instance, Idea and Vodaphone merged into VI to improve their operational efficiency and survive the competition and monopoly that Jio created in the market.

PROCESS OF AN M&A TRANSACTION

It’s important to get the timetables correct in any M&A process. What happens when is essential to the relative success of the finished product, just like how diverse elements come together to make a meal. Generally speaking, the M&A cycle is volatile and the length and complexity of the transaction will determine how many steps there are in the M&A process.

  • DEVELOPING STRATEGY

A Company must develop an appropriate acquisition strategy. A successful acquisition strategy is dependent on the buyer having a clear understanding of what they want to achieve from the transaction and why they are buying the target firm. This step is crucial as it assists the buyer in defining its goals by taking into cognizance, the market, and the capital required, the type of transaction, etc.

  • DEVELOP A SEARCH CRITERIA

As a buyer, considering the following factors is crucial: – the firm size, financial standing (profit margins), products or services supplied, clientele, culture, and any other relevant elements. It’s important to establish broad criteria at the start in order to save time and not engage prospects who won’t meet your standards. Companies often consider  a variety of M&A factors when deciding which transactions to pursue. These consist of:

Revenue – The size of the firm in terms of economic output will be one of the main parameters.

Geography – Would an acquisition offer access to a new territory or more market share in an existing geography?

Industry – Does the acquisition target work in the same sector as the buyer, or in a different one? How much of each industry overlaps the other?

Market – If both firms are in the same sector, does the target company operate in a market segment that is growing more quickly than the buyers?

Intellectual property – Would an acquisition give the buyer ownership of any intangible assets, such as IP?

  • IDENTIFYING AND CONTACTING TARGETS

Once the buyer is done developing an M&A strategy, it is time to search, identify and contact such potential target entity that meets the pre-determined requirements of the buyer. The buyer then contacts the targets to indicate interest in them after compiling a list of all prospective targets. This step’s major goal is to learn more about the targets and gauge their level of interest in a potential deal.

  • INFORMATION EXCHANGE

The initial documentation process begins once the initial conversation goes well and both parties have expressed interest in moving forward with the transaction. Typically, this involves submitting a Letter of Intent to formally express interest in the transaction and signing a Confidentiality Agreement to ensure that the proceedings and discussions of the deal will remain confidential. Following that, the parties exchange data such as financials, business histories, etc. to enable both parties to more accurately determine how the deal will benefit each party’s shareholders. In this phase, along with determining the target company’s owner’s interest in a sale or merger, it also helps in acquiring a basic idea of their expectations for valuation.

  • VALUATION AND SYNERGIES

Both parties will start evaluating the goal and the trade as a whole after learning more about the counterparty. The seller is attempting to find a fair price at which the shareholders would profit from the transaction. A respectable offer for the target is being evaluated by the seller. The buyer is also attempting to determine the degree to which they would benefit from the deal in terms of synergies in M&A, such as cost savings, enhanced market dominance, etc.

  • OFFER AND NEGOTIATION

The buyer makes an offer to the target’s shareholders after completing their valuation and analysis. This offer could be in the form of cash or shares. If the seller determines that the offer is not reasonable after reviewing it, they will bargain for a higher price as neither side wants to give the other the advantage by acting hurriedly to seal the contract, this phase may take a while to accomplish. Another frequent challenge at this stage is that, occasionally, if the target is a really alluring company, there may be more than one possible buyer.

  • DUE DILIGENCE

The systematic analysis and reduction of risk associated with a business or investment decision is known as due diligence. A study, audit, or inquiry known as “due diligence” is carried out to validate the truth or specifics of an issue under discussion11. Thus, after the target’s acceptance of the buyer’s offer, the buyer starts its investigation of the target company. Due diligence is a comprehensive examination of all aspects of the target company, including its goods, clientele, financial records, personnel resources, etc. The goal is to confirm that the details previously given to the buyer and upon which the offer was made are accurate. If certain inconsistencies are discovered, the bid may need to be revised to reflect the correct data.

  • PURCHASE AGREEMENT

Assuming due diligence has been completed without any significant issues or concerns emerging, a final contract for sale is executed once the parties have decided on the kind of the purchase agreement, such as whether it will be an asset acquisition or a share purchase.

  • DEAL CLOSURE AND INTEGRATION

Once the purchase agreement is complete, both sides sign the paperwork to complete the transaction, and the buyer takes possession of the target. The management teams of the two companies collaborate once the acquisition is finalized to incorporate them into the new company.

CONCLUSION

M&A transactions frequently occur, and sometimes they take the form of amicable deals, and other times they take the form of hostile transactions. They support business expansion into new sectors as well as growth within the same industry. Depending on the size and complexity of the transaction, the M&A procedure may be extensive or brief. The time frame could also be affected by the necessary regulatory permissions.

Significant clauses of a Shareholders Agreement

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This blog is written by Akhil Gupta, 5th year Law Student at National University of Study and Research in law, Ranchi. He was a participant of our Mergers & Acquisitions Course.

Significant clauses of a Shareholders’ Agreement

A shareholders’ agreement is a contract that specifies how a company will be handled and operated amongst its owners. It often addresses matters like the duties and rights of shareholders, how directors are chosen, how decisions concerning the company’s activities are made, and how disagreements are settled. An agreement that governs the relationship between shareholders, the management of the business, share ownership, rights, duties, and the protection of shareholders is sometimes referred to as a shareholders’ agreement. A shareholders agreement serves to safeguard the interests of the shareholders by establishing a clear set of rules and regulations for the administration and operation of the business. It can aid in ensuring that the business is conducted fairly and openly and in averting misconceptions and shareholder disputes. A shareholders’ agreement may also be a helpful instrument for luring investors and establishing the credibility of the firm because it shows that the latter is well-organized and has a defined course for the future. By preventing future management from abusing present shareholders’ interests, the shareholder agreement helps safeguard their interests. The agreement aids in protecting specific actions, such as dividend distribution and the issuance of new shares or debt, if new management is appointed or another organization buys the business. 

The specific clauses of a shareholders’ agreement will depend on the specific needs and circumstances of the company and its shareholders. However, some common clauses that are often included in a shareholders’ agreement are:

  • Purpose
  • Shareholding
  • Board of Directors
  • Management & Control 
  • Capital Contribution 
  • Transfer of shares
  • Deadlock
  • Termination
  • Governing law
  • Confidentiality 
  • Pre-emptive rights & Anti-dilution 

 

Let us understand each one elaborately: 

  • Purpose  

This clause sets out the purpose of the shareholders’ agreement and the nature of the company. 

  • Shareholding 

This clause sets out the details of the shareholding of each shareholder, including the number of shares held, the class of shares held, and any restrictions on the transfer of shares.

  • Board of Directors

This clause sets out the composition and powers of the board of directors, including the number of directors, the process for appointing and removing directors, and the responsibilities of the directors. 

  • Management and control

This clause sets out the roles and responsibilities of the shareholders in relation to the management and control of the company, and may include provisions on voting rights, decision-making processes, and the allocation of profits and losses.

  • Capital contributions

This clause sets out the obligations of the shareholders to contribute capital to the company, and may include provisions on the timing and amount of capital contributions and the conditions under which additional capital may be required.

  • Transfer of shares

This clause sets out the rules and procedures for the transfer of shares, including any restrictions on the transfer of shares, and may include provisions on pre-emptive rights, tag-along rights, and drag-along rights.

  • Deadlock

This clause sets out the procedures to be followed in the event of a deadlock between the shareholders, and may include provisions on the appointment of an independent third party to resolve disputes. This situation arises when the shareholders are not able to come in consensus.

  • Termination

This clause sets out the circumstances under which the shareholders’ agreement may be terminated, and may include provisions on the buy-out of shares and the winding up of the company. This clause addresses the situation wherein the shareholder leaves the Company. This happens after the essential milestones; the founders offer the investors to buy out or exist option from the business. Hence, through this clause the investors are provided with the exit formalities. 

  • Governing law

This clause sets out the jurisdiction under which the shareholders’ agreement will be governed, and may include provisions on the resolution of disputes through arbitration or other alternative dispute resolution mechanisms.

  • Confidentiality 

This clause sets out the obligations of the shareholders to maintain the confidentiality of sensitive company information, and may include provisions on the disclosure of information to third parties. 

  • Pre-emptive rights & Anti-dilution 

Pre-emptive rights and anti-dilution clauses are provisions that can be included in a shareholders’ agreement to protect the interests of shareholders in a company. Pre-emptive rights give shareholders the right to maintain their ownership percentage in the company by allowing them to purchase additional shares of the company before they are offered to new investors. This can help to prevent dilution of the shareholders’ ownership percentage, which can occur when new shares are issued and the overall number of outstanding shares increases. An anti-dilution clause, on the other hand, is a provision that protects shareholders from dilution by adjusting the conversion ratio of their convertible securities (such as preferred stock or convertible bonds) in the event that the company issues new shares at a lower price. This can help to ensure that the value of the shareholders’ securities is not significantly reduced by the issuance of new shares.

  • Restrictions on Transfer of Shares 

A restriction on transfer of shares clause is a provision that can be included in a shareholders’ agreement to limit the ability of shareholders to sell or transfer their shares in the company. This type of clause is typically used to protect the interests of the company and of the other shareholders by ensuring that the ownership of the company is stable and that new shareholders meet certain criteria. There are several types of restrictions on transfer of shares that can be included in a shareholders’ agreement, including: 

Right of first refusal: This gives the company or the other shareholders the right to purchase the shares before they are offered to a third party.

Drag-along rights: This gives the majority shareholders the right to force the minority shareholders to sell their shares along with the majority shareholders when the majority sells their shares to a third party.

Tag-along rights: This gives minority shareholders the right to sell their shares along with the majority shareholders when the majority sells their shares to a third party.

Restrictions on transfer to specific parties: This prohibits the transfer of shares to certain parties, such as competitors or individuals who do not meet certain criteria. 

  • Non-Compete & Non-Solicitation Provision

Non-compete and non-solicitation provisions are provisions that can be included in a shareholders’ agreement to protect the interests of the company and the other shareholders by limiting the ability of shareholders to compete with the company or to solicit its customers or employees after they leave the company. Therefore, these provisions can be useful tools for protecting the company’s intellectual property and confidential information and for preventing the loss of customers and employees. However, it is important to note that these provisions may be difficult to enforce and may be considered unenforceable if they are overly restrictive. As such, it is important for shareholders to carefully consider the potential implications of including these provisions in a shareholders’ agreement. 

Understanding the Agreement through the lens of the Companies Act, 2013 

A shareholder’s agreement is not required by law, but it can be a useful tool for establishing a clear set of rules and guidelines for the management and operation of the company and for protecting the interests of the shareholders. It is important to note that the provisions of a shareholder’s agreement must not conflict with the provisions of the Companies Act, 2013 or with the articles of association of the company. If there is a conflict, the provisions of the Companies Act, 2013 and the articles of association will take precedence.  The Companies Act, 2013 does not specifically address shareholders agreements, but it does contain provisions that relate to the rights and responsibilities of shareholders in a company. These provisions include:

Section 47 & 48: This section outlines the rights and duties of shareholders in a company. It specifies that shareholders have the right to receive notice of and attend meetings of the company, the right to vote on resolutions put before the company, and the right to receive dividends and other distributions from the company.

Section 96: This section outlines the procedure for calling meetings of shareholders. It specifies that meetings of shareholders must be called by the directors of the company, and that notice of the meeting must be given to all shareholders.

Sections 107, 108, 109 & 110: These sections outline the procedure for voting at meetings of shareholders. It specifies that each shareholder has the right to one vote on each resolution put before the company, and that decisions of the company must be made by a majority of the votes cast.

Section 152: This section outlines the procedure for appointment of the directors of the company. It specifies that the appointment of directors must be approved by a resolution of the shareholders.

It is important to note that these provisions of the Companies Act, 2013 apply to all companies incorporated in India, regardless of whether or not they have a shareholder’s agreement in place. If a shareholder’s agreement conflicts with the provisions of the Companies Act, 2013, the provisions of the Companies Act, 2013 will take precedence.

CONCLUSION

In India, shareholders agreements are typically governed by state laws, and disputes related to shareholders agreements are typically heard in state courts. The Supreme Court of India may consider cases involving shareholders agreements if the case involves a federal issue or if the case has been appealed from a lower court. There are many clauses in the Shareholders Agreement, however, the above-mentioned are some of the most important clauses that a Shareholders Agreement must have. Therefore, it is pertinent to mention that shareholders agreement does not find its express mention under the Companies Act, 2013, however, it is governed under the provisions of the Companies Act, 2013 wherein certain rights & obligations are mentioned of the shareholders of the company. 

Key Clauses of a Shareholders Agreement

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This blog post is written by Ms. Ritu Sajnani, Senior Legal Counsel, Coinswitch, Ex-AZB & Partners and Cyril Amarchand Mangaldas.

A Shareholders’ Agreement (“SHA”) seeks to regulate the relationship between the shareholders and the issuer company (the “Company”) itself. SHA particularly governs the rights, obligations, ownership of shares, privileges, voting and various protective provisions of the said shareholders.  

Key Clauses

  1. Board of Directors: This clause deals with the responsibilities, rights, duties, and obligations of the Board of Directors (“Board”). It also includes the composition of the Board which prescribes the manner of appointment, the rights vested with the promoters to alter the Board size, and the voting rights of shareholders pursuant to the process of removal and replacement of directors.
  2. Board proceedings: This clause stipulates the frequency of the Board meetings, the time interval permitted between both two meetings, the sitting fees of the directors, and the mode of carrying out the Board proceedings. The details regarding the appointment of chairman, constitution of a valid quorum for a Board meeting, the matters in which the quorum requirement is exempted or relaxed, etc. are also listed in this clause.

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  1. Committees: This clause envisages those circumstances wherein the Board might have delegated powers to committees of specific directors and/ or officials for specific tasks. It also states aforementioned provisions like quorum and decision making to such delegated committees.
  2. General Meetings: This clause provisions for the calling of a general meeting along with the mandate of holding a certain number of meetings each year, the quorum required for conducting these meetings and consequently, passing resolutions, sending notice particulars, and provision for holding an extraordinary general meeting.
  3. Reserved Matters: This clause refers to a set of matters that mandate an additional layer of obtaining consent from a specific group of persons, in order to have a legally binding effect. A violation of this clause, or the failure to obtain the requisite consents, would render any decision made, action taken or resolution passed as void and invalid.
  4. Exit: This clause confers an obligation upon the Company and its founders to provide a full exit with a stipulated exit period to its investors. Typically, exit can be in any of the following ways:

a) Initial Public Offering (“IPO”): In the event an exit is in the form of an IPO, this clause directs that it shall only be undertaken with the prior written consent of the investors’ majority, in consultation with independent merchant bankers and the statutory guidelines in force.

b) Company Sale: This clause envisages a situation wherein the Company fails to undertake a qualified IPO – in the event of which, it must typically undertake a company sale on the terms and conditions (including pricing) approved by the investors’ majority.

c) Third Party Sale: In the event, the Company fails to provide an exit in the stipulated exit period by way of an IPO or Company Sale, then the investors’ majority shall, by issuing a notice to the Company (Exit Notice), at any time subsequent to the expiry of the exit period, have the right to require the Company to appoint a merchant banker acceptable to them, to find a buyer for the shares held by the investors at a price that is the higher of: (i) Preference Amount; or (ii) Fair Market Value as on the date of the Third Party sale.

d) Buy Back: In the event, the Company fails to provide an exit in the stipulated exit period by way of an IPO or Company Sale or through Third Party Sale, then upon request of the investors’ majority, the Company, at its discretion, may propose by way of a notice (Buy Back Notice), to buy the shares held by its investors (on a pro-rata basis) at a price that is the higher of: (i) Preference Amount on an as-if-converted basis; or (ii) Fair Market Value as on the date of the Buy Back Notice, subject to applicable law in lines with the approval of the investors’ majority.

e) Drag Along Right: In the event, the Company fails to provide an exit in the stipulated exit period by way of an IPO or Company Sale or Third-Party Sale or through buy back or in case of default, the investors’ majority shall have the right and not an obligation to cause the transfer of all shares held by other investors or employees to a bona fide third party (not being an affiliate of any of the dragging investors) at the same price and same terms and conditions as may be offered to the dragging investors by the drag purchasers. 

  1. Event of Default: It is a non-obstante clause wherein in the event of breach, the other parties shall be entitled to seek specific performance and such other rights and remedies as are available to them under applicable law.
  2. Transfers: This clause fundamentally lays down the legal contours of transfer of shares by shareholders and investors by placing certain restrictions and conferring certain privileges. A transfer undertaken in violation of the agreement would be null, void and not binding on the parties and Company or any of the parties. Typically, the clause on transfers includes the following:

8.1 Right of First Offer (“ROFO”): A ROFO is a contractual obligation pursuant to which any investor intending to sell its share to a third person can only exercise such right after providing the right to purchase said shares to the promoter entity. The clause comprehensively regulates the procedure and manner in which the promoter entity may exercise their right. On the other hand, a Right of First Refusal provides non-selling shareholders with the right to accept or refuse an offer by a selling shareholder after the selling shareholder has solicited an offer for their shares from a third-party buyer.

8.2 Pre-emptive Right: This clause confers a contractual obligation upon the Company by virtue of which, in the event the said Company is desirous of issuing new equity shares, this clause mandates that the Company must provide the existing investors a right to participate in the proposed issuance by subscribing a quantum necessary to maintain their pro-rata shareholding in the Company on a fully diluted basis. 

8.3 Tag Along Rights of Investors: In the event, a promoter entity or its affiliates desire to transfer all or part of the equity securities held by them to another person, this clause confers a contractual right and not a mandatory obligation upon the investors to transfer its equity shares at the same price, terms and conditions, on a pro-rata basis, to the proposed transferee. 

8.4 Fall Away: This clause is a non-obstante clause which typically states that if the investors and/or its affiliates collectively cease to hold a prescribed number of equity securities or their shareholding falls below a certain threshold, typically all rights conferred upon them in the SHA will immediately and automatically cease to have effect.

  1. Value Protection/ Anti-Dilution Rights: In the event, the Company intends to issue securities to any third party other than its existing shareholders, which has the effect of lowering the investor’s entry valuation or dilute their effective shareholding in the Company, this clause imposes an obligation upon the Company to take all steps necessary to ensure that the investor is adequately compensated and/or steps are undertaken by the Company in a form and manner satisfactory to the investor.
  2. Most Favorable Clause: This clause confers an obligation upon the promoter entity that the Company shall not, without prior consultations with the investors, induct any new investor in the Company on terms which are more favorable than the existing shareholders’ rights granted to them under the transaction documents.
  3. Information and Inspection Rights: This clause imposed an obligation upon the Company to furnish necessary documents like audited and unaudited consolidated financial statements, monthly reports, any updates on functioning and operations on the Company’s business, including any breach of representations and warranted to the investors for their perusal.
  4. Liquidation Preference: This clause provides how the total proceeds from a liquidity event, shall be distributed between holders of relevant securities.

Due Diligence in the Mergers and Acquisitions transactions

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This blog post is written by Kartik Singh, a final year law student from National Law University, Odisha. He was a participant of our Mergers & Acquisitions Course. He is also an Incoming Associate at Trilegal law firm. 

What is Due Diligence?

Due diligence is essentially a background check to ensure that the parties to a deal have the information they need to proceed with the transaction. It is an examination and risk assessment of an anticipated commercial transaction. A thorough investigation is necessary to uncover misrepresentation and fraudulent activity in a significant business transaction. Due Diligence is the process through which interested parties who are planning to enter into a business deal exchange, review, and evaluate sensitive, legally binding, financial, and other material information. The phrase “due diligence” frequently refers to the thorough investigation and study carried out before signing a contract or starting a business with a party.

Due diligence-driven transactions have a better likelihood of succeeding. By improving the calibre of data available to decision-makers, due diligence aids in making educated decisions. The buyer can feel more certain that their expectations for the deal are accurate thanks to due diligence. Purchasing a business without performing due diligence elevates the risk to the purchaser significantly in mergers and acquisitions (M&A). To provide the buyer confidence, due diligence is carried out. Due diligence, however, could also work in the seller’s favour because a careful financial analysis might actually show that the seller’s company is worth more than was previously believed. As a result, it is usual for sellers to create their own due diligence reports before possible purchases.

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Need for a Due Diligence Report

In the framework of M&A activities, for instance, or to protect the value chain or to conform with restrictions and with laws on the combating of money laundering, bribery, and corruption, due diligence risk and adherence check tools assist businesses in protecting their interests. When it comes to due diligence, the adage “discovering skeletons in the closet before the deal is preferable than discovering them later” is applicable. The data gathered throughout this procedure must be published because it is essential for making decisions. The due diligence report clarifies how the business intends to increase profits (monetary as well as non-monetary).

It acts as a quick reference for realising the situation at the moment of buying, sale, etc. Getting a clear image of how the organization will function in the future is the ultimate goal. The main objective of this report is to accurately portray the firm’s future operations to the dealing party. Prior to the purchase being finalised, the primary objective of due diligence is to spot any warning signs. It assists in identifying potential threats in the future. For making decisions, the data obtained for this report is essential. The company might be able to negotiate if it finds any flaws during the due diligence process. The report aids the organisation in understanding how the target wants to generate additional revenue. It serves as a doomsayer, for instance, when determining the state of affairs at the time of sale or purchase.

When is Due Diligence Required?

The following transactions entail the requirement of conducting by the parties involved:

  • Mergers and Acquisitions (M&A): Both the buyer and the seller’s perspectives are taken into account when performing due diligence. The seller concentrates on the previous experience of the buyer, the financial capabilities to complete the deal, and the ability to uphold commitments made, whereas the consumer investigates the financials, litigation, patents, and a wide range of important information.
  • Partnership: Business alliances, business collaborations, and other types of partnering are subject to due diligence.
  • Joint Ventures: Reputation of the combined company is an issue when two businesses join forces. It is crucial to comprehend the other company’s position and assess whether their resources are adequate.
  • Public Offer: Decisions about public issues, disclosures in a prospectus, post-issue compliance, and similar problems are involved during the making of a public offer. Normally, these would demand careful consideration and thus, the process of due diligence is required.

Elements of Due Diligence Report

The various elements of a due diligence report are as follows:

  • Financial Information: It comprises looking over copies of the last five years’ worth of audited financial statements, along with all associated notes and management’s analysis and comments.
  • Corporate Records: A target company’s primary formation documents, such as the articles or certificate of incorporation and bylaws, are reviewed by legal counsel. Consider that the target company is a corporation or that the operating agreement and certificate of organisation, along with any changes, are a limited liability company.
  • Debt: This involves analysing the seller’s debt in terms of loans, notes, cash advances, and security agreements; evaluating the lender relationship; and performing ongoing commercial code checks with each daughter company.
  • Employment and Labor: This section includes the full names of all executives, employees, and directors, as well as information about pensions, stock plans, profit sharing, deferred pay, and other benefits or non-salary compensation. It also includes information about any ongoing labour and employment law cases.
  • Legal: It includes copies of documents submitted to government authorities, including reports and licences, as well as information on any environmental duties and details of any legal disputes.
  • Technology: The evaluation of the technology available to the organisation is a crucial issue to take into account. A required evaluation is one that helps determine future course of action.
  • Agreements: All contracts made by the corporation and its subsidiaries, such as leases on real estate, partnerships, joint ventures, and agreements governing the marketing, commission, sales, and distribution of goods, among other important contracts.
  • Effect of Synergy: The result of synergy Making decisions is aided by the creation of synergy between the target firm and the current business.

Types of Due Diligence

  • Business Due Diligence: It entails investigating the participants to the deal, the prospects of the company, and the calibre of the investment. It entails a thorough investigation of the parties involved in a transaction, the future profitability of the firm, and the investment’s standard.
  • Financial Due Diligence: Here, financial, operational, and commercial hypotheses are verified. The acquiring business can now acquire a company with much less difficulty, which is a tremendous relief. Here, a thorough review of accounting principles, audit procedures, tax compliance, and internal controls is conducted. It provides the acquiring company with a clear image of the value of the acquisition.
  • Legal Due Diligence: It mostly concentrates on legal dangers, other legal matters, and the legal implications of a transaction. It looks for any legal obstacles or red flags. It encompasses both intra-corporate transactions and transactions between corporations. This diligence includes the currently existing documentation as well as several regulatory checklists.

Conclusion

The impacts and usefulness of a due diligence report are clear from the points above. Another compliance, carried out by numerous due diligence report service providers in India, is how the companies must follow the process. Companies must implement the aforementioned procedures in order for the transactions to be feasible; otherwise, it may be difficult for both sides to effectively finish the project agreement.

The due diligence report should give you the amount of assurance you want regarding the possible investment and any associated risks. The report needs to be able to give the acquiring firm enough information to prevent the signing of any onerous contracts that might compromise the current return on investment. No specific rule oversees this process because it is more of a diligence method than a compliance attempt. Each business must complete this crucial phase in order to make investments and assess its overall health.