Mergers & Acquisition: A Complete Guide on M&A Transaction for Exponential growth of Business for Start-ups & Corporates

BRIEF:

In recent scenarios, the Mergers and acquisitions have become an essential and integral part of corporate strategy and will gain more significance as a competition among the corporate industries intensifies. Mergers and acquisitions (M&A) generally refer to buying / selling or combining of business entities, which in turn, help a company to grow quickly. However, merger and acquisition process is quite a complex process that consists of a few steps and wherein Transferor Company (i.e. Target Company Being acquired) and Transferee Company need to go through some distinct steps. The merger and acquisition process is also a big point of concern for the companies involved in the deal, as the process could be full of risk and uncertainty. However, prior effective planning and research could make the process easy and simple.

M & A - STATUTES PROVISION

Companies Act, 2013 contains the adequate provisions on Compromises, Arrangements and Amalgamations which specify mergers and amalgamations, Corporate Debt Restructuring, demergers, fast track mergers for small companies/holding subsidiary companies, cross border mergers, takeovers, an amalgamation of companies in public interest etc. It also specifies the related rules for making an application to the concerned authorities’ viz. National Company Law Tribunal (NCLT), Regional Director (RD) involved under Companies Act, 2013. Following are the major sections which captures the ambit of Mergers and Acquisitions (M&A)

•  Section 232 deals with mergers and amalgamation including demergers (Read with Section 230-231 deals with compromise or arrangements.)
•  Section 233 deals with amalgamation of small companies (also called fast track mergers)
•  Section 234 deals with amalgamation with foreign company (also called cross border mergers)

Other statutes compliances:

• SEBI Laws and Regulations (If any of the Merging Entity is a Listed Company)
• Taxation Authorities
• Foreign Exchange Management Act, 1999 (If there is involvement of Foreign Funds or there is a foreign Collaboration of the Merging Entity)

STRATEGY & PLANNING:

There are certain pre-requisites before any merger and acquisition process moves on, we have broadly classified these aspects in the following steps:

• Business evaluation

It is very important to ascertain the market value of the company being acquired along with its estimated financial performance in the future. Various factors such as organization history, products/ services and related brand value for business including statutory provisions and ownership are taken into consideration for the target company. We call it as Valuation Services in Delhi, Noida, and Gurgaon, India.

• Due- Diligence

As success of any deal depends on meticulous Due Diligence, this involves a process where seller makes its business process open for the buyer, so that it can make an in-depth investigation on the business as well as its attorneys, bankers, accountants, statutory advisors etc. so as to comprehend the objectives and important risk areas of the target. It is imperative to adopt the following phases before successful and fruitful aspects for any merger and acquisition are derived out.

1. Financial Due-Diligence

It is a vital part of the acquisition process. This more and largely focuses on financial and operational perspective of a business. Appropriateness of the accounting policies are evaluated along with its financial statements, revenues, cost analysis and budget consistencies. Moreover, quality of assets and working capital as well as capital expenditure levels are analysed during the process. It also covers analysis of assets and liabilities, internal financial systems and controls. Key terms with top customers including any relevant agreements are carefully reviewed so as to ascertain the possible financial transactions and feasibility of business plans.

2. Commercial Due-Diligence

Commercial due diligence involves a comprehensive review of the company's business plan in the context of market conditions and the industry/competition. Commercial due diligence provides a full overview of the internal and external environment, in-depth knowledge of the target company and the market in which it is positioned. It is designed to enable the prospective buyer to make an informed decision, and highlight any potential risks associated with the target business.

3. Statutory Due-Diligence

Statutory due diligence is a thorough investigation of different types of taxes that affect the target company. When an acquirer is considering a merger or an acquisition, it is important for him to recognize any significant tax exposure to the target company. Thus tax due diligence takes into consideration the liabilities that will crucially affect the profitability of the target company. A seller’s side due diligence is conducted by the target company in an attempt to recognize and remedy any major tax exposure before inviting prospective buyers. A buyer’s side due diligence is when the buyer wants to recognize the target company’s tax exposure before making the buying decision. This may include a review of all applicable types of taxes such as – corporation tax, sales/ value-added tax, excise tax, customs duties, employee tax and other specific taxes applicable to the target company.

4. Legal Due-Diligence

It involves analysing and understanding the legal risk associated with the target company before a merger or an acquisition transaction. The buyer reviews all the documents and interviews of related personnel of the target company. Thereafter, it tries to identify whether there will be any legal problems in the future. It involves understanding the structure of the target company and the following analysis viz.

• Understanding the business objectives of Target Company through Memorandum of Association, Articles of Association and other by-laws.
• Analysing commercial contracts of the target company viz. Contracts, licenses etc. of the target company 
• Understanding the target company’s risks and future liabilities towards the employees.
• Adherence to the laws, regulations, policies, and standards under which it operates. 
• Any possible or pending litigation under non-adherence to the environment law.
• Target company’s intellectual property rights are ascertained.

PRE-MERGER/DEAL PLANNING

Negotiation: Agreement and Documentation

• Issues like price and terms, deciding on due diligence period, deal structure, purchase price adjustments, earn out provisions liability obligations, ISRA and ERISA issues, Non-solicitation agreement, Breakup fees and no shop provisions, pre closing tax liabilities, product liability issues, post-closing insurance policies, representations and warranties, and indemnification issues etc. are negotiated in the Letter of Intent.
•  Valuation report in respect of the shares including swap ratios and the property and all assets, tangible and intangible, movable and immovable, of the company are also carried out.
•  After reviewing, a Definitive Purchase Agreement is prepared. It states the transaction details including regulatory approvals, financing sources and other conditions of sale.
•  A detailed plan viz. scheme of merger is drafted and vetted by the professionals based on the statutory provisions. Both, buyer and seller take the letter of intent to their respective attorneys to find out whether there is any scope of further negotiation left or not.
•  Filing of the relevant applications, affidavits and petitions before the concerned authorities viz. National Company Law Tribunal (NCLT), Regional Director (RD) and visiting on date to date hearing for the matters by advocates and professionals.

POST-MERGER INTEGRATION

Post the merger order by the relevant authorities, there remains certain important task which are required to be expedited within the time lines viz.

• Name change filings

If an order is a result of name change in the merger entities, the same required an approval and applications to be filed within the respective Registrar of Companies Office and various statutory specified filings are required to be completed in the relevant cases.

• Managing the formation / charter documents

However, if the change is not set forth in the merger document, the formation document would have to be amended. It becomes imperative to adopt the re-constituted formation documents of the company on account of various factors viz. name change. There are certain other aspects which requires careful considerations viz.

• Bylaws or operating agreements
• Tax registrations
• Officers and directors
• Banking resolutions
• Delegations of authority
• Inter-company agreements
• Business licenses etc

Other requisite compliances:

• To Pay Stamp Duty on the Order of the Court and other Agreements
• To follow up Pending Litigation Matters of the Transferor Company
• To Transfer Intellectual Property Rights such as Patents, Trademarks, Copyrights etc. of the Transferor Company in the name of Transferee Company
• To Modify the Contracts or Agreements executed between the Private Parties included Foreign entities and the merging entities, if required
• To make changes in the Letter Heads and Boards displaying the name of the company which are placed outside the Registered Office and Branches of the Transferee Company
• To get transferred the assets and liabilities of the Transferor Company in the name of Transferee Company
• If there are any Government Approvals or Licenses etc. in the name of merging entities, then the respective Government authority or license issuing authority will have to be intimated about the merger.
• Administrative Conduct:
• Re-constituting policies, synergies of HR department on account of merger of the entities.
• To inform the Bankers and Financial Institutions of the Transferor as well as the Transferee Company.
• Reviewing the contracts, business insurances and accounting policies in respect of merged/amalgamated entity.
• Dissemination of the information, orders to various authorities, Clients, Customers, Debtors and Creditors of the Transferor Company.

CONCLUSION:

Post-Merger Obligations have an important role to play in order to achieve the desired results after merger. A careful Due Diligence of the Pre and Post Merger Obligations will help the merging entities to take an informed decision before entering into a merger.

OUR OFFERINGS: MERGERS & ACQUISITIONS

•  M&A STRATEGY

We bring in a proven track record and extensive experience in extracting cost synergies and quantifying the potential for synergies, and assessing potential integration issues and general feasibility of the transaction. On the revenue side, our industry experts provide additional perspectives on top-line growth opportunities and likely competitive reactions. These more detailed insights can affect the proposed purchase price, and informs the planning for integration. In Nutshell, We can help in end to end Merger & Acquisition (M&A) Services in Delhi, Noida, and Gurgaon and all over India.

• VALUATION

Based on the structure of the transaction and needs of our client, our experienced team helps in providing a valuation/swap ratio which is in line with applicable regulations like FEMA, SEBI and Income Tax. We are Registered Valuer by IBBI to provide Valuation Services in India. We can help in Valuation Services & Consultants in Delhi, Noida, Gurgaon and all over India.

• DUE DILIGENCE SERVICES

Due diligence services, involving analysis of the target company’s operations and informing the buyer about possible threats and opportunities related to the structure of the transaction and its future operations. We have experienced team which are handling lot of due diligence services in Delhi, Noida, and Gurgaon and all over India.

• EXECUTION

Our vast experience in execution of transaction under single window has enabled us to foresee impediments in efficient execution of any deal and where there are possibilities of leads and lags This makes execution process, (which involves approvals of different government authorities at different stages), smooth and time and cost efficient.

• EXTERNAL EXPERTISE

M&A transactions are typically done under tight deadlines. The right external experts increase the probability that your M&A transaction will be among the few success stories that create shareholder value. We here also bring in our domain expertise in establishing and smooth lining the financial operations and other connected objectives of the company with adequate care so that the merged entity achieves the desired results.

We are doing lot of International Mergers where we are promoting Doing Business in India by helping companies to start operations in India by any M&A transaction or any other arrangement. For More Information on Merger & Acquisition Services, Valuation Services, Due Diligence Services, Doing Business in India, Transaction Advisory services (TAS), Virtual CFO Services in Delhi, Noida, Gurgaon and India, you can write CA Harshil Goyal, Senior Partner, Especia Associates LLP at [email protected] or log on to www.especia.co.in.