CS Professional:Corporate Restructuring,Insolvency,Liquidation and Winding Up [Ch-3 Planning & Strategy]

• sound strategic decision and procedure to:
• ensure success and fulfill expected desires
• achieve strategic objectives
• increase cost effectiveness
• opportunities for growth and a viable business solution for downsizing/exiting
• streamline operations by divestiture leading to efficiency/profitability
• achieve business synergy
• BENEFITS of M&A

PRIMARY FACTORS TO BE CONSIDERED FOR M&A

1. done for acquiring cash resources/eliminate competition/tax saving/large-scale operation
2. party identification
3. due diligence
4. third-party consents?
5. taxation
6. risk: indemnities/warranties/guarantees
7. transaction impact on existing arrangements
8. existing charges/modifications
9. licenses
10. supply contracts
11. intellectual properties used

 FUNDING PROCESS 

• Internal Accruals: retained earnings
• Borrowings: banks/financial institutions/commercial borrowings/debentures
• Securities Issue
• all cash and all stock offers give a premium over price for capital gain to shareholders
• all stock offers taxable for shareholders
• but stock-for-stock transactions aren't taxale
• or a combo of both of the above may also be offered
• in cash transactions, acquiring shareholders take on the entire risk but in stock transactions,risk shared in proportion to % in combined co.

 FUNDING THROUGH EQUITY SHARES 

1. permanent capital
2. no servicing as no fixed return
3. time consuming process and costly
4. requires legal compliance
5. complicated/long-drawn process
6. SEBI (ICDR) regulations, 2018 apply to almost all issues

FUNDING WITH PREFERENTIAL ALLOTMENT 62(1)(c)

1. to select identified people on a preferential basis and may not include ESOPs/rights issues/sweat equity/bonus/DRs.
2. For a preferential offer, we must compulsorily follow Section 42: private placement and SEBI (ICDR) or may raise funds through QIP.

FUNDING THROUGH PREFERENCE SHARES

1. includes payment of fixed preference dividend @ a fixed rate
2. board should ensure target co. would be able to yield sufficient profits for covering additional liability.
3. Section 55 read with Rule 9 & 10 of CO. (share capital & debentures) rules, 2014
4. no irredeemable issues after 2013 act
• redeemable within 20 years from issue at most 
• 20-30 years for infrastructure projects subject to conditions specified
• AoA authorization + SR required
• fully paid before redemption
• redeemed out of profits
5. no default in redemption of previous preference issues
6. nominal amount transferred to CRR

FUNDING THROUGH OPTIONS/DIFFERENTIAL RIGHTS SECURITIES

1. may also issue non-voting shares under quasi-equity instruments
2. additional fund source without interest cost and without repayment obligation
3. promoters may be interested as it imposes no obligation and no loss of control
4. options come under "securities" as per securities laws (second amendment) act,1999
• call option-right to buy if price expected to increase
• put option-right to sell if price expected to decline
5. Section 48 of co. act 2013 & rule 4 deals with differential right shares and it's procedure
• shareholder approval
• impact/approval from affected class
• variation cancellation
• non-compliance= co./officer fined 25,000-1,00,000 or imprisoned for upto 6 months
6. shall not issue 74% post-issue paid-up equity
7. no conversion from voting to differential voting and vice versa

 FUNDING THROUGH SWAPS/STOCK-TO-STOCK MERGERS 

1. holders of target co. receive acquiring co's shares in lieu of merger
2. share exchange ratio mutually determined by both boards on valuation report
3. might involve risk

FUNDING THROUGH ECB RECEIPTS

1. commercial loans raised by eligible residents from recognised non-resident entities and should conform to minimum maturity,end uses, max. all-in-cost ceiling etc.
2. ECB types
• loans
• capital market instruments
• notes/bonds/shares/debentures
• FCCBs
• FCEBs (only by approval route)
• A foreign currency convertible bond (FCCB) is a type of corporate bond issued by an Indian company in an overseas market in a currency different from that of the issuer. Investors have the option of redeeming their investment on maturity or converting the bonds into equity any time during the currency of the bond.
• (FCEB), investors have the option of converting the bonds into equity of the offered company. The company issuing FCEB shall be part of the promoter group of the offered company and shall hold the equity shares being offered at the time of issuance of FCEB.
• buyer/supplier credit
• financial lease 
3. not applicable to non-convertible debentures issued by RFPIs
4. raising loans comprises three tracks
• Track I: Medium term foreign currency denominated ECB with minimum average maturity of 3/5 years.
• Track II: Long term foreign currency denominated ECB with minimum average maturity of 10 years.
• Track III: Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years.
5. Eligible Borrowers

1. Masala Bonds: rupee denominated, sold to offshore investors who take forex risk for higher interest rates compared with dollar denominated offshore bonds.
• w.e.f 03/10/2017 won't constitute as FPI but as ECBs
• HDFC first to issue followed by NHAI,NTPC
• proceeds can't be used for:
• Real estate activities other than for development of integrated township/affordable housing projects
• Investing in the capital market and using the proceeds for equity investment domestically
• Activities prohibited as per the Foreign Direct Investment (FDI) guidelines
• On-lending to other entities for any of the above objectives
• Purchase of land.
2. Depository Receipts(DRs): foreign currency denominated instrument issued by foreign depository as per jurisdiction deposited with a domestic custodian.
• defined in 2(44) of co. act,2013 and DR schemes,2014 dated 21/10/2014
• ELIGIBILITY: who hasn't been specifically prohibited from accessing/dealing in capital market
• issued only if the holder has the right to issue voting instructions & listed on international exchange.
• PROCEDURE
• BY public offering/private placement
• permissible mode for security issue
• permissible securities transferred for issue of DRs with/without approval of such security issues through bilateral transactions or tendering through a public platform.
• shall not exceed foreign holding limit under the FEMA act,1999
• price as applicable to a corresponding issue
3. ECB/AML framework strengthened with circular dated 16/01/2019

 FUNDING THROUGH FI/BANKS 

• end-to-end advisory services-
1. target search/analysis
2. potential synergies
3. value analysis
4. pricing strategy
5. transactions docs review
6. negotiation support
7. closure
• Points to be considered: 
• capital gains tax
• stamp duty
• carry forward of accumulated losses
• meet organisational needs/objectives
• financial/managerial info placed before lender
• ADVANTAGES-
1. definite period
2. continued availability
• DISADVANTAGES:
• high interest burden
• opted only when the board is assured of adequate returns
• timely payment

FUNDING THROUGH REHABILITATION FINANCE

1. Section 252 of IBC,2016 notified w.e.f. 01/11/2016
2. AA cases transferred to NCLT within 180 days of code commencement with no fees.

FUNDING THROUGH LEVERAGED BUYOUTS (LBO)

• investment strategy of using borrowed money to increase potential return of investment.
• highly leveraged,i.e., debt>equity.
• A Leveraged Buyout (LBO) is the acquisition of a company in which the buyer puts up only a small amount of money and borrows the rest. The buyer can achieve this desirable result because the targeted acquisition is profitable and throws off ample cash used to repay the debt. The expectation with leveraged buyouts is that the return generated on the acquisition will more than outweigh the interest paid on the debt, hence making it a very good way to experience high returns whilst only risking a small amount of capital.
• 2000, landmark deal/first LBO by an Indian co.= TATA TEA ACQUIRED uk brand TETLEY FOR 271 MILLION POUNDS; making it the largest cross-border acquisition.
• Tata Tea created a Special Purpose Vehicle (SPV)-christened Tata Tea (Great Britain) to acquire all the properties of Tetley. The SPV was capitalised at 70 mn pounds, of which Tata tea contributed 60 mn pounds; this included 45 mn pounds raised through a GDR issue. The US subsidiary of the company, Tata Tea Inc. had contributed the balance 10 mn pounds.
• TATA MOTORS ACQUISITION OF JAGUAR LAND ROVER (JUNE,2008)

• GOOD LBO TARGETS
• able to pay off future debts
• Stable, strong cash flow business
• Company with low debt levels
• Non-cyclical businesses
• Companies with large economic moats
• Companies with good existing management teams
• Companies with a large asset base that can be used for collateral
• Distressed companies in good industries

MINORITY/MINORITY INTEREST UNDER CO. ACT,2013

1. not clearly defined in co. act but given collective statutory rights
2. Section 244 provides eligibility criteria as per company having/not having share capital.
• NCLT may also allow ineligible shareholders if deserving of action
3. OPPRESSION & MISMANAGEMENT (sections 241-246)

1. CLASS ACTION SUITS
• on 01/06/2016 MCA notified Section 245 & NCLT rules,2016 enlisting class action provisions.
• shareholders/depositors collectively institute a suit against co. in Tribunal.
• The requirement was felt when 2009,Satyam scam occurred where indian shareholders couldn't claim damages worth millions whereas the american investors claimed it in US courts.
• Section 245 is much wider and includes monetary compensation/damages for fraudulent actions along with restraining orders.
• it covers depositors as an added advantage.
2. MINORITY RIGHTS DURING MERGERS/AMALGAMATIONS/TAKEOVERS
• high court/tribunal/shareholder approval for corporate restructuring
• objection by 10%/more shareholding OR 5%/more of total outstanding debt
• CAA-2 (notice of petition hearing) required to be published in the newspaper and given to statutory authorities.
• takeovers (230-235), SEBI has power to appoint Investigating officers in case of complaints or suo-moto.
• dissenting shareholders given an opportunity to approach the tribunal with no applicable threshold.

LEGAL PROVISIONS OF CO. ACT,2013 AND DECIDED CASE LAWS (230-240)

1. Section 230: Tribunal's power to compromise/make arrangements and make orders.
• "arrangement" is interpreted under judicial pronouncements:
•  in section 390(b) of the 1956 Act [corresponding to Explanation to section 230(1) of the 2013 Act] is something by which parties agree to do a certain thing notwithstanding the fact there was no dispute between the parties. Navjivan Mills Co. Ltd., In re [1972]
• an inclusive definition and contemplates all arrangements and not only reorganisation of the share capital. This is all the more clear, because the word used is ‘includes’.Investment Corpn. of India Ltd., In re [1987]
• affects the rights of the creditors and the members of the company or any class of them, would fall within the term, ‘arrangement’.Bank of India Ltd. v. Ahmedabad Mfg. & Calico Printing Co. Ltd. [1972]
• reorganisation of share capital of the company by consolidation of shares of different classes or by division of shares into shares of different classes or both these methods.Hindusthan Commercial Bank Ltd. v. Hindusthan General Electrical Corpn. [1960] 30 Comp. Cas. 367 (Cal.)
• 'class' interpreted by the Gujarat High Court
• offered substantially different compromises each will form a different class. Even if there are different groups within a class, the interests of which are different from the rest of the class or who are to be treated differently in the scheme, such groups must be treated as separate classes for the purpose of the scheme. The group styled as a class should ordinarily be homogeneous and must have commonality of interest and the compromise offered to them must be identical. [(See section 391(1) of the 1956 Act) State Bank of India v. Engg. Majdoor Sangh [2000] 27 SCL 103 (Guj.)]
2. Section 231: Tribunal's power to enforce compromise/arrangement or make a winding-up order.
• powers under 392 may be exercised anytime at/after making order.(Bhavnagar Vegetable Products Ltd.) 
• Interpretation of the word ‘Modification’ [corresponding to section 231(1)(b) of the 2013 Act], ‘modification’ would mean addition to the scheme of compromise or arrangement or omission therefrom solely for making it workable.S.K. Gupta v. K.P. Jain [1979]
3. Section 232: merger/amalgamation (w.e.f. 15/12/2016)
• Tribunal's power for holding meetings and to make orders on proposed reconstruction. this section dictates the manner/procedure in which the Tribunal ordered meeting is held.
• “reconstruction/amalgamation”, used in the section, the Calcutta High Court opined that there is no particular meaning in the word ‘reconstruction’ or in the word ‘amalgamation’. It has to be found out from the scheme read as a whole whether it is a case of reconstruction or whether it is a case of amalgamation. [Inland Steam Navigation Workers’ Union v. Rivers Steam Navigation Co. Ltd. [1968] 38 Comp. Cas. 99 (Cal.)
• Sesa Industries Ltd. v. Krishna H. Baja, Civil Appeal Nos. 1430-1431 of 2011, February 7, 2011, [2011] 9 taxmann.com 218 (SC)], the Supreme Court opined that the Court before whom scheme of amalgamation is placed for sanction is not expected to put its seal of approval merely because majority voted in favor.since it is binding on dissenting minority;court should thoroughly examine it.
• Lotus Nikko Hotels Travel (P.) Ltd. v. Ashok Chopra & Co., EFA (OS) NO. 2 OF 2011,February 16, 2017, [2017] High Court of Delhi opined that,where scheme of arrangement providing for demerger stood confirmed; it also bound the creditor irrespective of consent.
• Wiki Kids Ltd. v. Avantel Ltd. (21.12.2017), a non-listed company Wiki Kids Limited (Transferor Company), wished to amalgamate with Avantel Limited, a listed company (Transferee Company).proposed a scheme of amalgamation and approached the Andhra Pradesh High Court. Pursuant to the directions of the High Court.
• NCLT observed that promoters of the Transferee Company held 99.90% of the shareholding of the Transferor Company. Thus, the NCLT, in light of its analysis, held that the entire scheme was designed in a manner to extend financial benefit of INR 12 crores only to common promoters even though transferor had no net worth/value.NCLT held the scheme to be against the public interest and refused to approve it.NCLAT upheld the order of NCLT rejecting amalgamation, as it resulted in undue advantage to the promoters of the amalgamating company.
4. Section 233: merger/amalgamation (M&A) of a certain co.: 2 small companies, between a holding co. and it's WOS; giving notice and inviting objections.
• CG powers delegated to RD @ D,M,K,C,Ahmedabad,Hyderabad and Shillong
5. Section 234: M&A with foreign co. (w.e.f. 13/04/2017); no corresponding section in 1956 act
• CG in consultation with RBI makes rules
6. Section 235: power to acquire dissenting shares from majority (9/10ths OR <) approved scheme/contract (395 of 1956 act)
• 'four months' interpreted by Chandigarh High Court:maximum period within which an offer is accepted, doesn't require an offer to be kept open for at least 4 months. Western Mfg. (Reading) Ltd., In re [1957] 
• Radhey Shyam Agarwal v. Bank of Rajasthan Ltd.question of investigating the affairs of the transferor, Bank of Rajasthan does not survive any further and the Company Law Board in its impugned order dt.30.9.2011 has taken note of the approval being granted by the RBI and the order of the Apex Court dated 13-9-2011 rejecting the writ petition preferred by the petitioner assailing the merger on multifarious grounds.
• when failed to get an interim injunction,petition rendered infructuous
• After the primary grievance of the appellant being finally crystallized, investigating the affairs of transferor Bank of Rajasthan does not survive any further and the Court is also of the view that the Company Law Board has not committed any error.
• no question of law which emerges from the order of the Company Law Board which may be open for the Court to examine under section 10F of the 1956 Act (Corresponding to section 465 of the 2013 Act)
7. Section 236: purchase of minority shareholding (395 of 1956 act)
• procedure of 90% holder notifying co. of intention to purchase
8. Section 237: CG to provide for amalgamation in public interest (396 of 1956 act) by passing order to be notified in the Official Gazette.
•  63, Moons Technologies Ltd. v. Union of India, the High Court of Bombay opined that final amalgamation order of NSEL with its holding company FTIL passed by CG doesn't violate natural justice principles and fair play.
9. Section 238: registration of scheme offer involving transfer
• prescribed fee= rs. 2000 under co. rules, 2016
• provides registration mode
• every circular  containing such offer/recommendation shall be accompanied by requisite info and registered with ROC pre-issue.
10. Section 239: preservation of records of amalgamated co. (396A of 1956 act)
• not without prior CG permission and examination for evidence of any offence commission w.r.t promotion/formation/management/acquisition.
11. Section 240: officer's liability for offence committed prior to M&A (no section in 1956 act)=continues post M&A.

MINORITY INTEREST PROTECTIONS

Tribunal/Shareholder approval required for corporate restructuring

CASE STUDIES/JUDICIAL PRONOUNCEMENTS

• instances of minority objecting and preventing a scheme: Tainwala Polycontainers Ltd (TPL), Dinesh V Lakhani, had apparently forced the company to call off its merger plans with Tainwala Chemicals and Plastics (India) Ltd. (TCPL). Lakhani had opposed the proposed merger on several grounds including allegations of willful suppression of material facts and malafide intention of promoters in floating separate companies.
• PARKE-DAVIS INDIA LTD. and PFIZER LTD. (2003): minority objected as requisite majority approval wasn't obtained.
• filed an urgent petition before Bombay High Court
• executed stay in 03/2003 restraining co. form taking further steps and extended till 09/2003
• dissenting shareholders filed a special leave petition with the Supreme Court and the court dismissed the petition
• amalgamation was completed
• TOMCO HLL MERGER: minority argued that HLL would capture large market share but the court superseded the argument.
• FAIR/REASONABLE SCHEME MADE IN GOOD FAITH
• Sussex Brick Co. Ltd., Re, (1960) 1 All ER 772 : (1960) 30 Com Cases 536 (Ch D) it was held, inter alia, that although it might be possible to find faults in a scheme that would not be sufficient ground to reject it. It was further held that in order to merit rejection, a scheme must be obviously unfair, patently unfair, unfair to the meanest intelligence.
• faults not enough to warrant a dismissal
• For such a provision is not a sine qua non to sanctioning a fair and reasonable scheme, unless any special case is made out which warrants the exercise of court’s discretion in favour of the dissentients. Re, Kami Cement & Industrial Co. Ltd., (1937) 7 Com Cases 348, 364-65 (Bom).
• MINORITY PROTECTION
• MAJORITY RULE: redress a wrongdoer/recover damages,action should be prima facie be brought by co. itself (FOSS V. HARBOTTLE [1843])
• EXCEPTIONS
• ultra vires act: no need to consult majority before instituting a suit  (Dhaneswari Cotton Mills Ltd. v. Nilkamal Chakravarthy [1937[ 7 Comp. Cas. 417 (Cal).
• minority fraud: tried even if majority has affirmed the transactions Cook v. Deeks [1916]1AC 554 (PC).
• wrongdoer in control
• The shareholder has the right to file suit: Menier v. Hooper’s Telegraph Works [1874]9 Ch. App. 350 (CA) 
• A minority in the saddle of power can't be allowed to litigate to oppose the majority: Life Insurance Corp of India v. Escorts Ltd [1986] 59 Comp Cas.548 (SC).
• OPPRESSION
• mere lack of confidence is not enough unless stemming from oppression: Shanti Prasad Jain v. Kainga Tubes Ltd. [1965] 35 Comp Cas. 351 (SC) 
• A series of illegal acts can be part of the same oppressive transaction: Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. [1981] 51 Comp Cas. 743 (SC)
• violation of contractual/statutory rights, 397 only maintainable in an extraordinary situation
• alleged illegality in majority conduct pleaded and proved with sufficient clarity/precision
• Sangramsingh P. Gaekwad v. Shantadevi P. Gaekwad [2005] 57 SCL 476 (SC)

FAMILY HOLDINGS AND THEIR MGMT.

growth objectives,expansion or sale; stakeholder communication is essential.

A trust/similar entity becomes pivotal to a succession plan.

BENEFITS OF SUCCESSION PLANNING

1. continuity planning: control/ownership consolidation for a clear vision and commitment
2. generational change: professionalization by introducing external talent
3. clear conflict mgmt.
4. security of family/personal assets
5. pooling/simplicity: provide benefit to heirs without loss of control
6. a typical business should have a 2-tier structure within a master trust with an apt governance structure.

ANNEXURE I-SCHEDULE VI (section 55 and 186)= INFRASTRUCTURE PROJECTS/FACILITIES