United States: Current Legal Issues In Mergers, Acquisitions and Take-Overs Of Indian Companies - Goals For Corporate Law In The Millennium

The last few decades have seen a spate of Mergers and Amalgamations on a global scale, involving major corporations and billions of dollars¹. Indian corporations were not free from this scenario. The rapid growth of the global economy with liberalized economic and legal environments has resulted in restructuring of commercial entities along more profitable lines so as to with stand global competition and to strengthen the business with the objective to maximize share holder value. Mergers and acquisitions are an important area of capital market activity in restructuring a corporation and had lately become one of the favored routes for growth and consolidation. The reasons to merge, amalgamate and acquire are varied, ranging from acquiring market share to restructuring the corporation to meet global competition. In recent years, India has seen a manifold growth in mergers and amalgamations, largely encouraged by liberalization measures, which have substantially relaxed restrictions on international mergers and amalgamation transactions². The acquisition of market control and extension of the product ranges are one of the additional reasons for a cross-country merger apart from globalization of the corporation.

Merger in the Indian and American contexts is similar and can be classified into three categories;

• Two corporate entities amalgamate and form a new entity (amalgamating entities being dissolved);
• A small and less profitable company merges with a big company (small company loses its identity);
• A relatively big and profitable company merges with a smaller company or a unprofitable company, which is popularly known as reverse merger( in which case the small or the unprofitable company survives)

The usual form of consideration for a merger in both the U.S. and Indian context is an exchange of shares by the acquiring corporation for the shares of the target company and cash.

First, it is not possible to merge a U.S. company with an Indian Company, as the U.S. Company is an entity under the U.S. laws and the Indian Company is registered under the Indian laws³. As such these two entities cannot be merged and made as one entity. However, the U.S. company can take-over the Indian company, which results in the Indian company becoming the subsidiary of the U.S. company, or a merger can be effected by setting up a subsidiary of the U.S. company in India which in turn will merge with the Indian company.

A statutory merger is the basic form of transaction. The statutory provisions of the state or states in which the parties to the merger are charted govern the transaction. In America the main elements of a statutory merger are the percentage of the votes required for the approval of the transaction by the shareholders that are entitled to vote, how the votes are counted and the rights of the voters who object to the transaction or its terms⁴. Merger provisions found in most of the states in America are based on the Delaware statute⁵. The procedure adopted in a corporation for a merger is that the boards of directors have to initially approve the transaction and then it is submitted for the ratification to the shareholders of the respective corporations. The state laws require a majority vote to ratify the transaction, however, the state of New York requires a two third majority for the approval the any such proposal. The interests of the minority shareholders are protected in a scheme of merger though the majority rule is the traditional legal doctrine.

A merger of a U.S. and an Indian company is impacted by several Indian laws pertaining to foreign investment in India. An attempt has been in the paper to enlighten those applicable laws randomly besides raising questions that have been not clear or unapprised.

• If the Indian Company is an unlisted⁶ private company, then private arrangement can be made between the shareholders of the Indian Company and the US company for the purchase of shares. Necessary approvals under the Foreign Exchange Management Act should be obtained in India⁷.

• In the case of listed companies, the procedure will be bit cumbersome and has to follow the guidelines on takeover and substantial acquisition of shares discussed later in the paper. This involves appointing a merchant banker, valuation of shares as per the guidelines, advertisements, offer to existing shareholders and opening of an escrow account.

The merger/acquisition proposals are coupled with the policy guidelines of the Government of India and the conditions under which foreign capital is welcomed are as follows:

• All foreign and Indian undertakings have to conform to the general requirements of the government’s Industrial policy.¹⁰
• Foreign enterprises can be treated on par with the Indian enterprises.
• Foreign enterprises should have the freedom to remit profits and repatriate capital, subject to foreign exchange consideration.

The objective of setting up the corporate acquisition vehicle in India has to be conformed with industrial policy below:

The Foreign participation is available in the Indian companies’ up to 51% on an automatic basis; where significant contribution is made to import, foreign holdings can be higher even up to 100%¹³.

A scheme of merger/acquisition can be structured differently and each have their own tax and regulatory issues.The following scheme of Merger/Acquisition raises some important legal issues for our discussion. At times an Indian resident, holding the entire share capital of an Indian company, intends to transfer his entire share holding to a foreign company in exchange for shares in the latter. This makes the Indian Company a 100% subsidiary of the foreign corporation. The transfer of shares of the foreign corporation would result in capital gain tax as for shareholders in Indian Company. The consideration received by the shareholders of the Indian Company would have to be reduced from the cost of acquisition of the shares¹⁴. The important legal issue to be considered here is that consideration received would have to be computed based on the values of shares in the foreign corporation received and not on the value of the shares of the Indian Company, that have been parted with. The amount of tax depends on the valuation of the shares of the foreign company. If the US corporation is a listed¹⁵ company, the market value of the shares in foreign company received could be considered for the valuation; however, if the foreign company is a unlisted company, the authenticity of the valuation of shares is in question and often shareholders are deprived from raising their voice, as there is no proper forum to address these issues.

International mergers in the context of developing economies like India need to be discouraged if they reduce or harm competition or are prejudicial to the interests of the investors and consumers. Very few Indian companies are of international size and that in the light of continuing economic reforms opening up of trade and foreign investment, a great deal of corporate restructuring is taking place in the country which allows the Indian corporations to be on an equal footing to compete with global giants, but at the same time, cross border mergers beyond a threshold limit would harm competition and are prejudicial to the interests of the investors and consumers. The investment potential of the US giant corporations will lead to predatory pricing, which is a situation where a firm with global market power, prices below costs so as to drive the domestic competitors out of the market which is generally prejudicial to the consumers interest .To allow such cross border mergers, acquisitions, take-overs might help the US corporate giants to increase their global market share, which shall result in undue concentration in global industry.

The domestic regulations governing such restrictive trade practices are confined to the investigation of the exclusionary practices and their anti-economic effect only within the country. The monitoring and control of global monopoly is also another important legal issue that hasn’t been addressed so far.

The number and power of the multinational corporations has grown rapidly and steadily throughout this century. According to United Nations estimates, there are over 35,000 multinational corporations worldwide that control about one third of all private sector assets.¹⁶ The multinational corporations have discovered the complexity in operating in several legal systems. It is too complex and perplexing to file a notice in every country that has nothing to do with the deal in this country. In the present scenario, there is a need for progressive harmonization and unification of the international corporate law. There is no consensus, however, on a preferred course of action. Ideas range from creating an accountability of reliable information on the laws of all jurisdictions, to the standardization of forms and procedures, to the adoption of common core principles, such as the prohibition of cartels. The question is who would do this and what charter of authority would they receive to do it? Should it be a part of the WTO Governance mechanism? Should it be something established under the auspicious of a group such as the Organization for Economic Co operation and Development? Do we need to create another multinational institution to perform any of these functions? In the light of international economic developments and emerging global economy, where the multinational corporations have their existence beyond borders, it is necessary to establish an "International corporate commission" to promote, regulate and provide for the settlement of the disputes arising in cross-border operation of multinational corporations. It is the next reasonable step to share information, promote common processes, and seek substantive harmonization. The International corporate commission should be vested with the investigative, prosecutorial and adjudicative functions to address various international legal issues arising in the operation of the multinational corporations. The international corporate commission should be a multinational member body comprised of eminent and erudite persons of integrity and objectivity from the field of judiciary, economics, law and international trade.

The commission should have necessary regulatory investigative and prosecutorial wings to address various legal issues arising in the field of international corporate, securities and competition laws.The commission shall strive for the international investor protection besides acting as a catalyst for the multinational companies to play efficiently in the global economy. An attempt to describe the objectives of the "International corporate commission" has been made here;

1. Preparing or promoting the adoption of new international conventions, model laws and uniform laws and promoting the codification and wider acceptance of international corporate laws in collaboration, where appropriate, with the organizations operating in this field;
2. Promoting ways and means of ensuring a uniform interpretation and application of international conventions and uniform laws applicable to Multi national corporations
3. Collecting and disseminating information on national legislation’s and modern legal developments, including case law, applicable to multi national corporations
4. Maintaining liaison with other Nations, organs and specialized agencies concerned with multinational corporations
5. Taking any other action it may deem useful to fulfil its functions.