Majmudar & Partners

Background Material Adverse Effect (“MAE”) or Material Adverse Change (“MAC”) clauses are often used in mergers and acquisition (“M&A”) agreements.

The Competition (Amendment) Act, 2023 (the “2023 Amendment”) was introduced on April 11, 2023, to amend the Competition Act, 2002 (the “Act”) and, inter alia,

Insider trading refers to the practice of trading a company’s securities based on Unpublished Price Sensitive Information (“UPSI”),

Insider trading refers to the practice of trading a company’s securities based on Unpublished Price Sensitive Information (“UPSI”), which is not available in the public domain. UPSI encompasses any information that, when made public, can significantly influence the prices of securities.

The Competition (Amendment) Act, 2023 (the “2023 Amendment”) was introduced on April 11, 2023, to amend the Competition Act, 2002 (the “Act”) and, inter alia, establish a new threshold for assessing transactions, known as the Deal Value Threshold (the “DV Threshold”).  On September 10, 2024 (the “Effective Date”), India’s Ministry of Corporate Affairs (the “MCA”) and the Competition Commission of India (the “CCI”) gave effect to the DV Threshold, which is particularly relevant for transactions in the digital markets, and notified the following: (i) the CCI (Combinations) Regulations, 2024 (the “Combination Regulations”); (ii) the Competition (Minimum Value of Assets or Turnover) Rules, 2024 (the “De Minimis Threshold Rules”); (iii) the Competition (Criteria of Combination) Rules, 2024 (the “Green Channel Rules”); (iv) the Competition (Criteria for Exemption of Combinations) Rules, 2024 (the “Exemption Rules”); and (v) an FAQ on the Combination Regulations.  In addition, certain provisions of the 2023 Amendment were notified, and the CCI issued a general statement on the Combination Regulations giving clarifications and addressing feedback received during the review process. This update highlights the key changes introduced by the CCI and their impact on transactions. Key changes Transactions involving acquisitions of control, shares, voting rights, or assets of a target entity, mergers or amalgamations (a “Transaction”) have to be assessed under the Act as potential “combinations.”  Once classified as such, the parties to the Transaction are required to issue a notification to the CCI (the “Notification Requirement”) for its clearance against any potential appreciable adverse effect on competition.  In this context, several significant changes have been introduced. (i) DV Threshold: Before the Effective Date, Transactions were assessed as “combinations” and triggered the Notification Requirement if they exceeded the assets and turnover thresholds stipulated under the Act. In assessing this, the assets and turnover of the entities involved in the Transaction, such as the acquirer, the target, the group of the target after acquisition, and the entity remaining after merger (as applicable), were considered.  However, the Notification Requirement did not apply if the target was subject to the de minimis exemption (as discussed below), which is commonly referred to as the “small target exemption.” Now, an additional DV Threshold has been introduced.  After the Effective Date, if the value of the Transaction itself exceeds INR 20 billion (~US$240 million) and the target entity, or the entity involved in the merger or amalgamation, has “substantial business operations in India” (the “SBO Threshold”), it will be considered a combination and must be notified to the CCI.  Further, the De Minimis Threshold Rules do not apply to Transactions that breach the DV Threshold.  Therefore, Transactions which were previously exempt because they did not breach the assets and turnover thresholds, or met the small target exemption, will now be subject to the Notification Requirement if the size of the Transaction exceeds INR 20 billion (~US$240 million) and they have “substantial business operations in India.”  This change is particularly relevant to companies operating in the digital and technology sectors, where companies often have minimal assets but significant data and market power. The manner in which to compute and assess the value of the Transaction and the SBO Threshold is set out below: (a) Value of Transaction The “value” of a transaction includes every valuable consideration, whether direct or indirect, immediate, or deferred, in cash or otherwise.  This includes consideration: agreed separately for covenants, undertakings, obligations, or restrictions imposed on seller or others. In this regard, the CCI has clarified that if no separate consideration has been ascribed to the non-compete covenants, or if such consideration is already included in the overall consideration, nothing further needs to be added to the value of Transaction; for all inter-connected steps and transactions; payable within two (2) years from the effective date for arrangements related to or incidental to the Transaction, such as technology assistance, licensing of intellectual property, usage rights for products, service or facility, supply agreements, or branding rights; for call options and shares to be acquired through exercise of such options. In this regard, the CCI has clarified that where the option exercise price is pre-determined, such price will be considered.  However, if the exercise price is contingent, then a best estimate will be considered; and payable, as per best estimates, contingent on future outcomes specified in the Transaction documents. In this regard, the best estimate will be the estimate of the board of directors (the “Board”) or the approving authority of the person obligated to file the notice.  However, if the best estimate has not been recorded by them, then the “maximum payable amount” will be treated as the best estimate.  The manner in which to compute this maximum payable amount has not been specified in the Combination Regulations.  That said, it appears that in case a Transaction contemplates contingent payments or adjustments to purchase price based on future performance, the Board and the approving authority must now make a reasonable best estimate at the time of entering the Transaction considering all reasonable predictions of future outcomes.  However, if such a “best estimate” has not been recorded by the foregoing parties, then the law will likely consider the largest possible payment under the most favourable future outcomes. Further, in the calculation of the “value”: (I) future payments cannot be discounted at the present value; (II) the value should include consideration for any acquisition by a party or its group entity in the target within two (2) years prior to the relevant date (i.e., the date on which the Board accords its approval to the proposal of merger or amalgamation, or the date of execution of agreement or such other document for acquisition, the “Relevant Date”); (III) Transaction costs, such as legal, investment banking, or regulatory fees, are to be excluded; and (IV) in case of Transactions where the true and complete value is not recorded in the Transaction documents, the value will be as considered by the Board or any approving authority of the person obligated to file the notice, and if the value cannot be reasonably determined by the Board or the approving authority, the value may be considered as exceeding the DV Threshold.  Therefore, the new rules prescribe that if the deal value is uncertain or cannot be precisely determined, the parties should assume that the DV Threshold will be breached and file a notice with the CCI. (b) SBO Threshold For a digital services provider, the SBO Threshold will be met if: (A) 10% or more of its global business or end users are located in India; (B) its gross merchandise value (“GMV”) for the period of twelve (12) months before the Relevant Date in India is 10% or more of its global GMV; or (C) its turnover during the preceding financial year in India is 10% or more of its global turnover derived from all products and services.  Further, the proportion of business users or end users is to be computed on the basis of the average number of such users for a period of twelve (12) months preceding the Relevant Date.  These changes will bring global technology transactions to the CCI’s scrutiny if any of the foregoing SBO Thresholds are met. For a non-digital entity, the SBO Threshold will be met if: (I) its GMV value for the period of twelve (12) months before the Relevant Date in India is 10% or more of its global GMV and more than INR 5 billion (~US$59,700,000); or (II) its turnover during the preceding financial year in India is 10% or more of its global turnover derived from all products and services and more than INR 5 billion (~US$59,700,000).  The additional threshold of INR 5 billion for non-digital entities will ensure that only entities with significant operations in India become subject to the DV Threshold. The CCI has also imposed a gun-jumping penalty of up to 1% of the deal value of the Transaction or up to 1% of the total assets or turnover, whichever is higher.  Therefore, if parties to the Transaction proceed to consummate an otherwise notifiable Transaction without obtaining the CCI’s prior approval, they can be subjected to the foregoing penalties. (c) Transition Provisions The Notification Requirement will apply to a Transaction that comes into effect, wholly or partly, on or after the Effective Date.  Accordingly, the Notification Requirement will not apply to Transactions that have been consummated prior to the Effective Date.  However, Transactions that have been signed (i.e., agreements or other documents executed prior to the Effective Date) but not consummated on the Effective Date, will have to immediately be reassessed for the Notification Requirement and must adhere to the standstill obligations (i.e., no implementation of the Transaction before receiving the CCI’s approval) to avoid gun-jumping penalties.  Transactions that have been signed and partly consummated as of the Effective Date will have to immediately be reassessed for the Notification Requirement for the pending portions.  That said, actions for partial consummation before the Effective Date will not be penalised for gun-jumping. (ii) Definition of control: In the context of a Transaction involving acquisition of control, the term “control” has been redefined to mean the ability to exercise “material influence,” in any manner whatsoever, over the management, affairs, or strategic commercial decisions (the “Material Influence Threshold”) of the target.  Originally, the definition of “control” was inclusive in its ambit, as well as silent on the standard to be used to assess its existence. The Material Influence Threshold is the lowest level of control, falling below de facto control (when someone holds less than 50% of the voting rights but still controls most of the votes cast at meetings) and de jure control (when someone holds more than 50% of the voting rights).  To establish control, particularly at the Material Influence Threshold, factors such as shareholding, statutory or contractual rights (e.g., veto or consultation rights), and participation in management are key.  Other indicators include the status and expertise of the person or entity, Board representation, and structural or financial arrangements. Control can also take forms like negative control (blocking special resolutions) or operational control (through commercial agreements).  Control is classified as negative, positive, sole, or joint, with varying degrees recognized in competition law.  While the CCI had already, in its prior rulings, begun to adopt the Material Influence Threshold, the formal insertion in the Act should make the combinations regime and the Notification Requirement more predictable for investors and entities.  Nevertheless, a further clarification may be necessary on what will qualify as “material influence,” and courts may have to step in.  Perhaps, the CCI should have identified a set of rights that will not constitute material influence. (iii) Exempted combinations: To sum up the position, after the notified changes, a Transaction triggers the Notification Requirement, if it breaches the asset, turnover, or DV Thresholds.  However, if the Transaction gets covered by the small target exemption under De minimis Threshold Rules, then the Notification Requirement does not apply, except if the DV Thresholds are breached.   Notwithstanding the foregoing, if a Transaction gets covered under the Exemption Rules, then the Notification Requirement does not apply. (a) De minimis Threshold Rules The 2023 Amendment expressly references the De minimis Threshold Rules in the Act, and these rules are aligned with the March 7, 2024 notification of the MCA (which exempted transactions where the target had assets below INR 4.5 billion (~US$ 53,700,000) or turnover below INR 12.5 billion (~US$ 149,000,000) in India).  This will ensure greater stability for parties relying on an exemption. (b) Exemption Rules The Exemption Rules replace Schedule I of the erstwhile CCI (Procedure in regard to the transaction of Business relating to Combinations) Regulations, 2011.  As per the Exemption Rules, the following Transactions, inter alia, are exempt: Acquisitions in the ordinary course of business by underwriters, stockbrokers, and mutual funds (subject to specified thresholds), and those of stock-in-trade, raw materials, trade receivables, or other similar current assets that do not constitute business. As the availability of this exemption has been narrowed, minority investors will not be able to avail of this exemption. Investment acquisitions if the acquirer does not, after the acquisition, hold (directly or indirectly) more than 25% of the shares or voting rights of the target entity (as a special resolution under the (Indian) Companies Act, 2013, requires a 75% majority and a shareholder with more than 25% voting rights will be able to veto such a resolution), or gain control of the target entity. Investment acquisitions mean acquisitions where the acquirer does not gain by virtue of the acquisition Board representation either as a director or observer or access to commercially sensitive information (“CSI”) (not yet defined), in any enterprise.  However, there should not exist horizontal, vertical, or complementary relations between the acquirer (including its group entities and affiliates) and the target (including its downstream group entities and affiliates), and if there is such an overlap, then the exemption will apply only if the acquisition does not result in the acquirer holding 10% or more shares or voting rights post-acquisition. In relation to the definition of “control,” it has been clarified that when a private equity investor invests as a minority shareholder, the CCI may not regard such an investment as a purely passive one if the minority shareholder gets Board representation or information rights.  The CCI may view these rights as conferring control, whether intended or not.  Moreover, even if there is no change of control, such investments will also not be subject to any exemptions and may, therefore, trigger the Notification Requirements, which can increase costs and lengthen timelines.  The CCI’s intention is clear, i.e., it seeks to prevent the sharing of CSI inter se between funds and their investee companies. Incremental acquisitions where the acquirer or its group entities do not hold more than 25% of the shares or voting rights prior to or after the acquisition. However, the acquisition should not result in the acquisition of control, and after the acquisition, the acquirer or group entities should not, for the first time, gain Board representation or access to CSI.  Further, in case of horizontal, vertical, or complimentary overlaps, the incremental shareholding or voting rights acquired by a single acquisition or a series of smaller inter-connected acquisitions should not exceed 5%, and such acquisition should not result in the shareholding or voting rights of the acquirer or group entities increasing from less than 10% to 10% or more. In a scenario where there is no change of control, the following are exempted: (I) additional acquisitions where the acquirer or group entities hold more than 25% (prior to acquisition) but less than 50% (prior or after acquisition) of the shares or voting rights; (II) additional acquisitions where the acquirer or group entities hold more than 50% of the shares or voting rights; (III) acquisitions through bonus issues, stock splits, buyback of shares, etc.; and (IV) intra-group asset acquisitions, mergers and amalgamations. Demerger and issuance of shares by the resulting company in consideration of the demerger, either to the demerged company or to the shareholders of the demerged company. The exemption simplifies the process for companies seeking to demerge a division or unit into a separate entity with either direct or mirrored shareholding in the resulting company because reorganizations, typically, do not raise any anti-competitive concerns. (iv) Definition of “affiliate”: The definition of “affiliate” has been revised to mean entities: (a) holding 10% or more of the shareholding or voting rights; (b) having the right or ability to access CSI; or (c) having the right or ability to have a representation on the Board either as a director or an observer. Earlier, the CSI criterion was not there.  The revised definition is relevant to both the Green Channel Rules and the Exemption Rules. In order to avail of the benefit of the Green Channel Rules, parties along with their group entities and affiliates must not produce or provide similar, identical, or substitutable products or services.  Additionally, they must not be involved in activities that are at different stages or levels of production or that are complementary to each other.  If these criteria are not satisfied, the combination will not receive deemed approval under the Green Channel Rules.  For instance, if Company A is acquiring Company B, the overlaps assessment will need to evaluate the relationship between Company A (including its ultimate controlling person, group entities, and affiliates such as a minority investor with access to CSI) and Company B (including its downstream group entities and affiliates).  The revised definition means that the overlaps assessment must now cover a wider range of entities, potentially including those without direct influence over the involved parties.  The broader scope will ensure a more thorough evaluation of potential overlaps but will also increase the due diligence burden on entities. If the CCI finds that the combination does not fulfil the criteria, or the information or declarations provided are materially incorrect or incomplete, the automatic approval shall be void ab initio, and the CCI may then issue any orders it considers fit.  However, no such orders will be issued without first providing the parties involved an opportunity to be heard.  Moreover, the CCI will not initiate any inquiry more than one (1) year after the combination has taken effect.  Additionally, the acquirer or other parties to the combination may submit a further notice in Form I within thirty (30) days of the CCI's order to avoid penalties. (v) Miscellaneous: The previous rule allowed two hundred and ten (210) days for a combination to take effect after notifying the CCI.  This has now been shortened to one hundred and fifty (150) days or until the CCI issues an order of approval, whichever happens first.  Further, the CCI must now give a prima facie opinion on a combination within thirty (30) calendar days, which was earlier thirty (30) working days.  If no opinion is issued within this timeframe, the combination will be deemed to be automatically approved.  Furthermore, the filing fees for Form I (short form notification) and Form II (a more detailed form) have been increased.  Form I fees have risen from INR 2 million to INR 3 million (~US$ 35,800), and Form II fees have gone up from INR 6.5 million to INR 9 million (~US$ 107,400).   Conclusion Although many of the changes introduced by the MCA and the CCI are welcome, in our view, certain amendments such as the expanded definition of control, the introduction of the DV Threshold, and the restrictions in the Exemption Rules, are likely to increase the costs and lengthen the timelines for investors, as it will be necessary to undertake a detailed analysis of both, quantitative and qualitative factors.  Going forward, PE investors must carefully negotiate agreements and ensure that the rights sought by them do not unintentionally act as a trigger of the Act and the Combination Regulations.   By: Rukshad Davar and Bhavya Solanki, Majmudar & Partners, India  

The Indian government has recently notified the Foreign Exchange Management (Non-Debt Instruments) (Fourth Amendment) Rules, 2024 (the “Amendment Rules”) to amend the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (the “NDI Rules”).  This update delves into some important changes on share swaps and clarifications introduced by the Amendment Rules. Key changes (i) Equity swaps by way of transfers: Rule 9A has been newly introduced in the NDI Rules to regulate equity swaps in the context of a transfer of shares.  Under this Rule, the transfer of equity instruments of an Indian company between a resident and a non-resident (“NR”) may occur via a swap of either, equity instruments of an Indian company, or equity capital of a foreign company.  Both types of swaps are subject to compliance with the rules and regulations prescribed by the Central Government and the Reserve Bank of India (the “RBI”) (“Appliable Law”).  In simple terms, the NDI Rules now permit the following transfers:  A resident holding equity instruments in an Indian company can transfer such instruments to an NR in exchange for equity instruments held by the NR in another Indian company; An NR holding equity instruments in an Indian company can transfer such instruments to a resident in exchange for equity instruments held by the resident in another Indian company; A resident holding equity instruments in an Indian company can transfer such instruments to an NR in exchange for the equity capital held by the NR in a foreign company, subject to compliance with Applicable Law; and An NR holding equity instruments in an Indian company can transfer such instruments to a resident in exchange for the equity capital held by the resident in a foreign company, subject to compliance with Applicable Law. (ii) Equity swaps for primary issuance of shares: The Amendment Rules have also introduced changes to Paragraph (1)(d) of Schedule I to the NDI Rules, which deals with issuance of equity instruments by an Indian company. Previously, Indian companies were permitted to issue equity instruments to an NR in exchange for equity instruments held by the NR in another Indian company.  The Amendment Rules have introduced a new clause that explicitly permits Indian companies to issue new equity instruments to an NR in exchange for equity capital held by the NR in a foreign company, subject to compliance with the OI Rules.  This change will facilitate cross-border share swaps for Indian companies and may result in more businesses opting for reverse flipping and simpler share-swap based structures for mergers, acquisitions, and restructuring across borders, subject to compliance with Applicable Law, including tax law. (iii) Definition of “control”: Rule 23 of the NDI Rules govern downstream (or indirect) foreign investments in India (“DI”) made by foreign investors through entities “owned” or “controlled” by those foreign investors (“FOCCs”). Previously, the NDI Rules defined “control” under Explanation (d) to Rule 23(7) as: (a) for companies, the right to appoint a majority of the directors or to control the management or policy decisions, including by virtue of shareholding, management rights, shareholders’ agreements, or voting agreements; and (b) for limited liability partnerships (“LLP”), the right to appoint a majority of the designated partners, where those designated partners, with specific exclusion to others, held control over all the policies of the LLP.   The Amendment Rules have now removed the foregoing definition and have added a new definition under Rule 2 of the NDI Rules.  Pursuant to this change, “control” for companies is now defined to have the meaning assigned to it in the Companies Act, 2013 (the “Companies Act”), while the definition of “control” for LLPs remains the same as before.  Additionally, the explanation on the definition of “control” under Schedule II(1)(a)(ii) of the NDI Rules, which applied to Foreign Portfolio Investors (“FPI”), has been removed.  Under the Companies Act, the definition of “control” is largely similar to the erstwhile definition in the NDI Rules but also expressly states that control can be exercised, directly or indirectly, by a person or persons acting individually or in concert.  Given the foregoing, in our view, the change has been introduced to harmonize the definition of “control” across various laws in India and is largely clarificatory in nature. (iv) DI by FOCCs owned by Overseas Citizens of India (“OCIs”): The Amendment Rules state that any DI made by an Indian entity (including a company, trust or partnership firm) owned and controlled by Overseas Citizens of India (“OCIs”) on a non-repatriation basis under Schedule IV of the NDI Rules will not be considered as indirect foreign investment. Pursuant to the change, the treatment of investments made by OCIs on a non-repatriation basis has been expressly clarified to be at par with the treatment of investments made by non-resident Indians (“NRIs”) on a similar basis.  The provision on treatment of investments by NRIs on a non-repatriation had been introduced in India’s foreign exchange regulations by way of Press Note 1 of March 2021.  The NDI Rules, under Schedule IV(A)(1)(a) read with Schedule IV(A)(1)(b) already stated that an NRI or an OCI, including a company, trust, partnership firm incorporated outside India and owned and controlled by NRIs or OCIs, may make specified investments on a non-repatriation basis, and these investments will be deemed to be domestic investments at par with the investments made by Indian residents.  Given this, in our view, the changes are clarificatory in nature. (v) Definition of “startup company”: The Amendment Rules have updated the definition of “startup company” to align with the latest notification on India’s Startup Action plan issued by the Department for Promotion of Industry and Internal Trade on February 19, 2019 (S.R. 127(E)).  The changes are intended to harmonize the definition of startup companies under Indian laws. (vi) Transfers: Rule 9 of the NDI Rules regulates the transfer of equity instruments of Indian companies by or to NRs. Previously, Proviso (i) of Rule 9(1) required prior government approval for transfers between two (2) NRs if the Indian company was engaged in a sector requiring such government approval.  The Amendment Rules replace the foregoing clause with a broader requirement of obtaining prior government approval for transfers in all cases where government approval is required.  This change clarifies that all necessary approvals under law, whether sector-specific or sector agnostic (for instance, acquisitions under Press Note 3 of 2020, which require government approval when the transferee is in a country sharding land border with India or has a beneficial owner who is situated in or is a citizen of such country), or from other regulators, will be required for transfers between two (2) NRs. (vii) FPI: In Schedule I of the NDI Rules, Paragraph 3(a) outlines the foreign investment entry routes into India, namely the automatic route, the government route, and the FPI route. Previously, under the FPI Route, aggregate FPI of up to either: (a) 49% of the Indian company’s fully diluted paid-up capital; or (b) the sectoral or statutory cap, whichever was lower, did not require government approval or compliance with sectoral conditions; provided, that, the FPI did not result in transfer of ownership and control of the Indian company from resident Indian citizens to NRs. The Amendment Rules omit the 49% threshold and now permit FPI up to the sectoral or statutory cap under the automatic route.  However, the Amendment Rules continue to specify an approval requirement if the acquisition by the FPI results in a transfer of ownership and/or control of the Indian company from a resident to an NR.  While the removal of the 49% threshold is welcome, the extent of the impact of this change is currently unclear as any transfer of ownership of the Indian company will continue to require government approval. (viii) White Label ATM: The Amendment Rules now incorporate White Label ATM (“WLA”) operations in the NDI Rules to align them with Paragraph 5.2.25 (White Label ATM Operations) of the Consolidated Foreign Direct Investment Policy (effective from October 15, 2020). Now, the NDI Rules also reflect that 100% FDI is permitted in WLA operations through the automatic route, subject to attendant conditions. Authors: Rukshad Davar, Rahul Datta and Bhavya Solanki, Majmudar & Partners, India    

The Indian government has recently notified the Foreign Exchange Management (Non-Debt Instruments) (Fourth Amendment) Rules, 2024 (the “Amendment Rules”) to amend the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (the “NDI Rules”). 

Majmudar & Partners is the winner of the Economic Times Legal Awards 2023 in the categories “Excellence in Deal Advisory,” “Excellence in Mergers & Acquisitions,” and “Boutique Law Firm of the Year.”

Overview In the Ayodhya Rami Reddy Alla (the “Taxpayer”) case, the Telangana High Court (the “THC”) held that,

The Department of Pharmaceuticals (the “DoP”) recently notified the Uniform Code for Pharmaceutical Marketing Practices 2024 (“UCPMP 2024”), in supersession of the UCPMP issued in 2014 (“UCPMP 2014”). 

With a career spanning over 18 years, Mustafa is a highly accomplished and reputed lawyer having extensive expertise in the field of dispute resolution, arbitration and real property law. Mustafa brings to the table a comprehensive understanding of real property law, a knack for resolving disputes, and a deep proficiency in navigating arbitration matter.  

The Indian parliament approved the Competition Amendment Act, 2023, (the “Amendment Act”) on April 11, 2023.  The Amendment Act has also been published in the Official Gazette, although it is yet to come in force. 

Last month, the Reserve Bank of India (the “RBI”) introduced master directions (the “Directions”) and guidelines (the “Guidelines”) for the acquisition and ownership of shares and voting rights in banking companies.  The main aim of the Directions and Guidelines is to ensure that the ultimate ownership and control of banking companies remains well diversified.  

Recently, the University Grants Commission (the “UGC”) has published the Draft University Grants Commission (Setting up and Operation of Campuses of Foreign Higher Educational Institutions in India) Regulations, 2023 (the “Draft Regulations”) proposing the establishment and operation of international branch campuses (“IBCs”) of foreign higher educational institutions (“FHEIs“) offering undergraduate and higher level programmes  in India.  The Draft Regulations prescribe the procedure for setting up IBCs, as well as the conditions of their operation.

In November 2022, Amazon initiated a voluntary separation program (“VSP”) which allowed eligible employees to resign voluntarily from employment in exchange for specific severance benefits, including twenty-two (22) weeks’ base pay, one (1) week’s base salary for every six (6) months of services, up to a maximum of twenty (20) weeks, medical insurance for six (6) months and notice period or pay in lieu of it.

The Securities and Exchange Board of India (the “SEBI”) has issued two (2) circulars, dated November 17, 2022 (the “SEBI November 17 Circular”) and November 23, 2022, (the “SEBI November 23 Circular”), respectively, in furtherance of the SEBI (Alternative Investment Funds) Regulations, 2012 (the “AIF Regulations”) to protect investor interests and to better regulate the securities market.  The amendments made by the SEBI are discussed below.

Mergers and Acquisitions (“M&A”) are strategic business collaborations that form an indispensable part of the corporate world. Parties have to mutually consent upon key terms and considerations regarding the target’s business before closing the deal. Legally speaking, the ongoing dispute between Twitter and Elon Musk (“Musk”) in the Delaware Chancery Court has given prominence to the contractual nuances prevalent in M&A deals with special attention on the Material Adverse Effect (“MAE”) clause. Typically, acquisition agreements include clauses which safeguard the interests of the contracting parties. One such clause is MAE, which is a ground for the acquirer to terminate a transaction on the occurrence of a materially adverse event that puts the acquirer’s commercial interest in jeopardy. Generally, a MAE clause envisages broad circumstances or events, whose adverse consequences make the transaction untenable. These may include events that have a materially adverse impact on the target business itself, or the ability of the parties to perform their obligations and consummate the transaction, or the ability of the acquirer to carry on the target’s business post-acquisition. MAE clauses are heavily negotiated and differ depending on the facts and industry requirements of each deal.  While acquirers seek to retain broad definitions, sellers seek to include qualitative and quantitative constraints to protect their own interests. In the ongoing Twitter v. Musk feud, the following developments have taken place: Musk has terminated the merger agreement to acquire Twitter by claiming that Twitter has made materially inaccurate representations (especially in relation to fake Twitter accounts), which allegedly result in a materially adverse event triggering the MAE clause. Twitter, on its part, has denied Musk’s claims of misrepresentation and challenged the termination. Twitter has alleged that Musk is seeking to walk away from the transaction due to a market downturn and subsequent fall in the stock price.  Twitter has relied on the qualitative thresholds in the MAE clause to argue that a market downturn does not trigger the MAE clause. In India, there is a scarcity of judicial decisions on the enforceability of MAE clauses, especially as many such disputes end up in arbitrations which are confidential in nature and not in public courts of law. However, the provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”) provide some guidance in the form of Regulation 23 which provides statutory grounds for withdrawal of a takeover offer. Accordingly, an offer for takeover can be withdrawn if a condition mentioned in the acquisition agreement attracting the obligation to make the open offer is not met for reasons outside the reasonable control of the acquirer. A similar provision in the predecessor to the Takeover Code i.e., SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, has been interpreted by the Indian judiciary to be restricted only to instances of legal and natural impossibility. Poor financial performance of the target entity is, typically, not permitted as a legitimate ground for invoking this provision. The Takeover Code, however, applies only to listed companies.  For private or unlisted public companies in India, there are no guiding statutory provisions. Hence, everything boils down to negotiations and the contractual understanding between the parties. American jurisprudence, however, provides some legal literature on this subject. In Re IBP, Inc. Shareholders Litigation v. Tyson Foods, Inc., the broadly worded MAE clause included events affecting the financial condition, business, assets, liabilities and results of operations of the target and its subsidiaries taken as a whole.  The Delaware court interpreted this clause to mean a substantial threat to the overall long-term earning potential of the acquirer and not just applicable to mere short-term setbacks.  The court also relied on past negotiations and conduct of the acquirer in its interpretation of the clause. In Akorn, Inc. v. Fresenius Kabi, the Delaware court permitted the termination as the acquirer had complied with all its obligations and its conduct showed an intent to close the deal.  In this case, the court also introduced a test of quantitative and qualitative materiality to invoke the MAE clause to safeguard the seller. M&A deals in India are at an all-time high, especially in the startup space which is attracting the interest of well-established conglomerates too. While regulatory, legislative and even judicial guidance is scare domestically, there are some lessons to be learned from this foreign dispute. Even as proceedings are sub judice, certain key aspects should be kept in mind by parties to a M&A deal: MAE clauses should be drafted with care to accurately capture the commercial intent of the parties.  Boilerplate MAE clauses should be avoided. Termination may only be permitted if the MAE has a substantial impact on the transaction. General stock market downturns may not save the day. Further, the conduct of the parties between signing and closing can play a key role in determining if a MAE clause is being invoked unreasonably. It is also suggested that parties should be proactive and get their existing arrangements legally reviewed for risk mitigation. In conclusion, this dispute has highlighted the importance of efficient contracting, especially to resolve future conflicts when the parties may no longer be on the same page. Lastly, we can expect the Delaware court to give a precedent-setting judgement, which will have the potential to change the course of future M&A deals in India and the world over. Author: Rukshad Davar, Partner and Head of M&A

Background Since the advent of globalization, enterprises have started engaging in increasingly complex cross-border transactions. In many cases, such mandates involve dealing, interfacing and obtaining approvals from government entities in foreign countries. So as to ensure transparency and fair play, governments the world over have enacted anti-bribery and anti-corruption legislations, many of which are extraterritorial in nature. Prime examples are the Foreign Corrupt Practices Act, 1988 (FCPA) and the United Kingdom Bribery Act, 2010. As a result, it has become very important for businesses to ensure that they are in compliance with the anti-corruption laws of not only their own country but also of countries where they do business.

Typically, private equity and venture capital investors seek various contractual rights to protect their investments and secure their returns.  In relation to private investments in public enterprises or PIPE deals, it becomes important for minority shareholders (including financial investors) to understand their statutory rights as listed below and ascertain whether their rights are well and truly enforceable.

By: Akil Hirani, Head of the Transactions Practice & Managing Partner, and Rukshad Davar, Head of the M&A Practice, Majmudar & Partners, India

Centre takes the first step towards legalising crypto by taxing gains at 30%. Here's what it means for investors.

By: Akil Hirani, Managing Partner, Majmudar & Partners, India

Background Micro, Small, and Medium Scale Enterprises (“MSMEs”) have faced a lot of hardships and financial stress during the Covid19 pandemic. The Indian government has taken several measures to mitigate their distress, including increasing the limit of the minimum amount that constitutes a default for the initiation of the Corporate Insolvency Resolution Process (“CIRP”) and suspending the filing of fresh insolvency applications under the Insolvency and Bankruptcy Code, 2016 (the “Code”) for a year post March 25, 2020.

Indian securities law has focussed on regulating, holding accountable and penalizing “promoters” as a result of concentrated family owned businesses which are largely prevalent in India.  In this regard, the Securities and Exchange Board of India (the “SEBI”) defines a “promoter” to include any person: (a) who has been identified as a promoter by the company in its offer documents or annual returns; (b) who has direct or indirect control over the affairs of the company whether as a shareholder, director or otherwise; or (c) in accordance with whose advice, directions or instructions, the board of directors of the company is accustomed to act.