CROSS BORDER ACQUISITION: LEGAL CHALLENGES – COMPARATIVE ANALYSIS IN US AND INDIA
Author: Arpitha Anna Mathew, III year of B.B.A.,LL.B from Christ Academy Institute of Law, Bangalore.
The cold wind blows, a twenty old with his boats on, having ramyeon, dressed in a Tommy Hilfiger pants and Peter England t-shirt mumbling while watching the Dexter series in his iphone 13 Pro Max in a Chinese Restaurant in MG Nagar. This has been the trend in the recent days with the utilization of world market. Ever since the new industrial policy, 1991, it’s observed that there is an increase in the interdependence of global markets with the rise in the variety of goods and services available in the market. This has been achieved through corporate restricting by cross border acquisitions (mergers, combinations).
Cross border acquisitions are put through the fire test of regulations and controls, therefore facing certain legal challenges.
Cross border Acquisition and challenges in India
A cross border acquisition is when one party involved in the corporate restructuring is registered in a foreign nation. Controls in cross border acquisition is mainly laid under Companies Act, 2013, Foreign Exchange Management (Cross Border Merger) Regulations, 2018, the Competition Act, 2002, Securities Exchange Board of India Act, 2014.
Companies Act, 2013
Chapter XV of the Companies Act, 2013 deals with compromises, arrangements and amalgamations from Section 230 to 240. Section 234 deals about the merger and amalgamation of company with foreign company.
Central Government has the power to make rules about Mergers and Acquisition in consultation with the Reserve Bank of India(RBI). With the prior approval of RBI, a foreign company can merge with an Indian company. After the amendment in 2013, cross border merger now includes both inbound and outbound merger. It was after the recommendation of Irani Committee, that outbound merger was added, which now permits merger of Indian Company with a foreign company. Rule 25A of the Companies (Compromise, Arrangements and Amalgamation) Rules, 2016, further deals with cross border acquisitions. As per this section, Foreign Company is a company and body corporate incorporated in India irrespective of wherever the place of business is.
The Foreign Exchange Management (Cross Border Merger) Regulations, 2018 defines cross border under Rule 2(ii) as any merger, amalgamation or arrangement between an Indian company and foreign company. It further requires, the managing director or the whole-time director and company secretary to produce a certificate for compliance with the FEMA regulations.
In the cross-border acquisition process, if the companies are listed on any stock exchange, the have to comply with the Securities and Exchange Board of India Act, 2014 and further SEBI Substantial Acquisitions of Shares and Takeovers Regulations, 2009 and SEBI (Listing Obligations and Diclosure) Regulations, 2015. SEBI has further powers under Section 11(2)(h) for regulating substantial acquisition of shares and take over of companies.
Antitrust Laws in India - Competition Act, 2002
The Competition Act, 2002 is a major piece of legislation which saw a shift from curbing monopolies to reducing adverse effects of competition both in India and outside India. Section 3 of the Act deals with the prohibition of anti- competitive agreements. It says that any enterprise or association of enterprise shall enter into an agreement on acquisition which causes or is likely to cause an appreciable adverse effect s(AAEC). Further, Section 5 of the Act lays down the regulation of combinations.
Section 6 lays down that no person or any enterprise shall enter into any agreement of combination which causes or is likely to cause AAEC in the relevant market and such a combination is considered void. Further, the Competition Commission of India is given investigative powers to enquire on combinations under Section 20 of the Act.
The regulations provide for an exhaustive set of forms to be filled. Further, there comes a difference between confidential and non-confidential information and on what basis, which must be disclosed. The public domain can access the underway Merger and Acquisition which is a staggering process and evokes further constrictions by competing companies. The CCI has the power to issue a show cause notice if it prima facie reasonably beliefs that it will cause an appreciable effect on competition. Filing fees is very high and is revised from time to time.
Taxation Policy and Stamp duty
Apart from anti-trust laws, the major hindrances are the difference in the taxation policy and the labour laws of different foreign nations. Due diligence must be taken in cases of acquisition. There are numerous statutory provisions to be complied with for tax concessions for corporate restructuring. Further, stamp duty varies from state to state and irrespective of it being a outbound or inbound merger a certain amount of tax should necessarily be paid in India.
Merger Controls in US
The Antitrust laws which regulate the acquisitions and combinations are mainly Clayton Act and Sherman Act. Section 7 is the major legislation but limits its application of jurisdiction to the United States. It applied to prohibit any combination which has immediate anticompetitive effects and also which have future chances of decreasing competition. The Sherman Act further restraints any trade or commerce of any company with foreign nations which monopolises or attempts to monopolise competition.
The US applies the effect test of antitrust laws to measure the effect of foreign combinations. In Timberlaine Lumber Co v. Bank of America, the US jurisdiction is granted only in cases were the combinations have a substantial magnitude effect on its competition. Indirectly, the court aimed in balancing the interest of the foreign or home country with the host country. Today, acquisition enforcements are composed primarily of pre-merger approvals. The US Antitrust Laws have such application that it can interfere in foreign nation’s independency to regulate the combinations.
Globalization has resulted in the surge of cross border acquisitions. It has become an universal practice for the economic integration and sustenance of countries economy by their contribution to the Gross Domestic Product(GDP). There will be faster pace for the legislations to regulate the cross border acquisitions. The problem arises when there is over regulation. Other than the CCI, the RBI, SEBI regulates cross border acquisition. There leads to complexities in the overburdened filling of form and regulations to be complied with. If there is a failure in the harmonious relationship between the regulatory interest of the Government and economic interest, it may prove detrimental to the economic future of the country.