Cross-border Investment / Mergers and Acquisitions Rules and Regulations Procedures Law

When companies of a country invest overseas, in addition to considering the relevant domestic approvals and their own food and salary supply, they also need to pay attention to the differences in the political system, economic policy, and culture of the target country. In addition, it is more important to understand and abide by the relevant laws and regulations of the target country, so as to ensure legal investment behavior and effectively avoid legal risks in overseas investment. The legal problems encountered by Chinese companies in overseas investment cannot be said to be like tigers, but they can be overcome as long as they are handled carefully.

 

1. Weather vane-foreign investment policy of target country

The country where foreign investment activities are located must have its own unique system. Therefore, before starting investment, you must go to the countryside to study and understand the relevant laws and regulations of the target country and the policy and legal environment related to foreign investment in order to conduct investment feasibility analysis and transaction structure. The determination and subsequent operational planning lay the foundation. 

Indian Mergers and Acquisition Policies

For example, in addition to understanding Indian laws and regulations, companies investing in India should also understand the FDI policies, which industries are allowed to invest, where are forbidden areas, recognize the automatically permitted part of the investment, and also understand that the government and RBI can Only by grasping the "wind vane" of the boundary of the hand, can the enterprise move forward and retreat freely.

 

👉 Foreign investment incentives in the target country

Most countries support and welcome foreign investment to varying degrees. Some countries have even introduced a series of preferential policies to attract foreign investment, such as low-priced land, opening of special economic zones, tax reduction and exemption policies, etc. Understand and make full use of these preferential policies. Only when Chinese companies increase revenue and reduce expenditure and strengthen themselves in overseas investment Rely on.

 

👉 Foreign investment restrictions

Before investing, it is necessary not only to see the preferential policies provided by the target country, but also to have an overall understanding of the legal environment of the target country. Many countries also have different degrees of restrictions on foreign investment, such as industrial restrictions, foreign ownership, or foreign exchange. Therefore, there must be laws and regulations for understanding this area, as well as corresponding government regulatory agencies.

 

Most of the forms of foreign investment restrictions are embodied in the form of additional conditions (proportion of foreign equity) or requirements for review or permits. It is worth noting that some countries completely prohibit foreign investment in certain sensitive industries. For example, Indian law prohibits foreign investment in the lottery industry, gambling industry, tobacco industry, etc. Of course, there are also industries that restrict investment. To control the proportion of foreign ownership. 

Although foreign direct investment in certain areas is restricted or prohibited, the laws of the country are always changing, especially foreign investment policies may be constantly adjusted due to the influence of domestic and international political and economic situations. Therefore, Chinese companies must keep abreast of the latest situation of the "weathervane" in order to respond actively and effectively.

 

2. Understanding the "double-edged sword"-the impact of antitrust laws on cross-border investment

The legal supervision of mergers and acquisitions in various countries in the world is largely related to anti-monopoly. Developed countries often have relatively mature anti-monopoly laws. 

Since mergers and acquisitions of enterprises may cause certain negative effects on market competition, all countries are starting to maintain market competition. From the perspective of certain regulations on mergers and acquisitions.

 

India promulgated the Competition Law in 2002, the scope of regulation includes anti-competitive agreements, abuse of market dominance, and business mergers. Taking this country as an example, in overseas M&A transactions, the antitrust legal requirements for investment in India need to be considered from the following aspects:

 

👉 Will the acquisition result in violation of anti-competitive agreements?

Enterprise mergers and acquisitions will inevitably lead to the elimination of competitors in the market, and may therefore lead to or strengthen a monopolistic market structure. The purpose of this control is not to limit the absolute scale of the enterprise, but to ensure that effective competition can still be carried out in the market after the transaction, thereby protecting the interests of consumers.

 

👉 Does the acquisition abuse its dominant market position?

Occupying a dominant market position is not illegal in itself, but abuse of such status so that the company’s operations can be protected from external competition or negatively affected its competitors or consumers can be regarded as abuse of dominant market position. 

Although the influence of Chinese companies under the scale of the global economy is still relatively limited, there are still relatively few transactions that may really have a significant negative impact on the competition in the target country's market. 

However, with the continuous expansion of Chinese enterprises' own strength, the scale and market position of the required acquisition targets will increase day by day, and overseas mergers and acquisitions of Chinese enterprises will also face anti-monopoly regulations.

 

3. Localized operation-labor law issues in overseas investment

Chinese companies' overseas investment involves a wide range of legal issues, including not only the laws directly related to investment mergers and acquisitions, but also the laws and regulations involved in the continuous operation of the local after investment. Just like labor law, social insurance, foreign exchange control and other aspects of legal norms and regulations are also very different.

 

In the main target countries for Chinese companies' overseas investments, these legal systems protect the legitimate rights and interests of employees and maintain the standards of social welfare, but on the other hand, they also bring a greater economic burden to the company. 

When Chinese companies conduct overseas investment and mergers, they need to adapt to local conditions and follow the local customs, which usually involves local employees’ labor contracts, compensation, retention, or layoffs. It is important to understand the requirements of local laws and regulations, rather than simply bringing some domestic concepts and practices abroad.

 

👉 Employee employment

After completing the overseas investment, the employment of employees in the company's operations must meet the legal requirements of the target country. To this end, Chinese companies that invest in need to understand the labor laws of the target country in detail. For example, what are the restrictions on the employment of local employees in Indian laws, what benefits and insurances need to be provided to employees, and what employment methods are legal and efficient, etc. 

 Only after dealing with the relationship with employees can we "make money with peace"

 

👉 Layoffs and dismissals

After the completion of the acquisition, if the target of the acquisition is a "distressed household", the acquirer often needs to make arrangements in line with the commercial strategy of the acquired party. How to integrate the "difficult household" into itself and reduce the debt burden of the acquirer as soon as possible Create profits, so sometimes layoffs become an inevitable part.

 The procedures and costs required for layoffs must be fully planned in advance. For example, study in advance the requirements of local laws on layoffs and dismissal of employees, analyze the government's possible attitude to layoffs, and avoid the purchaser's commitment to unreasonable restrictions and foreseeable labor disputes in the future.

 

👉 Chinese companies' response measures when facing labor problems in the target country

Before the acquisition, the acquirer should try its best to rely on the role that Chinese lawyers can play in the acquisition project. For example, in the due diligence stage of the lawyers in the early stage of the acquisition, the labor issues involving the acquiree should be amplified and timely feedback:

 

1. Investigations related to labor issues should be carried out in detail. At the same time, it is also necessary to have a macro understanding of the labor legal environment of the country where the acquired party is located, and understand the requirements of labor contracts, layoffs, social welfare, insurance and other aspects;

 

2. The other two aspects should be microscopically grasp the specific labor situation of the acquired party, such as employees, total number and structure, labor contract, collective contract, social welfare, employee equity incentive plan, etc.

 

Indian Investment Law

For every labor law issue that may be involved in the transaction, the purchaser must formulate a response plan. Even after the completion of the acquisition, Chinese shareholders should urge the acquiree to continue to comply with local labor laws.

 

4. Bundled gold rope-foreign exchange management system

The purpose of a company's overseas investment is to obtain a return on investment, so the investor can remit profits or other funds back to the country is a key step in investment behavior. If there are foreign exchange control measures in the target country, the impact of these measures on the flow of foreign exchange funds needs to be considered.

 

If the country where the M&A target is located is a foreign exchange control country, it must fully understand its foreign exchange laws and regulations. For example, India, in addition to the “Reserve Bank of India Act of 1934” and “Foreign Exchange Management Act of 1999”, there are a large number of specific areas involved in foreign exchange management. 

Management rules, such as "Foreign Exchange Management (Establishment of Branches, Offices or Other Business Places in India) Rules 2000", "Foreign Exchange Management (Transfer and Issuance of Foreign Securities) Rules 2000" and so on. 

In the foreign exchange management system, how to make full use of soft regulations to avoid corresponding risks. For example, in which countries the funds transferred from companies can avoid being charged corresponding taxes, and the control rules are less restrictive than other countries. Reference alternative.

 

5. Recruitment of talents-the recruitment of executives and core personnel

In many mergers and acquisitions, the key to successful acquisition is to retain senior management and core technical personnel of the acquired party. Therefore, how to ensure that key personnel can continue to be retained to serve the acquirer after the completion of the acquisition requires planning during the transaction negotiation stage. 

The acquirer can require the seller to urge the company to sign a lock-up agreement with these personnel, and make the signing of the lock-up agreement one of the prerequisites for delivery, so that the seller's interests are bound to the acquirer. 

In addition, Chinese companies should also consider granting key personnel retention incentives or design and implement executive equity incentive plans in accordance with the usual practices of the local market, so that the interests of core personnel are consistent with those of the company, so as to ensure the retention of core personnel and the stability of the acquired party. Transition operations.

 

From the beginning to the landing, cross-border investment and mergers and acquisitions are full of commercial risks, but in the final analysis, the so-called commercial risks are particularly obvious at the legal risk level. "It affects the whole body" is especially reflected in cross-border investment and mergers.

 However, this sentence is not about emphasizing what cannot be done, but about which risks can be treated flexibly to achieve avoidance. Cross-border investment needs to give full play to the "monopoly spirit"-this depends on whether we truly understand the "rules of the game" in the target region. Since we are not the rulers of the game, we must understand the rules of the game to achieve the top.

 

 

New SEBI regulations on Indian Companies Mergers and acquisitions 

In February 2017, in order to protect the interests of public shareholders, the Securities and Exchange Commission of India (SEBI) approved a number of proposals to modify and streamline the merger and merger rules of listed and unlisted entities. Such new regulations of SEBI will target some large-scale Of non-listed companies hope to achieve the goal of going public through reverse merger of a small listed company. 

In addition, SEBI has also raised the disclosure standards. Non-listed companies that merge with listed companies must meet the requirements for disclosure of materials and information.

 

 

SEBI, as the security regulator in India and the protector of the interests of public shareholders, has been paying attention to the risks associated with the governance of certain corporate mergers and acquisitions. In order to achieve the above objectives, SEBI revised the company’s listing-related agreements, requiring the stock exchange to pre-approve all mergers and acquisitions plans of listed companies and formulating strict guidelines for listed companies. 

At the board meeting held in February 2017, SEBI has revised the existing management framework of the merger and spin-off plan. At the same time, it also stated that in order to streamline and strengthen regulations, mergers and acquisitions of listed companies can only be classified as listed companies when they are listed on stock exchanges with national trading terminals.

 

 

After further testing and analysis of the latest trends and arrangements proposed by listed companies, SEBI has now approved the arrangements for approval of listed and non-listed entities mergers and mergers. According to the revised specifications, SEBI stated that the purpose of modifying such regulations is to "expand the proportion of public shareholding and prevent non-listed companies from adopting reverse mergers—namely, backdoor listings."

 

 

Proposed outstanding features

 

 

Involve more public shareholders

a. The shareholding ratio of expected shareholders of listed companies and qualified institutional buyers of non-listed companies shall not be less than 25% of the combined listed company.

 

b. The following plans need to be approved by public shareholders, and need to be voted through the electronic voting mechanism:

 

1) The merger plan/plan of the unlisted company will reduce the proportion of the total assets of the merged company by more than 5%, which requires public shareholders to vote;

 

2) The consideration for transferring all or substantially all of the business of a listed company in a form other than the listed equity;

 

3) The unlisted subsidiary is merged with the listed holding company, and the shares of the unlisted subsidiary are acquired by the holding company from the promoter/sponsor group.

 

 

Tighter disclosure standards

 

 

a. Non-listed companies must compulsorily disclose all important information in the form of a brief prospectus before merging with a listed company.

 

b. Issuing shares to a larger audience. In order to ensure that all types of shareholders receive fair treatment in such plans, listed companies must strictly follow the "ethical and law-abiding" pricing methods.

 

c. The wholly-owned subsidiary (WOS) merges with its parent company. SEBI also believes that it is necessary to relax certain procedures concerning the arrangement of the merger between WOS and its parent company. This scheme does not require submission or pre-approval from SEBI. These plans will need to be submitted directly to the stock exchange for the limited purpose of disclosure.

 

 

Other key recommendations

a. Non-listed companies can only merge with listed companies if they are listed on a stock exchange with a national trading terminal.

 

b. The company needs to submit a compliance report to confirm compliance with the SEBI circular, and the accounting standards need to be certified by the company secretary, chief financial officer, and managing director.

 

 

Recent reports in the press indicate that SEBI has effectively avoided listing obligations and disclosed an alarming number of large non-listed companies through mergers with small listed companies. In order to alleviate concerns, the SEBI Board of Directors has approved these recommendations to ensure greater public participation and review of these plans, thereby protecting the interests of public shareholders.

 

 

Generally speaking, these recommendations will increase the compliance burden of listed companies merging with non-listed companies. However, certain suggestions, such as the nature of important information that non-listed companies need to disclose in a simplified prospectus, will require SEBI to be more clarified. This is because at present, non-listed companies need to provide an information memorandum in order to obtain approval for the listing of their shares. But the exact distinction needs to be refined by SEBI. 

Of course, in this new regulation, SEBI is likely to over-regulate all types of mergers.

 

 

In addition, in accordance with Article 233 of the Indian Companies Act 2013, the SEBI board of directors agreed to amend the “approval requirements” to only “disclosure specifications” for wholly-owned subsidiaries (WOS) that quickly merged with their parent companies. This distribution will reduce any ambiguity in sections 230 and 233 of the 2013 Act.

 

 

Although SEBI’s regulatory intent may be clear, there has not been any formal amendment to the relevant SEBI regulations and therefore does not have legal effect. The specific rules will be promulgated from July to September 2017. At that time, the revised regulations need to be further analyzed to understand the extent to which SEBI's intentions are reflected.

 

Indian Labor Law Mandatory Provisions on Layoffs

When an enterprise wants to dismiss employees who do not meet the performance or meet the company's requirements, the company's human resources usually consider directly initiating the contract clauses related to termination of employment in the labor contract. Foreign companies in India often operate in this way, but this actually overlooks one point: India’s labor legislation is more effective than the contract clauses of autonomy between the parties. The usual impression is that hiring and dismissal are very simple things. In fact, it seems that simple dismissal of employees is more difficult. There are some mandatory provisions in the law to regulate the dismissal of workers and non-workers. Individual states (such as Punjab, Maharashtra, Tamil Nadu, etc.) also have different regulations on the notice period for arbitrary dismissal and dismissal of employees due to misconduct. Some large manufacturing companies even need permission from the state government in individual cases.

 

 

Legal basis for layoffs in India

The general understanding of "layoffs" refers to the reduction of some employees or redundant employees who do not meet the company's performance requirements due to economic reasons. In India, the main law governing "layoffs" is the "Labor and Management Dispute Act of 1947" (ID Act). Section 2 stipulates:

 

 

Layoffs do not include the following categories

 

a. Workers retire

 

b. Retire because the worker reaches the retirement age stipulated in the labor contract

 

c. Ended because the worker’s labor contract expires and is not renewed

 

d. Due to the worker's persistent physical illness

 

 

It should be noted that India’s "Labor Dispute Law" stipulates that employment can be terminated by layoffs for any reason. In the case of "Delhi Cloth and General Mills Co. Ltd. v. Sambu Nath Mukerji" of the Supreme Court of India, even the removal of employees who were absent from work because they did not take leave was defined as "layoffs." Therefore, the reasons for layoffs are not limited to any specific reason, of course, not only because of economic reasons, such as staff redundancy.

 

In addition to the need to understand the definition of layoffs, when layoffs (excluding dismissal due to misconduct), employers must also comply with the provisions of Section 25F of the Labor Dispute Law, which stipulates that employers should meet the requirements before layoffs. Some conditions. The clause stipulates that workers who have been continuously employed for no less than one year in any industry shall not be laid off, except in the following circumstances:

 

 

a. A written notice has been given one month in advance and explained the reason for the layoffs and the notice period has expired, or the employee has been paid in advance to replace the notice

 

b. Each year (or the part greater than 6 months) is equal to 15 days' salary paid to the employee;

 

c. According to the "Labor Dispute Act", for certain "industrial organizations" (such as factories, mines or farms with more than 100 workers), the employer is obliged to provide 3 months' notice or pay compensation accordingly.

 

 

Clause 25F(c) also requires employers to send notices to specific government departments. It is very important that the notice must clearly state the specific reasons for the layoffs and be sent to relevant government departments in accordance with the requirements of the Act. In addition, Section 25N stipulates that units employing more than 100 workers on an average day in the past 12 months need to obtain prior approval from the state government for their layoffs in the written notice of the reasons for the layoffs. 

The state government has the right to approve or suspend its layoff application after completing the relevant inquiry procedures. Therefore, once the layoff application is questioned and not approved by the government of the host state, dismissal based on a simple labor contract will bring more serious consequences.

 

 

In addition to the central-level legislation "Labor and Management Disputes Law", various state governments have also enacted relevant legislation, such as the "Shops and Commercial Establishments Act". 

This bill is the most important local legislation related to labor and employment. This legislation includes such as working hours.  Rest interval, overtime, vacation, leave, dismissal, stipulated working hours, rest interval, overtime, vacation, leave, dismissal, employment of children, young people and women, other rights of employees, and obligations of employers and employees, etc. Some states stipulate that unless the employer can prove the employee’s misconduct or the employee’s violation of company discipline, the labor contract cannot be terminated. 

The notice stipulated in the Law on Stores and Commercial Institutions is also a mandatory requirement, and you need to pay more attention and strictly abide by it in the individual case, so as not to be sentenced to invalid dismissal by the court. After all, employers face more lawsuits for the termination of employment contracts happening. 

If the employer fails to comply with the layoff notice required by the law, once the employee goes to the labor court and is ruled invalid by the court after the long-term lawsuit that the layoff violates the mandatory provisions of the law, all the efforts of the employer will be in vain. 

Moreover, the court will also require the employer to resume payment of the employee's full remuneration, including the entire time before the litigation decision is made.

 

 

The "Labor Dispute Law" also stipulates that when some employees are laid off due to employee redundancy, the "last-in, first-out method" shall be adopted, which means that the company shall lay off lesser workers first when layoffs, except for the following two cases:

 1 ) The employer and the worker have a special agreement on this in the contract

2) The employer has a written legal reason for termination. In addition, the employer shall not immediately supplement the retrenched positions after layoffs. 

If an employee is laid off and the relevant employer re-recruits, then the employer needs to give the laid-off employee a chance to re-employ, and the opportunity needs to be better than other applicants.

 

 

In recent years, more and more foreign companies have been attracted to invest in India by India's huge demographic dividend and potential consumer market. Investment in the localization of factories will inevitably require the employment of a large number of local workers. India’s labor and employment legislation is divided into categories and complex. There are dozens of legislation on labor and employment at the central level alone, which does not include the labor legislation of various states.

 

 

The main central legislation is:

1947 "Labor and Management Disputes Act", 1948 

"Factory Act", 1946 

"Employment Act", 1986 

"Child Labor Act (Prohibitions and Regulations)", 1948

 "Minimum Wage Act", 1936 

"Wage Payment Act", 1976 

"Equal Pay for Equal Work Act", 1952 

"Employee Provident Fund and Other Provisions Act", 1948

"Employees National Insurance Act", 1965 

"Bonus Payment Act", 1972 

"Remuneration Payment Act", 1961 

"Maternity Allowance Act", 1932

 "Employees Compensation Act", 2013

 "Workplace" Sexual Harassment against Women (Prevention, Prohibition, and Correction) Act, 1970 

Contract Workers Act (Regulations and Repeal), 1926 

Association Act, 1938

 Employer Responsibility Act, 1961 

Apprenticeship Act, 1952

Mine Act, 1986 

"Dock Workers (Safety, Health and Welfare) Act", 1996 

"Building and Other Construction Workers (Employment Management and Conditions of Service) Act", etc., the local level legislation is mainly related to each state government's own corresponding "shops and commercial establishments (Non-factory) Act.

 

 

Faced with such complicated labor legislation, it is very important for Chinese investors to abide by Indian laws and protect their own interests in recruiting, hiring, dismissing and layoffs. First of all, it is necessary to understand the labor legislation and regulations of India and the state where you live, including working conditions, employee benefits, wages, vacation and social security regulations, labor contracts and termination of employment, etc., so as to avoid stepping on the red line of the law.

 Whether it is the establishment of the company's internal personnel system and discipline, or the drafting of the labor contract dismissal notice, it is best for professionals to intervene to guide the drafting or review, and to better protect the interests of the employer on the basis of abiding by the law; finally, in the dismissal and layoffs or when labor disputes occur, you should consult legal professionals in a timely manner, properly collect and save evidence, and resolve them through legal channels. 

In addition, a recent employee protest incident also reminded investors to do a good job of employee training for both parties during local employment, respect local customs and culture, and better localize employment.

 

 

 

 

 

New Mandatory Taxation Policy in Mumbai

The municipality of Mumbai, the richest in India, issued a notice to warn tax debtors: If they do not pay the corresponding tax Money, their movable properties, valuable properties such as computers, sofas, and televisions will be forcibly confiscated. 

How exactly does this new Mumbai policy force taxpayers to pay taxes?

The Mumbai Municipal Department (BMC) will give tax debtors a final deadline for payment. The tax collection department of BMC will issue a new property tax bill in May of each fiscal year. The relevant regulations this year are that tax debtors must pay 50% of the tax by August, and the remaining 50% can be paid by December. After the implementation of this policy, a fine was imposed on arrears. In response, the Mumbai High Court also heard a case concerning a property tax dispute. The case ruled that the Municipal Council cannot impose fines of the above-mentioned nature. 

In response, the Municipal Council thought of another method to replace the previous fines. According to the new policy, BMC will cut off water for these tax debtors for three weeks to compel them to pay taxes, otherwise they will forcibly take away their furniture and other valuable movable properties, except for the gold necklace when women get married ). 

Elevators, building materials and house entrances may also be sealed to restrict access. In addition, BMC also has the right to order banks to seize the accounts of taxpayers. In addition, if the tax is still not paid, the property will be auctioned. If the auction price is less than its market price, BMC will buy it at the market price and "take it as its own" and write it on the ownership certificate Name yourself. (As mentioned earlier, it is the richest municipal council)

 

 

         

This new policy can be described as exhausting all means to enforce the collection of property taxes, because the people who owe the most taxes reached 10 million rupees (about 1 million yuan), and at least 120 people who owed high taxes like this people. The total tax owed amounts to Rs 524 crore.

 

The above are measures to impose taxes on Indian nationals, but the government's attitude towards foreign investment is also the focus of many investors. The Vodafone case in recent years may be a more intuitive interpretation of the Indian government's attitude.

 

 

 

India Vodafone Overseas Indirect Equity Transfer Case

Vodafone is a multinational mobile phone operator headquartered in the UK. It is currently one of the world's largest mobile communication network companies. Hutchison Telecommunications International Limited is a listed company registered in the Cayman Islands (a subsidiary of Hutchison Whampoa) that specializes in the telecommunications industry. Later, HTIL and Max entered the Indian telecommunications market as a joint venture and changed its name to "Hutchison Aisha". The shares were held by the CGP company established by HTIL in the Cayman Islands. In 2007, Vodafone purchased 67% of the shares of "Hutchison Aisha" through its Dutch subsidiary Vodafone International Holdings. On the surface, neither company was directly involved in the transaction, and both were completed by its overseas subsidiaries.

 

Soon after the completion of the transaction, the Indian tax authority issued a tax bill of 120 billion rupees (approximately RMB 12 billion) to the subsidiary of Vodafone in the Netherlands. The Indian tax authority stated that although the transaction was two non-Indian entities The transaction involves Indian assets, so Vodafone is obliged to withhold tax for it. Vodafone believes that India has no jurisdiction over this transaction and that this transaction does not need to pay taxes in India. In 2008, the Mumbai High Court issued a judgment in support of the tax authorities, stating that if a property or income comes from India, then the direct and indirect income generated by the property should be taxed according to the provisions of the income tax law. 

Non-residents and India If there are enough connections between them, then India’s income tax law applies. However, Vodafone did not pay the tax. Instead, it appealed the case to the Supreme Court of India. In January 2012, the Supreme Court made a meaningful judgment on this case of concern: Indian tax authorities have no right to transfer outside India Income from the transfer of foreign company equity is taxed, even if the transaction involves the indirect transfer of an Indian company.

 

The Vodafone case embodies the complex game between the government and enterprises. India is still working on attracting foreign investment. The Indian government's strong position on corporate income tax will directly affect the investment interest of many companies in India. Fortunately, Vodafone's victory in this lawsuit also highlights the importance of the Indian government to foreign investment. Otherwise, the risk of cross-border mergers and acquisitions will increase, forcing investors to weigh potential litigation and other costs will make investors lose confidence. 

At present, due to the differences and complexity of each country’s tax system, it is generally through bilateral treaties to avoid double taxation and tax evasion. An international taxation legal system needs to be established urgently, but there is still a long way to go.

 

How Companies Conduct Legal Due Diligence for Business Projects in India?

Whether it is a greenfield (new) project in India, an M&A or the establishment of a joint venture, due diligence on the target (land) or the acquired or joint venture is indispensable.

 

Considering that when the Indian party makes disclosures to Chinese investors, it is inevitable that there is an information tendency. Taking the Chinese companies (buyers) to acquire the shares of Indian companies (sellers) as an example, Indian companies often share information and information that is beneficial to them. Information is disclosed to potential buyers, and unfavorable information is not disclosed or less disclosed to buyers. This is true of the so-called "Wang Po sells melons, sells and boasts". Under the common law, there is a legal principle called "Caveat Emptor", which means that buyers need to be careful. That is, as a buyer, the buyer is legally presumed to be a "Sophisticated Buyer" and has the ability to identify various Information, at the same time, judge the risk and make a decision whether to proceed with the project. Therefore, it is very important to conduct due diligence and obtain relevant information.

 

The purpose of due diligence is to evaluate and quantify risks. Through the qualitative risk, we can ascertain whether the project can be launched, and the quantitative risk can solve the problem of increase or decrease in the consideration in the transaction.

 In addition to the risk elimination function, the results of due diligence can also be used in the next negotiation with the Indian side, as a very important negotiation weight to help Chinese investors achieve business goals such as reducing costs.

 

As mentioned in the beginning, generally when conducting joint venture projects, the sequence of due diligence, commercial negotiation, and drafting of joint venture agreement is the most ideal state to conduct due diligence first, and then conduct business after finding out the situation. The negotiation is at the same time as the drafting of the joint venture agreement. 

However, considering that there are various differences in the actual situation, it is often the case that these tasks are carried out at the same time or overlap. 

In practice, the author has also encountered the completion of commercial negotiations and the drafting of the joint venture agreement. When some people just started the due diligence case. Without the help of due diligence, some potential risk information of the counterparty company will not be known, the risk of joint venture projects will increase, and there is no information found in the due diligence as a support for the negotiation, and it may pay more in the negotiation, the price.

 

In a project before, a Chinese state-owned company plans to establish a joint venture with an Indian company in India. The two parties have been negotiating for a long time and have reached a consensus on the main commercial terms. 

The company will invest in cash and hold 51% of the shares, and the Indian company will use land use rights and part of the cash to invest in the remaining shares. The two parties have set a time for the chairman of the two parties to sign a joint venture agreement in India and announce it to the public. 

The corresponding arrangements such as visas, schedules, air tickets, and media have been completed. The cost of temporary cancellation is too great. 

However, at this time, foreign investors did not conduct company due diligence and land due diligence on the Indian company. Regarding this case, the author's opinion is that because the two parties have made corresponding arrangements and it is not convenient to cancel, but there is no due diligence to avoid some risks of future joint ventures. 

The final plan is that you can declare in the joint venture agreement , The results of the company due diligence and the land due diligence made in the later period shall be the necessary conditions for the joint venture agreement to take effect. This is, that the joint venture agreement is simply signed but not effective, and it will take effect after the problems found in the due diligence are fully resolved. Through this arrangement, the previous conflicts were subtly resolved.

 

Generally speaking, company due diligence reports mainly include the following aspects:

 

Due diligence on company-related matters in the past three years 

• Serial number
• Required information/documents
• Note

 

Corporate information and important documents

 

1. Company organization chart and business introduction

 

2. Business license, proof of business start and related documents

 

3. Copy of the company's memorandum

 

4. A copy of the company's articles of association

 

5. Change of name or business objectives after the establishment of the company, as well as supporting company resolutions and filing records

 

Director

 

6. List of directors and detailed information after the establishment of the company

 

7. Record the appointment information and appointment documents of directors with the Companies Registry

 

8. Director Information Disclosure Form

 

9. If a director resigns or suspends his position, the relevant declaration materials for his resignation or suspension

 

10. Employment Agreement/Service Agreement

 

Equity information

 

11. Shareholder information from the date of company establishment to the date of due diligence

 

12. If the shareholder is a non-resident shareholder, the relevant Reserve Bank of India (India Central Bank) filing and declaration information and the central bank permit (if any) are required

 

13. If there is an equity transfer, provide relevant documents for the equity transfer

 

14. Share certificate issued since the date of company establishment

 

15. Warrant/bond holder (if any) and their details

 

Minutes/Resolutions

 

16. Minutes of Board Meetings, Minutes of Board Committees

 

17. Minutes of the shareholders meeting since the establishment of the company

 

18. Specific information on the resolutions obtained at the meeting in the form of Postal Ballot

 

Companies Registry Forms and Statutory Register

 

19. All statutory registers maintained by the company

 

20. Forms and vouchers filed by the company to the Companies Registry

 

Company Capital

 

21. Information sheet about the company’s legal capital, issued share capital and paid-in capital, etc.

 

22. Company’s equity issuance and transfer status

 

23. Share restriction transfer agreement (if any)

 

Company's foreign investment

 

25. Details of the company's foreign investment and filing and reporting with relevant authorities

 

Employee

 

26. The company's current total number of employees and information table (employee category and number)

 

27. Standardized terms for each type of employee employment agreement

 

28. List of key management and technical personnel and their terms of service and employment agreement

 

Intellectual property

 

29. Information about trademarks that the company has registered or applied for or is in use

 

30. Design related information that the company has registered or applied for or is using

 

31. Information about trade names used by the company

 

32. The company permits others to use the company’s patents, trademarks, trade names, copyrights, know-how, confidential information, formulas, etc.

 

33. Other intellectual property rights or rights owned or being used by the company

 

34. Concession agreements, agency agreements, distribution agreements, research and development agreements, etc. signed by the company

 

35. Inventions that are used by the company, have not yet applied for a patent, or have not yet been approved

 

36. Information about the company's ongoing litigation or opposition procedures related to intellectual property rights, and the matters that have been settled in the foregoing procedures

 

Company property

37. Company-owned, leased, and occupied real estate information

 

38. Relevant land deeds, leases or license documents of real estate owned or owned by the company

 

39. Important documents and information related to the real estate owned and occupied by the company, such as development planning information, notices from local authorities, notices of demolition, owners' disputes, etc.

 

40. Whether the company has violated planning, environmental protection, pollution control, central or local laws and regulations related to safety and health production standards, if any, relevant information needs to be included

 

41. Does the company have subletting, subletting and related agreements (if any)

 

42. Recent real estate value assessment (if any)

 

Financing and Lending

 

43. List and information of outstanding bank loans and liquid funds obtained from other financial institutions, signed loan agreements, and relevant supporting materials from banks and other financial institutions

 

44. List of information issued by the company or issued by the directors and shareholders of the company on the company assets as the subject matter of mortgage, charge, and guarantee

 

45. Information about loan or guarantee agreements signed between the company and other companies

 

46. As of the date of receipt of the due diligence checklist, the company's outstanding loan information from banks and non-bank institutions

 

47. For information on equity assets of other companies (except for company subsidiaries), the company needs to list relevant information such as investment quota, investment nature, business relationship with the invested company, specific transactions, etc.

 

Insurance

 

48. A detailed list and copies of important insurance policies, including the type of insurance, the amount of insurance subject matter, and insurance premiums

 

49. A copy of the insurance policy of key person insurance purchased by the company

 

50. Information on the extent and scope of compensation for directors and senior management’s liability insurance

 

51. Scope and description of employee compensation

 

52. Product liability compensation scope and description

 

Government Permit

 

53. Information or arrangements of relevant government licenses and permits that have been obtained or are applying for

 

54. Important correspondence, declarations and other information related to the central or local state government agencies

 

55. Lists and information of licenses, licenses, government consents, etc. that have expired, been revoked, cannot be updated, or may have the above consequences

 

56. For information on correspondence with the government and relevant authorities due to violations or non-compliance of the above licenses, permits, government consents, registration matters, etc.

 

57.  Detailed information about government inspections or investigations

 

Litigation

 

58. A summary of pending or potential litigation, disputes, arbitration matters at all levels of the central, state, and local levels, as well as relevant government accountability, investor claims and other related information, including:

 

(i) Statement of dispute

 

(ii) Potential loss or compensation amount

 

(iii) Information on the relevant agreements or arrangements in response to the letter and lawyer’s letter affecting the dispute

 

59. Documents and materials related to litigation settlement

 

60. Information on lawsuits or disputes arising from guarantees

 

61. Information on laws, arbitration awards, and judgments made by governments, arbitration institutions, courts, etc.

 

62. Information that may affect potential transactions such as pending litigation, arbitration, etc. involving company subsidiaries, company directors, etc.

 

63. Information on pending or potential litigation directed at the company’s shareholders that will have a significant impact on the intended transaction

 

64. The company’s public exposure information in the aforementioned litigation and arbitration cases

 

Competitor

 

65. Is there any information that has been investigated by relevant government agencies related to the anti-monopoly law, the anti-unfair transaction law, and the monopoly and restricted transactions prohibited in the company law?

 

66. Information on oral or written agreements, arrangements, etc. between the company and one or more competitors

 

Accounting and tax

 

67. Copy information of the company's annual report, company accounting books, audit reports, etc.

 

68. A copy of the company's balance sheet

 

69. Copy of company income tax statement

 

70. Information on tax deductions, exemptions and special arrangements obtained by the company from relevant tax authorities

 

71. Information on tax incentives, tax holidays, etc. obtained by the company from tax authorities

 

72. Unresolved or potential legal issues affecting the transaction between the company and the tax authority

 

73. The company's existing tax reports, pending claims, etc.

 

74. Information on possible tax burdens due to deferred taxes

 

75. Information on circular transactions or ongoing matters that may affect future tax burdens

 

Agreement

 

76. List and copies of major contracts signed by the company so far

 

Trade related Matters

 

77. List of major trade matters carried out by the company so far

 

78. Orders signed or executed in the name of the company, bidding

 

79. List of the company's main customers in India or overseas

 

Miscellaneous

80. Other documents or information related to the company or its affiliated companies that need to be disclosed in consideration of the intended transaction

 

81. Other important documents and information related to existing shareholders that may affect the expected transaction

 

The mall is like a battlefield. There is a famous saying in the business community that "choosing a counterparty is choosing trading risks." Although there is an old saying that "wealth and wealth are sought in insurance", the most rational business person still hopes to minimize risks as much as possible. 

Therefore, due diligence came into being, which is responsible for discovering risks, resolving risks, revising prices, and assisting in negotiations and decision-making. 

However, after conducting due diligence, it does not mean that the transaction can rest easy, because due diligence has the following limitations, which will be amplified to a certain extent in the case of overseas transactions:

1. Limitations of the scope of due diligence

 The author gave a list of due diligence above. In most real business transactions, it is impossible for the surveyed party to provide all the above information to the surveying party because it is impossible for any seller to allow the buyer to Due diligence is conducted in the form of "copying home", not to mention that the seller is worried that the buyer is only using the transaction as an excuse. 

After obtaining all the information, it may cause information leakage and other potential risks. Therefore, even if the seller has all the above information, the seller It may not be easy to tell. Either the seller did have some information lost due to various reasons, so it could not be provided to the buyer.

 Regarding this limitation, investors can use limited information to restore the full picture of the transaction as much as possible with the help of their own team and external consultants. Of course, this requires investors to have very strong business insight. 

As long as the risks found do not belong to the "Deal breaker" risk that can veto the entire investment project with one vote, other risks can be protected through legal and financial arrangements. Of course, different investors have considerable differences in the definition and acceptance of risk. This requires specific case analysis.

 

2. The urgency of due diligence

 Generally speaking, the trading time is limited, and the longer the time is, the greater the possibility of "excessive branches" or other risks. Therefore, it is very important for investors to complete the due diligence efficiently and obtain the most valuable information.

 

3. The inclination of the information disclosure party

 For the party who is obliged to disclose information in due diligence, there are various motives to prompt them to provide some tendentious documents. Therefore, it needs to attract investors' attention. However, for many asset and license investigations, if there is something, there is something, and if there is not, there is nothing, either black or white. Of course, whether such information is true and effective still needs to be checked by professionals such as lawyers and accountants.

 

Conclusion

In addition to the risks mentioned above, after the due diligence is done, there will generally be a time lag before the transaction is settled. Investors also need to pay close attention to the dynamic changes in risk during this period. 

After all, due diligence reflects a certain cut-off point and previous risk dynamics. This also requires investors to calculate the time, such as through a detailed schedule to achieve the efficient connection of various parts, not to spend a lot of money to do the full adjustment, but the delay in the middle is longer, resulting in long nights and dreams.

 

 

[1] Please note that the items listed in this template of the due diligence list are not exhaustive, and there are possibilities for additions, deletions and changes for different items. This is only used as an example in this book.

 

[2] Chinese investors can decide whether the scope of due diligence data should be provided in the past three, five years or other time according to the actual situation of the project.

 

[3] Key Person Insurance Key Man Insurance or Key Person Insurance generally refers to the insurance purchased by the company for those holders of significant technology or intellectual property rights that are of great significance to the company’s development. Importantly, the risk of this kind of insurance confrontation is the loss to the company caused by the sudden death, incapacity, etc. of these people. Generally, it is a fixed amount of compensation, not compensation for the death or incapacity of such people. Expected or possible economic benefits.

 

[4] "Tax Holidays" refers to tax holidays, which refer to the tax holiday provided by the government to enterprises.

 

[5] Of course, there will be a relevant confidentiality agreement signed before due diligence, and the buyer will also use this to urge the seller to disclose as much as possible. However, once the buyer receives the sensitive information and abuses it, although the buyer can invoke some compensation clauses or dispute settlement clauses in the confidentiality agreement to protect their own interests, no one wants to invest time and money in a "remedy" way To protect their rights.