Ensuring Digital Signature Lawfulness for Business Purchase Agreements in India

How to eSign a document: digital signature lawfulness for Business purchase agreement in India

ladies and gentlemen my name is sameer shah and i am an m a partner in kaitan's corporate m a group thank you for taking the time to be with us today and i would like to extend a very warm welcome to this very first webinar of our m a academy program this program is designed to provide foundational legal knowledge and understanding on m a transactions and processes to corporate executives in-house legal teams and others participating or interested in m a m a is an important part of our firm's practice with more than 50 partners dedicated to this area because india is experiencing a massive growth in m a transactional activity and our subject today is share purchase agreements structure and key terms the topic for this webinar is quite important and why so because a preferred mode of conducting business in india in an organized manner is through a company as a result more often than not acquiring a business may involve acquiring shares in a company it is therefore important for you to better understand this space and which is of course our objective today in summary we will have a formal presentation followed by a q a session with audience questions we have already received several questions at the time of registration and please continue to submit your questions using the webinar portal if we receive more questions than we can address today we will respond offline over email after the webinar we will of course also send you the presentation summary notes and a recording of this webinar for your future reference so now to introduce our speaker today we have with us ashutosh sampath who is an m a partner based in our mumbai office although he works on projects nationally of course ashutosh has been with haitan and company for six years and he made partner in 2018 he is an m a expert and is highly experienced in this area of work some of his recent assignments have included representing brookfield asset management on the largest such transaction in the real estate space in india involving acquisition of certain office and co-working assets from rmz corp he has also represented advent international on several acquisitions including ra chem pharma avra laboratories and etc it is therefore difficult to think of a better partner to share his knowledge with you on this topic so without further ado i now invite ashitos to deliver his presentation thank you so much samir for that kind introduction and thank you everyone for joining today's presentation i really appreciate you taking your time out like samir mentioned the topic for today's presentation is share purchase agreement structure and key terms uh the intent of today's presentation is try and provide a high level overview of the shared purchase agreement and key components of share purchase agreement to all of you during the course of next half an hour i'll try and touch upon certain key components of a share purchase agreement as listed on the screen before you some of the aspects that we discussed today will require a deeper dive for better understanding these aspects should be picked up by my colleagues in future sessions of the m academy once we've discussed the key components we'll spend a couple of minutes discussing the key takeaways from today's presentation so shared purchase agreement is a transaction where existing shareholders of a company transfer the shares held by them to another person and on the screen before you is a typical structure of 100 buyout for target company for the purposes of today's discussion we'll focus only on 100 buyout for private company there are other considerations that apply in relation to transfer of shares of a private company but only a partial stake or otherwise transfer of shares of a listed company those considerations are not a subject matter of today's presentation but again will be picked up in the future sessions of remnant so firstly the first question that the sp addresses are were the parties to that spa and obviously the seller and the purchaser are the most common parties or most obvious parties to a share purchase agreement more often than not in addition to the seller in the purchaser the target company itself is also a party to the share purchase agreement there are rights and benefits the target company is entitled to let's say the identification obligation of the seller or the non-competitive covenants of the seller post-closing and to that extent if the target company is a party to the agreement the target company can itself enforce those obligations in addition to these obvious parties there could be situations where additional parties may have to be joined for example if the seller is an spv or a shell company that doesn't have any material assets other than the shares that are being transferred in such a case the purchaser may insist that the obligations of the seller especially the indemnification obligations post-closing are guaranteed or back stopped by a parent entity or any other pen entity with necessary financial background similarly the seller may not want to go through a situation where it goes through the trouble of completing all the cps only to find out that the purchaser doesn't have the necessary funds pay on the closing date in such a case the seller may insist that the purchaser's payment obligation on the closing date are bank stopped or guaranteed by a parent entity or another entity with financial benefit once the parties have been identified then spa generally identifies the shares that are being transferred that's the subject matter of the transaction it records the agreement between the seller and the purchaser that the seller will transfer these shares to the purchaser with effect from the closing date where a clear title will be transferred and the purchaser will be entitled the benefits of the shares that are transferred with effect from the closing date moving on the spa then generally deals with the consideration that's payable by the purchaser to the seller for the share transfer and before we discuss the components of consideration as reflected in a shared purchase agreement it's important to understand the difference between enterprise value and equity value and enterprise value is the gross value of all assets of the target company be tangible or intangible while the equity value really is the difference between the assets and liabilities of the company it's the equity value which represents the true commercial value of a particular entity and generally in a share purchase transaction the purchase consideration that's hard coded in the agreement is a function of equity value either it's liquid value itself it's a multiple of equity value or some sort of function of the equity value with further adjustments so the parties commercially agree once the parties commercially agree upon the consideration that's payable it's hardwired in the hp and the next question that the parties need to ask themselves is whether the purchase consideration that's hired wired in the spa requires any adjustments to account for the continuing operations of the company between the signing date and the closing date so let's take an example let's say that the spa is signed on the 1st of january but it closes only on the 31st of march because about 3 months are spent in the time that is required for the seller to complete the conditions precedent in this case there could be a situation where the equity value undergoes a change for example in the diagram that we have before you if the liabilities were to go up the equity value will go down and the question is should the purchaser then be required to pay the equity value as determined on the execution date or the one determined on the closing date what the sellers generally argue is that what's hardwired in the spa must be paid to the sellers and the only exception that sellers generally allow for are leakages or otherwise any value that's extracted by the seller from the company either way of declaring of dividends between signing and closing or payment of any consultancy fees which is inconsistent with the past practices of the company short of these leakages the sellers insist that they must be paid what is agreed in the share purchase agreement this process is known as a locked box mechanism and this lock box mechanism is a very seller friendly concept on the other hand the purchasers insist that the equity value of the company is recalculated on the closing date and to the extent that the equity value is lower than the equity value as of the execution date then the purchaser consideration purchase consideration will stand reduced this process is known as purchase price adjustment and this mechanism is favored by the buyers the next question that the sp addresses is the timing of payment of the purchase consideration should the entire consideration be paid upfront for example let's say there's a transaction and the transaction value is 100 cross should the purchaser pay the entire hundred pros to the on the closing date again this is a matter that's generally negotiated and what the purchasers generally insist that a part of the consideration be held back and deferred and be paid later and the reason that this amount is held back is that this purchasers want a security from the seller for the purpose of performance of the seller's obligations to post the closing date for example payment of cons refund of any consideration post the purchase price adjustment of payment of indemnification obligations and to the extent that a transaction is between a resident or a non-resident and vice versa it's important to remember that under the indian exchange control regulations any deferred consideration must be paid out within 18 months and the maximum amount of default consideration it can be held back is 25 of the total consideration once the consideration has been identified in the adjustments agreed to generally an spa will move on to identifying the conditions precedent that a seller must fulfill for the parties to proceed to closing and these conditions precedence generally are regulatory consents for example if if the company is a regulated entity then you would need the consent of the sector regulator for the change in control for example if the entity is an nvmc then you'd require the approval the rbi for affecting the change of control separately many a times especially in service contracts there are large contracts which sort of determine the value of the company which material contracts prescribe that there should be no change in control of the target company without the consent of the counterparty again in such a case the counterparty's consensus will be required as a condition for parties proceeding to closing next on most occasions lender provisions lender consents loan agreements provide that the consent of the lender must be sought for parties to affect to closing and change the change the control of the target company similarly there may be other issues that are observed in the diligence for example if there's a particular license that's missing then the purchasers may insist that that license should be obtained as a condition precedent to close the next aspect that a shared purchase agreement deals with as relation to conditions to closing is that the purchasers insist that there should be no change in the financial position operations or business of the company between the signing and the closing date and to the extent that there's a material change in such a position then the purchaser should have the right to walk away from the transaction the sellers generally either resist a provision of this nature which is generally known as a material adverse effect provision or at least insist that there should be objective thresholds for determining enemy the sellers also argue that to the extent that an event occurs which has a result on the industry generally not specifically on the company that should be excluded for the purpose of determining nma again to give an example during the peak ovate times uh there was this debate that always happened where the sellers insisted that should the seller not be able to operate the target companies manufacturing facilities due to a lockdown that's imposed by the government then the loss of revenues or loss of operations or loss of business that the target companies suffer should not be taken into account for the purpose of determination of nmae because this is not something that's specific to the company itself but this is something that's applicable to the industry as a whole in addition to the cps the sellers also undertake certain post pre-closing undertakings which pre-closing undertakings speak about a standstill covenant that must be maintained by the sellers this is to preserve the value of the company between the signing and the closing date this may be in the nature of agreeing to ensure that the company continues to operate its business in ance with the past practices in ordinary course not to take any material decisions between signing and closing date example terminating a material contract or taking loans beyond a particular threshold the sellers also agree to an exclusivity where the sellers say that once they've signed the spa then they will not negotiate the transfer of shares of the company that are subject matter of the share purchase agreement with any third party so that the purchaser is fully in the know of the companies and its business between the signing and the closing date the sellers also agree to notify the purchase of any key matters that occur between the signing of the closing date and also allow the purchaser reasonable access rights so that the purchaser can inspect and continue its religions between the signing and the closing date if the conditions preceded or not fulfilled by a particular date generally defined as a long stop date in the sales share purchase agreement the purchaser reserves the right to walk away from the transaction once the cps have been completed parties then proceed to complete the closing on a particular identified date known as the closing date where the transfer of the sale of shares is taking place these closing actions other parties generally undertake on the closing date is that the purchaser pays the payment consideration of the seller the seller transfers the shares to the purchaser either value of delivery of transfer forms or depository slips depending on whether the shares are in physical form or in electronic form the sellers directors on the board of the target company resign and the purchasers directors then replace reseller detectors all authorizations and signatories appointed by the sellers for its own representatives are then removed and are replaced by the purchaser's representatives and finally the company the target company takes the necessary corporate actions why we have board resolutions and updating statutory registers to record the purchaser as the owner of the shares that are transferred once the closing is done there are certain post-closing covenants that are identified in a shared purchase agreement which the parties need to abide by and then an spa most of these come from the seller the most common post closing covenant that's provided for in an sba is a non-compete and there's been a great debate in india whether non-compete restrictions that the company shares sales are impossible or not under indian law non-compete restrictions are generally seen as agreement for restraint of trade and are deemed to be unenforceable unless one the agreement is deemed to be the restriction is deemed to be reasonable and in the event that it's accompanied by sale of a goodwill of a particular company the delhi high court has recently held then when it comes to transfer of shares of a particular company if a controlling stake is being transferred and that's nothing really for the transfer of the business of the company along with its goodwill and any non-company that accompanies the transfer of shares is enforceable by the purchaser so long as the restrictions that are enforced are reasonable the next is a a non-solicit also works similarly with a non-complete as far as agreement for a state of data concern and a non-solicit again will be enforceable only if the restrictions that are imposed are reasonable so it's important both in case of non-compete and non-solicit to ensure that the scope the duration and the geography of the non-compete and non-solicit are clearly laid out in the shared purchasing the next post-closing covenant that a seller is bound by is a non-disclosure obligation while the seller holds the shares of the company the seller would be in possession of proprietary information of the target company and post the closing date the seller agrees to keep confidential this proprietary knowledge or trade secrets that it has of the target company the next post-closing continent that's generally negotiated among the seller and the purchaser is the transition support that is required from the seller to the purchaser for affecting the transition of the business from the seller's control to the purchaser's control to give an example if the company that's being transferred is a part of a group of companies of the sellers generally we see that the id systems of the target company are integrated with that of the group companies and a common platform is used many a times the purchasers request for a reasonable transition period during which this id systems will continue and the purchaser then replaces these it systems at a later point in time once opportunity has been provided to it for it to represent finally the buyer also has certain limited post closing components and one of the most common ones that we see is that the seller may insist that the name of the company which may include a corporate name or a trade name that's used by the sellers group of companies is replaced by the buyer post closing so what we've discussed until now are the covenants that parties that undertake for them to complete the transaction and the covenants that they undertake post the closing of the transaction another aspect that's dealt with in a shared purchase agreement are the risk allocation tools of warranties and indemnities anybody who's done an m a transaction will have endless stories to tell of the amount of time that they've spent negotiating warranties and identities these are perhaps the most heavily negotiated provisions of any sba warranties are nothing but a statement of fact and assurances that are provided by the parties in relation to the seller the seller provides these assurances in relation to itself and the position of the target the buyer also provides certain limited warranties in a shared purchase agreement but they are limited to the authority and capacity of the buyer and the financial ability of the buyer to undertake the transaction on the closing so what's the purpose of a warranty from a purchaser's perspective a warranty is the buyer's primary contractual protection for the transaction firstly the purpose that it serves is that it encourages a disclosure from the seller to give an example one of the most common warranties that's seen in an spa is that there are no litigations that are pending against the target company now to the extent that such a warranty is sought from the purchaser or from the seller by the purchaser and the seller is aware of specific litigations that are pending against the target company then the seller will be bound to disclose to the purchaser the existing litigations in such a case the seller will deliver a disclosure letter to the purchaser saying that there are no litigations that are pending against the company except for one two and three and provide material particulars in respect of that litigation the purchaser will then have the ability of reviewing those litigation and taking a call on whether they are material enough to provide for any risk allocation if it's a small customer contract the purchaser will let it pass but if it's a large large litigation there's a material impact on the business the operations or liabilities of the company then the purchaser may insist on a risk allocation either way of adjustment of the purchase consideration or seeking indemnity post closing the other purpose that a warranty serves that it allows for a post closing remedy for the buyer again to give an example one of the most common warranties that you will see in a share purchase agreement is that the sellers say that all tax liabilities of the target company have been duly discharged and let's say the closing is upgrade and a couple of years later a tax demand is made on the target company which says that as regards for the period prior to closing date certain amounts of tax are due and payable by the target company to the tax authorities because a warranty has been provided the buyer can go to the seller and tell the seller that one of the assurances that you provided me when i bought this company either there are no tax liabilities that are pending now that this tax demand has come you must make good this tax demand in the absence of this specific specific warranty the buyer would not be able to raise such such a demand this also goes back to what we discussed previously where the buyer is required to pay to the seller the equity value of the company as of the closing day and to the extent that posts the closing date it comes to the knowledge of the buyer that the liabilities of the target company as of the clergy closing date but in fact in excess of what was shown to the buyer on the closing date then he should be able to recover it from the seller this is the risk allocation mechanism that a warranty tries to capture warranties are provided by the sellers on the date of the execution of the share purchase agreement and all of these warranties are repeated as of the closing of the transaction documents to the exchange to the extent that there is any change in the position of those warranties between signing in the closing date a disclosure is made by the seller to the purchaser and again that requires a discussion between parties for the rescalation for this change in in the position of the company in an spa the warranties of the seller are generally divided in three buckets fundamental business and taxation fundamental warranties as the name suggests are matters which are fundamental to the transaction and the ability of the seller to undertake the transaction these are generally related to the authority capacity of the seller to undertake the transaction and the title that the seller has to the shares that are being transferred the next set of warranties that are provided are business warranties these are warranties that are provided by the seller in relation to the business and operations of the company for example the seller may provide a warranty that the business of the company is being complied has been performed in compliance with applicable lastly the other set of warranties are provided by the sellers are tax warranties these are warranties that are provided by the sellers in relation to the tax compliance of the company that's being transferred like we discussed one of the purposes of the warranties is to ensure that the buyer has a remedy post closing should the warranties turn out to be untrue and that's where the indemnities come into play and indemnity in a shared purchase agreement is nothing but an assurance by the seller to the purchaser that should the purchaser suffer a particular loss for an identified event then the seller will be liable for that loss an indemnity event that's generally provided for in a share purchase agreement is a breach of a warranty or a covenant that's provided for either seller in addition to a breach there may be specific indemnities that are identified in the shared purchase agreement for example if there's a particular diligence finding that's not been addressed by way of a purchase or price adjustment the purchaser may insist that to the extent that this losses suffered post-closing the loss will be numerified for by the seller because it's something that was known to the parties but the parties chose not to adjust the consideration for it lastly an indemnity is provided for any fraudulent activity of the seller in relation to the transaction or relation to the operations of the cargo so the reason that warranties and indemnities are so heavily negotiated are because these are risk allocation tools and in any commercial contract the primary objective of each party is to minimize its own risk and maximize its own benefit this constant push and pull where the seller is trying to minimize his risks and so as the purchaser is where the negotiations take place so while the purchasers try and allocate the risk onto the seller by taking a whole host of warranties and taking in empties for everything under the sun the sellers try and balance this risk allocation by having certain protections in their favor in relation to these indemnities and these protections include control of proceedings of third party claims that are raised by by by any person in relation to the individual so let's say one of the warranties that is provided for in a shared purchase agreement is that all vendor payments that are required to be made by the target company as of the closing date have been good now to the extent that post closing a vendor approaches the target companies and says that for a period prior to the closing i have not been paid for the services that i have rendered in that case if the payment has to be made to the vendor that payment will have to made by the seller the seller in such a case wants to then control the dispute with the vendor and to the extent that the vendor initiates any litigation for recovery of its payments the sellers insist that they will control the proceedings both by way of appointing the council and instruct the council in any such litigation procedure the next manner in which the sellers try and reduce or limit their liability in relation to any indemnification obligation is try and include monetary limitations and these monetary limitations are by me of thresholds and caps thresholds generally are de minimis and basket de minimis means that for a particular claim the sellers will not be liable unless the value of that individual claim exceeds an amount to give an example let's say the transaction value is 100 cross the sellers may say that they will not be liable for indemnifying for any claim for less than 10 lakh rupees because that amount is not really material in the context of the transaction the other threshold is the basket transaction where the sellers may say that unless all claims about e minimus aggregate to a particular threshold amount the sellers would not be liable to make good denomination payments let's take the example of hundred crores again in the sellers in such a case may say if the transaction value is 100 crore then the sellers will not be liable for any indemnification claim unless the indemnification claim amounts across a crore of rupees and the last monetary limitation that the sellers generally negotiate for are caps on the indemnity amounts and these caps generally are negotiated for business warranties we've seen the range for that business quantity between 25 to 100 of purchase consideration but that again is a reflection of the relative bargaining party covers between the first seller and the purchaser whichever party has a more bargaining power the range shifts towards the benefit of that particular party finally to ensure that the sellers are not on the hook for an eternity in relation to any indemnity claim the sellers also negotiate for themselves a survival period or a time period during which an indemnity may be raised in relation to business warranties we've seen this period extend from 18 to 36 months in relation to tax warranties this period is generally the statutory period that's allowed for for a tax authority to raise a demand or a claim under the tax class so that really is a summary of the key provisions of a shared purchase again you can spend just a couple of minutes on the key takeaways from what we've discussed until now firstly it's extremely important for the parties to attract a transaction to try and understand who the signatories to that spa should be the parties don't want to be a negotiate in a position where they've painstakingly negotiated rights for themselves but the counterparty is not in a position whereby the rights can be enforced against the counterparty so it's important to try and understand the financial wherewithal of the counterparty and take any mitigation risks that may be required either by taking any guarantees from the counterparty or a parent of the counterparty or otherwise in case of purchase consideration the purchase may hold back a part of the consideration for future performance by the seller next is as far as the consideration is concerned it's important that the consideration is determined in the agreement in a systemic way and any adjustments that need to be made to the consideration for the period business signing and the closing date is also provided for appropriately in the contract such that if there is any change in the position of the company between the signing and the closing date that can also be factored for in the event the next is identifying conditions precedent and it's important from a purchaser's perspective that conditions precedent are duly identified such that all consents that are required for the transfer are duly taken and all liabilities that can be mitigated are in fact mitigated but at the same time it is in the purchaser's interest the time period between the signing and the closing is minimal and to that extent the purchaser needs to be pragmatic when it lays down conditions precedent for the sellers to fulfill for example one of the most common religious observations that one sees is that either employment contracts or customer contracts are not duty stamped now it's not really entirely practical for all of these agreements to be fully stamped between signing and closing so maybe it's it's advisable that such a diligence observation is not addressed by way of condition precedent but maybe it's addressed by let's say a specific indemnity or other risk allocation mechanism amongst the cellular approaches the next question that the purchaser needs to ask itself is whether it should retain for itself the right to walk away from a transaction if there's a material adverse effect on the operations business or financial position of the company between the signing date and the closing date to the extent that there is such a change the purchaser would want to walk away while the sellers would want to provide for specific objective criterias for the particular purchaser to work the next as we've discussed is the risk allocation by way of warranties and dimnities it's extremely critical from a purchaser's perspective that necessary warranties and indemnities are included in a share purchase agreement at the same time it's important from a seller's perspective to ensure that appropriate restrictions and limitations are placed on the indemnification obligations of the seller finally the purchaser needs to determine whether there should be any restrictions on the seller going forward post-closing and these restrictions may be in the form of non-compete non-solicit confidentiality obligations and may also require positive transition support from the seller to the purchaser to ensure that this appropriate transition of the services and the business to the to the purchase so that's really a summary of a shared purchase agreement and uh before i pass on pass on this presentation to samir for conducting the q a session i just want to thank everyone for the time that you've taken i know this can be a really dry subject and i really appreciate the time that you've taken us through the presentation and i i do realize that this can be a dry subject but we've tried to make it as concise as possible we've tried to filter the experience that we've gained over the years to ensure that we can give you a high level overview of this particular subject that we're speaking about i hope you found this useful thank you so much samir over to you thank you ashraf that was really insightful and interesting and i hope our audience have also enjoyed it i must say there's a feverish set of activity going on in the q a chat box so it's it's good people people seem to be intrigued by your presentation so with that ladies and gentlemen uh if we move to the next uh part of the presentation which is the q a session and um maybe we'll just deep dive into the q a as we go so let's see what we have here catching us very interesting question from someone how is intellectual property transferred from the seller to the buyer and what is the process of transferring the same sure so to the extent that it's a transition support and it's needed for a short period of time by the purchase or the company then one way to do it is to have a license from the seller to the company for the company to have the ability to use that intellectual property for a period of time and to the extent that the company wants it in perpetuity such that it's important for the company's operations then what would need to happen is that the seller would need to completely assign the intellectual property from itself to the company such that the company has continued benefit of those rights in relation to the intellectual property perfect and and i was just noting that any intellectual property owned by the company would of course remain with the company that's really known for the transfer so maybe a connected question so if there is a share transfer sorry screen's a little small if there is a share transfer and should there be a name change of the target company is that advisable how would you cover that yeah that that's an interesting question samir but that again would be determined by the specific commercials of a particular transaction so to the extent that the target company's name incorporates a trade name of a corporate name that's used by the seller group generally then the sellers may insist that post closing the seller the purchaser changed the name of the company such that it does not identify with the seller or the seller's group similarly the purchaser may want to change the name of the company itself such that it's consistent with the group that the purchaser operates but there could be other situations where the name of the target company itself has a goodwill attached to it and to that extent the purchaser may want to continue the same name to give you an example let's say flipkart now walmart market bought it for about 16 billion dollars but after having bought it it continued with the name of flipkart both as regards the trade name and the corporate name because there's a specific goodwill that that's attached to that perfect i think that's a great example and of course the large transaction where our partners were able to advise that as well so of course now moving forward there's a question around securing warranty and indemnity coverage so how effective are indemnities and reps and warranties where the sellers are promoters especially for an outbound m a transaction and how would you mitigate the risk of non-fulfillment of indemnity obligations in such cases by the sellers so essentially the seller's credit risk how do you mitigate that that's right i mean one way of mitigating credit risk of course is holding to some amount of payments and to that extent uh maybe you can hold on to some payment again like we've discussed to the extent that it's a for it's a transaction in the rest of the non-resident certain foreign exchange country restrictions that apply but one way to mitigate that credit risk is to hold on to certain amounts of the payment for as long as you can the other aspect could be that you have another entity either indian or a non-resident that has a necessary financial bear with all that guarantees the obligations of the seller in relation to the share purchase transaction okay i think that's a that's a great way of looking at it um another question on warranty so if given that there are various kinds of warranties sought from a seller how should the seller try to limit its liability to the purchase consideration or a percentage thereof yeah i think that that's an interesting question and perhaps that require discussion for about for an hour by itself and that's why you have a separate session on that but uh to put it simply one way for the sellers to try and mitigate their risk is to try and bucket the warranties let's say business warranties tax warranties and have a cap for those respective warranties like we discussed in relation to business warranties many times we just see a situation where the sellers insist that as far as liability for breach of business warranties is concerned that one extent let's say 50 of the purchase consideration that's received for fundamental warranties they insist that just be 100 and in any event the overall cap of the sellers for any breach of any probation the agreement is kept 100 of the purchase consideration such that the sellers don't end up selling more than what they received for transferring the asset that's being transferred there are other mechanisms whereby sellers try and sort of mitigate or minimize their risk one is making sure that the definition of loss is narrowly defined to the extent that they say that if a direct actual loss is suffered by the purchaser that will be made good by the seller but are there any consequence losses loss of profit or indirect or remote losses and the sellers won't be liable so that automatically reduces or minimizes the risk of the seller other mechanisms for sellers to try and mitigate or minimize their risk is have indemnity insurances and to the extent that an indemnity is claimed for matters that were not not known to the sellers as of the closing date that can be insured by way of appropriate volunteering identity charge okay so we have a question here somebody seems to be a slightly troubled seller so he's saying why doesn't a buyer also provide an indemnity under the share purchase agreement breach of warranties yeah i think it's a fair question and we see that quite often to be honest especially when we're negotiating transactions where the buyer is a pe purchaser because more often than not in case of a pa purchase transaction the parent fund drops down an spv or a shell company to acquire that project or target company and to that extent sellers often say that we don't want to go through this trouble of these 25 conditions precision that you lay down for us including going to a regulator third party sort of customer make public disclosure the fact that we're making a change in control transaction and then on the closing date we realize that so that you don't really have the money to close the transaction so one way to do this of course is again maybe look at having a guarantee from the parent of that particular entity or a group company that has a necessity financial web at all make sure that you've seen the balance sheets of the companies that are acting as purchasers and guarantors to get yourself comfort in case of pe funds like we spoke about many times sellers insist that the parent fund or the general partners of that pe fund provide an equity commitment letter or comfort letter saying that as when the closing has to happen the parent fund will ensure that appropriate monies are provided to the purchaser to undertake and complete the closing okay what happens to ongoing legal cases of the company in the event of a complete acquisition right so as far as the proceedings are concerned of course they will just continue as they existed prior to to the share transfer the proceedings don't really abate because there's been a change in control but to the extent that these proceedings are known to the purchaser the punches may have a commercial negotiation with the seller whether the seller needs to ensure that these are settled prior to the closing date and to the extent that they are not settled they cannot be settled then the purchaser may insist that an appropriate specific unanimity is provided for for any liability that is suffered as a result of that particular litigation going against the target perfect so now you spoke of sellers being private equities so there is a question if the investor is a fund who has invested money in the company and after selling the fund has been dissolved in that case how can the indemnity be invoked by by the purchaser from the seller right in many cases what parties then provide for is that they say that in in the agreement itself they say that they will have the ability to assign their rights under the agreement to a third party create an affiliate or a parent for a gp so one way to do that is to make sure that before the purchaser entity winds up it sort of assigns the obligation the right that it has for indemnification to a party that will survive the process of the winding up of that entity which is purchasing okay there's a question around how do we decide whether a particular warranty should be a fundamental warranty or not interesting yeah that is an interesting question but the general thumb rule is that a fundamental warranty is a warranty that deals with the authority capacity of the seller to undertake the transaction and some of these are that there are necessary authorizations in favor of the seller to transfer that he's not entered into any contracts which conflict with the obligation to transfer for example he's not entered into a contract whereby he's agreed to sell these shares to a third party that there are no proceedings that are pending against the seller to undertake the transactions that have been promised under the document the next aspect that's dealt with in a fundamental warranty is the title to the shares that are being transferred and the sellers provide a warranty saying that the shares that are being transferred are being held free of any unconferences and as in when these shares are transferred to the purchaser the purchaser will have full benefit of these shares from the closing date another interesting aspect that's generally negotiated on whether it should be fundamental warranty or not is a warranty which is generally known as a 281 warranty from the seller and and the income tax laws in india are that to the extent that any proceedings that are pending against a seller income tax proceedings and during the pendency of the proceedings a material asset is disposed including shares of a particular company then the tax authorities can void that transaction and recover the tax cues that are pending in relation to that proceeding so one of the things that purchasers generally insist is that they seek a warranty from the sellers that there are no proceedings that are really pending against the seller which would invoke a 280 even related to provision and to the extent that the seller's not in a position to provide that fundamental warranty purchasers generally insist for an noc being obtained from the tax authority saying that they don't have an objection if the share transfer occurs and they will not void the transaction at a later point perfect so we have a question around regulatory approval so what happens when the deal is subject to regulatory approvals and do we see clauses that the buyer will do all required to ensure regulatory approvals the buyer example divester business to ensure cci approval also do we see a concept of break fees and typically what is the quantum seen as a percentage of the deal value so again very very specific very focused question right i think to answer the first question it's not very common to be honest to have an undertaking provided by the buyer that he he'll do everything that's required for getting an approval generally it's a cooperation language that's provided to the extent that the seller makes an application the buy will provide necessary cooperation that's required for the seller to take it as far as the specific question on approval and anti-trust or competition regulations it actually is a buyer condition where the approval is to be obtained by the buyer statutorily so if the buyer really wants that approval to come through the buyer will have to statutely undertake all actions that are required by the competition commission for that approval to come through so the cci approval perhaps is a slightly different bucket but other regulatory approvals are really the obligation of the seller which the buyer providing necessary comfort or cooperation has been required for undertaking that transaction and and as regards break free uh to be honest at least under the indian m a sort of atmosphere i know something what your experience is but in my experience it's not very common to have breakfast the only places where we see break fees is an auction process where it's a really competitive process and the seller in the auction process chooses to negotiate with a particular bidder grants exclusivity to that bidder to the exclusion of all other bidders in that case if the purchaser walks away from the transaction in that case the seller may well say that look i've spent so much time negotiating with you i already had other suitors i let them go in that case you pay me a big fee but that really is the limited sort of situation in which we see breakfast we don't really see breakfast too often otherwise i mean i don't know what your experience has been absolutely and i think this merits a separate conversation with the gentleman who posed the question so we will also i can see the name and we'll catch up after this after this okay so there's something on and i'm conscious of time but there's there's a lot to cover so ashley's bear with me uh there's a question on weapon warranty insurance and while i know we have a full fledged session on reps and warranties but some thoughts on when it should be obtained when it should not be obtained and what do you see tends to get carved out from such insurance right again so the concept of warranty and md insurance is picking up in india but again we don't see that very often indeed at least i don't see that very often in deeds and one of the reasons why pakis not very keen on getting onto warranty and empty insurance is that the number of exclusions that are provided for that insurance policy then don't make it that attractive for example if there's any known liability whatsoever then that gets automatically excluded so all specific enmities already get excluded anything that's disclosed in the disclosure letter gets excluded in all in all most situations if not all the insurers insist that anything and everything that is disclosed in the dis the the data room itself also gets exported so to that extent there is a host of exclusions that come in there are other matters like the fraud fraud and things like that also get excluded so to that extent warranty insurance is picking up and warranty insurance again becomes really critical when like let's say somebody asked a question what happens if the purchaser is a fund and the project purchaser gets found right i think that's a question that was asked what happens if the seller is is a pe fund and it's likely to get i mean liquidated in a while because the time periods expire in such a situation it may be should be important knowing that the life cycle of that seller is going to end soon for the purchaser to go and get an insurance such that if a liability would rise tomorrow which is an unknown liability that liability is sort of backed by an appropriate insurance policy so this dovetails into the next question so there's a question on what trends have we seen when pe investors are selling and what sort of indemnification do they offer particularly say if it's a majority or a hundred percent stake sale yeah i think that's an interesting question and it sort of leads to negotiations in every situation more often than not uh pe funds are not very keen on giving uh warranties other than of course fundamental warranties and wanted easily to title to the extent that they are controlling shareholders this becomes a bit tricky because they've really been in control of the business and then would want the purchaser would want that the identities in relation to business one day is also provided in such situations limited situations of a controlling share still be funds do sort of provide warranties but again they try and minimize the liability to the extent that's possible they try and ensure that the purchaser goes ahead and finds an insurance policy for example that backstops any business related warranties or otherwise the limitations the caps the survival period are more heavily negotiated when the seller is a pe fund as opposed to a strategic seller so just for the audience's benefit there are quite a few questions on tax and what we will be doing is there is a plan to have a separate session on tax issues associated with m a but we'll separately respond to some of those questions um an interesting one right so who would be held accountable for any criminal activities or environmental violations that happened pre-closing but came to light much after closing yeah generally if it's a criminal liability then what is relevant is the time on which the offense occurred and to the extent that the offense occurred for a period prior to the closing date then as far as individual liability goes that liability will stay with the people who are in control of the company prior to the closing date so let's say if there are seller directors seller kmps then they'll be liable as far as the individual liabilities go merely because there's been a change and the purchaser directors and kmps are now in control of the company they will not be personally alive but to the extent any penalties are imposed on on the target company for having violated it in the past statutorily it will still remain the obligation of the target company to make good those payments or penalties that are charged on the target company to the extent that the spa provides for any risk allocation in relation to this the purchase will have indemnification rights perfect now there's a slightly conceptual and philosophical question how do you differentiate between rights and obligations on one hand and reps and warranties on the other as sometimes those are similar or interchanging which which is true i i think that that can be the case but the thing about warranties of course they are provided as of a particular date and i think that's important to remember so let's say if a warranty is provided the warranty is provided by the selling shareholder as of the execution date and the closing date so it's not really forward-looking in that sense other sort of obligations that parties undertake let's say if it's an action between signing and closing then it's it's something that's forward looking from the execution date and if it's a obligation the party is undertaking post-closing then it's forward looking from the closing date that's not necessarily true in case of warranties okay so now there is a question around so there are at least seven or eight questions on non-compete so maybe you want to spend a moment further just on that section 27 and the delhi high court judgment because somebody is saying is the reasonableness exception statutory somebody saying our non-complete is enforceable in india maybe just on non-completes if you want to take a couple of those questions together that's right so under section 27 of the indian contract act an agreement that restrains any person from undertaking a trade is generally seen to be void and it's not enforceable the only exception for that is that if such a restriction is imposed on a particular person accompanied with the transfer of goodwill of the business that's being transferred so the exception statutory exception is that a goodwill is being transferred by the seller there's always been a debate not only in india but across the world on whether when the share sale happens well that's akin to transferring the business of the target company and at least in india they've been a series of judgments recently in a couple of cases at least the delhi high court has held that when a seller transfers the shares especially the controlling stake in a target company it's nothing really but transferring the business of the target company along with the goodwill of the target company and any restriction that is undertaken by the seller voluntarily in terms of let's say a non-compete or non-solicit would be enforceable against the seller because the sellers received good consideration for the transfer of the company the only caveat to that is that restriction needs to be reasonable now you can't really have a situation with let's say let's say you do a transaction today and and you then require the purchase the seller to not compete with the business of the company for an eternity that he can never do that business that perhaps may not be reasonable so what we generally see as legislated in a shared purchase agreement is the duration of for which this non-compete would apply and in in our experience we've seen this duration extend from about three to five years generally the other aspect that the agreement provides for is the scope of the non-compete what is it that the seller cannot do the idea really is to keep it restricted to ensure that it's sort of like to light with what the business of the company is doing such that the seller does not use its domain knowledge or know-how to compete with this very company that's being sold to the purchaser because the purchaser not only bought it for the assets of the company as of that particular date but also the future potential of that company going forward so you can't be in a situation the seller then uh competes with the very target coming that's being sold for which it has received consideration but again it's important to sort of keep the scope narrow not completely right you have to map it to the business of the company and the other aspect of course is the the geographical operation geographical operation of that non-complete to the extent that the company prior to the closing never really had any sort of global businesses it was a company that operated completely in india all its customers were in india then having a global restriction saying that the seller can't use this domain knowledge anywhere else can't do any exports perhaps may not be reasonable so that again will have to be tracked to the business of the company as was conducted by the sellers on a priority closing and so long as these restrictions are provided they're reasonable there's enough language for protection for the seller the seller i mean there's great legislation generating these documents where the seller says that it's taken legal advice that it realizes that the restrictions that are being post on it have been imposed on it it will comply with it it doesn't stop the seller from earning its livelihood and so on so long as those are provided for the property negotiated ordinarily a non-compete restriction should in my view be impossible perfect i there's absolutely no way in which we can cover all of the questions uh i'm i'm struggling just to just to cycle through all of those and i'm conscious of time so i shall ask you to pick one last one and then we'll move forward so particularly on valuation adjustments there are at least five or six questions asking for examples of of valuation adjustments either pre-closing or post-closing that you may have seen in your experience yeah i think one of the things that we often see is that let's say there are any trade liabilities that are provided for on the execution date right so there are trade payables that the company has on the execution date and let's say there are 100 rupees now it's possible that by the time that you get to closing that that trade payables go up from the company so effectively the liability of the company has gone up from the time that the purchaser saw it as of the execution date so if the liability is gone up obviously the equity values gone down and that's perhaps an example that we've seen in the past where where there is a purchase adjustments that's done and there are two ways of course of doing a purchase adjustment one is that you try and do it pre-closing where even before you reach the closing date you do a test so let's say the closing of the 31st of march you do a test as of the 15th of march and and then you sort of adjust the consideration pre-closing itself but the closing consideration itself is reduced the amount that the purchaser pays out the more common way to do it is that you get a pre-closing statement which is provided by the sellers the parties look at it so long it's it's fine on the face of it parties go and close it subject to minimal adjustments purchase consideration but once the closing is done what the purchaser then does that purchaser itself appoints independent accountants and articles would then audit the company's accounts and try and determine the equity value of the company on the closing date and to the extent that it is lower than the equity value as of the execution date then the purchasers insisted a portion that was excessively paid to the sellers be refunded back to the purchasers excellent so with that i think we need to move on from the q a uh just to leave the audience with a thought there are questions on asset sales we have a session coming forth on asset sales there are questions on tax there are questions on uh on detailed questions on indemnification and warranties again as ashutosh said we will have more more sessions around that uh there was a very interesting question on specs sorry i expect through that but we'll send you a link one of our partners ashwin vishnu has done an interesting set of series of videos on specs so we'll send you that link across so before we conclude we would request each one of you to respond to a poll um and we take this very seriously as a part of our continuous improvement program mitesh thank you for putting up the poll you will also separately receive a request for your feedback on the webinar and please take the time to send us this feedback comments criticism even compliments everything works and the form takes less than a minute to complete so we are mindful your time is precious okay so thanks to everybody who participated in the poll it certainly has been a thought provoking event and the slide before you uh list down contact information for ashutosh and myself to me personally some of the key takeaways from today's webinar were that it is critical to have a robust and well thought out share purchase agreement for both the buyer and the seller given it defines their legal relationship going forward and given how every transaction has its own set of different risks different facts there will be very ingenuous or different solutions required to meet the customized commercial requirements so it is important to identify these risks in advance and suitably discuss those with your council to factor those in to your transaction and the agreement i cannot stress enough this applies equally to a buyer and a seller so finally i would like to thank ashutosh whose presentation was outstanding and also to our audience for such tremendous and active participation and your attention we hope you found the webinar interesting and a worthwhile investment of your time we certainly enjoyed bringing it to you also please do not hesitate to contact us regarding any matters arising from this webinar thank you for your attendance today and we look forward to being of service again in future webinars thank you very much thanks everyone thank you you