Khyati Verma
INTRODUCTION
Many mergers of different scales have been locked down due to this Covid-19 Pandemic globally. Since September 2004 there is been a holdover M & A transaction globally amounting more than $1 Billion in the world. Even airline business have lost up to 19% globally in terms of worldwide passenger revenue of $113 Billion which prompts up to keen deduction in their fare prices. Bharat Petroleum Corp., much-awaited privatization delayed due to Market crunch which estimated to decline by $ 2 Billion. SEBI being market regulator have tried to relax all the compliance norms which pertain to the disclosure of shareholders by 1 June 2020. Merchant Bankers &other intermediaries which have been duly directed under SEBI to make online submissions.
STATEMENT OF PROBLEM
Merger & Acquisitions witnessed a very significant increase in the number of the business deal until the Covid-19 stuck and earlier experts predicted 2020 to be a strong year as the base year of 2019 was at boom but now everything is altered starting from the dynamics of global economics as there are many unprecedented economic challenges for nations, companies and people globally. Post corona there will be a chunk of companies fighting for survival and some have to face the prospect of business closure which brings a downfall to M&A segment wrt. business deal.
OBJECTIVE OF STUDY
In this paper, As COVID-19 pandemic is declared a Force Majeure the parties are anticipated to show impossibility towards performance under a contract but with abuse of such clause in a contract, the said parties may jump to MAC or frustration of contract u/s. 56 of the Contract Act which creates difficulties to determine at this point. “A successful M&A strategy would be to optimally explore a potential business opportunity with an apt business strategy along with to mitigate the legal/business risks will be the yardstick for a successful M&A”.
HYPOTHESIS
By way of this paper, the author tries to investigate the feasible effect of the global pandemic on M&A venture. Reshape how merchant bankers &legal advisors perform their functions & duties as market intermediaries under the SEBI (Substantial Acquisition of Shares &Takeovers) Regulations 2011 (Takeover Code).
RESEARCH QUESTION
- What are the responsibilities of merchant bankers &legal advisors entrusted with?
- What changes in this pandemic?
- How will courts &tribunals rule on this matter?
- What should market intermediaries focus on?
What are the responsibilities of Merchant Bankers & Legal Advisors entrusted with?
“Regulation 27(2) of the Takeover Code needs merchant bankers, as managers to open offers, which ensures that offer of the documents to be true, fair &adequate in all subject material”.
- In Almondz Global Securities Ltd. v. SEBI[1], “the SAT duly noted that merchant banker holds the responsibility to take dynamic steps & verify materials wrt. the offer document &responsibility is release through due diligence process which later help buyers to determine the sincerity of seller’s financial assets. Thus, the SEBI (Merchant Bankers) Regulation 1992, with due diligence accommodates adequacy of firm financial resources with the acquirer”.
- In Imperial Corporate Finance &Services v. SEBI[2], which says “ due diligence necessitates dynamic efforts from the merchant bankers to search of worthy material information whether or not certain merits disclosure & not simply informed by the clients is what held by SAT.”
- In Electrosteel Castings Limited. v. SEBI[3], The tribunal hence specified: “Thus, true & adequate disclosure is said to be made, if the disclosure is accurate & not misleading & does not omit a fact that is either material itself or is necessary to understand the facts that have been disclosed, so as to enable the investors investing in the issue to take an informed investment decision.”
According to “Section 11 of SEBI Act’1992, a Legal advisor is a person who is associated with the securities market and attached to a duty to regulate and manage a vigorous legal due diligence of their client’s full disclosure and their representation as they’re responsible to access risks which could lead to omission to the disclosure of facts”[4]. “The SEBI (Prohibition of Fraudulent &Unfair Trade Practices) Regulations 2003 states abstention from disclosure affects the market price of securities & is fraudulent trade practice, so act cautiously to avoid triggering SEBI’s wide investigative powers”.
What changes in this Pandemic?
As the global market is at the decline in a pandemic, the risks attached with negotiations of M & A transactions have enhanced and majorly fell over two major facets; due diligence exercises, & negotiation of (MAC) clauses. The reasoning behind the Takeover Code was to protect investors’ interest, create a disclosure-based mechanism which necessitates transparency which later enables informed decisions.
Due diligence process
Duly noted by the SAT, In “HSBC Securities Limited v. SEBI, merchant bankers can’t rely on SEBI’s response, or target company, or the auditors wrt. any discharge of basic responsibility of carrying due diligence. Therefore, in present times where in-person meetings are difficult (and, in several cases, impossible), merchant bankers have to resort to videoconferencing or telephonic conversations to undertake necessary due diligence and same has the extent to buyers of existing insurance policies, solvency or going-concern risks & lastly, the tendency to walk away from the transaction by invoking the MAC, or force majeure clause”. Whereas, there is progressively way more caution to be taken by merchant bankers and legal advisors to distort corporate announcements in order to suppress material information and such have the probabilities and magnitudes which can lead to change in the disclosure made in public domain & proclamation that the buyers have ‘firm financial arrangements’ may alter the situations of falling corporate valuations.
Material adverse change clauses
MAC clauses acts as a part of financial agreements which have a restrictive judicial interpretation earlier like, In 2013 UK High Court judgment in “ Grupo Hotelero Urvasco SA v. Carey Value Added[5] SL clarified that an adverse change would be material if it significantly affects the borrower’s ability to repay the loan in question”. Also, Regulation 23(1)(c) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, sets out that “any open offer can be +withdrawn in circumstances where any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is not met for reasons outside the reasonable control of the acquirer, and such agreement is rescinded, subject to such conditions having been specifically disclosed in the detailed public statement and the letter of offer” and Wrt. this clause many no. of tedious sitting regarding negotiations can be held in order to come up to census regarding the materiality of an event & Indian courts have regretted us with restricted opinions as to “any event or activity making it impossible or restricting any party to perform will be termed as Material Adverse Effect & no guidelines”.
In this COVID-19 time the parties are said to negotiate on the impact over their business transactions and issues faced by the seller which will narrow terms in MAC where buyers are sticking to include lockdowns, closure of territorial boundaries to be added as there is an undetermined long term impact so, it isn’t viable to wait for courts take on invoking MAC as parties should have other plans ready for verification wrt. its performance of an available contract which can be considered instead as it is essential to make a balance between the termination clause of the agreement and the agreed term of performance. As if now that if in case, any party invokes this clause the court will decide on the materiality of the impact of a pandemic on the transactions of the company. In “Subhishka Trading Services Ltd. v Blue Green Constructions & Investments[6], the Madras High Court deferred an amalgamation under the Companies Act 1956 only on the ground that the transferor company was in severe financial crisis &soon to be wound up. This dissolution of the company made the transaction impossible”.
How might Courts & Tribunals rule on this Matter?
As per “Section 55 of Indian Contracts Act,1872 which actually allows a temporary discharge of obligation on grounds of impossibility which is also known as FORCE MAJEURE CLAUSE, where parties with an executable contract face unanticipated circumstances which hinders performance and that’s when this clause is triggered”. In “Energy Watchdog v. CERC, wherein it was unambiguously held that force majeure clauses be granted a narrow &strict interpretation. Courts do not have the general power to absolve performance except when the very foundation of the contract is affected”[7]. Therefore, after a jurisprudential examination on force majeure & MAC clauses, it’s evident that Indian Judiciary is cautious in an opening floodgate of litigation. “Thus, two aspects become significant: one, the specific nature of the impact on the business & two, the language of the clause agreed to by the parties”.
CONCLUSION
What should market intermediaries focus on?
Merchant bankers & legal advisors need to focus on disclosure for such agreements where parties have already entered as these disclosures will show certain financial changes wrt. financial performances, employee counts supply-chain relationships which will not only enhance transparency in decision making but also ensure market deals with a bona fide nature. Already negotiated agreements should pivot on making the MAC clauses as exhaustive as possible because even if such clauses are absolute to each transaction, ‘pandemics’ or ‘epidemics’ are skipped as part of exclusion of MAC. Thus, legal advisors have a duty to ensure their buyer-clients secure the option to walk away in case of the disproportionate financial impact on the target whereas sellers have to push for a post-closing price adjustment to balance the risk of fluctuations in valuations which will not only prevent buyers from abandoning deal which will cause effects of the pandemic extent. “The onus of demonstrating whether Covid-19 actually affected the performance of the specific contractual obligations in a particular case lies heavily on the party seeking to have its non-performance excused”. SEBI’s approach towards COVID-19 will not only be interesting but will also guide regarding recovering securities market.
BIBLIOGRAPHY
- Samir Sheth, Navigating merger & acquisition activity during Covid 19, Consultancy (Apr.7, 2020), https://www.consultancy.in/news/2940/navigating-merger-acquisition-activity-during-covid-19.
- Mohana Roy, COVID 19: A pandemic, Force Majeure and MAC, Mondaq(Mar.24,2020), https://www.mondaq.com/india/maprivate-equity/907230/covid-19-a-pandemic-a-force-majeure-and-a-material-adverse-change?signup=true#_ftn2.
- Bhumesh Verma, Challenges and way ahead for M&A in COVID-19, Latestlaws(Apr.19,2020), https://www.latestlaws.com/articles/mergers-and-acquisitions-in-covid-19-times-challenges-and-way-ahead-by-bhumesh-verma/.
[1] “APPEAL Nos.: 275, 276 &301 of 2014”
[2] 2005 61 SCL 197 SAT
[3] Appeal No. 224 of 2016
[4] Miriam P. Hechler, ‘The Role of the Corporate Attorney within the Takeover Context: Loyalties to Whom?’ [1996] 21(3) Delaware Journal of Corporate Law 943.
[5] [2012] EWHC 888 (Comm)
[6] 05.08.2015, O.S.A.No.18 of 2011
[7] SATYABRATA GHOSE V MUGNEERAM BANGUR, AIR 1954 SC 44
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