What preliminary agreements are commonly drafted?
In case of an acquisition, the parties generally execute a memorandum of understanding or term sheet to record the broad terms and conditions of a proposed transaction until the execution of definitive documentation. These documents are generally made as a statement of intent and accordingly may not be binding on the parties. However, the parties are free to make certain clauses (eg, confidentiality and exclusivity) binding and enforceable.
What documents are required?
Depending on the type of acquisition being undertaken by the parties, the transaction documents may include a:
- share purchase, asset purchase or business transfer agreement;
- in case of a partial acquisition or a minority shareholding, a shareholders' agreement;
- IP assignment agreements;
- new employment agreements to be executed with key managerial personnel of the target; and
- if an escrow mechanism is contemplated, an escrow agreement.
In case of a merger between two companies resulting in the creation of a third company, transaction documentation includes a scheme of amalgamation (which must be approved by the jurisdictional high court) and may include a shareholders' agreement and employment agreements for the employees of the entity created.
Which side normally prepares the first drafts?
This may differ based on the structure of the transaction; however, in most cases, the acquirer prepares the first drafts of the transaction documents. In situations where an Indian company proposes to obtain bids from potential acquirers for the transaction, the company usually prepares the first draft of the transaction documents and requires comments from the bidders in advance of the decision.
What are the substantive clauses that comprise an acquisition agreement?
The substantial clauses in an acquisition agreement include:
- the obligations of each party with respect to the sale and acquisition;
- conditions precedent to completing the transaction;
- actions to be undertaken at and post-completion of the transaction;
- confidentiality and exclusivity obligations;
- representations, warranties and indemnities;
- termination and consequences of termination; and
- governing law and dispute resolution.
What provisions are made for deal protection?
For the purpose of deal protection, the following provisions are included in the transaction documentation to be effective between execution and closing:
- positive covenants to preserve the company's business and performance;
- negative covenants capturing the action items, including soliciting competing bids, which cannot be undertaken without the purchaser’s prior consent;
- clawbacks or escrow of shares of the promoters; and
What documents are normally executed at signing and closing?
Typically, definitive agreements (eg, the share purchase agreement, asset purchase agreement or business transfer agreement and, as the case may be, an IP assignment agreement) are all executed simultaneously.
At closing, the parties execute condition precedent completion certificates, share transfer forms (if applicable) and undertake the activities contemplated in the definitive agreements, such as passing necessary corporate resolutions and making requisite filings with government authorities to give effect to the transaction. In transactions involving the transfer of shares between a resident and a non-resident, the resident must file Form FC-TRS with its authorised dealer bank within 60 days of receipt of the purchase consideration. The transfer is not construed to be complete until the form is duly filed with the authorised dealer bank of the resident and the filed form is taken on record by the target’s board of directors. For public listed companies, filings must also be made with the relevant stock. For instance, if a promoter of a public listed company sells its securities to another person and the value of such securities in aggregate exceeds Rs1 million over any calendar quarter, the company must notify the particulars of the transaction to the stock exchange on which the shares of the company are listed.
Are there formalities for the execution of documents by foreign companies?
There are no separate formalities for execution of definitive documents by foreign companies. However, if a non-resident is purchasing or selling shares of an Indian company, it must execute Form FC-TRS and associated consent letters in addition to the share transfer form to give effect to the transaction.
Are digital signatures binding and enforceable?
Digital signatures are binding and enforceable in India, but are not yet popular.