Exemption from Takeover Regulations for Gift of Shares to Family Trust

SEBI has granted an exemption to an acquirer from making an open offer under the SEBI Takeover Regulations in the case involving Gujarat Organics Limited (the company). In that case, the promoter Mr. Ashwin S. Dani, owns 71.15% shares in the company, and proposes to transfer it by way of a gift to a private trust HD Trust, of which he is one of the trustees. The beneficiaries of the trust are his family members. The acquirer, HD Trust, does not hold any shares in the company, while Mr. Dani has been shown as a promoter for more than 3 years. SEBI granted the exemption for the transfer because this was an inter se reorganization of holdings that does not alter the control of the company in any way. Moreover, it was a gift and merely a private family arrangement to facilitate succession planning.

This is understandable because there is no change of effective control of the company, and an exemption order was sought from SEBI only because the transaction may not have satisfied the technical requirements for an automatic exemption.

Source : indiacorplaw.blogspot.in

Posted under Miscellaneous May 9,2013

The Scope of the Jurisdiction to Grant Relief against a Penalty Clause

In Andrews v Australia and New Zealand Banking Group, the High Court of Australia has considered an important question of contract law: is the jurisdiction to grant relief against a penalty clause confined to a sanction triggered by an event that can be characterised as a breach of contract, or does it extend to a sanction triggered by other events? The Supreme Court of India had occasion to consider exactly this question about two years in BSNL v Reliance, but unfortunately did not do so. We have commented on that decision here.

Simplifying the facts for the purposes of analysis, customers of the ANZ Banking Group [“ANZ”] challenged certain payments that they were required to make for banking services. This fell into, mainly, three classes: a late payment fee [“Late Payment Fee”], payable if a customer is late in making a scheduled payment; “honour” fees payable by a customer who overdraws his account and interest on these fees [“Honour Fee”]. At first instance, Gordon J. found that the Late Payment Fee was payable as a consequence of breach of contract by the customer (in not making the scheduled payment), but that the Honour Fee was not. The question was whether this meant that no relief could be granted against the payment of the Honour Fee. In English law, this was traditionally the position, established by the speeches delivered in the House of Lords in Export Credits Guarantee Department v Universal Oil Products [1983] 1 WLR 399. The result was that a sanction triggered by an event that was not a breach of contract did not attract the penalty rules.

The High Court of Australia rejected that analysis in an instructive judgment, of which the following is a brief summary. The word “condition”, like “rescission”, has a variety of meanings in contract law. One meaning, of course, is an important or fundamental term of a contract the breach of which entitles the other party to withhold further performance and terminate the contract. Used in this sense, condition is contrasted with warranties and innominate terms. But the word “condition” is not used in this sense in the cases in which the penalty rules were established.  In those cases, there was typically a bond, which would be forfeited on the happening or non-happening of a certain event. That event was called a “condition”. It could be a promise by the other party (in which event the bond would be forfeited on breach) but it could also be an event that was not a promise by the other party. In Campbell v French, Lord Kenyon gave this example: a bond to be forfeited if the “Pope of Rome visits London tomorrow” is perfectly good, since the event is, although unlikely, not impossible. The example demonstrates that “condition”, in this sense, did not mean “promise” and that relief granted against forfeiture, naturally, could not have been confined to a breach of promise. As the High Court points out, equity granted relief provided the non-performance of the condition secured by the bond could be compensated by an award of money. If the bond secured a money condition, the court of equity intervened by ordering the defendant to pay the principal amount, interest and costs; if it secured a non-money condition, the court of equity would direct an issue of quantum damnificatus to assess the loss. In neither case was there any basis for the suggestion that equity would intervene if the bond secured a promise but would not intervene if it secured something else. The High Court points out that the emergence of assumpsit did not introduce the breach limitation, because the relief granted by the common law courts in this actionmirrored the relief granted by the courts of equity but did not substitute it. In other words, the equitable relief retained its identity; the common law courts simply gave relief too.

One question that arises from the judgment of the High Court of Australia is this: if the penalty rules are not limited to a breach of contract, when do they not apply? The High Court gives a tentative answer to this, by pointing out that it would be necessary to examine whether the Honour Fee was payable as a security for the performance of an obligation or as the price of “further accommodation” by the ANZ Group. Professor Peel points out in a case note in the Law Quarterly Review ((2013) 129 LQR 152) that this distinction “seems simply to move some of the problems associated with the breach limitation to a different place”.

The Indian law on this point remains unresolved. In BSNL v Reliance, Mr Gopal Subramanium argued that clause 6.4.6 was a payment triggered by an event other than breach and that the penalty rules did not, therefore, apply. As we have discussed in our post, the Supreme Court did not decide this point. Section 74 opens with the words “when a contract is broken”, suggesting that it does not apply to an event other than breach. However, as the authors of the 2^nd edition ofPollock and Mulla point out at page 328, section 74 does not exhaust the equitable jurisdiction of the court to relieve against penalty clauses. That jurisdiction was exercised with respect to some stipulations before section 74 was amended in 1899, and nothing in the amendment suggests that it was taken away. The question, therefore, remains open and one hopes the Supreme Court will answer it when the opportunity next arises.

 SOURCE : http://indiacorplaw.blogspot.in/

Posted by V. Niranjan at 1:04 PM 

Labels: Contract Law

Competition Law Risks: Non-Compete Clauses in M&A Transactions – Part 1

[The following post is contributed by Soumya Hariharan, who is a Foreign Lawyer in Rodyk & Davidson LLP’s Corporate and Competition Law Practice in Singapore. Soumya obtained her BSL.LL.B degree from ILS Law College and has an LL.M degree (Corporate & Financial Services Law) from the National University of Singapore.

These views are personal.

In this first part, Soumya provides a broad overview of competition law risks arising from non-compete clauses and how they have been dealt with by the European Commission]

Competition law regulators have been actively investigating non-compete clauses in Merger and Acquisition (“M&A”) transactions.[1] Most jurisdictions recognize that certain contractual restrictions in the form of non-compete clauses may be directly related and necessary for the successful implementation of a merger. However there are times when non-compete clauses incorporated in M&A transactions and joint ventures carry the risk of infringing competition law.

Non-compete clauses that carry competition law risks can delay deal timelines and affect the transaction from obtaining a favorable clearance from the competition law regulator. Companies stand a risk of investigation by the competition law regulators and financial penalties can be imposed for illegal non-compete clauses.

This series of posts aims to give a broad overview on how non-compete clauses in M&A transactions carry certain competition law risks, in light of recent decisions rendered by the European Commission (“EC”) and the Competition Commission of India (“CCI”). The article also highlights the importance of drafting non-compete clauses in compliance with competition law.

Ancillary Restraints and Non-Compete Clauses

Non-compete clauses are usually negotiated in most M&A transactions and it is fairly common for the Acquirer to require non-compete obligations from the Vendor. To effect a successful transaction, certain restrictions on competition between the Parties are required to the extent that they are directly related and necessary for the implementation of the merger.

Such restrictions, negotiated by the Parties are referred to as “ancillary restraints” in competition law parlance. The most common examples of ancillary restraints include non-compete clauses, license agreements, purchase and supply agreements.

Usually it is standard business practice to incorporate non-compete obligations for the effective implementation of the proposed merger that allows the Acquirer to obtain full value from the acquired assets including tangible and intangible assets such as know-how and goodwill.  In Europe, the 2005Notice on restrictions directly related and necessary to concentrations (the “Ancillary Restraints Notice”) provides clarity and guidance on the treatment of non-compete clauses.  

The EC has been scrutinizing non-compete clauses that may result in a breach of competition law, i.e. cases where the non-compete clause is not directly related and necessary for the implementation of the merger.

Two recent decisions of the EC provide further clarity as to how it interprets non-compete clauses.  One of the cases deals with an illegal non-compete entered into by two telecom operators, where the non-compete clause operated as a market sharing agreement. The second case deals with a non-compete clause that was operative post the termination of the joint venture which was considered excessive in scope and duration by the EC. The following cases serve as effective guidance to those companies that plan to incorporate non-compete clauses in their M&A transactions.

Telefónica and Portugal Telecom[2]

In 2011, the EC investigated two large telecom players Telefónica and Portugal Telecom in relation to a non-compete clause in the context of Telefónica’s acquisition of sole control of the Brazilian mobile operator Vivo. They were fined EUR 79 million for a breach of Article 101 of the Treaty on the Functioning of the European Union (TFEU) which prohibits anti competitive agreements.[3]

Article 101 prohibits all agreements, decisions and practices between undertakings and concerted practices which may affect trade within EU member states and which have as their object or effect the prevention, restriction or distortion of competition within the EU market.  

In 2010, Telefónica acquired sole control of Vivo which was until then jointly owned by both Telefónica and Portugal Telecom. The parties entered into a non-compete clause in their purchase agreement as a part of the acquisition which required Telefónica and Portugal Telecom not to compete with each other in Spain and Portugal from the end of September 2010.

The EC held that by implementing the non-compete clause, Telefónica and Portugal Telecom deliberately agreed to stay out of each other’s home markets rather than competing with each other.  The parties terminated the non-compete agreement in early February 2011 nearly four months into operation by offering commitments to the EC.  It is useful to note that in this case, the EC commenced investigations on its own initiative and fined Telefónica and Portugal Telecom notwithstanding the short duration of the infringement.

Siemens and Areva[4]

In 2001 Areva and Siemens established a joint venture Areva NP, which combined their activities in nuclear technology and nuclear power plants. The Shareholders Agreement for the joint venture included a non-compete clause for a period of 11 years from the termination of the joint venture. The non-compete clause covered the core nuclear services of the joint venture as well as non-core products and services in relation to which the joint venture was not active. In 2009, Siemens withdrew from the joint venture and Areva acquired sole control over the joint venture.

In 2010 the EC opened an investigation over the competition concerns relating to the non-compete clause. The EC adopted a preliminary decision in 2011 that Siemens and Areva had infringed Article 101 due to the non-compete obligation being excessive in scope and duration. According to the EC the scope of the non-compete clause was excessive because it prevented Siemens from competing in markets where Areva NP was only a re-seller of Siemens products.

To address the concerns of the EC both Siemens and Areva offered commitments, to limit the scope of the non-compete clause to Areva NP’s core products and services for a period of three years after Siemens exit from the joint venture. Under the commitments the non-compete obligations would only apply to certain core products and services offered by the joint venture company solely controlled by Areva.

- Soumya Hariharan

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[1] The European Commission investigated Telefónica and Portugal Telecom in 2011 and investigated Areva and Siemens in 2010.

[2] See Press Release dated 23/01/2013 http://europa.eu/rapid/press-release_IP-13-39_en.htm

[3] The European Commission fined Telefonica and Portugal Telecom EUR 66894000 and EUR 12290000 respectively for agreeing not to compete with each other.

[4] Case COMP/39736 dated 18/06/2012

SOURCE : http://indiacorplaw.blogspot.in/

Posted by Umakanth Varottil at 12:59 PM