New Delhi: Associated Chambers of Commerce and Industry of India (Assocham) has cautioned all corporates wanting to takeover US companies with mergers and acquisitions where cost exceeds $50 mn (Rs225 crore), to first have their deals approved by US Anti-Trust Department to avoid legal entanglement.
The Chamber recommends that corporates wishing to hold part ownership in US companies through formation of joint ventures are also subject to transactions through US anti-Trust laws. This is necessary to sustain deals for longivity as US anti-trust department takes serious note of mergers and acquisitions after these are concluded.
In an advisory note prepared for domestic corporates for ‘Doing Business with USA: Trends and Legal Risks’, whenever foreign companies plan a fairly large acquisition, takeover and mergers in US, they should notify US anti-Trust Authority to obtain advance clearance from US federal anti-trust authority.
Takeovers worth upto $50 mn of US companies are exempt from pre-notification to anti-Trust authority of America but any takeover the cost of which exceeds $50 mn is subjected to pre-qualification of American anti-Trust authority.
Prior sanction from US Federal anti-trust authority is required even for American companies that intend to takeover overseas companies. Violation of rules laid down by anti-Trust authority of US Federal system for any overseas takeover results into heavy penalties and mergers and acquisitions could also be declared null and void. Domestic corporates must hire legal consultancy so that smooth sailing takes place in takeovers and buying for ownership of American corporates.
US laws provide for and allow merger of two corporations or their consolidation. These acquisition techniques can only be used where the purchase already has its own US corporation (or other suitable US legal entity) available to participate in the merger or consolidation.
The chamber’s detailed paper on the subject states that when a company is acquired through purchase of its stock, the parties to the acquisition agreement are the buyer and selling shareholders. This is probably the most common form of acquisition, especially of privately owned corporations. A stock acquisition can be carried out by private purchase of shares of one or more existing shareholders; purchase of stock on US stock exchanges; public takeover bid or tender offer which can be either “friendly” or “unfriendly”.
It is worth emphasizing that a stock acquisition for cash is normally a taxable transaction for selling shareholders. Thus, the buyer may have to pay a higher price to compensate seller(s) for those income taxes. And in contrast to an assets purchase, the buyer of stock does not acquire a new depreciation basis for the Target Company’s assets. Buyers, therefore, will generally want to purchase Target Company’s stock or ownership interests, whereas sellers will push for an assets sale.
Several US states have enacted anti-takeover laws like Delaware, New York and New Jersey. Statutory mergers have the advantage of greater simplicity. All assets and liabilities (including contractual rights and obligations) are transferred to the surviving corporation by operation of law.