by Aarchie Chaturvedi & Vikarn Verma
The world is moving at an unpredictably fast rate and the main issue for today’s company executives is to remain competitive and profitable in the face of increased turmoil and change. To overcome the challenges of volatile competitive markets, companies enter into mergers and acquisitions (M&A) to share information, technology, and other resources, thereby enhancing the company’s overall strengths.
One of the most prominent forms of M&A is Reverse Triangular Merger (RTM). In RTM an acquiring entity utilises its subsidiary company to buy another company. The subsidiary is merged into the target company, with only the target company surviving after the transaction. Ultimately, the acquirer can take over all of the target company’s assets and obligations (without any actual or real transfer) as the target /surviving company resumes its operations now as a subsidiary of the parent/acquirer company.
RTMs protect the parent company against any unknown liability that the target company might have. Moreover, a newly formed subsidiary company merges with the target and hence, the chances for the combined value of the assets and turnover to breach the threshold limit of Parties Test is considerably less. Thus, RTMs easily escape the clutches of the antitrust watchdogs in India.
This discussion has become relevant once again in the light of the recent order passed by the Competition Commission of India (CCI) in ReNew Energy Global Ltd./RMG II (dated 07.06.2021) wherein approval was granted to the reverse triangular merger of RMG Acquisition Corporation (RMG II) with the wholly-owned subsidiary of ReNew Energy Global Ltd (ReNew).
It is reported that this transaction will result in the first major overseas listing of an Indian company through the Special Purpose Acquisition Company route (SPAC). A SPAC is a shell public company whose main purpose is to i) acquire a private company ii) raise its funds through initial public offerings and iii) then take it public without going through the traditional Initial Public Offering (“IPO”) route of listing public companies, which is both long-drawn and expensive.
Hence, through this article we attempt to analyse CCI’s stance on RTMs, and the mechanism available to the parties to prevent the invalidation of their combination notice. We also draw parallels to the position of RTMs in the USA and lastly, we give suggestions for the Indian Competition regime.
RTM’s: Whether Merger or Acquisition?
It is interesting to know that the CCI has a divided opinion when it comes to categorising RTMs. In some cases, RTMs are recognized as acquisitions under Section 5(a) of the Competition Act 2002 (Act) and in other cases as amalgamations/mergers under Section 5(c) of the Act.
Mergers and acquisitions are the most common types of corporate restructuring and sought-after solutions for business processes. In simple words, a merger is a process of merging two businesses to form a new one whereas an acquisition occurs when one company is purchased by another corporation.
In Bayer/Monsanto, the RTM was structured as an acquisition. A notice was filed by Bayer in relation to the acquisition of the entire shareholding of Monsanto by way of a Merger-Sub. On the other hand, in Clariant Limited/Huntsman Corporation the RTM was viewed as a merger. A joint notice was filed by Clariant Limited, Hurricane Cyclone Corporation, and Huntsman Corporation whereby a newly incorporated wholly-owned subsidiary (Hurricane- the Merger-Sub) of Clariant Limited was formed for a merger with Huntsman, with Huntsman being the only surviving entity. As a result, Huntsman was merged into Clariant Limited with the entity finally being renamed as “Huntsman Clariant Ltd”.
Pre-Filing Consultation: A cost and time effective mechanism
With these two examples, it is evident that a transaction of a similar nature can be viewed by the CCI either as an acquisition or as a merger.
To save costs and time, the parties can go for a pre-filing consultation. Pre-filing consultation (PFC) is a route wherein the CCI gives answers to the parties regarding the complicated nature of the transactions. This helps the parties from running into the risk of invalidation of notice afterwards, as they have already taken advice from the CCI as to how they should file the notice for the transaction.
The United States perception of RTMs
RTMs are quite prominent in the US. In 1971, the United States Congress passed Section 368(a)(2)(E) of the Internal Revenue Code (IRC) to allow reverse triangular mergers, through which the subsidiary company of the acquirer could merge into the target company. The only prerequisite is that the acquiring company must have control over 80% of the voting stock in the target company as provided under Section 368(c) of IRC.
When creating a holding company under the above-mentioned provision, a reverse triangular merger provides at least two benefits: first, a tax-free reorganization of shares and debentures, and second, the selling off the company if in any case, the target failed to make a profit as it will be easier to sell a subsidiary than the division of a company.
Another significant benefit is that the anti-assignment clauses are not triggered. Anti-assignment clauses restrict the assignment of contractual rights without the consent of the other party to the contract. The target company survives (as a subsidiary) and is the same legal entity as the original contracting party. The contracts of the target remain with it without the need to obtain third-party consent. In merger and acquisition, however, two companies form a single new entity and the third-party can enforce the anti-assignment clause against any one of them.
This was also observed in the case of Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, wherein the Court of Delaware held that RTMs do not result in a transfer of any contractual liabilities, and the target company continues to own their assets even after the merger. The Court of California in the case of SQL Solutions, Inc. v. Oracle Corp., reiterated the same and observed that an assignment or transfer of rights occurs only through a change in the legal form of ownership of the business and, thus, in the cases of RTMs since there is no change in the legal form of ownership, the enforceability of the anti-assignment clause is not required.
With this, it can be deduced that RTM has well-defined roots in the US market, which facilitates the entrepreneurs to boost their businesses.
The way forward:
It has been observed that in the case of RTMs, the law in the US is much more advanced in comparison to Indian law. This can be one of the major reasons why India is lacking in the ease of doing business. As per the latest report of the World Bank on Ease of Doing Business 2019, the US stands at the 6th position and India ranks 63rd in the index.
In India, the position of law is quite unsettled as is seen through the above cases. The regulatory authority considered both kinds of RTMs differently. In one order, it was a merger and in the other, it was considered as an acquisition. However, in contrast to this, the US has laid down ground-breaking laws to deal with such kinds of mergers.
Another major problem with Indian law is that it does not facilitate the back door IPO as we have seen in the case of ReNew Ltd./RMG merger. ReNew Ltd. is now listed in NASDAQ (National Association of Securities Dealers Automated Quotations- stock exchange based in New York) after the acquisition of RMG-II (a foreign company already listed on NASDAQ), and it will help in boosting the US economy.
This is in a way disadvantageous to the Bombay Stock Exchange (BSE) due to the unavailability of laws on RTM in India. If the competition landscape in India had such laws, then the ReNew company could have had the option of listing themselves in the Indian stock market which, in turn, could have helped the Indian economy to grow better and faster.
Conclusion:
The Indian framework will benefit greatly by adopting a more flexible approach as is currently followed in the US. Additionally, the jurisprudence on RTMs is in its nascent stage in India. It could be helpful to learn from the oversight displayed by the US authorities.
Though RTMs are viewed by many regulatory authorities in a negative light as companies tend to undertake them to enjoy tax benefits. However, they can also be a boon for uplifting the economy especially in a crisis like the COVID-19 pandemic. Lesser formalities and numerous tax exemptions are some of the few reasons why companies choose this route. Thus, many small players could be prevented from exiting the market as they’re being acquired by the big businesses, thereby ensuring competition in the market.
This article is authored by Aarchie Chaturvedi & Vikarn Verma. Aarchie and Vikarn are 3rd-year students at the National University of Study and Research in Law (NUSRL), Ranchi.
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