Rules notified by MCA ease up restrictions on inter-corporate loans

The Ministry of Corporate Affairs (“MCA”) has notified Rules for Chapter XII (among other Chapters) of the Companies Act, 2013 (the “Act”) on 27th March 2014.

The Rules have brought about much needed clarity on the exceptions to restrictions placed by Section 185 of the Act which was notified by the MCA on 12th September 2013 for implementation.

In terms of Section 185 of the Act, an Indian company has been prohibited from either advancing any loan to, or giving any guarantee or security in relation to any loan taken by, its director or any other person in whom a director is interested. In terms of the Explanation to Section 185 of the Act, the expression ‘any other person in whom a director is interested’ includes a company having common directorship with the company providing the loan/security/guarantee. Such restrictions are not applicable if advancing loans, giving guarantee or providing security is done in the ordinary course of business of the lending company.

However, this provision, when notified, caused difficulties for corporates and financial institutions alike as most financings availed by companies would typically be backed by some form of security or guarantee from an associate or holding company. Since associate/parent companies usually have directors common with their subsidiaries (and in any event the wording of Section 185 was quite broad), in light of the restrictions under Section 185, providing such loans or security would not have been possible anymore.

It is pertinent to note that such restrictions had also been imposed under Section 295 of the Companies Act, 1956 (“1956 Act”), but Section 295 also provided certain exclusions, including situations where security is provided by a holding company for a loan being availed by its subsidiary. Unfortunately, although the language of Section 185 of the Act indicated that the restrictions imposed by it would be applicable subject to exceptions provided elsewhere in the Act, not many other sections of the Act, including the likely savior in Section 186, had been notified.

After receiving several representations with respect to Section 185 of the Act, the Ministry of Corporate Affairs issued clarificatory circulars in November 2013 and subsequently in February 2014, stating that till such time as Section 186 of the Act is notified, the corresponding provision in Section 372A of the 1956 Act will continue to apply. While the aforesaid circulars were probably intended to provide for exceptions to Section 185 of the Act, unfortunately they lacked clarity and only added complexity to the legal framework.

Now, the new Rules that have been notified right on the heels of more provisions of the Act including Section 186, have clarified the situation beyond doubt for now by allowing the following exceptions to Section 185 of the Act:

1. Loans made by a holding company to its wholly owned subsidiary for its principal business activities;
2. Guarantees given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary for its principal business activities; and
3. Guarantees given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary for its principal business activities.

The financing sector of the economy would surely be relieved with the notification of this exemption. However, with a host of other provisions having been notified alongside, what lies ahead still remains to be seen. In any event, shareholder loans from Indian parents or associate companies (except wholly owned subsidiaries) will still fall within the prohibition under Section 185.

Neha Vijayvargiya


Pharmaceutical Sector: DIPP’s Approval required for Non-Compete Clauses

The Department of Industrial Policy and Promotion (“DIPP“), through Press Note 1 of 2014 issued on 8 January 2014 (“Press Note“), has reviewed the conditions for Foreign Direct Investment in the Pharmaceuticals sector.

The existing limits and routes for Foreign Direct Investment in Pharmaceuticals sector remain the same as earlier. However, the DIPP has through the Press Note, added a condition that “non-compete clause would not be permitted, except in special circumstances with the approval of the Foreign Investment Promotion Board (“FIPB”)”.

The aforesaid condition appears to be applicable to both Brownfield Projects (already under approval route) and Greenfield Projects.


Background of this change in policy

This development is the result of a compromise between the divergent views of the government and the DIPP. Concerned about the slew of acquisitions on Indian pharmaceutical companies by foreign entities, which it felt would adversely affect the generic drug industry of the country, the DIPP had proposed a number of measures including a reduction in the FDI cap from 100% to 49% in ‘critical sectors’ of the industry. The DIPP’s concern stems from the acquisitions of two major Indian companies, Ranbaxy and Piramal Healthcare by two foreign pharmaceutical giants, Daiichi Sankyo and Abbott, respectively. However, such fears of the DIPP were waived by the cabinet which retained the existing policy with the additional condition of exclusion of non-compete clause.

This change in position of the government, however, lacks clarity and may present a confusing scenario for foreign investors for both Greenfield and Brownfield projects.

How it will affect Acquisitions

Non-compete clauses, a standard feature in merger and acquisition deals, restrict the promoters of target companies from venturing into the same line of business for a certain numbers of years especially in case of Brownfield pharmaceutical deals. This is done to primarily protect the interests of the buyer, as in the absence of such a stipulation the seller may be able to establish a new entity and conduct the same same business. Thus the main objective of the non-compete clause is to deter the inclusion of other players in the market. For instance, the US-based Abbott Laboratories inserted a non-compete clause in its 2010 agreement to acquire Piramal Healthcare, which prevents promoter Ajay Piramal from entering similar business for eight years (Piramal Healthcare Limited Q2 H1 FY2011 Results Conference Call” October 22, 2010 at Such clauses may also restrict any participant in the company from collaborating with a competitor.

It is not yet clear as to what special circumstances will allow for non-compete clauses to be allowed in case of FDI in the Pharmaceutical sector. It is clear to all that this change in policy is a protectionist measure amidst fears that major Indian Pharmaceutical companies will be acquired in the near future, which may, going forward, give rise to a situation which will effect India’s low cost generic medicine industry and make essential medicines expensive in India.

However, such lack of clarity will obviously affect future acquisition activities in this sector in India as non-compete clauses tend to be a significant instrument of protection for investors.

Automatic or Approval- the Greenfield Conundrum

Under the present scenario, in case of Greenfield projects, 100% foreign direct investment is allowed automatically without any need of approval from the FIPB. The foreign company has an option of investing either a full 100% in order to set up a wholly owned subsidiary in India, or even partially in case of a joint venture with an Indian company. However, in case of a joint venture with an Indian entity to set up a green field project in pharmaceutical sector in India, the foreign investor will now face  the strange conflict. Naturally in a capital intensive sector like Pharmaceutical, any foreign JV partner would want to ensure that  its Indian counterpart will be dedicated exclusively to exploring joint opportunities in the sector and would want to restrict  their ability to breach such exclusivity through a non-compete clause in its agreement with such Indian JV partner. However, with the change of position concerning the non-compete clause in such agreements, it would now become mandatory for even Greenfield projects with such clauses to seek approval from the FIPB. This therefore, presents a conflicting situation wherein a foreign company investing under the automatic route would nonetheless have to seek approval from the FIPB, hence defeating the very purpose of the ‘automatic route.’


While the pharmaceutical industry is relieved by the government’s stand to continue with the policy, it is “worried” about the “conditional scrapping” of the non-compete clause. The domestic industry fears that removing this clause would reduce its negotiating powers to get a high valuation, while foreign players are concerned that they (as buyers) would not be able to limit competition.

At a time when the country is liberalising foreign investment in various sectors and need significant capital inflows, such a policy review by DIPP could reduce potential foreign direct investment flows into a key and attractive sector like Pharmaceutical, which has seen a flurry of acquisitions of Indian units by foreign drug-makers in recent years. This approach may also further contribute to the existing confusion with regards to regulations of foreign investments in India, which will affect the reforms drive of the government and affect investor confidence adversely.

Anuj Sahay []

Pingal Khan []

Mohar Majumdar []

Pricing Guidelines for Equity Instruments with Options

Pursuant to Circular No. 86 A.P. (DIR Series) on 9 January 2014 (“Circular“), the Reserve Bank of India (“RBI“) has permitted foreign investors to be granted put options with respect to equity shares and compulsorily convertible instruments issued in accordance with the foreign direct investment (“FDI“) policy.  The Circular as also prescribed the conditions, including applicable pricing, under which put options may be granted to, and exercised by foreign investors.

Regulatory Resistance to Options

Legality of options has always been surrounded by uncertainties in India on a number of fronts.  There have been various challenges to the legality of call options on the basis that call options: (a) over shares of private companies, if not incorporated under the articles of association of private companies are void under company law; (b) over shares of public companies are contrary to the principle of free transferability stipulated under company law.  Both call and put options have also been challenged under securities law on the ground that privately negotiated options are outside the scope of derivative contracts that are permitted under India’s restrictive derivative securities regime.  Conflicting views taken by courts over time, and the view taken by the Securities and Exchange Board of India until recently on legality of options, only added to the uncertainty under statutes created by drafting ambiguities to begin with.

Against this backdrop, an altogether different challenge against put options was raised by the RBI, from a foreign exchange control perspective.  FDI is permitted in India only through equity shares and other securities that are compulsorily convertible to equity shares.  While optionally convertible and redeemable securities were earlier permitted for FDI purposes, this was changed in 2007 on the principle that from an exchange control standpoint, such securities bear more resemblance to debt securities than securities bearing equity risk.  Indian exchange control regulations governing foreign debt have traditionally been significantly more restrictive than FDI regulations, with a number of restrictions on source of funding, interest/coupon rate caps, end-use restrictions, etc.  RBI felt that optionally convertible and redeemable securities were being used for foreign funding transactions that were ostensibly posing as FDI, yet due to the redeemable nature of these instruments, the commercial effect of such transactions were similar to debt funding, and were being exploited to circumvent the restrictions applicable to foreign debt.

RBI’s previous opposition to put options in foreign equity transactions was based on the same principle.  It was argued that put options available to foreign investors against Indian residents over equity instruments, especially where the option price was determined on the basis of a pre-agreed IRR, rendered a foreign equity transaction more similar to debt, yet foreign investors enjoyed the relative regulatory ease associated with foreign equity transactions.

FDI Policy Circular (2 of 2011)

To address this apparent regulatory gap, a provision was incorporated by the Department of Industrial Policy and Promotion (“DIPP“) in the Consolidated FDI Policy Circular (2 of 2011) in September 2011 to the effect that equity instruments backed by put options would be treated as foreign debt, and restrictions applicable to foreign debt such as end-use restrictions, cap of returns, etc., will apply to such equity instruments.  While the intention behind introducing such a provision may have had been based on sound regulatory concerns, the rather broad sweep of the provision meant that a legitimate and important exit option that was available to foreign investors, especially venture capital and private equity investors, was taken away.  Due to widespread objections from the industry, this provision was deleted a month later.

The Circular

The Circular is the most recent attempt at addressing the apparent regulatory gap, while bearing in mind the industry’s legitimate concern regarding availability of put options as a genuine exit mechanism for foreign equity investors.  The Circular now permits put options for equity shares and compulsorily convertible securities issued to foreign investors, subject to the following conditions:

(a)     the securities will be subject to sectoral minimum lock-in requirements applicable to FDI, if any, i.e., the put option may be exercised only after expiry of any lock-in period stipulated for FDI investments – for instance, the 3 year lock-in period presently applicable to FDI in defence and construction development sectors; and

(b)     the put option must not result in “any assured return” for the foreign investor.

For the purposes of ensuring that the foreign investor is not entitled to “any assured return“, the RBI has prescribed the following pricing norms for the price payable to the foreign investor for sale of equity securities pursuant to exercise of the put option:

(a)     in the case of equity shares of listed companies, the price payable must be “the market price prevailing at recognized stock exchanges“;

(b)     in the case of equity shares of unlisted companies, the price payable must not exceed the price arrived at the on the basis of return on equity (RoE) as per the latest audited balance sheet of the company; and

(c)     in the case of compulsorily convertible debentures and preference shares, the price payable must be determined on the basis of any prevailing internationally accepted pricing methodology, which must be certified by a chartered accountant or a SEBI registered merchant banker.  While there seems to be a certain degree of choice in the pricing methodology that may be adopted for convertible securities, this is still subject to the overarching principle that the foreign investor should not be entitled to any “assured exit price“.

Lack of Clarity and Unintended Consequences

The intent of the RBI may be noble in so far as to address an apparent regulatory gap without taking away a legitimate exit option available to foreign equity investors.  However, its implementation through the Circular is not without concerns and uncertainties, both at a conceptual and textual level:

(a)     Although it is not clear from the Circular, it is arguable that the pricing norms prescribed in relation to put options, are still subject to pricing caps prescribed for other transfers of equity shares by non-residents to residents.  Transfer of equity shares pursuant to exercise of a put option is still a subset of the larger universe of transfer of equity shares by non-residents to residents, and there is arguably no reason why pricing for transfers pursuant to exercise of put options should operate independently of regular pricing caps.  Prior to RBI frowning down on IRR based put options, the IRR based price payable to foreign investors for transfer of shares pursuant to exercise of put options were still subject to pricing caps.  Such reasoning aside, this is not clear from the language used in the Circular, particularly in the context of put options over equity shares of listed companies, discussed in paragraph (b) below.

(b)     In the case of exercise of a put option for equity shares of listed companies, the price applicable is the market price prevailing at recognized stock exchanges.  However, the price payable for a regular non-resident to resident transfer of listed shares is capped at the higher of the average of the weekly high and low of the closing prices of such shares over the 26 or 2 weeks period preceding the date of transfer.  If the prevailing market price is higher than the 26/2 weeks weekly high-low closing average price, based on the reasoning in paragraph (a) above, it is not clear if the foreign investor would indeed be entitled to this higher exit price. In any event, utility of put options for shares for listed companies that is capped at the then prevailing market price is questionable since (at least theoretically) the foreign investor could have secured a similar exit through a market transaction on the stock exchange, though for larger volumes, there is the benefit of a ready buyer to purchase through a synchronized trade.

(c)     Similarly, even if the likelihood of such a scenario is relatively low, if the put option price based on the prescribed RoE valuation is higher than the price cap based on DCF valuation, applicable to other non-resident to resident transfers of unlisted equity shares, it is not clear if the foreign investor is entitled to the higher RoE based exit price.  More problematically, unlike the language in the Circular used for pricing of listed equity shares, in the case of unlisted shares, the put option price payable clearly operates as a cap.  If the RoE based price is lower than the DCF valuation (which is highly likely for start-up ventures, cyclical industries, and sectors with longer break-even periods), it is unclear if the foreign investor would be bound by the lower RoE based price cap for all future transfers of shares to the option counterparty, merely because the investor had secured a put option at the time of investment.  To illustrate, if a private equity investor should have a put option against the promoters of an Indian company, and if the RoE based price cap turns out to be lower than the DCF valuation, is it permissible for the private equity investor to not exercise the put option, but separately negotiate an exit with the promoters at a price higher than the RoE valuation but within the DCF valuation?  This is unclear, however, if the intention behind the Circular is indeed to restrict such an alternative exit at a higher price merely because the foreign investor happened to have secured a put option at the time of investment, it is contrary to the very essence of an option, which by definition includes the freedom to not exercise the option.  In any event, RoE valuation cap notwithstanding, a put option is still useful in the case of unlisted companies if there is no buyer for the shares held by the investor other than the option counterparty.

(d)     It is not clear how the RoE based valuation is practically useful in the case of companies with losses in the financial year immediately preceding the exit, or with a negative net worth.  Both these are highly likely scenarios for start-up ventures and industries with longer break-even periods.  Incidentally, such companies are the ones that are most in need of risk capital from venture capital and private equity investors, who in turn, commensurate to the equity risk taken, require alternatives to public market exits through means such as put options.

(e)     Clearly, the RBI’s intent behind the Circular is to prevent complete de-allocation of equity risk for the foreign investor in an equity transaction, which is exactly what IRR based put options do in equity transactions, thereby lending them the flavour of debt financing.  Preventing such complete de-allocation of risk, while at the same time preserving put options as a means of exit is the conceptual distinction that has completely missed both RBI and DIPP in the past. However, by prescribing an RoE based valuation cap, the RBI may have, perhaps unintentionally, allocated more risk to foreign equity investors than is required for securing both these objectives.  In addition to the points discussed in the paragraphs above, RoE based valuation is historical in nature and is linked to performance of the investee company in a single financial year.  At the time of investment, foreign investors are subject to a floor valuation based on DCF, which other than in the most atypical cases, provides a higher valuation for start-up ventures and industries with longer break-even periods.  Yet, a pre-agreed exit mechanism for the same foreign investors who assumed significant equity risk and provided much needed risk capital to the Indian company is subject to price cap that is highly likely to be lower than a prospective valuation methodology such as DCF valuation.  While complete de-allocation of risk for an equity investor is not desirable, can it be said that the foreign investor does not assume equity risk merely by virtue of availability of a put option based on prospective valuation.  In any event, since DCF valuation methodology is anyway used as the threshold for entry valuation, how significant, if any, is the de-allocation of risk for the foreign investor if the same methodology is used as the basis of a pre-agreed exit mechanism (despite, arguably, the malleability of DCF valuation in practice)?

(f)      RoE pricing methodology for put options may introduce an unwarranted bias in the choice of investment instrument in favour of compulsorily convertible debentures as opposed to compulsorily convertible preference shares, as the latter will add to the net worth of the investee company, thereby lowering RoE exit valuation.

(g)     RoE based valuation for put options may unfairly prejudice foreign investors in investee companies that reinvested earnings in its business, thereby increasing net worth and lowering exit valuation through put options, as opposed to foreign investors in companies that made frequent dividend distributions during the investment period.  The former class of investors not only does not receive dividend benefits, but is also subjected to a lower valuation for a pre-agreed exit, whereas the latter benefits from higher dividend payout as well as exit valuation.  At a macro level, ceteris paribus, if investment choices are influenced by this parameter, this may result in a bias against allocation of risk capital to sectors where growth is dependant on prudent reinvestment of earnings.

Permissibility vs. Utility

Based on the above, one is left to wonder whether the so called permissibility of put options introduced pursuant to the Circular is helpful to either: (a) foreign investors as a means of exit, from the perspective of both regulatory clarity and commercial utility; or (b) Indian industries as a whole from the perspective of attracting risk capital and prudently allocating such capital across industries.  The RBI may have had a sound conceptual basis for its resistance to put options.  However, yet again, as Indian regulatory environment has proved itself in the recent past, the new solution is unclear, may prove to be unhelpful and as damaging as the problem.

G. T. Thomas Phillippe []

Material Adverse Effect- A note on Osram Sylvania v Townsend Ventures

The Court of Chancery of the State of Delaware (“Court”) has pronounced an important judgement in the case of Osram Sylvania Inc. v. Townsend Ventures, LLC (“Osram”) where the issue was whether failure to meet projected sales figures constitutes a Material Adverse Effect. The Court held the target company’s failure to meet sales forecasts to be a Material Adverse Effect (“MAE”) to the acquirers[1]. In the following note, the terms material adverse effect and Material Adverse Change (“MAC”) have the same meaning and are used as alternate terms for each other[2].

Material Adverse Effect Clause

MAE clauses in contracts are used to specify a condition to the closing of a transaction or to qualify representations and warranties made by the parties to the contract [3]. It is aimed at ensuring that a party can exit the transaction after an agreement has been signed and the transaction is closed.

Jeffrey Rothschild, Nick Azis, Patrice Corbiau, Dennis White and Abigail Reed of McDermott Will & Emery while discussing MAE describe it as follows “Merger and acquisition contracts typically feature a material adverse change or material adverse effect clause, under which a buyer may exit the deal or renegotiate terms if an unforeseen material adverse business or economic change affecting the target company occurs between executing the acquisition agreement and closing the transaction.” Generally a MAE clause must be drafted employing an objective criterion to establish MAE. The clause must also specify any exceptions to the clause expressly and specify a time frame within which MAE could take place.[4]

Judicial position in Delaware till Osram

The Osram judgment is a paradigm shift in the Court’s position on MAE. The Court had earlier in IBP, Inc. v. Tyson Foods declared that MAE would occur only in case the target company’s long term earning power had changed[5]. The Court while discussing the standard to establish if a MAE has indeed occurred, stated, “An adverse change in the target’s business that is consequential to the company’s long-term earnings power over a commercially reasonable period, which one would expect to be measured in years rather than months”.

It is also important to understand the Court’s position in Hexion Specialty Chems. Inc. v. Huntsman Corp,[6] to understand the change in the Court’s position in Osram. In this case, Hexion Speciality Chemicals, Inc. (“Hexion”) had entered into an agreement to acquire Huntsman Corporation (“Huntsman”). Prior to the signing of the agreement, Huntsman had made projections of its financial position, which it was unable to meet after the signing of the agreement. The Court rejected Hexion’s contention that Huntsman’s failure to meet its financial projections amounted to a MAE. The Court further noted that it had never found MAE to have occurred in the context of a merger agreement.

Change in judicial position in Osram

In Osram, the plaintiff had entered into an agreement with the defendant to purchase some stock of Encelium Holdings, Inc. (“Encelium”) in October 2011 (“Agreement”). The plaintiff had agreed on the purchase price on the basis of the defendant’s representation of Encelium’s financial position. The defendants had forecast sales of USD 4 Million in the third quarter of 2011. However, Encelium’s sales in the third quarter were less than half of the projected amount. The defendant did not make any disclosure as to the sales falling short of its projections to the plaintiff.

The plaintiff contended that the defendant’s non-disclosure of facts amounted to a MAE. The plaintiff further alleged that the defendants had manipulated Encelium’s second quarter results to make Encelium look more profitable than it actually was. The Court found that financial manipulation prior to execution of the agreement could lead to a MAE. The Court also held the defendants failure to meet sales forecasts to be a MAE. The plaintiff had also raised a claim that the defendants misrepresentation based on financial manipulation amounted to fraud. The Court found the plaintiff’s plea met the standards for common law fraud. Kerry E. Berchem of Atkin Gump while discussing this states, “The court held that OSI had pled the elements of fraud with sufficient particularity to satisfy the heightened pleading standards applicable to common law fraud claims and OSI also pleaded a claim for negligent misrepresentation based on the sellers’ alleged manipulation and concealment of financial information before the closing. As to OSI’s equitable fraud claim, however, the court determined that OSI did not make the necessary allegations of any special relationship of trust or confidence between OSI and the sellers, and therefore granted sellers’ motion to dismiss as to OSI’s equitable fraud claim[7]. The plaintiff had also contended that the defendant had violated the implied covenant of good faith and fair dealing. However the Court held that defendant’s obligations were governed by the Agreement and found no contractual obligations under the Agreement to support the plaintiff’s claim.

In the light of the paradigm shift in the enforcement of MAE clauses in Delaware, it becomes important to analyze the implication of MAE on mergers and acquisitions in India.

Material Adverse Effect – Indian Context

In India, we are severely restricted with regards to literature on MAE clauses in acquisition contracts in the Indian context, mainly due to a glaring lack of case laws commenting on the same. While there has been reference to MAE clauses in an acquisition agreement by courts in passing, there have been no judgments as of yet which deals with the applicability or enforcement of the clause.

The Supreme Court of India in Nirma Industries and anr. v. Securities Exchange Board of India,[8] despite allegations of fraud due to the company’s financial manipulation, did not find it as sufficient grounds for the investor to exit the transaction. Similarly, in Subhiksha Trading Services v. (G)[9] the Madras High Court held financial misrepresentations by a transferee company to be insufficient grounds to withdraw consent to a scheme of amalgamation. It must be noted that while the courts in both these cases did discuss MAE in spirit, they refused to allow the acquirers to walk away from their respective transactions due to consideration of different statutory provisions. In spite of the fact that both these judgments were on issues other than material adverse effect, and in neither case was a such a clause or enforcement of such a clause urged by the petitioners, the courts in both cases, through their ancillary observations, held that such acts of misrepresentation. Fraud or suppression of facts still did not amount to material adverse effect as these could have been known to the petitioners if they had applied greater diligence. Therefore the Indian courts have not recognized MAC to be a basis for a party to walk out of a transaction.

A significant feature of any agreement is the representations and warranties by the parties to each other. While certain information provided by the sellers may be verified and relied upon in view of the filings made by the company at various public offices, reliance is required to be placed on the representations made by the parties where no such verification is possible. Hence, in the event a material adverse change occurs, the buyer has a vested right to terminate the agreement. This naturally makes the drafting of the material adverse clause extremely significant from the point of view of the counsel of both the acquirer and the seller.

Drafting MAE clauses

It is necessary for a MAE clause to be defined in a manner that eliminates any ambiguity as to the meaning of the term material itself. The term ‘material’ must be defined in a manner in which it clearly denotes that such change affects the decision of the parties. The exact manner in which material must be defined would depend on the context of the agreement.[10]

It is possible for both parties to be subject to provisions containing a materiality standard. In such case, it would be necessary to clearly define materiality. The parties to an agreement may choose to limit the qualifications for a change to ensure that the transaction is closed without delay.[11] In case of a MAE that can occur in the closing conditions of a transaction, in such case it is important to ensure that the MAE clause is an incorporated condition and not as a separate representation[12].

The difference between having the MAE clause as an additional condition or as representation would be in its enforcement. In case the MAE clause is a representation, its breach would grant the party against whom such MAE has taken place, a cause of action for damages or claims. However, if the MAE clause is a part of the conditions precedent to closing, a breach would allow the party against whom the breach has been committed to void the contract.[13]

The standard of proof for a change to have MAE on the agreement is high, and the burden of proof would fall on the buyer. Although the buyer can try to shift the burden to the seller by explicitly stating so in the agreement, it is better for the buyer to identify objective criteria or metrics (such as financial or operational targets) and include them in the agreement, rather than relying on the standard formulation of an MAE condition to terminate a deal. On the other hand, it is possible for the seller to insert carve-outs in the MAE clause so that specific changes (such as changes in the economic or financial policies or laws of the country)which result in changes in projections etc. of the financial status of the seller company are not counted as an MAE.

It is to be kept in mind that the seller will not generally accept a very wide definition of an MAE. However, the buyer may try to negotiate so as to include changes in the ‘prospects’ of the company and may provide exceptions to the carve-outs proposed by the buyer so as to exclude any disproportionate effects on the target even with consideration for the carve-outs. Similarly, the buyer too cannot be expected to agree to a wide range of carve-outs and the seller may need to specify the same.


The change in approach of the Courts in Delaware seems understandable in the volatile economic situation witnessed globally and specifically the elements of financial manipulation found in the Osram case. With India fast emerging as a major economy, it is not inconceivable that in the near future several private equity and acquisition transactions could be affected in valuation by complex manipulations especially where such valuations are entirely based on earning projections.

It may be pertinent to note for the Indian judiciary that such changing times may require application of greater weightage on Material Adverse Effect clauses in acquisition contracts, in order to better protect the future acquirers from avoidable losses and debacles. From a drafting point of view, it would be desirable to clearly set out the terms of a MAE clause and its carve outs. Clearer MAE clauses with detailed position on what would constitute material adverse effect or an exhaustive list of clearly defined carve-outs with a broader primary definition could go a long way in protecting future acquirers.

Clearly defined MAE clauses across acquisition agreements would also set the stage for greater enforcement of such clauses by courts in India.

[2] Kenneth A. Adam, A Manual of Style for Contract Drafting, Second Edition, American Bar Association, Pg 162

[3]Andrew M. Herman and Bernardo L. Piereck, Revisiting the MAC Clause in Transaction:What Can Counsel Learn from the Credit Crisis?, Business Law Today, 2 August 2010


[5]789 A.2d 14 (Del. Ch. 2001)

[6]965 A.2d 715 (Del. Ch. 2008)

[8]CIVIL APPEAL NO. 6082 of 2008

[9]C.Ps. No. 239 and 240 of 2008

[10]Kenneth A. Adam, A Manual of Style for Contract Drafting, Second Edition, American Bar Association, Pg 152

[11]Id. Pg 154

[12]Id, Pg 157


Thomas Philippe []

Pingal Khan []

Mohar Majumdar []

PXV Partner Thomas Philippe was interviewed by Economic Times in relation to the  share purchase agreement between Japanese drugmaker Daiichi Sankyo and Ranbaxy Labs.

GT Thomas Philippe, partner at PXV Law Partners, said that the most unusual part of the agreement is that the knowledge of the company here has been narrowed down to mean just Malvinder Singh. “It is very surprising that no other senior managerial personnel was included for this purpose.”

The whole article can be accessed here:

RBI plans to allow bank loans for acquisition of stressed assets

One of the major issues affecting the M&A space in India is that companies cannot raise bank finance to fund acquisitions (what is known internationally as leveraged buyouts) since the same is expressly prohibited in India. 

In a discussion paper released on 17 December 2013,  titled ‘Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy‘, the Reserve Bank of India (“RBI“) has proposed several moves to address  the increase in non-performing assets and restructured accounts held by banks, owing to the economic slowdown during the recent years. One of the proposals of the RBI is to allow leveraged buyouts of financially stressed companies by specialised entities. Once the proposal is implemented, banks would be allowed to extend finance to entities- usually known as vulture funds- specifically put together for the purpose of acquisition of financially troubled companies. Banks would, however, be required to ensure that such entities are adequately capitalised.

RBI has invited comments on its proposals by 1 January 2014.

As mentioned above, presently, banks are not allowed to finance acquisition of promoter stake in Indian companies. As stated by RBI in its discussion paper, the underlying rationale for this position is that promoters should employ their own sources to acquire equity stake in companies and not undertake borrowings for the purpose.

RBI now proposes to change this policy and allow entities specializing in turnarounds to buy financially troubled companies with the help of bank loans.  This is one of the incentives proposed by the RBI to encourage private equity firms and other institutions to play a greater role in restructuring of troubled company accounts, as RBI expects these institutions not only to bring additional funds for restructuring but also to bring in expertise for management of the business unit in question.

Once effective, this policy is expected to attract global acquisition firms which have so far been focused on developed economies, to the Indian market.

RBI’s discussion paper can be accessed at:

 Neha Vijayvargiya


Mohit Abraham’s Interview in Power Today- Towards a neuclear powered India

PXV Partner Mohit Abraham has been quoted in the article, “Towards a Neuclear Powered India” on his views on India’s nuclear liability regime and why it is unique.

The same can be accessed here