India-UK Business Transfer Agreement Considerations

Given the nature of the transaction and based on the assumption of it being a slump sale not involving a transfer of shares via sale/purchase, the following points have been observed:

Instrument of Transfer: It is recommended to draft a conveyance deed since the stamp duty is lower when compared to other instruments of transfer. The above can be preceded by information memorandums/term sheets, due diligence, certified copies of documents, and external audits.

Consideration & Payment Terms:

Consideration: Acquirer to ensure pricing guidelines issued under RBI’s Master Direction No. 11/2017-18 for FEMA and Acquisition & Transfer of Immovable Property in India Regulations, 2018 are followed. In any slump sale transaction, there is always a debate on how the acquirer should regard the excess paid over the book value of the assets to the acquired. Whether such excess should be characterized by the acquirer in non-compete fees or goodwill or should such excess be simply spread over the assets by recording each of the assets at a higher value in its books. Parties to be mindful of the same. Payment Terms: Agreement to capture details on payment terms in matters of timelines/milestone-based payouts whether in tranches or otherwise along with the mode of payment of cash/wire transfers. Taxes: Capital gains will be applicable on the business acquisition for the parties that as to be accounted for as per the relevant rates. Since GST would not have to apply on a slump sale, other tax provisions would have to be incorporated with reference to the following templates- In the event of incorrect/inappropriate/wrong disclosures regarding taxation by the acquirer for the transaction entered between the parties, if the acquirer has been denied the input tax credit of any applicable taxes, the acquiree would make all necessary corrections as allowed by the law and cooperate with the acquirer in resolving any errors in an effective manner.

If the acquiree fails to do so and if the acquired has been denied the input tax credit of any taxes paid, the acquiree would make good the loss to the acquired for any taxes, interest, and penalty imposed on the acquired by the tax authorities. With respect to the amount payable under this agreement, the acquirer will withhold income tax as applicable and at such rates, as prescribed under the income-tax law.

However, if either party is liable for a lower withholding tax rate then they shall timely provide a valid certificate to that extent from the income-tax authority and that party will withhold taxes accordingly. This party shall provide necessary Tax Deducted at Source (hereinafter referred to as “TDS”) certificates as prescribed under the Income-tax Law in a timely manner for the taxes withheld. Payment of Registration Fees, Taxes & Stamp Duty: Each state has a different rate of stamp duty that may be fixed or on the actual value of the transfer of the ad valorem basis. In the case of a slump sale, since the entire business is going to be purchased, assuming that the business is domiciled in Maharashtra, the stamp duty shall be paid on the entire consideration as per Art. 5 (h) (A) (iv) & 25 of Maharashtra Stamp Act, 1958. Given the international status of the parties, the acquiree to print the agreement on stamp paper of the applicable amounts. Regulatory Approvals: British client to ensure that the applicable regulatory approvals from the following regulators are in place by the acquiree as a condition precedent to the payment: Central Government approval. RBI for route approval for ODI/FDI and sectoral cap gave the status of the foreign status of the acquirer. NCLT to approve the terms of this acquisition framed as the scheme of arrangement. If the acquisition exceeds 70 Mn GBP, it may require the approval of the Office of Fair Trading for the acquirer. CCI to approve no material adverse effect on the existing market that the acquiree is based within. SEBI to approve the merger in the event the company is a listed entity with compliance with the takeover code. ITD approval to give an opinion on the structuring of the deal including but not limited to tax compliance, dues (S.281 certificate), pending suits, MAT, business transfer pricing, etc. MCA & ROC for all corporate form filings and compliance. Board Composition & Investor Rights: British client can appoint its personnel as a foreign national to the positions of Women Director, Independent Director, Small Shareholders Director, Additional Director, Alternative and Nominee Director in the acquiree. He/she/they can also be appointed as a Whole Time Director or Managing Director subject to the compliance of rules given in Part 1 of Schedule V of the Companies Act, 2013.

Indemnity: To be kept in the favor of the acquirer with no capping against all losses, penalties, fines, legal and court fees, claims, and damages by the acquiree arising out of the acquiree’s breach of its representation and warranties, third-party IPR, failure to obtain approvals, consents, and licenses required to carry out the obligations of the agreement, negligence, fraud, willful misconduct, and omission that survives the term of the agreement. Dispute Resolution & Governing Law: Given the international nature of the transaction and location of the parties, it would be best suited for the British client to ensure incorporation of a multi-tiered dispute resolution clause with appropriate escalation and commercial soundness. The following mechanism could be used- 1st Tier-Dispute to be settled via discussions by a governance committee having mutual representations of the parties.

2nd Tier-If the dispute can not be settled by the 1st Tier, the dispute to be settled via mediation as per the London Court of Mediation Rules, 2012.

3rd Tier- If the dispute cannot be settled by the 1st Tier, the dispute to be finally be settled via arbitration as per the London Court of Arbitration Rules, 2012.

4th Tier- In the event of any appeal, the same can then be referred to an appellate arbitration panel consisting of three arbitrators, each appointed by one party and appointed arbitrators appointing the third arbitrator having experienced the relevant law and transactions. This 3rd arbitrator shall be the presiding officer of this arbitration panel.

Additional clauses to include governing law to be the laws of the United Kingdom with each party bearing the cost of presenting its own case. The dispute is to be subject to the exclusive jurisdiction of the courts of London with the right of either party to seek interim/injunctive relief from them.

Counterparts: Even though the clause is a boilerplate provision since the parties are international, the clause to incorporate an electronically signed agreement to hold the same validity as much as one that is physically signed.

Annexures: Agreement to ensure inclusion of the required number of annexures with the relevant documents associated with the transaction including but not limited to-

Valuation reports, financial, and taxation documents.

Corporate compliance and due diligence documents.

Mandatory filings and supporting documents.

Asset annexure with details.

Regulatory approvals and other consents.

Transaction plan, payout, and transfer mechanism.

Art: "The Businessman" by Jacob Lawrence