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TO PARTNER OR TO ACQUIRE?

Cross-border alliances between companies are a fact of modern business. Such alliances are particularly relevant today because the ability to create and sustain global collaborations are vital for companies to compete and be profitable.

Two commonly recognized forms of collaborations are joint ventures and acquisitions.

In India, a joint venture is generally understood as a technical and financial collaboration between two existing companies. Typically, in a joint venture, one foreign company comes together with an Indian company to form a third Company, either a private or public limited company, and hold agreed portions of its share capital. On the other hand, an acquisition is a complete takeover of a company, either through a purchase of shares, assets or the entire business.

As joint ventures and acquisitions differ greatly in their utility, one of the most important decisions for any company is whether or not a joint venture will be best suited to achieve its corporate goals, as opposed to an acquisition or simple organic growth. A company that needs international technology which has not been implemented in India can consider creating a joint venture with a foreign company that has such technology. On the other hand, an acquisition may be better for a company that seeks to gain market share or an exclusive distribution channel.

Structurally, a joint venture offers significant contractual support in respect of coordination and co-operation with a partner and, at the same time, alleviates the integration challenges presented by an acquisition. Instances when a joint venture is preferred to an acquisition are:

  1. When the assets are difficult to separate. Assuming that a company manufactures two different products from one factory. If an acquirer were to buy out such a company, it will be saddled with assets that it does not need. Therefore, if a joint venture is arranged, the required assets can be structured to flow into the joint venture company without the other undesired assets.
  2. When a full acquisition will increase management costs. In a corporate acquisition, the acquirer acquires an existing corps of employees having their own routine and culture. Integrating such employees can prove difficult.
  3. When valuation is difficult. A joint venture is an effective and easy solution when the valuation of a target company is difficult.
  4. When legal or regulatory constraints make an acquisition difficult. Generally, joint ventures have lesser regulatory constraints easier to put in place. Assuming that a joint venture is the preferred mode of alliance, one issue that must be dealt with at the contracting stage is control and management of the joint venture company. The shareholders’ agreement can prescribe the number of directors on the board, the quorum for board meetings and general meetings, the mode of day-to-day management of the company, the procedure to be followed on the bankruptcy of a joint venture partner, etc. To prevent a deadlock, the chairman of the board of directors can be given a casting vote.

Protecting confidential information is very important in joint ventures. To protect sensitive business information from being divulged to others, confidentiality and non-disclosure agreements must be entered into prior to commencing negotiations.

Relevant clauses should also be incorporated in the shareholders’ agreement. Indian courts enforce such agreements and grant injunctions on adequate proof of breach or proposed breach. In many instances, companies route their investments into an Indian joint venture company through an offshore tax jurisdiction. India has double taxation avoidance agreements (“DTAA”) with many countries. Many foreign companies route their investments through Mauritius because under the India-Mauritius DTAA, a Mauritius resident does not pay any capital gains tax on a transfer of shares of an Indian company. Cyprus is another offshore destination gaining popularity.

On the flip side, a joint venture is also susceptible to various other hazards such as misappropriation of knowledge, hold-up by the joint venture partner, etc., which may make an acquisition more attractive. Structuring an acquisition so as to optimize tax and operational benefits is extremely important. For example, amalgamating two companies by following the procedure under the Indian Companies Act,  can save capital gains tax that may otherwise be applicable on an asset or share acquisition deal. However, the court procedure can be long drawn and requires compliance of a number of procedural formalities. Likewise, although a share purchase transaction can be completed fairly quickly, it requires a much higher level of due diligence on the company because, effectively, the buyer of the shares becomes the owner of the company and inherits all its liabilities also. As such, no compromise should be made on due diligence, and it is imperative to require the seller to resolve all company compliance matters before closing. An asset purchase transaction attracts capital gains tax on the assets, and is usually the easiest to close. An acquisition of a listed company can trigger the Securities Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the “Takeover Regulations”), as amended from time to time. If this occurs, the Takeover Regulations have to be followed and an open offer has to be made to at least 20% of a target company’s existing shareholders. In a buoyant stock market, it can, sometimes, be difficult to successfully close an open offer. Further, in cross-border acquisitions, it is important to comply with the government’s foreign investment regulations. Various industry sectors in India such as telecommunication, banking, insurance, aviation, defence, etc. are restricted to foreign investment, and compliance of sectoral caps and sector specific guidelines are imperative. The Vodafone-Hutchison deal is a classic example of the importance of complying with foreign investment regulations and obtaining the requisite government approvals at the very beginning. Otherwise, the foreign investor runs a high risk of post-closing scrutiny. On the anvil is a competition law, similar to the Hart-Scott-Rodin Act in the US and EU competition legislation. Once notified, most mega mergers that have an adverse effect on competition or cross a certain turnover threshold in India or abroad will have to be reported to the Competition Commission (“CC”). The CC will have to assess the impact of the merger on competition and public interest in India, and will have the authority to either approve or disapprove it.

Therefore, the decision between a joint venture and an acquisition should be an informed one based on objective business criteria.

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Protect Your Ideas with IP Laws!

God gifted a wonderful thing called Brain to Man and Mother Nature endowed him with the abundant physical and biological resources on the earth. Man started creating his own world by application of his brain or mind and by utilization of these natural resources. Man has also been bestowed with imagination and creativity. With his imagination and creativity, he has been producing various articles or products for his needs, comfort and convenience. In the earlier era, the creations and inventions by him fell in a public domain. These were the common properties. Anybody could use and copy these creations and inventions without any restriction, reservation or payment. However, with the passage of time, the importance and value of these creations was realized. The commercial aspect started playing a significant roll in these creations. By end of Twentieth Century, the things created and invented by the human mind were recognized as an intellectual property of the owner .The owner’s right over these properties was accepted and is known as an

Intellectual Property Right (commonly called I.P.R.). A new set of laws called Intellectual Property Right Laws, were enacted to protect these property rights. These I.P.R. laws provided a protection to the owners under different categories and names like Patents, Industrial designs, Copyrights, Trade- Marks etc.

Why Intellectual Property Rights?

The intellectual property rights were essentially recognized and accepted all over the world due to some very important reasons. Some of the reasons for accepting these rights are:-

  1. To provide incentive to the individual for new creations.
  2. Providing due recognition to the creators and inventors.
  3. Ensuring material reward for intellectual property.
  4. Ensuring the availability of the genuine and original products.

Kinds Of Intellectual Property Rights:

The knowledge of intellectual property rights is must to a common man. A common man everywhere and every time come across the things created, invented, discovered and produced by some human mind. A design of a house, the material used in a house , its furnishings like a carpet, sofa, fridge ,television, telephone, paintings, photographs, wall clock, the articles of daily use like a pens, books, the newspapers ,tissue papers, shoes etc ; the things that are worn by him like Jeans ,T-shirts , trousers, hats ties , shoes etc ; the items of conveyance like cycles, cars, bikes etc…The list is endless! Almost all the things that surround a common man are one way or other, property intellectual properties of some one. Somebody has spent his time, money and energy to invent and create them. Therefore, these all common things are intellectual property of someone and are protected by law.

These items of intellectual properties can be classified into two main categories:

  1. Industrial Property items
  2. Copyright and related rights items.

The industrial properties items include all sort of inventions, trademarks, industrial designs, and geographic indicators of source. The copyrights and related rights items include all literary works which range from articles, news-paper items, novels, story books, poetry books etc… The drawings, photographs, paintings, architectural design, music, dance, films and artistic performances.

The industrial property items are found all around us. All inventions are covered under this category. An invention has been defined as a process or a product which provides a new way of doing some thing or provides a new solution to a problem. Inventions are protected by the Patents. The owner of inventions can get his invention registered under a Patent. A Patent is granted for a period of 20 years form the date of filing the application of patent. After this period the invention is available to all for commercial exploitation and it becomes public property.

Some of the products we use in daily life are protected by Trade-mark laws. A Trade- mark can be patented like invention and industrial designs. The trade mark can be combination of words, letters, numbers, drawings, images, symbols, and even sounds. The trademarks not only protect the owner rights but also required for consumer to have confidence in the product purchase by him. The reputation and quality are also associated with trade-marks. The trade-marks are generally registered for seven years but they can be renewed indefinitely by applying again and paying the required fee.

A design is the aesthetic or the ornamental aspect of an article. The design can be two-dimensional like patterns, lines or colors. They can be three-dimensional like surface or shape of an article. These designs are made to look things attractive and beautiful. They also have commercial value. Due to these reasons, the industrial design is protected. One has to register this design against limitation and un-authorized copying. The protection is provided for five years and it can be renewed for fifteen years.

Some of the products we use have association with geographical indicators of source. The things like Basmati rice of Dehradun, Champagne of France, Darjeeling tea etc. are the product which can be protected by laws and international agreements because they are the geographical indicators of source.

The Copyrights are provided for items like literary, musical, artistic works like songs, musical scores, poetry, paintings, sculpture, films, architecture, maps, technical drawings; computer programs, data base etc are provided to the creators. Copyrights provide exclusive right to the creator to use or authorized other to use their workers. The reproduction in various forms, copying, printing, recording, public performance or adaptation are prohibited. This right provides economic right to the creator that is the financial benefit for a lasting period of fifty years after the creator’s death.

A common man comes across literary, artistic, musical works in his daily life. The literary works include novels, short stories, screen play, nonfiction works, news papers, history, biography, magazine, articles, encyclopaedias; dictionaries, computer programs, data bases, and others published works. The artistic works which are important to a common man include paintings, drawings, lithograph, etching, photographs, sculpture, films, videotapes, videodisk etc. The musical works include songs, lyrics, recorded on a compact disk, broadcasted on radio or performed in public are covered 100 years copy rights. The architectural works includes the designs, drawing and plans. The furniture is protected under industrial design whereas toys are protected under industrial design and copy frights.

Even the traditional craft items like hand- woven articles like carpets, cotton bed covers can also be registered for protection as an Industrial design. The protection of indigenous and traditional knowledge, folklore, culture and innovations are the some of the latest entries in the field of intellectual properties rights.

(Written & Published on September 2007 By Mr. Samar Inam Khan at http://legalexpertsindia.blogspot.com)