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Do the Risks Outweigh the Rewards?

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India offers risk and reward. IndusLaw partner, Gaurav Dani and Saurav Kumar spoke on some of the key issues to think about in the context of an equity investment and the pitfalls to be aware of in structuring joint ventures in Tokyo earlier in April

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Do the Risks Outweigh the Rewards?

  1. 1. Do the Risks Outweigh the Rewards? The Legal Perspective Gaurav Dani Partner 13 April 2018
  2. 2. Overview | Introduction | Existing Legal Framework In India Impacting Foreign Investment | Evaluating Joint Venture Opportunities | Risks Associated with Joint Ventures | Building-in Commercial Protections 2
  3. 3. Introduction | Many multinationals have invested in India over the past two decades, and their experiences offer important lessons for companies that wish to enter or expand their activities | We have identified three guiding principles for helping companies navigate India's complex business and regulatory landscape - Understanding the regulatory regime - Evaluating joint venture opportunities in forensic detail - Identifying risks and building-in commercial protections 3
  4. 4. Existing Legal Framework In India Impacting Foreign Investment | Foreign Direct Investment - The Foreign Exchange Management Act,1999 regulates the inflow and outflow of foreign exchange in and out of India | Company Law - The new Companies Act, 2013 illustrates why it is important to understand the motivations of the regulators. Indian legislators appear to have been motivated by a desire to address several high-profile corporate scams that have occurred in India in recent years | Competition Law - Prohibition on combinations which have caused or are likely to cause an appreciable adverse effect on competition in India - Acquisition where assets/ turnover is in India (and exceeds specified limits) is subject to the scrutiny of Competition Commission of India, even if the acquirer/target are located outside India 4
  5. 5. Existing Legal Framework In India Impacting Foreign Investment | Intellectual Property Rights - Recent developments in the field of IPR in India are positive moves towards bringing the IPR regime in India at par with global standards | Arbitration - Amendments introduced to the Arbitration and Conciliation Act, 1996 for expeditious hearing as well as disposal of arbitration proceedings, making arbitration in India more convenient for foreign parties - The latest developments in the arbitration jurisprudence through recent court judgments reflect the support of the judiciary in enabling India to adopt best international arbitral practices 5
  6. 6. Evaluation of Joint Venture Opportunities | Selection of the best partner involves three main steps - formulation of and agreement on an initial business plan - conducting due diligence on the partner - determination of the manner in which day-to-day operations, corporate governance and business relations will be conducted | Conducting Due Diligence Exercise in India - Basic checks, such as examining the business license and checking creditworthiness, are relatively straight forward in India - Background check of key managerial personnel - Additionally, the filed accounts and details of legal actions are available as public record. Discreet checks can be conducted - Joint ventures have collapsed as a result of insufficient due diligence. Therefore, foreign companies must take great care with respect to these in advance 6
  7. 7. Risks Associated with Joint Ventures Case Analysis | Asia Foundation & Constructions Ltd v State of Gujarat - Issue: Whether the members of the JVA could be held jointly and severally liable for performance of construction work jointly undertaken, irrespective of internal division of work | Key Takeaways - Joint venture partners may be jointly or severally liable to third parties for the debts of the joint venture, claims from employees or even tax liability - The terms of JVA should be adequately designed to determine the extent of liabilities that may arise pursuant to each party’s commitment to the JV. Indemnifications should be suitably built in - Including exclusivity and non-compete agreements in the contracts - to prevent partners from abandoning their commitments if another attractive opportunity arises 7
  8. 8. Risks Associated with Joint Ventures Case Analysis | McDonald’s v Vikram Bakshi - McDonald’s signed a JVA in India with Connaught Plaza Restaurants Limited (“CPRL”) | Key Takeaways - Foreign businesses do not have to choose a single partner for all of India - Multiple joint partnerships can diffuse risk while providing regional insight into the market - Identify differences in decision making, long & short term strategy, hierarchies - JVA is not simply a document but rather an anticipation of future conflicts - Contracts should include clear protocols for decision making, conflict resolution, and exit strategies - Consult a legal advisor based in India to better understand the regulatory landscape and focus on drafting a contract, which protects partners in cases of dispute 8
  9. 9. Risks Associated with Joint Ventures Fiduciary Liability | Indian courts have taken divergent views on the issue of liability of directors and key managerial personnel for offences committed by a company - View 1: A director can only be prosecuted if there is sufficient evidence of his active role with criminal intent or where the statutory regime itself attracts the doctrine of vicarious liability of the director for offence committed by the company - View 2: The person responsible for the conduct of the business of the company alone, may be prosecuted for the acts of the company as there is no statutory requirement that such person cannot be prosecuted unless the company is also an accused | Key takeaways - Director indemnification clauses in shareholder and director agreements should cover directors for indemnification from any proceedings brought by a third party for both legal costs and liabilities incurred - The directors should specifically seek directors and officer's liability insurance protection 9
  10. 10. Risks Associated with Joint Ventures Mitigation | Construction of Transaction Documents - Transaction documents include a Joint Venture Agreement or Shareholders’ Agreement, Memorandum and Articles of the JV, trademark license or assignment agreement, technology transfer agreements - A Joint Venture Agreement will not bind the JV company unless its terms are included in the articles of the company - Secure the right to appoint and remove key officers, particularly those with a financial oversight function and whenever possible, buttress contracts with collateral security - Unsecured commitments are risky by definition, and partners should be particularly diligent in vetting potential partners that cannot provide collateral - The indemnity clause should be unambiguous and cover all losses 10
  11. 11. Building-in Commercial Protections Lessons from the Tata Docomo Case | This dispute centres around the Tata group dishonouring the shareholders’ agreement (the “SHA”) between Tata group and NTT Docomo Inc. (“Docomo”) in relation to the shares of Tata Teleservices Limited (“TTSL”) | Under the SHA, if TTSL failed to satisfy certain ‘Key Performance Indicators’, Tata group would be obligated to find a buyer for Docomo’s shares in TTSL at a pre-fixed price. However, the Tata group did not comply with this condition in the SHA | Docomo initiated arbitration proceedings against the Tata group before an arbitral tribunal in London (the “AT”) which passed an award against Tata group, awarding damages of around $1.17 billion to Docomo (the “AT Award”) | Tata group initially petitioned before the Delhi High Court opposing the enforcement of the AT Award | During the pendency of the petition, the parties amicably settled their dispute and filed a settlement agreement before the Delhi High Court | The Reserve Bank of India (the “RBI”) objected to such settlement on the ground that the remittance of amounts under the AT Award or the settlement agreement violated provisions of the Foreign Exchange Management Act, 1999 (“FEMA”) and RBI’s pricing guidelines 11
  12. 12. Building-in Commercial Protections Lessons from the Tata Docomo Case | The Delhi High Court, dismissed the RBI’s objections, upheld the validity of the AT Award and directed the parties to act upon the terms of the settlement on the following grounds - RBI not being a party to the arbitration, did not have the locus standi to oppose the enforcement of the AT Award - Tata group could have lawfully performed its obligation under the SHA by finding a non-resident buyer for Docomo’s shares - the AT Award involves payment of damages to Docomo and not the payment for sale of shares at pre-fixed price under the SHA | Key takeaway - The foreign investor should be mindful of the fact that any arrangement entered into with an Indian investee company should not violate any applicable laws - The agreements executed in relation to such arrangements should be drafted in a manner that it cannot be rendered illegal or void due to violation of any applicable laws 12
  13. 13. Building-in Commercial Protections Lessons from Ranbaxy Daiichi | In June 2008, Japanese drug maker Daiichi Sankyo (“Daiichi”) bought a 64% stake in the Indian pharmaceutical company Ranbaxy from the Indian promoters and other shareholders, for a consideration of INR 1,98,04,02,45,051 | In September 2008, the United States Food & Drug Administration (the “US FDA”) banned drugs manufactured in Ranbaxy‘s units in India from being sold in the US on the ground of gross violation of approved manufacturing norms under the US FDA | Later, the US Department of Justice (the “US DoJ”) moved a motion against Ranbaxy in a local US court alleging forgery of documents and indulging in fraudulent practice for obtaining approval from the US FDA | In 2013, Daiichi moved Singapore’s international arbitral tribunal (“SIAT”) against the Indian promoters for concealment and misrepresentation of facts in relation to the ongoing investigations by the US FDA on Ranbaxy’s drugs and sought compensation for losses | In 2014, Daiichi sold its stake in Ranbaxy to an Indian company, Sun Pharmaceuticals Industries Limited for a consideration of INR 2,26,79,00,00,000 13
  14. 14. Building-in Commercial Protections Lessons from Ranbaxy Daiichi | In May 2016, SIAT passed an order for payment of damages amounting to $400 million to Daiichi (the “Foreign Award”) by the Indian promoters | In April 2016, Daiichi filed a petition for enforcement and execution of the Foreign Award before the Delhi High Court which passed an order, in 2018, allowing enforcement of the Foreign Award and recovery of over INR 35,00,00,00,000 (including interest on the amount of Foreign Award and legal costs) by Daiichi, as damages, from the Indian promoters | Key takeaways - A foreign investor must carry out a thorough due diligence on the investee Indian company - The indemnity and arbitration and dispute resolution clauses in the agreement entered into between the parties should be carefully drafted to protect the investor from any liabilities arising out of actions taken prior to the investment 14
  15. 15. Gaurav Dani Partner Delhi gaurav.dani@induslaw.com LLM, Boston University (2001) LLB, University of Buckingham (1999) Admitted to practice in India, New York PRACTICE Mergers & Acquisitions, Fund Formation, Fund Investment, Joint Ventures & Collaborations, Capital Markets & International Offerings, Corporate & Commercial Advisory, Suneeth Katarki Partner Bangalore suneeth.katarki@induslaw.com B.A. LL.B (Hons), National Law School of India University, Bangalore (1996) Admitted to practice in India PRACTICE Fund Investment, Private Equity & Venture Capital, Mergers & Acquisitions, Fund Formation, Intellectual Property, Joint Ventures & Collaborations, Corporate & Commercial Advisory INDUSLAW JAPAN DESK KEY CONTACTS
  16. 16. Saurav Kumar Partner Delhi saurav.kumar@Induslaw.com LL.B., ILS Law college, University of Pune (2002) LL.M., University of Bristol (2003) Admitted to practice in India PRACTICE Joint Ventures & Collaborations, Mergers & Acquisitions, Private Equity & Venture Capital, Corporate & Commercial Advisory Ray Vikram Nath Principal Associate Delhi rayvikram.nath@induslaw.com B.A. LL.B., Symbiosis Law School, 2003 LLM: University of Pennsylvania Law School, 2009 Admitted to practice in India PRACTICE Mergers & Acquisitions, Joint Ventures & Collaborations, Private Equity, Projects and Project Financing, Corporate & Commercial Advisory INDUSLAW JAPAN DESK KEY CONTACTS
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