Gaining economies of scale through wider business operation and increase in market share of a business entity by combining the existing market and if needed by taking the business across the border and through diversification of business are imperatives for accelerating overall business expansion. The quicker ways of such acceleration is either to buyout another business or to amalgamate. This buyout refers to acquisitions and combining amalgamation of two or more companies refers to merger (M&A).
An ambitious CEO (Chief Executive Officer) , and owners/shareholders of any big corporate or SME (Small and Medium-sized Enterprise) must learn how to grow at the rate the global business is growing, or else they will fall back and at certain stage business may not be sustainable. If this is true, then the best choice they have is either to build or to buy a business. A smart CEO has to be very prompt to give due consideration whether he/she has enough time and other resources to build a business. If the answer is no, then the M&A is a better option. It not only saves time and money but also creates synergies. The investment banks, in due course, engage the law firms, CA (chartered accountancy) firms, bankers and other professionals depending on the nature of the M&A deals.
The main focus of the present article is on the M&A in financial sector.
The legal environment greatly influences the financial literature which eventually impacts the economy of a country. The field of M&A is governed by a set of commercial laws and other specific laws which together form a legal environment. The legal environment is required to be conducive for any corporate changes. M&A can be instrumental in bringing corporate changes. This calls for proper understanding and availability of the relevant corporate laws. The regulatory issues relating to M&A may be categorised as general regulatory issues and industry-specific regulatory issues. The first category encompasses all transactions in general. The latter encompasses laws involving specific transactions which require approval by concerned regulatory authority depending on the specific industry involved. Any laws relating to general regulatory issues and industry-specific regulatory issues require careful examination by the lawyers, accountants, and also buyers and sellers to ensure necessary compliances as well as due diligence. In conducting the due diligence, careful attention to legal matters, tax matters and financial matters is the key requirement. The due diligence is also essential in matters relating to material contracts, assets of the target companies, management of resources including human resource and other corporate matters like articles and memorandum of association, shareholders' list etc. Therefore, due diligence in M&A calls for a deep dive into the regulatory requirements and compliance at the same time.
In Bangladesh, legal environment in terms of general regulatory laws is more or less satisfactory. We have almost all the laws formulated. For example, The Competition Act, 2012, The Environment Conservation Act 1995, The Environment Court Act 2010, The Forest Act 1927, The Bangladesh Labour Act 2006, The Foreign Exchange Regulations Act, 1947 and The Companies Act, 1994.
The Companies Act provides for the provisions broadly applicable for M&A in all the companies in general. The Companies Act, though not exhaustive, provides for the provisions relating to acquisition/takeover transaction. More specifically, the provisions for power to compromise with creditors, and members and to facilitate arrangements and compromise are provided under sections 228 and 229 of the Act respectively. These sections of the Act provide guidelines for concluding arrangement with shareholders and provide for the jurisdiction of the court. Section 230 of the Act provides for the provisions of power to acquire shares of shareholders dissenting from the schemes or contract approved by the majority.
Necessary ordinances and rules are promulgated and notifications and orders published under the Securities and Exchange Ordinance, 1969. A series of Acts and Rules have been promulgated under the Bangladesh Securities and Exchange Commission Act, 1993. The Bangladesh Securities and Exchange Commission (Substantial Acquisition of Shares and Takeovers) Rule, 2018 is the most relevant rule for acquisition which replaced the same rule promulgated in 2002. Section 2(c) of the Bangladesh Securities and Exchange Commissions (Substantial Acquisition) Rule 2018 has simplified the procedure of substantial acquisition.
The environmental laws create obligations not only for the buyer but also for the seller in an M&A deal. Allocation of liability for any breach of the provisions of the law must be ascertained. The securities laws are applicable in a deal where one or both of the companies are listed with the stock exchange. Jurisdiction of approval over the M&A transactions involving change in ownership and management in a particular industry must be clearly defined in the relevant industry-specific laws i.e. The Bank Companies Act, 1991.
Clearly laid-down provisions of securities laws are essential for different types of transactions of the listed companies that are subject to mandatory pre-merger notification. The main transactions are asset acquisitions, share acquisitions, amalgamation etc.
The competition laws are applicable to protect any unhealthy competition. The Labour Laws deal with the employment, employment relationship, minimum wages, compensation for injuries to workers, dispute resolution, trade unions, health, safety, welfare, working conditions, termination etc of workers in the post-merger integration phase. Therefore, clearly formulated laws are essential in creating M&A-friendly legal environment.
The Bank Companies Act, 1991, The Financial Institution Act, 1993, The Bangladesh Telecommunication Act, 2001, Telegraph Act, 1885, etc fall in the category of industry-specific laws.
Section 58 of the Bank Companies Act, Section 243, Section 27 of the Financial Institution Act, 1993, Section 28 of The Financial Institutions Act; BRPD (Banking Regulation & Policy Department, Bangladesh Bank) Circular No.03 of March 04, 2007 provides adequate provisions on guidelines for M&A deals.
The M&A practice in Bangladesh is quite limited, and as such most stakeholders of prospective M&A market are not well aware about it. Experience shows that the merger proposals are placed before the Board of Directors of the respective companies for approval. After due approval from the Board, an application under Sections 228 and 229 of the Companies Act 1994 has to be filed before the High Court Division of the Supreme Court of Bangladesh. The court examines the application taking public interests into account. Public interests refer to consumer interest, government revenue and fate of the employees of the companies being merged. The court may also exercise its inherent jurisdiction to enable various stakeholders to express their concern about a proposed merger. The jurisdiction under Sections 228 and 229 is supervisory in nature as observed by the court. The court, indeed, shows deference to the business decisions of the M&A subject to compliance with legal requirements.
Now to focus on the main regulatory bodies, the BSEC is the key regulatory body for M&A transactions. However, the BSEC grants exemption to the companies under Public-Private Partnership (PPP), public limited companies having a total capital not exceeding Tk 10 million (one crore), and private limited companies having a total capital not exceeding Tk 100 million (ten crore) at any given time after making an issue of capital as envisaged in the BSEC order 2016. In addition to the BSEC, an M&A deal is also regulated by Registrar of Joint Stock Companies and Firms (RJSC), Bangladesh Telecommunication Regulatory Commission (BTRC), Bangladesh Power Development Board (BPDB), Bangladesh Bank (BB) and Insurance Development & Regulatory Authority (IDRA) depending on in which industry the proposed M&A falls.
If we critically examine the legal environment for M&A in Bangladesh, then virtually there is hardly any substantial gap in the legal framework now. Of course, there were gaps in the past, but by now many of them are already addressed.
However, there is a perception that there is a gap in the legal framework in terms of M&A. Though there is no need for a separate law for M&A, yet a Mergers and Acquisitions Act may be enacted consolidating the scattered provisions and guidelines and making reference of various industry-specific laws in it. This would have an important bearing on the perception of adequacy of the legal framework. The government, according to informed sources, has already taken an initiative to make the legal environment for M&A more conducive.
Dr. Md. Tabarak Hossain Bhuiyan, IM&A, is Managing Director & CEO of Prime Bank Investment Limited
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