Beyond Deal Closure: Navigating Post-Closing Integration Challenges in Indian M&A Transactions

Introduction : Closing structure and post-closing integration obligations in M&A transactions heavily influence the provisions of the operative transaction agreement and hence should be considered early on in the deal negotiation process.

The terms and conditions of an agreement vary depending on whether the transaction is structured as a simultaneous signing and closing or as a deferred closing, so it is very important to understand the difference between the two. A simultaneous signing and closing is advantageous to both parties because it eliminates the transactional risks during the interim period. A simultaneous closing eliminates risks during the interim period and also saves time by eliminating the need for negotiations. By contrast, in a deferred closing situation, more resources and time are required to negotiate pre-closing covenants and other provisions in the operative agreement. A simultaneous closing may not be possible in a deal involving a condition of obtaining buyer financing or stockholder approval, whereas a deferred closing situation involves termination provisions. The operative agreement usually contains a "bring down" closing condition that requires all of the representations and warranties to be true. The parties' obligations do not end at closing. Depending upon the facts of the transaction, the buyer may also be subject to post closing conditions such as providing officer insurance and compensation for the outgoing directors.

Difference between closing a transaction and completing integration

During post closing integration legal concerns can be overlooked easily as businesses focus on combining their operations and achieving the expected benefits of the transaction. But various obligations may continue even after the deal has been closed, involving the commitments, obligations and post closing covenants.

Post-closing integration is an important stage of a transaction and should not be viewed simply as a set of administrative tasks to be completed after the deal is finalised. It requires careful legal planning to ensure that the parties continue to meet their contractual commitments, clearly understand their respective responsibilities and address potential risks before they develop into disputes. This article explores some of the legal aspects that deal teams may overlook during the integration process, including contractual obligations, regulatory compliance, employment-related matters, intellectual property rights and data protection. It also discusses practical steps that can help businesses manage these risks and ensure a smoother transition after the transaction.

Legal Provisions

Most deal teams consider closing day as the end of the transaction. On paper, it is. But the legal work does not stop there. There are a number of areas of Indian law which people often overlook post-transaction completion.

Companies Act, 2013

After a share acquisition, various aspects of governance of the company usually need to be updated, for example, new directors appointed, signatories changed and statutory registers updated.

Sections 179 and 180 of the Companies Act determine the approvals needed by the board and by the shareholders, respectively. Section 117 of the Act requires resolutions and agreements to be filed with the Registrar of Companies. Sections 92 and 137 deal with the filing of annual return and financial statements, respectively.

That being said, not every transaction type will require the same level of compliance. A stock purchase is much simpler than a merger or amalgamation under Sections 230 to 232 of the Act which requires an approved scheme.

Competition Act, 2002

Sections 5 and 6 of the Competition Act determine whether a transaction constitutes a “combination” requiring the approval of the Competition Commission of India.

Most crucially, if approval is required, it has to be obtained before closing and not after  the transaction has been completed. Many transactions will be below the prescribed thresholds or qualify for exemptions and therefore approval will not be required. However, it is important to make sure that any CCI conditions or obligations continuing after the transaction’s completion are taken into account.

FEMA, 1999

If the transaction involves foreign investment, then the Foreign Exchange Management Act, 1999 and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, as amended, become relevant.

The post-closing obligations under these rules are determined by a number of factors including the type of investor, the sectors in which the target company operates and the route of investment. The obligations can range from reporting to the Reserve Bank of India to following certain sector conditions.

This does not apply to a purely domestic transaction, but nevertheless it is important to check what rules applied as at the date of the transaction.

Indian Contract Act, 1872

Section 37 of the Indian Contract Act requires the parties to perform their obligations under the contract. Section 62 deals with novation and alteration and Section 73 provides for compensation for breach of contract.

It is commonly assumed that a change in ownership means that every contract must be re-negotiated. That is simply not true. A stock purchase does not assign any of the company’s contracts to a third party.

What matters is the exact wording of each agreement and clauses relating to assignment, change of control and termination. Wanting all group contracts to use a similar format is a commercial requirement, but it is not legally required.

Employment Laws

The employment analysis is largely dependent on the type of transaction. In a share sale, the employer remains the same, the employees continue to work for the same legal entity and their employment remains otherwise unaffected.

However, in a business transfer or where the legal employer changes, more complex issues arise. For example, issues around continuity of service, accrued benefits, notice requirements and employee consent can arise.

It is important to review the Industrial Relations Code, 2020 as well as employment contracts, standing orders and benefit policies. It is also important to take notice of the commencement notifications and transitional provisions as the new labour codes are not fully operative at this time.

Employees do not migrate from one employer to another and all employees do not need to sign up for fresh employment contracts.

Trade Marks Act, 1999 And IP

Sections 37 to 45 of the Trade Marks Act, 1999 deal with assignment and transmission of trademarks.

A common error is to conflate two separate transactions, namely, buying a company that owns some intellectual property and buying the intellectual property itself. These have very different legal consequences.

Post-transaction, the buyer should identify who actually owns each piece of IP, as it may be owned by the target company, a group company or even a third party. In addition, any existing licence agreements should be reviewed and it may be necessary to update or record certain IP registrations.

IT and Data Protection

Customer databases, employee records and shared IT systems often come with legal obligations.

During integration, new users may need to be granted access to IT systems, databases may need to be integrated or data used for new purposes. Prior to granting access or using any data, it is important to ensure that confidentiality obligations and other obligations relating to security and access controls are reviewed.

The Information Technology Act, 2000 applies here, as does the Digital Personal Data Protection Act, 2023. However, it is important to check what provisions of the new data protection law have actually started to be operative as a new law is not automatically fully operative as soon as it is passed.

Legal Analysis

A. Contractual Consents and Change-of-Control Clauses

Not all commercial relationships will continue after a deal, as many contracts include change-of-control, assignment or termination clauses which become operative upon a change in control. If such contractual provisions are not reviewed and addressed prior to a deal closing, the acquiring entity can find itself in disputes or unable to rely on a counterparty for critical commercial relationships.

Indian law starts its analysis from the contract itself. The Indian Contract Act, 1872, binds the parties to a contract to perform their obligations as agreed, and it is thus the language of the contract that determines rights and remedies. A long-term supply agreement with a termination right upon a change in control of the buyer can give the supplier such a right simply by reason of the acquisition. There is no requirement that a contract be novated or assigned to the new owner for the change-of-control clause to become operative.

A common pitfall arises from the premature action by the integration team which, in seeking to integrate operations, commences negotiations with suppliers or revises procurement strategies without regard for the applicable contract provisions. Failure to secure required consents can result in operational interruption and the commercial rationale for the transaction being undermined.

The deal team should therefore consider conducting a post-closing review of all material contracts to identify those requiring consent or notice to counterparties, and to ensure that the appropriate parties (and/or their advisers) are aware of their obligations and responsibilities. A practical approach would be to maintain a log of such actions and a record of any items still outstanding.

B. Corporate Governance and Statutory Compliance

The acquiring entity will typically seek to refresh the board of directors of the acquired entity as well as its authorised signatories, internal governance and approval processes and reporting lines. While such actions are clearly business decisions, there are statutory obligations that must be met in order to give effect to these actions.

The Companies Act, 2013 provides for the powers of the board, the documentation of resolutions and the filings with the Registrar of Companies that must be made in connection with specific actions. Each of these matters will depend on the nature of the action being taken and the requirements specified in the Act.

A few examples of the type of actions that may be required are:

A. Board and director appointments and terminations: Appointments and terminations of directors or other key managerial personnel must be documented and reported to the Registrar within the prescribed time (typically 30 days of the change, using the appropriate e-form). An internal record of these changes is not sufficient.

B. Documentation and filing of resolutions: Certain approvals, particularly those relating to special resolutions, require documentation in the form of resolutions by the members of the board and filing with the Registrar of Companies within 30 days (Section 117). Failure to file documents within the stipulated timelines can result in costs and penalties.

Relevant Case Laws

In Niranjan Shankar Golikari v. The Century Spinning and Manufacturing Co. Ltd., AIR 1967 SC 1098 : The Supreme Court upheld the restrictions applicable during the contractual period, finding them reasonable and necessary to protect the employer's interests.

Vodafone International Holdings v. Union of India (2012) 6 SCC 613 : Indirect transfers of Indian assets, and the later retrospective amendment, which still shapes how deals are structured.

Practical Implications

Closing the deal is never the end of the legal work. After the contracts are signed, it is the responsibility of the teams to ensure that all the obligations that were a part of the deal are followed and carried out. Those companies that view integration as a risk management issue and not an end in itself are more likely to avoid the disputes and liabilities that arise from misinterpretation long after the deal is closed. This way the new company can reach the anticipated goals and objectives of the transaction.

Conclusion

Success of an acquisition relies not only on successful closing of the deal but also on the parties’ ability to manage their legal obligations during the post-closing period. Taking the post-closing integration process into account from the beginning allows the deal teams to avoid unnecessary risks and protect the value of the acquisition, as well as help to make a smooth transition of the newly acquired business.

Author: Kaavya Srivastava in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney