Friday, November 15, 2013

Pre-emption rights in M&As get SEBI nod

To make mergers and acquisitions (M&A) more flexible, the Securities and Exchange Board of
India (SEBI) allowed shareholder agreements and articles of association of companies to have
contracts for pre-emption. This includes the right of first refusal, tag-along or drag-along rights.
The right of refusal gives one of the parties in an M&A deal the first option to buy out its partner
in the event of the latter wishing to exit from the agreement at a later stage. Tag-along is a contractual obligation used to protect a minority shareholder. If a majority shareholder sells his or her stake, then the minority shareholder has the right to join the transaction and sell his or her minority stake in the company. On the other hand, drag-along rights enable a majority shareholder to force a minority shareholder to join in the sale of a company. In addition, SEBI also allowed companies the use of call and put options with conditions. It said that the seller of the underlying securities should have been their owner for a minimum of one year from the contract date. The price of the underlying securities bought or sold on exercise of the option should be according to existing laws and the contract should be settled by actual delivery of the underlying securities.

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