This Q&A guide gives an overview of legal framework and practice of mergers and acquisitions (M&A) in Nepal with a primary focus on private company transactions. It also provides information related to acquisitions by foreign investors. The information in this Q&A guide is accurate as of January 2018 but should not be relied upon as legal advice.
Q1. What are the common methods and current trends in transaction structuring?
Typical acquisition transactions involving private companies in Nepal are structured as:
- Share purchase: The most common type of transaction is share purchase for cash consideration. In this transaction the buyer purchases shares of the target company for cash consideration.
- Asset purchase: Asset purchase transactions are used if the buyer’s key interest lies in land or assets owned by the target and if the parties only wish to purchase a business unit. Typically, asset purchase involving land or physical assets can be easier to finance.
- Merger: This is a less common method of structuring of acquisition transactions. The Company Act also allows cash exit of certain shareholders of merging entity.
Choice of particular structure depends on due diligence, commercial and tax advice. Typically consideration is cash paid on completion and consideration of loan notes or shares are not common. Usually prices are fixed but sometimes adjustment mechanisms may also be used. Use of escrow accounts and retention of purchase price are also gaining popularity.
Q2. What does a common due diligence process involve?
Depending on the transactions, buyers usually conduct financial and tax due diligence undertaken by a licensed chartered accountant. However, undertaking legal due diligence is limited to mostly large, complex and international transactions. However, smaller transactions will also benefit from due diligence process.
Legal due diligence should involve review of (i) corporate records, (ii) agreements, (iii) legal issues relating to material assets, (iv) government approvals, and (v) other issues identified depending on the company. Any risk should be mitigated through contractual covenants or adjusted in the price.
Q3. What preliminary agreements are entered prior to the transaction?
A Memorandum of Understanding, Term Sheet, or Letter of Intent is generally entered into by parties prior to starting the due diligence process. The key parts of the agreement such as sale and pricing are legally not binding. Parties agree to a price, structure, and key terms of the transaction, subject to due diligence. Legally binding terms may also include exclusivity and confidentiality. Procedure of conducting of due diligence and sharing of information is also addressed.
Q4. What are the key terms of the definitive agreement?
Upon conclusion of the due diligence and agreement in pricing and commercials, parties prepare, negotiate and execute Share Purchase Agreement or Asset Purchase Agreement. The agreement usually contains the following terms:
- Operative clause
- Pricing and tax clause
- Representations and warranties
- Pre-closing and closing
- Conditions precedents
- Non-competition clause
- Governing law and jurisdiction
- Other boilerplate clauses
Q5. What other agreements are entered into?
A sale deed/transfer deed (called, likhat in Nepali) is also executed by the parties at closing in a share purchase transaction. Deed is usually printed in Nepali paper and also affixed with thumbprint of the seller.
Disclosure letters, escrow agreements, and waiver letters are also common in the transactions. The buyers also wish to enter into a shareholders agreement with the other shareholders at or prior to closing in case of a partial acquisition.
Q6. What are the typical approvals required to foreign buyers to purchase share in Nepali companies?
Foreign Investment and Technology Transfer Act 1992 governs foreign investment into Nepal. An approval from Department of Industry will be required for share transfers of companies involving foreign investment. Further, second approval from Nepal Rastra Bank is also now required. Sellers are also personally be present at the Department of Industry (or Nepalese embassy abroad) to certify that it has sold the shares.
The buyer is required to obtain an investment certificate from a bank in Nepal to evidence investment in Nepal. Because of this requirement the purchase price is routed through the account of target company to the sellers.
Q7. What are the trends for dispute resolution clauses?
Local transactions are governed by Nepalese law and usually subject to the jurisdiction of Nepalese courts. Arbitration clause specifying UNCITRAL Rules and conduct of arbitration by Nepal Council of Arbitration (NEPCA) is also gaining popularity. We recommend that arbitration clauses should be drafted to avoid delays in appointment of arbitrators.
For transactions requiring foreign investment approvals, transactions in respect of companies whose “fixed asset capital” is NPR 500 million (USD 5 million) can be governed by foreign law and dispute resolved as agreed by the parties. English, New York and Singapore laws are common with Singapore International Arbitration Centre being popular choice for institutional arbitration.
Please note that this guide is published for information only and should not be considered as legal advice. You are requested to seek legal advice for specific factual situations. If you need further information on this matter please Contact Us