Sterlite Industries Ltd's buyout of Asarco LLC
The Sterlite Industries (India) Ltd’s $1.7 billion Asarco LLC buyout deal had joined the league of 10 biggest-ever merger and acquisitions deal in the year 2009. This acquisition was different from standard merger and acquisition deals where a buyer purchases a company or an asset from the seller as Asarco LLC had gone out of control of its parent company, Grupo Mexico, when the company filed bankruptcy in 2005. The independent Asarco board had put up the company on the block and Sterlite Industries (India) emerged as the highest bidder through an auction. Through this paper the author would try to analyze the whole case and deal with the US Bankruptcy procedure for asset acquisition. This paper will also give a brief overview of Indian and US corporate and securities laws which are generally applicable when an Indian company acquires a US company.
The term ‘buyout’ has not been defined in any statute. In corporate finance buyouts belong to the area of mergers and acquisitions (M&A). The purchase of controlling percentage of company’s shares is known as buyout. And, in more general term it describes the acquisition of a business or a part of it.
An acquisition or takeover is the purchase by one company of controlling interest in the share capital, or all or substantially all of the assets and/or liabilities, of another company. An acquisition may be defined as an act of acquiring effective control by one company over assets or management of another company without any combination of companies. Thus, in an acquisition two or more companies may remain independent, separate legal entities, but there may be a change in control of the companies.
When an acquisition is 'forced' or 'unwilling', it is called a takeover. But, when managements of acquiring and target companies mutually and willingly agree for the takeover, it is called acquisition or friendly takeover.
Acquisitions may be by way of acquisition of shares of the target, or acquisition of assets and liabilities of the target. In the latter case it is usual for the business of the target to be acquired by the acquirer on a going concern basis, i.e. without attributing specific values to each asset/ liability, but by arriving at a valuation for the business as a whole.
2. About the Parties
(i) Sterlite Industries (India) Limited (“Sterlite”)
Sterlite is India’s largest non-ferrous metals and mining company with interests and operations in aluminum, copper and zinc and lead. It is a subsidiary of Vedanta Resources plc; (“Vedanta”) a London-based diversified FTSE 100 metals and mining group. Sterlite has world class copper smelter and refinery operations in India. It’s main operating subsidiaries are Hindustan Zinc Limited for its zinc and lead operations; Copper Mines of Tasmania Pty Limited for its copper operations in Australia; and Bharat Aluminium Company Limited for its aluminium operations. Sterlite is listed on the Bombay Stock Exchange and National Stock Exchange in India and the New York Stock Exchange in the United States.
(ii) Asarco LLC (“Asarco”)
Asarco, formerly known as American Smelting and Refining Company, is currently the third largest copper producer in the United States of America. Originally organized in 1899 as American Smelting and Refining Company, Asarco has operated for over 100 years—first as a holding company for diverse smelting, refining, and mining operations throughout the United States and now as a Tucson-based integrated copper-mining, smelting, and refining company. The Company operates mines, mills and a smelter in Arizona and a smelter and refinery in Texas. Asarco is one of the largest nonferrous metal producers in the United States with approximately 2600 employees.
In 1999, Grupo Mexico, the largest mining company in Mexico, acquired Asarco, which held as one of its key assets the controlling interest (54.18%) in Southern Peru Copper Company (“SPCC”), a publicly traded Peruvian copper company.
In 2000, Grupo Mexico formed Americas Mining Corporation (“AMC”) to include its subsidiaries Asarco, SPCC and Minero Mexico. Thus, the corporate structure of Grupo’s ownership of Asarco is as follows: Grupo wholly owns AMC, AMC wholly owns Asarco.
On February 2, 2007, Asarco brought claims in the District Court against AMC seeking to, among other things; avoid the transfer of the stock of SPCC as a fraudulent conveyance.
Asarco, and its predecessor and related companies were involved in active mining, smelting and refining operations for more than 100 years which resulted in extensive contamination at over 100 sites in nineteen states across the country. In addition to the liabilities identified by the United States at 38 sites, environmental liabilities were asserted by nineteen state governments and several private parties. Asarco filed for protection under Chapter 11 of the U.S. bankruptcy code on Aug. 9, 2005.
At the time of its filing, the Asarco case was the largest environmental bankruptcy case in history with total environmental liabilities in the billions of dollars.
3. The Buyout Battle
(i) Sterlite-Asarco’s First Agreement
On May 31st, 2008, Sterlite and Asarco had signed a definitive agreement for the sale to Sterlite of substantially all the operating assets of Asarco for $2.6 billion in cash. The agreement was subject to the approval of the U.S. Bankruptcy Court for the Southern District of Texas, Corpus Christi Division. It was settled that the asset acquisition would be financed by Sterlite through a mix of debt and existing cash resources.
The integrated assets to be acquired included three open-pit copper mines and a copper smelter in Arizona, US and a copper refinery, rod and cake plant and precious metals plant in Texas, US. The asset acquisition was on a cash free and debt free basis. Sterlite agreed to assume operating liabilities but not legacy liabilities for asbestos and environmental claims for ceased operations.
The sale agreement resulted from a plan sponsor selection process in which Sterlite and several other entities participated over many months. Bidders submitted offers in late April and the selection of the highest and best bid occurred on 23 May, 2008. Grupo Mexico was also one of the bidders in the fray. The selection process carefully followed a procedure supported by Asarco’s creditors and approved by the U.S. Bankruptcy Court for the Southern District of Texas. An independent court appointed examiner also closely observed the bidding process.
Asarco was considered to be a logical and strategic fit with Sterlite’s existing copper business and was expected to create significant long term value for all stakeholders through:
· Leveraging Sterlite’s proven operational and project skills to develop and optimize Asarco’s mines and plants;
· Access to attractive mining assets with long life;
· Geographic diversification in the North American market; and
· Stable operating and financial platform for Asarco.
In June 2008, a takeover battle began when Sterlite’s $2.6-billion deal for Asarco was rivaled by a $4.1-billion counter offer from the latter’s promoter, Grupo Mexico.
Sterlite later lowered the offer amid the recession, when Grupo had withdrawn from the takeover bid. On October, 14, 2008 Asarco terminated the agreement citing the reason of Sterlite’s repudiation of the agreement.
(ii) Sterlite-Asarco’s Second Agreement
On March 7, 2009, Sterlite entered into a new agreement with Asarco for the purchase of substantially all the operating assets of Asarco. It was again agreed that the asset acquisition would be financed by Sterlite through a mix of existing cash resources and debt, as required.
The purchase consideration comprised (a) a cash payment of US$ 1.1 billion on closing; and (b) a senior secured non-interest bearing promissory note for US$ 600 million, payable over a period of nine years. The consideration being paid was towards the gross fixed assets and working capital of Asarco.
This agreement attracted a rival bid from Grupo Mexico. Grupo Mexico offered $2.2 billion in cash and a $ 280 million one year note payable to the asbestos creditors. Sterlite later revised its offer to $2.1 billion to match the competitive bid.
(iii) Grupo Mexico’s win
In August 2009, following lengthy litigation, the U.S. Bankruptcy Court for the Southern District of Texas held a two-week hearing on competing plans of reorganization for Asarco that would allow the company to be purchased out of bankruptcy. During this hearing, two competing plans (the Grupo Mexico’s plan and the Asarco’s Sterlite backed plan) emerged that proposed to pay creditors in full with interest.
On Aug. 31, 2009, Judge Richard Schmidt of the U.S. Bankruptcy Court in Corpus Christi issued a recommendation to the U.S. District Court for the Southern District of Texas to confirm the plan proposed by Asarco’s parent company-AMC and to reject Asarco’s plan. U.S. District Judge Andrew Hanen in Brownsville accepted Judge Schmidt’s recommendation and confirmed Grupo Mexico’s plan on Nov. 13, 2009.
On Dec. 9, 2009, Grupo Mexico met its funding obligations and the plan was consummated. Additionally, the environmental payment and property transfer obligations outlined in the numerous settlement agreements, which had been approved by the Bankruptcy Court over the course of the litigation, were complied with.
Main Reason of Grupo Mexico’s win
Judge Richard Schmidt of the U.S. Bankruptcy Court was of the opinion that both the reorganization plans were confirmable. However, Grupo Mexico backed plan was funded with sufficient cash to pay the creditors in full whereas Asarco’s Sterlite backed plan relied in part on the proceeds of a legal judgment against Grupo Mexico that was under appeal.
(iv) Sterlite’s appeal against District Court’s order
Sterlite joined hands with the biggest US labour union, United Steelworkers Union, (“Appellants”) and appealed against district court's order confirming the reorganization plan proposed by Grupo Mexico. On November 12, 2010, United States Court of Appeal dismissed the appeal stating that the Appellants had not sought a stay on the district court’s order and the plan had been substantially consummated with the distribution of billions of dollars to pay creditors' claims.
4. Acquiring assets through US bankruptcy procedure
To have a better understanding of what procedure was followed, for the acquisition of Asarco’s assets, in the above case, we need to be aware of the issues which are generally considered when assets are acquired through US bankruptcy procedure.
Issues to consider
Here are some things to know and issues to consider when contemplating acquisitions of assets through US bankruptcy procedures:
(i) How Chapter 11 works
Chapter 11 is typically used to reorganize a business, which may be a corporation, sole proprietorship, or partnership. A corporation exists separate and apart from its owners, the stockholders. The chapter 11 bankruptcy case of a corporation (corporation as debtor) does not put the personal assets of the stockholders at risk other than the value of their investment in the company's stock.
A chapter 11 case begins with the filing of a petition with the bankruptcy court serving the area where the debtor has a domicile or residence. A petition may be a voluntary petition, which is filed by the debtor, or it may be an involuntary petition, which is filed by creditors that meet certain requirements. The voluntary petition will include standard information concerning the debtor's name(s), social security number or tax identification number, residence, location of principal assets (if a business), the debtor's plan or intention to file a plan, and a request for relief under the appropriate chapter of the Bankruptcy Code. Upon filing a voluntary petition for relief under chapter 11 or, in an involuntary case, the entry of an order for relief, the debtor automatically assumes an additional identity as the “debtor in possession”. The term refers to a debtor that keeps possession and control of its assets while undergoing a reorganization under chapter 11, without the appointment of a case trustee. A debtor will remain a debtor in possession until the debtor's plan of reorganization is confirmed, the debtor's case is dismissed or a chapter 11 trustee is appointed.
Generally, a written disclosure statement and a plan of reorganization must be filed with the court. The disclosure statement is a document that must contain information concerning the assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment about the debtor's plan of reorganization. The contents of the plan must include a classification of claims and must specify how each class of claims will be treated under the plan. After the disclosure statement is approved by the court and the ballots are collected and tallied, the court will conduct a confirmation hearing to determine whether to confirm the plan.
(ii) The Chapter 11 debtor in possession
Section 1107 of the Bankruptcy Code places the debtor in possession in the position of a fiduciary, with the rights and powers of a chapter 11 trustee, and it requires the debtor to perform of all but the investigative functions and duties of a trustee.
(iii) The U.S. trustee or bankruptcy Administrator
The U.S. trustee plays a major role in monitoring the progress of a chapter 11 case and supervising its administration. The U.S. trustee is responsible for monitoring the debtor in possession's operation of the business and the submission of operating reports and fees.
(iv) Deal with management
Unlike most insolvency the board and management retain control after a US Chapter 11. However, the court, on motion by a party in interest or the U.S. trustee, shall order the appointment of a case trustee if there are reasonable grounds to believe that any of the parties in control of the debtor participated in actual fraud, dishonesty or criminal conduct in the management of the debtor or the debtor's financial reporting or if such an appointment is in the interest of creditors, any equity security holders, and other interests of the estate.
(v) It’s an auction
No sale is final until approved by court order. Even though there may be official bidding procedures with deadlines for submission of offers, they occasionally would be ignored as it is the highest value to the bankruptcy estate that counts in the end, when the court enters its order.
(vi) Bidding protections
Standard M&A bidding protections such as break-up fees and expense reimbursement are available for the first, “stalking horse” bidder. However, separate court approval of these procedures is required in order for them to be enforceable.
Creditors and other parties in interest are entitled to know, with few exceptions, a buyer’s identity, the assets being acquired, terms of sale and other information. Some companies might prefer not to disclose information under certain circumstances. Buyers should assume news media access as well.
(viii) No side deals
Transparency means that all “side deals” must be disclosed, whether with management or other potential bidders. Once there is an official auction sale, agreements between competing bidders at the sale are prohibited by statute.
(ix) Creditors interests first
A US Chapter 11 bankruptcy case is designed to maximize creditor recoveries. The interests of creditors are always superior to subordinated creditors and to preferred and common shareholders. Shifting fiduciary duties of the target’s board to include duties to creditors often creates additional leverage for a quick sale.
(x) Bankruptcy benefits
Closing an acquisition in a US bankruptcy case can have several ancillary benefits, including the possibility of avoiding onerous contracts while overriding prohibitions for the assumption of beneficial contracts and licenses, leaving liabilities behind, limiting successor liability and, in certain circumstances, obtain other tax and labour advantages.
(xi) Chapter 11 Plan sales
A purchase can be negotiated as part of a reorganization or liquidation plan for the target company that is a Chapter 11 debtor. Plan sales can have tax advantages, offer greater flexibility on deal structure (including issuance of stock with securities laws exemptions and statutory mergers), but they can take more time, cost more and require creditor voting. Acceptance of a plan requires the vote of two-thirds of the value and a majority of the number of creditors voting in each creditor class. At least one impaired class must vote in favor for the court to “cram down” the sale, or compel rejecting classes to accept the plan, if the plan is held to be “fair and equitable” to all classes.
5. Reasons why Indian companies are going for cross-border M&A
Expansion is one of the primary reasons to cross the borders. One has to look outside its boundaries and play out in the global arena to seek new opportunities and scale new heights. With the habit of creating an empire it becomes difficult for these entrepreneurs to stay within its limits. The simple fact is that most key players in the market have already extracted a significant proportion of the available value from the domestic resources. They have improved profitability through better cost management and through efficiency gains realized after domestic consolidation.
Another reason is to gain monopoly, the company which has been acquired by the acquirer is always a company which is trembling financially but had something to offer the acquiring company. It may be the market share or intellectual capital or other reasons but one thing that the acquirer looks is for is the untapped resources to be exploited which can lead the company a step higher in the ladder of success.
There are also new forces in play that make cross-border expansion more feasible and capable of creating value. For example, international deregulation is removing old barriers. Institutional investors are taking a more global perspective. Customer profiles across markets are becoming more homogeneous.
6. A brief overview on Indian corporate and securities law issues which come into play when an Indian Company goes for cross border M&A
Overseas Direct Investment
The provisions relating to investment by an Indian company in a foreign company were liberalized by the Foreign Exchange Management Act, 1999 (which came into effect from June 1, 2000 and the rules and regulations made there under. Subsequently, the Reserve Bank of India issued the Foreign Exchange Management (Transfer or Issue of Foreign Security) Regulations, 2000 which contain provisions governing any investment made by an Indian company in a foreign company. There are only certain special circumstances under which an Indian company is permitted to make an investment in a foreign company. An Indian party is not permitted to make any direct investment in a foreign entity engaged in real estate business or banking business without the prior approval of the Reserve Bank of India.
Indian corporate and securities law issues
An Indian company proposing to make an investment in a foreign company will also be required to comply with certain provisions of the Indian Companies Act, 1956 (the “Companies Act”) and if the Indian company is also listed on any Indian stock exchange, it will be required to comply with certain regulations issued by the Securities and Exchange Board of India. We have discussed some of these relevant provisions hereunder:
(1) Special resolution under Section 81(1A) of the Companies Act
If the Indian company is incorporated as a public limited company under the provisions of the Companies Act and the Indian company proposes to acquire the shares of the foreign company by issuing its shares as consideration to the shareholders of the foreign company, then the shareholders of the Indian company will be required to pass a special resolution under the provisions of Section 81(1A) of the Companies Act permitting the issue of shares to the shareholders of the foreign company.
(2) SEBI (Disclosure and Investor Protection) Guidelines, 2000
If the Indian company that is issuing its shares to the shareholders of the foreign company as consideration for acquiring shares of the foreign company is listed on any stock exchange in India, then it will be required to comply with the guidelines for preferential allotment under the SEBI (Disclosure and Investor Protection) Guidelines, 2000 (the “SEBI DIP Guidelines”) in addition to the provisions of Section 81(1A) of the Companies Act.
(3) Approval of the shareholders under Section 372-A of the Companies Act
If the investment by the Indian company in the foreign company exceeds sixty percent (60%) of the paid-up share capital and free reserves of the Indian company or one hundred percent (100%) of the free reserves of the Indian company, whichever is more, then the Indian company is required to obtain the prior approval of the shareholders vide a special resolution.
(4) Compliance with the provisions of the SEBI Takeover Code
If the issuing company is a listed company and makes a preferential allotment of shares to the acquirer, such an allotment would generally be exempt from the public offer provisions of the SEBI (Substantial Acquisitions and Takeovers) Regulations, 1997 provided that the disclosure requirements as prescribed in Regulation 3(1)(c) of the SEBI Takeover Regulations are fulfilled.
Further, upon completion of the acquisition and within 21 days from the issuance of shares to the shareholders of the target company, a detailed report in a prescribed format would have to be filed with the SEBI.
7. Acquiring a Company in the US
While Indian firms are actively looking to expand their operations into foreign territories, they face a host of potential difficulties, from understanding local labour laws and legislative requirements to assessing the background, reputation and integrity of the target business and its intangible assets.
There are several issues that an Indian company needs to keep in mind while structuring or planning its acquisition in the jurisdiction in which the foreign company is situated in order to determine the takeover code of a foreign company. The Indian company needs to be aware of the corporate and securities law regime requirements, the provisions relating to the rights of minority shareholders, etc.
Business combinations in the U.S. are governed by the federal laws of the U.S. and the laws of the state(s) where the parties to a business combination are incorporated.
The Securities Act and the Exchange Act
The two primary relevant federal laws are the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”), including the rules and regulations promulgated by the Securities and Exchange Commissions (the “SEC”) under both the Securities Act and the Exchange Act. The Securities Act deals primarily with the sale and purchase of securities and applies to all transactions where securities are being offered or sold. The Exchange Act, among other things contains the federal law provisions relating to tender offers, proxy statements, shareholder disclosure obligations and going-private transactions. The Exchange Act imposes certain duties on companies whose securities are publicly traded and on persons who would buy or sell securities of such companies.
Acquisition of a US public company would generally require a full-fledged registration with the SEC. The registration process is time-consuming and also expensive. However, for acquisition of non-public companies there are certain exemptions from registration requirements which can be availed by overseas acquirer. One of the most commonly used exemptions is offering securities by way of private placement.
The steep increase in the number of major cross-border transactions in recent years is not driven purely by opportunistic factors: Indian companies are in many cases motivated to look abroad in response to newly competitive, complex or risky domestic markets or to find capabilities and assets that are lacking in India. This M&A trend is a key factor helping Indian companies to emerge on the global stage.
Losing Asarco has not put a dent on Sterlite’s aspirations. It has very recently completed the acquisition of Skorpion Zinc Mine in Namibia from Anglo American plc for a cash consideration of approximately $707 million. Thus, Sterlite would continue to expand its operations by carrying out more cross border M&A deals.
# P Ramanatha Aiyar’s Concise Law Dictionary, third edition reprint 2008, pg. 145
# www.asarco.com, www.asarcoreorg.com
# Regulation 5 of the Foreign Exchange Management (Transfer or Issue of Foreign Security) Regulations, 2000 provides that no resident Indian (which term would include a company) can make an investment outside India, except in accordance with these regulations or without the prior approval of the Reserve Bank of India.
# Section 372(1) of the Companies Act.
# Regulation 8 of the SEBI Takeover Code.
The author can be reached at: firstname.lastname@example.org
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