Welcome to Monthly Madness – our monthly digest of the latest chaos in Indian (and sometimes, global) M&A. And as far as chaos goes, November did not disappoint. We got: (1) the latest (and probably deadliest) episode in the ongoing Byjus saga; (2) a probable U-turn on long-standing restrictions on Chinese investments; and (3) two global pharmaceutical giants fighting it out to buy a startup (and giving us a flash of M&A brilliance in the process).
The Metsera Takeover Battle (and Novo Nordisk’s Weird and Aggressive Bid)
Among the many wonders of existence, there are 2 things you can rely on to make an M&A lawyer instantly salivate: (i) heated global takeover battles involving a lot of money; and (ii) weird and creative deal structures.
Pfizer and Novo Nordisk’s $10 billion takeover battle for Metsera, which concluded this month, served up a generous amount of both.
First, the characters:
- Metsera. A hot new publicly listed American pharmaceutical company developing experimental (yet promising) weight-loss drugs.
- Pfizer. An American pharmaceutical giant, which does not have a weight-loss drug yet and desperately needs one to stand a chance in the booming weight-loss market before it’s too late1.
- Novo Nordisk. A Danish pharmaceutical giant which is the global kingpin of the weight-loss industry and the creator of Ozempic.
On September 22, Pfizer signed an agreement to acquire Metsera for $7.3 billion2. The deal was planned to be consummated by the 4th quarter of 2025. For a while, life seemed good for Pfizer – it would now have a horse in the ongoing weight-loss drug race, allowing it to compete with its peers.
On October 30, out of absolutely nowhere, Novo Nordisk entered the picture with a bid to acquire Metsera for $9.1 billion – a significantly higher amount than Pfizer’s. Metsera’s agreement with Pfizer prohibited it from entertaining any acquisition proposals from third-parties, as is common in acquisition agreements (called a “no shop clause”). But it provided for an exception: Metsera could entertain unsolicited proposals for ‘superior competing offers’. Such an exception is customary as well (called a “fiduciary out”). A company’s directors are required under law to act in the company’s and its shareholders’ best interests. Ignoring an offer that will make the shareholders vastly richer is a breach of this duty. A fiduciary out exception thus allows a company’s board to fulfil its legal obligations – and this is what Novo Nordisk exploited with its very very superior competing offer.
The head-turner in Novo’s offer (apart from the eye-watering price) was the weird and aggressive structure it contained. Here it is, before we unpack it:
- Step 1. Novo pays $6.5 billion out of the proposed $9.1 billion to Metsera on signing of the acquisition agreement. In return, Metsera issues non-voting stock representing 50% of its share capital to Novo. Simultaneously, Metsera pays out the $6.5 billion received from Novo to its shareholders as dividend.
- Step 2. Once the deal has been cleared by regulators, Novo acquires Metsera’s remaining shares for the rest of the proposed amount (i.e., ~$2.6 billion) to complete the deal.
There are 2 milestone events in every acquisition: (i) signing – when the parties agree on the deal terms and the price, and then move on to securing the required approvals for the deal; and (ii) closing – when the buyer hands over the money and the seller hands over the shares, once all regulatory approvals have been cleared (i.e., once the parties are sure that the deal is allowed to go through).
One key approval that the parties must seek after signing is an ‘antitrust approval,’ provided after the antitrust regulator reviews whether the signed acquisition will negatively affect competition in the market (for eg., acquisition of a smaller competitor by a larger firm, or which results in the large firm cornering a huge share of the market). If it finds that it does, it can block the deal from going through or ruthlessly alter the deal terms.
Novo’s offer is weird because it involves Novo handing over the cash to Metsera’s shareholders on signing, before any certainty whether the deal will pass antitrust approval. And the antitrust risk here is very real considering Novo is a weight-loss market leader (as opposed to a non-player like Pfizer)) acquiring a nascent competitor – this is an immediate red flag. The $6.5 billion payment on signing for 50% of Metsera’s share capital in non-voting stock is possible because acquisitions of voting stock do not require antitrust approval under US law. Meanwhile, completing the deal by acquiring Metsera’s outstanding voting stock will require an antitrust approval. If the deal doesn’t go through, Metsera’s shareholders get to keep the $6.5 billion paid on signing, with the only caveat being that Novo continues to own 50% of its share capital as non-voting stock which hardly matters since this gives Novo zero say in running the company.
The above structure achieves 2 things for Novo. Firstly, it transfers the antitrust risk entirely towards Novo to make the offer agreeable to Metsera. The only reason Metsera would want to take Pfizer’s lower offer over Novo’s is because of the risk of the FTC (US’ antitrust regulator) blocking it. With Novo’s freakish structure, Metsera’s shareholders get to keep the initial $6.5 billion and carry on with their company even if the deal is blocked. Secondly (and more importantly), once the deal is signed (and Metsera has all the incentive to sign it), it would block Pfizer and other competitors from acquiring Metsera… even if the deal falls through. This is because: (i) Metsera will be plunged into anti trust review for years (common in high-profile deals: the AT&T – Time Warner acquisition spent 2 years in review), by the end of which Metsera’s products will become obsolete; and (ii) if Metsera agrees to be acquired by any another company in the future, it would have to return the $6.5 billion paid by Novo to complete the acquisition. All things considered, Novo seems to care little about the deal with Metsera closing (which is unlikely anyway considering the antitrust risk) and more about obstructing Pfizer.
Pfizer, of course, recognised the deviousness of Novo’s plan. It called the offer “reckless and unprecedented” and “an old-fashioned bribe”. And it sued… twice. The first lawsuit argued that Novo’s offer does not constitute a ‘superior competing bid’ and had no right to break up the signed Pfizer deal. The second alleged that the offer was anti-competitive, aimed at protecting Novo’s dominant market position. Metsera, quite literally, called these arguments “nonsense.” Meanwhile, Novo hiked up its bid for Metsera from $9.1 billion to $10 billion.
The battle ended November 8, when the US FTC warned Metsera over a phone call that the signing payment would trigger an antitrust review, defeating the payment’s purpose as a guaranteed bag of cash for Metsera. The need for review was supported by the fact that the signing payment came with some obligations on Metsera (like not selling away its assets), which could be viewed as Novo exercising control despite only acquiring non-voting stock. Thoroughly spooked, Metsera accepted a revised bid put in by Pfizer moments later, matching Novo’s $10 billion offer.
It would be an interesting exercise to examine the viability of such a structure in India. Takeover battles aside, a structure like this may be desirable in situations (with modifications, of course) where: (i) the seller is haunted by the fear of a deal being pulled up by the antitrust regulator (in India, the CCI) while the buyer is more certain of the deal sailing through – the signing amount thus incentivises the seller; and (ii) the buyer is willing to part forever with the signing payment or the target company is a hot enough asset that there is a reasonable certainty of another acquirer purchasing it and returning the signing payment in the process. It must be noted regarding point (i) that the anti-trust risk in India is vastly different from the US. While the US FTC has routinely blocked high-profile deals, the CCI has never refused to approve a deal in its history. Instead, it handles problematic acquisitions by imposing conditions on the parties, such as selling off business divisions and assets, exiting a certain market/ geography, or providing competitors with access to technology/ IP. This remains a risk regardless – nobody ever wants to do any of these things.
If the target is listed like Metsera, the first major concern would regarding the payment of the signing amount to acquire non-voting stock (in India, preference shares) triggering a mandatory open offer3under Indian listing regulations. An open offer is triggered by an acquisition of shares that: (i) entitle the acquirer to voting rights in the target exceeding 25%; or (ii) provide the acquirer with ‘control’ over the target. The acquisition of non-voting preference shares on signing would thus not trigger an open offer by itself. To avoid the ‘control’ trigger, the acquirer must also ensure that the deal does not involve any special governance rights (right to nominate directors, etc.).
The other major concern would be surrounding the signing transaction attracting an antitrust review by the CCI… the way the US FTC warned Metsera it would. This is where things get tricky. Indian antitrust law defines an acquisition to mean acquiring or agreeing to acquire control, shares, voting rights or assets. Meanwhile, shares are defined as shares in the share capital of a company carrying voting rights. So, at least on paper, acquisitions of non-voting stock should not attract antitrust scrutiny. There are antitrust orders that support this view (i.e., non-requirement of review for non-voting securities). But… Indian antitrust law operates on the principle of ‘substance over form’. If the intent/ effect of a deal harms competition, it can be subjected to an antitrust review regardless of the mumbo-jumbo on paper. This is a problem.
We Might (Re)Open Our Doors to Chinese Investment
Lockdowns weren’t the only thing worrying governments as the COVID-19 pandemic swept across the world in early 2020. Stock markets plunged across the globe and valuations of companies declined steeply. The huge discounts in share prices left strategically important companies at the risk of hostile takeovers (simply, the acquisition of companies without the their consent) by governments of rival countries or companies linked to them. The only thing that could make a pandemic worse was, well… finding out that your top healthcare and infrastructure companies had been bought out by enemy nations and your citizens were now at their mercy to stay alive. And so, governments implemented approval requirements for incoming foreign investments at the time.
These fears haunted Indian policymakers equally, with the country having no shortage of nemeses. But hell truly broke loose when HDFC (India’s largest housing financier) published its quarterly shareholding pattern in April 2020 and the government discovered that China’s central bank had quietly snapped up 1.01% of the company. Within days, an amendment to India’s foreign investment law was pushed out, titled ‘Press Note 3 of 2020’ (PN3). Government approval was now required for any foreign investment: (i) by an acquirer from any country which ‘shares land border with India’; or (ii) where the ‘beneficial owner’ of a foreign investment is situated in/ a citizen of any such country. Investments from Pakistan and Bangladesh already required approval prior to PN3. The new approval requirement on ‘land border’ countries was aimed directly at China without naming it (let’s be real, nobody from Nepal is out to swallow Indian conglomerates).
The long, hard battle with the pandemic eventually ended. The world moved on to slurping matcha and playing with labubus. But the pandemic-era foreign investment restrictions remained in most countries, with some even declaring them as permanent as a result of geopolitical tensions. So was the case in India, whose frosty relations with China continued with a series of border clashes in 2021. PN3 came to become so deeply entrenched in Indian law that:
- Specific declarations are now required at the time of incorporating a company, transferring shares, and mergers, stating that no involved shareholder belongs to a land-bordering country.
- Directors from land-bordering countries (in addition to shareholders, as originally planned) are now required to obtain security clearances from the Home Ministry to serve in Indian companies.
- Any investing entity in the world in which Chinese (or Hong Kong) shareholders hold a bit of passive investment (i.e., ‘beneficial ownership’) – which includes a variety of global conglomerates and private equity majors – now require government approval to invest in India. At the same time, confusion prevails regarding exactly how much Chinese ownership in an investor is enough to be called ‘beneficial ownership’. The government has not yet prescribed a threshold under PN3 in this regard, and investors have resorted to using 10% as a safe figure, guided by the way the phrase has been defined in other existing law4.
- Indian investment funds (such as private equity, venture capital, and hedge funds) are now required to conduct a due diligence on their investors to determine whether >50% of their corpus is contributed by investors from land-bordering countries (or investors whose beneficial owners are from such countries). If yes, the fund is required to make monthly reports on the companies in which its investment crosses 10%5.
- Foreign portfolio investors (FPIs), who aren’t supposed to be covered under PN3 in the first place (since it only applies to foreign direct investment), are now required to disclose details of all entities that hold direct or indirect ownership in them, if: (i) >50% of their Indian AUM is invested in a single company; or (ii) their Indian AUM exceeds INR 25,000 crore.
One would imagine that a PN3 approval would involve the government taking a quick look to check for problematic intentions. This is what the government had in mind too, as it laid down a 12-week timeline to accept/ reject these proposals. In reality, these approvals tend to take months to years for a decision. The effects of PN3 have been unsurprising: (i) increased compliance burden for foreign investors transacting in India; and (ii) a decline in foreign direct investment, even from potential non-Chinese investors. At the same time, Chinese investors and their lawyers have figured alternatives to invest in India. Shein partnered with Reliance Retail in 2023 via a licensing/ profit-sharing arrangement (i.e., without Shein holding any equity) to offer its platform in India. Chinese investments have also, reportedly, been routed through other jurisdictions via opaque structures to get around PN3 approvals.
And so, several important voices began expressing that it was time for PN3 to go, or at least be relaxed. The Finance Ministry’s 2023-24 Economic Survey suggested easing PN3 restrictions to better integrate India into the global economy. The NITI Aayog (the government’s public policy think tank) recently echoed these sentiments. Warmer relations with China over the past year further fuelled hopes of the government rethinking PN3.
As of the past month, it seems the government is moving seriously to dilute PN3 at last. Discussions have reportedly been conducted among ministries and with industry folks, and a draft framework is ready. Insiders have shared that the framework proposes 2 main changes so far: (i) removing the approval requirement for investments of up to 49% from PN3 countries for selected sectors like electronics and consumer durables; and (ii) a conclusive definition for ‘beneficial ownership’, confirming the threshold borrowed from other existing law i.e., 10% of shareholding.
The exemption for 49% shareholding seems to be directly aimed at enabling Chinese-Indian manufacturing joint ventures (JVs). This JV model has emerged in recent year as a dominant structure for an overwhelming majority of Indian electronics manufacturing at the higher-end, utilising foreign technology-transfers while retaining Indian control. Case in point: Dixon Technologies’ upcoming JVs with China’s Longcheer (for smartphones), Chongqing Yuhai Precision (for precision mechanicals), Kunshan Q Tech (for camera modules), and HKC (for display modules). Or the multiple foreign-Indian JVs being set up in the semiconductor space. Doing away with the PN3 approvals so far required for such partnerships would serve to lubricate this emerging trend.
Formalising the 10% shareholding threshold for ‘beneficial ownership’ brings certainty but only reinforces the present difficulty for foreign investors to do business in India on account of the mere fact that a bunch Chinese folks hold some of their shareholding.
The draft proposal is yet to receive comments from all ministries and is subject to change. It is possible that it may not turn out to be the sweeping lifting of restrictions that many are hoping for, but you gotta start somewhere.
Byju’s Suffers its Largest Blow (Yet)
The implosion of Byju’s is a soap opera that never ends. The latest season, set in the US, is turning out to be somewhat of a banger. Here’s a simplified recap of the events alleged in court so far:
- Byju’s wanted to borrow money from US lenders. So it set up a special purpose vehicle in the US named Byju’s Alpha Inc. (let’s call it Alpha) to do exactly this, with Byju Raveendran’s brother Riju managing it.
- Alpha borrowed $1.2 billion from a bunch of American lenders, as it was supposed to.
- The loan agreement imposed certain conditions on Alpha. Some of these conditions6 were not met (despite the agreement being amended various times to make them easier). So the lenders asked for immediate repayment of the loan, as the agreement gave them the right to.
- Instead of repaying the lenders, Alpha transferred $533 million to an entity called Camshaft Capital Fund LP (Camshaft) as (apparently) an ‘investment’. Camshaft had multiple red flags: its registered office was an ‘International House of Pancakes’ outlet and was run by a 23 year old with no experience or qualification. After the transfer, Alpha had (surprise, surprise) no money to repay the lenders.
- The lenders quickly seized ownership of Alpha. They appointed their own guy to manage it and recover the transferred money. But right before they took control, Camshaft transferred the $533 million to a 2nd entity named Inspilearn LLC.
- Then came a 3rd transfer. On the day Alpha filed for bankruptcy, Insplilearn transferred the money to an unknown offshore trust. Raveendran allegedly said on a call with the lenders’ advisors: “the money is someplace the lenders will never find it.”
- The lenders sued in the US to hold Byju Raveendran, Divya Gokulnath (Raveendran’s wife) and Anita Kishore (chief strategy officer) personally accountable for directing the money away from Alpha. Riju had testified earlier that he had transferred the money under Byju’s instructions. To decide the case, the court needed documents from Raveendran regarding transfers, communications, etc – so it passed an order asking for them. Raveendran did not provide them, despite multiple requests and even $10,000 per day fine (now hundreds of thousands, which remains unpaid).
On November 20, the court seems to have finally lost it. It passed a ‘default judgment’ – a decision in favour of a party because the other party failed to respond/ appear in court. These can only be passed when all other methods have been exhausted. The court accepted the lenders’ claim of Raveendran’s role in the fraudulent transfers, considering the records obtained by the lenders on taking control of Alpha and those presented in another ongoing litigation to be sufficient evidence. Raveendran was ordered to pay $533 million (for the transfer from Alpha to Camshaft) + $540 million (for the transfer from Camshaft to Insplilearn) = an eye-watering +$1 billion to compensate the lenders. This was not a usual judgment passed after hearing evidence and arguments from both sides, but the court says Raveendran cannot complain because the usual process had been made impossible by his own wrongdoing.
The above decision is probably the largest blow yet in the massive shipwreck that is Byju’s, being the first time Raveendran was held personally liable. Limited liability – the separation of a company’s assets from the assets of the people running it – is a near-sacred principle of corporate law globally, including during bankruptcies. This incentivises people to start businesses and take risks, and so arguably, forms the bedrock of the modern economy. In some cases, the law makes exceptions – fraudulent transactions is one of them. Instances like the above tell us exactly why. If you’re a lender, you’re only supposed to proceed against assets of the company. But what do you do if someone running the company stashes those assets away?
Raveendran plans to appeal the decision and sue the lenders for $2.5 billion in compensation. He says the allegedly missing money was eventually routed to T&L and used for acquisitions (including popular sub-brand, Aakash) and he has the records to prove it. He claims he was unable to produce documents since he was given insufficient time to find a lawyer. Meanwhile, over the past few days back in India: (i) the Supreme Court rejected Raveendran’s plea to stop Byjus’ insolvency; and (ii) Aakash excluded Byju’s from its latest fundraising round for existing shareholders, claiming Byju’s was not legally capable of such an investment. The Byju’s soap opera is far from over but when it is all said and done, it’ll make for a hell of a book (or better yet, a web series).
Footnotes
- Pfizer had to abandon the weight-loss drug it was developing after clinical trials showed signs of liver injury in a patient. ↩︎
- The agreed purchase price consisted of: (i) an initial payment of $4.9 billion; and (ii) $2.4 billion subject to the achievement of 3 regulatory milestones in the development of Metsera’s upcoming drugs (these are called “contingent value rights” – the point is for Pfizer to not pay the full value till it is confirmed that the drugs work). ↩︎
- when an acquirer acquires a large chunk (25%) or control of a listed company, it is required to acquire another 20% from the target’s shareholders. The idea is that the target’s shareholders deserve to have the right to exit the company since there will now be a fundamental change in how the company will be run ↩︎
- namely, the Prevention of Money Laundering Act, 2002 (and the rules thereunder) and the RBI’s Know Your Customer (KYC) Direction, 2016. ↩︎
- Regulation 20(20) of the SEBI (Alternative Investment Funds) Regulations,
2012 (inserted on April 25, 2024) read with circular no. SEBI/HO/AFD/AFD-POD-1/P/CIR/2024/135 dated October 8, 2024. ↩︎ - namely: (i) submission of Byju’s latest financials to the lenders; and (ii) Whitehat Education Technology Private Ltd (an (infamous) subsidiary of Byjus) providing a guarantee with respect to the loan. ↩︎
