1 Deal structure

1.1 How are private and public M&A transactions typically structured in your jurisdiction?

Acquisition of shares (transfer and issue of shares): An acquisition of shares can take place either by subscribing to fresh equity in a company or by purchasing existing equity in the target from another shareholder. For publicly listed companies, shares may be bought either:

  • through the stock exchange at market price;
  • through the stock exchange at a negotiated price; or
  • by private arrangements (generally known as ‘private investment in public equity').

Merger (amalgamation): The target merges into the acquiring entity following a court order and the target is then dissolved. All assets and liabilities of the target vest in the buyer. The purchase consideration is paid by the buyer to the shareholders of the target, either by allotting shares or by paying cash for the value of their shares.

Demerger: This structure is adopted to avoid the tax inefficiencies of an itemised sale of assets. The target's undertaking or division is demerged from the target under a court order and then transferred to the buyer.

Asset/liability transfer (itemised sale of assets and liabilities): Specific assets and liabilities are sold under a sale and purchase agreement with an itemised list of assets and liabilities to be transferred.

Asset transfer (sale as a going concern): All assets and liabilities of an entity or a business division or plant are sold as a going concern under this structure. Like amalgamation, this requires approval from the court.

1.2 What are the key differences and potential advantages and disadvantages of the various structures?

Share purchase: A share purchase involves a very simple and straightforward process, which is easy to execute and implement. The only tax incidence is stamp duty, levied at 1.5% of the purchase consideration; no other direct or indirect tax is payable. There is minimal disruption to the target business in a share purchase. A share purchase does not trigger the need to obtain fresh consents or licences. There is no question of transferring employees. The only risk is that all liabilities of the target, disclosed or undisclosed, are also transferred automatically; but this can be addressed through indemnification.

Merger/demerger/sale as going concern: Taxes can be avoided, but the process is complex and time consuming, and the scheme requires approval by 75% of the creditors. Share acquisition from dissenting shareholders may also be considered as a potential risk. On the positive side, all assets and liabilities – including employees – are automatically transferred; and there is no need to obtain fresh consents or licences.

Asset transfer: On the positive side, liabilities may be segregated and thus are not automatically transferred. The scope and extent of the due diligence process are reduced, and the transaction can thus be implemented relatively quickly. However, this structure is tax inefficient, as various stamp duties (some at a rate of 3%) and direct or indirect must be paid. All operational licences must be procured afresh. The transfer of employee is required by way of termination followed by reappointment.

1.3 What factors commonly influence the choice of sale process/transaction structure?

  • Risk certainty to identify all liabilities of the target through due diligence;
  • The readiness of the sellers to issue indemnification against any undisclosed liabilities;
  • Whether the target is a division or business and whether the target is a listed company or unlisted public limited company or private company;
  • Whether there is a collective bargaining agreement with the employees and whether the employees are ready to move to a new company; and
  • The indebtedness of the target (ie, its debt-to-asset ratio).

2 Initial steps

2.1 What documents are typically entered into during the initial preparatory stage of an M&A transaction?

  • Letters of intent.
  • Term sheet: This is often drawn up as a letter of intent, a memorandum of understanding and/or a simple term sheet prepared by the parties before they enter into a binding contract. These preliminary documents typically specify a number of terms that are intended to be non-binding, including:
    • the purchase consideration and forms of payment;
    • binding agreements to be entered into by the parties; and
    • closing date and closing obligations.
  • The binding and enforceable terms generally concern:
    • tax and stamp duty obligations;
    • audit and revaluation based on closing date and price adjustment methodology;
    • exclusivity;
    • confidentiality; and
    • governing law and dispute resolution.
  • Exclusivity agreement: This requires the parties to negotiate exclusively with each other with a view to entering into a contract for a set period, during which the parties cannot negotiate with other intended buyers or sellers.
  • Non-disclosure agreement: This requires the parties to undertake to keep all commercially sensitive and publicly unavailable proprietary information confidential at all times, irrespective of successful closing of the transaction, and to use this information only in order to evaluate the proposed transaction.

2.2 Are break fees permitted in your jurisdiction (by a buyer and/or the target)? If so, under what conditions will they generally be payable? What restrictions and other considerations should be addressed in formulating break fees?

There is no express prohibition on break fee payment arrangements in Bangladesh. However, this is not common practice, although in some cases a break cost payment obligation is incorporated in the sale and purchase agreement.

Generally, when a sale and purchase agreement is short of closing, the defaulting party is required to pay the non-defaulting party the break cost. In the case of the purchase of shares from other shareholders, the seller and/or the buyer assumes such liability. In case of asset sell and share issue, the target and/or the buyer assumes such liability

However, as ‘break cost' as a term is not defined in the foreign exchange regulations, it is difficult to make such arrangements in practice. In such cases the parties often agree to pay accrued management fees in the form of constancy or legal fees.

2.3 What are the most commonly used methods of financing transactions in your jurisdiction (debt/equity)?

Small-scale transactions are primarily financed by equity, while larger transactions are financed by a mix of debt and equity.

2.4 Which advisers and stakeholders should be involved in the initial preparatory stage of a transaction?

  • Financial advisers;
  • Legal consultants
  • Tax consultants;
  • Valuers (generally chartered accounts or merchant banks); and
  • Merchant banks (for listed targets).

2.5 Can the target in a private M&A transaction pay adviser costs or is this limited by rules against financial assistance or similar?

Contractually, such payment obligations may be passed to the target if the parties agree. In the case of an asset sale and share issue, the target may assume such liability; but in the case of the purchase of shares from other shareholders, the target is not a party to the sale and purchase agreement, and thus cannot assume such liabilities.

3 Due diligence

3.1 Are there any jurisdiction-specific points relating to the following aspects of the target that a buyer should consider when conducting due diligence on the target? (a) Commercial/corporate, (b) Financial, (c) Litigation, (d) Tax, (e) Employment, (f) Intellectual property and IT, (g) Data protection, (h) Cybersecurity and (i) Real estate.

(a) Commercial/corporate

The bylaws should be carefully examined to ascertain the appropriate level of management that is required to authorise the transaction. Validation of the continuity of shareholdings and directorships as per the company returns is also important.

(b) Financial

Shareholder loans/share money deposits (ie, capital deposited by shareholders for the intended purchase of shares) should be accounted for. All informal related-party transaction should be accounted for and settled, and appropriate contracts executed.

(c) Litigation

It is not possible to conduct a litigation search at the courts of first instance, but it is possible to conduct an electronic search at the higher courts.

(d) Tax

It is important to ensure that all transaction of the target is made subject to appropriate indirect and direct taxes; and even if tax certificates are available, at least last six years of tax filings should be validated for the allocation of tax obligations. The possible carry-forward of losses should also be validated.

(e) Employment

Policies and contract templates should be validated, especially if there have been any unaccounted severance payment obligations in the past and if appropriate allocations have been made for the future. Relevant workers' profit participation fund liabilities, if relevant, should be taken into account.

(f) Intellectual property and IT

It is important to ensure that all technology assistance or licensing fees are being paid under proper contracts and authorisations entered into by the target.

(g) Data protection

Relevant data-handling policies of the target should be validated against the requirements of relevant laws, especially the Digital Security Act, 2018. If any lack of consent issue is identified, this may constitute a condition precedent.

(h) Cybersecurity

Cybersecurity aspects are not that relevant from the Bangladesh perspective and currently there are no data localisation requirements, except in some industries such as banking and telecommunications.

(i) Real estate

In Bangladesh, up-to-date mutation does not guarantee a clean title. As such, for substantial projects, it is important to check the chronological title transfers for real estate and suggest appropriate disclosure and indemnification.

3.2 What public searches are commonly conducted as part of due diligence in your jurisdiction?

  • Corporate return search at the Office of the Registrar of Joint Stock Companies and Firms (eg, corporate standing, shareholdings, directors, charges over assets, winding up proceedings);
  • Mutation and title search for real estate in the Land Office and relevant sub-registrar offices (validation of land title documents provided); and
  • Electronic searches for litigation in the higher courts and manual searches (if preferred) in the local courts.

3.3 Is pre-sale vendor legal due diligence common in your jurisdiction? If so, do the relevant forms typically give reliance and with what liability cap?

Pre-sale vendor legal due diligence is sometimes conducted for large industrial/commercial or infrastructure targets. Common forms typically give reliance to the purchaser, its advisers and financiers. A liability cap is generally determined by the liability insurance of the insurance provider, as no liability cap is generally included in such reports.

4 Regulatory framework

4.1 What kinds of (sector-specific and non-sector specific) regulatory approvals must be obtained before a transaction can close in your jurisdiction?

Approvals under the Foreign Exchange Regulations Act: There are no restrictions under the foreign exchange regime on general acquisitions and issue of shares of a target. However, all transfers involving foreign shareholders must take place at a fair price. In the case of foreign sellers, up to BDT 10 million of the sale proceeds may be repatriated without valuation and up to BDT 100 million of the sale proceeds may be repatriated based on valuation by a chartered accountant/merchant bank without central bank approval. Prior approval must be sought from the central bank for repatriable sale proceeds over BDT 100 million. In other cases involving transfers from either a local shareholder to a foreign buyer or a foreign seller to a foreign buyer, a simple post-closing notification to the central bank along with the valuation report will suffice.

The fair market valuation must be conducted by an accredited chartered account or a licensed bank, following an approximate mix of the asset-based, market value and income approaches. However, a valuation is not needed to repatriate the sale proceeds if the fair value of the shares is determined using the net asset value (NAV) approach, based on the latest audited financial statements together with tax returns, without any consideration to intangible assets. Under such circumstances, an undertaking is issued by the target specifying that the impairment of assets have been adjusted in arriving at the NAV; and that the remitting bank is satisfied that there has been no abnormal growth in total assets in any of the last three years, particularly in the last year.

Approvals from the original company jurisdiction of the high court: Merger and sale as a going concern both require approval from the original jurisdiction of the high court. Amalgamations in Bangladesh must also be sanctioned by the high court.

Approval from the Bangladesh Security and Exchange Commission: A listed company requires approval from the Bangladesh Security and Exchange Commission to issue any capital if its total paid-up capital would exceed BDT 100 million as a result.

Regulatory approval: In certain industries where share lock-in applies, M&A approval must also be obtained from the regulators – for example, for financial institutions, insurance companies, telecommunications companies and power generation companies .

Post-closing: Certain perfections for the transaction post-closing must also be made at the Office of the Registrar of Joint Stock Companies and Firms and the Bangladesh Investment Development Agency.

4.2 Which bodies are responsible for supervising M&A activity in your jurisdiction? What powers do they have?

The Competition Commission of Bangladesh, constituted under the Competition Act, 2012, is responsible for supervising M&A activity in Bangladesh. However, the provisions set out in the Competition Act are currently operating in reactive mode pending the incorporation of the underlying competition rules needed to impose proactive measures.

Any combination (including any M&A transaction) that would have an adverse effect on competition is prohibited. The commission has wide powers, among other things, to investigate any combination, either on its own motion or following a complaint from any third party. Statutory and regulatory authorities can seek a reference from the commission to determine whether a proposed combination is anti-competitive. The commission will issue its decision within 60 days.

The commission is yet to quantify the meaning of a ‘significant adverse effect' and the relevant thresholds for mandatory approval. Until these rules have been set out, the commission enjoys the discretion to decide on the possible effects of any combination. If, during or after completion of an investigation, the respondent, the commission and the complainant agree on the terms of an appropriate order, the commission will confirm the agreement as a consent order, subject to:

  • publication of the order in the Official Gazette within seven working days for comments within a period of 30 days;
  • the commission receiving, reviewing and hearing representations from third parties with material interest;
  • the consent order being made as agreed and proposed with or without changes; and
  • the commission's refusal to issue the order if additional information warrants this.

4.3 What transfer taxes apply and who typically bears them?

Share sale: Stamp duty is payable on a share transfer at a rate of 1.5% of the agreed purchase consideration. For foreign sellers, a withholding capital gain tax of 15% will apply. For local sellers, withholding is not mandatory.

Asset sale: Stamp duty for the conveyance of immovable or movable property is 1.5% of the purchase consideration. In addition, for immovable property, a local government tax of 1% and a registration fee of 1.5% of the property value are payable. In appropriate cases, a withholding tax of 5% on the purchase price and value added tax at a rate of 15% shall apply.

5 Treatment of seller liability

5.1 What are customary representations and warranties? What are the consequences of breaching them?

General representations cover:

  • the due legal personality of the sellers and the target;
  • the good standing of the sellers and the target;
  • appropriate capacity;
  • due authorisation to enter into the transaction documents; and
  • all authorisations secured from the appropriate authorities.

The sellers' warranties or indemnities typically cover areas such as:

  • title and marketability to shares, assets and properties of the target;
  • shares, assets and properties, free of any encumbrances;
  • the organisation and authorities of the target and the sellers;
  • approvals obtained to complete the transfer;
  • the capitalisation of the target;
  • the lack of conflicts or consents;
  • financial statements;
  • undisclosed liabilities;
  • the absence of certain changes, events and conditions;
  • material contracts;
  • the condition and sufficiency of business assets;
  • inventory;
  • accounts receivable and accounts payable;
  • customers and suppliers;
  • insurance;
  • legal proceedings and governmental orders;
  • compliance with laws and permits;
  • employee benefit plans and employee matters;
  • real property and leases;
  • taxes;
  • books and records;
  • related-party transactions;
  • bank accounts and power of attorney; and
  • environmental matters.

The indemnity clause allows the holder to require an indemnity providing that it be compensated for any losses or damages for the indemnifying period. Subject to breach, the seller must indemnify and/or compensate the purchaser for any loss resulting from such breach.

5.2 Limitations to liabilities under transaction documents (including for representations, warranties and specific indemnities) which typically apply to M&A transactions in your jurisdiction?

Limitations: The following limitations are generally imposed:

  • limitation periods overriding statutory limitations;
  • a cap on damages or compensation payable;
  • the exclusion of indirect damages;
  • matters disclosed in a disclosure schedule; and
  • minimum thresholds for making claims.

Qualifying warranties by disclosure: Qualifying warranties by disclosure is fairly common. Whenever a seller intends to qualify warranties, it does so by providing disclosures. These serve as an exception to the warranties.

5.3 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in your jurisdiction?

As yet, few buyers seek to obtain warranty and indemnity insurance, although this is available; this trend has just started to emerge in Bangladesh.

5.4 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?

  • In general, the seller's valuation, credit rating and business standing are relied upon by the buyer.
  • The holdback of purchase consideration is another practical and useful tool to address breach of warranties. However, for statutory reasons, no part of the share purchase price can be held back; rather the payment is apportioned as a performance payment contingent upon the completion of certain targets.
  • As outlined in question 5.3, indemnity insurance is emerging as an option for the parties to address the risks arising from breach of warranties.

5.5 Do sellers in your jurisdiction often give restrictive covenants in sale and purchase agreements? What timeframes are generally thought to be enforceable?

In Bangladesh, sellers generally impose a non-compete covenant and a non-disclosure covenant for a period of between two and five years. As per the Contract Act of Bangladesh, this is deemed to be reasonable.

5.6 Where there is a gap between signing and closing, is it common to have conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?

In Bangladesh, it is not common to impose such conditions to closing when there is a gap between signing and closing, but limitations are imposed on the volume and/or value of transactions that may be concluded in this interim period.

6 Deal process in a public M&A transaction

6.1 What is the typical timetable for an offer? What are the key milestones in this timetable?

Purchase through exchange: The typical timetable for an offer is one week, as follows:

  • Once an irrevocable offer has been filed, together with the relevant documents, with a corresponding stock broker or merchant bank, this notice will be circulated immediately.
  • The corresponding stock broker or merchant bank will complete the purchase within a week and report to the regulator. The offer may be cancelled if there is no seller for the shares.

Private purchase: The typical timetable of an offer is one week, as follows:

  • A detailed sale and purchase agreement is executed between the seller and the purchaser.
  • The seller gives an irrevocable sell order to the corresponding broker or merchant bank.
  • The broker freezes the shares and sends a confirmatory notice to the exchange.
  • The purchaser deposits 20% of the purchase price at the exchange by cheque.
  • The exchange immediately circulates the news.
  • Once the news has been circulated, the broker will complete the transaction.
  • On completion, the cheque will be returned to the purchaser.

6.2 Can a buyer build up a stake in the target before and/or during the transaction process? What disclosure obligations apply in this regard?

A purchaser cannot build up a stake during the transaction process. Before this, however, it can build up a stake as long as it holds less than 10% of the shares in the target.

Under the Bangladesh Securities and Exchange Commission (Substantial Acquisition of Shares and Takeovers) Rules, 2018, the acquisition of shares corresponding to 10% or more of the issuer's total voting shares is considered a ‘substantial acquisition' of shares. The following activities require disclosure in the stock exchange's online news circular:

  • any buy order or transaction that would result in this 10% threshold being met or exceeded;
  • any purchase of shares corresponding to 10% or more of the voting rights in the issuer; or
  • once an initial shareholding corresponding to a 10% or more of the voting rights in the issuer has been achieved, any further acquisition of shares.

6.3 Are there provisions for the squeeze-out of any remaining minority shareholders (and the ability for minority shareholders to ‘sell out')? What kind of minority shareholders rights are typical in your jurisdiction?

There are no provisions on the squeeze-out of any remaining minority shareholders and there is no possibility for minority shareholders to ‘sell out'. However, once a consortium ends up owning 90% of the shares in the target, it can purchase the remaining 10% at the price below (whichever is highest) and delist the company:

  • the last trade price;
  • the weighted average price over the last six months; or
  • the net asset value (NAV) per share, as per the latest financial statements.

6.4 How does a bidder demonstrate that it has committed financing for the transaction?

For an acquisition through exchange, the purchase price or the estimated purchase price must be deposited with the broker. For an acquisition on a private basis, the purchase price must be deposited with the broker and 20% must be deposited as a security deposit with the exchange.

6.5 What threshold/level of acceptances is required to delist a company?

At least 90% of the shares must be held individually or through a consortium to delist a company.

6.6 Is ‘bumpitrage' a common feature in public takeovers in your jurisdiction?

Yes, it is exercised to a certain extent in public takeovers in Bangladesh.

6.7 Is there any minimum level of consideration that a buyer must pay on a takeover bid (eg, by reference to shares acquired in the market or to a volume-weighted average over a period of time)?

A purchaser can buy from the shareholders at a negotiated price if a negotiated agreement has been concluded with the shareholders; but otherwise, it must buy at market price. For compulsory takeovers of the remaining 10% where a consortium has already acquired 90% of the shares, the price for the remaining 10% is the highest of the following:

  • the last trade price;
  • the weighted average price over the last six months; or
  • the NAV per share, as per the latest financial statements.

6.8 In public takeovers, to what extent are bidders permitted to invoke MAC conditions (whether target or market-related)?

The reversal of a takeover bid is allowed only in the following situations:

  • The acquirer is an individual who dies;
  • The acquirer is declared bankrupt;
  • The acquirer is a body corporate which is wound up;
  • The acquirer is acquired by another company which does not wish to complete the takeover;
  • There is no seller; or
  • The Security Exchange Commission deems that another reason for such reversal exists.

6.9 Are shareholder irrevocable undertakings (to accept the takeover offer) customary in your jurisdiction?

Shareholder irrevocable undertakings to accept a takeover offer are mandatory for such takeovers, as per the Bangladesh Securities and Exchange Commission (Substantial Acquisition of Shares and Takeovers) Rules, 2018.

7 Hostile bids

7.1 Are hostile bids permitted in your jurisdiction in public M&A transactions? If so, how are they typically implemented?

Under the Bangladesh Securities and Exchange Commission (Substantial Acquisition of Shares and Takeovers) Rules, 2018, hostile bids are not prohibited. Any consortium can acquire substantial shares as per the terms of such rules.

Another mechanism is prescribed for the acquisition of distressed businesses. ‘Distressed businesses' are:

  • financially weak companies which:
    • have had a negative net worth or share price below face value for three consecutive years; or
    • have paid no dividends for five years; or
  • any other company so listed by the regulator.

For such bailout takeovers, shares may be purchased in cash or exchanged; or a mix of the two can be adopted.

The bailout scheme is publicly announced by a financier, which will provide the future corporate governance framework. Thereafter, the financier (or the lead institution in case of a consortium) will evaluate the share purchase tenders to select the most appropriate offer or, in case of a purchase from existing shareholders, will negotiate a purchase price to implement the scheme. Bailout takeovers may be exempt from the substantial share acquisition requirements.

7.2 Must hostile bids be publicised?

As per the Bangladesh Securities and Exchange Commission (Substantial Acquisition of Shares and Takeovers) Rules, 2018, a hostile bid is still a substantial takeover bid and must thus be duly circulated as exchange news.

Bailout takeover proposals must be publicly tendered either as an offer for new investments or a purchase for current shareholders under price negotiation.

7.3 What defences are available to a target board against a hostile bid?

No defences are available. As soon as a consortium acquires a shareholding of 75% or more in the target, it can control the board.

In case of bailout takeovers by offering shares for purchase, the acceptance of any tender requires the target's management's approval.

8 Trends and predictions

8.1 How would you describe the current M&A landscape and prevailing trends in your jurisdiction? What significant deals took place in the last 12 months?

Bangladesh has one of the most liberal M&A regimes in the world and almost zero restrictions on country-specific foreign direct investment (FDI). This notwithstanding, however, this market of around 200 million consumers has seen little of the surge in M&A deals in evidence elsewhere in the world in recent years, and even less so since the start of the COVID-19 pandemic. Some global mergers and transactions have involved assets located in Bangladesh, but there are few actual acquisitions of local businesses. However, the country is an attractive destination for FDI, which suggests that there is still space in the market for greenfield investments rather than brownfield projects.

8.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms? In particular, are you anticipating greater levels of foreign direct investment scrutiny?

  • Unilever's acquisition of GlaxoSmithKline's local business;
  • Beximco's acquisition of Sanofi's local business;
  • Evercare's acquisition of Apollo Hospital;
  • Radiant's acquisition of Julpahr Pharmaceuticals; and
  • China Huadian Acquisition of Mymensing 50MW Solar IPP

9 Tips and traps

9.1 What are your top tips for smooth closing of M&A transactions and what potential sticking points would you highlight?

Before proceeding with an M&A deal, the parties should consider the following issues:

  • Prepare an appropriate risk matrix and risk allocation plan.
  • Consider all permit requirements, especially those stipulated by the foreign exchange regulations.
  • Many options for structuring the transaction may be available, but a tax-efficient structure should be emphasised. Tax evasion should not be considered as an option.
  • With regard to real estate, rather than demanding the disclosure of all chronological title transfers, indemnities and guarantees should be sought instead, in order to increase the chances of successful close. This is the major bottleneck in most deals.
  • If a financier will be involved, it should be involved from the beginning.
  • Environmental requirements should be considered from the outset, to avoid any surprises later on.
  • Break costs should be considered.
  • Timeline planning is a critical issue, both for structuring the transaction and for closing, especially given the relevant regulatory approvals required.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.