M&A Report 2020: Bangladesh

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Despite a fast-growing economy, Bangladesh's M&A environment remains in an embryonic stage in most sectors of the economy. The largest businesses are still closely held by families who mostly created them during the last three decades of economic liberalisation. With few exceptions, the appetite for M&A is yet to fully develop in the business community, which prefers to maintain full control and equity of their businesses rather than dilute control via the capital markets or with external investors.

The legal regime, as a result, is largely untested and undeveloped. The Competition Commission, created in 2012 and earmarked as the authority for merger control, has yet to formulate its guidelines and as such has no role to play in transactions, yet. As seen through the Robi-Airtel merger in 2016, the role of supervising mergers largely falls upon the particular sector regulator and, to an extent, the Company Bench of the High Court.

However, with significant disruptive practices emerging in business structures and practices, a corporate culture is on the rise and the M&A practice looks to be breaking out of its shell. The recent branding of Bangladesh as the emerging Asian powerhouse, global factors such as the US-China trade war and a long stretch of political stability in the country are, arguably, leading to encouraging signs in cross-border transactions. Bangladesh is ripe for M&A deals, both local and cross-border, in the technology, e-commerce and financial sectors and is expected to see deals in these sectors in the coming year.

The end of 2018 saw the biggest cross-border acquisition in Bangladesh's history as Japan Tobacco International (JTI) acquired the tobacco business of local conglomerate Akij Group. The acquisition was part of JTI's growth in emerging markets and was valued at $1.47 billion. US investment firm Evercare has reportedly signed a deal with STS Holdings for a major acquisition of the capital's premier hospital, Apollo, for a purchase price of $118 million – the acquisition is set to be completed during the early months of 2020. However, large M&A deals are still too few and far apart to discern any trends or compile any meaningful data.

The budding technology and e-commerce sectors have seen keen interest from institutional investors, although most of the transactions relating to Bangladeshi operating companies take place at the holding company level in jurisdictions such as Singapore. High corporate tax, cumbersome minority shareholder protection and difficulty in enforcing contracts in Bangladesh are probable reasons for investors choosing alternative destinations, particularly in case of tech companies.

The ready-made garments sector, where Bangladesh holds second place in the world after China, has seen increasing M&A activity as well. Foreign investors are keener to buy out their local joint-venture partners and this has led to substantial share acquisitions in the sector. There is the prospect of significant merger deals being struck in the financial sector, which is seeing a high number of poorly performing banks and NBFIs. The central bank, also the regulator of the financial sector, has time and again discussed the idea of merging banks and NBFIs and has issued a list of guidelines in this regard.

The Bangladeshi market is predominantly driven by private M&A transactions. Public M&A activities are rare. Private M&A deals generally take the form of acquisitions of unrelated companies. The only major exception was the merger of the Bangladesh operations of Axiata and Bharti Airtel in 2017 in the telecommunications sector. Mergers generally happen between intra-group entities.

In the technology and e-commerce sectors, most deals require substantial shares of the Bangladeshi operating company to be acquired by a foreign holding company, usually based in Singapore or Delaware. Institutional and private investors then acquire shares in the holding company. This trend is down to a perception that the framework for protection of minority investors is cumbersome in Bangladesh, mechanisms for resolving shareholder disputes are slow and exit plans are more difficult to execute. Bangladesh, as a hub of innovation in social business, has seen an increased number of impact investments, where investors have an exit plan in five to seven years. In these cases too, investors are more keen to invest in familiar jurisdictions to ensure they can liquidate their investments at the end of their stay. The ready-made garments sector has seen increased instances of acquisitions of shares of local partners in JVs by foreign partners.

Throughout the last decade, foreign private equity firms have been increasing their activity in Bangladesh's apparel, e-commerce, pharmaceutical and power sectors. Firms such as Brummer & Partners were early movers in the market. Since 2015, when the Bangladesh Securities and Exchange Commission (BSEC) in 2015 formulated the Bangladesh Securities and Exchange Commission (Alternative Investment) Rules, 2015, paving the way for registration and licensing of professional fund managers, several Bangladeshi firms have been able to form and are playing an increasingly important role in the M&A market. The end of 2019 saw the creation of the Alternative Trading Board for transacting non-listed securities. Itis believed that this will also lead to a substantial positive impact on the growth in the market. A draft amendment to the SEC (Alternative Investment) Rules, 2015, reducing lock-in periods and the registration fees for funds, is in the consultation stage and will possibly encourage more local players to enter the market.

There have been some benchmark M&A transactions over recent years. One of these was the merger of Summit Narayanganj Power, Summit Uttaranchal Power Company and Summit Purbanchol Power Company with Summit Power. Although this was an intra-group merger, as with Robi-Airtel, in sanctioning the scheme of amalgamation, the Hon'ble High Court laid down important guidelines as to the extent of the Court's power in determining an application filed before it for the approval of a scheme of amalgamation under section 228 and 229 of the Companies Act, 1994. The Court clarified that its jurisdiction under section 228 and 229 is of a supervisory nature and that it will not replace the valuation approved by the shareholders with its own calculation. Overall, the court demonstrated an inclination to defer to the commercial wisdom of the parties to the scheme and a general willingness to approve the proposed scheme, provided the legal requirements are complied with and the proposed scheme is reasonably sound.

The merger between the Bangladesh operations of Axiata and Bharti Airtel in 2016 is so far the largest merger in Bangladesh's history. The scheme of amalgamation was sanctioned by the Company Bench of the High Court in 2016. The Court, in sanctioning the merger, took a broad view of its role to protect the public interest. The Court found that the merger between two major players in the mobile phone network market had high public significance as the combined subscriber base of the two providers was over 32 million. The judgment took into consideration a range of socio-economic factors, such as consumer interest, employee interest and government revenue. The Court held that under its inherent jurisdiction, it could enable various interest groups and stakeholders to voice their concerns in court which could be considered by the Court in sanctioning a scheme.

The global merger of cement giants Lafarge and Holcim necessitated an acquisition of Holcim's shares in its Bangladesh subsidiary by Lafarge's Bangladesh entity. The agreed transaction price between the parties was $117 million, which Holcim's Bangladesh subsidiary wanted to repatriated. Bangladesh Bank, the central bank, found the price to be too high and approved the repatriation of only $62.5 million. The companies then agreed to carry out the transaction at that price. This has arguably created a negative precedent which will affect genuine transactions and regrettably, there is no valuation methodology clearly laid out Bangladesh Bank to determine the value of a purchase price in order to obtain its approval for remittance of sale proceeds.

The Companies Act, 1994 (the Act) contains the major provisions for M&A in all companies in general. It also regulates acquisition/takeover transactions. Most importantly, section 228 of the Act deals power to compromise with creditors and members while section 229 is about provisions for facilitating arrangements and compromises. Section 230 of the Act provides for the provisions to acquire shares of shareholders dissenting from the schemes or contracts approved by the majority. Necessary ordinances and rules are promulgated, and notifications and orders are published under the Securities and Exchange Ordinance, 1969. Moreover, a series of Acts and Rules have been enacted under the Bangladesh Securities and Exchange Commission Act, 1993. The Bangladesh Securities and Exchange Commission (Substantial Acquisition of Shares and Takeovers) Rules, 2018 was published to replace the 2002 rules. Section 2 (c) of the Rules, 2018 simplified the procedure of substantial acquisitions.

Moreover, section 15 of the Competition Act, 2012 restricts any takeover which may impact directly or indirectly the competition or creates monopoly or oligopoly in the market. The Act of 2012 empowers the Bangladesh Competition Commission to investigate complaints raised under the Act. However, the Competition Commission has not yet been fully operational.

In addition, section 18 of the Foreign Exchange Regulations Act 1947 states that prior permission from Bangladesh Bank is required if a company controlled by residents of Bangladesh is taken over by foreign investors. Industry-specific laws are also required to be followed in case of particular mergers. The Bank Companies Act, 1991, the Financial Institutions Act, 1993, the Bangladesh Telecommunications Act, 2001, Telegraph Act, 1885, fall in the category of industry-specific laws.

The BSEC is the major regulatory body for M&A. However, it may grant exemptions to companies under public-private partnership (PPP) if a public limited company's total capital does not exceed BDT10 million and if a private limited company's total capital do not exceed BDT100 million ($118,000) at any given time after making an issue of capital as envisaged in BSEC Order 2016. Bangladesh's Competition Commission was created by the Competition Act 2012. However, the government has not yet framed any rules for it to regulate M&A activity. In addition, Bangladesh Telecommunication Regulatory Commission (BTRC), Bangladesh Power Development Board (BPDB), Bangladesh Bank (BB) and Insurance Development & Regulatory Authority (IDRA) may also act as industry specific regulators for any particular M&A deal.

In 2018, Bangladesh published its first Digital Commerce Policy, where it barred foreign companies from holding more than a 49% stake in e-commerce companies operating in Bangladesh. The move faced substantial opposition from e-commerce entrepreneurs and has not seen much enforcement as of yet. Alibaba-owned Daraz would arguably face a challenge under this policy and be required to off-load its majority stake in order to continue doing business. Potential entrants such as Amazon would also be deterred from entering the market with this condition.

The BSEC (Substantial Acquisition of Shares and Takeovers) Rule, 2018 has also been published, replacing the 2002 rules. Section 2 (c) of the Rule 2018 has simplified the procedure for substantial acquisitions.

In 2019, the government drafted, but is yet to finalise, an amendment to the Digital Commerce Policy which barred majority stake of foreign shareholders in e-commerce ventures. The amendment, if approved, would allow 100% foreign shareholding but require 95% of human resources to be local.

Parties in M&A transactions often opt for carrying out the transactions at holding company level outside Bangladesh or tend to choose international hubs such as Singapore or Dubai as dispute resolution seats. This stems of a negative perception of Bangladesh's legal system, in particular its capacity to handle and resolve international commercial disputes. Added to this is uncertainty about repatriation of proceeds of share sales. However, Bangladesh is trying hard to establish itself as an arbitration-friendly country, leading to a supportive judiciary which has increasing expertise and experience in dealing with international commercial disputes, and that so on a priority basis. Moreover, the central bank is also mostly liberal about repatriation of profits and share sale proceeds.

Often overlooked aspects of transacting in Bangladesh include integration risk. It is actually a hard task to integrate the operations of two companies and in the absence of proper planning and design, the implementation of business strategies may not be successful. Poor strategic fit is another issue, anda lack of proper pre-M&A research can lead to a party can finding out too late that the major objectives and strategies of the companies do not match each other. Another area is weak financial reporting. Since M&A is not properly regulated, hence financial reports may be prepared exaggerating the actual figures which may ultimately lead to a failure of a transaction. Lack of proper due diligence can lead to a failed M&A since all the crucial matters were not gone thoroughly beforehand. Parties can be overly optimistic, so improper financial statements and overly optimistic projections about the acquired company may lead to wrong decisions and failure of M&A.

Lack of transparency can be a critical factor. In the absence of proper regulatory guidelines concerning valuation, companies may opt for extravagantly high valuations thatmay lead to complexities at the time approving the amalgamation in the Court. Other deals can suffer from a culture clash, astwo companies' corporate environments may differ greatly and this may lead to a failure implement key strategies. Finally, the question of employees is important. One of the most important stakeholders of an M&A is the employees working in the acquired company and often the buyer fails to take them into account at the planning stage.

In terms of market norms for legal practice, since both M&A and the use of technology in business are new concepts in Bangladesh, technology does not play any effective role in the M&A deal-making process. It is pertinent to mention that almost all the companies in Bangladesh store their data manually and not on any software.

The key driver for private entities to obtain control of a public company in Bangladesh has mainly been to recover an institution from immense loss. In Bangladesh, previously, government-owned industries suffered huge loss due to poor management and lack of proper funding. Hence, those organisations were privatised or taken over to overcome those obstacles. In recent times, there has not been any notable privatisation of a public company.

Competitive bids do not involve different considerations and there are no specific conditions attached to a public takeover offer. Nor is there a practice of break fee in Bangladesh.

Sophisticated consideration mechanisms and other tools, such as locked-box mechanisms, completion accounts, earn-outs and escrow, and tools such as warranty and indemnity (W&I) insurance do not exist in Bangladesh.

Conditions attached to a private takeover offer are as follows:

i) The company's articles of association allow a takeover process.

ii) The company's board of directors approve the takeover process.

iii) Approval of the shareholders are required for private placement of shares.

iv) Permission from the BSEC is required.

v) Approval from the sector-specific regulatory body is required.

vi) No Objection Certificate from the lending bank (if any) is required.

vii) Latest tax clearance certificate is required.

viii) All the licences and approvals must be updated and the company must be fully legally compliant.

It is not common to provide for a foreign governing law and/or jurisdiction in local private M&A share purchase agreements since registration of shares after acquisitions are made with a local regulatory body which follows local laws. However, in an M&A between a foreign investor and a private entity, it is common to have a foreign governing law and/or jurisdiction clause in the share purchase agreements.

Selling shares through the capital markets is very usual in Bangladesh as sellers are not obliged to follow the stringent requirements of Bangladesh Bank when repatriating sale proceeds. However, IPOs are often not viable options particularly for investors in start-ups as the company would need to show three years of profitability and at least BDT300 million in paid up capital.

Trade sales are becoming popular recently, as exemplified by Alibaba's acquisition of the largest online shopping platform-Daraz.

Bangladesh is growing at about 8% a year and the economy is creating entrepreneurship and a need for financing. The traditional and popular method of financing – bank loans – are expensive and are becoming problematic as the banking sector is facing a liquidity shortage. The new-generation entrepreneur in Bangladesh is more compliant with laws, is more willing to pay taxes and is not shy of strong financial reporting. It is likely that in 2020 more businesses will look towards funding through M&A in order to avoid paying the high costs of debt-financing.

Bangladesh is successfully branding itself as an emerging tiger in the region and this is bound to materialise into more investments into various sectors of its economy:finance, technology, pharmaceuticals, healthcare, apparel, power, etc. The government has started to take steps to improve its position in the World Bank's Ease of Doing Business rankings and is likely to heed calls to initiate reform in key areas such as the protection of minority investors and enforcement of contracts.

The legal services industry is growing at a faster rate than perhaps the economy itself, with more and more specialised teams working in M&A. The use of technology, although not in practice yet, may start in the near future, enabling law firms to handle deals in a more sophisticated manner.

About the author
		Saqeb Mahbub Associate partner, Mahbub & Company Dhaka, Bangladesh T: +880 172 515 0912 E: saqeb.mahbub@mahbub-law.com W: www.mahbub-law.com Saqeb Mahbub heads the corporate and commercial practice at Mahbub & Company. He has extensive experience advising foreign investors on entity structuring, tax regime, corporate governance, foreign exchange and other industry-specific regulatory regimes. Saqeb has advised clients on multiple cross-border joint-ventures and acquisitions and has significant dispute resolution experience in international trade, shareholder disputes and corporate insolvency. He was the counsel in the landmark 2014 case which established minimum shareholding of directors in listed companies. Saqeb has worked as a consultant for international development organizations such as UNDP, UNHCR, GIZ, World Bank and DANIDA and has also been a consultant for the the Ministry of Law and the Supreme Court on legislative and judicial reform respectively. Saqeb was recently the Bangladesh expert in a study on corporate governance frameworks in the SAARC region conducted by the Asian Development Bank. He is the co-editor of Think Legal Bangladesh, a non-profit legal think tank, and was co-host of Bangladesh's first-of-its-kind 'Corporate and Commercial Law Conference' in 2018.

About the author
		Wahid Sadiq Khan Associate barrister, Mahbub & Company Dhaka, Bangladesh T: +880 173 048 1628 E: wahid.sadiq@mahbub-law.com W: www.mahbub-law.com Wahid Sadiq Khan is an associate barrister at the firm and is part of its corporate and commercial practice. He has in-depth knowledge in corporate, arbitration and admiralty laws and has acted in various capacities for both foreign and local companies on complex international commercial matters. He has represented Eskayef Pharmaceuticals, Orient Group, Unimed Unihealth, BSRM, Akij Gas, New Hope, City Bank and several other well-reputed organisations. Wahid Sadiq Khan obtained his LLB (Hons) from University of London. He acquired a post-graduate diploma in international relations from University of Dhaka. He was called to the Bar of England and Wales from Lincoln's Inn, UK, in 2016.