5 ASIAN LEGAL BUSINESS – INDIA E-MAGAZINE WWW.LEGALBUSINESSONLINE.COM BROUGHT TO YOU BY EMERALD LAW OFFICES What are the core elements and key steps in the legal framework of M&A transactions for acquisition of greenfield and operational solar projects? What challenges have you typically encountered in your experience, and what strategies can be employed to navigate them effectively? As India progresses towards its renewable energy targets, there has been a notable uptick in M&A activity within the solar project sector. We have been actively advising numerous clients in navigating this evolving landscape. In a greenfield solar project, the Solar Power Developer (“SPD”) typically aims to exit post securing a power purchase agreement (“PPA”) with the government or a private entity, often prior to finalizing land acquisition and prior to commencing other critical activities such as EPC and financial closure. The legal challenges faced in such acquisitions may vary depending on the specifics of each project. However, common challenges and potential strategies to address them include: 1. Diligence on the Project Company: Typically, the project company takes the form of a newly incorporated special purpose vehicle (SPV), simplifying the due diligence process on the SPV. Nonetheless, conducting a comprehensive review is recommended, encompassing compliance with Registrar of Companies (RoC) filings, assessment of outstanding liabilities, and verification that its Articles of Association permit engagement in solar projects etc. Additionally, any obtained licenses should be well scrutinized as part of the diligence process. Before finalizing acquisition documents, the purchaser typically evaluates the Power Purchase Agreement (PPA) and its financial terms. In cases of private PPAs, amendments may be requested based on the purchaser’s review. 2. Lock-in Period: In government projects, there is typically a restriction on changing the controlling shareholding of the project company for one year from the Commercial Operation Date (CoD). Consequently, equity share acquisition may occur in 2-3 phases. Initially, a partial share purchase allows the purchaser certain project decision-making rights without altering control of the Project Company. Subsequently, the remaining shares are acquired post lock-in period expiration. During this period, parties execute a shareholder’s agreement outlining the purchaser’s and seller’s rights and obligations regarding the project company, including Board structure, EPC and O&M appointments, and financial closure decisions. For private projects, the acquisition of the entire project company’s shares may also occur in multiple phases. 3. Land Diligence and Acquisition: As with any infrastructure endeavor, land holds paramount importance in a solar project. Before acquiring shares of the project company (and in phase I for government projects), the purchaser conducts meticulous land diligence. Identified issues are addressed with assistance from the seller, who becomes obligated to ensure the execution of binding land documents (sale deed or lease deed) with the project company. Simultaneously, the land title is transferred along with possession to the project company upon the purchase of phase I shares. 4. Payment of Consideration and Deal Structure: In cases where the project stakes are higher or involve government projects, the structuring can become more intricate. Structuring entails phased equity share purchases with varying consideration amounts, necessitating comprehensive tax advice. Each phase would entail distinct conditions precedent to be fulfilled by the seller, such as: (a) Clearing land title; (b) Arranging agreements with EPC and O&M Contractors to the purchaser’s satisfaction; (c) Achieving financial closure to the purchaser’s satisfaction; (d) Providing promoter guarantees to lenders, with the purchaser potentially replacing them upon final acquisition or offering backto-back guarantees to the seller; (e) Pledging shares, with the purchaser. In scenarios where a solar project has achieved commissioning and is fully operational, its structure mirrors a conventional M&A transaction. However, unlike greenfield projects, due diligence on the project becomes far more intricate, involving reviews of EPC and O&M Contracts, lending/financing documents, land documents and diligence, existing tax or other liabilities, and corporate compliances. If the acquisition is phased for commercial reasons, interim shareholder agreements may be necessary. During these stages, the purchaser may gain full control over the project company if permissible under the law. Additionally, both the purchaser and the seller would typically possess compulsory call options and options, respectively, ensuring the purchase and sale of all remaining shares of the project company. Beyond these considerations, further challenges may arise, with various approaches available to address them, contingent upon the transaction’s nature. In our experience with M&A transactions in the solar sector, whether representing the acquirer or seller, we’ve encountered varying degrees of complexity, often contingent upon the commercial intent of the parties involved. Nevertheless, despite the intricacies, it’s entirely feasible to navigate and address risks for both the buyer and seller, ensuring their interests are safeguarded in an equitable and neutral manner, ultimately benefiting both parties. A conversation with Madhavan Srivatsan Madhavan Srivatsan Senior Partner E: msrivatsan@emeraldlaw.in Emerald Law Offices G-2, Ground Floor, Anand Niketan, Benito Juarez Marg, South Moti Bagh, Delhi 110021 W: emeraldlaw.in
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