Introduction on Acquisition

Acquisition has become vital for corporate growth and restructuring in Nepal’s changing economy. With the country’s market economy growing, businesses are turning to (Merger and Acquisition) M&A to gain synergy, market share, and competitiveness. In Nepal, the M&A process is regulated by a mix of legal frameworks, regulatory guidelines, and practical factors that account for the distinctive opportunities and challenges of the local market.

To learn more about Acquisition more, here is an in-depth step by step process mentioned below:-

1.Which corporate entities are typically involved in private acquisitions?

In Nepal, private limited companies are the most common corporate entities engaged in private acquisitions.

Private acquisitions often involve individual investors, foreign companies, and public limited companies as buyers and sellers.

2.Are there any limitations on transferring shares in a private company according to corporate law? Are there any limitations placed on foreign buyers regarding acquisitions?

Restrictions on share transfer

The Company Act 2006 provides that transfer restrictions and procedures can be specified in the articles of association.

The model articles of association for a private limited company with two or more shareholders specify that shares can only be transferred with the approval of the board of directors, and a first right of refusal must be provided to other existing shareholders before transferring them to third parties.

Foreign ownership restrictions

The Foreign Investment and Technology Transfer Act 1992 requires approval for foreign ownership in a local company. Approval from either the Department of Industry or the Investment Board of Nepal is necessary, depending on the investment’s size and nature.

100% foreign ownership is allowed in the manufacturing, information technology, agriculture, tourism, energy, infrastructure, real estate construction, and services sectors. Foreign ownership is restricted to 80% in the telecom and aviation sectors, and to 51% in consulting services.

Foreign investment is not allowed in sectors such as trading of land, household industries, fish farming, chicken farming, and atomic energy.

After approval from the Department of Industry or the Investment Board, a second approval from Nepal Rastra Bank (the Central Bank of Nepal) is required to transfer a foreign investment amount into Nepal (such as the purchase price when acquiring a Nepalese company or assets), and to repatriate sale proceeds if the seller is a foreign party.

There are no country-specific thresholds for making foreign investments. Investors from all countries are allowed to invest and own shares in companies in Nepal.

3.What are the main documents in an acquisition and who generally prepares the first draft?

The following are the main documents required for an acquisition:

• Share purchase agreement.
• Escrow agreement.
• Disclosure letter.
• Side agreements.
• Corporate resolutions.
• Share sale deed.

The buyer’s counsel usually prepares first drafts of the documents, other than the disclosure letter.

Documents used in asset purchase transactions are generally the same, except that an asset purchase agreement is entered into. If applicable, the seller will execute asset sale deeds at completion, or a land transfer deed at the Land Revenue Office.

4.What are the main substantive clauses in an acquisition agreement?

The main substantive clauses in an acquisition agreement include:

• Operative clause providing for the sale and transfer of shares or assets.
• Pricing and tax.
• Representations and warranties.
• Closing procedures.
• Conditions precedent.
• Termination provisions.
• Non-competition clause.
• Confidentiality clause.
• Governing law and jurisdiction and dispute resolution.
• Other boilerplate clauses such as notices, assignment, entire agreement and third-party rights.

Key clauses in an asset purchase agreement are generally the same. The agreement must identity the precise nature of all assets to be transferred, allocate a different price for each asset, and specify different methods through which the transfer of assets will take place.

5.Can a share purchase agreement provide for a foreign governing law? If so, are there any provisions of national law that would still automatically apply?

It is not common for Nepalese parties to select a foreign law to govern the agreement between them. However, the Civil Code allows the parties to decide the governing law of the agreement. If the governing law is not specified, the laws of Nepal will apply to an agreement to purchase shares of companies incorporated in Nepal or assets in Nepal.

In transactions involving a foreign seller or buyer requiring foreign investment approval, a share purchase agreement providing for a foreign governing law will only be approved if the target company’s industry registration certificate specifies fixed capital assets above NPR 500 million.

Nepalese contract law will not apply if the parties choose a foreign law to govern the share purchase agreement. Otherwise, Nepalese law will still apply to the following matters:

• Foreign investment and foreign exchange approvals.
• Employment and competition law.
• Procedures of share transfer governed by the Company Act 2006.
• Any criminal law or quasi-criminal law issues connected to the agreement.

Acquisition process in Nepal presents both opportunities and challenges for businesses seeking growth and consolidation. While the regulatory framework, led by institutions like the Nepal Rastra Bank, provides a foundation for these activities, the complexities of valuation, integration, and compliance must be carefully managed. As Nepal continues to develop its market economy, a deep understanding of the legal, regulatory, and socio-economic factors will be essential for companies aiming to successfully navigate the Acquisition landscape and achieve sustainable growth.

Disclaimer: All contains available here are for general information purposes. A proper legal solution always depends on your particular circumstances thus seeking advice from an attorney who can provide assurances of the information contained herein and interpretation of it.  You are requested to seek legal advice for specific factual situations. If you need further information on this matter, please contact us at Legal Access Nepal Pvt. Ltd. 

Advocate: Yogesh Bhandari, Sushma Dahal and Pushpa Basyal

Contact no. 9851249077/ 9851346722