While private M&A transactions have been generally on the rise in Nepal, there is very little reliable data available on M&A activity. The Office of the Company Registrar approved 170 and 52 merger transactions in fiscal years 2019/20 and 2020/21, respectively. There were 7,672 recorded share sale transactions relating to private companies in fiscal year 2019/20 and 11,773 in 2020/21. There is no data available on sectors and types of transaction.

A recent trend in the domestic M&A market is the establishment of professional investment funds. There are currently over a dozen investors identifying themselves as undertaking venture capital or private equity investments. The Specialised Investment Funds Regulation enacted in 2019 sets out requirements applicable to the operation of specialised investment funds, which include private equity funds, venture capital funds, and hedge funds. Some investors are in the process of obtaining a licence to operate funds from the Securities and Exchange Board of Nepal.

Debt-financed M&A transactions are rare in Nepal. However, there are precedents of Nepalese banks providing acquisition finance to buyers to purchase companies with strong and stable revenues.

Share sales are more common than asset sales in the Nepalese market. Cash deals are typical. Shares and loan stocks are not commonly used. While share swap transactions are on the rise, the majority of transactions are share sale deals paid in cash on closing.

The price is usually fixed during negotiations between the buyer and the seller. Deferred consideration and price adjustment mechanisms are rare in Nepal, although these mechanisms have been used in the hydropower sector. Transactions in the power sector sometimes use deferred consideration by reference to certain milestones (such as signing of the power purchase agreement, financial close, and grant of licences).

Transactions involving foreign investors must be supported by valuation reports prepared by registered accountants (rule 10, Foreign Investment and Technology Transfer Regulations 2021).

Most transactions use minimal documentation consisting of a share purchase agreement, a share sale deed, and corporate resolutions. It is increasingly common for the parties to enter an escrow agreement in transactions involving foreign investors, due to potential regulatory delays to obtain repatriation approval.

Sellers usually provide warranties. Indemnification caps are commonly set at 100% of the purchase price. Insurance companies in Nepal do not provide rep and warranty insurance.

The due diligence process varies depending on the type of buyer and specific transaction. Foreign investors and private equity funds place a lot of importance on legal, accounting, and tax due diligence, while Nepalese trade buyers have a more relaxed attitude and tend to focus on the business of the target company.

Auction sales are very rare in Nepal and most transactions are privately negotiated.

The private limited company is the most common corporate entity involved in private acquisitions in Nepal. A private limited company has a capital divided into shares and shareholders have limited liability. Private limited companies can only invest 60% of their paid-up capital and free reserves, or 100% of free reserves, in other companies, except for companies whose primary objective is to make investments.

Individual investors, foreign companies, and public limited companies are also frequently involved in private acquisitions.

Typical acquisitions involving private companies in Nepal are structured as follows:

A share purchase generally has the following advantages when compared to an asset purchase:

An asset purchase can provide the following advantages when compared to a share purchase:

Generally, assets or liabilities are not automatically transferred in a share sale and can be excluded from the purchase.

There is no provision on employees being automatically transferred on the sale of assets. Employees will continue to be employed by the entity that employed them unless they consent to the termination (see Question 37 and Question 38).

The transfer of liabilities in an asset sale depends on the structure of the asset sale. Tax liabilities and encumbrances directly related to the asset are transferred.

Share purchase transactions are generally less complex than asset purchase transactions for a business sale. A share purchase usually only involves intra-company consents and filing with the Office of the Company Registrar. Regulatory approvals are only required if the transaction involves a foreign investor or is in a licensed sector (for example, power, recruitment agencies, or telecommunications).

Asset transfers may be more complex, as separate formalities may be required for the transfer of real assets, business licenses and registrations, employees, and third-party contracts. The transfer of a company's substantial business must also be approved by special resolution passed at a general meeting.

From a tax perspective, a seller will usually prefer a share sale as it will only be liable for advanced income tax on capital gains. However, there are tax implications if there is a change of 50% or more in the ownership of the company within a three-year period. In this case, the company must be treated as disposing of all its assets and liabilities.

A seller may prefer an asset sale if it can set-off losses carried forward from previous financial years.

The tax advantages of an asset sale for the buyer include:

Sales of companies by auction are not common in Nepal. Most sales are done through private negotiations. There are no procedures and regulations governing sales of companies by auction.

Foreign ownership in a local company is subject to approval under the Foreign Investment and Technology Transfer Act 2019 (which replaced the Foreign Investment and Technology Transfer Act 1992). Depending on the size and nature of the investment, approval is required from the Department of Industry or the Investment Board of Nepal.

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

Foreign investment is not allowed in the following sectors:

The current minimum investment threshold for a foreign investor is NPR50 million.

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). Separate approvals from the Department of Industry and Nepal Rastra Bank must be obtained to repatriate sale proceeds if the seller is a foreign party. There are no country-specific thresholds for making foreign investment. Investors from most countries are allowed to invest and own shares in companies in Nepal.

Documents such as letters of intent, heads of terms or, more commonly, a memorandum of understanding, are concluded between the buyer and the seller before finalising the definitive agreements. The parties usually agree on the price, structure, procedure for due diligence, and other key terms of the transaction.

The key parts of the agreement such as the sale and price, closing date, and obligations are not usually legally binding. Terms such as due diligence, exclusivity, and confidentiality are expressly made binding and enforceable.

Exclusivity clauses are usually incorporated into the preliminary agreement. Enforceability and remedies for breach can be claimed in court. Contractual remedies of damages, injunctive relief, or specific performance are available.

Non-disclosure clauses are usually incorporated into the preliminary agreement. The parties must keep secret and confidential all confidential information disclosed or obtained during discussions and negotiations, or in correspondence relating to the performance and execution of the definitive agreement.

Contractual remedies of damages, injunctive relief, or specific performance are available.

Due diligence typically covers matters such as:

Generally, the seller provides warranties and a disclosure letter that qualifies these warranties.

Due diligence is usually based on a review of documents. The parties first identify and share the relevant documents. Documents are then examined to identify compliance issues. The review leads to conclusions on the compliance status of the target, a categorisation of risks (if any), and mitigation measures. Mitigation measures often form part of the conditions to completion.

The Company Act 2006 provides that a company's articles of association can specify transfer restrictions and procedures. 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.

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. Additionally, shareholders' agreements sometimes include drag-along and tag-along rights. The shareholders' first right of refusal does not generally apply to an issue of shares as consideration for an acquisition.

Sale of a company's substantial assets and mergers require a special resolution passed at a general meeting.

Board approval and valuation reports are required to grant shares as consideration for the acquisition. Shareholder approval is not required to grant shares in consideration for assets, unless otherwise provided in the articles of association or this requires a capital increase. An increase of a company's share capital requires an ordinary resolution passed at a general meeting. Increasing a company's authorised share capital requires a special resolution.

The consent of creditors or counterparties is required to transfer their right to payments or to assign rights and obligations to the buyer in an asset sale, unless the underlying contract provides otherwise.

Sector-specific regulatory approvals may be required depending on the sector in which the company operates. For example, the sale of shares representing more than 5% of the authorised share capital of a company with a telecommunication licence requires prior approval of the Nepal Telecommunications Authority. Additionally, a change in ownership or investment structure of a company holding an electricity generation licence requires approval of the Nepal Energy Regulatory Commission.

Approval of the Department of Industry is required for acquisitions involving companies with foreign shareholding (see also Question 9).

The following are the main documents required for an acquisition:

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.

The main substantive clauses in an acquisition agreement include:

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

Typically, a share purchase or asset purchase agreement includes warranties, unless a transaction is concluded on an "as is" basis, usually when the seller has agreed to a substantial price discount.

The main areas covered by warranties/indemnities are ownership of the shares or assets, authority to sell, and matters relating to the operation of the target company, such as:

Warranties are narrower and more asset-specific in an asset purchase agreement. They usually focus on ownership, authority to sell, and any liabilities specifically connected to the assets being sold.

The main limitations on warranties include:

Warranties are usually qualified by disclosure made by the seller to the buyer. A separate disclosure letter is delivered on the signing date.

Remedies for breach of warranties are usually specified in the agreement. Termination is usually available if the breach is discovered before closing. After closing, the buyer can claim damages or compensation for breach, or apply to void the transaction if the breach of warranty is fraudulent.

Unless specified in the agreement, the time limit for bringing claims under warranties is two years from the date the buyer discovers or is reasonably expected to discover the breach.

Conditions precedent usually depend on the outcome of due diligence and negotiations between the parties. Common conditions precedent in a share purchase agreement are as follows:

It is also common for parties to include a clause imposing an obligation to use reasonable efforts to fulfill the conditions precedent. Generally, the buyer reserves the right to terminate the agreement if the conditions are not satisfied within a certain time.

The following documents are typically produced and executed at signing:

The documents typically produced and executed at closing are as follows:

Different types of documents are subject to different legal formalities. The main different formalities are as follows.

Nepalese law requires documents to be initialled at the top and bottom of each page (other than the top of the first page) and signed on the signature page. Companies must also affix their stamp next to the signatures.

Powers of attorney, deeds of sale, loan deeds, security documents, and guarantees must have the thumbprints of the executors (if individuals) or the company stamp.

Each agreement or deed must be witnessed by two witnesses. The location and date of execution must be specified. Although not required by law, it is also common for deeds to be printed on traditional Nepali rice paper.

There are no additional formalities under Nepalese law for the execution of documents by foreign companies.

Proof of authorisation to sign is required at signing/closing.

Digital signatures provided by an entity licensed in Nepal are enforceable under the Electronic Transactions Act 2007. In practice, digital signatures are rarely used in acquisitions in Nepal.

The formalities required to transfer title to shares in a private limited company are as follows:

The law implies that the seller has good title to the shares and power and authority to sell the shares (section 535, Civil Code). Buyers normally impose a higher standard than implied by law. It is standard for the seller to warrant in the purchase agreement that:

Inclusion of any other terms depends on negotiation between the parties.

Contracts concluded on the basis of misleading statements are voidable and can be declared void if the conduct of the seller constitutes fraud or deceit. However, this can be difficult to prove in practice in transactions between sophisticated parties.

A contract is deemed to be made through fraud or deceit (jalsaji) when a party:

Damages can also be claimed for fraudulent misrepresentation.

Advisers of the seller involved in pre-contractual misrepresentation, misleading statements, or non-disclosure of material information can also be liable for fraudulent misrepresentation.

The Civil Code allows the parties to choose the governing law of the agreement. However, it is not common for Nepalese parties to select a foreign governing law. If the governing law is not specified, the laws of Nepal apply to agreements to purchase shares of companies incorporated in Nepal or to purchase assets located in Nepal.

In transactions involving foreign parties, the Foreign Investment and Technology Transfer Act 2019 now allows parties to enter into dispute settlement agreements. This means that the share purchase agreement can be governed by foreign law and any dispute under the agreement can be submitted to the foreign courts or arbitration. Previously, under the Foreign Investment and Technology Transfer Act 1992, this was restricted to transactions involving target companies whose industry registration certificate specified fixed capital assets above NPR500 million.

Nepalese contract law does not apply if a share purchase agreement provides for a foreign governing law. Nepalese law automatically applies to the following matters regardless of a choice of law:

It is fairly common practice to include arbitration provisions in private M&A documents, particularly in transactions involving foreign investors. Arbitration clauses are enforceable in Nepal under the Arbitration Act 1999. To be enforceable, arbitration agreements must be in writing and the parties must have a defined legal relationship, contractual or otherwise. The Arbitration Act 1999 provides that when an agreement includes an arbitration clause, disputes connected to that agreement or to issues arising under that agreement must be resolved through arbitration.

The local courts respect the choice of jurisdiction in an arbitration clause and the Civil Code of Nepal recognises the parties' freedom to agree on dispute resolution methods. Nepal is a party to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention) (by accession on 4 March 1998).

While most local transactions are subject to the jurisdiction of the local courts, parties to high-value and complex transactions prefer to resolve their disputes by arbitration.

Cash is the most common form of consideration in transactions in Nepal. It is common for parties to pay 10% to 20% of the purchase price on signing of the definitive agreements and the remaining amount at closing.

Shares and promissory notes can be used as consideration, but this is not common in Nepal.

Usually, parties prefer cash as consideration.

Promissory notes have been used as consideration in transactions involving related parties. In transactions involving foreign investors, cash investment certificates are issued by banks receiving the investment amount in the format prescribed by Nepal Rastra Bank.

The main methods used to value target companies/assets are the:

There is no consistent valuation approach in the market and parties often use different methods depending on the type of transaction.

Fixed price consideration is typically agreed. Adjustment mechanisms and earn-outs are not common in the Nepalese market.

Buyers typically pay the price in full on closing. Deferred consideration is not common. Escrow arrangements are increasingly common in large transactions requiring advance payments and transactions involving foreign investors where there may be a delay between the closing date and approval for repatriation of the sale price.

It is not common for buyers to raise cash by an issue of shares to fund an acquisition. However, a listed public company can raise funds for an acquisition through a further public offering (FPO).

The following consents and approvals are required to raise funds through an FPO:

Under the Securities Act 2007, a prospectus is required for an FPO. The prospectus must be approved by SEBON before publication and registered at the Office of Company Registrar.

A company cannot provide any loan or financial assistance of any kind to any person for purchasing its own shares or those of its holding company or subsidiary company, or for gaining any entitlement to such shares (section 62, Company Act 2006).

There are no exemptions from the rule against financial assistance.

Transfer taxes are not payable on the sale of shares.

A land registration transfer fee of between 3.5% and 5% applies to sales of land and buildings. The tax rate is set by the local and state authorities and may differ depending on the location.

Transfer taxes are not payable on a share sale.

There are no exemptions and reliefs from land registration transfer fees.

Advance income tax on capital gains made on a share sale must be paid at the following rates:

Advance income tax paid by a resident natural person and non-resident is final. A resident corporate body is subject to further additional corporate income tax (10%), bringing the total payable rate up to the standard rate 25% for companies. It is possible to deduct other investment losses from the taxable base subject to additional income tax (10%).

The target company must collect and pay advance income tax out of the proceeds of the sale of its shares.

A selling entity must pay tax at the standard corporate rate applicable to it (25% for most companies) on any gains made on a sale of assets.

A resident natural person must pay income tax at 10% on any gains made on a sale of assets.

Non-residents must pay income tax at 25% on any gains made on a sale of assets.

The Income Tax Act 2002 allows the government to conclude international agreements with other countries to avoid double taxation. Nepal has concluded agreements with India, Norway, Thailand, Sri Lanka, Mauritius, Austria, Pakistan, China, South Korea, Qatar, and Bangladesh. Under these agreements, if a person's income is taxable in both countries, benefits such as exemptions or lower tax rates are available. Double tax relief is available for gains on a sale of shares.

A loss from a disposal of business assets can be set off against a profit from a disposal of other business assets.

Double tax relief is available for gains on sales of movable property under double taxation agreements. However, it is rare for foreign companies to directly hold assets in Nepal.

Share sales are exempt from value added tax (VAT).

The buyer must pay VAT at 13% on a purchase of goods or assets subject to VAT. Transfers of land and buildings are exempt from VAT, but VAT is payable on transfers of other assets such as plant, machinery, vehicles, and stock.

The target company may also be subject to additional corporate tax (at 25% for most companies) if there is a change of 50% or more in the ownership of the company within a three-year period (section 57, Income Tax Act). In this case, the company must be treated as disposing of all its assets and liabilities at market value and tax is imposed if the deemed disposal results in a gain.

Nepal does not allow tax consolidation or combined reporting of group companies for tax purposes. Surrendering losses between companies in the same group is also not allowed. Each company is treated as a taxable entity and has separate tax liability for its income and transactions.

There is no obligation to inform or consult employees, representatives, or trade unions in an asset sale. If employees are to be transferred to the buyer, an agreement relating to the transfer must be concluded and consent from the individual employees must be obtained. Typically, on the consent of the employees, employment contracts with the previous employer are transferred to the new employer. Alternatively, new employment contracts can be concluded with the new employer.

There is no obligation to inform, consult, or seek consent of employees, representatives, or trade unions in a share sale.

Employees cannot be dismissed solely because of a business/asset sale. However, if the business sale results in excess workers or closure of the business or part of it, employees can be dismissed under the retrenchment procedure set out in section 145 of the Labour Act 2017. Before retrenchment, the employer must pay severance payment to the retrenched employees.

The employment relationship between the target company and its employees is not affected by a share sale. Employees cannot be dismissed solely because of a change in ownership of the target employer.

Consent of individual employees is required for a transfer from the seller to the buyer. The seller and the buyer must enter into a separate agreement on the transfer of the employees. The terms of employment remain the same, and the social security fund, provident fund, and gratuity fund of the employees must be transferred as set out in section 109 of the Labour Act 2017.

Not applicable.

There are no private pension schemes in Nepal. Instead of private pensions, employers maintain a provident fund, a gratuity fund, and a social security fund for their employees. The government recently launched a contribution-based security fund in which all private sector employers and employees are required to participate. Amounts held in other funds must be transferred to the new social security fund by the employer.

If employees consent to transfer their employment from the seller to the buyer in an asset sale, the seller employer must also transfer the provident fund, gratuity fund, and social security fund to the new employer, or the new employer must provide equivalent rights.

The Competition Promotion and Market Protection Act 2007 is the main legislation that governs anti-competitive activities in Nepal. Section 5 of the Act prohibits mergers or amalgamations intended to limit or control competition.

An enterprise that produces or distributes any goods or services with the intent to maintain a monopoly or restrictive trade practices cannot:

Under the Company Act 2006, the Office of the Company Registrar must not approve a merger if it appears to create a monopoly or unfair trade restriction or to be contrary to the public interest.

There are no notification requirements.

There is a presumption of intent to limit/control competition if the merger, amalgamation, share purchase, or takeover of persons or enterprises that produce or distribute similar goods or services results in a 40% market share of the total production or distribution in Nepal.

Under the Environment Protection Act 2019, the polluter (person or entity) is liable for causing pollution and environmental damage through its activities. A person or entity suffering any loss or damage due to any polluting activities can claim compensation from the polluter.

The buyer can inherit liability when purchasing the shares of a polluting company or polluting assets. The law does not specify the circumstances in which a buyer inherits environmental liability. However, in a share sale, the buyer will usually inherit the target's liabilities on transfer of the shares. In an asset sale, the buyer will only be liable for environmental damage caused by a purchased asset that occurred before the sale if the buyer specifically assumed liability.

It is not common to carry out environmental due diligence surveys and searches, except in sectors that involve environmental risks.

Compliance with environmental laws is often covered by the seller's representations and warranties.

There have been significant regulatory changes due to the adoption of the:

Lack of consultation, poor co-ordination, and poor drafting of regulations have resulted in a challenging regulatory framework for foreign investors. Foreign investors must obtain approval to sell shares and invest in Nepal, as well as two separate approvals from Nepal Rastra Bank and the Department of Industry to repatriate earnings from the sale of shares. This has increased risk for foreign investors who must transfer their shares before obtaining repatriation approval.

The market next year is likely to be affected by the impact of the COVID-19 pandemic on businesses, particularly in the tourism, hospitality, and transport sectors. While e-commerce and internet-based businesses will require more capital to grow, transactions in pandemic-affected businesses will be driven by the need to survive.