Buying or Selling businesses in Bangladesh

by Barrister Tahmidur Rahman | Jun 13, 2023 | 2023, Law

Buying or Selling businesses in Bangladesh

If you intend to acquire or sell a business, it is imperative that you hire M&A law firm with the appropriate credentials and experience. The acquisition of a business and the execution of an exit strategy are crucial milestones, and our corporate attorneys have a history of guiding our clients with expertise.

Whether you are building your business through acquisitions, acquiring a distressed business from an administrator, or selling your business to a trade buyer, private equity firm, or to management, we make it a priority to understand your objectives and priorities so that we can deliver a deal that is tailored to your specific goals and circumstances.

We frequently represent both purchasers and sellers, and our corporate team has extensive knowledge of the challenges faced by both parties. As part of the Euro- South Asian network, we have access to attorneys and other professional advisors throughout Europe and Asia, enabling us to offer seamless cross-border M&A services.

Transactional Structures (equities versus assets):

In addition to the various transaction types (trade sales, MBOs, EOTs, etc.), there are two primary methods to sell/buy a business. These are an asset sale, in which all (or a substantial portion of) the business’s assets and contracts are transferred to the buyer, and a share sale, in which the buyer acquires shares in the corporation that owns the business.

If the business is owned by an individual or partnership, the transaction must be structured as an asset transfer (unless the business is first incorporated). If the business is operated by a limited liability company, the buyer and seller will typically concur on whether a share sale or an asset sale will occur.

When choosing between these options, both buyer and vender face advantages and disadvantages, including the following:

Continuity:

• Share sale – the legal entity carrying on the business remains the company, and little will have changed externally. This also means that extant trading contracts are more likely to be unaffected (although some contracts contain termination clauses or require notice in the event of a change in ownership).
  
• Asset sale — the purchaser will become the operating company. Consequently, the transfer of particular assets may require additional steps (such as the registration of real estate transfers with the land registry and the transfer of domain names) to be “perfected.” Additionally, all existing contracts must be assigned (which frequently requires the consent of the respective consumer or vendor).

Liability

• Share sale – the company retains all of its existing liabilities, which must be factored into the purchase price by the buyer. As a result, the buyer will be eager to obtain sufficient assurance regarding the exposure (via due diligence and contractual protections). An underlying liability will remain with the company even if neither the buyer nor the vendor was aware of it.
  
• Asset sale – unless the buyer expressly agrees to assume the seller’s existing liabilities (which will typically require the consent of a third party), the seller’s existing liabilities will typically remain with the seller.

Employees

The treatment of employees differs significantly between the sale of shares and the sale of assets. In the event of a share transaction, the employer does not alter. The personnel will transfer to a new employer upon the sale of an asset. This is typically the result of law’s automatic operation and is extremely difficult to avoid.

The Transfer of Undertakings (Protection of Employment) Regulations (commonly referred to as TUPE) stipulate that not only do employees automatically transfer to the new owner of a business, but they do so as if they had always been employed by the buyer, meaning that the buyer assumes all existing liabilities of the seller.

Assets

Assuming that the assets of a business belong to the company, when the shares are transferred to the buyer, the assets will remain under the ownership of the company, even if the buyer and/or seller were oblivious of them.
Sale of assets – each asset must be transmitted to the buyer. The parties are permitted to “cherry-pick” the assets they wish to acquire, and the agreement between the buyer and vendor must specify which assets are being sold and which are being retained by the seller.

VAT

On the transfer of shares, no value-added tax is imposed.
Asset sales are not subject to VAT if the transfer is of a “going concern.” If this condition is not met, then the transfer of the assets may be subject to VAT.

Stamp Duty

Share transactions are subject to a 0.5% stamp duty on the purchase price.
On the transfer of the vast majority of assets, no stamp duty is due. Land is the most obvious form of asset for which stamp duty is payable upon transfer.
There are also a number of common elements in a business sale, regardless of whether the transaction involves the transfer of shares or assets.
In each instance, the buyer will want to conduct due diligence investigations to ensure that it understands what it is purchasing and to support this effort with contractually binding provisions pertaining to the business and its assets (known as warranties and indemnities).

Price and payment terms must also be negotiated and agreed upon by the parties. Notably, the parties may wish to agree on a mechanism to modify the purchase price to reflect the financial position of the business at closing (for example, a stock take or clarification of the cash, debt, and working capital position). They may also consent to an increased or decreased purchase price based on the business’s future performance.

Tax Issues on buying a company in Bangladesh

Depending on whether the transaction is a share sale or an asset sale, the tax treatment for both parties may differ. Typical tax issues involve structuring the acquisition vehicle and determining how to use retained earnings in a tax-efficient manner to finance a portion of the purchase price. Frequently, tax issues arise in relation to the purchase price structure, especially with deferred consideration and the use of promissory notes or consideration shares in the acquirer.

We have extensive experience with these matters and work closely with tax advisors and accountants to ensure that the transaction is tax-efficient.

How can Tahmidur Rahman Remura Wahid assist as a law firm in Bangladesh?

In addition to our corporate team’s expertise in advising on M&A transactions, we also provide corporate support from our real estate and labor attorneys. Please contact a member of the corporate team if you have any questions or are seeking for information on business purchases or any other corporate law matter.

Purchasing or Selling a Company in Bangladesh

If you are selling or buying a business or only a portion of its assets, or if you are selling or buying partial or complete shares in a company, we can assist you with the entire process.

Whether your transaction is large or small, involves the sale or purchase of assets, shares, or a combination of both, our experienced Sydney business attorneys can guide you through the entire process, from due diligence to completion.

Whether you are buying or selling a business or company, there are numerous factors to consider, and we can assist you with:

What is being marketed and bought?

• Overall business, including its goodwill and assets
• A portion of the business Company’s assets, consisting of a 100 percent shareholding in the company
• Some of the company’s shares were sold.

We are able to assist you with any of the above commercial transactions. Buying or selling a business can be a life-altering experience. Therefore, it is reassuring to know that all legal aspects of the transaction can be managed by skilled and seasoned legal professionals who will always act in your best interests. We advise you to contact our Sydney business attorneys as early as possible in the sale or purchase process to ensure that we are able to assist you with this significant life event.

Undertaking Due Diligence:

Due Diligence is an essential component of any business transaction, especially if you are the buyer. Due diligence is the investigational procedure by which a buyer mitigates the risk of acquiring a business or company that may not be viable. Due diligence generally involves:

• Verifying the banking and financial position of the business or the company and the value of the business or the company;
• reviewing the material contracts associated with the business(es), including lease(s) or ownership of premises (if any);
• verifying the corporate ownership structure, ownership of business assets, including IT and intellectual property rights;
• verifying the employees and suppliers of the business or the company, including by communicating with them; inquiring about the business or company’s employees and suppliers;
• inquiring about the business or company’s employees and suppliers
• In all of the aforementioned situations, the vendor must reasonably cooperate with the buyer to provide requested information for the buyer’s due diligence investigations.

As part of the process of conducting due diligence, consider the following:

What pertinent characteristics should I search for?

Aspects such as the business operation and its model, the legal structure, obtaining independent financial advice about the business’s financial success, and many others should be considered.

When should I conduct my homework?

After you and the vendor have negotiated contract terms, but prior to signing the sale of business contract, you should conduct your due diligence.

Can a law firm assist with my due diligence?

Yes. Our commercial law team can advise you throughout the entirety of a transaction, particularly in regards to the legal interests of the business. Please note, however, that we cannot provide you with financial advice.

What is Loyalty?

The goodwill of a business is a unique asset and a crucial factor in retaining existing consumers and attracting new ones, thereby maximizing the company’s revenue and profits. When purchasing a business, the vendor sells and the buyer purchases the following significant assets:

Stock; Equipment; and Goodwill:

As the business’s infrastructure and inventory are tangible assets, its only intangible asset is its goodwill. Goodwill may consist of the business’s identity, associated intellectual property such as trademarks and patents, customer list or database (client books), or something similar.

Capital Raising:

Our experienced commercial attorneys at Ivy Law Group have the knowledge and resources necessary to assist you with your proposed capital raise endeavor, as well as determining which form of capital raise will work best for you and your business.

Here is a table summarizing the key stages and considerations involved in buying and selling a business in Bangladesh:

Forms of Capital Fundraising

Debt Capital

Capitalization through debt – also known as the bank (or family and acquaintances). This prevalent and well-known method of capitalization is known as debt capital. This is equivalent to obtaining money.

Equity Capital

Equity capital enables you to raise more capital than you could via a loan or security. However, this type of capital raise requires you to transfer a portion of your business in exchange for growth capital. Typically, angel investors and/or venture capitalists supply the funds required to raise equity capital. Due to the diverse requirements and restrictions pertinent to businesses under these regimes, prudence is essential for these forms of capital raising.

Other types

Crowd-Sourced Funding is a new and popular method of raising capital through online intermediaries, in which online investors raise the capital your business requires for a minuscule portion of your business.

Do I require a law firm for a capital raise?

Several legal requirements must be satisfied during a capital raise matter, and numerous legal documents and contracts must be drafted in relation to the capital raise. Tahmidur Rahman Remura Wahid Law Group strongly advises that you seek the assistance of one of our seasoned business and commercial attorneys for assistance with this process.

Are you planning to buying, selling or registering a Private limited company in Bangladesh?

Company formation and registration at Tahmidur Rahman Remura: The Law Firm in Bangladesh:

The legal team of Tahmidur Rahman, The Law Firm in Bangladesh – The Law Firm in Bangladesh are highly experienced in providing all kinds of services related to forming and registering a Private Limited Company in Bangladesh . For queries or legal assistance, please reach us at:

E-mail: [email protected]
Phone: +8801847220062 or +8801779127165

Address: House 410, Road 29, Mohakhali DOHS

Definitive Purchase Agreement in Bangladesh

by Barrister Tahmidur Rahman | Jun 13, 2023 | 2023, Law

Definitive Purchase Agreement: What is a Definitive Purchase Agreement?

A Definitive Purchase Agreement (DPA) is a legal document that captures the terms and conditions of a merger, acquisition, divestiture, joint venture, or other form of strategic alliance between two companies. It is a legally binding agreement between the buyer and seller that specifies the asset being purchased, the purchase price, representations and warranties, closing conditions, etc.

The Final Purchase Agreement supersedes all prior oral and written agreements and understandings between the customer and seller. Sometimes, a DPA is referred to as a “Stock Purchase Agreement” or a “Definitive Merger Agreement.”

Ordinary business contracts safeguard the interests of businesses. The protection of the interests of all parties involved in business transactions is facilitated by definitive agreements.
Included in definitive agreements are:

• Stock Purchase Contracts
• Purchase Membership Agreement
• Asset Purchase Contract

By having clear and enforceable contracts, both parties can be certain of their expectations and the consequences if contractual obligations are not met. Thus, well-written contracts help your business avoid future misunderstandings and conflict.

What do your contracts’ terms and conditions look like for Definitive Purchase Agreement?

Contracts aid in protecting both parties’ interests and ensuring clarity from the outset.
We can assist you in conducting your due diligence prior to concluding a contract. Due to the fact that every business is unique, both the buyer and vendor require legal counsel to ensure that all terms are clear and concise.

To protect your business interests, we evaluate every aspect of the sale on your behalf!

Having everything stated out in a contract ensures that both parties are aware of what to expect, eliminating any confusion or ambiguity that could lead to issues in the future.

Lawyers receive a great deal of animosity from bankers and financiers, but one fact is frequently overlooked amidst this animosity: in many instances, you will be professing to be a lawyer regardless of your actual title.

When an M&A transaction is about to close and both parties begin disseminating the Definitive Agreement, one of these situations occurs.

Comparison Table: Definitive Purchase Agreement vs. Letter of Intent

Comprehensive Purchase Contract

The possession of a company is transferred using a Definitive Purchase Agreement. The agreement also includes schedules or appendices that describe the inventory list, essential personnel, tangible assets, net working capital determination, etc.

What is a Binding Contract?

It is known by numerous other names, such as “stock purchase agreement” and “definitive merger agreement,” etc.

In each case, however, it does the same thing: it outlines the terms of the finalized transaction between the buyer and vendor.

In contrast to a “Letter of Intent” (LOI), a preliminary document prospective purchasers may send when considering the acquisition of a company, the Definitive Agreement is… definitive. Final. The conclusion.

The essential terms consist of:

The Buyer and Seller, Price (per share or in one total sum for private companies), and Transaction Type.
This section is straightforward for public companies: the price is always stated per share, with the precise number of shares and the treatment of dilutive securities detailed later.

However, there are a few potential terms worth noting in this section:

Exchange Ratios and Collars –

In the real world, the majority of stock-based transactions are based on fixed or a(e.g., the seller receives X shares of the buyer for each of its own shares). Collars enable both parties to hedge the risk of declining or rising stock prices by adjusting the exchange ratios based on the buyer’s price.

Earn-Outs – Does the buyer only pay the seller a portion of the purchase price if certain milestones, such as specific revenue and EBITDA figures, are reached in the years following the conclusion of the transaction?

These two factors make it more difficult to provide an exact “price” for the transaction; if either of them applies, you must clarify it when summarizing the terms.

Outstanding Shares, Options, RSUs, and Other Dilutive Securities:

In some transactions, vested, exercisable options are “cashed out” (e.g., if the strike price is $8.00 and the per-share purchase price is $10.00, option holders receive the difference) and unvested options are converted into options for the buyer’s stock…

However, this is not always the case, and you must thoroughly review the treatment of other dilutive securities because it affects the effective purchase price.

Declarations and Guarantees:

In this section, both parties must state certain facts (“representations” or “reps”) and then “warrant” that each one is accurate.

This is almost always more extensive for the vendor, who must comply with taxes, regulations, intellectual property laws, internal accounting controls, contracts, etc.

This section typically contains a statement from the vendor regarding the financing of the transaction, e.g., if they need to issue debt to complete the transaction, they may discuss the commitment letters received from lenders.

This section is comparable to the covenants when a company raises debt; they may be positive (you MUST do this) or negative (you CANNOT do this).

Covenants:

Similar to debt covenants, the vendor may be prohibited from spending more than a specified amount on CapEx, selling assets, issuing stock or debt, etc.

This section prevents the seller from “looting” itself prior to being acquired; no buyer wants to pay billions of dollars for a company only to discover that the seller sold off all of its assets and raised a massive amount of debt just before the deal closed.

Solicitation (“No Shop” as opposed to “Go Shop”):

Obviously, a buyer wants to avoid being outbid by other potential acquirers; therefore, it is in their best interest to include a “no shop” clause that prohibits the company from considering alternative offers.

However, public vendors must consider all unsolicited offers due to fiduciary responsibilities. This is referred to as a “window shop,” and it is sometimes included in the contract for private sellers as well.

A “Go Shop” clause, on the other hand, allows the vendor to actively solicit bids from other buyers; this term may be used as a compromise if the seller does not receive the price it desires.

Sometimes, it’s also used to reduce the risk of potential lawsuits if there wasn’t a genuine “market check” before the transaction was announced – if this clause exists, the seller can say, “We spent time soliciting bids, but no one offered a higher price for the company. This is the greatest price we were able to negotiate.”

There is typically a 30-to-60-day time limit to prevent sellers from auctioning themselves off forever.

Financing

This section is most important if debt is involved; the buyer must explain where the financing is coming from if it’s not cash on hand or stock issuance.

Fee for Termination (or “Break-Up Fee”)

This clause is intended to penalize the seller if the transaction falls through or, more commonly, if the seller rejects the initial offer and accepts a competing bid.

This is typically between 2% and 4% of the Equity Purchase Price (4% would be more aggressive), but it’s almost always specified as a lump-sum dollar amount in the agreement, so you’ll need to do the math to determine the percentage.

These fees are more prevalent with public sellers, where competing bids can arise more readily, than with private sellers.

Indemnification:

What occurs if the seller concealed or failed to disclose a substantial liability? The vendor pays a substantial fee.

This clause is uncommon for public vendors, but quite common for private sellers. A portion of the purchase price may be deposited into an escrow account and then released once the buyer has confirmed that the seller has not engaged in any illegal activity.

Then there are “baskets” and “caps” that limit the seller’s liability; for instance, if the basket is $100,000 and the cap is $10 million, the buyer can only make a claim if it is worth more than $100,000, but it cannot seek more than $10 million in damages.

Clauses for Materially Adverse Change (MAC) and Materially Adverse Effect (MAE):

These clauses provide the vendor with a “out” if something catastrophic occurs between the signing and closing of the contract.

As you might expect, “something catastrophic” is subject to interpretation, and these clauses are written in vastly different language in various contracts.

For a long time, these portions were almost an afterthought, but during the financial crisis, buyers began to interpret “material adverse change” as “economy/stock market crashing and banks failing.”

Exclusions to these clauses are written into the agreement to prevent buyers from withdrawing if the company misses its projections, an employee leaves, or there is a general industry downturn (these differ greatly depending on the deal).

Closing Requirements:

This section summarizes the conditions that must be met for the transaction to close; it is primarily a summary of the previous sections.

In the United States, references to the HSR Act can be found in nearly all M&A transactions (deals of a certain magnitude must be approved by regulators).

What Does NOT Come with the Agreement?:

Arguably more intriguing than what IS included in the Definitive Agreement is what IS NOT included:

Complete financial projections or models for the companies.
Any information regarding potential revenue or cost synergies or dis-synergies, anticipated restructuring costs, etc.
The end result of a Fairness Opinion.
The exact quantity of cash, stock, and debt utilized (at least for public sellers), as well as the terms of the debt.
The intention is to keep the agreement focused on “the facts,” as opposed to prospective performance speculation.

Types of Binding Purchase Contracts:

There are two varieties of purchase contracts:

1 Stock Purchase Contract

By means of a Share Purchase Agreement, the vendor transfers the entity’s shares into the buyer’s name. Therefore, the purchaser now possesses the assets and liabilities previously held by the selling entity. This transaction type is also known as a “Stock Sale.”

2 Asset Acquisition Agreement

In an Asset Purchase Agreement, individual assets rather than the entire company are transferred from the vendor to the buyer. The vendor retains ownership of the entity, while the buyer merges the assets into his existing company or incorporates them into a new company.

Clauses in a Binding Purchase Contract:

1 Definitions of Important Terms

The agreement will define the terms and their meanings utilized throughout the document. It will explain how the buyer and vendor are referred to in the document, the significance of the closing date, the availability of sufficient working capital, etc.

2 Acquisition Consideration

The purchase consideration is the total amount that the buyer is obligated to pay the vendor. In addition, it discusses any necessary adjustments to the purchase price. It specifies the earnest money that is deposited in the escrow account, earn-outs, third-party financing, required working capital at the time of closure, etc., and provides a complete breakdown of the payment schedule following the closing date.

3 Guarantees and representations

In this section, both the buyer and vendor must make “representations” and “warrant” that the statements are accurate. Also known as “Reps and Warranties,” this is one of the most essential and lengthy sections of the agreement, and it is heavily negotiated.

The objective of the buyer is to obtain exhaustive representations and warranties, as they provide valuable information about what the buyer is paying for. On the other hand, the objective of the vendor is to restrict reps and warranties.

The vendor is in compliance with government regulations, the Worker’s Compensation Act, intellectual property laws, and has the legal authority to sign the agreement, etc., is a typical warranty.

Representations and Warranties:

The seller may limit its reps and warranties, however, by embracing the following:

Duration –

It may make a representation or warranty until a certain time, after which it will not be responsible for any occurrence.

Materiality –

It qualifies a representation or warranty by defining what is material and what could have a materially adverse effect.
Limiting the scope to what was provided in the virtual data room during the transaction process is an option.
Disclosure Schedules – It may also limit warranties and representations based on the information provided in the disclosure schedules.

This section addresses the possibility of the seller seeking out additional customers. A number of commonly used phrases are included in the agreement so as to convey their true meaning to both parties.

No-Shop Clause – This clause prohibits the vendor from pursuing additional buyers. This clause is advantageous to the buyer because he or she does not need to stress about being outbid by other potential acquirers.

This clause permits the vendor to actively seek out bids that are more favorable than the current one. This clause may be utilized when the seller is unable to obtain the intended price. The inclusion of this clause is undesirable from the perspective of the client.

Indemnification Provisions

Although the representations and warranties form the basis of the definitive purchase agreement, the indemnification clauses lend it strength. With this clause in place, the vendor must pay a hefty fee if he or she has failed to disclose a liability or has covered it up. The following indemnification clauses are frequently negotiated:

Sandbagging Clause – This clause is favorable to the buyer because it permits the buyer to file an indemnity claim based on breaches even if they were known prior to the closing. The vendor attempts to limit the buyer’s remedies on the basis of prior knowledge of an error or breach.

Continuity – An indemnification clause is not permanent. This provision stipulates an expiration date for indemnification claims made under the section on representatives and warranties. The duration of survival varies between 12 and 24 months.

Type of Damages – Parties negotiate extensively the types of damages that can be recovered under the definition of “Damages” or “Losses.” The buyer by default would like this clause to be as broad as possible and will want to include punitive damages, whereas the seller would want to explicitly exclude punitive, consequential, and similar damages, and may also look to exclude diminution in value damages.

Baskets & Deductibles – Baskets and deductibles are clauses that are intended to assure the vendor that he or she will not be liable for insignificant claims.

In the case of baskets, the seller is responsible for the buyer’s entire loss only if it exceeds the amount agreed upon in the basket. For instance, if the basket is worth $100,000 and the buyer’s loss is $70,000, the vendor is not required to compensate the buyer. In contrast, if the buyer’s total loss is $120,000, the vendor must cover the entire amount.

In the case of deductible provisions, the seller is only responsible for the amount of loss in excess of the deductible. Typically, both of these clauses are incorporated into the agreement.

Cap – Enables the setting of an utmost limit on the seller’s indemnification duty. It can be specified as a percentage of the transaction amount or a fixed dollar amount. In an ideal situation, the seller would prefer a cap and would prefer that it be as low as feasible, whereas the buyer would not prefer a cap or will negotiate to increase the size of the cap.

Closing Requirements

As regulatory approval is typically required, there is typically a delay between the signing of the agreement and the closing of the transaction. With such a time lag, there are conditions that must be met by both parties for the transaction to close successfully. The other party is not required to complete the transaction if certain conditions are not met.

Popular closing conditions in a Definitive Purchase Agreement include the following:

Buyer should request that representations and warranties are accurate as of the signature date and closing date.
As not all reps can be standardized, buyer and vendor can also negotiate the accuracy requirements for reps and warranties.
Material Adverse Effect is a factor that determines whether or not the closing conditions have been satisfied.
Miscellaneous Provisions

In addition to the above-mentioned significant provisions, the following provisions must also be considered:

Inventory – This section describes the inventory the vendor must have at the time of closing, as well as the valuation adjustments that may be necessary in the event of any changes. As annexures, a comprehensive description of the inventory is also included.

Resolution of Disputes – If there is a dispute between the parties, they should attempt to resolve it through discussion. In the event that they are unable to do so, the applicable laws will govern the agreement.

Termination Fees – This clause is inserted to penalize the vendor or buyer if the transaction falls through due to a last-minute change of heart. It is typically between 2% and 3% of the Enterprise Value.

Finder’s Fees – It is specified who pays the fees to the financier designated for the transaction. Typically, each party pays a fee to the advisor they’ve chosen.

Annexures to the Definitive Purchase Agreement include the Key Employee Agreement, Fixed Assets, Escrow Agreement, IP Agreement, and Net Working Capital Determination Methodology, among others.

Here are some items that are excluded from the agreement:

• The company’s anticipated development in the future and its projections
• The precise parameters of the buyer’s debt financing.
• Potential cost savings and revenue gains
• Financial model and expenditure commitment
• Relevant reading

Thank you for perusing the definitive purchase agreement guide by Tahmidur Rahman. See the following Tahmidur Rahman resources to learn more about mergers and acquisitions:

Contract Agreement & Breach of Contract in Bangladesh Services By TRW Barristers and law firm in Bangladesh

At TRW Barristers in Bangladesh, as the leading law firm in Dhaka, we also already supported our clients in securing the full compensation for a broken contract by means of out – of-court settlement or litigation. We will inform our clients with full clarity on the steps that need to be taken to minimize the damage caused by the breach and also enable them to obtain the best possible solution in the event of damage that has already been sustained in Contract Agreement & Breach of Contract in Bangladesh.

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Covenants and Easements in Bangladesh

by Barrister Tahmidur Rahman | Jun 13, 2023 | 2023, Law

Covenants and Easements in Bangladesh

Since the evolution of human societies, there has been a requirement for the accumulation of essential resources, such as food, water, etc. The basis for this was the unpredictability of nature.

The earliest humans did not have consistent access to resources. Once we learned how to cultivate crops, which served as a constant source of food and were essential to human survival, we had to live in close proximity to these cultivated lands. People eventually began living together, sharing the burden of cultivating these crops and savoring a guaranteed food supply.

More and more people settling together inevitably led to more food, the purchasing and selling of that food, the beginning of writing, the establishment of power and, as a result, the establishment of laws, etc. In this post we are gonna talk about Covenants and Easements in Bangladesh and property rights related to these two topics.

History of Covenants and Easements

The Babylonian Code of Hammurabi is believed to contain one of the earliest evidences of property laws. Since then, prominent discourse has been produced by western philosophy scholars. With the conclusion of the cold war and the establishment of US hegemony in the world, the United States’ political ideology of right-wing capitalism and the right to property has become the norm. Within the global context.

In modern times, there has been a global consensus that the right to property should be recognized as a fundamental human right. The purpose of this article is to explain succinctly what easements are and then examine how they can be transferred under the Transfer of Property Act, 1882 (henceforth referred to as TPA), along with their significance and how we unknowingly utilize them.

Rights to property in Bangladesh

This statute takes nonpossession property rights into account. Thus, for rights to property it permits the use of certain facilities with little emphasis on title and ownership. Some examples of easement property rights include the right to oxygen, light, and right of way.

It is a privilege enjoyed by the dominant proprietor over those who are compelled to refrain from or perform a certain action. Having the easement property right necessitates meeting the following conditions:

Dominant heritage and dominant owner – The landowner who enjoys certain privileges over property that is not legally theirs is referred to as the dominant owner. In this regard, the land is referred to as the dominant tenement or inheritance.

The proprietor who cannot restrict the dominant owner’s use of their land is known as the servient heritage or servient tenement. In this instance, the genuine landowner is referred to as the servient owner.

The Bangladeshi Easement Act of 1882 defines “easement” as the permission to use the land of another for a specified purpose.
Types of easement property rights include:

There are four varieties of easement property rights: continuous, discontinuous, apparent, and invisible.

Continuous easement –

A continuous easement is a type of property right privilege that by its very nature is perpetual, with or without human intervention.Continuous easement is exemplified by allowing livestock to perpetually graze on the existing pasture.

Discontinuous easement –

This form of easement necessitates a conscious act on the part of a person in order to manifest or produce benefits for the party involved. Construction of sanitary facilities is an illustration of a discontinuous easement.

Apparent Easement –

The presence of this form of easement right is indicated by means of a permanent sign. If someone inquires about the permanent sign, its components will become apparent.

Non-apparent Easement –

A non-apparent easement lacks a distinguishing sign.
Detailed description and analysis of the various easement property rights
As previously stated, there are three primary categories of easement property rights: the Right of Way, the Right of Light, and the Right of Air.

There are two primary categories of right of way:

Public liberties –

They are intended to benefit the general populace. Examples include highways, bypass roads, and flyovers, among others. It contains an element of service for the greater public benefit.
Private rights – These rights are held by specific individuals as opposed to dominant tenement proprietors.

Right to Air and Light-

This privilege prohibits the adjacent landowner from constructing or placing a structure on his property so that the dominant tenement’s access to light and air is not impeded.

There are several methods to acquire the right to light, including:

• A grant or covenant that, by its very nature, may be implicit or explicit.
• The Bangladeshi Easement Act entitles tenants to uninterrupted use of essentials for twenty years, commencing on the date of the property’s establishment or the commencement of their tenancy.

The court will not interfere with easement property rights if the obstruction of light and ventilation is insignificant. The court may, however, intervene in the redress of grievances if the tenement is plagued by problems of a particularly severe nature.

It must be understood that the material aspect of the entire scenario is accorded significant weight.

If a construction diminishes the value of the dominant structure or reduces the tenant’s previous level of comfort, the case will be heard in court. If the tenant can continue operating their business as before, the case has little chance of being heard in court.

In Bangladesh, courts may only hear a case if monetary compensation does not provide sufficient relief. The court will however grant an injunction if a man’s right to light and air is impeded by a neighbor’s building or structure.

However, the court would only intervene if a substantial loss of comfort occurred. The court would not hear cases involving plain loss of imaginative vision. It must also be noted that a mandatory injunction may not be granted if the party in question transfers the case to a different court after the building has been completed.

The term ’eminent domain’ was derived from Hugo Grotius’ 1625 legal dissertation De Jure Belli et Pacis, which used the Latin term dominium eminens (superior dominion). It refers to the principle that provides the government the authority to seize private property for public use. In Bangladesh, the right to property is not absolute; state intervention for legitimate purposes is permitted.

The Supreme Court has ruled that in a welfare state such as Bangladesh, the right to private property is a human right, so such purposes must be in the public interest. However, the issue that arises from this government right is that the term ‘public purpose’ has not yet been clearly defined, leaving space for unjust government practices and eminent domain abuse.

Easements in Bangladesh

A servitude is a non-possession privilege. This means that a third party could acquire property rights without possessing the property. This could include the right of a person to use a portion of land owned and possessed by a third party in order to enter his own property or to properly enjoy his property.

This could include, for instance, a passageway required for person A to access his own home on land owned and possessed by person B, or the path required for air and water to circulate. Person A has a legal easement over that portion of person B’s property, allowing him access to and reasonable enjoyment of his property.

Section 4 of the Easements Act of 1882 provides an explicit definition for easements. Important terms relating to easements and our upcoming discussion of easement transfers are as follows:

The person A (from the preceding example) on whose interest person B must provide the right to easement is referred to as the dominant owner.

• Dominant heritage – The land that A receives from B’s property in order to appreciate his own property in a just manner is known as dominant heritage.
• Servient owner: In this example, person B is the servient owner because he is legally obligated to cede a portion of his property to A in order to provide access to A’s residence.
• Serviant inheritance: The portion of B’s land given to A for the construction of a path to A’s home is known as the serviant inheritance.

Statute of Transfer of Property

The subject of the Transfer of Property Act is items that cannot be transferred. Clause [c] prohibits the transfer of easements with the exception of dominant heritage.

This means that it is impossible to merely transfer the right to an easement. The only way to acquire an easement is by purchasing the entire property. Along with the transfer of property, all associated rights and obligations are also transferred to the new owner. In this case, a transfer of hegemonic heritage will also occur alongside the transfer of property.

Throughout the years, a number of cases have given effect to this clause of section 6 of TPA. In T.V. Ravi v. B.R. Mohan, for instance, the plaintiff filed a lawsuit for the grant of easementary rights through agreement. The court ruled that the dominant inheritance will automatically pass to the individual to whom the property has been transferred. There will be no distinct transfer of easement or property.

In another case, Pandhari v. Motiram Jayram Deogade, the court reaffirmed the rule stated in section 6 [c] of the TPA and specifically addressed the issue of easement registration. The ruling states that in the absence of a property transfer, easements can be granted by executing a document and do not require registration.

Therefore, the kabuliyatnama mentioned in this instance was extremely valid and registration under the Registration Act of 1908 was not required. In Musunoori Satyanarayana Murti v. Chekka Lakshmayya and others, it was determined that “an agreement granting easementary right did not require registration because there was no transfer of ownership as contemplated by section 54 of the Transfer of Property Act, 1882.” I conclude that the aforementioned legal principle pertains to the present case.”

Profits and Easement

Sometimes, the phrases easement and profits a prendre are used interchangeably. Profits are a concept adopted from English law in Bangladesh. In the Registration Act and the General Clauses Act, profits are mentioned, but neither statute provides a definition.

Profits a prendre, like Easement rights, are a proprietary interest and a non-possessive right. Due to this, there are also numerous similarities between the two concepts. Profits a prendre refers to the right to use or remove something from the property of another in order to generate profits. For instance, the right to fish or the right to collect wood from another’s property.

Even if person A (dominant owner) acquires the right to acquire items from the land of person B (servant owner), there is no transfer of ownership. As previously described in detail, an easement is merely a positive right that annexes a portion of the servient land for the proprietor of the dominant land.

Both of these rights do not necessitate that the servient owner of the land provide any facilities other than the land itself for the dominant owner’s enjoyment and use. The definition of immovable property encompasses both the grant of easements and the right to generate profits from another person’s land.

The sections 3 of the TPA, 2(6) of the Registration Act, and 3(26) of the General Clauses Act all define immovable property. Since registration is required for all immovable property, a grant of profits a prendre and easements, as discussed previously, also require registration.

This aspect of the registration of a grant of profit was discussed in the case of Bihar eastern Gangetic Fisherman Co-operative Society Ltd v. Siphani Singh, wherein the right to fish was deemed a profit a prendre and had to be regarded as immovable property in the former case. In the latter case, the court defined profit a prendre and ruled that such grants were required to be registered as they constituted immovable property.

The distinction between a right of easement and a profit is that easements are typically granted without the expectation of yielding any profits and solely to ensure the dominant owner’s land is properly enjoyed. The granting of profits also permits the other party to remove something from the land. This is not always the case with easements.

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Put Option in Contract Agreement

by Barrister Tahmidur Rahman | Jun 12, 2023 | 2023, Law

Put Option in Contract Agreement in Bangladesh

• Put options confer the right, but not the obligation, to sell a predetermined quantity of the underlying security at a predetermined price within a predetermined time frame.
• 
  Put options are available on a vast array of assets, such as equities, indexes, commodities, and currencies.
• 
  Changes in the price of the underlying asset, the option strike price, time decay, interest rates, and volatility influence put option prices.
• 
  Put options appreciate as the price of the underlying asset declines, as the price’s volatility increases, and as interest rates fall.
• Put options lose value as the price of the underlying asset rises, as the underlying asset’s volatility decreases, as interest rates rise, and as the option’s expiration date approaches.

What Does Put Option Mean?

A put option (or “put”) is a contract that grants the option buyer the right, but not the obligation, to sell—or sell short—a specified quantity of an underlying security at a predetermined price within a specified time period. The strike price is the predetermined price at which the holder of a put option may sell the underlying security.

On numerous underlying assets, including stocks, currencies, bonds, commodities, futures, and indexes, put options are transacted. Contrast a put option with a call option, which grants the holder the right to purchase the underlying security at a specified price on or before the option contract’s expiration date.

How Put Options Operate

The value of a put option increases as the price of the underlying stock or security falls. In contrast, a put option loses value as the underlying stock’s price rises. As a consequence, they are typically employed for hedging or for speculation on downward price movement.

Frequently, investors utilize put options in a risk management strategy known as a protective put, which is used as a form of investment insurance or hedging to ensure that losses in the underlying asset do not exceed a certain threshold.

In this strategy, the investor purchases a put option to mitigate adverse risk in a portfolio holding. The investor would sell the stock at the put’s strike price if and when the option is exercised. If the investor does not already own the underlying stock and exercises a put option, a short position in the stock is created.

Aspects That Influence a Put’s Price

In general, the value of a put option declines as the option’s expiration date approaches due to time decay. As the option’s expiration date approaches, time decay escalates because there is less time to realize a profit from the trade. When the time value of an option expires, the intrinsic value remains. The intrinsic value of an option equals the difference between the strike price and the price of the underlying stock. In the money (ITM) refers to an option that has intrinsic value.

Out-of-the-money (OTM) and at-the-money (ATM) put options have no intrinsic value because exercising the option provides no benefit. As an alternative to exercising an out-of-the-money put option at an undesirable strike price, investors may short-sell the stock at the current higher market price. In the absence of a bear market, however, short selling is typically riskier than the purchase of put options.

The option’s premium reflects time value, also known as extrinsic value. If the strike price of a put option is BDT 2000 and the underlying stock is trading at BDT 1900, the option has an intrinsic value of BDT 100.

However, the put option could trade at BDT 135. The additional 35 represents time value, as the underlying stock price may fluctuate before the option expires. Put spreads may be created by combining various put options on the same underlying asset.

There are numerous considerations to bear in mind when selling put options. When contemplating a trade, it is crucial to grasp the value and profitability of an option contract; otherwise, you risk the stock falling below the point of profitability.

Where to Invest in Options

Options, including put options and many others, are transacted through brokerages. Some brokers provide options traders with specialized features and benefits. There are numerous brokers who specialize in options trading for those interested in options trading. It is essential to find a broker who meets your investment requirements.

Options Other Than Exercising a Put Option

The purchaser of a put option is not required to retain the option until its expiration. As the price of the underlying stock fluctuates, the option’s premium will fluctuate to reflect the most recent price changes. Depending on how the option’s price has changed since it was purchased, the option buyer can sell their option to either mitigate loss or realize a profit.

Likewise, the option writer can perform the same action. If the underlying price is greater than the strike price, they may take no action. This is because the option may expire worthless, allowing them to retain the entire premium. But if the underlying price is approaching or falling below the strike price, the option writer may simply buy the option back (thus exiting the position) to prevent a large loss. The profit or loss is calculated by subtracting the premium collected from the premium paid to exit the position.

Illustration of a Put Option

Assume an investor purchases a one-month put option with a $425 strike price on the SPDR S&P 500 ETF (SPY), which was trading at $445 in January 2023 . They paid a premium of $2.80, or $280 ($2.80 100 shares or units), for this option.

If units of SPY decline to $415 prior to expiration, the $425 put will be “in the money” and will trade at a minimum of $10, which is the intrinsic value of the put option (i.e. $425 – $415). The exact price of the put would hinge on a number of variables, the most significant of which would be the amount of time left until expiration. Assume the $425 put is trading at $10.50 per contract.

Since the put option is now “in the money,” the investor must choose between (a) exercising the option, which would grant the right to sell 100 shares of SPY at the strike price of $425, or (b) selling the put option and pocketing the profit. Consider two instances: (i) the investor owns 100 SPY units; and (ii) the investor does not own any SPY units. (The calculations below ignore commission costs, to keep things straightforward).

Consider the scenario where the investor exercises the put option. If the investor already owns 100 units of SPY (let’s presume they were purchased at $400) and the put was purchased to hedge downside risk (i.e. it was a protective put), then the investor’s broker would sell 100 SPY shares at the strike price of $425.

This trade’s net profit can be calculated as:

Put Purchase Price = [(SPY Sell Price – SPY Purchase Price) – (Put Purchase Price)] The quantity of shares or units

Profit = [($425 – $400) – $2.80)] × 100 = $2,220

What if the investor did not own SPY units and bought the put option as a speculative investment? In this case, exercising the put option would result in the short sale of 100 units of SPY at the strike price of $425. To terminate the short position, the investor could repurchase 100 SPY units at the current market price of $415.

This trade’s net profit can be calculated as:

(Short Sell Price of SPY – Purchase Price of SPY) – (Put Purchase Price) The quantity of shares or units

Profit = ($425 – ($415 – $2.80) × 100 = $720

Exercising the option, (short) selling the shares, and then repurchasing them sounds like a complicated process, not to mention the additional costs of commissions (due to the multiple transactions) and margin interest (for the short sale). However, the investor has a simpler “option” (for lack of a better term): Simply sell the put option at the current market price to generate a profit. Profit calculation in this situation:

[Enter Sell Price minus Buy Price] Shares or units outstanding = [$10.50 – $2.80] × 100 = $770

There is an important point to make here. Selling the option instead of going through the relatively complex procedure of option exercise yields a profit of $770, which is $50 more than the $720 profit generated by exercising the option. Why the disparity? Because selling the option enables the acquisition of the time value of $0.50 per share ($0.50 100 shares = $50). Therefore, the majority of long option positions with value prior to expiration are sold instead of being exercised.

The utmost loss on an option position for a buyer of put options is limited to the premium paid for the put. If the underlying stock price fell to zero, the utmost gain on the option position would occur.

Protective Puts:

Purchasing and selling puts:

Examples and strategies

Similarly to call options, there are specific strategies for put options. And it is common practice to combine them with call options, other put options, and/or existing equity positions. Included among the most prevalent strategies are protective puts, put spreads, covered puts, and bare puts.

Safeguard places

A protective put (also known as a married put) provides protection against price declines for the securities you own. How so? You continue to hold on to your existing shares (long position) while also holding put options, which can be viewed as an insurance policy (or a hedge) against price declines.

For instance, suppose you purchased 300 shares of XYZ technology company at $75 per share in addition to three put option contracts with a strike price of $70, a premium of $1 per share, and an expiration date six months in the future.

After four months, the market price per share falls to $50. You will only lose $1,800 if you exercise the put option and sell your stock at the $70 strike price ($5 per share multiplied by 300 shares equals $1,500, plus the $300 premium cost, or 3 contracts x 100 x 1).

What if the price of the stock declines further, to $35 per share? Since you can sell your stock at the strike price of $70, your losses are still limited to $5 per share, or $1,800. This is known as your utmost loss.

Without a put options contract, the loss would be greater because there is no limit. For example, if the price fell to $50 per share, you would lose $7,500, and if it fell to $35 per share, you would lose $12,000.

What occurs if the price per share of the stock increases? Assume that the same technology stock appreciates to $90 per share. That is $20 per share above your strike price, so you would not exercise your put option; instead, you would allow it to expire.

(However, since you purchased the options contract, you will forfeit the $300 premium: $1 per share multiplied by 300 shares.)
You will instead sell your stock at the market price, resulting in a $4,200 profit. ($15 multiplied by 300 shares, minus the premium cost of $300).

Since the growth potential of a stock is infinite, the profit potential of a protected put is also infinite, minus the premium paid.

Compared to Exercising an Option

Since exercising an option will result in a loss of time value, higher transaction costs, and additional margin requirements, the vast majority of long option positions with value prior to expiration are liquidated by selling rather than exercising.

Developing Put Options

In the previous section, we discussed put options from the buyer’s or investor’s perspective. We now turn our attention to the put option vendor or put option writer, who has a short put position.

In contrast to a long put option, a short or written put option requires the investor to take delivery of the underlying stock or purchase shares at the strike price specified in the option contract.

Assume a bullish investor believes SPY, which is presently trading at $445, will not fall below $430 in the next month. By writing one put option on SPY with a strike price of $430, the investor could collect a premium of $3.45 per share ( 100 shares, or $345).

If SPY remains above the $430 strike price over the next month, the investor would retain the $345 premium collected since the options would expire void. This is the utmost profit possible on the trade: $345, or the collected premium.

If SPY falls below $430 prior to the option’s expiration in one month, the investor is obligated to purchase 100 shares at $430, regardless of whether SPY falls to $400, $350, or even lower. No matter how far the stock falls, the put option writer is obligated to purchase the shares at the $430 strike price, meaning they incur a theoretical risk of $430 per share, or $43,000 per contract ($430 100 shares).

The maximum gain for a put writer is limited to the premium collected, while the maximum loss would be realized if the underlying stock price fell to zero. Thus, the gain/loss profiles of the buyer and seller of puts are diametrically opposed.

Is Purchasing a Put the Same as Short Selling?

Purchasing puts and selling short are both adverse strategies, but there are significant distinctions between the two. The maximum loss of a buyer of a put is limited to the premium paid for the put, and purchasing puts does not require a margin account and can be conducted with limited capital. Short selling, on the other hand, carries a theoretically unlimited risk and is substantially more expensive due to costs such as stock borrowing fees and margin interest (generally, short selling requires a margin account). Therefore, short selling is regarded as riskier than buying options.

Should I invest in In-the-Money (ITM) or Out-of-the-Money (OTM) puts?

It depends on variables such as your trading objectives, risk tolerance, capital, etc. In-the-money (ITM) puts are more expensive than out-of-the-money (OTM) puts because they grant the right to sell the underlying security at a higher price. However, the lower price of OTM puts is offset by the reduced likelihood that they will be profitable by expiration.

If you don’t want to spend too much on protective puts and are willing to tolerate the risk of a small portfolio decline, OTM puts may be the way to go.

Can I lose the entire premium that I paid for my put option?

Yes, you can lose the entire premium you paid for your put if the underlying security’s price does not trade below the strike price by the time the option expires.

If you are new to options and have limited capital, you may want to consider writing puts.
Put writing is a sophisticated option strategy intended for seasoned traders and investors; strategies such as writing cash-secured puts require a substantial amount of capital. If you are new to options and have limited funds, put writing is a hazardous endeavor that is not advised.

The Conclusion

Put options permit the holder to sell a security at a fixed price, even if the security’s market price has fallen. This makes them useful for both hedging and speculative trading strategies. Put options are among the most fundamental derivative contracts, alongside call options.

Put options can be a useful method to hedge against downside risk if the market declines, but they come with additional risks and complexity. Unlike stock trading, put option trading requires the investor to be correct on three levels: the underlying asset, the direction, and the timing, as all options contracts have an expiration date.

“Risk management is also important,” explains Cummings. “Many new investors avoid risk management techniques, such as entering trailing stop loss orders, to lock in profit on the upside and protect their premium on the downside.”

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