The Mergers & Acquisitions Litigation Review: Pakistan

Overview

Disputes arising out of mergers and acquisitions (M&A) are rarely brought before juridical forums in Pakistan. These disputes are also largely of such nature that result in fact-intensive decisions, rather than those with sufficient precedential value. In M&A – particularly deals involving foreign persons or entities – the parties tend to select judicial or arbitral forums outside of Pakistan for the resolution of disputes. It is therefore difficult to provide an accurate figure for M&A transactions in Pakistan and there are no public or reliable data for assessing the volume, key types or financial value of disputes.

The challenges generally present at a transactional level, involving difficulties in or a failure to obtain regulatory approvals; party disagreements on matters such as valuations and liquidation preferences; and foreign exchange control restrictions. Post-closing, common issues involve violations of shareholder agreements and other transaction documents, as well practical constraints in successfully concluding proceedings for recovery or enforcement, on account of excessive delays in Pakistan courts. Less commonly, third-party interventions such as employee or class actions may cause concern.

The Companies Act 2017 (2017 Act), the principal company law, has been amended several times over the previous three years. The aim is to reduce corporate administerial burdens to improve the ease of doing business, and to strengthen regulation for new types of entities and business models as they are emerging in the Pakistan market.

Legal and regulatory background

The types of M&A transactions permitted and governed by the laws of Pakistan include: acquisitions, whereby both merging entities survive and one becomes a holding company of another; mergers, whereby one entity survives and is absorbed by the other; and amalgamations, which involve the formation of a new company, with the existing entities ceasing to exist.

i Companies law: the 2017 Act

Compromise or scheme of arrangement with company members or creditors

Once a company and its members (shareholders) or creditors agree to a scheme, either the company or the member (or creditor) must apply to the high court having necessary jurisdiction to call a meeting of its members (or creditors). At such meeting, a three-quarters majority must agree to the scheme. The resolution so passed shall be submitted to the relevant high court, which may pass an order to sanction the scheme (with or without modification). Small-sized companies are now permitted to apply for such sanction to the Securities and Exchange Commission of Pakistan (SECP; the companies' regulator) (instead of to the high court), which saves significant time and costs.

There is no time frame for the passing of the order; however, unless the process is delayed due to objections raised by members, creditors or the SECP, an order may be passed within six to nine months from the date of the application.

Pakistan courts have historically exercised, and continue to exercise, restraint when called upon to interfere with the terms of a scheme, particularly if valid shareholder or creditor resolutions for approval are in order. This is especially since the 2017 Act prescribes additional information to be provided to members (or creditors) in advance of the meeting, which includes the terms of the scheme, its intended or foreseeable consequences, the financial position of the company and expert reports on valuation.

Courts consider that commercial matters of a merger are the prerogative of shareholders, while the court is mandated only to supervise the legal formalities and ascertain whether the scheme is against the public interest.2 Concerns and objections are, therefore, diminishing in number and being resolved at preliminary stages without recourse to formal dispute resolution.

Merger or amalgamation

Pursuant to the 2017 Act, boards of directors of companies have for the first time been permitted to approve mergers and amalgamations without requiring approval of the SECP, subject to certain conditions.

Minority squeeze-out

Where a scheme or contract involving the transfer of shares in a company (the transferor) to another company (the transferee) has been approved by members of the transferor collectively holding not less than 90 per cent in value of the shares sought to be transferred, the transferee may give notice to any dissenting shareholder of its intention to acquire the dissenting shareholders' shares. Dissenting shareholders may contest the notice by way of an application to be filed before the relevant high court. If such challenge is not sustained, the transferee shall be entitled and bound to acquire dissenting shareholders' shares on the same terms as for the approving members. The squeeze-out provisions are subject to certain conditions prescribed in the 2017 Act.

ii Competition laws: the Competition Act 2010 and the Competition (Merger Control) Regulations 2016

An acquisition of shares or assets of one undertaking by another that meets the pre-merger notification thresholds will require pre-merger clearance from the Competition Commission of Pakistan (CCP; the monopolies and competition regulator). The CCP exercises extraterritorial jurisdiction and applies to all undertakings, whether incorporated in Pakistan or not, and to all or any of such undertakings doing business in Pakistan. The application to the CCP will need to be made at the time that the parties agree in principle or sign a non-binding letter of intent to proceed with the intended transaction, but in any case, before consummation of the transaction.

There is a prescribed 30 working day time period within which the CCP is bound to complete its first stage review of a pre-merger application. A second stage review is required in rare circumstances and is also limited to a further period of 30 days (subject to being reset by requests for further information as for the first stage review).

Such review was carried out for the proposed acquisition of Warid Telecomm (Pvt) Limited by and amalgamation into Pakistan Mobile Communications Limited at the behest of competitors in the product market, and ultimately resulted in approval subject to industry-specific conditions, and monitoring and reporting requirements.3 Likewise, a second stage review was carried out by the CCP for assessing the proposed acquisition of Novartis AG's global vaccines business by GlaxoSmithkline PLC, which resulted in similar commitments and conditions attached to the approval.4

In our experience, the CCP issues its document and information requests, as well as its decisions on pre-merger applications, promptly and without undue delay. On account of its efforts to provide industry-wide guidance on the relevant markets, most applications are approved and decisions are, as such, less often contested.

While the CCP has become more vigilant and active in identifying transactions for which its approval is required, and is possessed with wide powers of investigation and attachment, the imposition of heavy fines and penalties, and to reverse transactions consummated without its approval or that do not comply with any conditions imposed by it, the CCP demonstrates leniency and its powers are rarely ever exercised.

iii Securities laws: the Securities Act 2015 and the Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations 2017

These laws apply only in the case of acquisitions of shares or other securities in a listed company not made pursuant to a scheme of arrangement, merger or amalgamation.

An acquirer of voting shares in a listed company is obligated to disclose his or her aggregate shareholding by way of a public announcement of intention to acquire voting shares that would entitle the acquirer to more than 10 per cent of the voting shares of the listed company. The public announcement of intention must be made at the earliest possible time; however in practice, it is made simultaneously with signing.

Until the acquirer withdraws the public announcement of intention, the directors must not:

  1. sell, transfer, or otherwise dispose of or enter into an agreement for the sale, transfer or disposal of the undertaking, or a sizeable part thereof, not being a sale or disposal of assets in the ordinary course of business of the target company or its subsidiaries;
  2. encumber any asset of the company or its subsidiary unless otherwise in the ordinary course of business;
  3. issue any rights or bonus voting shares;
  4. enter into any material contract (i.e., contracts that are not in the ordinary course of business, any onerous contracts, long-term contracts and contracts not terminable upon reasonable notice); or
  5. appoint an additional director or fill in any casual vacancy on its board of directors occurring during the period.

Where an acquirer intends to acquire more than 30 per cent of voting shares or control5 of a listed company, the acquirer is required to make a public announcement of offer to acquire at least 50 per cent of the remaining voting shares of the company. An appeal was brought before the commissioners of the SECP challenging the SECP's refusal to exempt the acquirer (TPL Trakker Limited) from the mandatory tender offer requirement in relation to the proposed acquisition by it of the shares held by Greenoaks Global Holdings in TPL Direct Insurance Limited. The SECP held that the appellant had been controlling the management of the target company independently as a major shareholder for the past three years; hence the acquisition would not amount to a hasty takeover.6

The SECP regulates compliance with takeover laws, for which fines and penalties may be imposed in the amount and manner prescribed. The appellate board of the SECP hears appeals against orders passed by the SECP in proceedings of show cause notices issued by the SECP for violations of various company laws.

iv National security and exchange control laws: the Foreign Exchange Regulation Act 1947 and the Foreign Exchange Manual

For both share acquisitions and mergers and amalgamations, the Foreign Exchange Regulation Act 1947 (1947 Act) and the Foreign Exchange Manual (FEM) provide that permission of the State Bank of Pakistan (SBP; the central bank of Pakistan) must be obtained if the acquirer or merging entity is owned or controlled by a foreign government. This is to ensure that shares may be held on a repatriable basis by the acquirer or merging entity so as to enable it to receive dividend payments and remit any proceeds from the subsequent sale of the shares outside of Pakistan.

In the case that a transfer of shares is envisaged from a resident to a non-resident on a repatriable basis, for consideration in cash, the price for the shares shall not be less than the market (listed companies) or breakup (private companies) value of the shares, and must be paid through normal banking channels. Likewise, the price of shares transferred from a non-resident to a resident must not be more than the market or breakup value of the shares.

If, as a result of a deal, foreign directors or shareholders are respectively appointed or acquire shares in a Pakistani company, an application for security clearance will need to be obtained from the Ministry of Interior through the SECP.

A significant milestone has been achieved by way of this year's amendments to the FEM, which for the first time permit residents of Pakistan to make investments abroad without permission of the SBP provided certain preconditions are met, and only in those countries that allow for the repatriation of profits, dividends and capital to Pakistan. These developments have been made in consultation with stakeholders in the tech start-up industry and considerably promote foreign investment in small-scale businesses. Although some discrepancies exist and clarity is needed on satisfying a number of the prescribed conditions, no formal dispute has as yet been raised.

This leniency extends to the establishment of holding companies abroad for the purpose of raising foreign capital investment, and to expanding the business of a local company. Further, resident individuals may acquire the shares of companies abroad, which are issued as sweat equity without monetary consideration.

On the other hand, recent initiatives of the federal government for compliance with standards of the Financial Action Task Force have resulted in the implementation of more stringent measures for due diligence in respect of foreign exchange transactions. For instance, residents of Pakistan, the target entity, its beneficial owners and its key management personnel intending to invest abroad cannot now have investigations pending against them on account of terrorism financing or money laundering under the Anti Money Laundering Act 2010 or the Anti-Terrorism Act 1997.

The SBP has been granted powers of entry and inspection to call for information and can impose fines or other penalties including imprisonment for contravention of the applicable laws. Where offences are tried by the tribunal prescribed under the 1947 Act, an appeal from its decision lies to the relevant high court.

v Price-sensitive information and insider trading: Securities Act 2015

The Rule Book of the Pakistan Stock Exchange (PSX) requires that any information that is price-sensitive and relates to a listed company be disclosed to the public and the PSX immediately. Price-sensitive information includes information regarding any joint ventures, merger, demerger, restructuring, acquisition or any material contract entered into or lost, as well as any material change in the ownership of a company.

The Securities Act 2015 (2015 Act) provides that when inside information pertaining to a company is disclosed to any person by an insider, such as on commencement of the due diligence process for assessing the feasibility of a sale, the company must make a complete and effective public disclosure of that information simultaneously. However, if the company enters into an agreement of confidentiality with the potential buyer, this information will not need to be disclosed to the public.

Insiders are widely defined to include sponsors, executive officers, directors and partners, shareholders of a listed company, as well as the spouse, lineal ascendants or descendants, partner or nominees of such persons, and anyone in receipt of inside information from such persons. Inside information means any information that is likely to have an effect on the price of listed securities, including information as to a person's intention to transact in listed securities, provided it is not public.

Especially in transactions where brokers or underwriters are engaged, parties to transactions in a listed company should be mindful of this prohibition, as the SECP is active both in calling them to account on allegations of insider trading and in imposing penalties for contravention, for which the punishment includes hefty fines or imprisonment for a maximum of three years, or both.

Shareholder claims

i Common claims and procedure

Minority shareholders would need to come together as a 10 per cent shareholding block to establish oppression or mismanagement through legal proceedings in the relevant high court. Despite the fact that the minimum shareholding required for bringing such action has been reduced from 20 per cent pursuant to the 2017 Act, these cases remain rare and difficult to substantiate; however, they are also the most common.

Close to all of the reported decisions of the high courts of Pakistan demonstrate a conservative approach to establishing oppression and mismanagement. Shareholders must demonstrate serious unfair prejudice and tangible detriment; mere allegations of irregularity are not held to suffice.7 In the majority of cases in which allegations of fraud, dishonesty or violation of fiduciary duties are brought against directors or management personnel of a company, courts are again reluctant to find in favour of the aggrieved, applying a high threshold for proof.

ii Remedies

Pre-closing

The directors of a company owe fiduciary duties to pass resolutions in the best interests of all shareholders. Minority shareholders may file a petition before the relevant high court for oppression or mismanagement; provided the minority represents at least 10 per cent of the shareholding of the company.

Such petition may also be brought for unfair prejudice to the public interest, and for conducting the business of a company in an unlawful or fraudulent manner, or contrary to its constitutional documents. However, as discussed, the courts in Pakistan borrow principles from the English jurisdiction, burdening the shareholders with establishing material and unjust exercise of authority and unfair treatment in order for a claim to succeed.8

Notably, high courts also decline intervention in matters for which the powers of investigation and enforcement vest in the SECP, and to which alternative penalties and procedures apply. This includes claims in respect of:

  1. non-disclosure of information;
  2. non-issuance of notices of meetings to shareholders;
  3. the valuation of shares or share swap ratios; or
  4. matters in which appropriate resolutions of the shareholders have not been obtained.

Moreover, the usual – albeit severe – delays in the courts of Pakistan, as well as the costs involved, do not encourage minority shareholders to litigate.

Nevertheless, shareholders are entitled to the mandatory public offer pursuant to the 2015 Act and the Listed Companies (Substantial Acquisition of Voting Shares and Takeovers) Regulations 2017. Shareholders may also challenge the appointment and removal of directors, as well as matters concerning violations in procedure or otherwise in respect of annual and other general meetings of a company at which the necessary resolutions for approving proposed mergers or schemes are to be passed.

Post-closing

Shareholders would have recourse to contractual remedies, including for the recovery of general and special damages. The Contract Act 1872 of Pakistan governs the creation and enforcement of contracts and types of contracts, as well as consequences of breach. The Specific Relief Act 1877 provides the circumstances in which specific performance of contracts and injunctions for breach may be sought in legal proceedings.

The civil courts or arbitral tribunals (under the Arbitration Act 1940) have jurisdiction for adjudicating contractual disputes. However, in the province of Sindh, any claim of a value of 15 million Pakistani rupees or more will be brought in the High Court of Sindh. Appeals lie to a district court if originated in the civil courts or otherwise to a division bench of the high court, and further to the Supreme Court of Pakistan.

iii Defences

Pakistani jurisprudence upholds the principle of company law that shareholders, directors, employees and officers of a company are distinct from it. The corporate veil for offences attributed by law to companies will not be lifted by the courts to pass ordinary liability for acts or omissions of a company unless there is substantial proof of gross negligence, fraud, misfeasance or other criminal misconduct on the part of the person.9 Certain provisions of the 2017 Act nevertheless place personal liability on directors, such as for failure to disclose conflicts of interest or for authorising or undertaking related-party transactions.

Ultimately it is the best interests test that applies, judged from a reasonable standard, in like employment or directorial position and circumstances. Compliance with prescribed and internal company policies and procedures would also serve as a defence. It is not common for the SECP or any court to penalise directors where no material prejudice is shown to have been caused.

iv Advisers and third parties

The Chartered Accountants Ordinance 1961 and the by-laws framed thereunder govern the practice of chartered accounts and provide for consequences of professional misconduct. Claims against advisers and third parties are not prevalent in Pakistan. However, the SECP has, from time to time, sought to enforce penalties against auditors for illegal or untrue accounts prepared for companies.

In one known instance, Hascol Petroleum Limited filed an appeal before the CCP, challenging its approval of the acquisition by Pakistan State Oil Limited of shares in Pakistan Refinery Limited, alleging that the subject acquisition did indeed present competition concerns. However, the appeal was dismissed on merit.10

v Class and collective actions

There are little to no class actions reported in Pakistan in the context of M&A. However, a constitutional petition brought on behalf of the purported labour union of K-Electric is currently pending in the High Court of Sindh challenging the proposed acquisition by Shanghai Electric Power Development (Hong Kong) Co Ltd of shares in K-Electric.

vi Insurance and indemnification

Insurance does not play a major role in current M&A practice.

Directors may be indemnified by companies through private agreements for liabilities arising out of acts done in the course of appointment or employment.

vii Settlement

With the introduction of the 2017 Act, companies, their respective boards of directors, management, shareholders and creditors are encouraged to settle disputes through mediation. Parties are free to choose the juridical forum and choice of law governing contracts (but only to the extent that such law is proved to the satisfaction of the court (which satisfaction is within the discretion of the court) and not considered contrary to the public policy of Pakistan); hence, the majority of disputes are settled in foreign courts or arbitrations.

Settlements may be achieved before or during the course of legal proceedings. Most pre-closing disputes are negotiated between the parties.

Counterparty claims

i Common claims and procedure

Pre-closing

Transactions involving companies in regulated sectors such as oil and gas, and electricity and power generation, are often subject to consent and approval requirements, as well as to restrictions on the transfer of shares or assets. These form conditions precedent to completion and, if not met, may delay or prevent the transaction altogether. For instance, where insider trading rules apply or pre-merger approval is required, regulators may bring actions to penalise contravention and enforce compliance. Disputes of this nature are generally resolved before decision-making bodies of the regulators and are not lengthy or time-consuming.

Disputes may also arise for breach of non-disclosure agreements, such as may be entered into at the time of the parties' negotiations. Damages may be sought on proof of loss, although court proceedings for recovery take several years to conclude and are subject to multiple rounds of appeal up to the Supreme Court.

Post-closing

Post-closing disputes are less common, especially as high-value transactions are strongly negotiated and parties are well advised of their contractual obligations in advance of signing. Unless an issue arises with respect to material non-disclosures as part of the due diligence process, or other such breaches of indemnities, representations and warranties, recourse to the courts is limited.

Given the trend in selecting forums abroad for the determination of disputes between parties in M&A transactions, whether through arbitration or the courts, it is difficult to analyse the comprehensive nature and volume of disputes.

ii Remedies

As previously discussed, contractual remedies are available to the parties to transactions, including specific reliefs such as specific performance and injunctions, as well as damages.

Enforcement of obligations may be limited by any statute of limitations and by laws relating to bankruptcy, insolvency, liquidation, receivership, reorganisation, moratoria or court schemes, or other laws of general application relating to the rights of creditors and the fact that claims may become subject to set-off, abatement or a counterclaim. Enforcement of obligations is subject to the doctrine of estoppel in relation to representations, acts or omissions of a party, which may preclude, limit or affect the ability to enforce such obligations.

Any late payment or other payment payable in the event of a breach or termination of a contractual obligation may be construed as a penalty; as such, it may be subject to the powers of the courts of Pakistan pursuant to the Contract Act 1872 to reduce to a reasonable amount any penalty deemed by the courts to be unreasonable. The Pakistan law of liquidated damages requires the claimant to prove that the amount named in the contract as liquidated damages and claimed as the loss suffered by it is, nevertheless, reasonable compensation for that loss before it can be awarded a sum (not exceeding the sum stipulated as liquidated damages).

iii Defences

Standard defences are available to counterparties, such as indemnities and denials of breach. Defences such as coercion, undue influence, duress, fraud or misrepresentation forming the basis for entry into agreements, and other grounds for declaring agreements or their provisions invalid or voidable, are also available (i.e., uncertainty, frustration, mistake).

iv Arbitration

Foreign arbitrations are the most popular choice for dispute resolution among parties to M&A transactions. However, the Supreme Court of Pakistan has held on grounds of public policy that where there are allegations of corruption or criminal wrongdoing, which afford a basis for rescission of a contract that was procured by such corrupt or other wrongful acts, civil claims arising from such rescission or purported rescission may not be the subject of international arbitration pursuant to the agreement of the parties to arbitrate disputes, and may only be litigated in the domestic courts.11

Cross-border issues

Pakistan is a signatory to and has ratified the New York Convention on the Recognition of Foreign Arbitral Awards 1958, which has been incorporated into domestic law through the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act 2011. A party to an arbitration agreement against whom legal proceedings have been brought in respect of a matter covered by an arbitration agreement may apply to the relevant high court to stay the proceedings insofar as they concern that matter; the court shall refer the parties to arbitration unless it finds that the arbitration agreement is null and void, inoperative or incapable of being performed.

The parties may choose the law governing arbitration agreements, otherwise this is determined to be the law of the seat of arbitration. Where the rules governing the procedure for arbitration have not been agreed, the law of the seat shall determine the curial law.

Some concerns that have arisen for parties are as follows:

  1. a Pakistani court or a duly constituted arbitral tribunal may decline to give effect to a purported obligation to pay another party's litigation costs or indemnity payments for legal costs and may make its own order as to such matters;
  2. while a Pakistan court or a duly constituted arbitral tribunal has power to give judgment in a currency other than Pakistani rupees, it has the discretion to decline; and
  3. an arbitral tribunal may decline jurisdiction over a dispute where the subject matter is deemed non-arbitral for reasons of public policy.

The public policy ground is exercised sparingly and in limited circumstances,12 with courts consistently upholding arbitration agreements.13

The choice of an exclusive jurisdiction clause is considered valid. Any money judgment obtained in the reciprocating court of a reciprocating territory (not being a sum payable in respect of taxes or other charges of a like nature or in respect of a fine or other penalty) will be recognised and enforced as if it were a decree of a district court in Pakistan without re-examination of issues of fact except as provided in Section 13 of the Code.

Section 13 provides that a money judgment is conclusive as to any matters thereby adjudicated between the parties to such judgment, except where:

  1. it has not been pronounced by a court of competent jurisdiction;
  2. it has not been given on the merits of the case;
  3. it appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognise the law of Pakistan where such law is applicable;
  4. the proceedings in which the judgment was obtained are opposed to natural justice;
  5. it has been obtained by fraud; or
  6. where it sustains a claim founded on a breach of any law in force in Pakistan.

In any other case, a party may bring a suit on the basis of the foreign judgment as a cause of action, and the execution would only follow once the judgment and decree have been passed in the suit by a court of competent jurisdiction in Pakistan.

The foreign exchange control restrictions discussed above are also relevant considerations in cross-border M&A.

Year in review

The federal government has made significant changes to legislative regimes in the past year. This is despite the advent of the pandemic, which has thus enabled small businesses in Pakistan to survive and prosper in these challenging times.

The simplification of administrative processes for companies, together with the introduction of laws for improving disclosure and transparency among the stakeholders of target entities, will likely reduce the potential for disputes arising out of M&A. We are especially hopeful that the removal of prohibitions in investment abroad by residents and other initiatives taken to support profitable business and finance structuring in the context of cross-border acquisitions will encourage growth in emerging industries and markets.

Outlook and conclusions

We expect that the recent legislative changes will begin to be tested in Pakistani courts in upcoming months. This may bring greater clarity to the procedure for consummating transactions and should alleviate the risks and concerns currently anticipated by foreign investors, particularly where these developments raise uncertainty as to the terms to be negotiated and practical implementation.

Both the SECP and the SBP remain engaged in consultations with stakeholders and top legal advisers to introduce additional measures, with a specific aim to expand and diversify investment in the Pakistani market.

Footnotes

1 Alizeh Bashir is a partner at Kabraji & Talibuddin.

2 In the matter of Gadoon Textile Mills before the High Court of Sindh, reported as 2015 CLD 2010.

3 Before the CCP, reported as 2016 CLD 1344.

4 Before the CCP, reported as 2016 CLD 402.

5 Control is defined broadly to include 'the right to appoint a majority of directors or to control management or policy decisions, exercisable by a person individually or through any person acting in concert, directly or indirectly, whether by virtue of his shareholding, management right, shareholder's agreement, voting agreement or otherwise'.

Persons acting in concert means persons who with a common objective or purpose of acquiring voting shares or voting rights in, or control over a target company, pursuant to an agreement or understanding, whether formal or informal, directly or indirectly, cooperate for the acquisition of such shares or voting rights in, or control over, the target company.

6 Before the commissioners of the SECP, reported as 2018 CLD 101.

7 In the Lahore High Court, Lahore – Jubilee Spinning & Weaving Mills Ltd v. Jubilee Energy Limited, reported as 2011 CLD 10.

8 In the Lahore High Court, Lahore – Nadeem Kiani v. American Lycetuff (Pvt) Limited, reported as 2021 CLD 7.

9 In the High Court of Sindh – In the matter of Add Oil (Private) Limited and Another, reported as 2018 CLD 15.

10 Before the Appellate Tribunal, CCP – Hascol Petroleum Limited v. Competition Commission of Pakistan, reported as 2018 CLD 812.

11 The Hub Power Company Limited (HUBCO) v. Pakistan WAPDA, reported as PLD 2000 SC 841.

12 In the Lahore High Court, Lahore – Orient Power Company (Private) Limited v. Sui Northern Gas Pipelines Limited, reported as PLD 2019 Lah 607.

13 In the High Court of Sindh – Taisei Corporation v. AM Construction Company (Pvt) Limited, reported as 2018 MLD 2058.

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