THE LEGAL PERSPECTIVE

Companies Act 1956

Presented By:
Garima Manocha Harshit Takkar

INTRODUCTION
Merger in corporate business means fusion of two or more corporations by the transfer of all properties and liabilities to a single corporation. The term amalgamation is used synonymously with the term merger, and has the same verbal meaning as that of merger. The expressions amalgamation and merger are not precisely defined in the Companies Act, 1956 though these terms are freely and interchangeably used in practice. However, the Income Tax Act, 1961 defines the term amalgamation as the merger of one or more companies to form one company in such a manner that all the properties and liabilities of the amalgamating company (s), before the amalgamation, become the properties and liabilities of the amalgamated company, pursuant to the amalgamation, and not less than three-fourth shareholders of the amalgamating company become the shareholders of the amalgamated company

INTRODUCTION (Contd.)
The term takeover, is neither defined in the Companies Act 1956 nor in the Securities and Exchange Board of India Act, 1992 , or in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulation 1997. In commercial parlance, the term takeover denotes the act of a person or a group of persons (acquirer) acquiring shares or voting rights or both, of a company (target company), from its shareholders, either through private negotiations with majority shareholders, or by a public offer in the open market with an intention to gain control over its management. Thus, the term takeover may be described as the process whereby the majority of the voting capital of a company is bought through secret acquisition of shares or through a public offer to the shareholders.

Companies Act, 1956

Regulations for M&A
Sections 390 to 396A of the Companies Act govern a merger of two or more companies under Indian law. However, two or more companies can amalgamate only when the amalgamation is permitted under their memorandum of association. Also, the acquiring company should have the permission in its object clause to carry on the business of the acquired company. In the absence of these provisions in the memorandum of association, it is necessary to seek the permission of the shareholders, board of directors and the Company Law Board before affecting the merger or acquisition.

Procedure for Merger/ Amalgamation:

(i) Scheme of Amalgamation/Merger: The Scheme of amalgamation/merger should be prepared by the companies which have arrived at a consensus to merge. (ii) Approval of Board of Directors for the scheme: Respective Board of Directors of transferor and transferee companies are required to approve the scheme of amalgamation/merger. (iii) Approval of the scheme by financial institutions banks/trustees for debenture holders: The Board of Directors should in-fact approve the scheme only after it has been cleared by the financial institutions/banks which have granted loans to these companies or the debenture trustees to void any major change in the meeting of creditors to the convened at the instance of the company courts under section 391 of the Companies Act, 1956. (iv) Intimation to stock exchange about proposed amalgamation/ merger: Listing agreements entered into between company and stock exchange require the company to communicate price-sensitive information to the stock exchange immediately and simultaneously when released to press and other electronic media on conclusion of Board meeting according approval to the scheme .

(v) Application to Court for directions: The next step is to make an application under section 391(1) of the Companies Act to the High Court having jurisdiction over the Registered office of the company, for an order calling a meeting of its members. The transferor company and the transferee company should make separate applications to the High Court. (vi) High Court directions for members' meeting: Upon the hearing of the summons, the High Court shall give directions fixing the date, time and venue for the members' meeting and appoint and Advocate Chairman to preside over the meeting and submit a report to the Court. (vii) Approval of Registrar of High Court to notice for calling the meeting of members: Pursuant to the directions of the court, the transferor as well as the transferee companies shall submit for approval to the Registrar of the respective High Courts the draft notices calling the meetings of the members together with a scheme of arrangements and explanations, statement under section 393 of the Companies Act and form of proxy to be sent to members along with the said notice (viii) Despatch of notices to members/shareholders: Once the notice has been signed by the chairman of the forthcoming meeting as aforesaid it could be despatched to the members under certificate of posting at least 21 days before the date of the meeting. (ix) Holding the shareholders general meeting and passing the resolutions: The general meeting should be held on the appointed date. The amalgamation/merger scheme should be approved by the members by a majority in number of members present in person or on proxy and voting o the resolution and this majority must represent at least 3/4ths in value of the shares held by the members who vote in the poll.

(x) Filing of resolutions of general meetings with Registrar of Companies: Once the shareholders' general meetings approves the amalgamation/merger scheme by a majority in number of members holding not less that 3/4ths in value of the equity shares, the scheme is binding on all the members of the company. A copy of the resolution passed by the shareholders approving the scheme of amalgamation/ merger should be filed with the Registrar of Companies within 30 days from the date of passing the resolution. (xi) Submission of report of the chairman of the general meeting to court: The chairman of the general meeting of shareholders is required to submit to the Court within 7 days from the date of the meetings a report setting out therein the number of persons who attend either personally or by proxy, and the percentage of shareholders who voted in favour of the scheme as well as the resolution passed by the meeting. (xii) Submission of joint petition to court for sanctioning the scheme: Within 7 days from date on which the chairman has submitted his report about the result of the meeting to the court, both the companies should make a joint petition to the High Court for approving the scheme of amalgamation/ merger. (xiii) Issue of notice to Regional Director's Company Law Board under section 394A: On receipt of the petition for amalgamation/ merger under section 391 the court will give notice of the petition to the Regional Director, Company Law Board and will take into consideration the representations, if any, made by him. (xiv) Filing of Courts order with ROC by both the Companies: Both the transferor and transferee companies should obtain the Court's order sanctioning the scheme of amalgamation/ merger and file the same with ROC with their respective jurisdiction as required vide section 394(3) of the within 30 days after the date of the Courts order.

(xv) Dissolution of transferor company: Section 394(1)(iv) vests powers in the High Court, either by order sanctioning the scheme or by a subsequent order of dissolution, without winding up, of any transferor company provided the official liquidation has, on scrutiny of the books and papers of the company, made a report to the Court that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest. (xvi) Transfer of assets and liabilities: Section 394(2) vests power in the High Court to order for the transfer of any property or liabilities from transferor company to transferee company. (xvii) Allotment of shares to shareholders of transferor company: Pursuant to the sanctioned scheme of amalgamation/ merger, the shareholders of the transferor company are entitled to get shares in the transferee company in the exchange ratio provided under the said scheme. (xviii) Post merger secretarial obligation: There are various formalities to be compiled with after amalgamation of the companies is given effect to and allotment of shares to the shareholders of the transferor company is over. These formalities include filing of returns with Registrar of Companies, transfer of investments of transferor company in the name of the transferee, intimating banks and financial institutions, creditors and debtors about the transfer of the transferor company's assets and liabilities in the name of the transferee company.

Procedure under the Merger Provisions:

(For Foreign Companies)
Section 394 vests the Court with certain powers to facilitate the reconstruction or amalgamation of companies, i.e. in cases where an application is made for sanctioning an arrangement that is: for the reconstruction of any company or companies or the amalgamation of any two or more companies; under the scheme the whole or part of the undertaking, property or liabilities of any company concerned in the scheme (referred to as the transferor company) is to be transferred to another company (referred to as the transferee company). Section 394 (4) (b) makes it clear that: a transferor company would mean any body corporate, whether or not a company registered under the Companies Act (i.e. an Indian company), implying that a foreign company could also be a transferor, and a transferee company would only mean an Indian company. Therefore, the Merger Provisions recognize and permit a merger/reconstruction where a foreign company merges into an Indian company. But the reverse is not permitted, and an Indian company cannot merge into a foreign company.

Provisions for Acquisitions under CA

The Companies Act does not make a reference to the term acquisition per se. However, the various modes used for making an acquisition of a company involve compliance with certain key provisions of the Companies Act. The most commonly adopted are a share acquisition or an asset purchase.

1. Acquisition of Shares
A share purchase may take place by an acquisition of all existing shares of the target by the acquirer, or by way of subscription to new shares in the target so as to acquire a controlling stake in the target.

Transferability of shares
Broadly speaking, an Indian company may be set up as a private company or a public company. Membership of a private company is restricted to 50 members, and a private company is required by the Companies Act to restrict the transferability of its shares. A restriction on transferability of shares is consequently inherent to a private company, such restrictions being contained in its articles of association (the byelaws of the company), and usually in the form of a pre-emptive right in favour of the other shareholders. The articles of association may prescribe certain procedures relating to transfer of shares that must be adhered to in order to affect a transfer of shares. While acquiring shares of a private company, it is therefore advisable for the acquirer to ensure that the non-selling shareholders (if any) waive any rights they may have under the articles of association, and the procedure for transfer under the articles of association is followed, lest any shareholder of the company claim that the transfer is void or claim a right to such shares.

Transfer of shares
The transferor and transferee are required to execute a share transfer form, and lodge such form along with the share certificates, with the company. The share transfer form is a prescribed form, which must be stamped in accordance with law. On lodging the same with the company, the company will affect the transfer in its records and endorse the share certificates in favour of the acquirer. It is also necessary for the Board of the company to pass a resolution approving the transfer of shares.

Squeeze out provisions: Section 395 of the Companies Act provides that if a scheme or contract involving the transfer of shares or a class of shares in a company (the transferor company) to another company (the transferee company) is approved by the holders of at least 9/10ths in value of the shares whose transfer is involved, the transferee company may give notice to the dissenting shareholders that it desires to acquire such shares, and the transferee company is then, not only entitled, but also bound to acquire such shares. In computing 90% (in value) of the shareholders as mentioned above, shares held by the acquirer, nominees of the acquirer and subsidiaries of the acquirer must be excluded. The scheme or contract referred to above should be approved by the shareholders of the transferee company within 4 months from the date of the offer. The dissenting shareholders have the right to make an application to the Court within one month from the date of the notice, if they are aggrieved by the terms of the offer. If no application is made, or the application is dismissed within one month of issue of the notice, the transferee company is entitled and bound to acquire the shares of the dissenting shareholders. If the transferee already holds more than 10% (in value) of the shares (being of the same class as those that are being acquired) of the transferor, then the following conditions must also be met: The transferee offers the same terms to all holders of the shares of that class whose transfer is involved; The shareholders holding 90% (in value) who have approved the scheme/contract should also be not less than 3/4ths in number of the holders of those shares (not including the acquirer).

New share issuance

If the acquisition of a public company involves the issue of new shares or securities to the acquirer, then it would be necessary for the shareholders of the company to pass a special resolution under the provisions of Section 81(1A) of the Companies Act. A special resolution is one that is passed by at least 3/4ths of the shareholders present and voting at a meeting of the shareholders. A private company is not required to pass a special resolution for the issue of shares, and a simple resolution of the board of directors should suffice. The issue of shares by an unlisted public company to an acquirer must also comply with the Unlisted Public Companies (Preferential Allotment) Rules, 2003.

Limits on investment
Section 372A of the Companies Act provides for certain limits on inter-corporate loans and investments. An acquirer may acquire by way of subscription, purchase or otherwise, the securities of any other body corporate up to 60% of the acquirers paid up share capital and free reserves, or 100 % of its free reserves, whichever is more. However, the acquirer is permitted to acquire shares beyond such limits, if it is authorized by its shareholders vide a special resolution passed in a general meeting. It may be noted that the restrictions under Section 372A are not applicable to private companies. Further, Section 372A would not be applicable to an acquirer which is a foreign company.

2. Asset Purchase
An asset purchase involves the sale of the whole or part of the assets of the target to the acquirer. The board of directors of a public company or a private company which is a subsidiary of a public company, cannot sell, lease or dispose all, substantially all, or any undertaking of the company without the approval of the shareholders in a shareholders meeting. Therefore, it would be necessary for more than 50% of the shareholders of the seller company to pass a resolution approving such a sale or disposal. Further, a separate asset purchase agreement may sometimes be executed to better capture the provisions relating to transfer of assets. Non - compete provisions may also be linked to goodwill and contained in the asset purchase agreement.

Provisions in New Companies Bill 2011

PARTICULARS COMPANIES ACT 1956
Approval by majority in number representing 3/4th in value of the creditors or members or class thereof present and voting in person or by proxy. Approval of High Court (NCLT). No need to give valuation report to the Shareholders/ Creditors along with notice convening meeting.

COMPANIES BILL 2011

Approval by majority in number representing 3/4th in value of the creditors or members or class thereof present and voting in person or by proxy or by postal ballot. Approval of High Court (NCLT). Valuation report to be given to Shareholders/ creditors along with notice convening meeting. Objection to compromise or arrangement be made only by: Persons holding > 10% of the shareholding Or Having outstanding debt of > 5% of total outstanding debt as per the latest audited balance sheet.

Approval Required

Valuation report

Objection to compromise/ arrangement.

Objection to compromise or arrangement can be made by shareholder/ creditor as the case may be, irrespective of their shareholding or outstanding debt.

PARTICULARS

COMPANIES ACT 1956

COMPANIES BILL 2011

Takeover offer

A scheme of compromise and arrangement may include takeover A scheme of compromise/ arrangement offer in a prescribed manner. In case of cannot include a takeover offer. listed companies, such takeover offer shall be as per SEBI Regulations.

Transfer of Listed Company with Unlisted Company

No specific provisions for compromise/ arrangement between a listed transferor company and an unlisted transferee company.

In case of compromise/ arrangement between a listed transferor company and an unlisted transferee company, NCLT to provide that transferee company shall remain unlisted until it becomes listed and exit option be given to shareholders of transferor company wherein the exit price to be not less than the price under any SEBI regulations.

Notice of Meeting

Notice to be served to CG, IT No specific provisions for serving of notice authorities, RBI, SEBI, Stock Exchanges, to Income Tax and other regulators. CCI, sectoral regulators/ authority.

PARTICULARS

COMPANIES ACT 1956

COMPANIES BILL 2011

Fast Track provisions made to facilitate merger between 2 or more small companies or between holding company and its wholly owned subsidiary or such other class of companies as may be prescribed. Approval required of ROC, Official Liquidator, members or class of members holding at least 90% of total no. of shares, majority of creditors or class of creditors representing 9/10th in value.

Fast Track Merger

No specific provisions for fast track merger.

Merger of Indian Company with Foreign Company

Indian Company cannot be merged with Foreign Company.

Foreign Company may, with the prior approval of RBI, merge into Indian company and vice versa. The consideration for merger can be in the form of cash and / or Depository Receipts. This would apply to foreign companies in jurisdictions as notified by CG.

PARTICULARS

COMPANIES ACT 1956

COMPANIES BILL 2011

Acquirer and/ or PAC or person/ group of persons holding 90% or more of the issued equity capital of the company by virtue of amalgamation, share exchange, conversion of securities or for any other reasons, can purchase the remaining equity shares of the company from minority shareholders at a price determined by registered valuer. Minority shareholders may also offer to the majority shareholders to purchase their equity shareholding in the company at the price determined by registered valuer.

Purchase of Minority Shareholding by majority Shareholder

No specific provisions for acquisition of minority shareholders by majority shareholders.