Amalgamation & Merger

Regulatoryframework Amalgamation & Merger

Corporate restructuring is vital for survival of a Company in the competitive environment. • Ordinary meaning of the word “restructure” is to organize differently, to organise something such as system or a company in a new and different way. • Expression “Corporate Restructuring” implies reorganising a company or its business or its financial structure in such a way so as to enable it to make it operate more effectively.

Corporate restructuring would include both debt restructuring and capital restructuring. • A Corporate restructuring can also be divided as an exercise in internal reconstruction and external reconstruction with or without a scheme of compromise. • Exercise of corporate restructuring is as much a legal exercise as it is a business exercise.

Restructure may be of two types (i) Organic restructure and (ii) Inorganic restructure. • Organic restructure refers to an internal change without a change in the corporate entity which a Company owns. • On the Other hand under the Inorganic restructure the Corporate entity itself undergoes a change.

Types of organic restructure of a Corporate entity: • A.Capital Restructure • Changes in share capital by issue of shares to public for the first time. • Changes in share capital by issue of new shares by way of rights or otherwise • Change in capital employed by issue of debentures or bonds • Restructure to add or create shareholders value- Change in share capital as part of buy back of shares • Restructuring as part of compromise or arrangement with members or creditors and consequent reduction in capital or voting rights.(other than

B: Business Restructure • Rationalization of work force • Spin off of undertaking or brands etc • Acquisition on new trade • Diversification of new markets • Conversion of a public company to a private company • Joint venture-general or for particular work • Franchising and loan licensing

Contd. • Conversion of a firm to a company • Conversion of public company to private company • Joint venture. • Under the non-organic restructure of a corporate entity the most common form is amalgamation or merger or demerger

Some of the provisions of the Companies Act facilitate corporate, business or financial restructure: • Chapter V of the Companies Act comprising section 390 to 396A contains provisions on Arbitration, Compromises, Arrangements and Reconstrutions(However no provison on Arbitration since section 389 which dealt with Arbitration stands deleted) • Section 100 to 105 of the Act which facilitate reduction of share capital • Section 106 and 107 of the Act which facilitate variation of shareholder’s right • Section 494 facilitates restructuring of a company in course of winding up.

Section 391 of the Companies Act, 1956 • Initially enacted to facilitate restructuring of a company facing distress and to wound up but as an alternative mode for liquidation. • It corresponds to section 153 of the Companies Act of 1913 and section 206 of the English companies Act, 1948. • Any scheme of reconstruction of company, reorganization of share capital or amalgamation with another may be carried through this section.

Section 390 to 393 of the Companies Act: • 390. In section 391 and 393- • (a) the expression “Company means any company liable to be wound up under this Act • (b) the expression “arrangement” includes a reorganization of hare capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes or by both these methods. • (c ) unsecured creditors who may have filed suits or obtained decrees shall be deemed to be of same class as other unsecured creditors.

Contd. • 391(1) Where a compromise or arrangement is proposed- • between a company and its creditors or any class of them; or • (b) between a company and its members or any class of them; or • the Tribunal may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of creditors or class of creditors, or of the members or class of members, as the case may be, to be called held and conducted in such manner as the Tribunal directs. • (2) If a majority in number representing three-fourths in value of the creditors, or class of creditors or members or class of members, as the case may be , present and voting either in person or , where proxies are allowed 1(under the rules made under section 643 , by proxy, at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the Tribunal, be binding on all the creditors, all the creditors of the class, all the members, or all the creditors of the class, all the members or all the members of the class, as the case be and also on the company or in the case of a company which is being wound up, on the liquidator and contributories of the company • Provided that no order sanctioning any compromise or arrangement shall be made by the Tribunal unless the Tribunal is satisfied that the company or any other person by whom an application has been made under sub section(1) has disclosed to the Tribunal, by affidavit or otherwise, all material facts relating to company such as latest financial position of the company , the latest auditor’s report on the account of company , the pendency of any investigation proceeding in relation to the company under section 235 to 251, and like. • (3) An order made by the Tribunal under sub-section(2) shall have no effect until a certified copy of the order has been filed with Registrar.

Analysisof the Meaning of the various expressions: • the expression “company” means any company liable to be wound up under this Act. • Specific meaning of the term company applicable only for the interpretation of sections 391 and 393. • The rationale behind a specific definition of the term company is : • Companies Act not only deals with companies but also other associations which are not companies as generally understood. • The basic objective of the section 391 to 393 of the Act meant to resolve disputes amongst the members of public be it members of company or creditors or other associations. • Hence the definition made wider to cover not only a company but such ‘other associations’ as well.

Contd. • Separate definition is to give effect to a compromise or arrangement in respect of not only a corporate body formed and registered under the Companies Act but also other corporate bodies which are not formed and registered under Companies Act. • Example: a company incorporated outside India ( Section 584 of the Act) or an unregistered company which approaches the court for seeking winding up directions( Section 582 of the Companies Act)

Concept of Company liable to be wound up: • The word “liable” predicates a further possibility or probability which may or may not actually occur. • Bombay High Court in Khandelwal Udyog Limted and Acme Mfg Ltd(1977) has interpreted the term as “If a Company is within the reach of the provisions of the Act pertaining to winding up such a company must be held to be a company “Liable to be wound up under this Act.” and section 391 can be invoked by such company. • A confusion prevailed in view of above judgment and also with a prior judgment in Seksaria Cotton Mills Ltd that section 391 not applicable to a financially sound company. • Confusion was resolved by the later interpretations of the courts in Delhi High Court in Telesound India Ltd(1983) 53 Com Cas 926 941(Delhi) • “The expression ‘liable to be wound up’ has nothing to do with the satisfaction of the conditions for a winding up order or the objective of conditions of a company and the expression must be construed to mean a company which, on the conditions for winding up being satisfied, could be wound up under the Act” • “All that it meant to be included by the words “liable to be wound up” is that it must be a company which is subject to the laws of winding up as provided in the Companies Act.” • It is settled law that section 391 to 393 would equally apply to both a financially weak company as to financially heallty company.

Meaning of Compromise • The term compromise unlike the word arrangement is not defined. • Oxford dictionary gives meaning as agreement attained by mutual concession; adjust by mutual concession. • Compromises implies existence of a dispute which needs to be resolved through a give and take action by the parties concerned unlike arrangement which may be due to dispute or otherwise.. • Pennington on Company Law observed a compromise as an agreement terminating a dispute between the parties as to the rights of one or both of them,, or modifying the undoubted rights which he has difficult in enforcing( Quoted in Navjivan Mills Ltd case).

Meaning of arrangement • Arrangement is defined under an inclusive definition as • “ a reorganization of the share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes, or by both these methods.” • The term arrangement is in no way analogous to compromise( as quoted in Kohinoor Mills case) and will include agreements which modify rights about which there is no dispute. • Arrangement not only cover reorganization of share capital by consolidation of shares etc but also any other arrangement between member members and/or creditors in relation to reorganization of the company.

Member • Member will include both equity share holders , preference shareholders as also all other class of shareholders whose name is recorded in the register of members. • Creditor • A creditor is not defined under the Companies Act but in case Seksaria Cotton Mills Ltd(1967) the Hon’ble High Court held that a creditor include a person who may have contingent claim against the company. The analogy drawn from section 528 of the Companies Act. • In this case sales tax department had a claim against the company, even though claim might have been a future claim or even a contingent claim.

Class • Supreme Court in Mihir H Mafatlal Vs Mafatlal Industries (1996) held “If there are different groups within a class the interests of which are different from the rest of the class, or which are to be treated differently under the scheme, such groups must be treated as separate class for purpose of scheme. • Delhi High Court in Siel Ltd has held “ A group of persons would constitute one class when it is shown that all of them have a common interest and they are not adversely situated.” • The court generally do not decide whether a particular group of members or creditors forms a separate class and order convening of meeting based on avertments made in application but Company generally proposes the classification at the risk of scheme being rejected ultimately in cae court at hearing finds classification as improper.

Contd. • Section391 not only provides for procedural mechanism for a scheme of compromise or arrangement to be sanctioned but also makes a sanctioned scheme binding on all concerned, including the members and creditors of the Company . • The most outstanding facet of section 391 is that neither of the two crucial terms used therein namely compromise and arrangement put in straight jacketed artificial definition and on the contrary left to wider interpretation. • Section 391 is a complete code for single window clearance.

Section 394 of the Companies Act, 1956 • Section covers special provisions in connection with any Compromise or arrangement in connection with amalgamation of two or more companies, involving transfer of whole or any part of undertaking, property or liabilities • Merger or amalgamation are synonymous but none defined under the Act • Merger means fusion or absorption of one company by another and latter retaining its own name, identity and acquiring assets, liabilities of the other. • SC in Saraswati Industrial Syndicate summarized : “An amalgamation or reconstruction has no precise legal meaning. In amalgamation tow or more companies are fused into one by merger or by taking over by another or two companies are merged or joined to form a third Company.

Contd. Amalgamationmay be in the form of Vertical Merger, Horizontal Merger or conglomerate merger or merger by way of absorption Objects and reasons for merger may be to synergize operations, economies of scale, reduction in costs, optimize capacities, tax advance, strengthening financial strength or advantage of brand equity or competitive advantage

Contd. Amalgamation is a sort compromise or arrangement therefore it requires compliance with provision of 391 & also 394 of the companies Act Both orders under section 391 and section 394 of the companies Act needs to be obtained from High Court

Approval of creditors or members • When separate meetings were called for one composite scheme covering both secured and unsecured creditors it become absolutely necessary that both meetings should pass the scheme by a scheme by a three-fourth majority. • The three-fourth majority refer only to person who are ‘present and voting’ at the meeting called for in terms of section 391 of the Companies Act. • The twin requirements are (i) majority in number and (ii) such majority should be three-fourth in value.

Court Power in Regard to meetings and Procedure involved: • Court refers to the jurisdictional High Court. • Filing of an application before the jurisdictional High court )referred to as first motion) under Section 391(1) of the Act for proper directions for convening the meeting to obtain the approval of interested persons. • It is important to note that in cases scheme does not affect the rights of the members of the transferee company or its creditors or to do not involve any reorganization of share capital of transferee company, no need file an application by the transferee company. • Application to be supported by Judge summons(Form 33) and Affidavit( Form 34). • First motion is moved with annexures comprising (i) board resolution and (ii) draft scheme and other documents like memorandum and latest financial position. • The application for convening meeting is moved ex-parte under Rule 67 of Company Court rules.

Court may dispense with meeting: • Where consent of all or virtually all the shareholders have been given outside a meeting • Where it is a wholly owned subsidiary and the company and its holding company are involved in a merger • Where shareholders are few in number where the membership is restricted to a single family. • No meeting of the class whose interest is not part of the arrangement. This is equally applicable for preference shareholder or creditors. • Major creditors agreed to the scheme and transferee creditor also in beneficial position then not necessary to hold separate meetings

Contd. Ordinarily convening a meeting of members and creditors is a must but discretion to waive only under exceptional circumstances. Similarly convening a meeting may be refuses if scheme proposed is unfair.

Basic criteria for the scheme • It mush be fair and reasonable • Scheme will yield to smooth and satisfactory working • Scheme does not offend public or commercial morality • Scheme is not detrimental to the interests of creditors or members • The scheme is not violative of the Companies(Acceptance of Deposit) Rules, 1975

Contentsof the scheme of amalgamation • Appointed date(or transfer date) of amalgamation. • Effective date of amalgamation • Capital structure of transferor company and transferee company • Share Exchange ratio • Transfer of undertaking and liabilities of transferor company to transferee company from the appointed date • Continuance of legal proceeding of transferor company by the transferee company after effective date. • Transferor company to carry on business on behalf of the transferee company • Effect of amalgamation on contracts, services of employees, conditions, effects on retirement benefits • Main objects of transferor company and dissolution of transferor company without winding up. • Conditions subsequent and Conditions precedent

Standard Schedule • Convene a meeting of board of directors to consider and approve in principle amalgamation and to appoint an expert for valuation of shares. • Hold the meeting of board of director • Convene a board meetings to approve the scheme of amalgamation • Hold the meeting of the board of directors • Intimate to Stock exchanges where the shares of the company are listed • Apply the High court concerned seeking directions for holding shareholders/creditors meetings alone with an affidavit • Obtain summons for directions and minutes of the order from High Court for holding the meetings. • Dispatch notice of meetings

Contd. • Advertise in newspapers regarding the proposed amalgamation • Make an affidavit of service of individual notices to shareholders and creditors as well as publication of notice in newspapers, to be filed with the High Court • Hold the meetings of shareholders and creditors • Apply for approval from RBI for issue and allotment of shares to non-residents under the FEMA • File reports of the Chairmen of the shareholders and creditors meetings with the High Court • File Petition and Affidavit with the High Court • Obtain an order for admission of Petition • File E form 23 electronically with ROC • Obtain RBI approval for issue of share to non-resident

Contd. Send individual notices to creditors (in case High court allowed exemption from holding of creditors meeting) Arranging notices to be published in the newspapers Arrange for seven days before hearing an affidavit as to the service of individual notices to creditors and publication o notices in newspapers. Attend hearing and passing of orders in the high court Obtain order from the High Court File the copy of the order of High court sanction the scheme of amalgamation with the concerned ROC

Supervisory Power of the Court: • It comprises: • Compliance with the formalities of the statute • Scheme backed by the requisite majority vote • Creditors or members had the relevant material to enable the voters to approve at an informed decision for approving the scheme • All necessary material indicated like (i) basis of valuation (ii) nature of consideration (iii) Mode of payment (iv) Manner of surrender/receipt of shares or securities (v) time schedule which in which shares etc to be surrender/received and payments to be made (vi) Tentative date by which scheme would become effective(vii) Details of approvals obtained/to be obtained/sought from creditors, authorities like stock exchange and under Companies Act(vii) Dates of Board meeting when the proposal was to be considered (ix) Any other material details

That proposed scheme not violative of any provisions of law • That the Company court has also to satisfy itself that members or class of members or creditors were acting bona fide and in good faith and no coercing the minority • Company court also seeks report from the official liquidator. • Further a copy of the Petition to be served to Regional Director and he submits his affidavits with his objections to the scheme. • Court has further powers to stay all suits or proceeding against the company once an application is filed

Amalgamation & Merger