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Merger and Amalgamation under Companies Act 2013

In relation to merger and acquisitions (M&A) under Companies Act, 2013 it has replaced the 1956 Act. The new Act enhanced disclosure norms, providing protection to investors and minorities thereby making M&A smooth and efficient. It helps in the overall process of acquisitions, mergers and restructuring, facilitate domestic and cross-border mergers and acquisitions. In this article we shall have a detailed overview on Merger and Amalgamation.

Concept of Merger & Amalgamation

Under the Companies Act 2013, the concept of merger & amalgamation is fully explained whereas under Companies Act 1956, the term ‘merger’ is not defined and also under the Income Tax Act, 1961.

The merger is a combination of two or more entities into one, it is not just the accumulation of assets and liabilities of the distinct entities, but the organization of the entity into one business.

Central Government issued notification for enforcement of sections related to merger & amalgamation on 7th November 2016.Vide notification dated 14th December 2016, Ministry of Corporate Affairs^[1] issued rules regarding Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016.

Even though substantial changes have been incorporated in the new act but still there are certain provisions which remain unchanged such as pre-condition to merger & an amalgamation of accepting scheme by three-fourths of shareholders is still a pre-condition under the new act. Central government still has the power to order merger & amalgamation in the interest of the nation. There is also an obligation to maintain records of merger & amalgamation under section 239. There are some other provisions which remain unaltered related to convening meetings, obtaining the permission of regulatory authorities and central government.

Application filed in relation to the reconstruction of the company under Section 230 for compromise & arrangement or which involves merger or amalgamation of two or more companies, have to specify the purpose of the scheme.

Reason for Merger & Amalgamation

The following reasons can be highlighted for Merger and Amalgamation:

• Expansion and Diversification;
• Optimum Economic Benefit;
• Risk Strategy;
• Scaling up operations for competitive advantages;
• Increase the Market capitalization;
• Reducing overheads for cost reduction;
• Increasing the efficiencies of operations;
• Tax Benefits;
• Access Foreign Markets.

Basic Terms of Merger and Amalgamation

Amalgamation

It is a combination of two or more businesses into a single business enterprise.

Demerger

There is a transfer of an undertaking of a company into another company.

Reconstruction

Under this, there is re-organization of share capital, varying the rights of shareholders.

Arrangement

It includes all modes of reorganizing share capital.

Who can File Application for Merger & Amalgamation?

An application is required to be filed with Tribunal (NCLT). An application shall be made by both the transferor and the transferee company in the form of a petition to the tribunal for the purpose of sanctioning the scheme of amalgamation.

Joint Application

In the case where more than one company is involved then at the discretion of such companies, an application may be filed as a joint application.

But if the registered office of the Companies is in different states then, in that case, there will be two tribunals having jurisdiction hence separate petition is required to be filed.

Process

Companies should have the power in the object clause of their Memorandum of Association for amalgamation.

Scheme of amalgamation shall be drafted for the purpose of getting it approved at a Board meeting of the company.

Format of Application

An Application is required to be filed with the tribunal for Merger & Amalgamation and this application will be submitted in form NCLT-1 along with the following documents:

• Notice of admission in Form NCLT-2.
• Affidavit in form NCLT-6.
• Copy of Scheme of Compromise & Arrangement / Merger & Amalgamation.

Following Disclosure in form of the affidavit are also required:

• Material facts relating to the company, such as-

1. Latest Information related to the financial position of the company.
2. Latest auditor’s report of the company
3. Information related to investigation or proceedings against the company

• Reduction of the share capital of the company.
• Consent of the secured creditors have been obtained by not less than 75% in relation to scheme of Corporate Debt Restructuring

1. Creditor’s Responsibility statement in form CAA-1.
2. For the protection of secured and unsecured creditors, Safeguards.
3. Auditor’s Report about the fund requirements of the company after the corporate debt restructuring is approved.
4. The statement in relation to company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India.
5. Valuation report by a registered valuer in respect of the shares, property, and assets, whether tangible and intangible/ movable and immovable/ of the company.

• It is required for an applicant to disclose to the tribunal, the basis on which each class of members or creditors has been identified for the purposes of approval of the scheme in the application.

Calling for Meeting by Tribunal

On the application, Tribunal shall, unless it thinks necessary to dismiss the application, will provide such directions in respect of the meeting of the creditors or class of creditors, or of the members or class of members to be called or held and conducted in such manner as prescribed.

1. Fix the time and place of the meeting.
2. Appoint a Chairperson and scrutinized for the meeting and fix the term of the appointment and remuneration;
3. Fix the quorum and procedure to be followed at the meeting including voting in person or by proxy or by postal ballot or by voting through electronic means.
4. Determine the values of the creditors or the members, whose meeting is required to be held.
5. Notice to be given of the meeting with the advertisement of such notice.
6. Notice to be given to authorities required under sub-section (5) of section 230.
7. The time period within which the chairperson of the meeting is required to report the result of the meeting to the Tribunal.
8. Such other matters as the Tribunal may deem necessary.

Notice of Meeting

Notice of the meeting after the order of tribunal is required to be given in Form No. CAA-2.

It is required to be sent to each Creditor/Member and debenture-holders at the registered address of the company.

The notice of the meeting shall be sent by:

1. Chairman of the Company.
2. In case Tribunal direct than either by the Company or its liquidator or by any other person.

The notice can be sent by the following modes:

1. Registered post, or by Speed post/ courier
2. E-mail or by hand delivery
3. By any other mode as directed by the tribunal

It is required to send a notice of meeting along with the Copy of Scheme of compromise & arrangement.

Following details of compromise & arrangement is required to be mentioned:

• All the required details of the Tribunal’s order regarding the calling, convening and conducting of the meeting:-

1. Date of the Order;
2. Date, time and place of the meeting.

• Following Details of the company:

1. Corporate Identification Number (CIN) / Global Location Number (GLN)
2. Permanent Account Number (PAN);
3. Name of the company;
4. Date of incorporation;
5. Type of the company (public or private or one person company);
6. Registered office address of the company and e-mail address;
7. Main object as per the memorandum of association.
8. Details regarding the name change of the company registered office details and objects of the company during the last five years;
9. Details of the stock exchange where securities of the company are listed;
10. Details of the capital structure of the company such as authorized capital, issued capital, subscribed capital and paid up share capital;
11. Names of the promoters and directors along with their addresses.

Combined Application

In case scheme of compromise or arrangement is related to more than one company then the details of the relationship between such companies who are parties to such scheme including holding, subsidiary or associate companies.

Board Meeting Details

1. Date on which the scheme was approved at the board meeting of the board of directors.
2. Name of the directors voted in favor of the resolution.
3. Name of the directors who voted against the resolution.
4. Name of the directors who did not vote or participate in such resolution.

Explanatory Statement disclosing following details of the scheme of compromise or arrangement:

1. Parties in compromise or arrangement;
2. Appointed date, effective date, share exchange ratio (if applicable);
3. Summary of valuation report including basis of valuation and opinion of the registered valuer with the declaration that the valuation report is available for inspection at the registered office of the company;
4. Capital details or details of debt restructuring;
5. Rationale for the compromise or arrangement;
6. Rationale for the compromise or arrangement;
7. Benefits of the compromise or arrangement as perceived by the Board of directors to the company, members, creditors, and others (as applicable);
8. Benefits of the compromise or arrangement as perceived by the Board of directors to the company, members, creditors, and others (as applicable);
9. Amount due to unsecured creditors.

Disclosure regarding the effect of the Merger & Amalgamation on the following:

1. Key Managerial Personnel;
2. Directors;
3. Promoters;
4. Non-Promoter Members;
5. Depositors;
6. Creditors;
7. Debenture holders;
8. Deposit trustee and debenture trustee;
9. Employees;

• A report on explaining the effect of compromise on each class of shareholders, key managerial personnel, promoters and non-promoter shareholders adopted by the directors of the merging companies.
• Following details required to be mentioned:

1. Investigation or any proceedings pending against the company.
2. Details of approvals, sanctions or no-objection from regulatory authorities which is received or pending for the proposed scheme of compromise or arrangement
3. The statement in relation to the persons to whom the notice is sent may vote at the meeting either in person or by proxies or by voting through electronic means.
4. A copy of the evaluation report, if any.

Details of availability of documents:

Details of the following documents for inspection by the members and creditors, namely-

1. Latest audited financial statements of the company (including consolidated financial statements).
2. Copy of the order of Tribunal in relation to which the meeting is to be convened or has been dispensed with.
3. copy of scheme of Merger & Amalgamation;
4. Contracts or agreements material to the Merger & Amalgamation;
5. Certificate issued by Auditor of the company in relation to accounting treatment.
6. Proposed scheme of Merger & Amalgamation is in conformity with the Accounting Standards prescribed under Section 133 of the Companies Act, 2013.
7. Such other necessary information or document relevant to making a decision in favor or against the scheme.

Other Documents: Order made by the Tribunal under section 232(1) for merging companies or the companies in respect of which a division is proposed, shall also be required to circulate the following:

1. Drafting of the proposed terms of the scheme adopted by the directors of the merging company;
2. Confirmation that a copy of the draft scheme has been filed with the Registrar of Companies;
3. Valuation Report (if any).

Conclusion

Merger and Amalgamation is corporate restructuring. These are done with a view to diversify business and to exercise increased scale of operations. In case you need more information on the same, contact Enterslice.

Read our article: Companies (Compromise Arrangements & Amalgamations) Amendment Rules 2020