Author Name:   shuchi.lawstudent

this article deals with the laws relating to mergers and acquisitions in india...

Merging a company

1. What is merger
A business grows over time as the utility of its products and services are recognized. It also grows through an inorganic process, symbolized by an instantaneous expansion in work force, customers, infrastructure resources and thereby an overall increase in the revenues and profits of the entity. When the companies merge/ combine/ acquired, the cost of the company relative to theoretically the same revenue stream is lowered, thus increasing profit. Merging a company also provides varied pool of resources of both the combining companies along with a larger share in the market, wherein the resources can be exercised. It facilitates better use of complimentary resources. It may take the form of revenue enhancement (to generate more revenue than its two predecessor standalone companies would be able to generate) and cost savings (to reduce or eliminate expenses associated with running a business).

The term mergers refer to the consolidation of companies. It is the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. A merger is a combination of two companies to form a new company, which further can be defined to mean unification of two players into a single entity, and acquisitions are situations where one player buys out the other to combine the bought entity with itself.

Mergers can be in form of a purchase, where one business buys another or a management buyout, where the management buys the business from its owners or can be of the types as mentioned under the following heads:

· Horizontal merger- Two companies that are in direct competition and share the same product lines and markets i.e. it results in the consolidation of firms that are direct rivals. E.g. Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls Royce and Lamborghini

· Vertical merger- A customer and company or a supplier and company i.e. merger of firms that have actual or potential buyer-seller relationship e.g. Ford- Bendix, Time Warner-TBS.

· Conglomerate merger- generally a merger between companies which do not have any common business areas or no common relationship of any kind. Consolidated firma may sell related products or share marketing and distribution channels or production processes. Such kind of merger may be broadly classified into following:

§ Product-extension merger - Conglomerate mergers which involves companies selling different but related products in the same market or sells non-competing products and use same marketing channels of production process. E.g. Phillip Morris-Kraft, PepsiCo- Pizza Hut, Proctor and Gamble and Clorox

§ Market-extension merger - Conglomerate mergers wherein companies that sell the same products in different markets/ geographic markets. E.g. Morrison supermarkets and Safeway, Time Warner-TCI.

§ Pure Conglomerate merger- two companies which merge have no obvious relationship of any kind. E.g. BankCorp of America- Hughes Electronics.

2. How is merger different from acquisition
Although the terms merger and acquisition are often uttered in the same breath and used as though they were synonymous, they mean slightly different things. The difference amongst the two is spelled as below:
i. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.
While in the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.

ii. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition.

iii. Whether the deal results in a merger or an acquisition essentially depends on whether it is friendly or unfriendly and the way it is announced. In other words, the main difference lies in how the purchase is communicated to and received by the target company's board of directors, shareholders and employees.

iv. In case of mergers the stocks of both the companies are surrendered, while new stocks are issued afresh. While no such fresh issues are required in case of acquisition as the buyer company “swallows” the business of the target company, which ceases to exist.

v. Mergers are almost amongst the companies of equal type whereas acquisition involves coming together of one big and small company.

vi. At times mergers give ways to acquisitions. This happens when two entities first decide to merge and when the deal goes awry during the negotiation process the stronger company ends up with acquiring the weaker one.

3. Laws relating to mergers
The legal process of mergers is dealt under the following provisions of law in India:

a) Indian Companies Act, 1956- the provisions for mergers are dealt under Sections 391 to 394 of the Act. The four provisions are as follows:

§ Section 391 of the Act provides the power to the companies to compromise or make arrangements with creditors and members. Where a compromise or arrangement is proposed between a company and its creditors or any class of them; or between a company and its members or any class of them; the Court 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 the 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 Court directs.

§ Section 392 of the Act provides for the Power of Tribunal to enforce compromise and arrangement. Where the Tribunal makes an order under section 391 sanctioning a compromise or an arrangement in respect of a company, it shall have power to supervise the carrying out of the compromise or an arrangement; and
may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement..

§ Section 393 of the Act provides for requirement of sharing the information as to compromises or arrangements with creditors and members by calling a meeting of creditors or any class of creditors, or of members or any class of members, under section 391 as the case may be.

§ Section 394 of the Act provides for provisions for facilitating reconstruction and amalgamation of companies.

b) The Income Tax Act,1961 [Section 2(1A)]defines amalgamation as the merger of one or more companies with another or the merger of two or more companies to form a new company, in such a way that all assets and liabilities of the amalgamating companies become assets and liabilities of the amalgamated company and shareholders not less than nine-tenths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company.

c) The Competition Act, 2002 regulates the various forms of business combinations through Competition Commission of India. Under the Act, no person or enterprise shall enter into a combination, in the form of an acquisition, merger or amalgamation, which causes or is likely to cause an appreciable adverse effect on competition in the relevant market and such a combination shall be void. Enterprises intending to enter into a combination may give notice to the Commission, but this notification is voluntary. But, all combinations do not call for scrutiny unless the resulting combination exceeds the threshold limits in terms of assets or turnover as specified by the Competition Commission of India. The Commission while regulating a 'combination' shall consider the following factors:-

a. Actual and potential competition through imports;
b. Extent of entry barriers into the market;
c. Level of combination in the market;
d. Degree of countervailing power in the market;
e. Possibility of the combination to significantly and substantially increase prices or profits;
f. Extent of effective competition likely to sustain in a market;
g. Availability of substitutes before and after the combination;
h. Market share of the parties to the combination individually and as a combination;
i. Possibility of the combination to remove the vigorous and effective competitor or competition in the market;
j. Nature and extent of vertical integration in the market;
k. Nature and extent of innovation;
l. Whether the benefits of the combinations outweigh the adverse impact of the combination.

Thus, the Competition Act does not seek to eliminate combinations and only aims to eliminate their harmful effects also the following provisions of the Act, deals with mergers of the company:-

Section 5 of the Competition Act, 2002 deals with “Combinations” which defines combination by reference to assets and turnover exclusively in India and in India and outside India.

Section 6 of the Competition Act, 2002 states that, no person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void.

d) Foreign Exchange Management Act,1999
The foreign exchange laws relating to issuance and allotment of shares to foreign entities are contained in The Foreign Exchange Management (Transfer or Issue of Security by a person residing out of India) Regulation, 2000 issued by RBI vide GSR no. 406(E) dated 3rd May, 2000. These regulations provide general guidelines on issuance of shares or securities by an Indian entity to a person residing outside India or recording in its books any transfer of security from or to such person. RBI has issued detailed guidelines on foreign investment in India vide “Foreign Direct Investment Scheme” contained in Schedule 1 of said regulation.

e) SEBI Takeover Code 1994
SEBI Takeover Regulations permit consolidation of shares or voting rights beyond 15% up to 55%, provided the acquirer does not acquire more than 5% of shares or voting rights of the target company in any financial year. [Regulation 11(1) of the SEBI Takeover Regulations] However, acquisition of shares or voting rights beyond 26% would apparently attract the notification procedure under the Act. It should be clarified that notification to CCI will not be required for consolidation of shares or voting rights permitted under the SEBI Takeover Regulations. Similarly the acquirer who has already acquired control of a company (say a listed company), after adhering to all requirements of SEBI Takeover Regulations and also the Act, should be exempted from the Act for further acquisition of shares or voting rights in the same company.

4. Pre merger precautions
When two or more companies are merged together the functions, operation, earning, etc of all the companies can be altered and sometimes to the disadvantage of a person or a class of persons associated with the company, therefore before merging the companies together each company should obtain an assent for such a merger from any person or class of persons who are to be affected directly or indirectly by the said coming together of the companies. In this regards section 393 of the companies Act requires every company to hold a meeting of all the concerned persons to approve the proposal of mergers.

5. Steps in merging two companies
a) Memorandum of Association (M/A):- The Memorandum of Association must provide the power to amalgamate in its objects clause. It M/A is silent, amendment in M/A must take place.

b) Board Meeting:- A Board Meeting should be convened to consider and pass the following requisite resolutions:

o Approve the draft scheme of amalgamation;

o To authorize filing of application to the court for directions to convene a general meeting;

o To file a petition for confirmation of scheme by the High Court.
Through an application under s.391/ 394 of Companies Act, 1956 by the member or creditor of a company as the court may not be able to sanction the scheme which is not approved by the company by a Board or members resolution.

c) Application to the Court:- An application shall be made to the court for directions to convene a general meeting by way of Judge's summons supported by an affidavit. The proposed scheme of amalgamation must be attached to such affidavit. The summons should be accompanied by:
A certified copy of the M&A of both companies. A certified true copy of the latest audited Balance sheet and Profit &Loss Account of Transferee Company. The application to convene meeting under s.391(1) is required to be made to the respective jurisdictional HC by the company concerned depending on the location of its registered office. Similarly an application for the scheme of arrangement will have to be made to the concerned HC where the company’s registered office is situated.

d) Person entitled to apply for the mergers are as follows:-
o U/s.391 & 394, members of the company have right to apply to court
o A successor to a share of a deceased member has in the normal course, locus standi to maintain an application u/s.391, 395.
o An application can also be made by the transferee of shares.
o The creditor also have right to apply to court.
o The liquidator is also empowered to make an application to the court.

e) Copy to Regional Director:-A copy of application made to concerned High Court shall also be sent to the Regional Director. Although, such notice is supposed to be sent by the High Court, usually the company sends it without waiting for the High Court to send it.

f) Order Of High Court:-On hearing of the summons, the High Court shall pass the necessary orders which shall include: (a) Time and place of the meeting, (b) Chairman of the meeting, (c) Fixing the quorum, (d) Procedure to be followed in the meeting for voting by the proxy, (e) Advertisement of notice of the meeting, (f) Time limit for the chairman to submit the report to the court regarding the result of the meeting.
Where the court observes that any of the following circumstances exist in the case of the merger it may not order a meeting when shareholders are few in number; or where the membership is restricted to a single family, HUF or close relatives; or where shareholding pattern of transferor and transferee companies is identical.

g) Notice Of The Meeting:-The notice of the meeting shall be sent to the creditors and/or all the shareholders individually (including preference shareholders) by the chairman so appointed by registered post enclosing: (a) A statement setting forth the following:
- Terms of amalgamation and its effects
- Any material interests of the director, MDs or Manager, in any capacity
- Effect of the arrangement on those interests.
(b) A copy of the proposed scheme of amalgamation
(c) A form of proxy, (d) Attendance slip, (e) Notice of the resolution for authorizing issue of shares to persons other than existing shareholders
Computation: The notice that is required to be given u/s.393 of the Act for the meeting of the members/creditors shall be by 21 clear days notice.

h) Advertisement of Notice Of Meeting:-The notice of the meeting shall be advertised in an English and Hindi Newspapers as the court may direct by giving not less than 21 clear days notice before the date fixed for the meeting. However in some instances, the 21 days period can be condoned if reasons are found jusiticiable.

i) Notice To Stock Exchange: - In case of the listed company, 3 copies of the notice of the general meeting along with enclosures shall be sent to the Stock Exchange where the company is listed.

j) Filing Of Affidavit For The Compliance: - An affidavit not less than 7 days before the meeting shall be filed by the Chairman of the meeting with the Court showing that the directions regarding the issue of notices and advertisement have been duly complied with.

k) General Meeting:-The General Meeting shall be held to pass the following resolutions:

o Approving the scheme of amalgamation by ¾th majority e.g. if a meeting is attended by say 100 members holding 100 shares, the scheme shall be deemed to have been approved only when it is supported by at least 51 members holding together 750 shares amounts themselves;

o Special Resolution authorizing allotment of shares to persons other than existing shareholders or an ordinary resolution be passed subject to getting Central Government's approval for the allotment as per the provisions of Section 81(1A) of the Companies Act, 1956,

o The resolution to empower directors to dispose of the shares not taken up by the dissenting shareholders at their discretion.

o An ordinary/special resolution shall be passed to increase the Authorized share capital, if the proposed issue of shares exceeds the present authorized capital. The decision of the meeting shall be ascertained only by taking a poll on resolutions.

l) Reporting Of Result Of The Meeting:-The Chairman of the meeting shall report the result of the meeting to the court within the time fixed by the judge or within 7 days, as the case may be. A copy of proceedings of the meeting shall also be sent to the concerned Stock Exchange.

m) Formalities With ROC:- The following documents shall be filed with ROC along-with the requisite filing fees: (i)Form No. 23 of Companies General Rules & Forms copy of Special Resolution, (ii) Resolution approving the scheme of amalgamation, (iii) Special resolution passed for the issue of shares to persons other than existing shareholders.

n) Petition:-For approval of the scheme of amalgamation, a petition shall be made to the High Court within 7 days of the filing of report by the chairman. If the Regd. Offices of the companies are in same state - then both the companies may move jointly to the High Court. If the Regd. Offices of the companies are in different states - then each company shall move the petition in respective High Court for directions. However in a recent judgment of Jaipur Polypin Ltd. v. Rajasthan Spinning & Weaving Mills, it was held that when the two companies are at different places, then no need to file an application at two different places.

o) Sanction of The Scheme:- The Court shall sanction the scheme on being satisfied that: (i) The whole scheme is annexed to the notice for convening meeting. (This provision is mandatory in nature)(ii) The scheme should have been approved by the company by means of ¾th majority of the members present. (iii)The scheme should be genuine and bona fide and should not be against the interests of the creditors, the company and the public interest. After satisfying itself, the court shall pass orders in the requisite form. 15. Stamp Duty
A scheme sanctioned by the court is an instrument liable to stamp duty.

p) Filing with ROC- The following documents shall be filed with ROC within 30 days of order:
o A certified true copy of Court's Order
o Form No. 21 of Companies General Rules & Forms
o A copy of court's order shall be annexed to every copy of the Memorandum of Association issued after the certified copy of the order has been filed with as aforesaid.

q) Allotment of shares
A Board Resolution shall be passed for the allotment of shares to the shareholders in exchange of shares held in the transferor-company and to fix the record date for this purpose.

r) Steps to be followed by Transferor Company:-
The procedure as given above shall be followed by the transferor company. The only exception is that - there is no need for the transferor company to pass a special resolution for offering shares to the persons other than the existing shareholders and to file Form No. 23 of the Companies General Rules and Forms with the Registrar of Companies.

6. Conclusion
Merger refers to the process of combination of two companies, whereby a new company is formed. The benefits of mergers and acquisitions are quite a handful. These benefits are as stated below:

Firstly, mergers and acquisitions generally succeed in generating cost efficiency through the implementation of economies of scale. Secondly, it may also lead to tax gains and can even lead to a revenue enhancement through market share gain. Finally another benefit from mergers and acquisitions can be listed as increased value generation, increase in cost efficiency and increase in market share.
With the pros, cons too exist. Mergers sometimes lead to certain discomforts in the industries. These are firstly it leads to the diseconomies of scale if the business becomes too large. Secondly, clashes of culture between different types of businesses can occur reducing the effectiveness of the integration. Finally, may cause a conflict of objectives between different businesses making it more difficult to make decisions and thereby causes disruption in running a business.

Therefore it can be said that merging a company can be both boon and bane to that company.

Bibliography:
1. Jhunjhunwala, Bharat, Protectionism, Free Market and Global Regulator, Business Line, August 27, 2003.
2. Maitra, Neelanjan, Merger Control Under the New Competition Bill, CLC Vol. 2 p.701 (Journal)
3. Ramaya, A., Guide to Companies Act (15th ed.), Wadhwa & Co
4. http://legalserviceindia.com/article/l463-Laws-Regulating-Mergers-&-Acquisition-In-India.html
5. http://legalserviceindia.com/articles/amer.htm
6. http://webcache.googleusercontent.com/search?q=cache:uG6HRMDPlAAJ:www.whereincity.com/articles/legal/7085.html  what are the legal steps involved in merging a company
7. http://sawaal.ibibo.com/personal-finance-and-tax/what-advantages-disadvantages-mergers-555533.html

The  author can be reached at: shuchi.lawstudent@legalserviceindia.com

ISBN No: 978-81-928510-1-3
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