Legal Procedure for Legal Procedure for MergersMergers

An OverviewAn Overview

Basis for Exchange RatioBasis for Exchange Ratio

The Merchant Banker should be mandated to The Merchant Banker should be mandated to give due diligence opinion on the assumptions give due diligence opinion on the assumptions themselves, otherwise the share exchange ratio themselves, otherwise the share exchange ratio will have to be taken as just the management will have to be taken as just the management speaking through himspeaking through him

Along with the scheme the report of the Along with the scheme the report of the Chartered Accountants Chartered Accountants

Legal Procedure- IntroductionLegal Procedure- Introduction

A Scheme of merger or amalgamation A Scheme of merger or amalgamation involving two or more companies requires the involving two or more companies requires the approval of the Court.approval of the Court.

Sections 390 to 396A of the Companies Act Sections 390 to 396A of the Companies Act 1956 deals with the provisions relating to 1956 deals with the provisions relating to merger/amalgamation. The procedure for merger/amalgamation. The procedure for obtaining the approval of the Court is laid obtaining the approval of the Court is laid down in the Companies (Court) Rules, 1959.down in the Companies (Court) Rules, 1959.

Legal Procedures- M and ALegal Procedures- M and A

Tax aspects of mergers are covered by the Tax aspects of mergers are covered by the Income Tax Act, 1961, other aspects attract Income Tax Act, 1961, other aspects attract the provisions of the MRTP Act 1969, the provisions of the MRTP Act 1969, FEMA Acts applicable is also required.FEMA Acts applicable is also required.

Formulation of the SchemeFormulation of the Scheme

Once the ‘prospecting phase’ is over, the Once the ‘prospecting phase’ is over, the companies seek the help of merchant bankers companies seek the help of merchant bankers to finalize the details of the proposed scheme to finalize the details of the proposed scheme of merger in accordance with the guidelines of of merger in accordance with the guidelines of SEBI, who has the statutory powers to enforce SEBI, who has the statutory powers to enforce these regulations.these regulations.

Legal Procedure – M and ALegal Procedure – M and A

Articles of Association: The object clause of Articles of Association: The object clause of Articles of association of amalgamated Articles of association of amalgamated (transferee) company should be examined to (transferee) company should be examined to see if it permits continuation of the business of see if it permits continuation of the business of amalgamating( transferor) company by it.amalgamating( transferor) company by it.

If it does not, then suitable If it does not, then suitable amendments/alterations must be made in theamendments/alterations must be made in the

manner prescribed in the Companies Act.manner prescribed in the Companies Act.

Legal Procedure - MergersLegal Procedure - Mergers

Intimation to SEBI, Stock Exchange/s and issueIntimation to SEBI, Stock Exchange/s and issue

Of Notification:Of Notification: On acquisition of 15% OF Voting capital On acquisition of 15% OF Voting capital

(includes conversion of debentures), SEBI and (includes conversion of debentures), SEBI and Stock Exchange/s should be informed. Stock Exchange/s should be informed.

On acquisition of 15% of voting capital, open On acquisition of 15% of voting capital, open offer should be made to other share holders to offer should be made to other share holders to acquire 20% of the floating stock.acquire 20% of the floating stock.

Legal Procedure- M and ALegal Procedure- M and A

As soon as the offer of merger is made , the As soon as the offer of merger is made , the stock exchanges, where the shares of the stock exchanges, where the shares of the companies are listed should be notified and companies are listed should be notified and the fact of the offer should be announced in the fact of the offer should be announced in the newspapers, in the form approved by the the newspapers, in the form approved by the Stock Exchange.Stock Exchange.

Boards ApprovalsBoards Approvals

The Boards of directors of the companies The Boards of directors of the companies involved in a merger negotiate in secrecy and involved in a merger negotiate in secrecy and come to an agreement. The relative values of come to an agreement. The relative values of the companies are worked out and share the companies are worked out and share exchange ratio is agreed upon. The help pf exchange ratio is agreed upon. The help pf financial and legal experts is taken during this financial and legal experts is taken during this phase. Who initiates the merger talks has a phase. Who initiates the merger talks has a

bearing on the values put on the companies and bearing on the values put on the companies and therefore on the share exchange ratio.therefore on the share exchange ratio.

Legal Procedures-M and ALegal Procedures-M and A

A Merger Scheme is drawn up with the help of A Merger Scheme is drawn up with the help of financial and legal experts in mutual consent. financial and legal experts in mutual consent. Inevitably a few support staff of theInevitably a few support staff of the

two companies have to be taken into two companies have to be taken into confidence and they should be careful not to confidence and they should be careful not to be accused of insider trading. The merger be accused of insider trading. The merger proposal is then given a legal status by proposal is then given a legal status by approving it in at formal board meetings and approving it in at formal board meetings and notifying the stock exchanges.notifying the stock exchanges.

Shareholders ApprovalShareholders Approval

The scheme, once approved by the Boards of The scheme, once approved by the Boards of Directors, should be placed before shareholders at a Directors, should be placed before shareholders at a general meeting for their approval. The Companies general meeting for their approval. The Companies get the scheme approved by their shareholders before get the scheme approved by their shareholders before they file an application for the sanction of the Court. they file an application for the sanction of the Court. At a such a meeting, the transferee (amalgamated) At a such a meeting, the transferee (amalgamated) company can pass such resolutions as are necessary company can pass such resolutions as are necessary to implement the scheme, e.g alteration of the articles to implement the scheme, e.g alteration of the articles of association, rescinding the right to get shares on of association, rescinding the right to get shares on priority basis under Sec. 81 of the Co. Act and priority basis under Sec. 81 of the Co. Act and increase or decrease in share capital.increase or decrease in share capital.

Courts ApprovalCourts Approval

Each Company has to file an application under Each Company has to file an application under Section 391(1), with the High Court of the state in Section 391(1), with the High Court of the state in which its registered office is located along with the which its registered office is located along with the merger scheme as approved by the Boards ,of the merger scheme as approved by the Boards ,of the Concerned Companies.Concerned Companies.

The Court directs the Company to call a meeting of The Court directs the Company to call a meeting of the shareholders and to place the scheme together the shareholders and to place the scheme together with the explanatory statement before them and with the explanatory statement before them and report back to the Court the decision of the report back to the Court the decision of the shareholders.shareholders.

Courts ApprovalCourts Approval

The Chairman of the meeting is appointed by The Chairman of the meeting is appointed by the Court. The Court also orders the Company the Court. The Court also orders the Company to publish advertisements in various to publish advertisements in various newspapers about the scheme and the meeting. newspapers about the scheme and the meeting. In due Course, the Court peruses the report of In due Course, the Court peruses the report of the Chairman of the meeting, hears the views the Chairman of the meeting, hears the views of the Company Law department and any of the Company Law department and any other person who wishes to be heard and other person who wishes to be heard and passes such orders as it deems fit.passes such orders as it deems fit.

Courts ApprovalCourts Approval

Generally, the Courts tend to view the merger Generally, the Courts tend to view the merger essentially a business decision to be taken by the essentially a business decision to be taken by the shareholders and approve the merger, if the legal shareholders and approve the merger, if the legal formalities have been properly observed and the formalities have been properly observed and the shareholders have voted in favor. This procedure has shareholders have voted in favor. This procedure has to be gone through for each of the companies to be gone through for each of the companies concerned. Before finally approving the merger, the concerned. Before finally approving the merger, the Court calls for a report from the Official liquidator on Court calls for a report from the Official liquidator on the affairs of the transferor company and then orders the affairs of the transferor company and then orders the merger as effective .Thereafter the transferee the merger as effective .Thereafter the transferee company is dissolved without winding up.company is dissolved without winding up.

Courts ApprovalCourts Approval

The Chairman so appointed by the Court sends The Chairman so appointed by the Court sends individual notices to creditors and members. The individual notices to creditors and members. The notice is accompanied by a copy of the proposed notice is accompanied by a copy of the proposed merger scheme is sent, under UPC, at least 21 clear merger scheme is sent, under UPC, at least 21 clear days before the date fixed for the meeting. days before the date fixed for the meeting. Simultaneously, a notice of the meeting is advertised Simultaneously, a notice of the meeting is advertised in such newspapers( at least one English and one in such newspapers( at least one English and one vernacular) as the judge may direct. The Chairman vernacular) as the judge may direct. The Chairman files an affidavit with the Court, at least 7days before files an affidavit with the Court, at least 7days before the meeting , that the Courts directions in this regard the meeting , that the Courts directions in this regard have been compiled with.have been compiled with.

Courts ApprovalCourts Approval

The proposed merger scheme is taken as The proposed merger scheme is taken as approved if it is passed by a majority approved if it is passed by a majority representing three fourths in value of the representing three fourths in value of the members (Creditors at Creditors meeting), members (Creditors at Creditors meeting), present and voting in person or proxy. The present and voting in person or proxy. The Chairman shall report the results of the Chairman shall report the results of the meeting to the court within 7 days of such meeting to the court within 7 days of such meeting or as directed by the Court.meeting or as directed by the Court.

Petition for Confirmation of Petition for Confirmation of mergermerger

If a merger scheme is passed by the creditors and If a merger scheme is passed by the creditors and members, the Company, within 7 days of filing of members, the Company, within 7 days of filing of report by the Chairman to the Court, has to present a report by the Chairman to the Court, has to present a petition for confirmation of the scheme and petition for confirmation of the scheme and appropriate orders and directions under Section 394 appropriate orders and directions under Section 394 of the Companies Act..of the Companies Act..

Date of hearing the petition is fixed.Date of hearing the petition is fixed. Notice of such a hearing advertised in newspapers as Notice of such a hearing advertised in newspapers as

directed by the Court.directed by the Court. This notice is served on Central Government, The This notice is served on Central Government, The

Registrar, the Company Law Board and the Official Registrar, the Company Law Board and the Official liquidator.liquidator.

Petition for Confirmation of Petition for Confirmation of mergermerger

Order of the Court:Order of the Court: For passing the order, the Court has to receive a report from the For passing the order, the Court has to receive a report from the

ROC and the OL that the affairs of the Company have not ROC and the OL that the affairs of the Company have not been conducted in a manner prejudicial to the interests of its been conducted in a manner prejudicial to the interests of its members or of the public.members or of the public.

Co has to show that all the requisite approvals, Co has to show that all the requisite approvals, acknowledgements from the Co. Law Board ( For alteration in acknowledgements from the Co. Law Board ( For alteration in its articles of association) , Central Govt (MRTP Act) , the its articles of association) , Central Govt (MRTP Act) , the RBI (FEMA Act) and SEBI have been obtained. The Court on RBI (FEMA Act) and SEBI have been obtained. The Court on hearing all the parties satisfies itself that the proposed merger hearing all the parties satisfies itself that the proposed merger is fair and treasonable. The Court, if satisfied, shall pass the is fair and treasonable. The Court, if satisfied, shall pass the order, sanctioning the scheme. order, sanctioning the scheme.

For the order to be effective, every Company in relation to For the order to be effective, every Company in relation to which the order is passed should file a certified copy of the which the order is passed should file a certified copy of the Courts’ order with the ROC, within 10 days of the order.Courts’ order with the ROC, within 10 days of the order.

Evaluation of the ProcedureEvaluation of the Procedure

There is very little interference by any govt. There is very little interference by any govt. agency or authority.agency or authority.

There is no prescribed format for drawing up There is no prescribed format for drawing up the merger scheme and the explanatory the merger scheme and the explanatory statement to be issued to the shareholders, statement to be issued to the shareholders, except some guidelines in the Company except some guidelines in the Company (Court) Rules, and procedures, which are (Court) Rules, and procedures, which are generally adhered to.generally adhered to.

This can be done effectively by the Companies This can be done effectively by the Companies Act and the relevant rules.Act and the relevant rules.

Evaluation of the procedureEvaluation of the procedure Following rules should be stipulated:Following rules should be stipulated: a) The disclosure of the basis for the share a) The disclosure of the basis for the share exchange ratio.exchange ratio. b) Publishing in the next 3 to 5 years annual reports to be issued b) Publishing in the next 3 to 5 years annual reports to be issued

after the merger becomes effective, the actual benefits realized after the merger becomes effective, the actual benefits realized on account of the merger as compared to the benefits anticipated on account of the merger as compared to the benefits anticipated at the time of at the time of

framing the merger proposal and determining the share exchange framing the merger proposal and determining the share exchange ratio, so as to be more informative to the shareholders..ratio, so as to be more informative to the shareholders..

c) This should be backed by an effective monitoring system with c) This should be backed by an effective monitoring system with provisions for deterrent penalties for defaulters. provisions for deterrent penalties for defaulters.

Evaluation of the procedureEvaluation of the procedure

Such monitoring could be by way of requiring, Such monitoring could be by way of requiring, as a part of the Annual Return, details of the as a part of the Annual Return, details of the benefits actually realized and those estimated benefits actually realized and those estimated earlier, duly certified by the Directors of the earlier, duly certified by the Directors of the Co. and the Co. Secretary. The Company Law Co. and the Co. Secretary. The Company Law Board, may reviewed the correctness of these Board, may reviewed the correctness of these Annual Returns during inspections.Annual Returns during inspections.

Basis for Exchange RatioBasis for Exchange Ratio

The Justification for the share exchange ratio, The Justification for the share exchange ratio, one of the most important terms of any merger one of the most important terms of any merger scheme is generally not provided. The scheme is generally not provided. The exchange ratio must necessarily take into exchange ratio must necessarily take into consideration the projected future earnings of consideration the projected future earnings of the Companies and the benefits expected from the Companies and the benefits expected from the merger which will increase the combined the merger which will increase the combined profits.profits.

Basis for exchange ratioBasis for exchange ratio

The merchant banker should be mandated to The merchant banker should be mandated to give the due diligence opinion of the give the due diligence opinion of the assumptions themselves otherwise the share assumptions themselves otherwise the share exchange ratio shown in the report will have to exchange ratio shown in the report will have to be taken just as the management speaking be taken just as the management speaking through him.through him.

Basis of exchange ratioBasis of exchange ratio Along with the scheme, the report of the Chartered Along with the scheme, the report of the Chartered

Accountants should be circulated Accountants should be circulated to the shareholders and others entitled to have a say to the shareholders and others entitled to have a say

on the merger proposal. It is not sufficient to make it on the merger proposal. It is not sufficient to make it available for inspection at its registered office, available for inspection at its registered office, because in practice distances and cost of traveling because in practice distances and cost of traveling prevent a shareholder from inspecting. The report of prevent a shareholder from inspecting. The report of the chartered accountants who made the valuation and the chartered accountants who made the valuation and recommended the share exchange ratio is not among recommended the share exchange ratio is not among the documents as available for inspection at its the documents as available for inspection at its registered office, making it almost impossible to take registered office, making it almost impossible to take an informed decision on the merger proposal.an informed decision on the merger proposal.

Follow up on benefits of mergerFollow up on benefits of merger

For 3 to 5 years, after the merger becomes For 3 to 5 years, after the merger becomes effective each annual report should be required effective each annual report should be required to set out in a meaningful manner, with figures to set out in a meaningful manner, with figures the actual benefits realized from the merger the actual benefits realized from the merger and compare them with the estimated at the and compare them with the estimated at the time of fixing the share exchange ratio. time of fixing the share exchange ratio. Explanation must be provided for shortfalls Explanation must be provided for shortfalls beyond say 10%.beyond say 10%.

Follow up on benefits of mergerFollow up on benefits of merger If the variation is more than say 20% any prospectus issued by If the variation is more than say 20% any prospectus issued by

the Company/or its associates should disclose this fact so as to the Company/or its associates should disclose this fact so as to enable the public to form an opinion about the credibility of enable the public to form an opinion about the credibility of the figures put up by the management.the figures put up by the management.

The nature and extent of disclosure may be approved by the The nature and extent of disclosure may be approved by the regulatory authority, on a case by case basis, with enabling regulatory authority, on a case by case basis, with enabling power to them to exempt a company from such disclosure if power to them to exempt a company from such disclosure if there are good reasons. i.e. there is a total change in the there are good reasons. i.e. there is a total change in the management of the Co. and the regulatory authority is satisfied management of the Co. and the regulatory authority is satisfied that it will be unfair to burden the new management with the that it will be unfair to burden the new management with the deficiencies of the previous management.deficiencies of the previous management.

ConclusionConclusion

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