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8/13/2019 Mergers & Acquistions -Introduction
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Mergers & Acquisitions -
Introduction
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Amalgamation
When two or more companies merge together
to form a new company, the process is known as
amalgamation. Although the terms merger and
amalgamation appear synonymous there is a
difference between the two.
All amalgamations are necessarily mergers, all
mergers may not necessarily be amalgamations.
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Kinds of Mergers
Cogeneric mergers: These mergers happen
between companies that operate within the
same industry
Horizontal mergers: These mergers are between
companies in the same business activity
Vertical mergers: These mergers are between
two or more companies which are engaged in a
different functions within the same industry
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Kind of mergers
Conglomerate mergers: Mergers betweencompanies that belong to different industries
Upstream merger: Merger in which the subsidiary ismerged with the parent company
Down-stream merger: Merger in which a parent ismerged with its subsidiary
Reverse Merger: Merger in which a company with asound financial track record amalgamates with aloss making or less profitable company
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Takeover
Takeover is a strategy of acquiring control over
the management of another companyeither
directly by acquiring shares of the company that
carry voting rights or indirectly by participating
in the management.
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Takeover
Where the shares of the company as closelyheld by a small number of shareholders, atakeover might be affected by an agreement
with the shareholders.Where the share of a company are widely heldby the general public it involves the process asset out in the SEBI guidelines called SubstantialAcquisition of Shares and TakeoversRegulation,1997
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Kinds of Takeovers
Friendly Takeover- Takeover with the consentof the target company achieved throughnegotiations between the management
Hostile Takeover- Where a company silentlyand unilaterally pursues efforts to gain controlagainst the wishes of the existing mangement,such an attempt is considered hostile.Example: LN Mittal group acquired control ofArcelor
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Kinds of takeovers
Bailout takeover: Takeover of a financially weak
company by a financially stable company to
bailout the former is known as bailout takeover.
In the Indian context the financial institution
appraises the financially weak company which is
not a sick industrial company, and draws up a
rehabilitation plan on the principle of protectionof interests of the minority shareholders, good
management, effective revival and transparency.
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Kind of takeovers
Leveraged buyout:
This form of takeover is defined as acquisition of stock orassets of a company by an acquirer, in a manner that theconsideration is financed largely by borrowing (i.e. debtfunding) and a small component of equity. The acquirerforms a shell company to act as a legal entity making theacquisition. The LBO differs from a normal acquisition ontwo grounds:
A Large fraction of the acquisition is debt financed
The shares of the target company are not publiclytraded
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Kind of takeovers
Management buyout: Acquisition of a
company by its management is referred to as
MBO. In this form the management will buy
out all or most of the shareholders
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Economic Aspects of M&A
Shareholders wealthenhancing shareholdersvalue
Synergy --- Synergy signifies an improvement in the
performanceMarket Share- the merged entity could get asubstantial market share e.g. coke buying theTHUMS UP
Core competenceMergers enhance the corecompetence of a company that already hasexpertise in a business domain
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Economic Aspects of M&A
Diversification: Merger gives a tool for the
company to diversify into new business area
Increased debt capacity: A merged company
would have a higher capacity to absorb debt
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Definition of Merger as per Company
Law
Section 390 of the Companies Act defines the
term arrangement to include re-organisation of
share capital of a company by the consolidation
of shares of different classes, or by the divisionof shares into shares of different classes or by
both these methods
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Broad procedure to be followed for sanction of
an amalgamation
Stage 1- Drafting the scheme and obtaining boardsapproval
The scheme incorporates the following:
Transfer of assets and liabilities Transfer of employees, legal proceedings, contracts,
permits, licences etc of the transferor company tothe transferee company
Appointed date of transfer of assets and laibilities Consideration for the amalgamation and manner of
discharge
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Broad procedure to be followed for sanction of
an amalgamation
Stage 1:
Method of accounting
Dissolution of the transferor company
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Stage 2
In the case of listed companies after board of
approval, the scheme needs to be approved by
the Stock Exchange where the shares of the
companies concerned are listed
Clause 24(f) of listing agreement with BSE/NSE
Broad procedure to be followed for sanction of
an amalgamation
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Stage 3Application to be filed in the High Court
seeking directions to convene the meeting of
shareholders and creditors to obtain consent,
for approval of scheme of amalgamation
Broad procedure to be followed for sanction of
an amalgamation
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Stage 4. Meeting of shareholders and creditors
and filing of petitions--- The scheme would have
to be approved by three-fourths in value of the
shareholders and creditors present and voting atsuch meetings.
In case of amalgamation of a wholly owned subsidiary into its
parent, the Bombay High court observed that the parent neednot file a petition for sanction-Mahaamba Investments v IDI
Limited (2001)
Broad procedure to be followed for sanction of
an amalgamation
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Stage V- Approvals from regional director and
official liquidator
Notice needs to be given to the Central
Government and to the official liquidator
attached to the High Court to obtain their
approval to the scheme of amalgamation
Broad procedure to be followed for sanction of
an amalgamation
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Stage VIApproval from the High Court
After considering all the relevant andcircumstances, the High Court may sanction the
scheme of amalgamation with or without
modifications as it deems fit.
Broad procedure to be followed for sanction of
an amalgamation
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Accounting aspect of Mergers
AS 14 deals with the accounting for
amalgamations and the treatment of any
resultant goodwill or reserves.
AS 14 classifies amalgamation into two broad
categories:
1. Amalgamation in the nature of merger
2. Amalgamation in the nature of purchase
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Amalgamation in the nature if merger
All the following conditions have to be satisfied:
All the assets and liabilities of the transferor company
become after amalgamation the assets and liabilities of
the transferee company
Shareholders holding not less than 90% of the equityshares become equity shareholders of the transferee
company
The consideration is wholly discharged by the issue of
equity shares of the transferee company The assets and liabilities of the transferor company are
recorded at their book value in the transferee company
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Amalgamation in the nature of merger
A very important aspect of the amalgamation in
the nature of merger is that any difference
between the amount of share capital issued and
the amount of share capital of the transferorcompany has to be as premium and adjusted in
the capital reserve (not free for distribution as
dividend)
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Examples
Two very good examples of pooling of interestare:
Amalgamation of I-Ven Interactive Limited
with Infomedia 18 Limited (effective dateAugust 25, 2009)
Amalgamation of Aptech Software Limited
with Aptech Limited(Appointed date beingApril 1, 2009)
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The normal accounting rules of purchase are
applicable to this method and hence reserves,
other than the reserves that are required by law
do not appear in the books of the transfereecompany. Any consideration paid over and
above the value of the assets/liabilities is
considered as goodwill. In case of a deficit thedifference is considered as capital reserve
Amalgamation in the nature of Purchase
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Amortisation of Goodwill
AS 14 as it stands requires goodwill to be
amortised
AS 28 requires that the goodwill be tested for
impairment
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Important Dates in Mergers
Appointed Date:
This is the date stated in the scheme as a date
appointed by the parties to the amalgamation
concerned. Sec. 391 of the Companies Act
Effective Date:
This is the date on which the order of the high
court approving the scheme is filed with the
registrar of companies
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Disclosure requirements
AS 14 requires the following disclosures for all
amalgamations to be made in the financial statements:
Names and general nature of business of the
amalgamating companies
Effective date of amalgamation for accountingpurposes
Method of accounting used to reflect the
amalgamation Particulars of the scheme sanctioned under a statute
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Disclosure requirements
If the amalgamation is under the pooling of interestmethod
Description and number of shares issued, together with theswap ratio; and
Amount of any difference between the consideration and the
value of net identifiable assets acquired and the treatmentthereof
If the amalgamation is under the purchase method
Consideration for amalgamation an d a description of theconsideration payable and ;
Amount of any difference between the consideration and thevalue of net identifiable assets acquired and the treatmentthereof including the period of amortisation of any goodwillarising on amalgamation
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Regulatory aspect
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SEBI Regulations
SEBI regulations are applicable when the
following conditions are satisfied:
A listed company is amalgamating with
another listed company
An unlisted company is amalgamating with a
listed company
A listed company is amalgamating with an
unlisted company
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Listing Agreement
All amalgamations involving listed companies require in-principle
approval of stock exchange. Listing agreement of stock
exchanges require all listed companies to file any scheme of
arrangement proposed to be filed before any Court or Tribunal
under s. 391, 394 and 101 of the Companies Act, with the stockexchange at least a month before it is presented to the Court or
Tribunal
Auditors certificate: The above filing with the exchange has to
be accompanied by the auditors certificate that states that theaccounting treatment in the scheme of amalgamation is in
compliance with all Accounting Standards
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Listing of an unlisted company without an IPO
This situation arises when a listed company gets merged into anunlisted company:
The shares for which the company seeks listing must have
been allotted to the holders of securities of the listed
company pursuant to the scheme sanctioned by the relevantHigh Court
The terms of their listing should be governed by the Scheme
and must not issue any shares not covered under the scheme
Atleast 25% of its fully diluted, paid-up share capital shouldbe issued to the public shareholders in the listed company
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Listing of an unlisted company without an IPO
Lock-in requirements:The increased promoters stake in the listed company has to be
locked-in as follows:
25% of increase in promoters stake for 3 years; or
Entire increase in the promoters stake for one year
Shares issued by the unlisted company in lieu of the locked-in
shares of the listed company must be subject to lock-in for theremaining period
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Income Tax Implications
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Definition of tax-neutral amalgamation under
the Income Tax Act
All properties of the transferor company become theproperties of the transferee company;
All liabilities of the transferor company become the liabilitiesof the transferee company;
Shareholders holding 75% or more in value of the shares in
the transferor company (excluding shares already heldimmediately before the amalgamation by the transferorcompany or its subsidiaries or its nominees) becomeshareholders of the transferee company
The above must be achieved by virtue of the merger and notby way of purchase of properties by one company fromanother or by way of distribution of properties pursuant tothe winding up of a company concerned
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What is a tax neutral amalgamation
All properties of the transferor company become the
properties of the transferee company
All liabilities of the transferor company become the liabilities
of the transferee company
Shareholders holding 75% or more in value of the shares in
the transferor company (excluding shares already held
immediately before the amalgamation by the transferor
company or its subsidiaries or its nominees) become
shareholders of the transferee company, and;
The above must be achieved by way of merger and not bypurchase
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ILLUSTRATION: Scenario 1
Pre-amalgamation structure
Mr A and (60%) Mr B(40%) are
shareholders in AB Ltd.
Mr C (50%) and Mr D (50%) are
shareholders in CD Ltd.
AB Ltd. Is merged in CD Ltd. , the share holding pattern now is
Mr A (30%), Mr B(20%), Mr C (25%), Mr D(25%)
The above amalgamation would qualify as amalgamation under the ACT
but if the Mr B had received cash instead of shares and thus only 60% of
the AB Ltd. shareholders would be merged, the merger would not qualify
as an amalgamtion under the act
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Section 47(vi)
The act specifically provides under sec. 47(vi) that any transfer of
capital assets in a scheme of amalgamation would be regarded
as exempt transfer and accordingly would not attract capital
gains.
The CBDT has also clarified vide its circular no 5P(LXXVI-63) of
1967 dated October 9, 1967 that where a company transfers its
assets pursuant a amalgamation, such transfer will not be
regarded as distribution of accumulated profits
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Implications for shareholders of the
amalgamating company
Amount (Rs)
Year 1. Mr A purchased 100 shares of A Ltd for Rs 20. 2000
Year 5: A Ltd. Amalgamates with B Ltd. The share swap ratio is
for one share of A Ltd. the shareholder will get 10 shares of B
Ltd.Year 5: Fair value of 1 share of B Ltd. Is Rs 5
Year 5: Mr A receives 1000 shares of B Ltd. Hence he will get
shares that are worth
5000
Gain on receipt of shares of B Ltd on amalgamation 3000
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Tax Implication to the transferee company
1. Actual cost of assets, depreciation, WDV in respect of capitalassets transferred
2. Tax holiday benefits
3. Allowability of amalgamation expenses
4. Carry forward of losses of transferor company5. Continuity of certain deduction of certain specific expenses
incurred by transferor company
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Actual cost of assets, depreciation, WDV in
respect of capital assets transferred
-When a capital asset is transferred by a transferor company to atransferee company pursuant to an amalgamation, the latter
being an Indian company, the actual cost of the transferred asset
to the transferee company should be the same as it would have
been to the transferor company, if the amalgamation had not
taken place
Pursuant to amalgamation, where a block of assets is transferred
by transferor company to transferee company, then, the opening
written down value of the block of assets transferred by the
transferor company is regarded as the WDV of the block for the
transferee company
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Actual cost of assets, depreciation, WDV in
respect of capital assets transferred
The tax depreciation is calculated differently for the year inwhich the amalgamation takes place. The aggregate annual
depreciation in respect of depreciable assets which are
transferred by a transferor company to the transferee company
is required to be apportioned between the amalgamating and
amalgamated company in the ratio of the number of days of
usage of those assets by the respective companies
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Tax Holiday benefits
All Tax holidays benefits other than the tax holiday enjoyedunder Sec.80 IA of the Income Tax Act will be treated as follows:
No tax holiday deduction will be allowed to the transferor
company in the year of amalgamation The amalgamated company would be entitled to the tax
holiday for the unexpired period, as if the amalgamation had
not taken place
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Tax Holiday benefits under 80 IA
Circular No 3 dated March 12, 2008 of CBDT has made thefollowing clear:
Any Tax Holiday enjoyed under sec. 80-IA will not be enjoyed by
the amalgamated company if such amalagamation/de-mergerhas happened after 31/3/2007. There was a special subsection
(12) added to the section 80-IA.
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Amalgamation Expenses
Under section 35DD of the Act:
The transferee company is allowed a deduction of 1/5thof the
expenses incurred wholly and exclusively for the purpose of the
Scheme over a period of five successive years beginning from theyear in which the amalgamation takes place
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Amalgamation Expenses
Under section 35DD of the Act:
The transferee company is allowed a deduction of 1/5thof the
expenses incurred wholly and exclusively for the purpose of the
Scheme over a period of five successive years beginning from theyear in which the amalgamation takes place
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Carry forward of losses
Section 72A, 72AA and 72AB of the Act provides that accumulated losses of the
transferor company would be deemed to be those of the transferee companyprovided :
1. The transferor company has been engaged in the business in which theaccumulated losses occurred or depreciation remains unabsorbed, for 3 ormore years
2. The transferor company has held continuosly as on the date of amalgamation
at least 75% of the book value of the fixed assets held by it 2 years prior tothe date of amalgamation
3. The transferee company continues to hold 75% of the book value of the fixedassets for at least 5 years
4. The transferee company carries on the business of the amalgamatingcompany for at least 5 years
5. The transferee company should achieve the level of production of at least50% of the installed capacity before the end of the 4 years from the date ofamalgamation and continue to maintain this level of production till the endof 5 years from the date of amalgamation
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Preliminary Expenses
The Act provides that if an Indian Company having an
unamortised preliminary expenditure is amalgamated with
another Indian company before the expiry of five years of the
amortisation period, the unamortised preliminary expenses can
be claimed by the transferee company for the unexpired period.
l d f b l
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Capital Expenditure for obtaining licence to
operate telecommunication services
The capital expenditure incurred by the transferor company for
obtaining a telecommunications licence and for which payment
has been actually made.
Where in a scheme of amalgamation any such licence is
transferred by the transferor company to the transfereecompany the expense is not allowed as a deduction for the
transferor company but allowed for the transferee company as if
the amalgamation did not take place
di i f i l
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Expenditure on prospecting for minerals or
development of mines
Expenditure incurred for prospecting minerals or development
of mines is deductible in ten equal installments in respect of any
expenditure incurred after March 31, 1970.
Such expenditure is not allowed as a deduction for the transferor
company in the year the amalgamation takes place, but allowed
to the transferee company from the previous year the
amalgamation takes place as if the amalgamation has never
taken place.
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ILLUSTRATION
Consider the amalgamation of AB Ltd. and CDLtd. Both the companies have accumulated
losses 100 crore and 200 crore respectively, the
fair values of the companies are Rs 5,100 crore
and Rs. 4,900 crore respectively.
The shares are alloted in the ratio of the
valuation that they have arrived at. There couldthree scenarios that could happen
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ILLUSTRATION: Scenario 1
Pre-amalgamation structure
Shareholder of AB Ltd 100% Shareholder of CD Ltd 100%
100 cr. loss 200 cr. loss
AB Ltd. Is merged in CD Ltd. , the share holding pattern now is
Shareholders of AB Ltd. get 51% and CD Ltd. get 49%
Because CD Ltd. Shareholding has been reduced to 49% the 300 crore set-
off of losses WILL NOT BE AVAILABLE FOR CARRY FORWARD, BUT THE
LOSSES OF AB LTD.OF A 100 CRORE IS AVAILABLE FOR SET-OFF
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ILLUSTRATION: Scenario 2
Pre-amalgamation structure
Shareholder of AB Ltd 100% Shareholder of CD Ltd 100%
100 cr. loss 200 cr. loss
CD Ltd. Is merged in AB Ltd. , the share holding pattern now is
Shareholders of AB Ltd. get 51% and CD Ltd. get 49%
In this scenario since CD has merged with AB Ltd. The 51% shareholding of
AB Ltd. Continue to be 51% and hence the losses of AB and also of CD
would not lapse
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ILLUSTRATION: Scenario 3
Pre-amalgamation structure
Shareholder of AB Ltd 100% Shareholder of CD Ltd 100%
100 cr. loss 200 cr. loss
AB and CD both merge into a new company called ABCD
Shareholders of AB Ltd. get 51% and CD Ltd. get 49%
In this scenario the losses of both AB and CD would continue to be allowed
to be carried forward and set-off against future profits
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Stamp Duty(Not in detail)State Stamp Duty on amalgamation
Andhra Pradesh 2% of the market value of the property
Gujurat Maximum of 10 crores
1% of the market value of the shares issued or allotted
OR
1% of the immovable property of the transferor
company situated in the state of gujurat
Whichever is higher
Karnataka 2% of the market value of the property of the
transferor company located in karnataka
OR
1% of the aggregate market value of shares issued or
allottedWhichever is higher
Madhya Pradesh 7% of the market value of immovable property
transferred which is located in MP
OR
0.7% of the aggregate market value of the shares
issued
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Stamp Duty (not in detail)
State Stamp Duty on amalgamation
Maharashtra Maximum of 25 crore10% of the market value of shares transferred or issued
The amount of duty shall not exceed:
(i) 5% of the true market value of the immovable
property located within the State of Maharashtra
OR
(ii) 0.7% of the aggregate of the market value of theshares issued or allotted in exchange
Whichever is higher
Rajasthan 4% of the market value of the property transferred
which was located in Rajasthan
West Bengal 8% of the aggregate market value of the shares issuedor allotted in exchange or otherwise
Tamil Nadu 2% of the market value of the immovable property of
the transferor company loacted in the state
OR
0 6% f h k l f h h